Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to            

 

Commission file number 001-13913

 

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

51-0261715

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

6300 Lamar Avenue

Overland Park, Kansas 66202

(Address, including zip code, of Registrant’s principal executive offices)

 

(913) 236-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes o  No x.

 

Shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:

 

Class

 

Outstanding as of October 20, 2011

Class A common stock, $.01 par value

 

85,307,747

 

 

 



Table of Contents

 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended September 30, 2011

 

 

 

Page No.

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2011 and December 31, 2010

3

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2011 and September 30, 2010

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2011 and September 30, 2010

5

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2011

6

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and September 30, 2010

7

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 6.

Exhibits

33

 

 

 

 

Signatures

34

 

2



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

September 30,

 

 

 

 

 

2011

 

December 31,

 

 

 

(unaudited)

 

2010

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

316,501

 

195,315

 

Cash and cash equivalents - restricted

 

55,662

 

81,197

 

Investment securities

 

123,576

 

192,611

 

Receivables:

 

 

 

 

 

Funds and separate accounts

 

29,942

 

27,234

 

Customers and other

 

114,391

 

84,422

 

Deferred income taxes

 

13,349

 

10,622

 

Income taxes receivable

 

7,430

 

4,336

 

Prepaid expenses and other current assets

 

11,318

 

9,313

 

Total current assets

 

672,169

 

605,050

 

 

 

 

 

 

 

Property and equipment, net

 

72,480

 

71,248

 

Deferred sales commissions, net

 

71,457

 

64,710

 

Goodwill and identifiable intangible assets

 

221,210

 

221,210

 

Other non-current assets

 

13,422

 

14,713

 

Total assets

 

$

1,050,738

 

976,931

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable

 

$

54,601

 

40,836

 

Payable to investment companies for securities

 

100,966

 

117,596

 

Accrued compensation

 

38,814

 

37,555

 

Payable to third party brokers

 

47,613

 

38,908

 

Other current liabilities

 

51,386

 

47,047

 

Total current liabilities

 

293,380

 

281,942

 

 

 

 

 

 

 

Long-term debt

 

190,000

 

189,999

 

Accrued pension and postretirement costs

 

17,382

 

22,492

 

Deferred income taxes

 

6,734

 

4,729

 

Other non-current liabilities

 

22,208

 

20,608

 

Total liabilities

 

529,704

 

519,770

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

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; 85,420 shares outstanding (85,751 shares outstanding at December 31, 2010)

 

997

 

997

 

Additional paid-in capital

 

216,699

 

201,442

 

Retained earnings

 

702,644

 

618,813

 

Cost of 14,281 common shares in treasury (13,950 at December 31, 2010)

 

(371,236

)

(346,064

)

Accumulated other comprehensive loss

 

(28,070

)

(18,027

)

Total stockholders’ equity

 

521,034

 

457,161

 

Total liabilities and stockholders’ equity

 

$

1,050,738

 

976,931

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited, in thousands, except for per share data)

 

 

 

For the three months

 

For the nine months

 

 

 

ended September 30,

 

ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

133,494

 

111,159

 

404,123

 

333,874

 

Underwriting and distribution fees

 

131,001

 

114,071

 

401,118

 

341,752

 

Shareholder service fees

 

33,254

 

29,577

 

99,027

 

88,014

 

 

 

 

 

 

 

 

 

 

 

Total

 

297,749

 

254,807

 

904,268

 

763,640

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Underwriting and distribution

 

151,936

 

132,857

 

461,159

 

400,229

 

Compensation and related costs (including share-based compensation of $11,662, $10,944, $34,490 and $30,049, respectively)

 

37,052

 

36,164

 

119,619

 

103,444

 

General and administrative

 

22,491

 

16,022

 

59,622

 

48,417

 

Subadvisory fees

 

7,291

 

6,481

 

23,684

 

20,441

 

Depreciation

 

3,980

 

3,526

 

11,426

 

10,457

 

 

 

 

 

 

 

 

 

 

 

Total

 

222,750

 

195,050

 

675,510

 

582,988

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

74,999

 

59,757

 

228,758

 

180,652

 

Investment and other income (loss)

 

(4,365

)

3,933

 

(910

)

3,239

 

Interest expense

 

(2,838

)

(3,128

)

(8,573

)

(9,797

)

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

67,796

 

60,562

 

219,275

 

174,094

 

Provision for income taxes

 

27,962

 

20,029

 

83,838

 

63,500

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

39,834

 

40,533

 

135,437

 

110,594

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

0.47

 

1.58

 

1.29

 

Diluted

 

$

0.46

 

0.47

 

1.58

 

1.29

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

85,776

 

85,438

 

85,951

 

85,683

 

Diluted

 

85,782

 

85,448

 

85,964

 

85,715

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

 

 

 

For the three months

 

For the nine months

 

 

 

ended September 30,

 

ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

39,834

 

40,533

 

135,437

 

110,594

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized appreciation (depreciation) of investment securities during the period, net of income taxes of $(3,768), $1,917, $(3,297) and $997, respectively

 

(6,458

)

3,286

 

(5,657

)

1,709

 

 

 

 

 

 

 

 

 

 

 

Valuation allowance on investment securities’ deferred tax asset during the period

 

(3,873

)

1,128

 

(4,129

)

590

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement benefits, net of income taxes of $212, $206, $644 and $617, respectively

 

393

 

350

 

1,171

 

1,050

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for amounts included in net income, net of income taxes of $(100), $(143), $(830) and $(464), respectively

 

(172

)

(247

)

(1,428

)

(799

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

29,724

 

45,050

 

125,394

 

113,144

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Equity

For the Nine Months Ended September 30, 2011

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Stock

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

99,701

 

$

997

 

201,442

 

618,813

 

(346,064

)

(18,027

)

457,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

135,437

 

 

 

135,437

 

Recognition of equity compensation

 

 

 

34,490

 

 

 

 

34,490

 

Issuance of nonvested shares and other

 

 

 

(28,047

)

 

28,047

 

 

 

Dividends accrued, $0.60 per share

 

 

 

 

(51,606

)

 

 

(51,606

)

Exercise of stock options

 

 

 

941

 

 

3,881

 

 

4,822

 

Excess tax benefits from share-based payment arrangements

 

 

 

7,873

 

 

 

 

7,873

 

Repurchase of common stock

 

 

 

 

 

(57,100

)

 

(57,100

)

Unrealized depreciation on available for sale investment securities

 

 

 

 

 

 

(5,657

)

(5,657

)

Valuation allowance on investment securities’ deferred tax asset

 

 

 

 

 

 

(4,129

)

(4,129

)

Pension and postretirement benefits

 

 

 

 

 

 

1,171

 

1,171

 

Reclassification adjustment for amounts included in net income

 

 

 

 

 

 

(1,428

)

(1,428

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2011

 

99,701

 

$

997

 

216,699

 

702,644

 

(371,236

)

(28,070

)

521,034

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

For the nine months

 

 

 

ended September 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

135,437

 

110,594

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

12,080

 

10,325

 

Amortization of deferred sales commissions

 

40,178

 

44,528

 

Share-based compensation

 

34,490

 

30,049

 

Excess tax benefits from share-based payment arrangements

 

(7,873

)

(4,280

)

Gain on sale of available for sale investment securities

 

(2,258

)

(1,093

)

Net purchases and sales or maturities of trading securities

 

63,543

 

(11,865

)

(Gain) loss on trading securities

 

2,740

 

(2,879

)

Loss on sale and retirement of property and equipment

 

1,697

 

88

 

Capital gains and dividends reinvested

 

 

(366

)

Deferred income taxes

 

(1,368

)

(6,353

)

Changes in assets and liabilities:

 

 

 

 

 

Cash and cash equivalents - restricted

 

25,535

 

15,905

 

Receivables from funds and separate accounts

 

(2,708

)

9,085

 

Other receivables

 

(29,969

)

83,759

 

Other assets

 

(549

)

(794

)

Deferred sales commissions

 

(46,925

)

(44,353

)

Accounts payable and payable to investment companies

 

(2,865

)

(109,322

)

Other liabilities

 

17,453

 

5,153

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

238,638

 

128,181

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of available for sale investment securities

 

(99,297

)

(20,000

)

Proceeds from sales and maturities of available for sale investment securities

 

92,276

 

12,773

 

Additions to property and equipment

 

(14,359

)

(12,408

)

Proceeds from sales of property and equipment

 

5

 

5

 

 

 

 

 

 

 

Net cash used in investing activities

 

$

(21,375

)

(19,630

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Debt repayment

 

 

(10,000

)

Dividends paid

 

(51,672

)

(48,970

)

Repurchase of common stock

 

(57,100

)

(61,378

)

Exercise of stock options

 

4,822

 

9,675

 

Excess tax benefits from share-based payment arrangements

 

7,873

 

4,280

 

 

 

 

 

 

 

Net cash used in financing activities

 

$

(96,077

)

(106,393

)

Net increase in cash and cash equivalents

 

121,186

 

2,158

 

Cash and cash equivalents at beginning of period

 

195,315

 

244,359

 

Cash and cash equivalents at end of period

 

$

316,501

 

246,517

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

7



Table of Contents

 

WADDELL & REED FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Description of Business and Significant Accounting Policies

 

Waddell & Reed Financial, Inc. and Subsidiaries

 

Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the “Company,” “we,” “our” and “us”) derive revenues from investment management, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the “Advisors Funds”), Ivy Funds (the “Ivy Funds”), Ivy Funds Variable Insurance Portfolios (the “Ivy Funds VIP”), and InvestEd Portfolios (“InvestEd”) (collectively, the Advisors Funds, Ivy Funds, Ivy Funds VIP and InvestEd are referred to as the “Funds”), and institutional and separately managed accounts.  The Funds and the institutional and separately managed accounts operate under various rules and regulations set forth by the United States Securities and Exchange Commission (the “SEC”). Services to the Funds are provided under investment management agreements, underwriting agreements and shareholder servicing and accounting service agreements that set forth the fees to be charged for these services. The majority of these agreements are subject to annual review and approval by each Fund’s board of trustees and shareholders. Our revenues are largely dependent on the total value and composition of assets under management.  Accordingly, fluctuations in financial markets and composition of assets under management can significantly impact revenues and results of operations.

 

Basis of Presentation

 

We have prepared the accompanying unaudited consolidated financial statements included herein pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented.  The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”).  Certain amounts in the prior period financial statements have been reclassified for consistent presentation.

 

The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in our 2010 Form 10-K, which include the following: use of estimates, cash and cash equivalents, disclosures about fair value of financial instruments, investment securities and investments in mutual funds, property and equipment, software developed for internal use, goodwill and identifiable intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, share-based compensation, accounting for income taxes and derivatives and hedging activities.

 

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at September 30, 2011, the results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010 in conformity with accounting principles generally accepted in the United States.

 

8



Table of Contents

 

2.              Accounting Pronouncements Not Yet Adopted

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”)This ASU was issued concurrently with International Financial Reporting Standard (“IFRS”) 13, “Fair Value Measurements” (“IFRS 13”), to provide largely identical guidance about fair value measurement and disclosure requirements. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP.  For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13.  This standard is effective for interim and annual periods beginning after December 15, 2011 and is required to be applied prospectively.  In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that result from applying the ASU and to quantify the total effect, if practicable.  The Company expects that the adoption of ASU 2011-04 in 2012 will not have a material impact on its consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”).  Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity.  This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and is required to be applied retrospectively.  The Company is currently in compliance with this standard.

 

In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350):  Testing Goodwill for Impairment” (“ASU 2011-08”).  This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the two-step goodwill impairment test.  If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying value, it need not perform the two-step impairment test.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company will comply with this standard upon adoption in 2012.

 

3.              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 segregated in compliance with federal and other regulations.

 

9



Table of Contents

 

4.     Investment Securities

 

Investment securities at September 30, 2011 and December 31, 2010 are as follows:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

September 30, 2011

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

10

 

1

 

 

11

 

Municipal bonds

 

2,548

 

 

(38

)

2,510

 

Corporate bonds

 

43,065

 

24

 

(232

)

42,857

 

Mutual funds

 

51,456

 

2,081

 

(7,606

)

45,931

 

 

 

$

97,079

 

2,106

 

(7,876

)

91,309

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

 

 

 

 

 

64

 

Municipal bonds

 

 

 

 

 

 

 

500

 

Corporate bonds

 

 

 

 

 

 

 

12,924

 

Common stock

 

 

 

 

 

 

 

35

 

Mutual funds

 

 

 

 

 

 

 

18,744

 

 

 

 

 

 

 

 

 

32,267

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

123,576

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

December 31, 2010

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

U.S. treasury bills

 

$

56,961

 

 

 

56,961

 

Mortgage-backed securities

 

10

 

2

 

 

12

 

Municipal bonds

 

2,729

 

 

(185

)

2,544

 

Mutual funds

 

28,633

 

5,662

 

(37

)

34,258

 

 

 

$

88,333

 

5,664

 

(222

)

93,775

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

4,997

 

U.S. treasury bills

 

 

 

 

 

 

 

60,958

 

Mortgage-backed securities

 

 

 

 

 

 

 

73

 

Municipal bonds

 

 

 

 

 

 

 

487

 

Corporate bonds

 

 

 

 

 

 

 

50

 

Common stock

 

 

 

 

 

 

 

201

 

Mutual funds

 

 

 

 

 

 

 

32,070

 

 

 

 

 

 

 

 

 

98,836

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

192,611

 

 

Purchases of trading securities during the nine months ended September 30, 2011 were $23.1 million, while sales and maturities were $86.6 million for the same period.

 

10



Table of Contents

 

A summary of available for sale debt securities and mutual funds with fair values below carrying values at September 30, 2011 and December 31, 2010 is as follows:

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

September 30, 2011

 

Fair value

 

Unrealized
losses

 

Fair
value

 

Unrealized
losses

 

Fair
value

 

Unrealized
losses

 

 

 

(in thousands)

 

Municipal bonds

 

$

 

 

2,511

 

(38

)

2,511

 

(38

)

Corporate bonds

 

24,378

 

(232

)

 

 

24,378

 

(232

)

Mutual funds

 

35,424

 

(7,588

)

322

 

(18

)

35,746

 

(7,606

)

Total temporarily impaired securities

 

$

59,802

 

(7,820

)

2,833

 

(56

)

62,635

 

(7,876

)

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

December 31, 2010

 

Fair value

 

Unrealized
losses

 

Fair
value

 

Unrealized
losses

 

Fair
value

 

Unrealized
losses

 

 

 

(in thousands)

 

Municipal bonds

 

$

 

 

2,544

 

(185

)

2,544

 

(185

)

Mutual funds

 

810

 

(10

)

313

 

(27

)

1,123

 

(37

)

Total temporarily impaired securities

 

$

810

 

(10

)

2,857

 

(212

)

3,667

 

(222

)

 

Based upon our assessment of these municipal bonds, corporate bonds and mutual funds, the time frame investments have been in a loss position, our intent to hold mutual funds until they have recovered and our history of holding bonds until maturity, we determined that a write-down was not necessary at September 30, 2011.

 

Mortgage-backed securities, municipal bonds and corporate bonds accounted for as available for sale and held as of September 30, 2011 mature as follows:

 

 

 

Amortized
cost

 

Fair value

 

 

 

(in thousands)

 

Within one year

 

$

 14,845

 

14,684

 

After one year but within 10 years

 

29,777

 

29,718

 

After 10 years

 

1,001

 

976

 

 

 

$

45,623

 

45,378

 

 

Mortgage-backed securities, municipal bonds and corporate bonds accounted for as trading and held as of September 30, 2011 mature as follows:

 

 

 

Fair value

 

 

 

(in thousands)

 

After one year but within 10 years

 

$

13,424

 

After 10 years

 

64

 

 

 

$

13,488

 

 

11



Table of Contents

 

We determine the fair value of our investments using broad levels of inputs as defined by related accounting standards as follows:

 

·                  Level 1 — Investments are valued using quoted prices in active markets for identical securities at the reporting date.  Assets classified as Level 1 include mutual funds classified as available for sale and mutual funds and common stock classified as trading.

 

·                  Level 2 — Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities.  Assets classified as Level 2 include mortgage-backed securities, municipal bonds and corporate bonds.

 

·                  Level 3 — Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments.

 

The following table summarizes investment securities recognized on our balance sheet using fair value measurements based on the differing levels of inputs:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Level 1

 

$

64,710

 

189,445

 

Level 2

 

58,866

 

3,166

 

Level 3

 

 

 

Total

 

$

123,576

 

192,611

 

 

5.     Goodwill and Identifiable Intangible Assets

 

Goodwill represents the excess of the purchase price over the tangible assets and identifiable intangible assets of an acquired business.  Our goodwill is not deductible for tax purposes.  Goodwill and identifiable intangible assets (all considered indefinite-lived) are as follows:

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

(in thousands)

 

 

 

 

 

 

 

Goodwill

 

$

202,518

 

202,518

 

Accumulated amortization

 

(36,307

)

(36,307

)

Total goodwill

 

166,211

 

166,211

 

 

 

 

 

 

 

Mutual fund management advisory contracts

 

38,699

 

38,699

 

Mutual fund subadvisory management contracts

 

16,300

 

16,300

 

Total identifiable intangible assets

 

54,999

 

54,999

 

 

 

 

 

 

 

Total

 

$

221,210

 

221,210

 

 

12



Table of Contents

 

6.     Indebtedness

 

On January 13, 2006, the Company issued $200.0 million in principal amount 5.60% senior notes due 2011 (the “Notes”) resulting in net proceeds of approximately $198.2 million (net of discounts, commissions and estimated expenses).  Interest was payable semi-annually on January 15 and July 15 at a fixed rate of 5.60% per annum.  During the first quarter of 2010, we repurchased $10.0 million of the Notes.

 

On August 31, 2010, the Company entered into an agreement to complete a $190.0 million private placement of senior unsecured notes that were issued and sold in two tranches:  $95.0 million bearing interest at 5.0% and maturing January 13, 2018 (the “Series A Notes”) and $95.0 million bearing interest of 5.75% and maturing January 13, 2021 (the “Series B Notes”) (collectively, the “Senior Notes”).  The agreement contained a delayed funding provision that allowed the Company to draw down the proceeds in January 2011 when the Notes matured.  The Company used the proceeds of the issuance and sale of the Senior Notes to repay in full the Notes.  Interest is payable semi-annually in January and July of each year.  The most restrictive provisions of the agreement require 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 and similar covenants in prior facilities for all periods presented.

 

Debt is reported at its carrying amount on the consolidated balance sheet.  The fair value of the Company’s outstanding indebtedness is approximately $188.2 million as of September 30, 2011 compared to the carrying value of $190.0 million.  The following is a summary of long-term debt at September 30, 2011 and December 31, 2010:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Principal amount unsecured 5.0% senior notes due in 2018

 

$

95,000

 

 

Principal amount unsecured 5.75% senior notes due in 2021

 

95,000

 

 

Principal amount unsecured 5.60% senior notes due in 2011

 

 

190,000

 

Discount on unsecured 5.60% senior notes due in 2011

 

 

(1

)

Total

 

$

190,000

 

189,999

 

 

7.     Income Tax Uncertainties

 

As of January 1, 2011 and September 30, 2011, the Company had unrecognized tax benefits, including penalties and interest, of $6.6 million ($4.6 million net of federal benefit) and $8.4 million ($6.0 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate.  Unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the consolidated balance sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable.

 

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, 2011, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $1.9 million ($1.5 million net of federal benefit).  The total amount of penalties and interest, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the nine month period ended September 30, 2011 was $0.3 million.  The total amount of accrued penalties and interest related to uncertain tax positions at September 30, 2011 of $2.2 million ($1.8 million net of federal benefit) is included in the total unrecognized tax benefits described above.

 

In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain.  In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions.  The 2008, 2009 and 2010 federal income tax returns are open tax years that remain subject to potential future audit.  Nearly all state income tax returns for all years after 2007, and in certain states, income tax returns for 2006 and 2007, are subject to potential future audit by tax

 

13



Table of Contents

 

authorities in the Company’s major state tax jurisdictions.  The 2005, 2006 and 2007 tax years also remain open to a limited extent on federal and certain state income tax returns due to capital loss carryback claims.

 

The Company is currently being audited in various state jurisdictions.  It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period.  It is estimated that the Company’s liability for unrecognized tax benefits, including penalties and interest, could decrease by approximately $0.2 million to $1.9 million ($0.2 million to $1.3 million net of federal benefit) upon settlement of these audits.  Such settlements are not anticipated to have a significant impact on the results of operations.

 

8.     Pension Plan and Postretirement Benefits Other Than Pension

 

We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”).  Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final ten years of employment.  We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees, including Waddell & Reed and Legend advisors.  The medical plan is contributory with retiree contributions adjusted annually.  The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established.

 

The components of net periodic pension and other postretirement costs related to these plans are as follows:

 

 

 

Pension Benefits

 

Other
Postretirement
Benefits

 

Pension Benefits

 

Other
Postretirement
Benefits

 

 

 

Three months ended
September 30,

 

Three months ended
September 30,

 

Nine months
ended
September 30,

 

Nine months
ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands)

 

(in thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,775

 

1,535

 

139

 

111

 

5,326

 

4,605

 

418

 

332

 

Interest cost

 

1,799

 

1,649

 

100

 

91

 

5,397

 

4,947

 

301

 

273

 

Expected return on plan assets

 

(2,191

)

(1,875

)

 

 

(6,573

)

(5,624

)

 

 

Actuarial loss amortization

 

451

 

404

 

 

 

1,353

 

1,212

 

 

 

Prior service cost amortization

 

139

 

139

 

14

 

11

 

417

 

417

 

42

 

34

 

Transition obligation amortization

 

1

 

1

 

 

 

3

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,974

 

1,853

 

253

 

213

 

5,923

 

5,560

 

761

 

639

 

 

During the first quarter of 2011, we made a $10.0 million contribution to the Pension Plan.  We do not expect to make additional contributions to the Pension Plan for the remainder of 2011.

 

14



Table of Contents

 

9.   Stockholders’ Equity

 

Earnings per Share

 

The components of basic and diluted earnings per share were as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

39,834

 

40,533

 

135,437

 

110,594

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

85,776

 

85,438

 

85,951

 

85,683

 

Dilutive potential shares from stock options

 

6

 

10

 

13

 

32

 

Weighted average shares outstanding - diluted

 

85,782

 

85,448

 

85,964

 

85,715

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

0.47

 

1.58

 

1.29

 

Diluted

 

$

0.46

 

0.47

 

1.58

 

1.29

 

 

Anti-dilutive Securities

 

Options to purchase 27 thousand shares of our common stock were excluded from the diluted earnings per share calculation for the three months ended September 30, 2011 because they were anti-dilutive.  There were no anti-dilutive options for the nine months ended September 30, 2011.  Options to purchase 401 thousand shares and 327 thousand shares of our common stock were excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2010, respectively, because they were anti-dilutive.

 

Dividends

 

On July 20, 2011, the Board of Directors approved a dividend on our common stock in the amount of $0.20 per share to stockholders of record as of October 3, 2011 to be paid on November 1, 2011.  The total dividend to be paid is approximately $17.1 million.

 

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 shares issued to employees in our stock-based compensation programs.  There were 651,878 shares and 37,087 shares repurchased in the open market or privately during the three months ended September 30, 2011 and 2010, respectively, which included 1,355 shares and 27,087 shares repurchased from employees who elected to tender shares to cover their minimum income tax withholdings with respect to vesting of stock awards during the three months ended September 30, 2011 and 2010, respectively.  There were 1,609,551 shares and 1,916,297 shares repurchased in the open market or privately during the nine months ended September 30, 2011 and 2010, respectively, which included 341,527 shares and 299,417 shares repurchased from employees who elected to tender shares to cover their minimum income tax withholdings with respect to vesting of stock awards during each of these two periods.

 

15



Table of Contents

 

10.  Share-Based Compensation

 

A summary of stock option activity and related information for the nine months ended September 30, 2011 is presented in the table below.  All options outstanding expire prior to December 31, 2013.

 

 

 

Options

 

Weighted
average
exercise price

 

Outstanding, December 31, 2010

 

298,295

 

$

29.98

 

Granted

 

 

 

Exercised

 

(156,112

)

30.89

 

Terminated/Cancelled

 

(76,347

)

29.21

 

Outstanding, September 30, 2011

 

65,836

 

$

28.70

 

Exercisable, September 30, 2011

 

65,836

 

$

28.70

 

 

11.  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.

 

Michael E. Taylor, Kenneth B. Young, individuals, on behalf of themselves individually and on behalf of others similarly situated v. Waddell & Reed, Inc. and DOES 1 through 10 inclusive; Case No. 09-CV-2909 AJB (WVG); in the United States District Court for the Southern District of California.

 

In this action filed December 28, 2009, the Company, along with various of its affiliates, were sued in an individual action, class action and Fair Labor Standards Act (“FLSA”) nationwide collective action by two former advisors asserting misclassification of financial advisors as independent contractors instead of employees. Only Waddell & Reed, Inc. remains as a defendant in the case.  Plaintiffs assert claims under the FLSA for minimum and overtime wages, claims under California Labor Code Statutes, and a claim for Unfair Business Practices under the California Business & Professions Code.  Plaintiffs seek declaratory and injunctive relief and monetary damages.  Plaintiffs have moved to conditionally certify the purported FLSA collective action, asking the court to allow certain financial advisors the opportunity to opt in to the lawsuit.  The Company has opposed this request. If the court conditionally certifies the FLSA collective action, certain current and former financial advisors will be provided written notice of the lawsuit and offered the opportunity to participate as plaintiffs.  If conditional certification is granted, the scope and cost of the case would increase, particularly where there is a high participation rate by those notified.  The Company intends to continue vigorously contesting plaintiffs’ claims.

 

In the opinion of management, the ultimate resolution and outcome of this matter is uncertain.  At this stage of the litigation, the Company is unable to estimate the expense or exposure, if any, that it may represent.   The ultimate resolution of this matter, or an adverse determination against the Company, could have a material adverse impact on the financial position and results of operations of the Company.  However, this possible impact is unknown and not reasonably determinable; therefore, no liability has been recorded in the consolidated financial statements.

 

16



Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and industry in general.  These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions.  These statements are generally identified by the use of such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature.  Readers are cautioned that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance.  Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below.  If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected.  Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010, which include, without limitation:

 

·                                          The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;

 

·                                          The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;

 

·                                          Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;

 

·                                          A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds;

 

·                                          The loss of existing distribution channels or inability to access new distribution channels;

 

·                                          A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;

 

·                                          A decrease in, or the elimination of, any future quarterly dividend paid to stockholders; and

 

·                                          Our inability to hire and retain senior executive management and other key personnel.

 

The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission, including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, 2010 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2011.  All forward-looking statements speak only as the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

17



Table of Contents

 

Overview

 

We are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments.  Our earnings and cash flows are heavily dependent on financial market conditions.  Significant increases or decreases in the various securities markets can have a material impact on our results of operations, financial condition and cash flows.

 

We derive our revenues from providing investment management, investment product underwriting and distribution, and shareholder services administration primarily to mutual funds and institutional and separately managed accounts. Investment management fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of commissions derived from sales of investment and insurance products, Rule 12b-1 asset-based service and distribution fees, distribution fees on certain variable products, fees earned on fee-based asset allocation products, and related advisory services. The products sold have various commission structures and the revenues received from those sales vary based on the type and amount sold.  Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on assets under management or number of accounts.

 

One of our distinctive qualities is that we are a significant distributor of investment products.  Our retail products are distributed through our Advisors channel sales force of independent financial advisors or through our Wholesale channel, which includes third-parties such as other broker/dealers, registered investment advisors (including the retirement advisors of Legend) and various retirement platforms.  We also market our investment advisory services to institutional investors, either directly or through consultants, in our Institutional channel.

 

Third Quarter Highlights

 

During the third quarter, we operated in a period of high volatility in the financial markets.  Over the three month period the Dow Jones Industrial Average declined 12% and the Standard & Poor’s 500 Index declined 14%.  Our assets under management decreased from $91.7 billion to $77.5 billion, or 16%, during this period.  Our average assets under management of $87.4 billion during the third quarter grew 21% compared to the third quarter of 2010, resulting in an increase in revenues in this year’s third quarter.

 

Net income decreased 2% compared to the third quarter of 2010, however our operating margin improved to 25.2%, an improvement of 170 basis points compared to last year’s third quarter.  Compared to the second quarter of 2011, net income decreased 20% and our operating margin decreased 30 basis points.

 

During the quarter, our trading investment portfolio experienced a decline of $3.4 million and we recorded a write-down on a partnership interest of $1.0 million.  Because of these adjustments, our tax valuation allowance was increased by $1.6 million to account for the potential of not realizing past capital loss carryforward claims in the future.  The resulting impact of these investment and tax adjustments on our quarterly earnings for the third quarter totaled $4.4 million.  Our results for the quarter were also impacted by our decision to write-off software capitalization costs of $1.8 million due to the discontinuation of use of certain software licenses.

 

In our Wholesale channel, our continuing efforts to diversify sales resulted in sales of products other than Asset Strategy accounting for 46% of total sales during the third quarter of 2011, an improvement compared to 40% of total sales for fiscal 2010, but less than the 53% achieved during the second quarter of 2011.

 

We believe our balance sheet is strong, and we ended the quarter with cash and investments of $440.1 million.  In January 2011, the Company drew down the proceeds from a $190.0 million private placement of Senior Notes and used the proceeds to repay in full its existing senior notes.

 

18



Table of Contents

 

Assets Under Management

 

Assets under management decreased to $77.5 billion on September 30, 2011 compared to $91.7 billion on June 30, 2011 due primarily to market depreciation of $15.6 billion, partially offset by net flows of $1.3 billion.

 

Change in Assets Under Management(1)

 

 

 

Third Quarter 2011

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

34,843

 

46,558

 

10,346

 

91,747

 

 

 

 

 

 

 

 

 

 

 

Sales (net of commissions)

 

867

 

3,957

 

1,625

 

6,449

 

Redemptions

 

(1,004

)

(3,515

)

(737

)

(5,256

)

Net Sales

 

(137

)

442

 

888

 

1,193

 

 

 

 

 

 

 

 

 

 

 

Net Exchanges

 

(79

)

79

 

 

 

Reinvested Dividends & Capital Gains

 

83

 

29

 

18

 

130

 

Net Flows

 

(133

)

550

 

906

 

1,323

 

 

 

 

 

 

 

 

 

 

 

Market Depreciation

 

(4,950

)

(8,970

)

(1,694

)

(15,614

)

Ending Assets

 

$

29,760

 

38,138

 

9,558

 

77,456

 

 

 

 

Third Quarter 2010

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

28,215

 

32,523

 

7,541

 

68,279

 

 

 

 

 

 

 

 

 

 

 

Sales (net of commissions)

 

839

 

2,933

 

905

 

4,677

 

Redemptions

 

(919

)

(2,566

)

(704

)

(4,189

)

Net Sales

 

(80

)

367

 

201

 

488

 

 

 

 

 

 

 

 

 

 

 

Net Exchanges

 

(138

)

27

 

115

 

4

 

Reinvested Dividends & Capital Gains

 

81

 

59

 

26

 

166

 

Net Flows

 

(137

)

453

 

342

 

658

 

 

 

 

 

 

 

 

 

 

 

Market Appreciation

 

2,705

 

3,504

 

821

 

7,030

 

Ending Assets

 

$

30,783

 

36,480

 

8,704

 

75,967

 

 


(1)       Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions.

 

19



Table of Contents

 

Assets under management decreased to $77.5 billion on September 30, 2011 compared to $83.7 billion on December 31, 2010 due to market depreciation of $11.2 billion, partially offset by net flows of $5.0 billion.

 

 

 

Year to Date 2011

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

33,181

 

40,883

 

9,609

 

83,673

 

 

 

 

 

 

 

 

 

 

 

Sales (net of commissions)

 

2,942

 

12,887

 

2,958

 

18,787

 

Redemptions

 

(3,053

)

(9,242

)

(1,977

)

(14,272

)

Net Sales

 

(111

)

3,645

 

981

 

4,515

 

 

 

 

 

 

 

 

 

 

 

Net Exchanges

 

(196

)

194

 

 

(2

)

Reinvested Dividends & Capital Gains

 

266

 

146

 

63

 

475

 

Net Flows

 

(41

)

3,985

 

1,044

 

4,988

 

 

 

 

 

 

 

 

 

 

 

Market Depreciation

 

(3,380

)

(6,730

)

(1,095

)

(11,205

)

Ending Assets

 

$

29,760

 

38,138

 

9,558

 

77,456

 

 

 

 

Year to Date 2010

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

29,474

 

32,818

 

7,490

 

69,782

 

 

 

 

 

 

 

 

 

 

 

Sales (net of commissions)

 

2,680

 

10,893

 

2,491

 

16,064

 

Redemptions

 

(2,582

)

(7,976

)

(1,771

)

(12,329

)

Net Sales

 

98

 

2,917

 

720

 

3,735

 

 

 

 

 

 

 

 

 

 

 

Net Exchanges

 

(230

)

115

 

115

 

 

Reinvested Dividends & Capital Gains

 

242

 

160

 

75

 

477

 

Net Flows

 

110

 

3,192

 

910

 

4,212

 

 

 

 

 

 

 

 

 

 

 

Market Appreciation

 

1,199

 

470

 

304

 

1,973

 

Ending Assets

 

$

30,783

 

36,480

 

8,704

 

75,967

 

 

20



Table of Contents

 

Average assets under management, which are generally more indicative of trends in revenue for providing investment management services than the quarter over quarter change in ending assets under management, are presented below.

 

Average Assets Under Management

 

 

 

Third Quarter 2011

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

23,908

 

40,009

 

9,726

 

$

73,643

 

Fixed Income

 

7,740

 

3,705

 

786

 

12,231

 

Money Market

 

1,213

 

347

 

 

1,560

 

Total

 

$

32,861

 

44,061

 

10,512

 

$

87,434

 

 

 

 

Third Quarter 2010

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

21,479

 

31,631

 

7,359

 

$

60,469

 

Fixed Income

 

6,823

 

2,546

 

743

 

10,112

 

Money Market

 

1,267

 

278

 

 

1,545

 

Total

 

$

29,569

 

34,455

 

8,102

 

$

72,126

 

 

 

 

Year to Date 2011

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

25,176

 

40,337

 

9,587

 

$

75,100

 

Fixed Income

 

7,503

 

3,423

 

779

 

11,705

 

Money Market

 

1,201

 

300

 

 

1,501

 

Total

 

$

33,880

 

44,060

 

10,366

 

$

88,306

 

 

 

 

Year to Date 2010

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

21,992

 

31,822

 

7,136

 

$

60,950

 

Fixed Income

 

6,443

 

2,216

 

722

 

9,381

 

Money Market

 

1,272

 

283

 

 

1,555

 

Total

 

$

29,707

 

34,321

 

7,858

 

$

71,886

 

 

21



Table of Contents

 

Results of Operations — Three and Nine Months Ended September 30, 2011 as Compared with Three and Nine Months Ended September 30, 2010

 

Net Income

 

 

 

Three months ended

 

 

 

 

 

September 30,

 

 

 

 

 

2011

 

2010

 

Variance

 

 

 

(in thousands, except per share amounts
and percentage data)

 

 

 

 

 

 

 

 

 

Net Income

 

$

39,834

 

40,533

 

-2

%

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.46

 

0.47

 

-2

%

Diluted

 

$

0.46

 

0.47

 

-2

%

 

 

 

 

 

 

 

 

Operating Margin

 

25.2

%

23.5

%

7

%

 

 

 

Nine months ended

 

 

 

 

 

September 30,

 

 

 

 

 

2011

 

2010

 

Variance

 

 

 

(in thousands, except per share amounts
and percentage data)

 

 

 

 

 

 

 

 

 

Net Income

 

$

135,437

 

110,594

 

22

%

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

1.58

 

1.29

 

22

%

Diluted

 

$

1.58

 

1.29

 

22

%

 

 

 

 

 

 

 

 

Operating Margin

 

25.3

%

23.7

%

7

%

 

We reported net income of $39.8 million, or $0.46 per diluted share, for the third quarter of 2011 compared to $40.5 million, or $0.47 per diluted share, for the third quarter of 2010.  Net income for the nine months ended September 30, 2011 was $135.4 million, or $1.58 per diluted share, compared to net income of $110.6 million, or $1.29 per diluted share, for the same period in 2010.

 

22



Table of Contents

 

Total Revenues

 

Total revenues increased 17% to $297.7 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 due to a rise in average assets under management of 21% and an increase in gross sales of 38%.  Revenues were $904.3 million for the nine months ended September 30, 2011, an increase of 18% over revenues for the same period in 2010, attributable to a rise in average assets under management of 23% and an increase in gross sales of 17% for the nine months ended September 30, 2011 compared to the same period in the prior year.

 

 

 

Three months ended

 

 

 

 

 

September 30,

 

 

 

 

 

2011

 

2010

 

Variance

 

 

 

(in thousands, except percentage data)

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

133,494

 

111,159

 

20

%

Underwriting and distribution fees

 

131,001

 

114,071

 

15

%

Shareholder service fees

 

33,254

 

29,577

 

12

%

Total revenues

 

$

297,749

 

254,807

 

17

%

 

 

 

Nine months ended

 

 

 

 

 

September 30,

 

 

 

 

 

2011

 

2010

 

Variance

 

 

 

(in thousands, except percentage data)

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

404,123

 

333,874

 

21

%

Underwriting and distribution fees

 

401,118

 

341,752

 

17

%

Shareholder service fees

 

99,027

 

88,014

 

13

%

Total revenues

 

$

904,268

 

763,640

 

18

%

 

Investment Management Fee Revenues

 

Investment management fee revenues are earned for providing investment advisory services to the Funds and to institutional and separate accounts.  Investment management fee revenues increased $22.3 million, or 20%, from last year’s third quarter and $70.2 million, or 21%, for the nine month period ended September 30, 2011 compared to the same period in 2010.

 

Revenues from investment management services provided to our retail mutual funds, which are distributed through the Advisors, Wholesale and Institutional channels, were $123.4 million for the quarter ended September 30, 2011.  Revenues increased $20.6 million, or 20%, compared to the third quarter of 2010, while the related retail average assets increased 20% to $76.9 billion.  For the nine months ended September 30, 2011, revenues from investment management services provided to our retail mutual funds increased $63.6 million, or 21%, to $373.5 million compared to the first nine months of 2010, while the related retail average assets increased 22% to $77.9 billion.  For the nine month comparison period, investment management fee revenues increased less than the related retail average assets due to the effect of recording management fee waivers, mostly for money market funds, as an offset to investment management fees beginning in the second half of 2010.

 

Institutional account revenues were $10.1 million for the third quarter of 2011, representing an increase of $1.7 million, or 21%, from last year’s third quarter, and were $30.6 million for the nine month period ended September 30, 2011, an increase of 28% compared to the same period in 2010.  For both comparative periods, average assets increased approximately 30%.  Account revenues increased less than the related average assets due to a decline in the average management fee rate, attributable to the lower management fee rates of recent, significant mandates.

 

Long-term redemption rates (which exclude money market fund redemptions) in the Advisors channel were 10.0% in this year’s third quarter and 9.9% year-to-date, compared to 10.0% in the third quarter of

 

23



Table of Contents

 

2010 and 9.2% for the first nine months of 2010.  In the Wholesale channel, long-term redemption rates were 31.0% for the quarter ended September 30, 2011, compared to 29.2% in the third quarter of 2010.  For the nine months ended September 30, 2011, the Wholesale channel’s long-term redemption rate decreased to 27.6% compared to 30.6% for the same period in 2010.  We expect the Advisors channel long-term redemption rate to remain lower than that of the Wholesale channel due to the personal and customized nature in which our financial advisors provide service to our clients.

 

Long-term redemption rates for our Institutional channel were 27.8% and 34.4% for the third quarter of 2011 and 2010, respectively, and decreased to 25.5% for the nine month period ended September 30, 2011 compared to 30.1% for the same period in 2010.

 

Our overall redemption rates of 22.9% and 20.7% for the third quarter and first nine months of 2011, respectively, remain low compared to the year to date industry average of 27%, based on data from the ICI.

 

Underwriting and Distribution Fee Revenues and Expenses

 

The following tables summarize our underwriting and distribution fee revenues and expenses segregated by distribution method within the respective Advisors or Wholesale channel:

 

 

 

Third Quarter 2011

 

 

 

Advisors

 

Wholesale

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Revenue

 

$

70,088

 

60,913

 

131,001

 

Expenses

 

 

 

 

 

 

 

Direct

 

49,748

 

65,526

 

115,274

 

Indirect

 

24,761

 

11,901

 

36,662

 

 

 

74,509

 

77,427

 

151,936

 

Net Underwriting & Distribution

 

$

(4,421

)

(16,514

)

(20,935

)

 

 

 

Third Quarter 2010

 

 

 

Advisors

 

Wholesale

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Revenue

 

$

60,862

 

53,209

 

114,071

 

Expenses

 

 

 

 

 

 

 

Direct

 

43,472

 

56,351

 

99,823

 

Indirect

 

21,142

 

11,892

 

33,034

 

 

 

64,614

 

68,243

 

132,857

 

Net Underwriting & Distribution

 

$

(3,752

)

(15,034

)

(18,786

)

 

24



Table of Contents

 

 

 

Year to Date 2011

 

 

 

Advisors

 

Wholesale

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Revenue

 

$

216,661

 

184,457

 

401,118

 

Expenses

 

 

 

 

 

 

 

Direct

 

153,042

 

201,493

 

354,535

 

Indirect

 

71,276

 

35,348

 

106,624

 

 

 

224,318

 

236,841

 

461,159

 

Net Underwriting & Distribution

 

$

(7,657

)

(52,384

)

(60,041

)

 

 

 

Year to Date 2010

 

 

 

Advisors

 

Wholesale

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Revenue

 

$

182,843

 

158,909

 

341,752

 

Expenses

 

 

 

 

 

 

 

Direct

 

129,163

 

171,127

 

300,290

 

Indirect

 

65,734

 

34,205

 

99,939

 

 

 

194,897

 

205,332

 

400,229

 

Net Underwriting & Distribution

 

$

(12,054

)

(46,423

)

(58,477

)

 

Underwriting and distribution revenues earned in this year’s third quarter increased $16.9 million, or 15%, compared with the third quarter of 2010.  Revenues from fee-based asset allocation products increased $9.1 million compared to the prior year.  Rule 12b-1 asset-based service and distribution fee revenues increased $8.4 million as a result of an increase in average mutual fund assets under management.  Variable annuity revenues increased $0.6 million compared to 2010, but the increase was offset by a decrease in other front-load product sales revenue period over period.

 

Underwriting and distribution revenues earned for the nine months ended September 30, 2011 increased $59.4 million, or 17%, compared with the same period in 2010.  Over half of this increase in revenues was due to higher Rule 12b-1 asset-based service and distribution fee revenues of $30.6 million as a result of an increase in average mutual fund assets under management.  Revenues from fee-based asset allocation products increased $25.8 million compared to the prior year.  Variable annuity revenues increased $6.2 million compared to 2010, but the increase was offset by a decrease in other front-load product sales revenue period over period.

 

Underwriting and distribution expenses increased by $19.1 million, or 14%, compared to the third quarter of 2010.  A significant portion of this increase was attributed to higher direct expenses in the Wholesale channel of $9.2 million as a result of an increase in average wholesale assets under management and higher sales volume year over year.  We incurred higher dealer compensation paid to third party distributors and increased Rule 12b-1 asset-based service and distribution expenses.  Wholesaler commissions expense increased due to higher sales volumes.  These increases were partially offset by lower amortization expense of deferred sales commissions.  Direct expenses in the Advisors channel increased $6.3 million, or 14%, compared to the third quarter of 2010 due to increased commissions related to the sale of fee-based asset allocation products of $6.6 million and higher Rule 12b-1 asset-based service and distribution commissions of $1.3 million.  Indirect expenses increased $3.6 million compared to the quarter ended September 30, 2010 due to increased employee compensation and benefits expenses, higher marketing costs and higher convention costs.

 

Underwriting and distribution expenses increased by $60.9 million, or 15%, compared to the first nine months of 2010.  A significant portion of this increase was attributed to higher direct expenses in the Wholesale channel of $30.4 million as a result of an increase in average wholesale assets under management and higher

 

25



Table of Contents

 

sales volume year over year.  We incurred higher dealer compensation paid to third party distributors and increased Rule 12b-1 asset-based service and distribution expenses.  Wholesaler commissions expense increased due to higher sales volumes.  These increases were partially offset by lower amortization expense of deferred sales commissions.  Direct expenses in the Advisors channel increased $23.9 million, or 18%, compared to the first nine months of 2010 due to increased commissions related to the sale of fee-based asset allocation products of $17.6 million and higher Rule 12b-1 asset-based service and distribution commissions of $7.2 million.  Indirect expenses increased $6.7 million compared to the first nine months of 2010, related to increased employee compensation and benefits expenses, higher marketing costs and higher convention costs.

 

Shareholder Service Fees Revenue

 

Shareholder service fees revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees.  Portfolio accounting and administration fees are asset-based revenues or account-based revenues, while transfer agency fees and custodian fees from retirement plan accounts are based on the number of accounts.  During the third quarter of 2011, shareholder service fees revenue increased $3.7 million, or 12%, over the third quarter of 2010.  Of this increase, $2.6 million is due to higher asset-based fees quarter over quarter in certain share classes and $1.1 million is attributable to account-based revenues due to a 3% increase in the average number of accounts.  For the nine month period ended September 30, 2011, shareholder service fees revenue increased $11.0 million, or 13%, compared to the same period in 2010.  Of this increase, $10.2 million is attributable to account-based revenues due to a 2% increase in the average number of accounts and $0.8 million is due to higher asset-based fees in certain share classes.

 

Total Operating Expenses

 

Operating expenses increased $27.7 million, or 14%, in the third quarter of 2011 compared to the third quarter of 2010, primarily due to increased underwriting and distribution expenses and general and administrative costs.  For the nine months ended September 30, 2011, operating expenses increased $92.5 million, or 16%, compared to the same period in 2010, primarily due to increased underwriting and distribution expenses, compensation and related costs and general and administrative costs.  Underwriting and distribution expenses are discussed above.

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

 

 

 

 

 

2011

 

2010

 

Variance

 

 

 

(in thousands, except percentage data)

 

Underwriting and distribution

 

$

151,936

 

132,857

 

14

%

Compensation and related costs

 

37,052

 

36,164

 

2

%

General and administrative

 

22,491

 

16,022

 

40

%

Subadvisory fees

 

7,291

 

6,481

 

12

%

Depreciation

 

3,980

 

3,526

 

13

%

Total operating expenses

 

$

222,750

 

195,050

 

14

%

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

 

 

 

 

2011

 

2010

 

Variance

 

 

 

(in thousands, except percentage data)

 

Underwriting and distribution

 

$

461,159

 

400,229

 

15

%

Compensation and related costs

 

119,619

 

103,444

 

16

%

General and administrative

 

59,622

 

48,417

 

23

%

Subadvisory fees

 

23,684

 

20,441

 

16

%

Depreciation

 

11,426

 

10,457

 

9

%

Total operating expenses

 

$

675,510

 

582,988

 

16

%

 

26



Table of Contents

 

Compensation and Related Costs

 

Compensation and related costs increased $0.9 million compared to the third quarter of 2010, due to higher base salaries and payroll taxes of $1.9 million associated with increased headcount and annual salary increases and decreased capitalized software development activities of $1.0 million, partially offset by lower incentive compensation expense of $3.2 million.  Share-based compensation increased $0.7 million compared to the third quarter of 2010 due to higher amortization expense associated with our April 2011 and December 2010 grants of nonvested stock compared to grants that became fully vested in 2011 partially offset by lower non-employee advisor (independent contractor) stock award amortization expense in 2011 compared to 2010.

 

Compensation and related costs for the nine months ended September 30, 2011 increased $16.2 million compared to the same period in 2010, primarily due to higher base salaries and payroll taxes of $5.4 million attributable to increased headcount and annual salary increases, higher incentive compensation expense of $2.3 million and decreased capitalized software development activities of $1.7 million.  Group insurance costs also increased $700 thousand.  Share-based compensation increased $4.4 million compared to the first nine months of 2010 primarily due to higher amortization expense associated with our April 2011, December 2010 and April 2010 grants of nonvested stock compared to grants that became fully vested in 2011.

 

General and Administrative Costs

 

General and administrative expenses increased $6.5 million to $22.5 million for the third quarter of 2011 compared to the third quarter of 2010.  Included in the current quarter is a $1.8 million charge related to the write-off of software capitalization costs due to the discontinuation of use of certain software licenses.  The remaining variance is due to increased dealer services costs of $2.0 million, higher computer services and software costs of $1.2 million, increased legal expenses, costs incurred for our national branding campaign that was launched in the first quarter of 2011, and higher fund expenses of $0.5 million.

 

General and administrative expenses of $59.6 million for the first nine months of 2011 represents an increase of $11.2 million, or 23%, compared to the first nine months of 2010.   Excluding the write-off mentioned above as well as a $1.3 million charge due to a trade order execution error recorded in the first quarter of 2010, expenses increased $10.7 million.  This increase is due to increased dealer services costs of $3.4 million, higher legal fees, costs incurred for our national branding campaign, and increased computer services and software costs of $2.2 million, partially offset by lower fund expenses of $1.2 million.  Fee waivers were previously recorded as part of fund expenses; however, beginning in the second half of 2010, fee waivers are netted against management fee revenues.

 

Subadvisory Fees

 

Subadvisory fees represent fees paid to other asset managers for providing advisory services for certain mutual fund portfolios.  These expenses reduce our operating margin since we pay out approximately half of our management fee revenue received from subadvised products.  Gross management fee revenues for products subadvised by others were $14.5 million for the three months ended September 30, 2011 compared to $13.0 million for the third quarter of 2010 due to a 12% increase in average net assets.  For the nine months ended September 30, 2011, gross management fee revenues for products subadvised by others were $47.0 million compared to $40.6 million for the same period in 2010 due to a 16% increase in average net assets.  Subadvisory expenses followed the same pattern of increase compared to 2010.

 

Other Income and Expenses

 

Investment and Other Income, Interest Expense and Taxes

 

Investment and other loss was $4.4 million for the quarter ended September 30, 2011, compared to income of $3.9 million in the same period a year ago.  In our mutual fund trading portfolio, we recorded losses of $3.4 million during the quarter, compared to gains of $4.7 million in the same period last year.  Included in the current quarter was a $1.0 million write-down of the Company’s investment in limited partnerships, compared to a write-down of $1.5 million during the third quarter of 2010.  We also recorded

 

27



Table of Contents

 

gains of $0.3 million from the sale of available for sale mutual fund holdings during the third quarter of 2011 and 2010.

 

Investment and other loss was $0.9 million for the nine months ended September 30, 2011, compared to income of $3.2 million for the nine months ended September 30, 2010.  In our mutual fund trading portfolio, we recorded losses of $2.6 million during the first nine months of 2011, compared to gains of $2.8 million in the same period last year.  During 2011, we recorded gains of $2.2 million from the sale of available for sale mutual fund holdings compared to gains of $1.1 million in 2010.  The current year included a $1.0 million write-down of the Company’s investment in limited partnerships, while 2010 included a $1.5 million write-down.

 

Interest expense was $2.8 million in the third quarter of 2011 compared to $3.1 million for the third quarter of 2010.  We incurred lower costs related to both our long-term debt and our $125.0 million revolving credit facility.   Interest expense was $8.6 million in the first nine months of 2011 compared to $9.8 million for the same period in 2010.  In addition to lower costs related to our long-term debt and our revolving credit facility, the first quarter of 2010 included costs associated with the repurchase of $10.0 million of our senior notes.

 

Our effective income tax rate was 41.2% for the third quarter of 2011, as compared to 33.1% for the third quarter of 2010.  Due to the sale of a subsidiary in 2009, the Company has deferred tax assets related to capital loss carryforwards that are available to offset current and future capital gains.  In 2009, a valuation allowance was recorded on a portion of these capital losses due to the limited carryforward period permitted by law on losses of this character.  During the third quarter of 2011, the fair value of the Company’s investment portfolios declined, which led to an increase in the valuation allowance through a charge to income tax expense and, as a result, increased our effective tax rate.  During the third quarter of 2010, an increase in the fair value of the Company’s investment portfolios allowed for a release of the valuation allowance through a credit to income tax expense, which decreased our effective tax rate.  The higher effective tax rate in 2011 as compared to 2010 was largely attributable to the increase of the valuation allowance through tax expense in 2011 as compared to the decrease in the valuation allowance through tax expense in 2010.  The third quarter 2011 and 2010 effective income tax rates, removing the effects of the valuation allowance, would have been 39.0% and 37.8%, respectively.  The increase in the adjusted effective income tax rate is due to changes in state legislation in jurisdictions in which the Company operates as well as a charge to income tax expense on tax positions for which the outcome is uncertain in tax years in which the statute of limitations remains open.

 

Our effective tax rate was 38.2% for the nine months ended September 30, 2011, as compared to 36.5% for the nine months ended September 30, 2010.  Excluding the increase to the valuation allowance recorded for the nine months ended September 30, 2011, the effective tax rate would have been 38.0%.  Excluding the decrease to the valuation allowance recorded for the nine months ended September 30, 2010, the effective tax rate would have been 37.5%.  The increase in the adjusted effective income tax rate is due to a favorable outcome in 2010 on a tax position previously considered partially uncertain.

 

The Company expects its future effective tax rate, exclusive of any increases or reductions to the valuation allowance, state tax incentives, unanticipated state tax legislative changes, and unanticipated fluctuations in earnings to range from 37% to 39%.

 

28



Table of Contents

 

Liquidity and Capital Resources

 

Our operations provide much of the cash necessary to fund our priorities, as follows:

 

·      Finance internal growth

 

·      Pay dividends

 

·      Repurchase our stock

 

Finance Internal Growth

 

We use cash to fund growth in our distribution channels.  Our Wholesale channel, which has a higher cost to gather assets, requires cash outlays for wholesaler commissions and commissions to third parties on deferred load product sales.  We continue to invest in our Advisors channel by providing additional support to our advisors through wholesaling efforts and enhanced technology tools, including compliance-related technology.

 

Dividends

 

We paid quarterly dividends on our common stock that resulted in financing cash outflows of $51.7 million for the first nine months of 2011.  The dividends paid on our common stock during the first nine months of 2010 resulted in financing cash outflows of $49.0 million.

 

Repurchases

 

We repurchased 1,609,551 shares and 1,916,297 shares of our common stock in the open market or privately during the nine months ended September 30, 2011 and 2010, respectively, resulting in cash outflows of $57.1 million and $61.4 million, respectively.

 

Operating Cash Flows

 

Cash from operations is our primary source of funds and increased $110.5 million for the nine months ended September 30, 2011 compared to the previous year.  The increase is due to higher net income and non-cash share-based compensation expense, as well as significant net sales and maturities of trading securities in 2011 compared to net purchases of trading securities in 2010.

 

The payable to investment companies for securities account can fluctuate significantly based on trading activity at the end of a reporting period, and from December 31, 2009 to September 30, 2010 there was a significant decrease in Fund shareholder investments received prior to the balance sheet date that were in the process of being invested in the Funds.  On December 31, 2009, the Company changed the trustee of its 401(k) plan.  Approximately $100.0 million of the payable to investment companies for securities balance was due to the transfer of assets between trustees.  As a result, on our consolidated balance sheet there was a decrease in both the payable to investment companies and a decrease in the cash and receivable accounts from December 31, 2009 to September 30, 2010.  On the statement of cash flows, there were corresponding increases and decreases to cash from operations.  There is little impact to the Company’s liquidity and operations for the variations in these accounts.

 

During the first quarter of 2011, we made a $10.0 million contribution to our non-contributory retirement plan and do not expect to make an additional contribution for the remainder of 2011.

 

Investing Cash Flows

 

Investing cash flows consist primarily of the purchase, sales and maturities of available for sale investment securities, as well as capital expenditures.  We expect our 2011 capital expenditures to be in the range of $18.0 to $20.0 million.

 

29



Table of Contents

 

Financing Cash Flows

 

As noted previously, dividends and stock repurchases accounted for a majority of our financing cash outflows in the first nine months of 2011 and 2010.

 

Additionally, during 2010 we repurchased $10.0 million of our $200.0 million aggregate principal amount 5.6% senior notes due January 2011 (the “Notes”).  On August 31, 2010, the Company entered into an agreement to complete a $190.0 million private placement of senior unsecured notes that were issued and sold in two tranches:  $95.0 million bearing interest at 5% and maturing January 13, 2018 (the “Series A Notes”) and $95.0 million bearing interest of 5.75% and maturing January 13, 2021 (the “Series B Notes”) (collectively, the “Senior Notes”).  The agreement contained a delayed funding provision that allowed the Company to draw down the proceeds in January 2011 when the Notes matured.  The Company used the proceeds of the issuance and sale of the Senior Notes to repay in full the Notes.  Interest is payable semi-annually in January and July of each year.

 

Future Capital Requirements

 

Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund its short-term operating and capital requirements.  Expected short-term uses of cash include dividend payments, interest payments on outstanding debt, income tax payments, seed money for new products, share repurchases, payment of deferred commissions to our financial advisors and third parties, capital expenditures and home office leasehold improvements, and could include strategic acquisitions.

 

Expected long-term capital requirements include indebtedness; payment of upfront fund commissions for Class B shares, Class C shares and certain fee-based asset allocation products; operating leases; purchase obligations and income tax payments.  Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure and home office expansion, strategic acquisitions, payment of dividends, seed money for new products, pension funding and repurchases of our common stock.

 

Critical Accounting Policies and Estimates

 

Management believes certain critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.  The Company’s critical accounting policies and estimates are disclosed in the “Critical Accounting Policies and Estimates” section of our 2010 Form 10-K.

 

30



Table of Contents

 

Supplemental Information

 

 

 

Third

 

Third

 

 

 

Year to

 

Year to

 

 

 

 

 

Quarter

 

Quarter

 

 

 

Date

 

Date

 

 

 

 

 

2011

 

2010

 

Change

 

2011

 

2010

 

Change

 

Redemption rates - long term (annualized)

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisors

 

10.0

%

10.0

%

 

 

9.9

%

9.2

%

 

 

Wholesale

 

31.0

%

29.2

%

 

 

27.6

%

30.6

%

 

 

Institutional

 

27.8

%

34.4

%

 

 

25.5

%

30.1

%

 

 

Total

 

22.9

%

22.1

%

 

 

20.7

%

21.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue per advisor (000’s)

 

37.6

 

29.1

 

29.2

%

117.0

 

84.7

 

38.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of financial advisors

 

1,758

 

1,950

 

-9.8

%

 

 

 

 

 

 

Average number of financial advisors

 

1,754

 

1,978

 

-11.3

%

1,752

 

2,058

 

-14.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shareholder accounts (000’s)

 

4,118

 

4,015

 

2.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shareholders

 

826,563

 

911,910

 

-9.4

%

 

 

 

 

 

 

 

Item 3.            Quantitative and Qualitative Disclosures About Market Risk

 

The Company has had no significant changes in its Quantitative and Qualitative Disclosures About Market Risk from that previously reported in the Company’s 2010 Form 10-K.

 

Item 4.            Controls and Procedures

 

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report, have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

The Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

31



Table of Contents

 

Part II.  Other Information

 

Item 1.            Legal Proceedings

 

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 the 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.  Information required to be reported under this Part II., Item 1. has been previously disclosed in Note 11 to the consolidated financial statements in Part I. above and is incorporated herein by reference.

 

Item 1A.         Risk Factors

 

The Company has had no material changes to its Risk Factors from those previously reported in the Company’s 2010 Form 10-K.

 

Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table sets forth certain information about the shares of common stock we repurchased during the third quarter of 2011.

 

Period

 

Total Number
of Shares
Purchased (1)

 

Average
Price Paid
Per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Program

 

Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Program

 

 

 

 

 

 

 

 

 

 

 

July 1 - July 31

 

40,910

 

$

36.61

 

40,910

 

n/a

(1)

August 1 - August 31

 

444,468

 

30.36

 

444,468

 

n/a

(1)

September 1 - September 30

 

166,500

 

26.71

 

166,500

 

n/a

(1)

 

 

 

 

 

 

 

 

 

 

Total

 

651,878

 

$

29.82

 

651,878

 

 

 

 


(1)   On August 31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our common stock on the open market.  Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding common stock or (ii) $50 million of our common stock.  We may repurchase our common stock through the New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems.  Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased.  Our Board of Directors reviewed and ratified the stock repurchase program in July 2004.  During the third quarter of 2011, all stock repurchases were made pursuant to the repurchase program including 1,355 shares, reflected in the table above, that were purchased in connection with funding employee income tax withholding obligations arising from the vesting of nonvested shares.

 

32



Table of Contents

 

Item 6.            Exhibits

 

31.1         Section 302 Certification of Chief Executive Officer

 

31.2         Section 302 Certification of Chief Financial Officer

 

32.1         Section 906 Certification of Chief Executive Officer

 

32.2         Section 906 Certification of Chief Financial Officer

 

101          Materials from the Waddell & Reed Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in Extensible Business Reporting Language (XBRL):  (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statement of Stockholders’ Equity, (iv) Consolidated Statements of Comprehensive Income, (v) Consolidated Statements of Cash Flows, and (vi) related Notes to the Unaudited Consolidated Financial Statements, tagged in detail.

 

33



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 28th day of October 2011.

 

 

WADDELL & REED FINANCIAL, INC.

 

 

 

 

By:

/s/ Henry J. Herrmann

 

 

Chief Executive Officer, Chairman of the Board and Director

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

By:

/s/ Daniel P. Connealy

 

 

Senior Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

By:

/s/ Brent K. Bloss

 

 

Senior Vice President - Finance and Treasurer

 

 

(Principal Accounting Officer)

 

34