Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Waddell & Reed Financial, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Waddell & Reed Financial, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Kansas City, Missouri
February 23, 2018
|
(c)
|
|
Changes in Internal Control over Financial Reporting.
The Company’s internal control over financial reporting 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 December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Information required by this Item 10 is incorporated herein by reference to our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 11. Executive Compensation
Information required by this Item 11 is incorporated herein by reference to our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by Item 403 of Regulation S-K is incorporated herein by reference to our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
Equity Compensation Plan Information
The following table provides information as of December 31, 2017 with respect to shares of the Company’s common stock that may be issued under our existing equity compensation plans.
|
|
|
|
|
|
|
|
|
|
Plan Category
|
(a)
Number of Securities to be issued upon exercise of outstanding options, warrants and rights
|
|
(b)
Number of Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
)(1)
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
6,301,669
|
(2)
|
2,457,741
|
(3)
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
-
|
|
-
|
|
|
|
|
|
|
Total
|
6,301,669
|
|
2,457,741
|
|
|
|
|
|
|
|
|
|
(1)
All shares may be issued in the form of restricted stock.
(2)
Represents shares of the Company’s unvested restricted common stock.
(3)
Represents shares available for future issuance from the Stock Incentive Plan.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item 13 is incorporated herein by reference to our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 14. Principal Accounting Fees and Services
Information required by this Item 14 is incorporated herein by reference to our definitive proxy statement for our 2018 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
|
|
|
|
(a)(1)
|
Financial Statements.
|
|
|
Reference is made to the Index to Consolidated Financial Statements on page 57 for a list of all financial statements filed as part of this Report.
|
|
(a)(2)
|
Financial Statement Schedules.
|
|
|
None.
|
|
(b)
|
Exhibits.
|
|
|
|
Exhibit
No.
|
|
Exhibit Description
|
3.1
|
|
Restated Certificate of Incorporation of Waddell & Reed Financial, Inc. Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10‑Q, File No. 333‑43687, for the quarter ended June 30, 2006 and incorporated herein by reference.
|
3.2
|
|
Amended and Restated Bylaws of Waddell & Reed Financial, Inc. Filed as Exhibit 3.1 to the Company’s Current Report on Form 8‑K, File No. 001‑13913, filed December 21, 2017 and incorporated herein by reference.
|
4.1
|
|
Specimen of Class A Common Stock Certificate, par value $0.01 per share. Filed as Exhibit 4.1 to the Company’s Registration Statement on Form S‑1/A, File No. 333‑43687, on February 27, 1998 and incorporated herein by reference.
|
4.2
|
|
Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock of Waddell & Reed Financial, Inc., as filed on April 9, 2009 with the Secretary of State of the State of Delaware. Filed as Exhibit 4.1 to the Company’s Current Report on Form 8‑K, File No. 333‑43687, on April 10, 2009 and incorporated herein by reference.
|
4.3
|
|
Certificate of Elimination of Series B Junior Participating Preferred Stock of Waddell & Reed Financial, Inc., as filed on February 16, 2018 with the Secretary of the State of Delaware.
|
10.1
|
|
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.7 to the Company’s Annual Report on Form 10‑K, File No. 001‑13913, for the year ended December 31, 2011 and incorporated herein by reference.*
|
10.2
|
|
Credit Agreement, dated October 20, 2017, by and among Waddell & Reed Financial, Inc., the lenders party thereto, Bank of America, N.A., as Administrative Agent for the lenders and Swingline Lender, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Bookrunner. Filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, File No. 001‑13913, filed October 27, 2017 and incorporated herein by reference.
|
10.3
|
|
Note Purchase Agreement, dated August 31, 2010, by and among Waddell & Reed Financial, Inc. and the purchasers party thereto. Filed as Exhibit 10.2 to the Company’s Current Report on Form 8‑K, File No. 001‑13913, on September 7, 2010 and incorporated herein by reference.
|
10.4
|
|
Waddell & Reed Financial, Inc. 2003 Executive Incentive Plan, as amended and restated.*
|
10.5
|
|
Amended and Restated Investment Management Agreement, dated May 15, 2017, by and between the Waddell & Reed Advisors Funds and Waddell & Reed Investment Management Company.
|
10.5.1
|
|
First Amendment to the Amended and Restated Investment Management Agreement, dated June 3, 2017, by and between the Waddell & Reed Advisors Funds and Waddell & Reed Investment Management Company.
|
10.6
|
|
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance Portfolios and Ivy Investment Management Company. Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10‑Q, File No. 001-13913, for the quarter ended September 30, 2016 and incorporated herein by reference.
|
10.7
|
|
Investment Management Agreement, dated July 29, 2016, by and between Ivy Variable Insurance Portfolios and Ivy Investment Management Company. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10‑Q, File No. 001-13913, for the quarter ended September 30, 2016 and incorporated herein by reference.
|
10.8
|
|
Investment Management Agreement, dated November 13, 2008, by and between Ivy Funds and Ivy Investment Management Company. Filed as Exhibit 10.18 to the Company’s Annual Report on Form 10‑K, File No. 001‑13913, for the year ended December 31, 2011 and incorporated herein by reference.
|
10.9
|
|
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.28 to the Company’s Annual Report on Form 10‑K, File No. 001‑13913, for the year ended December 31, 2011 and incorporated herein by reference.*
|
10.10
|
|
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.26 to the Company’s Annual Report on Form 10‑K, File No. 001‑13913, for the year ended December 31, 2015 and incorporated herein by reference.*
|
10.11
|
|
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.27 to the Company’s Annual Report on Form 10‑K, File No. 001‑13913, for the year ended December 31, 2016 and incorporated herein by reference.*
|
10.12
|
|
Form of Restricted Stock Award Agreement for awards to Non‑Employee Directors pursuant to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10‑Q, File No. 333‑43687, for the quarter ended September 30, 2007 and incorporated herein by reference.*
|
10.13
|
|
Form of Restricted Stock Award Agreement for awards to Non‑Employee Directors pursuant to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.*
|
10.14
|
|
Form of Restricted Stock Award Agreement for awards to Non‑Employee Directors pursuant to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.*
|
10.15
|
|
Form of Restricted Stock Award Agreement for awards to Non‑Employee Directors pursuant to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.*
|
10.16
|
|
Form of Indemnification Agreement. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8‑K, File No. 001‑13913, on November 16, 2009 and incorporated herein by reference.*
|
10.17
|
|
Severance Agreement and Release of All Claims, effective January 13, 2018, by and between Thomas W. Butch and W&R Corporate LLC. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8‑K, File No. 001‑13913, on January 18, 2018 and incorporated herein by reference.*
|
18
|
|
Preferability Letter from KPMG LLP
|
21
|
|
Subsidiaries of Waddell & Reed Financial, Inc.
|
23
|
|
Consent of KPMG LLP
|
24
|
|
Powers of Attorney
|
31.1
|
|
Rule 13a‑14(a)/15d‑14(a) Certification of the Chief Executive Officer
|
31.2
|
|
Rule 13a‑14(a)/15d‑14(a) Certification of the Chief Financial Officer
|
32.1
|
|
Section 1350 Certification of the Chief Executive Officer
|
32.2
|
|
Section 1350 Certification of the Chief Financial Officer
|
101
|
|
Materials from the Waddell & Reed Financial, Inc. Annual Report on Form 10‑K for the year ended December 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (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 Consolidated Financial Statements, tagged in detail.
|
*Indicates management contract or compensatory plan, contract or arrangement.
|
ITEM 16. Form 10-K Summary
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Overland Park, State of Kansas, on February 23, 2018.
|
|
|
|
WADDELL & REED FINANCIAL, INC.
|
|
|
|
|
By:
|
/s/ PHILIP J. SANDERS
|
|
|
Philip J. Sanders
|
|
|
Chief Executive Officer and Chief Investment Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ PHILIP J. SANDERS
|
|
Chief Executive Officer, Chief Investment Officer and Director (Principal Executive Officer)
|
|
February 23, 2018
|
Philip J. Sanders
|
|
|
|
|
|
|
|
|
/s/ BRENT K. BLOSS
|
|
Executive Vice President, Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial Officer)
|
|
February 23, 2018
|
Brent K. Bloss
|
|
|
|
|
|
|
|
|
/s/ BENJAMIN R. CLOUSE
|
|
Vice President and Chief Accounting Officer (Principal Accounting Officer)
|
|
February 23, 2018
|
Benjamin R. Clouse
|
|
|
|
/s/ HENRY J. HERRMANN*
|
|
Chairman of the Board and Director
|
|
February 23, 2018
|
Henry J. Herrmann
|
|
|
|
|
|
|
|
|
/s/ SHARILYN S. GASAWAY*
|
|
Director
|
|
February 23, 2018
|
Sharilyn S. Gasaway
|
|
|
|
|
|
|
|
|
/s/ THOMAS C. GODLASKY*
|
|
Director
|
|
February 23, 2018
|
Thomas C. Godlasky
|
|
|
|
|
|
|
|
|
/s/ ALAN W. KOSLOFF*
|
|
Director
|
|
February 23, 2018
|
Alan W. Kosloff
|
|
|
|
|
|
|
|
|
/s/ DENNIS E. LOGUE*
|
|
Director
|
|
February 23, 2018
|
Dennis E. Logue
|
|
|
|
|
|
|
|
|
/s/ MICHAEL F. MORRISSEY*
|
|
Director
|
|
February 23, 2018
|
Michael F. Morrissey
|
|
|
|
|
|
|
|
|
/s/ JAMES M. RAINES*
|
|
Director
|
|
February 23, 2018
|
James M. Raines
|
|
|
|
|
|
|
|
|
/s/ JERRY W. WALTON*
|
|
Director
|
|
February 23, 2018
|
Jerry W. Walton
|
|
|
|
|
|
|
|
|
/s/ JEFFREY P. BENNETT
|
|
Attorney‑in‑fact
|
|
February 23, 2018
|
Jeffrey P. Bennett
|
|
|
|
*
By:
Attorney‑in‑fact
WADDELL & REED FINANCIAL, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Waddell & Reed Financial, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has elected to change its method of accounting for net periodic pension cost to immediately recognize actuarial gains and losses in net periodic pension cost in the year in which the gains and losses occur.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1981.
/s/ KPMG LLP
Kansas City, Missouri
February 23, 2018
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
207,829
|
|
555,102
|
|
Cash and cash equivalents - restricted
|
|
|
28,156
|
|
31,137
|
|
Investment securities
|
|
|
700,492
|
|
328,750
|
|
Receivables:
|
|
|
|
|
|
|
Funds and separate accounts
|
|
|
25,664
|
|
27,181
|
|
Customers and other
|
|
|
131,108
|
|
128,095
|
|
Prepaid expenses and other current assets
|
|
|
25,593
|
|
21,574
|
|
Total current assets
|
|
|
1,118,842
|
|
1,091,839
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
87,667
|
|
102,449
|
|
Goodwill and identifiable intangible assets
|
|
|
147,069
|
|
148,569
|
|
Deferred income taxes
|
|
|
13,308
|
|
31,430
|
|
Other non-current assets
|
|
|
17,476
|
|
31,985
|
|
Total assets
|
|
$
|
1,384,362
|
|
1,406,272
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
38,998
|
|
28,023
|
|
Payable to investment companies for securities
|
|
|
43,422
|
|
53,691
|
|
Payable to third party brokers
|
|
|
25,153
|
|
31,735
|
|
Payable to customers
|
|
|
66,830
|
|
82,918
|
|
Short-term notes payable
|
|
|
94,996
|
|
—
|
|
Accrued compensation
|
|
|
47,643
|
|
41,670
|
|
Other current liabilities
|
|
|
44,797
|
|
58,941
|
|
Total current liabilities
|
|
|
361,839
|
|
296,978
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
94,783
|
|
189,605
|
|
Accrued pension and postretirement costs
|
|
|
15,137
|
|
38,379
|
|
Other non-current liabilities
|
|
|
25,210
|
|
26,655
|
|
Total liabilities
|
|
|
496,969
|
|
551,617
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
|
|
14,509
|
|
10,653
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Preferred stock—$1.00 par value: 5,000 shares authorized; none issued
|
|
|
—
|
|
—
|
|
Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 82,687 shares outstanding (83,118 at December 31, 2016)
|
|
|
997
|
|
997
|
|
Additional paid-in capital
|
|
|
301,410
|
|
291,908
|
|
Retained earnings
|
|
|
1,092,394
|
|
1,089,122
|
|
Cost of 17,014 common shares in treasury (16,583 at December 31, 2016)
|
|
|
(522,441)
|
|
(531,268)
|
|
Accumulated other comprehensive income (loss)
|
|
|
524
|
|
(6,757)
|
|
Total stockholders’ equity
|
|
|
872,884
|
|
844,002
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable noncontrolling interests and stockholders’ equity
|
|
$
|
1,384,362
|
|
1,406,272
|
|
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands, except per share data)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Investment management fees
|
|
$
|
531,850
|
|
|
557,112
|
|
|
709,562
|
|
Underwriting and distribution fees
|
|
|
518,699
|
|
|
561,670
|
|
|
663,998
|
|
Shareholder service fees
|
|
|
106,595
|
|
|
120,241
|
|
|
143,071
|
|
Total
|
|
|
1,157,144
|
|
|
1,239,023
|
|
|
1,516,631
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution
|
|
|
593,424
|
|
|
664,648
|
|
|
774,428
|
|
Compensation and related costs (including share-based compensation of $57,716, $51,514 and $47,518, respectively)
|
|
|
181,376
|
|
|
200,822
|
|
|
208,841
|
|
General and administrative
|
|
|
105,520
|
|
|
83,995
|
|
|
105,066
|
|
Depreciation
|
|
|
20,983
|
|
|
18,359
|
|
|
16,046
|
|
Subadvisory fees
|
|
|
13,174
|
|
|
9,572
|
|
|
9,134
|
|
Intangible asset impairment
|
|
|
1,500
|
|
|
9,749
|
|
|
—
|
|
Total
|
|
|
915,977
|
|
|
987,145
|
|
|
1,113,515
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
241,167
|
|
|
251,878
|
|
|
403,116
|
|
Investment and other income (loss)
|
|
|
15,689
|
|
|
(763)
|
|
|
(5,244)
|
|
Interest expense
|
|
|
(11,279)
|
|
|
(11,122)
|
|
|
(11,068)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
245,577
|
|
|
239,993
|
|
|
386,804
|
|
Provision for income taxes
|
|
|
101,368
|
|
|
81,884
|
|
|
149,226
|
|
Net income
|
|
|
144,209
|
|
|
158,109
|
|
|
237,578
|
|
Net income attributable to redeemable noncontrolling interests
|
|
|
2,930
|
|
|
1,414
|
|
|
—
|
|
Net income attributable to Waddell & Reed Financial, Inc.
|
|
$
|
141,279
|
|
|
156,695
|
|
|
237,578
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Waddell and Reed Financial, Inc. common shareholders, basic and diluted:
|
|
$
|
1.69
|
|
|
1.90
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted:
|
|
|
83,573
|
|
|
82,668
|
|
|
83,499
|
|
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Net income
|
|
$
|
144,209
|
|
158,109
|
|
237,578
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) of available for sale investment securities during the period, net of income tax expense (benefit) of $(956), $(2), and $2, respectively
|
|
|
7,505
|
|
(391)
|
|
(4,771)
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit, net of income tax expense (benefit) of $(99), $(718), and $983, respectively
|
|
|
(224)
|
|
(1,220)
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
151,490
|
|
156,498
|
|
234,474
|
|
Comprehensive income attributable to redeemable noncontrolling interests
|
|
|
2,930
|
|
1,414
|
|
—
|
|
Comprehensive income attributable to Waddell & Reed Financial, Inc.
|
|
$
|
148,560
|
|
155,084
|
|
234,474
|
|
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2017, 2016 and 2015
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
Total
|
|
Non
|
|
|
|
Common Stock
|
|
Paid-In
|
|
Retained
|
|
Treasury
|
|
Comprehensive
|
|
Stockholders’
|
|
Controlling
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Income (Loss)
|
|
Equity
|
|
interest
|
|
Balance at December 31, 2014
|
|
99,701
|
|
$
|
997
|
|
318,636
|
|
993,507
|
|
(525,015)
|
|
(2,041)
|
|
786,084
|
|
—
|
|
Net income
|
|
—
|
|
|
—
|
|
—
|
|
237,578
|
|
—
|
|
—
|
|
237,578
|
|
—
|
|
Recognition of equity compensation
|
|
—
|
|
|
—
|
|
47,256
|
|
262
|
|
—
|
|
—
|
|
47,518
|
|
—
|
|
Net issuance/forfeiture of nonvested shares
|
|
—
|
|
|
—
|
|
(39,094)
|
|
—
|
|
39,094
|
|
—
|
|
—
|
|
—
|
|
Dividends accrued, $1.75 per share
|
|
—
|
|
|
—
|
|
—
|
|
(146,099)
|
|
—
|
|
—
|
|
(146,099)
|
|
—
|
|
Excess tax benefits from share-based payment arrangements
|
|
—
|
|
|
—
|
|
4,813
|
|
—
|
|
—
|
|
—
|
|
4,813
|
|
—
|
|
Repurchase of common stock
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
(80,335)
|
|
—
|
|
(80,335)
|
|
—
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(3,104)
|
|
(3,104)
|
|
—
|
|
Balance at December 31, 2015
|
|
99,701
|
|
|
997
|
|
331,611
|
|
1,085,248
|
|
(566,256)
|
|
(5,145)
|
|
846,455
|
|
—
|
|
Adoption of consolidation guidance on January 1, 2016 - redeemable noncontrolling interests in sponsored funds
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
14,330
|
|
Net income
|
|
—
|
|
|
—
|
|
—
|
|
156,695
|
|
—
|
|
—
|
|
156,695
|
|
1,414
|
|
Net redemption of redeemable noncontrolling interests in sponsored funds
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5,091)
|
|
Recognition of equity compensation
|
|
—
|
|
|
—
|
|
51,382
|
|
132
|
|
—
|
|
—
|
|
51,514
|
|
—
|
|
Net issuance/forfeiture of nonvested shares
|
|
—
|
|
|
—
|
|
(84,741)
|
|
—
|
|
84,741
|
|
—
|
|
—
|
|
—
|
|
Dividends accrued, $1.84 per share
|
|
—
|
|
|
—
|
|
—
|
|
(152,953)
|
|
—
|
|
—
|
|
(152,953)
|
|
—
|
|
Tax impact of share-based payment arrangements
|
|
—
|
|
|
—
|
|
(6,344)
|
|
—
|
|
—
|
|
—
|
|
(6,344)
|
|
—
|
|
Repurchase of common stock
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
(49,753)
|
|
—
|
|
(49,753)
|
|
—
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,612)
|
|
(1,612)
|
|
—
|
|
Balance at December 31, 2016
|
|
99,701
|
|
|
997
|
|
291,908
|
|
1,089,122
|
|
(531,268)
|
|
(6,757)
|
|
844,002
|
|
10,653
|
|
Adoption of share-based compensation guidance on January 1, 2017
|
|
—
|
|
|
—
|
|
3,504
|
|
(2,200)
|
|
—
|
|
—
|
|
1,304
|
|
—
|
|
Net income
|
|
—
|
|
|
—
|
|
—
|
|
141,279
|
|
—
|
|
—
|
|
141,279
|
|
2,930
|
|
Net subscription of redeemable noncontrolling interests in sponsored funds
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
926
|
|
Recognition of equity compensation
|
|
—
|
|
|
—
|
|
50,593
|
|
690
|
|
—
|
|
—
|
|
51,283
|
|
—
|
|
Net issuance/forfeiture of nonvested shares
|
|
—
|
|
|
—
|
|
(44,595)
|
|
|
|
44,595
|
|
|
|
—
|
|
—
|
|
Dividends accrued, $1.63 per share
|
|
—
|
|
|
—
|
|
—
|
|
(136,497)
|
|
—
|
|
—
|
|
(136,497)
|
|
—
|
|
Repurchase of common stock
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
(35,768)
|
|
—
|
|
(35,768)
|
|
—
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
7,281
|
|
7,281
|
|
—
|
|
Balance at December 31, 2017
|
|
99,701
|
|
$
|
997
|
|
301,410
|
|
1,092,394
|
|
(522,441)
|
|
524
|
|
872,884
|
|
14,509
|
|
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
144,209
|
|
158,109
|
|
237,578
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,983
|
|
18,359
|
|
16,050
|
|
Write-down of impaired assets
|
|
|
1,500
|
|
9,749
|
|
—
|
|
Amortization of deferred sales commissions
|
|
|
4,855
|
|
23,601
|
|
43,074
|
|
Share-based compensation
|
|
|
51,283
|
|
51,514
|
|
47,518
|
|
Investments (gain) loss, net
|
|
|
(17,104)
|
|
(12,075)
|
|
12,412
|
|
Net purchases of trading securities
|
|
|
(43,714)
|
|
(24,352)
|
|
(75,160)
|
|
Deferred income taxes
|
|
|
20,481
|
|
1,982
|
|
(6,188)
|
|
Pension and postretirement plan benefits
|
|
|
(17,714)
|
|
3,166
|
|
18,390
|
|
Net change in trading securities held by consolidated sponsored funds
|
|
|
(101,457)
|
|
(79,065)
|
|
—
|
|
Other
|
|
|
3,276
|
|
(2,523)
|
|
(4,133)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - restricted
|
|
|
2,981
|
|
35,743
|
|
9,715
|
|
Customer and other receivables
|
|
|
(3,013)
|
|
92,565
|
|
(3,817)
|
|
Payable to investment companies for securities and payable to customers
|
|
|
(26,357)
|
|
(97,459)
|
|
(5,964)
|
|
Receivables from funds and separate accounts
|
|
|
1,517
|
|
7,218
|
|
4,711
|
|
Other assets
|
|
|
10,134
|
|
2,255
|
|
(25,111)
|
|
Accounts payable and payable to third party brokers
|
|
|
4,395
|
|
(22,948)
|
|
(17,510)
|
|
Other liabilities
|
|
|
(2,423)
|
|
(42,192)
|
|
(17,615)
|
|
Net cash provided by operating activities
|
|
|
53,832
|
|
123,647
|
|
233,950
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of available for sale and equity method securities
|
|
|
(365,770)
|
|
(72,096)
|
|
(27,388)
|
|
Proceeds from sales of available for sale and equity method securities
|
|
|
160,158
|
|
156,965
|
|
36,657
|
|
Additions to property and equipment
|
|
|
(6,783)
|
|
(15,691)
|
|
(29,610)
|
|
Net cash of sponsored funds on consolidation
|
|
|
—
|
|
6,887
|
|
—
|
|
Other
|
|
|
—
|
|
(194)
|
|
(2,254)
|
|
Net cash (used in) provided by investing activities
|
|
|
(212,395)
|
|
75,871
|
|
(22,595)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(154,042)
|
|
(152,830)
|
|
(143,959)
|
|
Repurchase of common stock
|
|
|
(35,768)
|
|
(49,753)
|
|
(80,335)
|
|
Net subscriptions, (redemptions, distributions and deconsolidations) of redeemable noncontrolling interests in sponsored funds
|
|
|
926
|
|
(3,473)
|
|
—
|
|
Other
|
|
|
174
|
|
3,145
|
|
4,813
|
|
Net cash used in financing activities
|
|
|
(188,710)
|
|
(202,911)
|
|
(219,481)
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(347,273)
|
|
(3,393)
|
|
(8,126)
|
|
Cash and cash equivalents at beginning of period
|
|
|
555,102
|
|
558,495
|
|
566,621
|
|
Cash and cash equivalents at end of period
|
|
$
|
207,829
|
|
555,102
|
|
558,495
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Income taxes, net
|
|
$
|
85,299
|
|
76,982
|
|
152,262
|
|
Interest
|
|
$
|
10,299
|
|
10,289
|
|
10,297
|
|
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017, 2016 and 2015
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Amounts in the accompanying financial statements and notes are rounded to the nearest thousand unless otherwise stated. Certain amounts in the prior years’ financial statements have been reclassified for consistent presentation. Also, refer to the “Pension Plan” section below regarding a change in accounting.
The Company operates in one business segment as the Company’s management utilizes a consolidated approach to assess performance and allocate resources.
Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, “
Improvements to Employee Share-Based Payment Accounting
.” This ASU requires excess tax benefits and tax shortfalls to be recognized as income tax benefit or expense in the income statement on a prospective basis. Additionally, excess tax benefits or shortfalls recognized on share-based compensation are classified as an operating activity in the statement of cash flows. The Company has applied this provision prospectively, and thus, the prior period presented in the income statements and statement of cash flows has not been adjusted. This ASU allows entities to withhold shares issued during the settlement of a stock award or option, as means of meeting minimum tax withholding due by the employee, in an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without resulting in a liability classification of the award (versus an equity classification). The value of the withheld shares is then remitted by the Company in cash to the taxing authorities on the employees’ behalf. The Company’s historical policy to withhold shares equivalent to the minimum individual tax rate is consistent with the thresholds meeting the classification of an equity award and, therefore, a retrospective classification adjustment was not required. This ASU requires that all cash payments made to taxing authorities on the employees’ behalf for withheld shares be presented as financing activities on the statement of cash flows. As this requirement is consistent with the Company’s historical accounting policy, a retrospective adjustment to presentation of the statement of cash flows was not required. This ASU also allows for the option to account for forfeitures as they occur when determining the amount of share-based compensation expense to be recognized, rather than estimating expected forfeitures over the course of a vesting period. The Company elected to account for forfeitures as they occur. The net cumulative effect to the Company from the adoption of this ASU was an increase to additional paid-in capital of $3.5 million, a reduction to retained earnings of $2.2 million and an increase to the non-current deferred tax asset of $1.3 million as of January 1, 2017.
Pension Plan
During the fourth quarter of 2017, the Company retrospectively changed its method of accounting for net periodic pension cost. Historically, net actuarial gains or losses in excess of 10% of the greater of the market-related value of plan assets or the plan’s projected benefit obligation (the corridor) were amortized into operating expenses over the remaining working life of active plan participants. Unrecognized actuarial gains or losses were reflected as a component of stockholders’ equity in our consolidated balance sheets. Under the Company’s new method of accounting, the Company elected to immediately recognize all actuarial gains and losses in net periodic pension cost in the year in which the gains and losses occur noting that it is generally preferable to accelerate the recognition of gains and losses into income rather than to delay such recognition. This change is intended to improve the transparency of the Company’s underlying financial performance by recognizing the effects of current economic and interest rate trends on assumptions used to measure plan obligations and assets. These gains and losses are generally only measured annually as of December 31 and accordingly will be recorded in the fourth quarter, unless a remeasurement event occurs during an earlier interim period. Financial data for all periods presented has been adjusted to reflect the effect of this accounting change.
The cumulative effect of the change on retained earnings as of January 1, 2015 was a decrease of $48.4 million, with the corresponding adjustment to accumulated other comprehensive loss. The effects of the change in accounting on our consolidated statements of income and consolidated balance sheets for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Historical
Accounting
Method
|
|
Adjusted
|
|
As Reported
|
|
Adjusted
|
|
As Reported
|
|
Adjusted
|
|
|
(dollars in thousands, except per share amounts)
|
Income Statement Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and distribution expenses
|
|
$
|
600,067
|
|
593,424
|
|
671,105
|
|
664,648
|
|
769,781
|
|
774,428
|
Compensation and related costs
|
|
|
196,209
|
|
181,376
|
|
209,850
|
|
200,822
|
|
200,752
|
|
208,841
|
Income before provision for income taxes
|
|
|
224,101
|
|
245,577
|
|
224,508
|
|
239,993
|
|
399,540
|
|
386,804
|
Provision for income taxes
|
|
|
92,592
|
|
101,368
|
|
76,188
|
|
81,884
|
|
154,004
|
|
149,226
|
Net income
|
|
|
131,509
|
|
144,209
|
|
148,321
|
|
158,109
|
|
245,536
|
|
237,578
|
Net income attributable to Waddell & Reed Financial, Inc.
|
|
|
128,579
|
|
141,279
|
|
146,906
|
|
156,695
|
|
245,536
|
|
237,578
|
Net income per share attributable to Waddell & Reed Financial, Inc. common shareholders, basic and diluted
|
|
|
1.54
|
|
1.69
|
|
1.78
|
|
1.90
|
|
2.94
|
|
2.85
|
Statement of Comprehensive Income Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefit, net of income tax expense (benefit)
|
|
$
|
12,476
|
|
(224)
|
|
8,569
|
|
(1,220)
|
|
(6,291)
|
|
1,667
|
Statement of Cash Flows Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
131,509
|
|
144,209
|
|
148,321
|
|
158,109
|
|
245,536
|
|
237,578
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
11,705
|
|
20,481
|
|
(3,714)
|
|
1,982
|
|
(1,410)
|
|
(6,188)
|
Pension and postretirement plan benefits
|
|
$
|
3,762
|
|
(17,714)
|
|
18,651
|
|
3,166
|
|
5,654
|
|
18,390
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
2017
|
|
2016
|
|
|
Historical
Accounting
Method
|
|
Adjusted
|
|
As Reported
|
|
Adjusted
|
Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
1,126,263
|
|
1,092,394
|
|
1,135,694
|
|
1,089,122
|
Accumulated other comprehensive income (loss)
|
|
$
|
(33,345)
|
|
524
|
|
(53,329)
|
|
(6,757)
|
Consolidation
In
the normal course of our business, we sponsor and manage various types of investment products. These investment products include open-end mutual funds, a closed-end mutual fund, privately offered funds, exchange-traded managed funds, and a Luxembourg SICAV. When creating and launching a new investment product, we typically fund the initial cash investment, commonly referred to as “seeding,” to allow the investment product the ability to generate an investment performance track record so that it is able to attract third party investors. Our initial investment in a new product typically represents 100% of the ownership in that product. We generally redeem our investment in seeded products when the related product establishes a sufficient track record, when third party investments in the related product are sufficient to sustain the strategy, or when a decision is made to no longer pursue the strategy. The length of time we hold a majority interest in a product varies based on a number of factors, including market demand, market conditions and investment performance. Our exposure to risk in these investment products is generally limited to any equity investment we have in the product and any earned but uncollected management or other fund-related service fees.
In accordance with financial accounting standards, we consolidate certain sponsored investment products in which we have a controlling interest or the investment product meets the criteria of a variable interest entity (“VIE”) and we are deemed to be the primary beneficiary. In order to make this determination, an analysis is performed to determine
if the investment product is a VIE or a voting interest entity (“VOE”). Assessing if an entity is a VIE or VOE involves judgment and analysis on an entity by entity basis. Factors included in this assessment include the legal organization of the entity, the Company’s contractual involvement with the entity and any implications resulting from or associated with related parties’ involvement with the entity.
A VIE is an entity which does not have adequate equity to finance its activities without subordinated financial support, the equity investors do not have the normal characteristics of equity investors for a potential controlling financial interest as a group, or the voting rights are not proportional to their obligations to absorb the expected losses or their rights to receive the expected residual returns of the entity. The Company is deemed to be the primary beneficiary if it absorbs a majority of the VIE’s expected losses, expected residual returns, or both. If the Company is the primary beneficiary of a VIE, we are required to consolidate the assets, liabilities, results of operations and cash flows of the VIE into our consolidated financial statements.
If an entity does not meet the criteria and is not considered a VIE, it is treated as a VOE, which is subject to traditional consolidation concepts based on ownership rights. Sponsored investment products that are considered VOEs are consolidated if we have a controlling financial interest in the entity absent substantive investor rights to replace the investment manager of the entity (kick-out rights).
Use of Estimates
GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying notes, and related disclosures of commitments and contingencies. Estimates are used for, but are not limited to, depreciation and amortization, income taxes, valuation of assets, pension and postretirement obligations, and contingencies. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Actual results could differ from our estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short‑term investments. We consider all highly liquid investments with maturities
upon acquisition of 90 days or less to be
cash equivalents. Cash and cash equivalents – restricted represents cash held for the benefit of customers and non-customers segregated in compliance with federal and other regulations.
Disclosures About Fair Value of Financial Instruments
Fair value of cash and cash equivalents, receivables and payables approximates carrying value. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values for investment securities are based on Level 2 or Level 3 inputs detailed in Note 3. Fair value of long‑term debt is disclosed in Note 7.
Investment Securities and Investments in Sponsored Funds
Our investments are comprised of debt and equity securities, investments in sponsored funds and sponsored privately offered funds. Sponsored funds, which include the Funds, IVH and the IGI Funds, are investments we have made to provide seed capital for new investment products. The Company has classified its investments in certain sponsored funds as either equity method investments (when the Company owns between 20% and 50% of the fund) or as available for sale investments (when the Company owns less than 20% of the fund). Investments held by our broker-dealer entities or certain investments that are anticipated to be purchased and sold on a more frequent basis are classified as trading.
Unrealized gains and losses on securities classified as available for sale, net of related tax effects, are excluded from earnings until realized and are reported as a separate component of comprehensive income. For trading securities, unrealized gains and losses are included in earnings. Realized gains and losses are computed using the specific identification method for all investment securities, other than sponsored funds. For sponsored funds, realized gains and losses are computed using the average cost method. Substantially all of the Company’s equity method investees are investment companies that record their underlying investments at fair value. Therefore, under the equity method of accounting, our share of the investee's underlying net income or loss is predominantly representative of fair value adjustments in the investments held by the equity method investee. Our share of the investee's net income or loss is based
on the most current information available and is recorded as a net gain or loss on investments within investment and other income (loss).
Our available for sale investments are reviewed each quarter and adjusted for other than temporary declines in value. We consider factors affecting the issuer and the industry in which the issuer operates, general market trends including interest rates, and our ability and intent to hold an investment until it has recovered. Consideration is given to the length of time an investment’s market value has been below carrying value as well as prospects for recovery to carrying value. When a decline in the fair value of equity securities is determined to be other than temporary, the unrealized loss recorded net of tax in other comprehensive income is realized as a charge to net income, and a new cost basis is established. When a decline in the fair value of debt securities is determined to be other than temporary, the amount of the impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current‑period credit loss. If so, the other than temporary impairment recognized in earnings is equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If not, the portion of the impairment related to the credit loss is recognized in earnings while the portion of the impairment related to other factors is recognized in other comprehensive income, net of tax.
Property and Equipment
Property and equipment are carried at cost. The costs of improvements that extend the life of a fixed asset are capitalized, while the costs of repairs and maintenance are expensed as incurred. Depreciation and amortization are calculated and recorded using the straight‑line method over the estimated useful life of the related asset (or lease term if shorter), generally three to 10 years for furniture and fixtures; one to 10 years for computer software; one to five years for data processing equipment; one to 30 years for buildings; two to 26 years for other equipment; and up to 15 years for leasehold improvements, determined by the lesser of the lease term or expected life.
Software Developed for Internal Use
Certain internal costs incurred in connection with developing or obtaining software for internal use are capitalized in accordance with ASC 350,
“Intangibles – Goodwill and Other Topic.”
Internal costs capitalized are included in property and equipment, net in the consolidated balance sheets, and were $10.5 million and $13.3 million as of December 31, 2017 and 2016, respectively.
Amortization begins when the software project is complete and ready for its intended use and continues over the estimated useful life, generally one to 10 years.
Goodwill and Identifiable
Intangible
Assets
Goodwill represents the excess of cost over fair value of the identifiable net assets of acquired companies. Indefinite-lived intangible assets represent advisory and subadvisory management contracts for managed assets obtained in acquisitions. The Company considers these contracts to be indefinite-lived intangible assets as they are expected to be renewed without significant cost or modification of terms. Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or circumstances indicate that the carrying value may not be recoverable. Goodwill and intangible assets require significant management estimates and judgment, including the valuation determination in connection with the initial purchase price allocation and the ongoing evaluation for impairment. Additional information related to the indefinite-lived intangible assets is included in Note 6.
Revenue Recognition
Investment Management and Advisory Fees
We recognize investment management fees as earned over the period in which services are rendered. We calculate investment management fees from the Funds daily based upon average daily net assets under management in accordance with investment management agreements between the Funds and the Company. The majority of investment and/or advisory fees earned from the IGI Funds and from institutional and separate accounts are calculated either monthly or quarterly based upon an average of net assets under management in accordance with such investment management agreements. The Company may waive certain fees for investment management services at its discretion, or in accordance with contractual expense limitations, and these waivers are reflected as a reduction to investment management fees on the consolidated statements of income.
Our investment advisory business receives research products and services from broker-dealers through “soft dollar” arrangements. Consistent with the “soft dollar” safe harbor established by Section 28(e) of the Securities Exchange Act of 1934, as amended, the investment advisory business does not have any contractual obligation requiring it to pay for research products and services obtained through soft dollar arrangements with brokers. As a result, we present “soft dollar” arrangements on a net basis.
The Company has contractual arrangements with third parties to provide subadvisory services. Investment advisory fees are recorded gross of any subadvisory payments and are included in investment management fees based on management’s determination that the Company is acting in the capacity of principal service provider with respect to its relationship with the Funds. Any corresponding fees paid to subadvisors are included in operating expenses.
Distribution, Underwriter and Shareholder Service Fees
Underwriting and distribution commission revenues resulting from the sale of investment products are recognized on the trade date. When a client purchases Class A or Class E shares (front-end load), the client pays an initial sales charge of up to 5.75% of the amount invested. The sales charge for Class A or Class E shares typically declines as the investment amount increases. In addition, investors may combine their purchases of all fund shares to qualify for a reduced sales charge. When a client invests in a fee-based asset allocation product, Class I or Y shares are purchased at net asset value, and we do not charge an initial sales charge.
Under a Rule 12b-1 service plan, the Funds may
charge a maximum fee of 0.25% of the
average daily net assets under management for Class B, C, E and Ivy Funds Y shares for expenses paid to broker-dealers and other sales professionals in connection with providing ongoing services to the Funds’ shareholders and/or maintaining the Funds’ shareholder accounts, with the exception of the Funds’ Class R shares, for which the maximum fee is 0.50% and for the Class I, N and Advisors Funds Y shares, which do not charge a service fee. The Funds’ Class B and Class C shares may charge a maximum of 0.75% of the average daily net assets under management under a Rule 12b-1 distribution plan to broker-dealers and other sales professionals for their services in connection with distributing shares of that class. The Funds’ Class A shares may charge a maximum fee of 0.25% of the average daily net assets under management under a Rule 12b-1 service and distribution plan for expenses detailed previously. The Rule 12b-1 plans are subject to annual approval by the Funds’ board of trustees, including a majority of the disinterested members, by votes cast in person at a meeting called for the purpose of voting on such approval. All Funds may terminate the service and distribution plans at any time with approval of fund trustees or portfolio shareholders (a majority of either) without penalty.
Fee‑based asset allocation revenues are calculated monthly based upon average daily net assets under management. For certain types of investment products, primarily variable annuities, distribution revenues are generally calculated based upon average daily net assets under management. Fees collected from financial advisors for various services are recorded in underwriting and distribution fees on a gross basis, as the Company is the primary obligor in these arrangements.
Shareholder service fees are recognized monthly and are calculated based on the number of accounts or assets under management as applicable. Other administrative service fee revenues are recognized when contractual obligations are fulfilled or as services are provided.
Advertising and Promotion
We expense all advertising and promotion costs as the advertising or event takes place. Advertising expense was $9.7 million, $9.4 million and $15.7 million for the years ended December 31, 2017, 2016 and 2015, respectively, and is classified in both underwriting and distribution expense and general and administrative expense in the consolidated statements of income.
Leases
The Company leases office space under various leasing arrangements. Most lease agreements contain renewal options, rent escalation clauses and/or other inducements provided by the landlord. Rent expense is recorded on a straight-line basis, including escalations and inducements, over the term of the lease.
Share‑Based Compensation
We account for share‑based compensation expense using the fair value method. Under the fair value method, share‑based compensation expense reflects the fair value of share‑based awards measured at grant date, and is recognized over the service period. The Company also issues share‑based awards to our financial advisors, who are independent contractors, and to our Board of Directors. Changes in the Company’s share price result in variable compensation expense over the vesting period of awards granted to our financial advisors and Board of Directors.
During the fourth quarter of 2016, the Company established a Cash Settled RSU Plan (the “RSU Plan”), which allows the Company to grant cash-settled restricted stock units (“RSUs”) Unvested RSUs have no purchase price and vest in 25% increments over four years, beginning on the first anniversary of the grant date. On the vesting date, RSU holders receive a lump sum cash payment equal to the fair market value of one share of the Company’s common stock, par value $0.01, for each RSU that has vested, subject to applicable tax withholdings. We treat RSUs as liability-classified awards and, therefore, account for them at fair value based on the closing price of our common stock on the reporting date, which results in variable compensation expense over the vesting period.
Accounting for Income Taxes
Income tax expense is based on pre-tax income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance as prescribed by ASC 740, “
Income Taxes Topic.
” Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is recognized to reduce deferred tax assets if, based on available evidence, it is more likely than not that all or some portion of the asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates that will be in effect when they are expected to be realized or settled. The effect on the measurement of deferred tax assets and liabilities of a change in income tax law is recognized in earnings in the period that includes the enactment date.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted, which significantly revised the U.S. corporate income tax system by, among other things, permanently reducing the federal statutory tax rate from 35% to 21% effective January 1, 2018. The Company recorded a one-time charge of $5.4 million in the fourth quarter of 2017 to measure our net deferred tax assets at the reduced federal statutory rate. The SEC staff issued Staff Accounting Bulletin No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company has recognized the provisional tax impact related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The impact of the Tax Reform Act is expected to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018.
2. New Accounting Guidance
Accounting Guidance Adopted During Fiscal Year 2017
On January 1, 2017 the Company adopted ASU 2016-07, “
Investments-Equity Method and Joint Ventures
.” This ASU eliminates the requirement that when an investment qualifies for the use of equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively as if the equity method had been in effect during all previous periods that the investment had been held. This ASU also requires that when an entity has an available for sale equity security that becomes qualified for the equity method, it must recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The adoption of this ASU has an immaterial impact on our consolidated financial statements and related disclosures.
On January 1, 2017, the Company adopted ASU 2016-09. See Note 1 – Summary of Significant Accounting Policies – Basis of Presentation for a description of this ASU and the financial statement impact of adopting this ASU.
New Accounting Guidance Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “
Revenue from Contracts with Customers,”
which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This standard also specifies the accounting for certain costs to obtain or fulfill a contract with a customer. This ASU will supersede much of the existing revenue recognition guidance in GAAP and is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period; early application is permitted for the first interim period within annual reporting periods beginning after December 15, 2016. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. Upon adoption, the Company will utilize the cumulative effect approach. We have evaluated our population of contracts and did not identify any material changes in our current revenue recognition practices and concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements. Upon adoption of the amendments in this ASU, the Company will add qualitative and quantitative information to the notes to its consolidated financial statements related to contracts with customers, including revenue and impairments recognized, disaggregation of revenue, information about contract balances and performance obligations; significant judgments and changes in judgments about determining the timing of satisfaction of performance obligations and determining the transaction price and amounts allocated to performance obligations; and assets recognized from the costs to obtain or fulfill a contract.
In February 2016, FASB issued ASU 2016-02, “
Leases,”
which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU will be presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Although we are currently evaluating the estimated impact the adoption of this ASU will have on our consolidated financial statements and related disclosures, we currently believe the most significant changes will be related to the recognition of new right-of-use assets and lease liabilities on our consolidated balance sheet for real estate operating leases.
In August 2016, FASB issued ASU 2016-15, “
Classification of Certain Cash Receipts and Cash Payments.”
This ASU eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. This ASU designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.
In November 2016, FASB issued ASU 2016-18, “
Statement of Cash Flows: Restricted Cash.”
This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied retrospectively to all periods presented. Upon adoption of this ASU on January 1, 2018, we will include cash and cash equivalents – restricted as a component of cash and cash equivalents on our consolidated statements of cash flows for all periods presented, and will remove the change in cash and cash equivalents-restricted as a component of net cash provided by operating activities.
In March 2017, FASB issued ASU 2017-07, “
Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”
This ASU changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in a separate line item outside of operating items. In addition, only the service cost component is eligible for capitalization as part of an asset. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We have concluded that the adoption of this ASU will have no effect on our net income because it only impacts the classification of certain information on the consolidated statement of income. The service cost component of net periodic benefit cost was recognized in underwriting and distribution, and compensation and related costs through September 30, 2017. An amendment to freeze our noncontributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”) was approved effective September 30, 2017; therefore, after September 30, 2017, we no longer incurred service cost. The other components of net periodic cost will be reclassified to investment and other income (loss) on a retrospective basis.
In May 2017, FASB issued ASU 2017-09, “
Compensation-Stock Compensation: Scope of Modification Accounting.”
This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718,
Compensation – Stock Compensation Topic.
This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We have concluded that the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures.
3. Investment Securities
Investment securities at December 31, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
(in thousands)
|
|
Available for sale securities:
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
12,999
|
|
—
|
|
Commercial paper
|
|
|
34,978
|
|
—
|
|
Corporate bonds
|
|
|
197,442
|
|
—
|
|
U.S. Treasury bills
|
|
|
19,779
|
|
—
|
|
Sponsored funds
|
|
|
124,016
|
|
122,806
|
|
Sponsored privately offered funds
|
|
|
—
|
|
570
|
|
Total available for sale securities
|
|
|
389,214
|
|
123,376
|
|
Trading securities:
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
1,999
|
|
—
|
|
Corporate bonds
|
|
|
55,414
|
|
—
|
|
U.S. Treasury bills
|
|
|
4,929
|
|
—
|
|
Mortgage-backed securities
|
|
|
10
|
|
13
|
|
Common stock
|
|
|
116
|
|
101
|
|
Consolidated sponsored funds
|
|
|
139,086
|
|
145,710
|
|
Sponsored funds
|
|
|
13,841
|
|
29,541
|
|
Sponsored privately offered funds
|
|
|
695
|
|
—
|
|
Total trading securities
|
|
|
216,090
|
|
175,365
|
|
Equity method securities:
|
|
|
|
|
|
|
Sponsored funds
|
|
|
95,188
|
|
26,775
|
|
Sponsored privately offered funds
|
|
|
—
|
|
3,234
|
|
Total equity method securities
|
|
|
95,188
|
|
30,009
|
|
Total securities
|
|
$
|
700,492
|
|
328,750
|
|
Certificates of deposit, commercial paper, corporate bonds and U.S. Treasury bills accounted for as available for sale and held as of December 31, 2017 mature as follows:
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
cost
|
|
Fair value
|
|
|
(in thousands)
|
Within one year
|
$
|
98,323
|
|
98,390
|
After one year but within five years
|
|
167,936
|
|
166,808
|
|
$
|
266,259
|
|
265,198
|
Certificates of deposit, U.S. Treasury bills, corporate bonds and mortgage-backed securities accounted for as trading and held as of December 31, 2017 mature as follows:
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
|
|
(in thousands)
|
Within one year
|
|
|
$
|
12,064
|
After one year but within five years
|
|
|
|
45,288
|
After 10 years
|
|
|
|
5,000
|
|
|
|
$
|
62,352
|
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
cost
|
|
gains
|
|
losses
|
|
Fair value
|
|
|
|
(in thousands)
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
13,000
|
|
1
|
|
(2)
|
|
12,999
|
|
Commercial paper
|
|
|
34,836
|
|
142
|
|
—
|
|
34,978
|
|
Corporate bonds
|
|
|
198,404
|
|
33
|
|
(995)
|
|
197,442
|
|
U.S. Treasury bills
|
|
|
20,019
|
|
—
|
|
(240)
|
|
19,779
|
|
Sponsored funds
|
|
|
122,722
|
|
2,576
|
|
(1,282)
|
|
124,016
|
|
|
|
$
|
388,981
|
|
2,752
|
|
(2,519)
|
|
389,214
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the gross unrealized gains (losses) related to securities classified as available for sale at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
cost
|
|
gains
|
|
losses
|
|
Fair value
|
|
|
|
(in thousands)
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds
|
|
$
|
129,427
|
|
828
|
|
(7,449)
|
|
122,806
|
|
Sponsored privately offered funds
|
|
|
265
|
|
305
|
|
—
|
|
570
|
|
|
|
$
|
129,692
|
|
1,133
|
|
(7,449)
|
|
123,376
|
|
Investment securities with fair values of $237.2 million, $234.4 million and $102.2 million were sold during 2017, 2016 and 2015, respectively. During 2017, net realized gains of $0.9 million, $6.9 million and $1.5 million were recognized from the sale of $86.9 million in available for sale securities, the sale of $73.2 million in equity method securities, and the sale of $57.1 million in consolidated traded securities, respectively, and net realized losses of $0.5 million were recognized from the sale of $19.8 million in trading securities. During 2016, net realized gains of $3.6 million were recognized from the sale of $98.2 million in available for sale securities and net realized losses of $2.3 million were recognized from the sale of $58.7 million in equity method securities. During 2015, net realized gains of $3.0 million and $0.6 million were recognized from the sale of $31.6 million in available for sale securities and the sale of $65.9 million in trading securities, respectively, and net realized losses of $0.5 million were recognized from the sale of $5.3 million in equity method securities.
A summary of available for sale sponsored funds with fair values below carrying values at December 31, 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
December 31, 2017
|
|
Fair value
|
|
losses
|
|
Fair value
|
|
losses
|
|
Fair value
|
|
losses
|
|
|
(in thousands)
|
Certificates of deposit
|
|
$
|
2,998
|
|
(2)
|
|
—
|
|
—
|
|
2,998
|
|
(2)
|
Corporate bonds
|
|
|
192,409
|
|
(995)
|
|
—
|
|
—
|
|
192,409
|
|
(995)
|
U.S. Treasury bills
|
|
|
19,779
|
|
(240)
|
|
—
|
|
—
|
|
19,779
|
|
(240)
|
Sponsored funds
|
|
|
49,641
|
|
(600)
|
|
23,707
|
|
(682)
|
|
73,348
|
|
(1,282)
|
|
|
$
|
264,827
|
|
(1,837)
|
|
23,707
|
|
(682)
|
|
288,534
|
|
(2,519)
|
During 2017, we recorded a pre-tax charge of $1.3 million to reflect the “other than temporary” decline in value of certain of the Company’s investments in sponsored funds as the fair value of these investments had been below cost for an extended period of time. This charge is recorded in investment and other income in the consolidated statement of operations for 2017.
Sponsored Privately Offered Funds
The Company holds voting interests in certain sponsored privately offered funds that are structured as investment companies in the legal form of LLCs. The Company held investments in these funds totaling $0.7 million and $3.8 million as of December 31, 2017 and December 31, 2016, respectively, which is our maximum loss exposure.
Consolidated Sponsored and Sponsored Privately Offered Funds
The following table details the balances related to consolidated sponsored and sponsored privately offered funds at December 31, 2017 and 2016, as well as the Company’s net interest in these funds:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
|
(in thousands)
|
Cash
|
|
$
|
8,472
|
|
|
6,885
|
Investments
|
|
|
139,086
|
|
|
145,710
|
Other assets
|
|
|
1,588
|
|
|
763
|
Other liabilities
|
|
|
(1,040)
|
|
|
(390)
|
Redeemable noncontrolling interests
|
|
|
(14,509)
|
|
|
(10,653)
|
Net interest in consolidated sponsored funds
|
|
$
|
133,597
|
|
|
142,315
|
During the year ended December 31, 2017, we consolidated certain of the sponsored privately offered funds, Ivy Funds, Ivy NextShares and Ivy ProShares in which we provided initial seed capital at the time of the funds’ formation. When we no longer have a controlling financial interest in a sponsored fund, it is deconsolidated from our consolidated financial statements. During 2017, we closed and redeemed our investment in three IGI Funds. Additionally, we deconsolidated the Ivy Proshares funds and two Ivy funds, as we no longer have a controlling interest in those funds. Accordingly, we deconsolidated $2.6 million from cash and cash equivalents, $53.6 million from investments and $56.2 million from redeemable controlling interests. Four IGI funds, one Ivy Fund, one sponsored privately offered fund and the Ivy Nextshares funds remain consolidated as of December 31, 2017. There was no impact to the consolidated statement of income as a result of the closures and deconsolidations, as the funds were carried at fair value.
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.
|
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 municipal bonds is measured based on pricing models that take into account, among other factors, information received from market makers and broker-dealers, current trades, bid‑wants lists, offerings, market movements, the callability of the bond, state of issuance and benchmark yield curves. 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. The fair value of equity derivatives is measured based on active market broker quotes, evaluated broker quotes and evaluated prices from vendors.
The following tables summarize our investment securities as of December 31, 2017 and 2016 that are recognized in our consolidated balance sheets using fair value measurements based on the differing levels of inputs. There were no transfers between levels for the years ended December 31, 2017 or 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Other Assets Held at Net Asset Value
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash equivalents: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
145,785
|
|
—
|
|
—
|
|
—
|
|
145,785
|
|
Commercial paper
|
|
|
—
|
|
11,064
|
|
—
|
|
—
|
|
11,064
|
|
Total cash equivalents
|
|
$
|
145,785
|
|
11,064
|
|
—
|
|
—
|
|
156,849
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
—
|
|
12,999
|
|
—
|
|
—
|
|
12,999
|
|
Commercial paper
|
|
|
—
|
|
34,978
|
|
—
|
|
—
|
|
34,978
|
|
Corporate bonds
|
|
|
—
|
|
197,442
|
|
—
|
|
—
|
|
197,442
|
|
U.S. Treasury bills
|
|
|
—
|
|
19,779
|
|
—
|
|
—
|
|
19,779
|
|
Sponsored funds
|
|
|
124,016
|
|
—
|
|
—
|
|
—
|
|
124,016
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
—
|
|
1,999
|
|
—
|
|
—
|
|
1,999
|
|
Corporate bonds
|
|
|
—
|
|
55,414
|
|
—
|
|
|
|
55,414
|
|
U.S. Treasury bills
|
|
|
—
|
|
4,929
|
|
—
|
|
—
|
|
4,929
|
|
Mortgage-backed securities
|
|
|
—
|
|
10
|
|
—
|
|
—
|
|
10
|
|
Common stock
|
|
|
116
|
|
—
|
|
—
|
|
—
|
|
116
|
|
Consolidated sponsored funds
|
|
|
77,128
|
|
61,958
|
|
—
|
|
—
|
|
139,086
|
|
Sponsored funds
|
|
|
13,841
|
|
—
|
|
—
|
|
—
|
|
13,841
|
|
Sponsored privately offered funds measured at net asset value (2)
|
|
|
—
|
|
—
|
|
—
|
|
695
|
|
695
|
|
Equity method securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds
|
|
|
95,188
|
|
—
|
|
—
|
|
—
|
|
95,188
|
|
Total
|
|
$
|
310,289
|
|
389,508
|
|
—
|
|
695
|
|
700,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Other Assets Held at Net Asset Value
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash equivalents: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents
|
|
$
|
71,758
|
|
—
|
|
—
|
|
—
|
|
71,758
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds
|
|
$
|
122,806
|
|
—
|
|
—
|
|
—
|
|
122,806
|
|
Sponsored privately offered funds measured at net asset value (2)
|
|
|
—
|
|
—
|
|
—
|
|
570
|
|
570
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
—
|
|
13
|
|
—
|
|
—
|
|
13
|
|
Common stock
|
|
|
101
|
|
—
|
|
—
|
|
—
|
|
101
|
|
Consolidated sponsored funds
|
|
|
100,847
|
|
44,863
|
|
—
|
|
—
|
|
145,710
|
|
Sponsored funds
|
|
|
29,541
|
|
—
|
|
—
|
|
—
|
|
29,541
|
|
Equity method securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds
|
|
|
26,775
|
|
—
|
|
—
|
|
—
|
|
26,775
|
|
Sponsored privately offered funds measured at net asset value (2)
|
|
|
—
|
|
—
|
|
—
|
|
3,234
|
|
3,234
|
|
Total
|
|
$
|
280,070
|
|
44,876
|
|
—
|
|
3,804
|
|
328,750
|
|
|
(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 NAV 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)
|
|
Substantially all of the Company’s equity method investments are investment companies that record their underlying investments at fair value.
|
4. Derivative Financial Instruments
In 2016, the Company implemented an economic hedge program that uses total return swap contracts to hedge market risk with 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.
Excluding derivative financial instruments held in certain consolidated sponsored funds, the Company was party to six total return swap contracts with a combined notional value of $213.9 million and three total return swap contracts with a combined notional value of $160.2 million as of December 31, 2017 and 2016, respectively. These derivative 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 income (loss), net on the Company’s consolidated statement of income.
The Company posted $9.7 million and $7.1 million in cash collateral with the counterparties of the total return swap contracts as of December 31, 2017 and 2016, respectively. The cash collateral is included in customers and other receivables on the Company’s consolidated balance sheet. The Company does not record its fair value in derivative transactions against the posted collateral.
The following table presents the fair value of the derivative financial instruments, excluding derivative financial instruments held in certain consolidated sponsored funds as of December 31, 2017 and 2016 calculated based on Level 2 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Balance sheet
|
|
|
|
|
|
|
|
|
location
|
|
Fair value
|
|
Fair value
|
|
|
|
|
(in thousands)
|
Total return swap contracts
|
|
Other current liabilities
|
|
$
|
1,093
|
|
|
475
|
The following is a summary of net losses recognized in income for the years ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Income statement
|
|
December 31,
|
|
|
location
|
|
|
2017
|
2016
|
|
|
|
|
(in thousands)
|
Total return swap contracts
|
|
Investment and other (loss)
|
|
$
|
(36,368)
|
(31,974)
|
5. Property and Equipment
A summary of property and equipment at December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
2017
|
|
2016
|
|
useful lives
|
|
|
|
(in thousands)
|
|
|
|
|
Leasehold improvements
|
|
$
|
22,106
|
|
22,426
|
|
1 - 15
|
years
|
|
Furniture and fixtures
|
|
|
30,529
|
|
30,501
|
|
3 - 10
|
years
|
|
Equipment
|
|
|
20,802
|
|
20,616
|
|
2 - 26
|
years
|
|
Computer software
|
|
|
99,644
|
|
100,941
|
|
1 - 10
|
years
|
|
Data processing equipment
|
|
|
18,678
|
|
19,458
|
|
1 - 5
|
years
|
|
Buildings
|
|
|
11,759
|
|
11,699
|
|
1 - 30
|
years
|
|
Land
|
|
|
2,843
|
|
2,843
|
|
|
|
|
Property and equipment, at cost
|
|
|
206,361
|
|
208,484
|
|
|
|
|
Accumulated depreciation
|
|
|
(118,694)
|
|
(106,035)
|
|
|
|
|
Property and equipment, net
|
|
$
|
87,667
|
|
102,449
|
|
|
|
|
Depreciation expense was $21.0 million, $18.4 million and $16.0 million during the years ended December 31, 2017, 2016 and 2015, respectively.
At December 31, 2017, we had property and equipment under capital leases with a cost of $1.9 million and accumulated depreciation of $1.0 million. At December 31, 2016, we had property and equipment under capital leases with a cost of $1.8 million and accumulated depreciation of $0.8 million.
6. Goodwill and Identifiable Intangible Assets
Goodwill and identifiable intangible assets (all considered indefinite-lived) at December 31, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
Goodwill
|
|
$
|
106,970
|
|
106,970
|
|
|
|
|
|
|
|
|
Mutual fund management advisory contracts
|
|
|
38,699
|
|
38,699
|
|
Mutual fund management subadvisory contract
|
|
|
1,200
|
|
2,700
|
|
Other
|
|
|
200
|
|
200
|
|
Total identifiable intangible assets
|
|
|
40,099
|
|
41,599
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
147,069
|
|
148,569
|
|
7. Indebtedness
On August 31, 2010, the Company entered into a note purchase agreement to complete a $190.0 million private placement of the Senior Notes. Interest is payable semi‑annually in January and July of each year. The agreement requires the Company to maintain a consolidated leverage ratio not to exceed 3.0 to 1.0 for four consecutive quarters and a consolidated interest coverage ratio of not less than 4.0 to 1.0 for four consecutive quarters. The Company was in compliance with these covenants for all periods presented. As of December 31, 2017, the Company’s consolidated leverage ratio was 0.6 to 1.0, and the consolidated interest coverage ratio was 29.2 to 1.0.
Debt is reported at its carrying amount in the consolidated balance sheet. The fair value of the Company’s Series A Senior Notes maturing January 13, 2018 was $95.1 million at December 31, 2017 compared to the carrying value net of debt issuance costs of $95.0 million, which is listed under short-term notes payable in the consolidated balance sheet and was repaid upon maturity. The fair value of the Company’s Series B Senior Notes maturing January 13, 2021 was $101.7 million at December 31, 2017 compared to the carrying value net of debt issuance costs of $94.8 million, which is listed under long-term debt in the consolidated balance sheet. Fair value is calculated based on Level 2 inputs.
On October 20, 2017, we entered into a three-year unsecured revolving credit facility (the “New Credit Facility”) with various lenders, which initially provides for borrowings of up to $100.0 million and may be expanded to $200.0 million. The New Credit Facility replaced the prior credit facility, which was set to terminate in June 2018. At December 31, 2017 and 2016, there were no borrowings outstanding under the New Credit Facility or the prior credit facility. Borrowings under the Credit Facility bear interest at various rates including adjusted LIBOR or an alternative base rate plus, in each case, an incremental margin based on the Company’s credit rating. The Credit Facility also imposes a facility fee on the aggregate amount of commitments under the revolving facility (whether or not utilized). The facility fee is also based on the Company’s credit rating level. The covenants in the New Credit Facility are consistent with the covenants in the prior credit facility, including the required consolidated leverage ratio and the consolidated interest coverage ratio, which match those outlined above for the Senior Notes.
8. Income Taxes
The provision for income taxes from continuing operations for the years ended December 31, 2017, 2016 and 2015 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
73,167
|
|
72,711
|
|
142,576
|
|
State
|
|
|
7,720
|
|
7,174
|
|
12,800
|
|
Foreign
|
|
|
—
|
|
17
|
|
38
|
|
|
|
|
80,887
|
|
79,902
|
|
155,414
|
|
Deferred taxes
|
|
|
20,481
|
|
1,982
|
|
(6,188)
|
|
Provision for income taxes
|
|
$
|
101,368
|
|
81,884
|
|
149,226
|
|
The following table reconciles the statutory federal income tax rate with our effective income tax rate from continuing operations for the years ended December 31, 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Statutory federal income tax rate
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State income taxes, net of federal tax benefits
|
|
2.5
|
|
2.2
|
|
2.0
|
|
Share-based compensation
|
|
3.4
|
|
—
|
|
—
|
|
Charges related to decrease in U.S. tax rate
|
|
2.2
|
|
—
|
|
—
|
|
State tax incentives
|
|
(0.2)
|
|
(0.3)
|
|
(0.2)
|
|
Valuation allowance on losses capital in nature
|
|
(1.0)
|
|
(3.2)
|
|
1.0
|
|
Other items
|
|
(0.6)
|
|
0.4
|
|
0.8
|
|
Effective income tax rate
|
|
41.3
|
%
|
34.1
|
%
|
38.6
|
%
|
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 2017 and 2016 are as follows:
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Deferred sales commissions
|
|
$
|
(331)
|
|
(484)
|
|
Property and equipment
|
|
|
(7,301)
|
|
(13,906)
|
|
Identifiable intangible assets
|
|
|
(7,419)
|
|
(11,118)
|
|
Unrealized gains on investments securities and partnerships
|
|
|
(3,554)
|
|
—
|
|
Prepaid expenses
|
|
|
(1,679)
|
|
(1,968)
|
|
Additional postretirement liability
|
|
|
(150)
|
|
(356)
|
|
Total gross deferred liabilities
|
|
|
(20,434)
|
|
(27,832)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Benefit plans
|
|
|
3,381
|
|
15,425
|
|
Accrued compensation
|
|
|
5,558
|
|
10,678
|
|
Other accrued expenses
|
|
|
4,094
|
|
7,058
|
|
Unrealized losses on investment securities and partnerships
|
|
|
—
|
|
1,834
|
|
Capital loss carryforwards
|
|
|
57
|
|
3,920
|
|
Share-based compensation
|
|
|
15,047
|
|
20,516
|
|
Unused state tax credits
|
|
|
2,788
|
|
2,115
|
|
State net operating loss carryforwards
|
|
|
7,235
|
|
5,716
|
|
Other
|
|
|
2,817
|
|
3,428
|
|
Total gross deferred assets
|
|
|
40,977
|
|
70,690
|
|
Valuation allowance
|
|
|
(7,235)
|
|
(11,428)
|
|
Net deferred tax asset
|
|
$
|
13,308
|
|
31,430
|
|
The Company has a deferred tax asset for a capital loss carryforward that is available to offset current and future capital gains. As of December 31, 2017 and 2016, the deferred tax asset, net of federal tax effect, related to this capital loss carryforward is $0.1 million and $3.9 million, respectively. During 2017, realized capital gains on investment securities and capital gain dividend distributions exceeded the federal capital loss carryforward and therefore, the related deferred tax asset was eliminated. As of December 31, 2017, $0.1 million deferred tax assets remains related to a state capital loss carryforward. Due to the character of the losses and the limited carryforward period permitted by law upon realization, the Company had a valuation allowance recorded against this deferred tax asset as of December 31, 2016 in the amount of $5.8 million. Management believes it is more likely than not that the Company will realize the full benefit of the state capital loss carryforward prior to its expiration in 2018. As a result, no valuation allowance remains on the balance sheet as of December 31, 2017.
Certain subsidiaries of the Company have net operating loss carryforwards in certain states in which these companies file on a separate company basis. The deferred tax asset, net of federal tax effect, relating to these carryforwards as of December 31, 2017 and 2016 is approximately $7.2 million and $5.7 million, respectively. The carryforwards, if not utilized, will expire between 2018 and 2037. Management believes it is not more likely than not that these subsidiaries will generate sufficient future taxable income in these states to realize the benefit of the net operating loss carryforwards and, accordingly, a valuation allowance in the amount of $7.2 million and $5.6 million has been recorded at December 31, 2017 and 2016, respectively.
The Company has state tax credit carryforwards of $2.8 million and $2.1 million as of December 31, 2017 and 2016, respectively. Of these state tax credit carryforwards, $2.6 million will expire between 2024 and 2033 if not utilized and $0.2 million will expire in 2026 if not utilized. The Company anticipates these credits will be fully utilized prior to their expiration date.
As of January 1, 2017, the Company had unrecognized tax benefits, including penalties and interest, of $11.5 million ($8.4 million net of federal benefit) that, if recognized, would impact the Company’s effective tax rate. As of December 31, 2017, the Company had unrecognized tax benefits, including penalties and interest, of $10.9 million ($8.9 million net of federal benefit) that, if recognized, would impact the Company’s effective tax rate. The unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the accompanying consolidated balance sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are
included in income taxes payable; and unrecognized tax benefits that reduce a net operating loss, similar tax loss, or tax credit carryforward are presented as a reduction to noncurrent deferred income taxes.
The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes. As of January 1, 2017, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $3.8 million ($3.1 million net of federal benefit). The total amount of penalties and interest, net of federal benefit, related to tax uncertainties recognized in the statement of income for the period ended December 31, 2017 was $0.5 million. As of December 31, 2017, the Company had total accrued penalties and interest related to uncertain tax positions of $4.0 million ($3.5 million net of federal benefit) in the consolidated balance sheet, which is included in the total unrecognized tax benefits described above.
The following table summarizes the Company's reconciliation of unrecognized tax benefits, excluding penalties and interest, for the years ended December 31, 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Balance at January 1
|
|
$
|
7,734
|
|
8,448
|
|
8,105
|
|
Increases during the year:
|
|
|
|
|
|
|
|
|
Gross increases - tax positions in prior period
|
|
|
244
|
|
465
|
|
1,401
|
|
Gross increases - current-period tax positions
|
|
|
97
|
|
494
|
|
700
|
|
Decreases during the year:
|
|
|
|
|
|
|
|
|
Gross decreases - tax positions in prior period
|
|
|
(56)
|
|
(167)
|
|
(308)
|
|
Decreases due to settlements with taxing authorities
|
|
|
(178)
|
|
(21)
|
|
(486)
|
|
Decreases due to lapse of statute of limitations
|
|
|
(998)
|
|
(1,485)
|
|
(964)
|
|
Balance at December 31
|
|
$
|
6,843
|
|
7,734
|
|
8,448
|
|
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. During 2017, the Company closed an Internal Revenue Service audit of the 2014 tax year. This audit was settled with no significant adjustments. During 2016, the Company settled two open tax years that were undergoing audit by a state jurisdiction in which the Company operates. During 2015, the Company settled three open tax years that were undergoing audit by state jurisdictions in which the Company operates. The Company is currently under one audit in one state jurisdiction in which the Company operates. The 2014, 2015, 2016 and 2017 federal income tax returns are open tax years that remain subject to potential future audit. State income tax returns for all years after 2013 and, in certain states, income tax returns for 2013, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.
9. Pension Plan and Postretirement Benefits Other Than Pension
Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final 10 years of employment. On July 26, 2017, the Compensation Committee of the Company’s Board of Directors approved an amendment to freeze the Pension Plan effective September 30, 2017. After September 30, 2017, participants in the Pension Plan will not accrue additional benefits for future service or compensation. Participants will retain benefits accumulated as of September 30, 2017 in accordance with the terms of the Pension Plan. In accordance with applicable accounting standards, the Pension Plan’s assets and liabilities were remeasured as of July 31, 2017, the date participants were notified of the freeze. This resulted in a reduction of the accrued pension liability of approximately $30.0 million and a curtailment gain of $31.6 million.
During 2016, the Company offered eligible terminated, vested pension plan participants an option to elect a one-time voluntary lump sum window distribution equal to the present value of the participant’s pension benefit, in settlement of all future pension benefits to which they would otherwise have been entitled. This offer was made in an effort to reduce pension obligations and ongoing annual pension expense. Payments were distributed to participants who accepted the lump sum offer in 2016 from the assets of the Pension Plan. The Company recognized a non-cash settlement charge of $20.7 million in 2016 related to this event.
We also sponsor an unfunded defined benefit postretirement medical plan that previously covered substantially all employees, as well as independent financial advisors associated with W&R. The medical plan is contributory with participant contributions adjusted annually. The medical plan does not provide for benefits after age 65 with the exception of a small group of employees that were grandfathered when such plan was established. During 2016, the Company amended this plan to discontinue the availability of coverage for any individuals who retire after December 31, 2016. The plan amendment resulted in an $8.5 million curtailment gain, recorded in 2016 as part of net other postretirement benefit costs.
A reconciliation of the funded status of these plans and the assumptions related to the obligations at December 31, 2017, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year
|
|
$
|
180,921
|
|
210,783
|
|
208,085
|
|
2,446
|
|
8,421
|
|
9,902
|
|
Service cost
|
|
|
8,367
|
|
12,199
|
|
12,080
|
|
—
|
|
555
|
|
910
|
|
Interest cost
|
|
|
6,248
|
|
9,432
|
|
8,420
|
|
58
|
|
297
|
|
397
|
|
Benefits paid
|
|
|
(8,511)
|
|
(52,288)
|
|
(10,184)
|
|
(954)
|
|
(674)
|
|
(505)
|
|
Actuarial (gain) loss
|
|
|
28,841
|
|
(19,886)
|
|
(7,618)
|
|
139
|
|
1,790
|
|
(2,632)
|
|
Retiree contributions
|
|
|
—
|
|
—
|
|
—
|
|
506
|
|
532
|
|
349
|
|
Curtailment gain
|
|
|
(31,621)
|
|
—
|
|
—
|
|
—
|
|
(8,475)
|
|
—
|
|
Settlement loss
|
|
|
—
|
|
20,681
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Net benefit obligation at end of year
|
|
$
|
184,245
|
|
180,921
|
|
210,783
|
|
2,195
|
|
2,446
|
|
8,421
|
|
The accumulated benefit obligation for the Pension Plan was $150.1 million at December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
144,529
|
|
173,885
|
|
175,548
|
|
—
|
|
—
|
|
—
|
|
Actual return on plan assets
|
|
|
24,863
|
|
2,932
|
|
(11,479)
|
|
—
|
|
—
|
|
—
|
|
Employer contributions
|
|
|
10,000
|
|
20,000
|
|
20,000
|
|
448
|
|
142
|
|
156
|
|
Retiree contributions
|
|
|
—
|
|
—
|
|
—
|
|
506
|
|
532
|
|
349
|
|
Benefits paid
|
|
|
(8,511)
|
|
(52,288)
|
|
(10,184)
|
|
(954)
|
|
(674)
|
|
(505)
|
|
Fair value of plan assets at end of year
|
|
$
|
170,881
|
|
144,529
|
|
173,885
|
|
—
|
|
—
|
|
—
|
|
Funded status at end of year
|
|
$
|
(13,364)
|
|
(36,392)
|
|
(36,898)
|
|
(2,195)
|
|
(2,446)
|
|
(8,421)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands, except percentage data)
|
|
Amounts recognized in the statement of financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
—
|
|
—
|
|
—
|
|
(422)
|
|
(458)
|
|
(316)
|
|
Noncurrent liabilities
|
|
|
(13,364)
|
|
(36,392)
|
|
(36,898)
|
|
(1,773)
|
|
(1,988)
|
|
(8,105)
|
|
Net amount recognized at end of year
|
|
$
|
(13,364)
|
|
(36,392)
|
|
(36,898)
|
|
(2,195)
|
|
(2,446)
|
|
(8,421)
|
|
Weighted average assumptions used to determine benefit obligation at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.76
|
%
|
4.39
|
%
|
4.60
|
%
|
3.28
|
%
|
3.46
|
%
|
4.44
|
%
|
Rate of compensation increase
|
|
|
Not applicable
|
|
5.12
|
%
|
5.12
|
%
|
Not applicable
|
|
The discount rate assumption used to determine the pension and other postretirement benefits obligations was based on the Aon Hewitt AA Only Above Median Yield Curve. This discount rate was determined separately for each
plan by plotting the expected benefit payments from each plan against a yield curve of high quality, zero coupon bonds and calculating the single rate that would produce the same present value of liabilities as the yield curve.
Our Pension Plan asset allocation at December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
Percentage of
|
|
Percentage of
|
|
|
|
Plan Assets at
|
|
Plan Assets at
|
|
Plan assets by category
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Cash
|
|
40
|
%
|
18
|
%
|
Equity securities:
|
|
|
|
|
|
Domestic
|
|
29
|
%
|
49
|
%
|
International
|
|
18
|
%
|
17
|
%
|
Fixed income securities
|
|
8
|
%
|
10
|
%
|
Gold bullion
|
|
5
|
%
|
6
|
%
|
Total
|
|
100
|
%
|
100
|
%
|
Historically, the primary investment objective has been to maximize growth of the Pension Plan assets to meet the projected obligations to the beneficiaries over a long period of time and to do so in a manner that is consistent with the Company’s earnings strength and risk tolerance. Asset allocation is the most important decision in managing the assets and is reviewed regularly. The asset allocation policy considers the Company’s financial strength and long‑term asset class risk/return expectations since the obligations are long‑term in nature. Prior to the Pension Plan freeze in 2017, assets were invested in our Asset Strategy investment style, managed by our in‑house investment professionals. Subsequent to the freeze, the Company adjusted the Pension Plan’s asset allocation to decrease the exposure to equity securities. In 2018, the Company started the implementation of a new pension de-risking strategy designed to more closely match assets to the pension obligations by shifting exposure from return-seeking assets to liability-hedging assets as the funded status of the Pension Plan increases.
We determine the fair value of our Pension Plan assets using broad levels of inputs as defined by related accounting standards and categorized as Level 1, Level 2 or Level 3, as described in Note 3. The following tables summarize our Pension Plan assets as of December 31, 2017 and 2016. As of December 31, 2017 a portion of the international equity securities were valued utilizing Level 2 inputs, in accordance with company policy based on market movement greater than or equal to 0.50% on the final trading day of the year.
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in thousands)
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
49,540
|
|
—
|
|
—
|
|
|
49,540
|
|
International
|
|
|
4,889
|
|
26,542
|
|
—
|
|
|
31,431
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries
|
|
|
—
|
|
6,455
|
|
—
|
|
|
6,455
|
|
Corporate bond
|
|
|
—
|
|
587
|
|
—
|
|
|
587
|
|
Foreign bonds
|
|
|
—
|
|
6,591
|
|
—
|
|
|
6,591
|
|
Gold bullion
|
|
|
8,369
|
|
—
|
|
—
|
|
|
8,369
|
|
Total investment securities
|
|
|
62,798
|
|
40,175
|
|
—
|
|
|
102,973
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
67,908
|
|
Total
|
|
|
|
|
|
|
|
|
$
|
170,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in thousands)
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
71,159
|
|
—
|
|
—
|
|
|
71,159
|
|
International
|
|
|
24,622
|
|
—
|
|
—
|
|
|
24,622
|
|
Equity derivatives
|
|
|
—
|
|
12
|
|
—
|
|
|
12
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
—
|
|
10
|
|
—
|
|
|
10
|
|
U.S. Treasuries
|
|
|
—
|
|
4,801
|
|
—
|
|
|
4,801
|
|
Corporate bond
|
|
|
—
|
|
526
|
|
—
|
|
|
526
|
|
Foreign Bonds
|
|
|
—
|
|
8,897
|
|
—
|
|
|
8,897
|
|
Gold bullion
|
|
|
8,420
|
|
—
|
|
—
|
|
|
8,420
|
|
Total investment securities
|
|
|
104,201
|
|
14,246
|
|
—
|
|
|
118,447
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
26,082
|
|
Total
|
|
|
|
|
|
|
|
|
$
|
144,529
|
|
The 6.00% expected long‑term rate of return utilized after the plan freeze in 2017 reflected management’s expectations of long‑term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation and investment strategy. In 2018, we will adjust the expected long-term rate of return to 5.00% to reflect a further decrease to the Plan’s equity securities’ holdings.
The components of net periodic pension and other postretirement costs consisted of the following for the years ended December 31, 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
8,367
|
|
12,199
|
|
12,080
|
|
—
|
|
555
|
|
910
|
|
Interest cost
|
|
|
6,248
|
|
9,432
|
|
8,420
|
|
58
|
|
297
|
|
397
|
|
Expected return on plan assets
|
|
|
(10,113)
|
|
(13,927)
|
|
(14,510)
|
|
—
|
|
—
|
|
—
|
|
Actuarial gain (loss)
|
|
|
14,091
|
|
(8,891)
|
|
18,371
|
|
—
|
|
—
|
|
—
|
|
Actuarial gain amortization
|
|
|
—
|
|
—
|
|
—
|
|
(180)
|
|
(153)
|
|
—
|
|
Prior service cost amortization
|
|
|
—
|
|
—
|
|
—
|
|
(4)
|
|
4
|
|
19
|
|
Curtailment gain
|
|
|
(31,621)
|
|
—
|
|
—
|
|
—
|
|
(8,475)
|
|
—
|
|
Settlement loss
|
|
|
—
|
|
20,681
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Total (1)
|
|
$
|
(13,028)
|
|
19,494
|
|
24,361
|
|
(126)
|
|
(7,772)
|
|
1,326
|
|
|
(1)
|
|
For the year ended December 31, 2017, $9.7 million of net periodic pension and other postretirement benefit credits were included in compensation and related costs and $3.5 million included in underwriting and distribution expense.
|
The estimated net actuarial gain and prior service credit for the postretirement medical plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2018 are $120 thousand and $2 thousand, respectively.
The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
Discount rate
|
|
4.39% / 3.96
|
1
%
|
4.60
|
%
|
4.13
|
%
|
3.46
|
%
|
4.44
|
%
|
4.07
|
%
|
Expected return on plan assets
|
|
7.00% / 6.00
|
1
%
|
7.50
|
%
|
7.75
|
%
|
Not applicable
|
|
Rate of compensation increase
|
|
5.12
|
%
|
5.12
|
%
|
5.12
|
%
|
Not applicable
|
|
|
(1)
|
|
Due to the plan freeze and associated remeasurement as of July 31, 2017, the discount rate changed from 4.39% to 3.96% and the expected return on assets changed from 7.00% to 6.00%.
|
We expect the following benefit payments to be paid:
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
Postretirement
|
|
|
|
Benefits
|
|
Benefits
|
|
|
|
(in thousands)
|
|
2018
|
|
$
|
10,895
|
|
421
|
|
2019
|
|
|
8,667
|
|
421
|
|
2020
|
|
|
8,642
|
|
315
|
|
2021
|
|
|
9,659
|
|
241
|
|
2022
|
|
|
9,406
|
|
199
|
|
2023 through 2027
|
|
|
50,906
|
|
484
|
|
|
|
$
|
98,175
|
|
2,081
|
|
Our policy with respect to funding the Pension Plan is to fund at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended, and not more than the maximum amount deductible for tax purposes. All contributions made to the Pension Plan for 2017, 2016 and 2015 were voluntary.
All Company contributions to other postretirement medical benefits are voluntary, as the postretirement medical plan is not funded and is not subject to any minimum regulatory funding requirements. The contributions for each year represent claims paid for medical expenses, and we anticipate making the 2018 expected contribution with cash generated from operations. Contributions by participants to the postretirement plan were $506 thousand, $532 thousand and $349 thousand for the years ended December 31, 2017, 2016 and 2015, respectively.
For measurement purposes, the initial health care cost trend rate was 7.02% (prior to age 65) and 8.47% (subsequent to age 65) for 2017, 6.82% for 2016 and 7.55% for 2015. The health care cost trend rate reflects anticipated increases in health care costs. The initial growth rates for 2017 are assumed to gradually decline over the next 8 years to a rate of 4.5%. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 2017 accumulated postretirement benefit obligation by approximately $102 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $108 thousand. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 2017 accumulated postretirement benefit obligation by approximately $91 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost by approximately $97 thousand.
We also sponsored the Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan, as amended and restated (the “SERP”), a non-qualified deferred compensation plan covering eligible employees. The SERP was adopted to supplement the annual pension benefit for certain senior executive officers that the Pension Plan was prevented from providing because of compensation and benefit limits in the Internal Revenue Code (the “IRC”).
Each calendar year, the Compensation Committee of the Board of Directors (the “Compensation Committee”) credited participants’ SERP accounts with (i) an amount equal to 4% of the participant’s base salary, less the amount of the maximum employer matching contribution available under our 401(k) plan, and (ii) a non formula award, if any, as determined by the Compensation Committee in its discretion. There were no discretionary awards made to participants during 2017, 2016 or 2015. Additionally, each calendar year, participants’ accounts were credited (or charged) with an amount equal to the performance of certain hypothetical investment vehicles since the last preceding year. Upon a participant’s separation, or at such other time based on a pre-existing election by a participant, benefits accumulated under
the SERP are payable in installments or in a lump sum. As of December 31, 2016, the aggregate liability to participants was $3.8 million. Following a lump sum payment of $3.8 million in February 2017 to the sole remaining participant in the SERP, the Board of Directors terminated the SERP.
At December 31, 2017, the accrued pension and postretirement liability recorded in the consolidated balance sheet was comprised of accrued pension costs of $13.4 million and a liability for postretirement benefits in the amount of $1.8 million. The current portion of postretirement liability of $0.4 million is included in other current liabilities on the consolidated balance sheet. At December 31, 2016, the accrued pension and postretirement liability recorded in the consolidated balance sheet was comprised of accrued pension costs of $36.4 million and a liability for postretirement benefits in the amount of $2.0 million. The accrued liability for SERP benefits of $3.8 million and the current portion of postretirement liability of $0.4 million is included in other current liabilities on the consolidated balance sheet.
10. Employee Savings Plan
We sponsor a defined contribution plan that qualifies under Section 401(k) of the IRC to provide retirement benefits to substantially all of our employees. As allowed under Section 401(k), the plan provides tax‑deferred salary deductions for eligible employees. Our matching contributions to the plan for the years ended December 31, 2017, 2016 and 2015 were $6.0 million, $6.8 million and $6.6 million, respectively.
In 2017, in connection with the Pension Plan freeze, the Company amended its 401(k) plan to permit employer discretionary nonelective contributions to eligible participants. For the 2017 plan year, the Company approved a discretionary nonelective contribution in an amount equal to 4% of such participant’s eligible compensation. These contributions, which were expensed over the service period in 2017, totaled $5.5 million and are expected to be funded and allocated to participant accounts during the first quarter of 2018.
11. Stockholders’ Equity
Earnings per Share
For the years ended December 31, 2017, 2016 and 2015, earnings per share were computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waddell & Reed Financial, Inc.
|
|
$
|
141,279
|
|
156,695
|
|
237,578
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
83,573
|
|
82,668
|
|
83,499
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic and diluted
|
|
$
|
1.69
|
|
1.90
|
|
2.85
|
|
Dividends
The Board of Directors declared dividends on our common stock of $1.63 per share, $1.84 per share and $1.75 per share for the years ended December 31, 2017, 2016 and 2015, respectively. In December 2017, the Board of Directors approved a quarterly dividend on our common stock of $0.25 per share payable on February 1, 2018 to stockholders of record as of January 11, 2018. As of December 31, 2017 and 2016, other current liabilities included $20.7 million and $38.2 million, respectively, for dividends payable to stockholders.
Common Stock Repurchases
The Board of Directors has authorized the repurchase of our common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including as shares issued to employees in our stock‑based compensation programs. There were 1,842,337 shares, 2,320,726 shares and 1,955,509 shares repurchased in the open market or privately during the years ended December 31, 2017, 2016 and 2015, respectively. The repurchased shares include; 402,337 shares, 423,726 shares and 432,353 shares repurchased from employees who elected to tender
shares to cover their minimum tax withholdings with respect to vesting of stock awards during the years ended December 31, 2017, 2016 and 2015, respectively.
Accumulated Other Comprehensive Loss
The following table summarizes other comprehensive income (loss) activity for the years ended December 31, 2017 and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
valuation
|
|
|
|
|
|
|
|
|
|
|
allowance for
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
Total
|
|
|
|
Unrealized
|
|
gains
|
|
Postretirement
|
|
accumulated
|
|
|
|
gains (losses)
|
|
(losses) on
|
|
benefits
|
|
other
|
|
|
|
on investment
|
|
investment
|
|
unrealized
|
|
comprehensive
|
|
Year ended December 31, 2017
|
|
securities
|
|
securities
|
|
gains (losses)
|
|
income (loss)
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2016
|
|
$
|
(3,972)
|
|
|
(3,388)
|
|
603
|
|
(6,757)
|
|
Other comprehensive income (loss) before reclassification
|
|
|
4,039
|
|
|
3,743
|
|
(106)
|
|
7,676
|
|
Amount reclassified from accumulated other comprehensive income (loss)
|
|
|
78
|
|
|
(355)
|
|
(118)
|
|
(395)
|
|
Net current period other comprehensive income (loss)
|
|
|
4,117
|
|
|
3,388
|
|
(224)
|
|
7,281
|
|
Balance at December 31, 2017
|
|
$
|
145
|
|
$
|
—
|
|
379
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
valuation
|
|
|
|
|
|
|
|
|
|
|
allowance for
|
|
|
|
|
|
|
|
|
|
|
unrealized
|
|
|
|
Total
|
|
|
|
Unrealized
|
|
gains
|
|
Postretirement
|
|
accumulated
|
|
|
|
gains (losses)
|
|
(losses) on
|
|
benefits
|
|
other
|
|
|
|
on investment
|
|
investment
|
|
unrealized
|
|
comprehensive
|
|
Year ended December 31, 2016
|
|
securities
|
|
securities
|
|
gains (losses)
|
|
income (loss)
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2015
|
|
$
|
(3,729)
|
|
|
(3,240)
|
|
1,824
|
|
(5,145)
|
|
Other comprehensive income (loss) before reclassification
|
|
|
1,948
|
|
|
1,195
|
|
(1,125)
|
|
2,018
|
|
Amount reclassified from accumulated other comprehensive loss
|
|
|
(2,191)
|
|
|
(1,343)
|
|
(96)
|
|
(3,630)
|
|
Net current period other comprehensive loss
|
|
|
(243)
|
|
|
(148)
|
|
(1,221)
|
|
(1,612)
|
|
Balance at December 31, 2016
|
|
$
|
(3,972)
|
|
$
|
(3,388)
|
|
603
|
|
(6,757)
|
|
Reclassifications from accumulated other comprehensive income and included in net income are summarized in the table that follows for the years ended December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
|
|
(expense)
|
|
|
|
|
|
|
|
Pre-tax
|
|
benefit
|
|
Net of tax
|
|
Statement of income line item
|
|
|
|
(in thousands)
|
|
Reclassifications included in net income:
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds investment losses
|
|
$
|
(124)
|
|
46
|
|
(78)
|
|
Investment and other income (loss)
|
|
Valuation allowance
|
|
|
—
|
|
355
|
|
355
|
|
Provision for income taxes
|
|
Amortization of postretirement benefits
|
|
|
184
|
|
(66)
|
|
118
|
|
Underwriting and distribution expense and Compensation and related costs
|
|
Total
|
|
$
|
60
|
|
335
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
|
|
(expense)
|
|
|
|
|
|
|
|
Pre-tax
|
|
benefit
|
|
Net of tax
|
|
Statement of income line item
|
|
|
|
(in thousands)
|
|
Reclassifications included in net income:
|
|
|
|
|
|
|
|
|
|
|
Sponsored funds investment gains
|
|
$
|
3,489
|
|
(1,298)
|
|
2,191
|
|
Investment and other income (loss)
|
|
Valuation allowance
|
|
|
—
|
|
1,343
|
|
1,343
|
|
Provision for income taxes
|
|
Amortization of postretirement benefits
|
|
|
149
|
|
(53)
|
|
96
|
|
Underwriting and distribution expense and Compensation and related costs
|
|
Total
|
|
$
|
3,638
|
|
(8)
|
|
3,630
|
|
|
|
12. Share‑Based Compensation
During 2017 the Company utilized one stock based compensation plan: the Company 1998 Stock Incentive Plan, as amended and restated (the “SI Plan”). Two other plans, the Company 1998 Executive Stock Award Plan, as amended and restated, and the Company 1998 Non Employee Director Stock Award Plan, as amended and restated, had no outstanding awards, and, effective February 2016, the Board of Directors terminated both plans.
The SI Plan allows us to grant equity compensation awards, including, among other awards, and nonvested stock as part of our overall compensation program to attract and retain key personnel and encourage a greater personal financial investment in the Company, thereby promoting the long-term growth of the Company. In April 2016, our stockholders approved amendments to the SI Plan to, among other things, increase by 5.6 million the number of shares available for awards. Following those amendments, a maximum of 35.6 million shares of common stock are authorized for issuance under the SI Plan and as of December 31, 2017, 2,458,263 shares of common stock were available for issuance under the SI Plan. In addition, we may make incentive payments under the Company 2003 Executive Incentive Plan, as amended and restated (the “EIP”) in the form of cash, stock options, nonvested stock or a combination thereof. Incentive awards paid under the EIP in the form of stock options or nonvested stock are issued out of shares reserved for issuance under the SI Plan. Generally, shares of common stock covered by terminated, surrendered or cancelled options, by forfeited nonvested stock, or by the forfeiture of other awards that do not result in issuance of shares of common stock are again available for awards under the plan from which they were terminated, surrendered, cancelled or forfeited.
Nonvested stock awards are valued on the date of grant and have no purchase price. These awards have historically vested over four years in 33 1/3% increments on the second, third and fourth anniversaries of the grant date; however, awards granted on or after December 31, 2016 vest in 25% increments on the first anniversary of the grant date. The Company has issued nonvested stock awards to financial advisors associated with W&R who are independent contractors. These awards have the same terms as awards issued to employees; however, changes in the Company’s share price result in variable compensation expense over the vesting period.
Beginning in 2017, the Company established a Cash Settled RSU Plan (the “RSU Plan”), which allows the Company to grant RSUs to attract and retain key personnel and enable them to participate in the long-term growth of the Company. Unvested RSUs have no purchase price and vest in 25% increments over four years, beginning on the first anniversary of the grant date. On the vesting date, RSU holders receive a lump sum cash payment equal to the fair market value of one share of the Company’s common stock, par value $0.01, for each RSU that has vested, subject to applicable tax withholdings. We treat RSUs as liability-classified awards and, therefore, account for them at fair value based on the closing price of our common stock on the reporting date, which results in variable compensation expense over the vesting period.
Nonvested shares and nonvested RSU’s are forfeited upon the termination of employment with or service to the Company, as applicable, or service on the Board of Directors, dependent upon the circumstances of termination. Except for restrictions placed on the transferability of nonvested stock, holders of nonvested stock have full stockholders’ rights during the term of restriction, including voting rights and the rights to receive cash dividends. Since nonvested RSUs are not shares of Company stock, holders of nonvested RSUs are not entitled to voting rights but are entitled to dividend equivalent payments for each RSU equal to the dividend paid on one share of our common stock.
A summary of nonvested share activity and related fair value for the year ended December 31, 2017 follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Nonvested
|
|
Grant Date
|
|
|
|
Stock Shares
|
|
Fair Value
|
|
Nonvested at December 31, 2016
|
|
4,786,103
|
|
$
|
34.74
|
|
Granted
|
|
1,717,333
|
|
|
19.77
|
|
Vested
|
|
(1,109,002)
|
|
|
48.22
|
|
Forfeited
|
|
(305,794)
|
|
|
26.31
|
|
Nonvested at December 31, 2017
|
|
5,088,640
|
|
$
|
27.26
|
|
A summary of nonvested cash-settled unit activity for the year ended December 31, 2017 follows:
|
|
|
|
|
|
|
|
Nonvested
|
|
|
Cash-Settled Units
|
Nonvested at December 31, 2016
|
|
—
|
Granted
|
|
1,284,459
|
Vested
|
|
(522)
|
Forfeited
|
|
(70,908)
|
Nonvested at December 31, 2017
|
|
1,213,029
|
For the years ended December 31, 2017, 2016 and 2015 compensation expense related to nonvested stock totaled $57.7 million, $51.5 million and $47.5 million, respectively.
The income tax benefit from the compensation expense related to nonvested stock was $12.2 million, $19.2 million and $17.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. These benefits will be recognized upon vesting and may increase or decrease depending on the fair value of the shares on the date of vesting. As of December 31, 2017, the remaining unamortized expense of $83.7 million is expected to be recognized over a weighted average period of 2.4 years.
The total fair value of shares vested (at vest date) during the years ended December 31, 2017, 2016 and 2015, was $20.8 million, $26.7 million and $53.9 million, respectively. The Company withholds a portion of each employee’s vested shares to satisfy the minimum tax withholding obligations of the Company with respect to vesting of the shares.
13. Uniform Net Capital Rule Requirements
Two of our subsidiaries, W&R and IDI are registered broker-dealers and members of FINRA. Broker-dealers are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3‑1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15.0 to 1.0. The primary difference between net capital and stockholders’ equity is the non‑allowable assets that are excluded from net capital.
A broker-dealer may elect not to be subject to the Aggregate Indebtedness Standard of paragraph (a)(1)(i) of Rule 15c3‑1, in which case net capital must exceed the greater of $250 thousand or 2% of aggregate debit items computed in accordance with the Formula for Determination of Reserve Requirements for broker-dealers. W&R made this election and thus is not subject to the aggregate indebtedness ratio as of December 31, 2017 or 2016.
Net capital and aggregated indebtedness information for our broker-dealer subsidiaries is presented in the following table as of December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
W&R
|
|
IDI
|
|
W&R
|
|
IDI
|
|
Net capital
|
|
$
|
28,024
|
|
|
|
21,167
|
|
52,639
|
|
|
|
12,894
|
|
Required capital
|
|
|
250
|
|
|
|
1,757
|
|
250
|
|
|
|
2,152
|
|
Excess of required capital
|
|
$
|
27,774
|
|
|
|
19,410
|
|
52,389
|
|
|
|
10,742
|
|
Ratio of aggregate indebtedness to net capital
|
|
|
Not
|
|
|
|
|
|
Not
|
|
|
|
|
|
|
|
|
applicable
|
|
|
|
1.25 to 1.0
|
|
applicable
|
|
|
|
2.50 to 1.0
|
|
14. Rental Expense and Lease Commitments
We lease certain home office buildings, certain sales and other office space and equipment under operating leases. Rent expense was $24.5 million, $24.3 million and $23.7 million, for the years ended December 31, 2017, 2016 and 2015, respectively. Future minimum rental commitments under non‑cancelable operating leases are as follows:
|
|
|
|
|
Year
|
|
Commitments
|
|
|
|
(in thousands)
|
|
2018
|
|
$
|
19,921
|
|
2019
|
|
|
14,181
|
|
2020
|
|
|
9,050
|
|
2021
|
|
|
5,340
|
|
2022
|
|
|
2,746
|
|
Thereafter
|
|
|
7,489
|
|
|
|
$
|
58,727
|
|
15. Related Party Transactions
We earn investment management fee revenues from the Funds and IGI Funds for which we act as an investment adviser, pursuant to an investment management agreement with each Fund. In addition, we have agreements with the Funds pursuant to Rule 12b‑1 under the ICA for which distribution and service fees are collected from the Funds for distribution of mutual fund shares, for costs such as advertising and commissions paid to broker-dealers, and for providing ongoing services to shareholders of the Funds and/or maintaining shareholder accounts. We also earn service fee revenues by providing various services to the Funds and their shareholders pursuant to a shareholder servicing agreement with each Fund (except Ivy VIP) and an accounting service agreement with each Fund. Certain of our officers and directors are also officers and/or trustees for the various Funds for which we act as an investment adviser. These agreements are approved or renewed on an annual basis by each Fund’s board of trustees, including a majority of the disinterested members.
Revenues for services provided or related to the Funds and IGI Funds for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Investment management fees
|
|
$
|
508,035
|
|
523,304
|
|
654,727
|
|
Rule 12b-1 service and distribution fees
|
|
|
159,873
|
|
208,901
|
|
303,046
|
|
Shareholder service fees
|
|
|
106,595
|
|
120,241
|
|
143,071
|
|
Total revenues
|
|
$
|
774,503
|
|
852,446
|
|
1,100,844
|
|
Included in Funds and separate accounts receivable at December 31, 2017 and 2016 are receivables due from the Funds of $20.6 and $21.6 million, respectively.
16. 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 Topic.”
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 must be disclosed. Management’s judgment is required related to contingent liabilities because the outcomes are difficult to predict.
Shareholder Derivative Litigation
As previously disclosed, in an action filed on April 18, 2016 in the District Court of Johnson County, Kansas, Hieu Phan v. Ivy Investment Management Company, et al (Case No. I6CV02338 Div. 4), plaintiff filed a putative derivative action on behalf of the nominal defendant, a mutual fund trust affiliated with the Company, alleging breach of fiduciary duty and breach of contract claims relating to investments held in the affiliated mutual fund by the Company's registered investment adviser subsidiary, the nominal defendant trust, and the current and retired trustees of the trust. On behalf of the nominal defendant trust, plaintiff sought monetary damages and demanded a jury trial. On May 2, 2017, the nominal defendant trust filed a motion to stay the litigation pending the investigation and recommendation of a special litigation committee formed by the nominal defendant trust. On June 13, 2017, the court granted a 60-day stay until August 12, 2017, after which formal discovery commenced. While the Company denies that any of its subsidiaries breached their fiduciary duties to, or committed a breach of the investment management agreement with, the nominal defendant trust, on January 8, 2018 the parties to the litigation reached a settlement in principle. On February 22, 2018, the parties filed a joint motion for preliminary approval of the settlement and other associated pleadings with the court. The settlement contemplates the payment of $19.9 million, recoverable to the Company through insurance, to the affiliated mutual fund for the benefit of its shareholders. The settlement is subject to final approval by the court. The Company has recorded a liability and offsetting receivable from insurance, which are reflected in the Company's 2017 consolidated balance sheets.
401(k) Plan Class Action Litigation
In an action filed on June 23, 2017 and amended on June 26, 2017 in the U.S. District Court for the District of Kansas, Schapker v. Waddell & Reed Financial, Inc., et al, (Case No. 17-2365 D. Kan.), Stacy Schapker, a participant in the Company’s 401(k) and Thrift Plan, as amended and restated (the “401(k) Plan”), filed a lawsuit against the Company, the Company’s Board of Directors, the Administrative Committee of the 401(k) Plan, and unnamed Jane and John Doe Defendants 1-25. The amended complaint, which is filed on behalf of the 401(k) Plan and a proposed class of 401(k) Plan participants, purports to assert claims for breach of fiduciary duty and prohibited transactions under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) based on the 401(k) Plan’s offering of investments managed by the Company or its affiliates from June 23, 2011 to present. The amended complaint seeks, among other things, an order compelling the disgorgement of fees paid to the Company and its affiliates by the 401 (k) Plan and the restoration of losses to the 401(k) Plan arising from defendants alleged ERISA violations, attorneys’ fees and other injunctive and equitable relief. The Company believes the allegations are without merit and intends to vigorously defend this matter. On October 6, 2017, the defendants filed a motion to dismiss the amended complaint, and on February 22, 2018, the court denied the motion to dismiss. In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. Given the preliminary nature of the proceedings and the Company’s dispute over the merits of the claims, the Company is unable to estimate a range of reasonably possible loss, if any, that such matter may represent. While the ultimate resolution of this matter is uncertain, an adverse determination against the Company could have a material adverse impact on our business, financial condition and results of operations.
17. Concentrations of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents held. The Company maintains cash and cash equivalents with various financial institutions. Cash deposits maintained at financial institutions may exceed the federally insured limit.
Our investments in sponsored funds and investments held as trading expose us to market risk. The underlying holdings of our assets under management are also subject to market risk, which may arise from changes in equity prices, credit ratings, foreign currency exchange rates, and interest rates.
18. Selected Quarterly Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
(in thousands)
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
286,564
|
|
286,657
|
|
289,447
|
|
294,476
|
|
Net income attributable to Waddell & Reed Financial, Inc.
|
|
$
|
33,871
|
|
24,061
|
|
53,582
|
|
29,765
|
|
Net income per share, basic and diluted
|
|
$
|
0.40
|
|
0.29
|
|
0.64
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
(in thousands)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
323,816
|
|
319,208
|
|
303,086
|
|
292,913
|
|
Net income attributable to Waddell & Reed Financial, Inc.
|
|
$
|
38,069
|
|
34,678
|
|
54,908
|
|
29,040
|
|
Net income per share, basic and diluted
|
|
$
|
0.46
|
|
0.42
|
|
0.66
|
|
0.35
|
|
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