WADDELL & REED FINANCIAL INC

The Company has operating and finance leases for corporate office space and equipment.  Our leases have remaining lease terms of less than one year to seven years, some of which include options to extend leases for up to 20 years, and some of which include options to terminate the leases within one year.  Certain leases include variable lease payments in future periods based on a market index or rate.  We determine if an arrangement is a lease at inception (or the effective date of the ASU). Operating lease assets and liabilities are included in other non-current assets, other current liabilities, and other non-current liabilities in our consolidated balance sheet at March 31, 2019. Finance leases are included in property and equipment, net, other current liabilities, and other non-current liabilities in our consolidated balance sheets. 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date (or the effective date of the ASU) based on the present value of lease payments over the lease term. The Company uses an incremental borrowing rate based on the information available at commencement date (or the effective date of the ASU) in determining the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.

The long-term redemption rate for the three months ended March 31, 2019 remained unchanged in the unaffiliated channel and slightly decreased in the institutional and broker-dealer channels as compared to the three months ended March 31, 2018.  We have been notified of approximately $0.5 billion of redemptions in our institutional channel expected in the first half of 2019, of which $0.3 billion was redeemed in April 2019. Prolonged redemptions in any of our distribution channels could negatively affect revenues in future periods. 

Distribution expenses for the first quarter of 2019 decreased by $4.7 million, or 4%, compared to the first quarter of 2018.  Distribution expenses in the unaffiliated channel decreased by $7.1, while distribution expenses in the broker-dealer channel increased $2.4 million.  The primary driver of the net reduction was a decrease in average mutual fund AUM for which we pay Rule 12b-1 commissions to third party distributors, however, the decrease was moderated by the enhancements to the Advisor compensation grid starting in 2019, which increased expense in the broker-dealer channel. 

Compensation and benefits decreased $3.9 million, or 6%, compared to the first quarter of 2018. The decrease is primarily due to a $2.1 million decrease in share-based compensation primarily due grants with larger grant date fair value being fully amortized and partially offset by increased expense due mark-to-market adjustments of cash-settled restricted stock units.  Compensation and other related costs decreased $1.8 million primarily due to lower headcount.

General and administrative expenses decreased $4.8 million, or 25%, compared to the first quarter of 2018. The decrease was primarily due to decreases in contractor, legal and consulting costs due to the completion of significant projects in early 2018.  Fund expenses also decreased for the comparative period primarily due to decreased fee waivers in excess of revenue on certain Funds.