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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 7/31/20 Waddell & Reed Financial Inc 10-Q 6/30/20 70:9.9M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.41M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
12: R1 Document and Entity Information HTML 73K
13: R2 Consolidated Balance Sheets HTML 105K
14: R3 Consolidated Balance Sheets (Parenthetical) HTML 37K
15: R4 Consolidated Statements of Income HTML 79K
16: R5 Consolidated Statements of Income (Parenthetical) HTML 23K
17: R6 Consolidated Statements of Comprehensive Income HTML 42K
18: R7 Consolidated Statements of Comprehensive Income HTML 25K
(Parenthetical)
19: R8 Consolidated Statements of Stockholders' Equity HTML 79K
and Redeemable Noncontrolling Interests
20: R9 Consolidated Statements of Stockholders' Equity HTML 22K
and Redeemable Noncontrolling Interests
(Parenthetical)
21: R10 Consolidated Statements of Cash Flows HTML 93K
22: R11 Description of Business and Significant Accounting HTML 40K
Policies
23: R12 New Accounting Guidance HTML 24K
24: R13 Revenue Recognition HTML 86K
25: R14 Investment Securities HTML 347K
26: R15 Derivative Financial Instruments HTML 59K
27: R16 Goodwill and Identifiable Intangible Assets HTML 41K
28: R17 Indebtedness HTML 23K
29: R18 Income Tax Uncertainties HTML 25K
30: R19 Pension Plan and Postretirement Benefits Other HTML 72K
Than Pension
31: R20 Stockholders' Equity HTML 201K
32: R21 Leases HTML 148K
33: R22 Contingencies HTML 24K
34: R23 Subsequent Events HTML 23K
35: R24 Description of Business and Significant Accounting HTML 33K
Policies (Policies)
36: R25 Revenue Recognition (Tables) HTML 85K
37: R26 Investment Securities (Tables) HTML 348K
38: R27 Derivative Financial Instruments (Tables) HTML 58K
39: R28 Goodwill and Identifiable Intangible Assets HTML 40K
(Tables)
40: R29 Pension Plan and Postretirement Benefits Other HTML 68K
Than Pension (Tables)
41: R30 Stockholders' Equity (Tables) HTML 199K
42: R31 Leases (Tables) HTML 173K
43: R32 Description of Business and Significant Accounting HTML 36K
Policies (Details)
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45: R34 Revenue Recognition - Disaggregation of revenue HTML 56K
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48: R37 Investment Securities - Investment securities and HTML 35K
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49: R38 Investment Securities - Available for sale HTML 47K
sponsored funds with fair values below carrying
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securities (Details)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
(Mark One)
i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i June 30, 2020
OR
i ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number i 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
| | |
i Delaware | | i 51-0261715 |
(State or other jurisdiction | | (I.R.S. Employer |
of incorporation or organization) | | Identification No.) |
i 6300 Lamar Avenue
i Overland Park, i Kansas i 66202
(Address, including zip code, of Registrant’s principal executive offices)
( i 913) i 236-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
i Class A Common Stock, $.01 par value | i WDR | i New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
i Large accelerated filer ☒ | | Accelerated filer ☐ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company i ☐ |
| | |
| | Emerging growth company i ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes i ☐ No ☒.
Shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:
| | |
Class | | Outstanding as of July 24, 2020 |
Class A common stock, $.01 par value | | i 65,163,673 |
WADDELL & REED FINANCIAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Quarter Ended June 30, 2020
| | |
| Page No. |
| | | | |
| | |||
| | | | |
| | | ||
| | | | |
| | Consolidated Balance Sheets at June 30, 2020 and December 31, 2019 | | 3 |
| | | | |
| | Consolidated Statements of Income for the three and six months ended June 30, 2020 and June 30, 2019 | | 4 |
| | | | |
| | | 5 | |
| | | | |
| | | 6 | |
| | | | |
| | Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019 | | 7 |
| | | | |
| | | 8 | |
| | | | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 24 | |
| | | | |
| | 40 | ||
| | | | |
| | 40 | ||
| | | | |
| | |||
| | | | |
| | 40 | ||
| | | | |
| | 41 | ||
| | | | |
| | 42 | ||
| | | | |
| | | 43 | |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
| | | | | | | |
| | | | | | ||
| | 2020 | | | December 31, | | |
| | (Unaudited) | | | 2019 | | |
Assets: |
| | |
| | |
|
Cash and cash equivalents | | $ | i 156,710 |
| | i 151,815 | |
Cash and cash equivalents - restricted | |
| i 44,810 |
|
| i 74,325 | |
Investment securities | |
| i 619,052 |
|
| i 688,346 | |
Receivables: | | | | | | | |
Funds and separate accounts | |
| i 14,428 |
|
| i 15,167 | |
Customers and other | |
| i 81,971 |
|
| i 80,089 | |
Prepaid expenses and other current assets | |
| i 28,369 |
|
| i 31,655 | |
Total current assets | |
| i 945,340 |
|
| i 1,041,397 | |
| | | | | | | |
Property and equipment, net | |
| i 31,928 |
|
| i 34,726 | |
Goodwill and identifiable intangible assets | |
| i 145,869 |
|
| i 145,869 | |
Deferred income taxes | |
| i 17,454 |
|
| i 14,418 | |
Other non-current assets | |
| i 25,411 |
|
| i 29,918 | |
Total assets | | $ | i 1,166,002 |
| | i 1,266,328 | |
| | | | | | | |
Liabilities: | | | | | | | |
Accounts payable | | $ | i 19,909 |
| | i 20,123 | |
Payable to investment companies for securities | |
| i 37,403 |
|
| i 36,883 | |
Payable to third party brokers | |
| i 14,367 |
|
| i 17,123 | |
Payable to customers | |
| i 65,748 |
|
| i 84,558 | |
Short-term notes payable | | | i 94,962 | | | — | |
Accrued compensation | |
| i 49,076 |
|
| i 79,507 | |
Other current liabilities | |
| i 61,789 |
|
| i 71,001 | |
Total current liabilities | |
| i 343,254 |
|
| i 309,195 | |
| | | | | | | |
Long-term debt | |
| — |
|
| i 94,926 | |
Accrued pension and postretirement costs | |
| i 3,541 |
|
| i 3,145 | |
Other non-current liabilities | |
| i 26,647 |
|
| i 30,960 | |
Total liabilities | |
| i 373,442 |
|
| i 438,226 | |
| | | | | | | |
Redeemable noncontrolling interests | | | i 25,857 | | | i 19,205 | |
| | | | | | | |
Stockholders’ equity: | | | | | | | |
Preferred stock—$ i i 1.00 / par value: i i 5,000 / shares authorized; i i none / issued | |
| — |
|
| — | |
Class A Common stock—$ i i 0.01 / par value: i i 250,000 / shares authorized; i i 99,701 / shares issued; i 65,174 shares outstanding ( i 68,847 at December 31, 2019) | |
| i 997 |
|
| i 997 | |
Additional paid-in capital | |
| i 289,439 |
|
| i 312,693 | |
Retained earnings | |
| i 1,255,770 |
|
| i 1,241,598 | |
Cost of i 34,527 common shares in treasury ( i 30,854 at December 31, 2019) | |
| ( i 783,990) |
|
| ( i 749,625) | |
Accumulated other comprehensive income | |
| i 4,487 |
|
| i 3,234 | |
Total stockholders’ equity | |
| i 766,703 |
|
| i 808,897 | |
| | | | | | | |
Total liabilities, redeemable noncontrolling interests and stockholders’ equity | | $ | i 1,166,002 |
| | i 1,266,328 | |
See accompanying notes to the unaudited consolidated financial statements.
3
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited, in thousands, except for per share data)
| | | | | | | | | | | | | |
| | For the three months ended June 30, | | For the six months ended June 30, | | ||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | ||||
| | | | | | | | | | | | | |
Revenues: |
| |
|
| |
|
| | |
| | |
|
Investment management fees | | $ | i 95,824 |
| | i 112,870 | | $ | i 201,043 |
| | i 222,632 | |
Underwriting and distribution fees | |
| i 123,633 |
| | i 133,495 | | | i 260,576 |
| | i 259,740 | |
Shareholder service fees | |
| i 20,577 |
| | i 23,789 | | | i 42,148 |
| | i 47,192 | |
Total | |
| i 240,034 |
| | i 270,154 | | | i 503,767 |
| | i 529,564 | |
| | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Distribution | |
| i 107,876 |
| | i 116,477 | | | i 227,909 |
| | i 226,271 | |
Compensation and benefits (including share-based compensation of $ i 12,532, $ i 11,199, $ i 22,515 and $ i 23,892, respectively) | |
| i 61,863 |
| | i 61,876 | | | i 120,288 |
| | i 126,719 | |
General and administrative | |
| i 20,524 |
| | i 16,037 | | | i 39,122 |
| | i 30,741 | |
Technology | | | i 14,237 | | | i 16,442 | | | i 27,739 | | | i 32,750 | |
Occupancy | | | i 4,291 | | | i 6,701 | | | i 9,000 | | | i 13,416 | |
Marketing and advertising | | | i 1,119 | | | i 2,399 | | | i 3,015 | | | i 4,363 | |
Depreciation | |
| i 3,209 |
| | i 5,228 | | | i 6,722 |
| | i 11,229 | |
Subadvisory fees | |
| i 3,288 |
| | i 3,715 | | | i 6,954 |
| | i 7,272 | |
Total | |
| i 216,407 |
| | i 228,875 | | | i 440,749 |
| | i 452,761 | |
| | | | | | | | | | | | | |
Operating income | |
| i 23,627 |
| | i 41,279 | | | i 63,018 |
| | i 76,803 | |
Investment and other income | |
| i 15,148 |
| | i 9,025 | | | i 7,403 |
| | i 18,478 | |
Interest expense | |
| ( i 1,539) |
| | ( i 1,552) | | | ( i 3,088) |
| | ( i 3,100) | |
| | | | | | | | | | | | | |
Income before provision for income taxes | |
| i 37,236 |
| | i 48,752 | | | i 67,333 |
| | i 92,181 | |
Provision for income taxes | |
| i 9,412 |
| | i 14,190 | | | i 19,045 |
| | i 24,861 | |
Net income | | | i 27,824 |
| | i 34,562 | | | i 48,288 |
| | i 67,320 | |
Net income attributable to redeemable noncontrolling interests | | | i 3,000 | | | i 614 | | | i 1,478 | | | i 1,318 | |
Net income attributable to Waddell & Reed Financial, Inc. | | $ | i 24,824 | | | i 33,948 | | $ | i 46,810 | | | i 66,002 | |
| | | | | | | | | | | | | |
Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted: | | $ | i 0.38 | | | i 0.45 | | $ | i 0.70 | | | i 0.87 | |
| | | | | | | | | | | | | |
Weighted average shares outstanding, basic and diluted: | |
| i 65,488 | | | i 74,694 | | | i 66,581 | | | i 75,492 | |
See accompanying notes to the unaudited consolidated financial statements.
4
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited, in thousands)
| | | | | | | | | | | | | |
|
| For the three months ended June 30, | | For the six months ended June 30, | | ||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | | | | | | | | | | | | |
Net income | | $ | i 27,824 |
| | i 34,562 | | $ | i 48,288 |
| | i 67,320 | |
| | | | | | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Unrealized gain on available for sale investment securities during the period, net of income tax expense of $ i 1,195, $ i 402, $ i 435 and $ i 919, respectively | |
| i 3,783 |
|
| i 1,281 | |
| i 1,353 |
|
| i 2,939 | |
| | | | | | | | | | | | | |
Postretirement benefit, net of income tax benefit of $( i 16), $( i 28), $( i 34) and $( i 58), respectively | |
| ( i 51) |
|
| ( i 95) | |
| ( i 100) |
|
| ( i 189) | |
| | | | | | | | | | | | | |
Comprehensive income | | | i 31,556 |
| | i 35,748 | | | i 49,541 |
| | i 70,070 | |
Comprehensive income attributable to redeemable noncontrolling interests | | | i 3,000 | | | i 614 | | | i 1,478 | | | i 1,318 | |
Comprehensive income attributable to Waddell & Reed Financial, Inc. | | $ | i 28,556 | | | i 35,134 | | $ | i 48,063 | | | i 68,752 | |
See accompanying notes to the unaudited consolidated financial statements.
5
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Redeemable Noncontrolling Interests
(Unaudited, in thousands)
| | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, | |||||||||||||||
| | | | | | | | | | | | | Accumulated | | | | Redeemable |
| | | | | | | Additional | | | | | | Other | | Total | | Non |
| | Common Stock | | Paid-In | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | |||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Stock |
| Income |
| Equity |
| Interests | |
Balance at March 31, 2019 |
| i 99,701 | | $ | i 997 |
| i 290,872 |
| i 1,211,566 |
| ( i 636,726) |
| i 1,895 |
| i 868,604 |
| i 12,936 |
Net income |
| — | |
| — |
| — |
| i 33,948 |
| — |
| — |
| i 33,948 |
| i 614 |
Net subscription of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | i 1,565 |
Recognition of equity compensation |
| — | |
| — |
| i 7,941 |
| i 148 |
| — |
| — |
| i 8,089 |
| — |
Net issuance/forfeiture of nonvested shares |
| — | |
| — |
| ( i 4,326) |
| — |
| i 4,326 |
| — |
| — |
| — |
Dividends accrued, $ i 0.25 per share |
| — | |
| — |
| — |
| ( i 18,348) |
| — |
| — | | ( i 18,348) | | — |
Repurchase of common stock |
| — | | | — | | — | | — | | ( i 36,823) | | — |
| ( i 36,823) |
| — |
Other comprehensive income |
| — | |
| — |
| — |
| — |
| — |
| i 1,186 |
| i 1,186 |
| — |
Balance at June 30, 2019 | | i 99,701 | | $ | i 997 |
| i 294,487 |
| i 1,227,314 |
| ( i 669,223) |
| i 3,081 |
| i 856,656 |
| i 15,115 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
Balance at March 31, 2020 |
| i 99,701 | | $ | i 997 |
| i 282,401 |
| i 1,247,084 |
| ( i 765,579) |
| i 755 |
| i 765,658 |
| i 19,070 |
Net income |
| — | |
| — |
| — |
| i 24,824 |
| — |
| — |
| i 24,824 |
| i 3,000 |
Net subscription of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | i 3,787 |
Recognition of equity compensation |
| — | |
| — |
| i 6,688 |
| i 19 |
| — |
| — |
| i 6,707 |
| — |
Net issuance/forfeiture of nonvested shares |
| — | |
| — |
| i 350 |
| — |
| ( i 350) |
| — |
| — |
| — |
Dividends accrued, $ i 0.25 per share |
| — | |
| — |
| — |
| ( i 16,157) |
| — |
| — | | ( i 16,157) | | — |
Repurchase of common stock |
| — | | | — | | — | | — | | ( i 18,061) | | — |
| ( i 18,061) |
| — |
Other comprehensive income |
| — | |
| — |
| — |
| — |
| — |
| i 3,732 |
| i 3,732 |
| — |
Balance at June 30, 2020 | | i 99,701 | | $ | i 997 |
| i 289,439 |
| i 1,255,770 |
| ( i 783,990) |
| i 4,487 |
| i 766,703 |
| i 25,857 |
| | | | | | | | | | | | | | | | | |
| | For the six months ended June 30, | |||||||||||||||
| | | | | | | | | | | | | Accumulated | | | | Redeemable |
| | | | | | | Additional | | | | | | Other | | Total | | Non |
| | Common Stock | | Paid-In | | Retained | | Treasury | | Comprehensive | | Stockholders’ | | Controlling | |||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Stock |
| Income |
| Equity |
| interest | |
Balance at December 31, 2018 |
| i 99,701 | | $ | i 997 |
| i 311,264 |
| i 1,198,445 |
| ( i 627,587) |
| i 331 |
| i 883,450 |
| i 11,463 |
Net income |
| — | |
| — |
| — |
| i 66,002 |
| — |
| — |
| i 66,002 |
| i 1,318 |
Net subscription of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | i 2,334 |
Recognition of equity compensation |
| — | |
| — |
| i 17,549 |
| i 240 |
| — |
| — |
| i 17,789 |
| — |
Net issuance/forfeiture of nonvested shares |
| — | |
| — |
| ( i 34,326) |
| — |
| i 34,326 |
| — |
| — |
| — |
Dividends accrued, $ i 0.50 per share |
| — | |
| — |
| — |
| ( i 37,373) |
| — |
| — | | ( i 37,373) | | — |
Repurchase of common stock |
| — | | | — | | — | | — | | ( i 75,962) | | — |
| ( i 75,962) |
| — |
Other comprehensive income |
| — | |
| — |
| — |
| — |
| — |
| i 2,750 |
| i 2,750 |
| — |
Balance at June 30, 2019 | | i 99,701 | | $ | i 997 |
| i 294,487 |
| i 1,227,314 |
| ( i 669,223) |
| i 3,081 |
| i 856,656 |
| i 15,115 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
Balance at December 31, 2019 |
| i 99,701 | | $ | i 997 |
| i 312,693 |
| i 1,241,598 |
| ( i 749,625) |
| i 3,234 |
| i 808,897 |
| i 19,205 |
Net income | | — | |
| — |
| — |
| i 46,810 |
| — |
| — |
| i 46,810 |
| i 1,478 |
Net subscription of redeemable noncontrolling interests in sponsored funds | | — | | | — | | — | | — | | — | | — | | — | | i 5,174 |
Recognition of equity compensation | | — | |
| — |
| i 14,381 |
| i 90 |
| — |
| — |
| i 14,471 |
| — |
Net issuance/forfeiture of nonvested shares | | — | | | — | | ( i 37,635) | | | | i 37,635 | | — | | — | | — |
Dividends accrued, $ i 0.50 per share | | — | |
| — |
| — |
| ( i 32,728) |
| — |
| — |
| ( i 32,728) |
| — |
Repurchase of common stock | | — | |
| — |
| — |
| — |
| ( i 72,000) |
| — |
| ( i 72,000) |
| — |
Other comprehensive income | | — | |
| — |
| — |
| — |
| — |
| i 1,253 |
| i 1,253 |
| — |
Balance at June 30, 2020 | | i 99,701 | | $ | i 997 |
| i 289,439 |
| i 1,255,770 |
| ( i 783,990) |
| i 4,487 |
| i 766,703 |
| i 25,857 |
See accompanying notes to the unaudited consolidated financial statements.
6
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited, in thousands)
| | | | | | | |
|
| For the six months ended June 30, | | ||||
| | 2020 |
| 2019 |
| ||
| | | | | | | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | i 48,288 |
| | i 67,320 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| i 6,349 |
|
| i 11,543 | |
Amortization of deferred sales commissions | |
| i 772 |
|
| i 1,049 | |
Share-based compensation | |
| i 22,515 |
|
| i 23,892 | |
Investments and derivatives loss (gain), net of collateral | |
| i 17,726 |
|
| ( i 15,914) | |
Net purchases, maturities, and sales of trading and equity securities | |
| i 6,057 |
|
| ( i 13,327) | |
Deferred income taxes | |
| ( i 3,436) |
|
| i 7,088 | |
Net change in equity securities and trading debt securities held by consolidated sponsored funds | | | ( i 5,846) | | | ( i 8,973) | |
Other | | | i 1,304 | | | i 588 | |
Changes in assets and liabilities: | | | | | | | |
Customer and other receivables | |
| ( i 15,822) |
|
| i 69,484 | |
Payable to investment companies for securities and payable to customers | |
| ( i 18,290) |
|
| ( i 97,464) | |
Receivables from funds and separate accounts | |
| i 739 |
|
| ( i 2,414) | |
Other assets | |
| i 1,236 |
|
| i 8,882 | |
Accounts payable and payable to third party brokers | |
| ( i 6,744) |
|
| ( i 7,434) | |
Other liabilities | |
| ( i 26,098) |
|
| ( i 21,173) | |
Net cash provided by operating activities | | $ | i 28,750 |
|
| i 23,147 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Purchases of available for sale and equity method securities | | | ( i 20,995) | | | ( i 99,584) | |
Proceeds from sales of available for sale and equity method securities | |
| i 2,366 |
|
| i 19,667 | |
Proceeds from maturities of available for sale securities | | | i 73,021 | | | i 78,678 | |
Additions to property and equipment | |
| ( i 6,268) |
|
| ( i 2,748) | |
Net cash provided by (used in) investing activities | | $ | i 48,124 |
|
| ( i 3,987) | |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Dividends paid | |
| ( i 33,647) |
|
| ( i 38,188) | |
Repurchase of common stock | |
| ( i 72,924) |
|
| ( i 77,147) | |
Net subscriptions (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds | | | i 5,174 | | | i 2,334 | |
Other | | | ( i 97) | | | ( i 117) | |
Net cash used in financing activities | | $ | ( i 101,494) |
|
| ( i 113,118) | |
| | | | | | | |
Net decrease in cash, cash equivalents and restricted cash | |
| ( i 24,620) |
|
| ( i 93,958) | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| i 226,140 |
|
| i 291,555 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | i 201,520 |
| | i 197,597 | |
See accompanying notes to the unaudited consolidated financial statements.
7
iWADDELL & REED FINANCIAL, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business and Significant Accounting Policies |
Waddell & Reed Financial, Inc. and Subsidiaries
Waddell & Reed Financial, Inc. (hereinafter referred to as the “Company,” “we,” “our” or “us”) is a holding company, incorporated in the state of Delaware in 1981, that conducts business through its subsidiaries. Founded in 1937, we are one of the oldest mutual fund complexes in the United States, having introduced the former Waddell & Reed Advisors group of mutual funds (the “Advisors Funds”) in 1940. Over time, we added additional mutual funds: Ivy Funds (the “Ivy Funds”); Ivy Variable Insurance Portfolios, our variable product offering (“Ivy VIP”); InvestEd Portfolios, our 529 college savings plan (“InvestEd”); and the Ivy High Income Opportunities Fund, a closed-end mutual fund (“IVH”) (collectively, Ivy Funds, Ivy VIP, InvestEd and IVH are referred to as the “Funds”). In addition to the Funds, our assets under management (“AUM”) include institutional managed accounts. As of June 30, 2020, we had $ i 65.0 billion in AUM.
We derive our revenues from providing investment management and advisory services, investment product underwriting and distribution, and shareholder services administration to the Funds and institutional accounts. We also provide wealth management services, primarily to retail clients through Waddell & Reed, Inc. (“W&R”), and independent financial advisors associated with W&R (“Advisors”), who provide financial planning and advice to their clients. Investment management and advisory fees and certain underwriting and distribution revenues are based on the level of AUM and assets under administration (“AUA”) and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of fees earned on fee-based advisory programs, asset-based service and distribution fees promulgated under Rule 12b-1 of the Investment Company Act of 1940 (“Rule 12b-1”), distribution fees on certain variable products, and commissions derived from sales of investment and insurance products. The products sold have various commission structures and the revenues received from those sales vary based on the type and dollar amount sold. Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on client AUM or number of client accounts. Our major expenses are for distribution of our products, compensation related costs, occupancy, general and administrative, and information technology.
The Company continues to proactively manage business continuity and safety considerations as circumstances of the coronavirus disease 2019 (“COVID-19’) evolve. Our leadership team’s priority is on ensuring the health and safety of all employees, clients, Advisors and communities, while also ensuring full continuity of service and access. The Company started transitioning to a work from home environment early in March 2020 and has been following the Centers for Disease Control and Prevention and local authorities’ recommendations on safe practices throughout this process. We have undertaken a number of steps to facilitate safety, security and full continuity of service, including:
| ● | Our Enterprise Preparedness Team and COVID-19 steering committee continue to meet regularly to assess developments and determine the best action to ensure business continuity and the safety of our employees and partners. |
| ● | We have adopted interim business practices, including restricting business travel, requiring all meetings to take place via remote access tools, adopting safety protocols to limit the potential for exposure, adopting social distancing practices, implementing a clearly-defined approval process for reentry to any worksite, advising personnel on preventive measures and offering remote collaboration and productivity tools and training resources to our employees. |
| ● | We enhanced monitoring and capabilities of our systems to allow our remote workforce to function efficiently and have continued our educational and monitoring practices to ensure there are no compromises to confidentiality, privacy and cybersecurity requirements. |
| ● | The Ivy investment management and distribution teams transitioned seamlessly to remote working. Our teams have a strong heritage of active collaboration which has migrated to a virtual environment without compromise. |
/8
| ● | Within our wealth management business, the majority of independent advisors are working from temporary locations. We are demonstrating our differentiated service and support model by continuing regular communications with Advisors as well as delivering additional advisor and client focused resources. |
| ● | We have not initiated any layoffs, furloughs or reduced hours. As we implemented our business continuity plans, we have intentionally maintained the same pay practices for all of our employees based upon their regular work schedule, paid spot bonuses to certain employees, implemented a temporary hourly wage increase to designated client services personnel, increased certain benefit coverages for specific COVID-19 related treatments through October, and are increasing our philanthropic contributions to local organizations to help support the COVID-19 responses in our community. |
iBasis of Presentation
We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented. The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 Form 10-K”). Certain amounts in the prior year’s financial statements have been reclassified for consistent presentation. Derivative activity was reclassified within operating activities on our consolidated statements of cash flows to provide a comprehensive view of the impact of the economic hedge program for our seed investment portfolio.
The accompanying unaudited consolidated financial statements are prepared consistent with the accounting policies described in Note 1 to the consolidated financial statements included in our 2019 Form 10-K with the exception of the adoption of Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment and ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, all of which became effective January 1, 2020.
In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at June 30, 2020 and the results of operations and cash flows for the three and six months ended June 30, 2020 and 2019 in conformity with accounting principles generally accepted in the United States.
iAssets Held for Sale
Assets held for sale included real property related to our corporate headquarters move and aviation equipment. The second quarter of 2020 included asset impairment charges of $ i 0.9 million on assets held for sale, which were recorded in general and administrative expenses in our consolidated statements of income. As of June 30, 2020, $ i 2.2 million of equipment, $ i 3.8 million of buildings and $ i 1.9 million of land that were held for sale were included in Property and equipment, net on our consolidated balance sheets. As of December 31, 2019, $ i 3.1 million of equipment, $ i 3.8 million of buildings and $ i 1.9 million of land that were held for sale were included in Property and equipment, net on our consolidated balance sheets. The Company intends to actively pursue the sale of these assets at market prices as soon as reasonably possible.
/
iImplementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
As of June 30, 2020, the Company had $ i 3.8 million of capitalized implementation costs for hosting arrangements with $ i 100 thousand of accumulated amortization in prepaid and other current assets on the consolidated balance sheet. Our hosting arrangements that are service contracts include internal and external costs related to various technology additions in support of our asset management and wealth management businesses. Amortization costs are recorded on a straight-line basis over the term of the hosting arrangement agreement.
/
9
2. | New Accounting Guidance |
Accounting Guidance Not Yet Adopted
In December 2019, FASB issued i ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies and improves the consistent application of the accounting for income taxes by removing certain exceptions to general principles and by clarifying and amending existing guidance. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are evaluating the impact the adoption of this ASU will have on our consolidated financial statements and related disclosures.
/ i3. | Revenue Recognition |
iAll revenue recognized in the consolidated statements of income is considered to be revenue from contracts with customers. The vast majority of revenue is determined based on average assets and is earned daily or monthly or is transactional and is earned on the trade date. As such, revenue from remaining performance obligations is not significant. The following table depicts the disaggregation of revenue by product and distribution channel:
| | | | | | | | | | |
| | For the three months ended June 30, | | For the six months ended June 30, | ||||||
| | 2020 |
| 2019 | | 2020 | | 2019 | ||
| | (in thousands) | ||||||||
Investment management fees: | | |
|
|
|
| |
|
|
|
Funds | | $ | i 92,977 |
| i 109,007 |
| $ | i 195,269 |
| i 214,752 |
Institutional | |
| i 2,847 |
| i 3,863 |
|
| i 5,774 |
| i 7,880 |
Total investment management fees | | $ | i 95,824 |
| i 112,870 |
| $ | i 201,043 |
| i 222,632 |
Underwriting and distribution fees: | | | | | | | | | | |
Unaffiliated | | | | | | | | | | |
Service and distribution fees | | $ | i 13,670 | | i 16,615 | | $ | i 28,946 | | i 33,081 |
Sales commissions | | | i 373 | | i 493 | | | i 824 | | i 935 |
Other revenues | | | i 91 | | i 83 | | | i 226 | | i 175 |
Total unaffiliated distribution fees | | $ | i 14,134 | | i 17,191 | | $ | i 29,996 | | i 34,191 |
Wealth Management | | | | | | | | | | |
Advisory fees | | $ | i 72,534 | | i 70,220 | | $ | i 149,652 | | i 135,450 |
Service and distribution fees | | | i 13,600 | | i 16,041 | | | i 28,189 | | i 31,445 |
Sales commissions | | | i 15,034 | | i 20,794 | | | i 35,691 | | i 40,416 |
Other revenues | | | i 8,331 | | i 9,249 | | | i 17,048 | | i 18,238 |
Total wealth management distribution fees | | | i 109,499 | | i 116,304 | | | i 230,580 | | i 225,549 |
Total distribution fees | | $ | i 123,633 | | i 133,495 | | $ | i 260,576 | | i 259,740 |
Shareholder service fees: | | | | | | | | | | |
Total shareholder service fees | | $ | i 20,577 |
| i 23,789 |
| $ | i 42,148 |
| i 47,192 |
| |
| |
| |
|
| |
| |
Total revenues | | $ | i 240,034 |
| i 270,154 |
| $ | i 503,767 |
| i 529,564 |
/10
4. | Investment Securities |
iInvestment securities at June 30, 2020 and December 31, 2019 were as follows:
| | | | | | |
| | June 30, | | | ||
|
| 2020 |
| 2019 | | |
| | | (in thousands) | | ||
Available for sale securities: | | | | | | |
Commercial paper | | $ | i 2,728 | | i 1,977 | |
Corporate bonds | | | i 203,799 | | i 254,291 | |
Total available for sale securities | |
| i 206,527 | | i 256,268 | |
Trading debt securities: | | | | | | |
Commercial paper | | | i 12,502 | | i 1,977 | |
Corporate bonds | |
| i 79,136 | | i 84,920 | |
U.S. Treasury bills | | | i 6,001 | | i 5,979 | |
Mortgage-backed securities | |
| i 2 | | i 4 | |
Term loans | | | i 39,643 | | i 44,268 | |
Consolidated sponsored funds | |
| i 49,413 | | i 43,567 | |
Total trading securities | |
| i 186,697 | | i 180,715 | |
Equity securities: | | | | | | |
Common stock | |
| i 39,252 | | i 34,945 | |
Sponsored funds | | | i 144,320 | | i 178,386 | |
Sponsored privately offered funds | |
| i 848 | | i 845 | |
Total equity securities | | | i 184,420 | | i 214,176 | |
Equity method securities: | | | | | | |
Sponsored funds | |
| i 41,408 | | i 37,187 | |
Total securities | | $ | i 619,052 | | i 688,346 | |
iCommercial paper and corporate bonds accounted for as available for sale and held as of June 30, 2020 mature as follows:
| | | | |
| | Amortized | | |
| | cost |
| Fair value |
| | (in thousands) | ||
Within one year | $ | i 53,380 | | i 54,005 |
After one year but within five years | | i 148,049 | | i 152,522 |
| $ | i 201,429 | | i 206,527 |
Commercial paper, corporate bonds, U.S. Treasury bills, mortgage-backed securities and term loans accounted for as trading and held as of June 30, 2020 mature as follows:
| | | | |
| | | | Fair value |
| | | | (in thousands) |
Within one year | | | $ | i 31,322 |
After one year but within five years | | | | i 83,599 |
After five years but within 10 years | | | | i 21,868 |
After 10 years | | | | i 495 |
| | | $ | i 137,284 |
/11
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at June 30, 2020:
| | | | | | | | | | |
|
| Amortized |
| Unrealized |
| Unrealized |
| |
| |
| | cost | | gains | | losses | | Fair value |
| |
|
| (in thousands) | | |||||||
Available for sale securities: | | | | | | | | | | |
Commercial paper | | $ | i 2,728 | | — | | — | | i 2,728 | |
Corporate bonds | | | i 198,701 |
| i 5,098 | | — |
| i 203,799 | |
| | $ | i 201,429 |
| i 5,098 |
| — |
| i 206,527 | |
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2019:
| | | | | | | | | | |
|
| Amortized |
| Unrealized |
| Unrealized |
| |
| |
| | cost | | gains | | losses | | Fair value |
| |
| | (in thousands) | | |||||||
Available for sale securities: | | | | | | | | | | |
Commercial paper | | $ | i 1,976 | | i 1 | | — | | i 1,977 | |
Corporate bonds | | | i 250,982 |
| i 3,314 | | ( i 5) |
| i 254,291 | |
| | $ | i 252,958 |
| i 3,315 |
| ( i 5) |
| i 256,268 | |
iA summary of available for sale investment securities with fair values below carrying values at June 30, 2020 is as follows:
| | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total | |||||||
| | | | | Unrealized | | | | Unrealized | | | | Unrealized |
|
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
| | (in thousands) | |||||||||||
Commercial paper | | $ | i 2,429 | | — | | — | | — | | i 2,429 | | — |
A summary of available for sale investment securities with fair values below carrying values at December 31, 2019 is as follows:
| | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or longer | | Total | |||||||
| | | | | Unrealized | | | | Unrealized | | | | Unrealized |
|
| Fair value |
| losses |
| Fair value |
| losses |
| Fair value |
| losses | |
| | (in thousands) | |||||||||||
Corporate bonds | | $ | i 4,538 | | — | | i 8,056 | | ( i 5) | | i 12,594 | | ( i 5) |
/
The Company’s investment portfolio included i 1 available for sale security in an unrealized loss position at June 30, 2020.
The Company evaluated available for sale securities in an unrealized loss position at June 30, 2020, including reviewing credit ratings, assessing the extent of losses, and considering the impact of market conditions for each individual security. The Company concluded no allowance for credit losses was necessary as it expects to recover the entire amortized cost basis of each security. The unrealized losses in the Company’s investment portfolio were primarily caused by changes in interest rates. At this time, the Company does not intend to sell, and does not believe it will be required to sell these securities before recovery of their amortized cost.
For equity securities held at the end of the period, net unrealized gains of $ i 28.1 million and $ i 5.1 million were recognized for the three months ended June 30, 2020 and June 30, 2019, respectively and net unrealized losses of $ i 7.8 million and net unrealized gains of $ i 18.2 million were recognized for the six months ended June 30, 2020 and June 30, 2019, respectively.
12
Sponsored Funds
The Company has classified its equity investments in the Funds as equity method investments (when the Company owns between 20% and 50% of the fund) or equity securities measured at fair value through net income (when the Company owns less than 20% of the fund). These entities do not meet the criteria of a variable interest entity (“VIE”) and are considered to be voting interest entities (“VOE”). The Company has determined the Funds are VOEs because the structure of the investment products is such that the voting rights held by the equity holders provide for equality among equity investors.
Sponsored Privately Offered Funds
The Company holds an interest in a privately offered fund structured in the form of a limited liability company. The members of this entity have the substantive ability to remove the Company as managing member or dissolve the entity upon a simple majority vote. This entity does not meet the criteria of a VIE and is considered to be a VOE.
Consolidated Sponsored Funds
iThe following table details the balances related to consolidated sponsored funds at June 30, 2020 and December 31, 2019, as well as the Company’s net interest in these funds:
| | | | | | |
| | June 30, | | | ||
| | 2020 |
| | 2019 | |
|
| (in thousands) | ||||
Cash |
| $ | i 3,459 | | | i 1,530 |
Investments | |
| i 49,413 | |
| i 43,567 |
Other assets | |
| i 1,290 | |
| i 483 |
Other liabilities | |
| ( i 1,737) | |
| — |
Redeemable noncontrolling interests | |
| ( i 25,857) | |
| ( i 19,205) |
Net interest in consolidated sponsored funds |
| $ | i 26,568 | | | i 26,375 |
During the six months ended June 30, 2020, we consolidated one Ivy Fund in which we provided initial seed capital at the time of the fund’s formation. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements.
Fair Value
Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of the asset. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset. An individual investment’s fair value measurement is assigned a level based upon the observability of the inputs that are significant to the overall valuation. The three-level hierarchy of inputs is summarized as follows:
| ● | Level 1 – Investments are valued using quoted prices in active markets for identical securities. |
| ● | Level 2 – Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities. |
| ● | Level 3 – Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments. |
13
Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value. The carrying amounts of certificates of deposit and commercial paper are measured at amortized cost, which approximates fair value due to the short time between purchase and expected maturity of the investments. Depending on the nature of the inputs, these investments are generally classified as Level 1 or 2 within the fair value hierarchy. U.S. Treasury bills are valued upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer. Term loans are valued using a price or composite price from one or more brokers or dealers as obtained from an independent pricing service. The fair value of loans is estimated using recently executed transactions, market price quotations, credit/market events, and cross-asset pricing. Inputs are generally observable market inputs obtained from independent sources. Term loans are generally categorized in Level 2 of the fair value hierarchy, unless key inputs are unobservable in which case they would be categorized as Level 3. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.
iThe following tables summarize our investment securities as of June 30, 2020 and December 31, 2019 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs.
| | | | | | | | | | | | |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Held at Net Asset Value | | Total |
| ||
| | (in thousands) |
| |||||||||
Cash equivalents: (1) | | | | | | | | | | | | |
Money market funds | | $ | i 54,598 | | — | | — | | — | | i 54,598 | |
Commercial paper | | | — | | i 28,503 | | — | | — | | i 28,503 | |
Total cash equivalents | | $ | i 54,598 | | i 28,503 | | — | | — | | i 83,101 | |
Available for sale securities: | | | | | | | | | | | | |
Commercial paper | | $ | — | | i 2,728 | | — | | — | | i 2,728 | |
Corporate bonds | | | — | | i 203,799 | | — | | — | | i 203,799 | |
Trading debt securities: | | | | | | | | | | | | |
Commercial paper | | | — | | i 12,502 | | — | | — | | i 12,502 | |
Corporate bonds | | | — | | i 79,136 | | — | | | | i 79,136 | |
U.S. Treasury bills | | | — | | i 6,001 | | — | | — | | i 6,001 | |
Mortgage-backed securities |
| | — |
| i 2 |
| — |
| — | | i 2 | |
Term loans | |
| — |
| i 35,990 |
| i 3,653 |
| — | | i 39,643 | |
Consolidated sponsored funds | |
| — |
| i 49,413 |
| — |
| — | | i 49,413 | |
Equity securities: | | | | | | | | | | | | |
Common stock | | | i 39,252 | | — | | — | | — | | i 39,252 | |
Sponsored funds | | | i 144,320 | | — | | — | | — | | i 144,320 | |
Sponsored privately offered funds measured at net asset value (2) | | | — | | — | | — | | i 848 | | i 848 | |
Equity method securities: (3) | | | | | | | | | | | | |
Sponsored funds | | | i 41,408 | | — | | — | | — | | i 41,408 | |
Total investment securities | | $ | i 224,980 | | i 389,571 | | i 3,653 | | i 848 | | i 619,052 | |
/14
| | | | | | | | | | | | |
| Level 1 |
| Level 2 |
| Level 3 |
| Other Assets Held at Net Asset Value | | Total |
| ||
| | (in thousands) |
| |||||||||
Cash equivalents: (1) | | | | | | | | | | | | |
Money market funds | | $ | i 4,203 | | — | | — | | — | | i 4,203 | |
Commercial paper | | | — | | i 38,143 | | — | | — | | i 38,143 | |
Total cash equivalents | | $ | i 4,203 | | i 38,143 | | — | | — | | i 42,346 | |
Available for sale securities: | | | | | | | | | | | | |
Commercial paper | | $ | — | | i 1,977 | | — | | — | | i 1,977 | |
Corporate bonds | | | — | | i 254,291 | | — | | — | | i 254,291 | |
Trading debt securities: | | | | | | | | | | | | |
Commercial paper | | | — | | i 1,977 | | — | | — | | i 1,977 | |
Corporate bonds | | | — | | i 84,920 | | — | | | | i 84,920 | |
U.S. Treasury bills | | | — | | i 5,979 | | — | | — | | i 5,979 | |
Mortgage-backed securities |
| | — |
| i 4 |
| — |
| — | | i 4 | |
Term loans | | | — | | i 40,368 | | i 3,900 | | — | | i 44,268 | |
Consolidated sponsored funds | | | — | | i 43,567 | | — | | — | | i 43,567 | |
Equity securities: | | | | | | | | | | | | |
Common stock | |
| i 34,942 |
| — |
| i 3 |
| — | | i 34,945 | |
Sponsored funds | |
| i 178,386 |
| — |
| — |
| — | | i 178,386 | |
Sponsored privately offered funds measured at net asset value (2) | | | — | | — | | — | | i 845 | | i 845 | |
Equity method securities: (3) | | | | | | | | | | | | |
Sponsored funds | | | i 37,187 | | — | | — | | — | | i 37,187 | |
Total investment securities | | $ | i 250,515 | | i 433,083 | | i 3,903 | | i 845 | | i 688,346 | |
| (1) | Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at net asset value and are classified as Level 1. Cash investments in commercial paper are measured at cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization and are classified as Level 2. |
| (2) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. |
| (3) | The Company’s equity method investments are investment companies that record their underlying investments at fair value. |
15
The following table summarizes the activity of investments categorized as Level 3 for the six months ended June 30, 2020:
| | | |
|
| For the six months ended | |
| | ||
| | (in thousands) | |
Level 3 assets at December 31, 2019 | | $ | i 3,903 |
Additions | |
| i 6,501 |
Transfers in to level 3 | | | i 9,877 |
Transfers out of level 3 | | | ( i 12,395) |
Losses in Investment and other income | |
| ( i 1,127) |
Redemptions/Paydowns | | | ( i 3,106) |
Level 3 assets at June 30, 2020 | | $ | i 3,653 |
| | | |
Change
in unrealized gains for Level 3 assets held at | | $ | i 43 |
i5. | Derivative Financial Instruments |
The Company has in place an economic hedge program that uses total return swap contracts to hedge market risk related to its investments in certain sponsored funds. Certain of the consolidated sponsored funds may utilize derivative financial instruments within their portfolios in pursuit of their stated investment objectives. We do not hedge for speculative purposes.
The Company was party to i 11 total return swap contracts with a combined notional value of $ i 221.8 million and i 14 total return swap contracts with a combined notional value of $ i 228.2 million as of June 30, 2020 and December 31, 2019, respectively. These derivative financial instruments are not designated as hedges for accounting purposes. Changes in fair value of the total return swap contracts are recognized in Investment and other (loss) income in the Company’s consolidated statements of income.
The counterparties of the total return swap contracts posted $ i 3.8 million in cash collateral with the Company as of June 30, 2020, which is included in accounts payable in the Company’s consolidated balance sheet. The Company posted $ i 3.7 million in cash collateral with the counterparties of the total return swap contracts as of December 31, 2019, which is included in customers and other receivables in the Company’s consolidated balance sheet. The Company does not record its fair value in derivative transactions against the posted collateral.
iThe following table presents the fair value of the derivative financial instruments as of June 30, 2020 and December 31, 2019 and is calculated based on Level 2 inputs:
| | | | | | | | |
| | | | | June 30, | | | December 31, |
| | Balance sheet | | | 2020 | | | 2019 |
|
| location |
| Fair value |
| Fair value | ||
| | |
| (in thousands) | ||||
Total return swap contracts |
| Prepaid expenses and other current assets | | $ | i 2,145 | | | — |
Total return swap contracts | | Other current liabilities | | | — | | | i 3,990 |
Net total return swap asset (liability) | | |
| $ | i 2,145 | | | ( i 3,990) |
iThe following is a summary of net (losses) gains recognized in income for the three and six months ended June 30, 2020 and June 30, 2019:
| | | | | | | | | | | |
| | | | Three months ended | | Six months ended | |||||
| | Income statement | | June 30, | | June 30, | |||||
|
| location |
| | 2020 | 2019 |
| | 2020 | | 2019 |
| | |
| (in thousands) | | (in thousands) | |||||
Total return swap contracts |
| Investment and other income |
| $ | ( i 30,449) | ( i 5,241) | | $ | i 11,620 | | ( i 25,863) |
/
16
6. | Goodwill and Identifiable Intangible Assets |
iGoodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business. Our goodwill is not deductible for tax purposes. The Company performs an annual goodwill impairment assessment during the second quarter of each year. Goodwill and identifiable intangible assets (all considered indefinite lived) at June 30, 2020 and December 31, 2019 are as follows:
| | | | | | |
| | June 30, | |
| ||
| | 2020 | | 2019 | | |
| | (in thousands) | | |||
Goodwill |
| $ | i 106,970 |
| i 106,970 |
|
| | | | | | |
Mutual fund management advisory contracts | |
| i 38,699 |
| i 38,699 | |
Other | |
| i 200 |
| i 200 | |
Total identifiable intangible assets | |
| i 38,899 |
| i 38,899 | |
| | | | | | |
Total | | $ | i 145,869 |
| i 145,869 | |
/
i7. | Indebtedness |
Debt is reported at its carrying amount in the consolidated balance sheets. The fair value, calculated based on Level 2 inputs, of the Company’s senior unsecured notes maturing January 13, 2021 was $ i 97.1 million at June 30, 2020 compared to the carrying value net of debt issuance costs of $ i 95.0 million, which is listed under short-term notes payable in the consolidated balance sheet.
/ i8. | Income Tax Uncertainties |
In the accompanying consolidated balance sheets, unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities; unrecognized tax benefits that are expected to be settled within the next 12 months are included in other current liabilities; unrecognized tax benefits that reduce a net operating loss, similar tax loss, or tax credit carryforward are presented as a reduction to non-current deferred income taxes. As of June 30, 2020 and December 31, 2019, the Company’s consolidated balance sheets included unrecognized tax benefits, including penalties and interest, of $ i 2.1 million ($ i 1.8 million net of federal benefit) and $ i 2.0 million ($ i 1.7 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate.
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. The Company does not expect the resolution or settlement of any open audits, federal or state, to materially impact the consolidated financial statements.
Our 2016-2019 federal income tax returns are open tax years that remain subject to potential future audit. Our state income tax returns for all years after 2015 and, in certain states, income tax returns for 2015, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.
/17
9. | Pension Plan and Postretirement Benefits Other Than Pension |
Benefits payable under our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) were based on employees’ years of service and compensation during the final i 10 years of employment. On July 26, 2017, the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) approved an amendment to freeze the Pension Plan, effective September 30, 2017. After September 30, 2017, participants in the Pension Plan ceased accruing additional benefits for future service or compensation. Participants retain benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. The Compensation Committee approved the termination of the Pension Plan, effective June 1, 2019, and the Company intends to terminate the Pension Plan in a standard termination, as defined by the Pension Benefit Guaranty Corporation. The Company is currently performing the administrative actions required to carry out the termination, including payments in July 2020 to participants, beneficiaries and alternate payees that elected to receive a lump sum distribution and to the selected annuity provider that has assumed the liabilities of the Pension Plan.
We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as Advisors. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for benefits after age i 65 with the exception of a small group of employees that were grandfathered when this plan was established. During the third quarter of 2016, the Company amended this plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016.
iThe components of net periodic pension costs and other postretirement costs related to these plans are reflected in the table below. Net periodic pension costs are recorded in investment and other income on the Company’s consolidated statements of income.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Other | | | | | | | Other | | ||||||
| | Pension Benefits | | Postretirement Benefits | | Pension Benefits | | Postretirement Benefits | | ||||||||||||
| | Three months ended June 30, | | | Three months ended June 30, | | Six months ended June 30, | | | Six months ended June 30, | | ||||||||||
| | 2020 | | 2019 | | | 2020 | | 2019 | | 2020 | | 2019 | | | 2020 | | 2019 | | ||
| | | (in thousands) | | | (in thousands) | | ||||||||||||||
Components of net periodic benefit cost: |
| |
|
|
|
|
|
|
|
|
| | |
| |
| | |
| |
|
Interest cost | | $ | i 1,316 |
| i 1,545 | | $ | i 4 |
| i 8 | | $ | i 2,632 |
| i 3,073 |
| $ | i 8 |
| i 16 | |
Expected return on plan assets | |
| ( i 1,122) |
| ( i 1,567) | |
| — |
| — | |
| ( i 2,244) |
| ( i 3,157) |
|
| — |
| — | |
Actuarial gain amortization | |
| — |
| — | |
| ( i 67) |
| ( i 123) | |
| — |
| — |
|
| ( i 134) |
| ( i 247) | |
Total | | $ | i 194 | | ( i 22) | | $ | ( i 63) | | ( i 115) | | $ | i 388 | | ( i 84) | | $ | ( i 126) | | ( i 231) | |
/
i10. | Stockholders’ Equity |
Earnings per Share
iThe components of basic and diluted earnings per share were as follows:
| | | | | | | | | | | |
| | Three months ended | | Six months ended | | ||||||
| | June 30, | | | |||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | ||
| | (in thousands, except per share amounts) | | ||||||||
Net income attributable to Waddell & Reed Financial, Inc. |
| $ | i 24,824 |
| i 33,948 |
| $ | i 46,810 |
| i 66,002 |
|
| | | | | | | | | | | |
Weighted average shares outstanding, basic and diluted | |
| i 65,488 | | i 74,694 | |
| i 66,581 | | i 75,492 | |
| | | | | | | | | | | |
Earnings per share, basic and diluted | | $ | i 0.38 | | i 0.45 | | $ | i 0.70 | | i 0.87 | |
/18
Dividends
During the quarter, the Board of Directors declared a quarterly dividend on our Class A common stock in the amount of $ i 0.25 per share with an August 3, 2020 payment date and a July 13, 2020 record date. The total dividend to be paid on August 3, 2020 is $ i 16.3 million.
Common Stock Repurchases
The Board of Directors has authorized the repurchase of our Class A common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including issuing shares to employees in our stock-based compensation programs.
There were i 1,468,367 shares and i 2,142,894 shares repurchased in the open market or privately during the three months ended June 30, 2020 and 2019, respectively, which includes i 219,852 shares and i 290,910 shares, respectively, repurchased from employees who tendered shares to cover income tax withholdings with respect to vesting of stock awards during these two reporting periods. There were i 5,275,805 shares and i 4,369,219 shares repurchased in the open market or privately during the six months ended June 30, 2020 and 2019, respectively, which includes i 451,245 shares and i 439,983 shares, respectively, repurchased from employees who tendered shares to cover income tax withholdings with respect to vesting of stock awards during these two reporting periods.
Accumulated Other Comprehensive Income
iThe following tables summarize accumulated other comprehensive income activity for the three and six months ended June 30, 2020 and June 30, 2019.
| | | | | | | |
| | For the three months ended June 30, | |||||
| | | | | | Total | |
| | Unrealized | | Postretirement | | accumulated | |
| | gains (losses) on | | benefits | | other | |
| | AFS investment | | unrealized | | comprehensive | |
| | securities | | gains (losses) | | income (loss) | |
| | (in thousands) | |||||
Balance at March 31, 2020 |
| $ | i 91 |
| i 664 |
| i 755 |
Other comprehensive income before reclassification |
|
| i 3,943 | | — |
| i 3,943 |
Amount reclassified from accumulated other comprehensive income |
|
| ( i 160) | | ( i 51) |
| ( i 211) |
Net current period other comprehensive income (loss) |
|
| i 3,783 | | ( i 51) |
| i 3,732 |
Balance at June 30, 2020 | | $ | i 3,874 |
| i 613 |
| i 4,487 |
| | | | | | | |
| | | | | | | |
Balance at March 31, 2019 |
| $ | i 861 |
| i 1,034 |
| i 1,895 |
Other comprehensive income before reclassification |
|
| i 1,281 |
| — |
| i 1,281 |
Amount reclassified from accumulated other comprehensive income |
|
| — |
| ( i 95) |
| ( i 95) |
Net current period other comprehensive income (loss) |
|
| i 1,281 | | ( i 95) |
| i 1,186 |
Balance at June 30, 2019 | | $ | i 2,142 |
| i 939 |
| i 3,081 |
19
| | | | | | | |
| | For the six months ended June 30, | |||||
| | | | | | Total | |
| | Unrealized | | Postretirement | | accumulated | |
| | gains (losses) on | | benefits | | other | |
| | AFS investment | | unrealized | | comprehensive | |
| | securities | | gains (losses) | | income (loss) | |
| | (in thousands) | |||||
Balance at December 31, 2019 |
| $ | i 2,521 |
| i 713 |
| i 3,234 |
Other comprehensive income before reclassification |
| | i 1,716 |
| — |
| i 1,716 |
Amount reclassified from accumulated other comprehensive income |
| | ( i 363) |
| ( i 100) |
| ( i 463) |
Net current period other comprehensive income (loss) |
| | i 1,353 | | ( i 100) |
| i 1,253 |
Balance at June 30, 2020 | | $ | i 3,874 |
| i 613 |
| i 4,487 |
| | | | | | | |
| | | | | | | |
Balance at December 31, 2018 |
| $ | ( i 797) |
| i 1,128 |
| i 331 |
Other comprehensive income before reclassification | | | i 3,034 | | — | | i 3,034 |
Amount reclassified from accumulated other comprehensive income |
| | ( i 95) | | ( i 189) |
| ( i 284) |
Net current period other comprehensive income (loss) |
| | i 2,939 | | ( i 189) |
| i 2,750 |
Balance at June 30, 2019 | | $ | i 2,142 |
| i 939 |
| i 3,081 |
iReclassifications from accumulated other comprehensive income (loss) and included in net income are summarized in the tables that follow.
| | | | | | | | | |
| | | | | Tax | | | | |
For the three months ended June 30, 2020 | | Pre-tax | | expense | | Net of tax | | Statement of income line item | |
| | (in thousands) | | | |||||
Reclassifications included in net income: |
| |
|
|
|
|
|
|
|
Gains on available for sale debt securities | | $ | i 211 |
| ( i 51) | | i 160 |
| Investment and other income |
Amortization of postretirement benefits | | | i 67 |
| ( i 16) |
| i 51 |
| Compensation and benefits |
Total | | $ | i 278 |
| ( i 67) |
| i 211 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | Tax | | | | |
For the three months ended June 30, 2019 | | Pre-tax | | expense | | Net of tax | | Statement of income line item | |
| | (in thousands) | | | |||||
Reclassifications included in net income: |
| |
|
|
|
|
|
|
|
Amortization of postretirement benefits | | $ | i 123 |
| ( i 28) |
| i 95 |
| Compensation and benefits |
Total | | $ | i 123 |
| ( i 28) |
| i 95 | | |
| | | | | | | | | |
| | | | | Tax | | | | |
For the six months ended June 30, 2020 | | Pre-tax | | expense | | Net of tax | | Statement of income line item | |
| | (in thousands) | | | |||||
Reclassifications included in net income: |
| |
|
|
|
|
|
|
|
Gains on available for sale debt securities | | $ | i 477 |
| ( i 114) |
| i 363 |
| Investment and other income |
Amortization of postretirement benefits | | | i 134 |
| ( i 34) |
| i 100 |
| Compensation and benefits |
Total | | $ | i 611 |
| ( i 148) |
| i 463 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | Tax | | | | |
For the six months ended June 30, 2019 | | Pre-tax | | expense | | Net of tax | | Statement of income line item | |
| | (in thousands) | | | |||||
Reclassifications included in net income: |
| |
|
|
|
|
|
|
|
Gains on available for sale debt securities | | $ | i 125 |
| ( i 30) |
| i 95 |
| Investment and other income |
Amortization of postretirement benefits | |
| i 247 |
| ( i 58) |
| i 189 |
| Compensation and benefits |
Total | | $ | i 372 |
| ( i 88) |
| i 284 | | |
20
i11. | Leases |
The Company has operating and finance leases for corporate office space and equipment. Our leases have remaining lease terms of less than i one year to i six years, some of which include options to extend leases for up to i 20 years, and some of i which include i options to terminate the leases within i one year. Certain leases include variable lease payments in future periods based on a market index or rate. We i determine if an arrangement is a i lease at inception (or the effective date of ASU 2016-02, Leases). Operating lease assets and liabilities are included in other non-current assets, other current liabilities, and other non-current liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, net, other current liabilities, and other non-current liabilities in our consolidated balance sheets.
Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date (or the effective date of ASU 2016-02, Leases) based on the present value of lease payments over the lease term. The Company uses an incremental borrowing rate based on the information available at the commencement date (or the effective date of ASU 2016-02, Leases) in determining the present value of lease payments. The ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which we have elected not to separate.
During January 2020, we signed a i fifteen-year lease, which we expect to commence during 2022, relating to the development of a new i 260,000 square foot innovative, distinctive and sustainably-designed corporate headquarters building in the heart of downtown Kansas City, Missouri. The lease will be recognized in the Company’s consolidated financial statements during the period that includes the lease’s commencement date.
iThe components of lease expense were as follows:
| | | | | | |
| | Three months ended June 30, | ||||
| | 2020 | | 2019 | ||
| | (in thousands) | ||||
Operating Lease Cost | | $ | i 3,028 |
| $ | i 4,965 |
| | | | | | |
Finance Lease Cost: | | | | | | |
Amortization of ROU assets | | $ | i 52 |
| $ | i 61 |
Interest on lease liabilities | | | i 4 |
| | i 7 |
Total | | $ | i 56 | | $ | i 68 |
| | | | | | |
| | Six months ended June 30, | ||||
| | 2020 | | 2019 | ||
| | (in thousands) | ||||
Operating Lease Cost | | $ | i 6,261 |
| $ | i 10,283 |
| | | | | | |
Finance Lease Cost: | | | | | | |
Amortization of ROU assets | | $ | i 107 |
| $ | i 144 |
Interest on lease liabilities | | | i 13 |
| | i 15 |
Total | | $ | i 120 | | $ | i 159 |
/21
Supplemental cash flow information related to leases was as follows:
| | | | | | |
| | Six months ended June 30, | ||||
| | 2020 | | 2019 | ||
| | (in thousands) | ||||
Cash paid for amounts included in the measurement of lease liabilities: |
| |
|
| |
|
Operating cash flows from operating leases | | $ | i 6,280 |
| $ | i 9,867 |
Operating cash flows from finance leases | |
| i 13 |
|
| i 15 |
Financing cash flows from finance leases | | | i 133 | | | i 153 |
| | | | | | |
ROU assets obtained in exchange for lease obligations: | | | | | | |
Operating leases | | | i 7 | | | — |
Finance leases | | | i 10 | | | i 40 |
iSupplemental balance sheet information related to leases was as follows:
| | | | | | |
| | | ||||
| | (in thousands, except lease term and discount rate) | ||||
Operating Leases: |
| |
|
| |
|
Operating lease ROU assets (Other non-current assets) | | $ | i 17,493 |
| $ | i 23,457 |
| | | | | | |
Other current liabilities | | $ | i 8,373 | | $ | i 10,479 |
Other non-current liabilities | | | i 10,843 | | | i 14,694 |
Total operating lease liabilities | | $ | i 19,216 | | $ | i 25,173 |
| | | | | | |
| | | | | | |
Finance Leases: | | | | | | |
Property and equipment, gross | | $ | i 801 | | $ | i 985 |
Accumulated depreciation | | | ( i 661) | | | ( i 737) |
Property and equipment, net | | $ | i 140 | | $ | i 248 |
| | | | | | |
Other current liabilities | | $ | i 112 | | $ | i 203 |
Other non-current liabilities | | | i 19 | | | i 55 |
Total finance lease liabilities | | $ | i 131 | | $ | i 258 |
| | | | | | |
| | | | | | |
Weighted average remaining lease term: | | | | | | |
Operating leases | | | i 4 years | | | i 4 years |
Finance leases | | | i 1 year | | | i 1 year |
| | | | | | |
Weighted average discount rate: | | | | | | |
Operating leases | | | i 4.28% | | | i 4.32% |
Finance leases | | | i 6.00% | | | i 6.00% |
22
Maturities of lease liabilities are as follows:
| | | | | | |
| | Operating | | | Finance | |
| | Leases | | | Leases | |
| | (in thousands) | ||||
Year ended December 31, | | | | | | |
2020 (excluding the six months ended June 30, 2020) |
| $ | i 5,130 |
| | i 83 |
2021 | | | i 6,493 | | | i 47 |
2022 | |
| i 2,415 |
| | i 8 |
2023 | |
| i 2,122 |
| | — |
2024 | | | i 2,090 | | | — |
Thereafter | |
| i 2,613 |
| | — |
Total lease payments | |
| i 20,863 |
| | i 138 |
Less imputed interest | | | ( i 1,647) | | | ( i 7) |
Total | | $ | i 19,216 |
| | i 131 |
i12. | Contingencies |
The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.
The Company establishes reserves for litigation and similar matters when those matters present material loss contingencies that management determines to be both probable and reasonably estimable in accordance with ASC 450, “Contingencies.” These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information. The Company discloses the nature of the contingency when management believes it is reasonably possible the outcome may be significant to the Company’s consolidated financial statements and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items that management believes should be disclosed. Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.
i13. Subsequent Events
In connection with the termination of the Pension Plan, in July 2020, the Company contributed $ i 3.7 million dollars to the Pension Plan. Payments were made in July 2020 to participants, beneficiaries and alternate payees that elected to receive a lump sum distribution and to the selected annuity provider that has assumed the liabilities of the Pension Plan. As part of the assumption of Pension Plan liabilities by the annuity provider, the Company relieved the pension liability on its balance sheet and recorded a preliminary settlement loss in the amount of $ i 0.6 million.
/23
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and notes to the unaudited consolidated financial statements included elsewhere in this report. Unless otherwise indicated or the context otherwise requires all references to the “Company,” “we,” “our” or “is” refer to Waddell & Reed Financial, Inc. and its consolidated subsidiaries.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of AUM and AUA, distribution sources, expense levels, redemption rates, stock repurchases and the financial markets and other conditions. These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature. Readers are cautioned that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to the impact of the COVID-19 pandemic and related economic conditions, as well as the factors discussed below. If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019, which include, without limitation:
| ● | The loss of existing distribution relationships or inability to access new distribution relationships; |
| ● | A reduction in our AUM on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures; |
| ● | The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body; |
| ● | Changes in our business model, operations and procedures, including our methods of distributing our proprietary products, as a result of evolving fiduciary standards; |
| ● | The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes; |
| ● | A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds; |
| ● | Our inability to reduce expenses rapidly enough to align with declines in our revenues due to various factors, including fee pressure, the level of our AUM or our business environment; |
| ● | Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies; |
| ● | Our inability to attract and retain senior executive management and other key personnel to conduct our business; |
| ● | A failure in, or breach of, our operational or security systems or our technology infrastructure, or those of third parties on which we rely; and |
| ● | Our inability to implement new information technology and systems, or our inability to complete such implementation in a timely or cost effective manner. |
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The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission (the “SEC”), including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, 2019 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2020. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.
Overview
We are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions and client activity. Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.
Our products are distributed through our unaffiliated channel, or through our wealth management channel by Advisors. Through our institutional channel, we distribute an array of investment styles to a variety of clients.
Through our unaffiliated channel, we distribute mutual funds through broker-dealers, retirement platforms and registered investment advisers through a team of external and internal wholesalers.
In our wealth management channel, we had 924 Advisors and 393 licensed advisor associates as of June 30, 2020, for a total of 1,317 licensed individuals associated with W&R who operate out of offices located throughout the United States and provide financial advice for retirement, education funding, estate planning and other financial needs for clients.
We manage assets in a variety of investment styles in our institutional channel. Most of the clients in this channel are other asset managers that hire us to act as a subadviser for their branded products; they are typically domestic and foreign distributors of investment products who lack scale or the track record to manage internally, or choose to market multi-manager styles. Our diverse client list also includes pension funds, Taft Hartley plans and endowments.
Operating Results
| ● | Net income attributable to Waddell & Reed Financial, Inc. for the second quarter of 2020 was $24.8 million, or $0.38 per diluted share, compared to $33.9 million, or $0.45 per diluted share, during the second quarter of 2019. |
| ● | Revenues of $240.0 million during the second quarter of 2020 decreased 11% compared to the second quarter of 2019. Operating expenses of $216.4 million during the second quarter of 2020 decreased 5% compared to the same quarter in 2019. The operating margin was 9.8% during the second quarter of 2020, compared to 15.3% during the second quarter of 2019. |
| ● | AUM ended the quarter at $65.0 billion, a decrease of 10% compared to the second quarter of 2019 due to market volatility and continued net outflows. Redemptions decreased 19% compared to the second quarter of 2019. |
| ● | Ivy Investments introduced two additional strategies in model-delivery format, bringing the total offering to nine strategies. Additionally, as a result of changes stemming from ongoing strategic evaluation of Ivy Funds fees, 76% of AUM is now priced at or below its respective peer median. |
| ● | Wealth management AUA ended the quarter at $59.0 billion, a 3% increase compared to the same quarter in 2019 primarily due to market appreciation and growth in net new advisory AUA, partially offset by an ongoing migration away from non-advisory AUA. |
| ● | Significant progress in wealth management transformation continued, with enhanced focus on recruiting, improving operating metrics and additional growth opportunities. |
| o | Since January 1, 2020, 21 Advisors have affiliated with W&R with combined prior firm AUA totaling $1.4 billion. Advisor count inflected modestly, stabilizing at 1,317 licensed individuals at June 30, 2020. |
| o | Advisory AUA net flows were positive for the 6th straight quarter despite a challenging market backdrop, illustrating the wealth manager’s ability to capture assets through market cycles. |
| o | Launched the second phase of our wealth management technology transformation, ONESource, which seamlessly connects data across platforms for Advisors, and ONEService, a digital repository of processes, procedures and other information available to all Advisors. |
| o | Introduced a High Net Worth suite of products and services as well as a new Separately Managed Account Strategies product offering. |
| ● | During the second quarter of 2020, we returned $34.6 million of capital to stockholders through dividends and share repurchases, compared to $55.7 million in the same period in 2019. We repurchased 1.5 million shares during the second quarter of 2020. |
| ● | Our balance sheet remains solid and we ended the second quarter of 2020 with cash and investments of $775.8 million, excluding restricted cash. |
| ● | Hired two executives focused on strategic growth – one to support the buildout of enterprise-wide data analytics and related capabilities, and one to support M&A origination, evaluation, and integration. |
Vision and Growth Strategy
We are committed to steadily executing on our long-term vision and growth strategy, which consists of six key, strategic enablers: competitive products and pricing; continued focus on strong core processes and performance metrics; the ability to leverage technology and analytics as a strategic asset across the organization; having a growth culture and a more agile organization; sharpening our brand awareness in the marketplace; and finally, effectively allocating capital through internal investment initiatives, as well as taking advantage of potential dislocations and acquisition opportunities in the asset management and wealth management industries. Over the quarter, we took some major steps in support of these key focus areas.
Within the product and pricing enabler, we introduced new products in both businesses. In our asset management business, we introduced two additional strategies in a model-delivery format, bringing our total offering to nine strategies. These strategies are available in third-party retail separately managed accounts and unified managed accounts. In our wealth management business, we introduced a High Net Worth suite of products and services designed to meet the needs of more affluent clients while enabling Advisors to offer a holistic, flexible approach to complex financial situations. We also introduced new Separately Managed Account Strategies (“SMAs”), in partnership with a range of institutional money managers, allowing Advisors to offer the direct ownership structure, transparency, tax strategy options and other benefits of SMAs to clients who may benefit.
Within the core processes and performance enabler, we made enhancements in both businesses. In our asset manager, we strengthened our institutional distribution model by launching new technology to create a more seamless client experience. In our wealth manager, we implemented a remote recruiting process that allows us to continue Advisor recruiting activities despite the challenges associated with COVID-19. We expect these innovations will benefit our recruiting efforts even in a more normal working environment, as we are able to leverage technology to more nimbly and quickly evaluate candidates in our pipeline. Our wealth management team also converted our annual Vision conference to a virtual format and was able to pivot quickly to leverage technology-enabled solutions and create an interactive, virtual, two-day experience that was attended by nearly 1,500 Advisors, partners and home office staff.
Within the technology & analytics enabler, we have filled the newly created position of Chief Analytics Officer. This role will spearhead our efforts across the enterprise focused on our enterprise-wide data analytics and artificial intelligence initiatives. We have also continued with our wealth management and asset management technology platform initiatives with the long-term objectives of improved Advisor and client experiences, enhanced sales enablement and improved internal operations. Lastly, we implemented additional digital and technology capabilities for our employees throughout the quarter for continued operational productivity and efficiency while we navigate during this unique time period.
Within our growth culture and agile organization strategic enabler, we took additional action to further our diversity and inclusion initiatives. We have made great strides to ensure we have a true culture of belonging within our organization. Recently completed actions and steps include: conducting additional all employee learning sessions called Days of Understanding focused on racial diversity and justice; announcing that beginning in 2021, we will observe Juneteenth
26
each year as a paid Company holiday, which will provide our employees the opportunity to pause to celebrate this day dedicated to freedom and liberty and reflect on its meaning for our country; the creation of two new roles within the Company dedicated entirely to diversity and inclusion, including a Head of Diversity and Inclusion, responsible for developing and delivering on the next evolution of our comprehensive diversity & inclusion strategy that is aligned with our purpose, vision, mission, values and business goals across the organization, and a second role that will focus on diversity outreach and sourcing; and providing support to organizations to help address racial justice and diversity and to better support our local, underserved communities.
Within our brand awareness enabler, we have launched a full brand review that will include all three of our brands across the enterprise. This is a multi-year effort, and we launched the first phase of this initiative in the second quarter and are partnering with a premiere, well respected global brand agency on this phase of the project.
Within our capital allocation enabler, our balance sheet enables us to maintain regular capital return to shareholders by way of dividends and share buybacks, while also positioning us to pursue and finance strategic M&A if opportunities arise. In support of these efforts, we announced during the quarter that we filled a newly created position of Vice President, Acquisitions Strategy & Integration. We expect that inorganic growth will be a key component of our strategy, and this position will play a key role as we continually evaluate acquisition opportunities.
Impact of COVID-19
The market volatility that began in March 2020, as a result of the reaction to COVID-19 and its impact on the global economy, resulted in significant depreciation in the stock markets. In the second quarter of 2020, the markets rebounded, benefiting our measures of AUM and AUA for the three months ended June 30, 2020, but not entirely recovering to beginning of year levels. AUM as of June 30, 2020 was 5% more than the average AUM for the quarter. AUA increased 14% during the quarter from $51.8 billion at March 31, 2020 to $59.0 billion at June 30, 2020, but like AUM, average AUA decreased from the first quarter to the second quarter of 2020. Since average assets or beginning of the month assets is the measure by which revenues are calculated, we continued to see the revenue impact of the first quarter market depreciation in the second quarter of 2020.
Some of our expenses, particularly certain distribution expenses, are directly correlated with revenue, and we saw decreases in these expenses in line with the revenue decreases during the second quarter. In regard to controllable expenses, defined as Compensation and benefits, General and administrative, Technology, Occupancy and Marketing and advertising, while the Company did take several incremental actions to reduce these expenses through the first six months of 2020, we continue to take a long-term view and invest in the areas we think will allow us to come out of the pandemic in a stronger position and drive our long-term growth strategy. We will continue to closely monitor expenses for opportunities to drive additional efficiencies; however, we do expect an increase in controllable expense for the remainder of 2020, primarily related to continued strategic project investments but subject to the broader market environment.
We transitioned most of our workforce and Advisors to a work from home environment early in March 2020. By late March, 98% of our employees were working remotely, with negligible downtime. The remote work environment continued through the second quarter of 2020. Our steady and proactive response has allowed our asset management and wealth management businesses to maintain full continuity of service and the access that our clients need and expect. With a successful transition to a remote working environment, we plan to closely monitor developments and reintroduce employees to the workplace only when it is safe to do so. The transition of employees to a work from home environment did not result in any material incremental expenses during the first or second quarter of 2020, and we do not expect to incur any material incremental expenses in future periods. For additional discussion regarding steps we have taken to facilitate safety, security and full continuity of service, please see Part I – Item 1 – “Financial Statements (unaudited), Note 1 – Description of Business and Accounting Policies”, of this Quarterly Report on Form 10-Q.
We continue to maintain a strong balance sheet without any significant leverage and ended the quarter with $775.8 million in cash and investments. Our exceptionally strong balance sheet allows us to continue to execute our long-term growth strategies while retaining our focus on controlling expenses.
For additional discussion regarding the risks that can impact our business, results of operations and financial condition due to COVID-19 and the related economic conditions, please see Part II – Item 1A – “Risk Factors”.
27
Assets Under Management
During the second quarter of 2020, AUM increased 16% to $65.0 billion from $56.0 billion at March 31, 2020 due to market appreciation of $10.4 billion, partially offset by net outflows of $1.4 billion. Sales of $2.2 billion during the current quarter increased 3% compared to the second quarter of 2019. Redemptions decreased 19% compared to the second quarter of 2019.
Change in Assets Under Management (1)
| | | | | | | | | | |
| | Three months ended June 30, 2020 |
| |||||||
| | | | | | Wealth | | |
| |
|
| Unaffiliated(2) | | Institutional | | Management | | Total | | |
|
| (in millions) | | |||||||
Beginning Assets |
| $ | 20,244 |
| 2,427 |
| 33,339 |
| 56,010 | |
| | | | | | | | | | |
Sales (3) | |
| 1,490 |
| 52 |
| 649 |
| 2,191 | |
Redemptions | |
| (2,179) |
| (202) |
| (1,259) |
| (3,640) | |
Net Exchanges | |
| 205 |
| 22 |
| (227) |
| — | |
Net Flows | |
| (484) |
| (128) |
| (837) |
| (1,449) | |
| | | | | | | | | | |
Market Action | |
| 3,964 |
| 698 |
| 5,743 |
| 10,405 | |
Ending Assets |
| $ | 23,724 |
| 2,997 |
| 38,245 |
| 64,966 | |
| | | | | | | | | | |
| | Three months ended June 30, 2019 |
| |||||||
| | | | | | Wealth | | |
| |
|
| Unaffiliated(2) | | Institutional | | Management | | Total | | |
|
| (in millions) | | |||||||
Beginning Assets |
| $ | 27,506 |
| 4,053 |
| 40,095 |
| 71,654 | |
| | | | | | | | | | |
Sales (3) | |
| 1,291 | | 54 |
| 789 |
| 2,134 | |
Redemptions | |
| (2,441) |
| (440) |
| (1,609) |
| (4,490) | |
Net Exchanges | |
| 303 |
| 25 |
| (328) |
| — | |
Net Flows | |
| (847) |
| (361) |
| (1,148) |
| (2,356) | |
| | | | | | | | | | |
Market Action | |
| 886 |
| 195 |
| 1,497 |
| 2,578 | |
Ending Assets |
| $ | 27,545 |
| 3,887 |
| 40,444 |
| 71,876 | |
During the first six months of 2020, AUM decreased 7% to $65.0 billion from $70.0 billion at December 31, 2019 due to net outflows of $3.7 billion and market depreciation of $1.3 billion. Sales of $4.7 billion during the six months ended June 30, 2020 increased 2% compared to the six months ended June 30, 2019. Redemptions during the six months ended June 30, 2020 decreased 4% compared to the same period of 2019.
| | | | | | | | | | |
| | Six months ended June 30, 2020 |
| |||||||
| | | | | | Wealth | | |
| |
|
| Unaffiliated(2) | | Institutional | | Management | | Total | | |
|
| (in millions) | | |||||||
Beginning Assets |
| $ | 26,264 |
| 3,096 |
| 40,598 |
| 69,958 | |
| | | | | | | | | | |
Sales (3) | |
| 3,069 |
| 95 |
| 1,546 |
| 4,710 | |
Redemptions | |
| (5,198) |
| (381) |
| (2,847) |
| (8,426) | |
Net Exchanges | |
| 532 |
| 22 |
| (554) |
| — | |
Net Flows | |
| (1,597) |
| (264) |
| (1,855) |
| (3,716) | |
| | | | | | | | | | |
Market Action | |
| (943) |
| 165 |
| (498) |
| (1,276) | |
Ending Assets |
| $ | 23,724 |
| 2,997 |
| 38,245 |
| 64,966 | |
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| | | | | | | | | | |
| | Six months ended June 30, 2019 |
| |||||||
| | | | | | Wealth | | |
| |
|
| Unaffiliated(2) | | Institutional | | Management | | Total | | |
|
| (in millions) | | |||||||
Beginning Assets |
| $ | 24,977 |
| 3,655 |
| 37,177 |
| 65,809 | |
| | | | | | | | | | |
Sales (3) | |
| 2,885 |
| 195 |
| 1,541 |
| 4,621 | |
Redemptions | |
| (4,748) |
| (797) |
| (3,233) |
| (8,778) | |
Net Exchanges | |
| 580 |
| 25 |
| (605) |
| — | |
Net Flows | |
| (1,283) |
| (577) |
| (2,297) |
| (4,157) | |
| | | | | | | | | | |
Market Action | |
| 3,851 |
| 809 |
| 5,564 |
| 10,224 | |
Ending Assets |
| $ | 27,545 |
| 3,887 |
| 40,444 |
| 71,876 | |
| (1) | Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions. |
| (2) | Unaffiliated includes National channel (home office and wholesale), Defined Contribution Investment Only, Registered Investment Advisor and Variable Annuity. |
| (3) | Sales consists of gross sales and includes net reinvested dividends, capital gains and investment income. |
29
Average Assets Under Management
Average AUM, which are generally more indicative of trends in revenue from investment management services than the change in ending AUM, are presented below.
| | | | | | | | | | | |
| | Three months ended June 30, 2020 |
| ||||||||
| | | | | | Wealth | | | |
| |
|
| Unaffiliated | | Institutional | | Management | | Total | | ||
|
| (in millions) | | ||||||||
Asset Class: | | | | | | | | | | | |
Equity |
| $ | 17,558 |
| 2,834 |
| 26,753 |
| $ | 47,145 | |
Fixed Income | |
| 4,284 |
| — |
| 8,350 | |
| 12,634 | |
Money Market | |
| 158 |
| — |
| 1,781 | |
| 1,939 | |
Total |
| $ | 22,000 |
| 2,834 |
| 36,884 |
| $ | 61,718 | |
| | | | | | | | | | | |
| | Three months ended June 30, 2019 | | ||||||||
| | | | | | Wealth | | | | | |
| | Unaffiliated | | Institutional | | Management | | Total | | ||
| | (in millions) | | ||||||||
Asset Class: | | | | | | | | | | | |
Equity |
| $ | 21,581 |
| 3,797 |
| 29,739 |
| $ | 55,117 | |
Fixed Income | |
| 5,265 |
| 20 |
| 9,304 | |
| 14,589 | |
Money Market | |
| 97 |
| — |
| 1,557 | |
| 1,654 | |
Total |
| $ | 26,943 |
| 3,817 |
| 40,600 |
| $ | 71,360 | |
| | | | | | | | | | | |
| | Six months ended June 30, 2020 |
| ||||||||
| | | | | | Wealth | | | |
| |
|
| Unaffiliated | | Institutional | | Management | | Total | | ||
|
| (in millions) | | ||||||||
Asset Class: | | | | | | | | | | | |
Equity |
| $ | 18,370 |
| 2,865 |
| 27,682 |
| $ | 48,917 | |
Fixed Income | |
| 4,579 |
| — |
| 8,622 | |
| 13,201 | |
Money Market | |
| 128 |
| — |
| 1,675 | |
| 1,803 | |
Total |
| $ | 23,077 |
| 2,865 |
| 37,979 |
| $ | 63,921 | |
| | | | | | | | | | | |
| | Six months ended June 30, 2019 | | ||||||||
| | | | | | Wealth | | | | | |
| | Unaffiliated | | Institutional | | Management | | | Total | ||
| | (in millions) | | ||||||||
Asset Class: | | | | | | | | | | | |
Equity |
| $ | 21,363 |
| 3,872 |
| 29,271 |
| $ | 54,506 | |
Fixed Income | |
| 5,221 |
| 20 |
| 9,294 | |
| 14,535 | |
Money Market | |
| 102 |
| — |
| 1,595 | |
| 1,697 | |
Total |
| $ | 26,686 |
| 3,892 |
| 40,160 |
| $ | 70,738 | |
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Performance
We have seen a slight decline from the prior quarter in trailing one- and three-year performance, while trailing five-year performance remained consistent as measured by the percentage of funds ranked in the top half of their respective Morningstar universes. As measured by percentage of assets, one- and three-year performance declined while five-year performance improved. While absolute returns were strong in the market during the second quarter, active managers generally did not keep pace with benchmarks for the period. We maintained strong long-term relative performance across our quality-oriented growth franchises owing to our long-term commitment to finding and investing in companies with differentiated long-term growth prospects. Our commitment to institutional caliber processes means that while we are mindful of short-term market dynamics, we remain focused on the long term and on maintaining discipline and consistency in volatile times such as we have seen in the first half of 2020.
The following table is a summary of Morningstar rankings and ratings as of June 30, 2020:
| | | | | | | |
MorningStar Fund Rankings 1 |
| 1 Year |
| 3 Years |
| 5 Years |
|
Funds ranked in top half |
| 48 | % | 49 | % | 37 | % |
Assets ranked in top half |
| 45 | % | 48 | % | 38 | % |
| | | | | | | |
MorningStar Ratings 1 |
| Overall |
| 3 Years |
| 5 Years |
|
Funds with 4/5 stars |
| 28 | % | 28 | % | 26 | % |
Assets with 4/5 stars |
| 41 | % | 39 | % | 41 | % |
(1) Based on class I share, which reflects the largest concentration of sales and assets.
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Assets Under Administration
AUA includes both client assets invested in the Funds and in other companies’ products that are distributed through W&R and held in direct to fund accounts, brokerage accounts or within our fee-based advisory programs. AUA as of June 30, 2020 increased 3% as compared to June 30, 2019 primarily due to market appreciation and growth in net new advisory AUA, partially offset by an ongoing migration away from non-advisory AUA. Average AUA was flat for the three months ended June 30, 2020 as compared to the same period in 2019. For the six months ended June 30, 2020, average AUA increased 3% as compared to the six months ended June 30, 2019. Starting in the second quarter of 2020, we updated our definition of net new AUA to include dividends and interest to be consistent with peers and have reflected this new definition for all periods presented in the table below. Notwithstanding the updated net new AUA definition, this quarter continued a multi-quarter growth trend in net new advisory AUA. This quarter marked the 6th straight quarter of positive advisory AUA net flows. We continue to see increased average productivity per Advisor due to our efforts to transform W&R into a fully competitive and profitable aspect of our business model, with a focus on higher producing Advisors.
| | | | | | |
| | | | | ||
| | (in millions) | ||||
Ending AUA | | | | | | |
Advisory AUA | | $ | 27,155 | | | 24,789 |
Non-advisory AUA | |
| 31,836 | | | 32,641 |
Total ending AUA | | $ | 58,991 | | | 57,430 |
| | | | | | | | | | | | | | |
| | Three months ended June 30, | | | Six months ended June 30, | | ||||||||
| | | 2020 | | | 2019 | | | | 2020 | | | 2019 | |
| | (in millions, except percentage data) | | |||||||||||
Average AUA (1) | | | | | | | | | | | | | | |
Advisory AUA (1) | | $ | 25,030 | | | 23,917 | |
| $ | 25,855 | | | 23,137 | |
Non-advisory AUA (1) | |
| 30,151 | | | 32,272 | |
|
| 31,320 | | | 31,812 | |
Total average AUA (1) | | $ | 55,181 | | | 56,189 | | | $ | 57,175 | | | 54,949 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net new advisory AUA (2) | | $ | 189 | | | 349 | | | $ | 631 | | | 650 | |
Net new non-advisory AUA (2), (3) | |
| (346) | | | (747) | |
|
| (1,004) | | | (1,521) | |
Total net new AUA (2), (3) | | $ | (157) | | | (398) | |
| $ | (373) | | | (871) | |
| | | | | | | | | | | | | | |
Annualized advisory AUA growth (4) | | | 3.3 | % | | 5.9 | % | | | 4.7 | % | | 6.1 | % |
Annualized AUA growth (4) | | | (1.2) | % | | (2.8) | % | | | (1.2) | % | | (3.4) | % |
| | | | | | |
| | | | | ||
Advisors and advisor associates | |
| 1,317 | | | 1,347 |
Average trailing 12-month production per Advisor (5) (in thousands) | | $ | 464 | | | 408 |
| (1) | Average AUA are calculated as the average of the beginning of month AUA during each reporting period. |
| (2) | Net new AUA are calculated as total client deposits and net transfers less client withdrawals. Client deposits include dividends and interest. |
| (3) | Excludes activity related to products held outside of our wealth management platform. These assets represent less than 10% of total AUA. |
| (4) | Annualized growth is calculated as annualized total net new AUA divided by beginning AUA. |
| (5) | Production per Advisor is calculated as trailing 12-month Total Underwriting and distribution fees less “other” underwriting and distribution fees divided by the average number of Advisors. “Other” underwriting and distribution fees predominantly include fees paid by Advisors for programs and services. |
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Results of Operations — Three and Six Months Ended June 30, 2020 as Compared with Three and Six Months Ended June 30, 2019
Total Revenues
Total revenues decreased 11% to $240.0 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Investment management fees, underwriting and distribution fees and shareholder service fees all decreased during the quarter. For the six months ended June 30, 2020, total revenues decreased $25.8 million, or 5%, compared to the same period in the prior year. The decrease was due to a decrease in investment management fees and shareholder service fees while underwriting and distribution fees were relatively flat. For both comparative periods, the decreases in investment management fees were due to lower average AUM and lower effective management fee rates related to targeted fee reductions on certain products, and the decreases in shareholder service fees were due to a reduction in fund reimbursements related to the outsourcing of our transfer agency transactional processing operations as well as lower assets and number of accounts. For the three months ended June 30, 2020, underwriting and distribution fees decreased due to lower sales commissions and a decrease in service and distribution fees due to lower assets, partially offset by increased advisory fees due to ongoing increases in net new AUA and higher advisory AUA. For the six months ended June 30, 2020, underwriting and distribution fees were relatively flat due to an increase in advisory fees resulting from higher advisory AUA, offset by a decrease in service and distribution fees due to lower assets. Sales commissions were also lower due to reduced sales activity.
| | | | | | | | |
| | Three months ended | | | | |||
| | | | | ||||
|
| 2020 |
| 2019 |
| Variance |
| |
| | (in thousands, except percentage data) | | |||||
Investment management fees | | $ | 95,824 |
| 112,870 |
| (15) | % |
Underwriting and distribution fees | |
| 123,633 |
| 133,495 |
| (7) | % |
Shareholder service fees | |
| 20,577 |
| 23,789 |
| (14) | % |
Total revenues | | $ | 240,034 |
| 270,154 |
| (11) | % |
| | | | | | | | |
| | Six months ended | | | | |||
| | | | | ||||
|
| 2020 |
| 2019 |
| Variance |
| |
| | (in thousands, except percentage data) | | |||||
Investment management fees | | $ | 201,043 |
| 222,632 |
| (10) | % |
Underwriting and distribution fees | |
| 260,576 |
| 259,740 |
| — | |
Shareholder service fees | |
| 42,148 |
| 47,192 |
| (11) | % |
Total revenues | | $ | 503,767 |
| 529,564 |
| (5) | % |
Investment Management Fee Revenues
Investment management fee revenues for the second quarter of 2020 decreased $17.0 million, or 15%, from the second quarter of 2019. For the six-month period ending June 30, 2020, investment management fee revenues decreased $21.6 million, or 10%, compared to the same period in 2019. For both comparative periods, the decrease was due to a decrease in average assets and a lower effective management fee rate, which was primarily due to targeted pricing reductions on certain products.
33
The following table summarizes investment management fee revenues, related average AUM, fee waivers and investment management fee rates for the three and six months ended June 30, 2020 and 2019.
| | | | | | | | | | |
| | Three months ended June 30, | | | | | ||||
|
| 2020 |
| 2019 |
| | Variance |
| ||
| | (in thousands, except for management fee rate and average assets) | | | | | ||||
Investment management fees (net) | | $ | 92,977 | | | 109,007 | | | (15) | % |
Average assets (in millions) | | $ | 58,884 | | | 67,543 | | | (13) | % |
Management fee rate (net) | |
| 0.6351 | % | | 0.6473 | % | | | |
Institutional investment management fees (net) | | $ | 2,847 | | | 3,863 | | | (26) | % |
Institutional average assets (in millions) | | $ | 2,834 | |
| 3,817 | |
| (26) | % |
Institutional management fee rate (net) | |
| 0.4040 | % |
| 0.4059 | % |
| | |
| | | | | | | | | | |
| | Six months ended June 30, | | | | | ||||
|
| 2020 |
| 2019 |
| | Variance |
| ||
| | (in thousands, except for management fee rate and average assets) | | | | | ||||
Investment management fees (net) | | $ | 195,269 | | | 214,752 | | | (9) | % |
Average assets (in millions) | | $ | 61,056 | | | 66,846 | | | (9) | % |
Management fee rate (net) | |
| 0.6432 | % | | 0.6479 | % | | | |
Institutional investment management fees (net) | | $ | 5,774 | | | 7,880 | | | (27) | % |
Institutional average assets (in millions) | | $ | 2,865 | |
| 3,892 | |
| (26) | % |
Institutional management fee rate (net) | |
| 0.4052 | % |
| 0.4083 | % |
| | |
Revenues from investment management services provided to our retail mutual funds, which are distributed through the unaffiliated and wealth management channels, decreased 15% in the second quarter of 2020 and decreased 9% for the six months ended June 30, 2020, compared to the same periods in 2019. These decreases were due to decreases in average AUM and a lower effective management fee rate due to pricing reductions. Effective April 1, 2020, new fee reductions were made on our large cap growth and core bond products, which we expect to have a one to two cent annualized impact on earnings per share.
Institutional account revenues in the second quarter of 2020 decreased $1.0 million compared to the second quarter of 2019. For the six months ended June 30, 2020, institutional account revenues decreased $2.1 million compared to the same period in 2019. These decreases were due to a decrease in average AUM.
| | | | | | | | | | |
| | Annualized long-term redemption rates | | |||||||
| | (excludes money market redemptions) | | |||||||
| | Three months ended | | | Six months ended | | ||||
| | June 30, | | | | |||||
|
| 2020 |
| 2019 |
| | 2020 |
| 2019 |
|
Unaffiliated channel |
| 39.9 | % | 36.7 | % | | 45.6 | % | 36.2 | % |
Institutional channel |
| 28.6 | % | 46.1 | % | | 26.7 | % | 41.3 | % |
Wealth Management channel |
| 11.6 | % | 13.8 | % | | 13.2 | % | 14.2 | % |
Total |
| 22.6 | % | 24.3 | % | | 25.7 | % | 24.1 | % |
The long-term redemption rate for the three and six months ended June 30, 2020 increased in the unaffiliated channel as compared to the three and six months ended June 30, 2019. Increased market volatility during the quarter led to continued redemptions in this channel, particularly in our International Core Equity and High Income funds. The long-term redemption rate decreased in the institutional channel, primarily due to elevated client redemptions from our Core Equity and Large Cap Growth strategies during the first six months of 2019. In the wealth management channel, the long-term redemption rate decreased for both comparative periods. Prolonged redemptions in any of our distribution channels could negatively affect revenues in future periods.
The current year-to-date industry average redemption rate, based on data provided by the Investment Company Institute, was 35.2%, versus our rate of 25.7%.
34
Underwriting and Distribution Fee Revenues
The following tables summarize the significant components of underwriting and distribution fee revenues by distribution channel:
| | | | | | | |
| | For the three months ended June 30, 2020 | |||||
|
| |
| Wealth | | | |
|
| Unaffiliated |
| Management | | Total | |
|
| (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Advisory fees | | $ | — |
| 72,534 |
| 72,534 |
Service and distribution fees | |
| 13,670 | | 13,600 |
| 27,270 |
Sales commissions | |
| 373 |
| 15,034 |
| 15,407 |
Other revenue | |
| 91 |
| 8,331 |
| 8,422 |
Total |
| $ | 14,134 |
| 109,499 |
| 123,633 |
| | | | | | | |
| | For the three months ended June 30, 2019 | |||||
| | |
| Wealth | | | |
| | Unaffiliated |
| Management | | Total | |
| | (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Advisory fees |
| $ | — |
| 70,220 |
| 70,220 |
Service and distribution fees | |
| 16,615 |
| 16,041 |
| 32,656 |
Sales commissions | |
| 493 |
| 20,794 |
| 21,287 |
Other revenue | |
| 83 |
| 9,249 |
| 9,332 |
Total |
| $ | 17,191 |
| 116,304 |
| 133,495 |
| | | | | | | |
| | For the six months ended June 30, 2020 | |||||
|
| |
| Wealth | | | |
|
| Unaffiliated |
| Management | | Total | |
|
| (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Advisory fees |
| $ | — | | 149,652 | | 149,652 |
Service and distribution fees | | | 28,946 | | 28,189 | | 57,135 |
Sales commissions | | | 824 | | 35,691 | | 36,515 |
Other revenue | | | 226 | | 17,048 | | 17,274 |
Total |
| $ | 29,996 | | 230,580 | | 260,576 |
| | | | | | | |
| | For the six months ended June 30, 2019 | |||||
| | |
| Wealth | | | |
| | Unaffiliated |
| Management | | Total | |
| | (in thousands) | |||||
Underwriting and distribution fee revenues | | | | | | | |
Advisory fees |
| $ | — |
| 135,450 |
| 135,450 |
Service and distribution fees | |
| 33,081 |
| 31,445 |
| 64,526 |
Sales commissions | |
| 935 |
| 40,416 |
| 41,351 |
Other revenue | |
| 175 |
| 18,238 |
| 18,413 |
Total |
| $ | 34,191 |
| 225,549 |
| 259,740 |
| | | | | | | |
Underwriting and distribution revenues earned in the second quarter of 2020 decreased by $9.9 million, or 7%, compared to the second quarter of 2019. The decrease was primarily due to lower sales commissions and lower service and distribution fees due to lower assets and was partially offset by an increase in advisory fee revenues as a result of the ongoing shift in sales to advisory products. Underwriting and distribution revenues earned for the six months ended June 30, 2020 were relatively flat compared to the same period in 2019. Advisory fee revenues increased due to the ongoing shift in sales to advisory products and overall increases in average advisory AUA. This increase was offset with decreases in sales commissions and lower service and distribution fees due to lower assets.
35
Shareholder Service Fee Revenue
During the second quarter of 2020, shareholder service fee revenue decreased $3.2 million, or 14%, compared to the second quarter of 2019. For the six months ended June 30, 2020, shareholder service fee revenue decreased $5.0 million, or 11% as compared to the same period of 2019. For both comparative periods, the decrease was primarily due to a decrease in the number of accounts and assets on which these fees are based and a reduction in fund reimbursements related to the outsourcing of our transfer agency transactional processing operations and a corresponding reduction in costs.
Total Operating Expenses
Operating expenses for the second quarter of 2020 decreased $12.5 million, or 5%, compared to the second quarter of 2019, primarily due to decreases in distribution, technology, occupancy, marketing and advertising and depreciation, partially offset by an increase in general and administrative expenses. For the six months ended June 30, 2020, operating expenses decreased $12.0 million, or 3%, compared to the six months ended June 30, 2019, primarily due to decreased compensation and benefits, technology, occupancy, marketing and advertising and depreciation, partially offset by increased general and administrative expenses. We have been able to successfully reduce controllable expenses compared to the first six months of 2019 as we continue to invest in targeted growth areas of our strategy.
| | | | | | | | |
| | Three months ended | | | | |||
| | | | | ||||
|
| 2020 |
| 2019 |
| Variance |
| |
| | (in thousands) | | | | |||
Distribution | | $ | 107,876 |
| 116,477 |
| (7) | % |
Compensation and benefits | |
| 61,863 |
| 61,876 |
| (0) | % |
General and administrative | |
| 20,524 |
| 16,037 |
| 28 | % |
Technology | |
| 14,237 |
| 16,442 |
| (13) | % |
Occupancy | |
| 4,291 |
| 6,701 |
| (36) | % |
Marketing and advertising | |
| 1,119 |
| 2,399 |
| (53) | % |
Depreciation | | | 3,209 | | 5,228 | | (39) | % |
Subadvisory fees | | | 3,288 | | 3,715 | | (11) | % |
Total operating expenses | | $ | 216,407 |
| 228,875 |
| (5) | % |
| | | | | | | | |
| | Six months ended | | | | |||
|
| | | | ||||
|
| 2020 |
| 2019 |
| Variance |
| |
| | (in thousands) | | | | |||
Distribution | | $ | 227,909 |
| 226,271 |
| 1 | % |
Compensation and benefits | |
| 120,288 |
| 126,719 |
| (5) | % |
General and administrative | |
| 39,122 |
| 30,741 |
| 27 | % |
Technology | |
| 27,739 |
| 32,750 |
| (15) | % |
Occupancy | |
| 9,000 |
| 13,416 |
| (33) | % |
Marketing and advertising | | | 3,015 | | 4,363 | | (31) | % |
Depreciation | | | 6,722 | | 11,229 | | (40) | % |
Subadvisory fees | | | 6,954 | | 7,272 | | (4) | % |
Total operating expenses | | $ | 440,749 |
| 452,761 |
| (3) | % |
Distribution expenses for the second quarter of 2020 decreased by $8.6 million, or 7%, compared to the second quarter of 2019. The decrease in expense was consistent with the decreases in underwriting and distribution fee revenues from lower asset levels and insurance product sales. For the six months ended June 30, 2020, distribution expenses increased slightly, compared to the same period for 2019, which is consistent with underwriting and distribution fee revenues for the same period.
Compensation and benefits during the second quarter of 2020 remained unchanged compared to the same period of 2019, primarily due to a lower headcount offset by higher share-based compensation due to mark-to-market adjustments. For the six months ended June 30, 2020, compensation and benefits expenses decreased $6.4 million, or 5%, primarily due to lower headcount and a decrease in share-based compensation due to a change in the timing of annual grants.
36
General and administrative expenses for the second quarter of 2020 increased $4.5 million, or 28%, compared to the second quarter of 2019. For the six months ended June 30, 2020, general and administrative expenses increased $8.4 million, or 27%, compared to the six months ended June 30, 2019. For both comparative periods, the increases were primarily due to the shift of our transfer agency transactional processing operations outsourcing costs from technology expenses to general and administrative expenses and increased strategic project spending, partially offset by lower travel and meetings costs due to restricted travel and a transition to virtual meetings during the pandemic.
Technology expense for the second quarter of 2020 decreased $2.2 million, or 13%, compared to the same period of 2019. For the six months ended June 30, 2020, technology expense decreased $5.0 million, or 15%, compared to the six months ended June 30, 2019. For both comparative periods, the decreases were primarily due to costs related to the transfer agency transactional processing operations outsourcing shifting to general and administrative expenses, partially offset by increased consulting and software costs for new technologies.
Occupancy expense decreased $2.4 million, or 36%, for the second quarter of 2020 compared to the second quarter of 2019 and decreased $4.4 million, or 33%, for the six months ended June 30, 2020, as compared to the same period in 2019. For both comparative periods, the decreases are due to the planned transition of field offices from corporate-leased space to Advisor personal branch offices.
Depreciation expense decreased $2.0 million, or 39%, for the second quarter of 2020 compared to the second quarter of 2019 and decreased $4.5 million, or 40%, for the six months ended June 30, 2020, as compared to the same period in 2019. The decreases were primarily due to capitalized software development assets becoming fully depreciated.
Investment and Other Income
Investment and other income for the three months ended June 30, 2020 increased $6.1 million, compared to the same period in 2019 primarily due to greater unrealized gains, net of hedging activity, on the seed and corporate investment portfolios in the current period compared the prior year comparative period, partially offset by a decline in interest income due to lower interest rates. For the six months ended June 30, 2020, investment and other income decreased $11.1 million compared to the same period in 2019 primarily due to unrealized losses, net of hedging activity, on the seed and corporate investment portfolios in the current period compared to unrealized gains, net of hedging activity, in the prior year comparative period and a decrease in interest income due to lower interest rates.
37
Taxes
The following table reconciles the statutory federal income tax rate with our effective income tax rate from continuing operations for the three and six months ended June 30, 2020 and 2019:
| | | | | | | | | | |
|
| Three months ended | | | Six months ended | | ||||
| | June 30, | | | | |||||
| | 2020 |
| 2019 | | | 2020 |
| 2019 | |
Statutory federal income tax rate |
| 21.0 | % | 21.0 | % | | 21.0 | % | 21.0 | % |
State income taxes, net of federal tax benefit |
| 2.8 | | 3.2 | | | 3.6 | | 3.1 | |
Share-based compensation | | 3.5 | | 4.5 | | | 2.6 | | 2.6 | |
Income attributable to redeemable noncontrolling interests |
| (1.7) | | (0.3) | | | (0.5) | | (0.3) | |
Permanent differences | | (0.4) | | 0.4 | | | 1.6 | | 0.5 | |
Other items |
| 0.1 | | 0.3 | | | — | | 0.1 | |
Effective income tax rate |
| 25.3 | % | 29.1 | % | | 28.3 | % | 27.0 | % |
| | | | | | | | | | |
Our effective income tax rate was 25.3% for the three months ended June 30, 2020, as compared to 29.1% for the same period in 2019, a decrease of 3.8%. The decrease was due to a reduced impact of share-based compensation and a greater impact of noncontrolling interests. In addition, the impact of market volatility on our estimated pre-tax income for the remainder of 2020 resulted in a decrease in our annualized effective tax rate during the second quarter of 2020, which decreased the proportional tax impact of state income taxes on our rate.
Our effective income tax rate was 28.3% for the six months ended June 30, 2020, as compared to 27.0% for the same period in 2019, an increase of 1.3%. Our state income tax rate increased in 2020 due to additional state tax filings. Nondeductible expenses also increased year over year.
The Company expects continued future volatility in its effective tax rate as the tax effects of share-based compensation will be impacted by market fluctuations in our stock price. The future effective tax rate could also experience volatility from federal and state tax incentives, unanticipated federal and state tax legislative changes, and unanticipated fluctuations in earnings.
Liquidity and Capital Resources
Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund the Company’s short-term operating and capital requirements. Expected short-term uses of cash include dividend payments, repurchases of our Class A common stock, interest on indebtedness and maturities of outstanding debt in January 2021, income tax payments, seed money for new products, ongoing technology enhancements, Advisor transition loans, capital expenditures, and collateral funding for margin accounts established to support derivative positions, and could include strategic acquisitions.
Expected long-term capital requirements include operating leases and purchase obligations. Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure, strategic acquisitions, payment of dividends, seed money for new products, and repurchases of our Class A common stock.
Our operations provide much of the cash necessary to fund our priorities, as follows:
| ● | Pay dividends |
| ● | Repurchase our stock |
| ● | Finance growth objectives |
Our existing capital return policy is designed to provide financial flexibility to invest in our business, support ongoing operations and maintain a strong balance sheet, while continuing to provide a very competitive return to stockholders. The components of the capital return policy are described below.
38
Pay Dividends
We paid quarterly dividends on our Class A common stock that resulted in financing cash outflows of $33.6 million and $38.2 million for the first six months of 2020 and 2019, respectively.
The Board of Directors approved a dividend on our Class A common stock of $0.25 per share with an August 3, 2020 payment date and a July 13, 2020 record date. The total dividend to be paid on August 3, 2020 is $16.3 million.
Repurchase Our Stock
We repurchased 5,275,805 shares and 4,369,219 shares of our Class A common stock in the open market or privately during the six months ended June 30, 2020 and 2019, respectively, resulting in share repurchases of $72.0 million and $76.0 million, respectively. We continue to engage in an active share repurchase plan as part of our ongoing capital management plan.
Finance Growth Objectives
We use cash to fund growth in our distribution channels. We continue to invest in our wealth management channel by offering home office resources, wholesaling efforts, enhanced technology tools, including the modernization of our wealth management platforms, and Advisor transition loans. Our unaffiliated channel requires cash outlays for wholesaler commissions and commissions to third parties on deferred-load product sales and technology enhancements for asset management and distribution. We also provide seed money for new products to further enhance our product offerings and distribution efforts. As we continue to advance our investment in improved technology, we expect increased costs in this area in the near term.
Cash Flows
Cash from operations is our primary source of funds. Cash from operations increased $5.6 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase is primarily due to cash inflows during the first six months of 2020 as compared to cash outflows during first six months of 2019 related to our total return swap and is partially offset by lower net income.
The payable to investment companies for securities, payable to customers and other receivables accounts can fluctuate significantly based on trading activity at the end of a reporting period. Changes in these accounts resulted in variances within cash from operations on the statement of cash flows; however, there is no impact to the Company’s liquidity and operations due to the variances in these accounts.
Investing activities consist primarily of the seeding and sale of sponsored investment securities, purchases and maturities of investments held in our corporate investment portfolio and capital expenditures.
Financing activities include payment of dividends and repurchases of our Class A common stock. Future financing cash outflows will be affected by the existing capital return policy.
Critical Accounting Policies and Estimates
There have been no material changes in the critical accounting policies and estimates disclosed in the “Critical Accounting Policies and Estimates” section of our 2019 Form 10-K.
39
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are primarily exposed to market risk associated with unfavorable movements in interest rates and securities prices for both our corporate investments and our AUM and AUA, on which our revenues are based, and credit risk related to collateral on our economic hedge program derivative trading. The Company has had no material changes in its market risk policies or its market risk sensitive instruments and positions since December 31, 2019 other than the changes to the investment and derivative portfolios disclosed in Note 4 and Note 5 to the unaudited consolidated financial statements and changes to AUM and AUA in Part I – Item 2 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations”. As further described in Note 5, the Company has an economic hedge program that uses total return swap contracts to hedge market risk related to its investments in sponsored funds.
Item 4. | Controls and Procedures |
The Company maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2020, have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.
The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Part II. | Other Information |
Item 1A. | Risk Factors |
Except as noted below, there have been no material changes to the Company’s Risk Factors from those previously reported in the Company’s 2019 Form 10-K.
The COVID-19 Pandemic Could Have a Material Adverse Effect on Our Business, Results of Operations or Financial Condition. The ongoing COVID-19 pandemic has caused significant disruption in global financial markets, including significant volatility in the securities markets. Declines in our AUM and AUA negatively impact our future revenues, earnings and growth prospects. In addition, certain of the risk factors set forth in the 2019 Form 10-K could be heightened by the effects of COVID-19 pandemic and related economic conditions resulting in a material adverse effect on our business, results of operations or financial condition, including due to:
| ● | declines in the securities markets or our Funds’ performance, which could result in decreased sales and increased redemptions; |
| ● | unprecedented market dislocation and disparate impact on particular businesses and industries; |
| ● | availability of financing capital; |
| ● | disruption of worldwide supply chains; |
| ● | negative impacts to our distribution channels or other financial institutions with which we do business; |
| ● | a work-from-home environment, which could result in reductions in our operating effectiveness or efficiency, increased operational, compliance and cybersecurity risks, the failure of controls and risk management policies to identify and manage risks, or the failure or breach of our operational or security systems or our technology infrastructure; |
40
| ● | the unavailability of key personnel necessary to conduct our business activities and operational challenges and costs associated with the return of employees from their remote working environments to the workplace; |
| ● | travel and visitation restrictions that limit our ability to engage with management of businesses in which we invest or may invest and with clients and business partners; |
| ● | the ability of Advisors to interact with clients and access their leased office spaces; |
| ● | actions and recommendations of federal, state and local governments in response to the COVID-19 pandemic; or |
| ● | our inability to reduce the level of our expenses to align with decreases in our revenues. |
We are unable to accurately predict the ultimate impact of the COVID-19 pandemic due to various uncertainties, including the duration of the outbreak and length of time it will take for the financial markets and economy to recover and for our employees to safely return to the workplace. We closely monitor the impact of the COVID-19 pandemic, continually assessing its potential effects on our business and on the businesses in which we invest. The extent to which our business and financial results are affected by COVID-19 will largely depend on future developments, which cannot be accurately predicted and are uncertain.
For additional discussion regarding the impact on our business, results of operations and financial condition due to COVID-19 and the related economic conditions, please see Part I – Item 2 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of COVID-19”.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth certain information about the shares of Class A common stock we repurchased during the second quarter of 2020.
| | | | | | | | | |
|
| |
| | |
| Total Number of |
| Maximum Number (or |
| | | | | | | Shares | | Approximate Dollar |
| | | | | | | Purchased as | | Value) of Shares That |
| | Total Number | | Average | | Part of Publicly | | May Yet Be | |
| | of Shares | | Price Paid | | Announced | | Purchased Under The | |
Period | | Purchased | | per Share | | Program (1) | | Program (1) | |
April 1 - April 30 |
| 1,105,847 | | $ | 11.92 |
| 898,515 |
| n/a |
May 1 - May 31 |
| 350,000 | |
| 13.32 |
| 350,000 |
| n/a |
June 1 - June 30 |
| 12,520 | |
| 15.59 |
| — |
| n/a |
Total |
| 1,468,367 | | $ | 12.28 |
| 1,248,515 | | |
| (1) | In October 2012, our Board of Directors approved a program to repurchase shares of our Class A common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding Class A common stock or (ii) $50 million of our Class A common stock. We may repurchase our Class A common stock in privately negotiated transactions or through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems. Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased. We continue to engage in an active share repurchase plan. |
During the second quarter of 2020, 219,852 shares were purchased in connection with funding employee income tax withholding obligations arising from the vesting of restricted shares.
41
Item 6. | Exhibits |
| | |
10.1 | | Waddell & Reed Financial, Inc. Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 001-13913, on April 30, 2020 and incorporated herein by reference. |
31.1* | | |
| | |
31.2* | | |
| | |
32.1** | | |
| | |
32.2** | | |
| | |
101* | | Materials from the Waddell & Reed Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Notes to the Unaudited Consolidated Financial Statements, tagged in detail. |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
** Furnished herewith
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 31st day of July 2020.
| WADDELL & REED FINANCIAL, INC. | |
| | |
| By: | |
| | Chief Executive Officer and Director |
| | (Principal Executive Officer) |
| | |
| By: | |
| | Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
| By: | /s/ Michael J. Daley |
| | Vice President, Chief Accounting Officer, Investor Relations and Treasurer (Principal Accounting Officer) |
43
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 1/13/21 | ||||
| 12/31/20 | ||||
| 12/15/20 | ||||
| 8/3/20 | ||||
| Filed on: | 7/31/20 | |||
| 7/24/20 | ||||
| 7/13/20 | 8-K | |||
| For Period end: | 6/30/20 | |||
| 4/1/20 | ||||
| 3/31/20 | 10-Q, 13F-HR | |||
| 1/1/20 | ||||
| 12/31/19 | 10-K, 13F-HR, 4 | |||
| 6/30/19 | 10-Q, 13F-HR | |||
| 6/1/19 | ||||
| 3/31/19 | 10-Q, 13F-HR | |||
| 12/31/18 | 10-K, 13F-HR, 4, 5 | |||
| 9/30/17 | 10-Q, 13F-HR | |||
| 7/26/17 | ||||
| 12/31/16 | 10-K, 11-K, 13F-HR, 4 | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/17/21 Waddell & Reed Financial Inc. DEFM14A 1:4.6M Toppan Merrill/FA 1/22/21 Waddell & Reed Financial Inc. PREM14A 1/22/21 1:3.5M Toppan Merrill/FA |