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Section 1: 10-Q (10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2012

 

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 001-15253

 

 

Janus Capital Group Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

43-1804048

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

151 Detroit Street, Denver, Colorado

 

80206

(Address of principal executive offices)

 

(Zip Code)

 

(303) 333-3863

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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 Company was required to file such reports), and (2) has been subject to the 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 (§232.405 of this chapter) 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.  See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

 

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

 

As of October 19, 2012, there were 187,209,321 shares of the Company’s common stock, $.01 par value per share, issued and outstanding.

 

 

 



 

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in Millions)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

352.7

 

$

360.0

 

Investment securities

 

330.9

 

312.0

 

Accounts receivable

 

91.8

 

96.7

 

Income taxes receivable

 

12.2

 

22.0

 

Other current assets

 

46.4

 

45.2

 

Total current assets

 

834.0

 

835.9

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Property and equipment, net

 

33.4

 

36.9

 

Intangible assets, net

 

1,250.2

 

1,261.8

 

Goodwill

 

488.2

 

488.2

 

Other assets

 

18.6

 

21.2

 

 

 

 

 

 

 

Total assets

 

$

2,624.4

 

$

2,644.0

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

5.0

 

$

5.5

 

Accrued compensation and benefits

 

71.0

 

82.8

 

Other accrued liabilities

 

60.8

 

60.5

 

Total current liabilities

 

136.8

 

148.8

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

Long-term debt

 

542.8

 

595.2

 

Deferred income taxes

 

435.0

 

421.7

 

Other liabilities

 

42.0

 

43.8

 

Total liabilities

 

1,156.6

 

1,209.5

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

56.2

 

85.4

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Preferred stock ($1.00 par, 10,000,000 shares authorized, none issued)

 

 

 

Common stock ($.01 par, 1,000,000,000 shares authorized; 265,500,708 and 265,500,708 shares issued, respectively; 187,379,447 and 187,035,534 shares outstanding, respectively)

 

1.9

 

1.9

 

Retained earnings

 

1,388.9

 

1,311.8

 

Accumulated other comprehensive income (loss)

 

0.1

 

(0.5

)

Total JCG stockholders’ equity

 

1,390.9

 

1,313.2

 

Noncontrolling interests

 

20.7

 

35.9

 

Total stockholders’ equity

 

1,411.6

 

1,349.1

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

2,624.4

 

$

2,644.0

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in Millions, Except Per Share Data)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

194.1

 

$

202.2

 

$

588.5

 

$

653.4

 

Performance fees

 

(20.9

)

(3.1

)

(61.8

)

(2.5

)

Shareowner servicing fees and other

 

35.8

 

37.8

 

106.7

 

115.4

 

Total

 

209.0

 

236.9

 

633.4

 

766.3

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

70.8

 

71.2

 

209.4

 

232.8

 

Long-term incentive compensation

 

16.2

 

16.4

 

51.0

 

52.3

 

Marketing and advertising

 

5.4

 

6.2

 

16.3

 

20.5

 

Distribution

 

32.3

 

35.5

 

96.0

 

111.2

 

Depreciation and amortization

 

9.9

 

8.1

 

26.0

 

25.5

 

General, administrative and occupancy

 

26.5

 

25.3

 

78.2

 

82.8

 

Total

 

161.1

 

162.7

 

476.9

 

525.1

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

47.9

 

74.2

 

156.5

 

241.2

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(11.1

)

(13.0

)

(33.9

)

(39.3

)

Investment gains (losses), net

 

7.6

 

(23.4

)

6.9

 

(23.1

)

Other income, net

 

0.3

 

1.4

 

2.2

 

1.8

 

Loss on early extinguishment of debt

 

 

 

(7.2

)

(9.9

)

Income before taxes

 

44.7

 

39.2

 

124.5

 

170.7

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

(17.0

)

(11.9

)

(45.4

)

(57.0

)

 

 

 

 

 

 

 

 

 

 

Net income

 

27.7

 

27.3

 

79.1

 

113.7

 

Noncontrolling interests

 

(2.6

)

0.1

 

(8.0

)

(6.5

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to JCG

 

$

25.1

 

$

27.4

 

$

71.1

 

$

107.2

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to JCG common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

$

0.15

 

$

0.39

 

$

0.59

 

Diluted

 

$

0.14

 

$

0.15

 

$

0.38

 

$

0.58

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Net unrealized gain on available-for-sale securities

 

$

0.1

 

$

 

$

0.6

 

$

0.1

 

Amortization of net loss on cash flow hedge

 

 

 

 

0.1

 

Reclassification for net losses (gains) included in net income

 

0.2

 

(0.9

)

(0.1

)

(1.4

)

Foreign currency translation adjustment

 

0.3

 

(2.1

)

0.1

 

(0.8

)

Total other comprehensive income (loss), net of tax

 

0.6

 

(3.0

)

0.6

 

(2.0

)

Comprehensive income

 

28.3

 

24.3

 

79.7

 

111.7

 

Comprehensive income attributable to noncontrolling interests

 

(2.6

)

0.1

 

(8.0

)

(6.5

)

Comprehensive income attributable to JCG

 

$

25.7

 

$

24.4

 

$

71.7

 

$

105.2

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Millions)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2012

 

2011

 

CASH FLOWS PROVIDED BY (USED FOR):

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

79.1

 

$

113.7

 

Adjustments to net income:

 

 

 

 

 

Depreciation and amortization

 

26.0

 

25.5

 

Deferred income taxes

 

12.1

 

(0.9

)

Amortization of stock-based compensation

 

22.5

 

31.4

 

Investment (gains) losses, net

 

(6.9

)

23.1

 

Amortization of debt discount and deferred issuance costs

 

8.4

 

8.5

 

Loss on early extinguishment of debt

 

7.2

 

9.9

 

Payment of deferred commissions, net

 

(3.9

)

(3.8

)

Other, net

 

0.3

 

(0.4

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

5.2

 

32.6

 

Other assets

 

6.8

 

(10.4

)

Accounts payable and accrued compensation payable

 

(8.7

)

(48.9

)

Other liabilities

 

(6.6

)

(30.0

)

Net operating activities

 

141.5

 

150.3

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(4.4

)

(5.0

)

Purchase of investment securities

 

(96.4

)

(158.2

)

Proceeds from sales of investment securities

 

69.5

 

218.0

 

Net investing activities

 

(31.3

)

54.8

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Repayment of long-term debt

 

(65.8

)

(223.0

)

Purchase of noncontrolling interests

 

(6.5

)

(0.9

)

Proceeds from stock plans

 

5.3

 

3.1

 

Proceeds from stock option issuance

 

4.9

 

 

Excess tax benefit from equity-based compensation

 

1.3

 

3.3

 

Repurchase of common stock

 

(14.9

)

 

Distributions to noncontrolling interests

 

(9.1

)

(12.1

)

Principal payments under capital lease obligations

 

(0.8

)

(0.7

)

Dividends paid to shareholders

 

(31.9

)

(18.6

)

Net financing activities

 

(117.5

)

(248.9

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Net decrease

 

(7.3

)

(43.8

)

At beginning of period

 

360.0

 

373.2

 

At end of period

 

$

352.7

 

$

329.4

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

19.9

 

$

26.4

 

Cash paid for income taxes

 

$

27.3

 

$

66.5

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Amounts in Millions)

 

 

 

 

 

 

 

 

 

Accumulated

 

Nonredeemable

 

 

 

 

 

 

 

 

 

 

 

Other

 

Noncontrolling

 

Total

 

 

 

 

 

Common

 

Retained

 

Comprehensive

 

Interests in

 

Stockholders’

 

 

 

Shares

 

Stock

 

Earnings

 

Income (Loss)

 

Subsidiaries

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

184.1

 

$

1.8

 

$

1,168.1

 

$

1.6

 

$

11.7

 

$

1,183.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

142.9

 

 

 

2.4

 

145.3

 

Other comprehensive loss

 

 

 

 

 

 

 

(2.1

)

 

 

(2.1

)

Amortization of stock-based compensation

 

 

 

 

 

24.9

 

 

 

4.5

 

29.4

 

Issuance and forfeitures of restricted stock awards, net

 

2.3

 

0.1

 

 

 

 

 

 

 

0.1

 

Stock option exercises and employee stock purchases

 

0.6

 

 

 

3.6

 

 

 

 

 

3.6

 

Changes in noncontrolling interests in consolidated investment products

 

 

 

 

 

 

 

 

 

22.1

 

22.1

 

Purchase of noncontrolling interests

 

 

 

 

 

 

 

 

 

(0.8

)

(0.8

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(2.7

)

(2.7

)

Change in fair value of redeemable noncontrolling interests

 

 

 

 

 

(1.4

)

 

 

0.4

 

(1.0

)

Vesting of nonredeemable noncontrolling interests

 

 

 

 

 

1.7

 

 

 

(1.7

)

 

Common stock dividends

 

 

 

 

 

(28.0

)

 

 

 

 

(28.0

)

Balance at December 31, 2011

 

187.0

 

1.9

 

1,311.8

 

(0.5

)

35.9

 

1,349.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

71.1

 

 

 

1.4

 

72.5

 

Other comprehensive income

 

 

 

 

 

 

 

0.6

 

 

 

0.6

 

Amortization of stock-based compensation

 

 

 

 

 

20.5

 

 

 

3.5

 

24.0

 

Issuance and forfeitures of restricted stock awards, net

 

1.3

 

 

 

 

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

0.9

 

 

 

5.3

 

 

 

 

 

5.3

 

Common stock repurchases

 

(1.8

)

 

 

(14.9

)

 

 

 

 

(14.9

)

Changes in noncontrolling interests in consolidated investment products

 

 

 

 

 

 

 

 

 

(16.5

)

(16.5

)

Purchase of noncontrolling interests

 

 

 

 

 

 

 

 

 

(0.6

)

(0.6

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(1.8

)

(1.8

)

Change in fair value of redeemable noncontrolling interests

 

 

 

 

 

22.1

 

 

 

(1.2

)

20.9

 

Stock option issuance

 

 

 

 

 

4.9

 

 

 

 

 

4.9

 

Common stock dividends

 

 

 

 

 

(31.9

)

 

 

 

 

(31.9

)

Balance at September 30, 2012

 

187.4

 

$

1.9

 

$

1,388.9

 

$

0.1

 

$

20.7

 

$

1,411.6

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4



 

JANUS CAPITAL GROUP INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Note 1 — Basis of Presentation

 

In the opinion of Janus Capital Group Inc. (collectively, “JCG” or the “Company”) management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments necessary to fairly present the financial position, results of operations and cash flows of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All such adjustments are of a normal recurring nature. Such unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the issuance date. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

The accompanying condensed consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Note 2 to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Note 2 — Recent Accounting Guidance

 

In June 2011, the Financial Accounting Standards Board issued an update regarding the presentation of comprehensive income. This standard eliminated the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Under the updated guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts (net income and other comprehensive income), are displayed under either alternative. The statement(s) must be presented with equal prominence as the other primary financial statements. The Company adopted the standard on January 1, 2012, and has presented items of net income and other comprehensive income in one continuous statement.

 

5



 

Note 3 — Investment Securities

 

JCG’s investment securities, all carried at fair value at September 30, 2012 and December 31, 2011, are summarized as follows (in millions):

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Cost

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Basis

 

Gains

 

Losses

 

Value

 

Basis

 

Gains

 

Losses

 

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seeded investment products

 

$

198.9

 

$

16.3

 

$

(2.6

)

$

212.6

 

$

196.6

 

$

8.2

 

$

(8.4

)

$

196.4

 

Mutual fund share awards

 

83.8

 

6.9

 

(2.2

)

88.5

 

72.6

 

6.5

 

(4.3

)

74.8

 

Other investment securities

 

 

 

 

 

3.2

 

 

 

3.2

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seeded investment products

 

32.0

 

1.1

 

(3.3

)

29.8

 

34.1

 

0.8

 

(3.4

)

31.5

 

Derivative instruments

 

8.0

 

 

(8.0

)

 

8.0

 

 

(1.9

)

6.1

 

Total investment securities

 

$

322.7

 

$

24.3

 

$

(16.1

)

$

330.9

 

$

314.5

 

$

15.5

 

$

(18.0

)

$

312.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred compensation hedge asset

 

$

8.6

 

$

3.2

 

$

(0.1

)

$

11.7

 

$

8.6

 

$

2.3

 

$

(0.1

)

$

10.8

 

 

Cash flows related to investment securities for the three and nine months ended September 30, 2012 and 2011, are summarized as follows (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

Purchases

 

Sales/
Maturities

 

Purchases

 

Sales/
Maturities

 

Purchases

 

Sales/
Maturities

 

Purchases

 

Sales/
Maturities

 

Trading securities

 

$

(16.4

)

$

6.9

 

$

(10.7

)

$

19.3

 

$

(77.9

)

$

51.4

 

$

(144.5

)

$

67.6

 

Available-for-sale securities

 

(0.1

)

2.9

 

(0.1

)

5.3

 

(0.8

)

8.0

 

(0.2

)

38.7

 

Held-to-maturity securities

 

 

 

 

92.0

 

 

 

 

92.3

 

Derivative instruments

 

(7.4

)

1.8

 

 

12.7

 

(17.7

)

10.1

 

(13.5

)

19.4

 

Total cash flows

 

$

(23.9

)

$

11.6

 

$

(10.8

)

$

129.3

 

$

(96.4

)

$

69.5

 

$

(158.2

)

$

218.0

 

 

Investment securities are classified as follows:

 

Trading Securities

 

At September 30, 2012, investments classified as trading securities totaled $301.1 million, representing $212.6 million of seeded investment products and $88.5 million of investments related to economic hedging of mutual fund share awards. Seeded investment products represent $62.9 million of securities held in separately managed accounts and $149.7 million of securities held in the portfolios of mutual funds advised by the Company.

 

At December 31, 2011, investments classified as trading securities totaled $274.4 million, representing $196.4 million of seeded investment products, $74.8 million of investments related to economic hedging of mutual fund share awards and $3.2 million of other investment securities. Seeded investment products represent $48.9 million of securities held in separately managed accounts and $147.5 million of securities held in the portfolios of mutual funds advised by the Company.

 

JCG recognized (losses) gains of $(0.2) million and $4.5 million from the sale of trading securities during the three and nine months ended September 30, 2012, respectively. Additionally, JCG recognized $3.3 million and $6.1 million of investment gains related to mark-to-market adjustments for the economic hedge of mutual fund share awards during the three and nine months ended September 30, 2012, respectively.

 

JCG recognized (losses) gains of $(0.6) million and $10.9 million from the sale of trading securities during the three and nine months ended September 30, 2011, respectively. Additionally, JCG recognized $(12.8) million and $(11.3) million of investment losses related to mark-to-market adjustments for the economic hedge of mutual fund share awards during the three and nine months ended September 30, 2011, respectively.

 

6



 

Available-for-Sale Securities

 

At September 30, 2012 and December 31, 2011, available-for-sale securities representing seeded investment products totaled $29.8 million and $31.5 million, respectively. JCG recognized gains of $0.6 million and $0.1 million from the sale of available-for-sale securities for the three and nine months ended September 30, 2012, respectively. JCG recognized gains of $0.3 million and $1.1 million from the sale of available-for-sale securities for the three and nine months ended September 30, 2011, respectively. No impairment charges were recognized during the nine months ended September 30, 2012 and 2011.

 

Derivative Instruments — Put Spread Option Contracts

 

Derivative instruments at December 31, 2011, consisted of investments in put spread option contracts of $6.1 million. At September 30, 2012, the value of the put spread option contracts is zero. The put spread option contracts were purchased by the Company in the fourth quarter 2011 to mitigate potential negative impacts on 2012 profitability in the event of a market downturn. The contracts will return a cash payment if the 2012 average daily closing price of the Standard & Poor’s (“S&P”) 500 Index falls below 1250, no cash payment if the average daily closing price rises above 1250 and a total maximum cash payment of $37.3 million if the average daily closing price falls below 950. The contracts mature on December 31, 2012. JCG recognized $0.1 million and $6.1 million of investment losses related to the put spread option contracts during the three and nine months ended September 30, 2012, respectively.

 

Derivative Instruments — Economic Hedge Strategy

 

JCG implemented an economic hedge strategy in December 2008 covering the majority of its trading securities related to initial cash investments in seeded products. The economic hedge strategy has subsequently been reduced to cover approximately 40% of the investments in seeded products as of September 30, 2012. The hedge strategy is designed to mitigate a portion of the net income volatility created by the mark-to-market accounting of these investment securities. The strategy primarily utilizes futures contracts on various market indices to minimize volatility in earnings. These instruments are settled daily, with settlement amounts recognized in investment gains (losses), net on the Condensed Consolidated Statements of Comprehensive Income.

 

JCG recognized the following net gains (losses) on hedged trading securities and associated derivative instruments (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net gains (losses) in net income:

 

 

 

 

 

 

 

 

 

Hedged trading securities

 

$

4.8

 

$

(15.5

)

$

9.4

 

$

(12.9

)

Economic hedge derivative instruments

 

(5.0

)

13.1

 

(10.1

)

8.5

 

Total

 

$

(0.2

)

$

(2.4

)

$

(0.7

)

$

(4.4

)

 

7



 

Note 4 — Fair Value Measurements

 

The following table presents assets and redeemable noncontrolling interests carried at fair value on a recurring basis as of September 30, 2012 (in millions):

 

 

 

Fair Value Measurements Using:

 

 

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

$

122.5

 

$

90.1

 

$

 

$

212.6

 

Mutual fund share awards

 

88.5

 

 

 

88.5

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

11.8

 

18.0

 

 

29.8

 

Total investment securities

 

222.8

 

108.1

 

 

330.9

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

Deferred compensation hedge asset

 

11.7

 

 

 

11.7

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

234.5

 

$

108.1

 

$

 

$

342.6

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

$

 

$

 

$

56.2

 

$

56.2

 

 

The following table presents assets and redeemable noncontrolling interests carried at fair value on a recurring basis as of December 31, 2011 (in millions):

 

 

 

Fair Value Measurements Using:

 

 

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

$

121.6

 

$

74.8

 

$

 

$

196.4

 

Mutual fund share awards

 

74.8

 

 

 

74.8

 

Other investment securities

 

 

 

3.2

 

3.2

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

9.0

 

22.5

 

 

31.5

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

 

6.1

 

 

6.1

 

Total investment securities

 

205.4

 

103.4

 

3.2

 

312.0

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

Deferred compensation hedge asset

 

10.8

 

 

 

10.8

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

216.2

 

$

103.4

 

$

3.2

 

$

322.8

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

$

 

$

 

$

85.4

 

$

85.4

 

 

JCG’s Level 1 and Level 2 fair value measurements consist of exchange-traded equity and debt securities underlying separate accounts and consolidated mutual funds and shares of unconsolidated mutual funds. The underlying securities of mutual funds and separate accounts may be denominated in a foreign currency. The closing price of such securities may be adjusted to capture the effects of any post-closing activity impacting the markets in which they trade. These adjustments would result in the securities being classified as Level 2 and may also result in significant movements of securities between Level 1 and Level 2.

 

For the nine months ended September 30, 2012, there were less than $0.1 million of transfers out of Level 1 to Level 2 and $4.9 million of transfers out of Level 2 to Level 1. For the nine months ended September 30, 2011, there were no transfers between levels. Transfers from Level 1 to Level 2 represent foreign securities whose quoted market prices at a given period-end required the additional consideration of subsequent fluctuations in active markets, where no such consideration was necessary under the previous Level 1 designation due to less market volatility. Transfers from Level 2 to Level 1 represent foreign securities whose quoted market prices at a given period-end no longer required the additional consideration of subsequent fluctuations in active markets.

 

8



 

JCG’s Level 3 recurring fair value measurements primarily represent redeemable noncontrolling interests in INTECH Investment Management LLC (“INTECH”) and Perkins Investment Management LLC (“Perkins”).

 

Redeemable noncontrolling interests in INTECH are measured at fair value on an annual basis, or more frequently if considered necessary, using a discounted cash flow methodology with probability-weighted scenarios. Significant unobservable inputs to the discounted cash flow analysis include forecasted operating results, discount rate and terminal multiple of forecasted earnings before interest expense, taxes, depreciation and amortization. Significant increases or decreases in the forecasted operating results and terminal multiple inputs in isolation would result in a significantly higher or lower fair value measurement, respectively. A significant increase or decrease in the discount rate input would result in a significantly lower or higher fair value measurement, respectively. The terminal multiple input for each scenario is influenced by the growth rate contained in the forecasted operating results. Generally, a change in the assumptions used for forecasted operating results is accompanied by a directionally similar change in the terminal multiple. The average discount rate and average terminal multiple used in the December 31, 2011 analysis were 13% and 8.50x, respectively. The redeemable noncontrolling interests in INTECH were subject to subsequent analysis during the third quarter 2012, the result of which reduced fair value by $4.1 million. The average discount rate and average terminal multiple used in the third quarter 2012 analysis were 13% and 7.50x, respectively.

 

Redeemable noncontrolling interests in Perkins are measured by a contractual formula intended to represent fair value. Significant unobservable inputs to the contractual formula include trailing 12-month revenues of Perkins investment products and the relative performance of Perkins investment products as compared to benchmark indices. The contractual formula applies defined revenue multiples to trailing 12-month Perkins revenues to arrive at fair value; the revenue multiples are subject to increases if certain performance targets are met. Due to the contractual nature of the formula, the revenue and performance inputs are relationally independent. The revenue multiples used in the September 30, 2012 and December 31, 2011 valuations were 4.19x and 5.00x, respectively.

 

Nonrecurring Level 3 fair value measurements include goodwill and intangible assets. JCG measures the fair value of goodwill and intangible assets using a discounted cash flow analysis that requires assumptions regarding projected future earnings and discount rates. Because of the significance of the unobservable inputs in the fair value measurements of these assets and liabilities, such measurements have been classified as Level 3. There were no remeasurements of these assets for the nine months ended September 30, 2012 and 2011 with the exception of a $2.5 million impairment charge from the loss of a JCG subadvised relationship during the third quarter 2012.

 

Other nonrecurring Level 3 fair value measurements include stock options sold to The Dai-ichi Life Insurance Company, Limited (“Dai-ichi”) as described in Note 12.

 

The changes in carrying value of JCG’s recurring Level 3 fair value measurements are as follows (in millions):

 

 

 

Redeemable

 

Other

 

 

 

Noncontrolling

 

Investment

 

 

 

Interests

 

Securities

 

Fair value at January 1, 2011

 

$

82.8

 

$

5.5

 

Distributions

 

(9.4

)

 

Current earnings

 

9.6

 

 

Impairment of investments

 

 

(2.3

)

Change in fair value

 

2.4

 

 

 

 

 

 

 

 

Fair value at December 31, 2011

 

85.4

 

3.2

 

Distributions

 

(7.3

)

 

Current earnings

 

4.8

 

 

Purchase of redeemable noncontrolling interest

 

(5.8

)

 

Sale of investments

 

 

(3.2

)

Change in fair value

 

(20.9

)

 

 

 

 

 

 

 

Fair value at September 30, 2012

 

$

56.2

 

$

 

 

9



 

Note 5 — Debt

 

Debt consisted of the following (in millions):

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

6.119% Senior Notes due 2014

 

$

38.9

 

$

40.9

 

$

82.3

 

$

85.9

 

3.250% Convertible Senior Notes due 2014

 

151.7

 

180.4

 

144.8

 

167.5

 

6.700% Senior Notes due 2017

 

352.2

 

395.6

 

368.1

 

392.7

 

Total long-term debt

 

$

542.8

 

$

616.9

 

$

595.2

 

$

646.1

 

 

Fair Value of Debt

 

The fair value of debt was determined using broker quotes and recent trading activity for each of the notes listed above.

 

Loss on Early Extinguishment of Debt

 

2012

 

On March 20, 2012, JCG completed a debt tender in which $59.4 million aggregate principal amount of the Company’s outstanding 2014 and 2017 Senior Notes were repurchased with cash on hand. JCG recognized a $7.2 million net loss on early extinguishment of debt related to the repurchase of these notes. Results of the tender offer were as follows:

 

 

 

Aggregate
Principal
Outstanding

 

Principal
Amount
Tendered

 

Tender Offer
Consideration

 

Gross Loss
on Debt
Tender

 

Deferred
Costs

 

Tender Costs

 

Net Loss on
Debt Tender

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.119% Senior Notes due 2014

 

$

82.4

 

$

43.5

 

$

47.9

 

$

4.4

 

$

0.7

 

$

0.2

 

$

5.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.700% Senior Notes due 2017

 

368.5

 

15.9

 

17.6

 

1.7

 

0.1

 

0.1

 

1.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

450.9

 

$

59.4

 

$

65.5

 

$

6.1

 

$

0.8

 

$

0.3

 

$

7.2

 

 

Deferred costs include the write-off of previously capitalized bond discounts and issuance costs.

 

2011

 

During the fourth quarter 2010, JCG exercised its redemption right on the $120.9 million carrying value of its 6.250% Senior Notes and retired the notes on January 14, 2011. Under the terms of the redemption, JCG was required to pay the principal and the present value of the interest that would have been paid if the debt remained outstanding through scheduled maturity. As a result, JCG recognized a $9.9 million net loss on early extinguishment of debt in the first quarter 2011.

 

3.250% Convertible Senior Notes

 

In July 2009, JCG issued $170.0 million of 3.250% convertible senior notes (“convertible senior notes”), which pay interest semiannually on July 15 and January 15 of each year and mature on July 15, 2014, unless earlier converted. The convertible senior notes are convertible under certain circumstances into cash, shares of JCG common stock, or a combination of cash and shares of JCG common stock, at JCG’s election. The holders of the convertible senior notes have the right to require JCG to repurchase their notes for cash under certain circumstances. The original conversion rate of 71.3 shares of JCG common stock per $1,000 principal amount of convertible senior notes was adjusted during the third quarter 2012 as a result of the quarterly cash dividend paid on August 20, 2012. The adjusted conversion rate was 73.6 shares of JCG common stock per $1,000 principal amount of convertible senior notes, which was equivalent to a conversion price of approximately $13.60 per share of common stock. The Company is required to continue to adjust the

 

10



 

conversion rate to the extent there are future dividend payments above $0.04 per share on an annual basis. The convertible senior notes are not callable by JCG.

 

Holders may convert their notes at their option prior to the close of business on the business day immediately preceding April 15, 2014, only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2009, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; or (2) upon the occurrence of other specified events. On or after April 15, 2014, until maturity, holders may convert their notes regardless of the preceding circumstances. As of September 30, 2012, the conversion criteria of the convertible senior notes have not been satisfied.

 

Because the convertible senior notes may be wholly or partially settled in cash, the proceeds were required to be bifurcated into debt and equity components. The $125.7 million initial debt component was determined by discounting future contractual cash flows at a 10.0% rate, which is consistent with the estimated market rate at the time of issuance for similar senior notes with no conversion option. The debt component will accrete up to the face value over the five-year expected term through interest expense. The unamortized discount at September 30, 2012, is $18.4 million and will be amortized over the remaining period of 1.8 years. The $44.3 million (or $27.9 million, net of deferred taxes) initial equity component was determined using the difference between the proceeds and the debt component. The fair value of the convertible notes in the table above is based on the outstanding principal balance while the carrying value represents the outstanding principal balance exclusive of the unamortized discounts. Interest expense related to the convertible senior notes includes interest on the outstanding principal balance as well as amortization of capitalized issuance costs and totaled $3.9 million and $11.6 million for the three and nine months ended September 30, 2012, respectively. Interest expense related to the convertible senior notes totaled $3.8 million and $11.0 million for the three and nine months ended September 30, 2011, respectively.

 

Interest Rate Adjustment Covenant

 

All of JCG’s senior notes, excluding the convertible senior notes, are subject to an interest rate adjustment covenant that provides that the interest rate payable will increase by 25 basis points for each level that the Company’s debt rating is decreased by Moody’s Investors Service Inc. (“Moody’s”) from Baa3 or by S&P from BBB-, up to a maximum increase of 200 basis points. If the interest rate is adjusted upward as a result of either Moody’s or S&P decreasing its rating, then for each level of a subsequent rating increase, the interest payable will be decreased by 25 basis points, but in no event to a rate less than the interest rate payable on the date of issuance of the respective notes. The interest rate adjustment covenant will permanently terminate if the Company’s debt ratings increase to Baa2 (or higher) by Moody’s and BBB (or higher) by S&P, with a stable or positive outlook regardless of any subsequent decrease in the ratings by either or both rating agencies. S&P increased JCG’s credit rating to BBB- on January 10, 2011, resulting in a 25 basis point decrease in the interest rate payable on all of JCG’s senior notes, excluding the convertible senior notes. On May 8, 2012, Moody’s reaffirmed its Baa3 credit rating for JCG and revised its outlook from negative to stable.

 

Credit Facility

 

At September 30, 2012, JCG had a $250 million, unsecured, revolving credit facility (the “Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent and swingline lender. Under the Credit Facility, JCG’s financing leverage ratio cannot exceed 3.00x, and its interest coverage ratio must equal or exceed 4.00x. At September 30, 2012, JCG was in compliance with all covenants and there were no borrowings under the Credit Facility. The Credit Facility has a maturity date of October 14, 2014.

 

Capital Lease Obligations

 

JCG’s capital lease obligations represent leased computer equipment. The carrying value of the obligations totaled $2.9 million and $1.2 million at September 30, 2012 and December 31, 2011, respectively, and is included in other accrued liabilities and other liabilities on the Condensed Consolidated Balance Sheets. The related lease terms extend through 2017.

 

11



 

Note 6 — Income Tax Contingencies

 

As of September 30, 2012, JCG had $6.9 million of accrued reserves for income tax contingencies, including interest.  JCG did not accrue additional reserves for income tax contingencies, except for interest, during the third quarter 2012. During the nine months ended September 30, 2012, JCG decreased its income tax contingency reserves by $4.3 million, as a result of the expiration of statutes of limitations, creating a net tax benefit of $2.7 million. JCG anticipates that its income tax contingency reserves will decrease by approximately $2.0 million in the next 12 months, primarily from the expiration of statutes of limitations and the resolution of audits. Accrued reserves for income tax contingencies are presented in other accrued liabilities and other liabilities on the Condensed Consolidated Balance Sheets.

 

Note 7 — Noncontrolling Interests

 

Noncontrolling interests consist of the following:

 

Noncontrolling Interests That Are Not Subject to Put Rights

 

Noncontrolling interests that are not subject to put rights totaled $20.7 million as of September 30, 2012, representing third-party investors’ ownership in consolidated seeded investment products of $12.6 million and the value of certain INTECH and Perkins ownership interests held by employees of $8.1 million. Noncontrolling interests that are not subject to put rights totaled $35.9 million as of December 31, 2011, representing third-party investors’ ownership in consolidated seeded investment products of $29.2 million and the current value of certain INTECH and Perkins ownership interests held by employees of $6.7 million. Certain of the Perkins ownership interests granted to employees become subject to put rights upon vesting at which time such interests are reclassified to redeemable noncontrolling interests.

 

Redeemable Noncontrolling Interests

 

Redeemable noncontrolling interests as of September 30, 2012, consist of INTECH and Perkins interests that are currently puttable to JCG or will become subject to put rights at certain future dates of $54.2 million and undistributed earnings of $2.0 million. Redeemable noncontrolling interests as of December 31, 2011, consisted of INTECH and Perkins interests that were puttable to JCG or would become subject to put rights at certain future dates of $80.9 million and undistributed earnings of $4.5 million.

 

INTECH

 

During the second quarter 2012, JCG purchased 10,000 INTECH ownership interests, representing 0.5% of total outstanding INTECH ownership interests, from one of the two founding members of INTECH for $3.3 million. During the third quarter 2012, JCG purchased his last remaining 10,892 ownership interests, representing 0.5% of total outstanding INTECH ownership interests, for $2.5 million.

 

INTECH ownership interests held by the other founding member have an estimated value of approximately $4.8 million as of September 30, 2012, representing approximately 1.0% aggregate ownership of INTECH. This founding member is entitled to retain his remaining INTECH shares outstanding until his death and he has the option to require JCG to purchase from him his ownership interest of INTECH at fair value.

 

Although the two founding members are no longer employed by INTECH, they remain as consultants.

 

Ownership interests held by other INTECH employees subject to put rights have an estimated value of approximately $1.9 million as of September 30, 2012.

 

Perkins

 

JCG has the option to acquire the majority of the 22.2% noncontrolling interest of Perkins at fair value (as described below) on the fifth, seventh or each subsequent anniversary of December 31, 2008 (“closing”), the date JCG acquired a majority ownership in Perkins. The owners of noncontrolling interests of Perkins have the option to require JCG to purchase any or all of their remaining ownership interests following the fourth or sixth anniversary of closing at fair value. The total Perkins noncontrolling interests subject to put rights has an estimated value of approximately $47.5 million as of September 30, 2012, based on a contractual formula driven by revenue and investment performance of products managed by Perkins. The formula is intended to represent fair value.

 

12



 

Note 8 — Long-Term Incentive Compensation

 

JCG granted $56.0 million in long-term incentive awards during the first nine months of 2012, which generally vest and will be recognized ratably over a four-year period. The 2012 awards consisted of $12.7 million of restricted stock (1.5 million shares at a weighted-average price of $8.47 per share), $39.8 million of mutual fund share awards, $0.6 million of stock option awards and $2.9 million of INTECH ownership interests.

 

JCG records compensation expense associated with long-term incentive awards based on the amount of awards expected to vest at the end of the stated service period, comprising the total value of the awards less an estimate for forfeitures. During first quarter 2012, JCG revised its estimate for forfeitures as a result of lower than expected employee departures, which resulted in a $2.1 million increase in long-term incentive compensation expense.

 

During the three and nine months ended September 30, 2012, respectively, JCG recognized $1.7 million and $4.3 million of long-term incentive compensation expense related to mark-to-market adjustments of mutual fund share awards. JCG recognized $(1.1) million and $1.6 million of long-term incentive compensation expense related to mark-to-market adjustments of mutual fund share awards during the three and nine months ended September 30, 2011, respectively.

 

Note 9 — Other Income, Net

 

The components of other income, net are as follows (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Dividend income

 

$

0.3

 

$

0.3

 

$

1.0

 

$

0.9

 

Interest income

 

0.2

 

0.2

 

0.4

 

0.6

 

Translation (losses) gains, net

 

(0.2

)

0.8

 

(1.0

)

0.1

 

Other, net

 

 

0.1

 

1.8

 

0.2

 

Total

 

$

0.3

 

$

1.4

 

$

2.2

 

$

1.8

 

 

13



 

Note 10 — Earnings Per Share

 

Basic earnings per common share is calculated by dividing net income attributable to JCG common shareholders by the weighted-average number of common shares outstanding during the period. The calculation of diluted earnings per common share adjusts the weighted-average shares outstanding by the dilutive impact of shares underlying stock options, unvested restricted stock awards and price-vesting units. The following is a summary of the earnings per share calculation (in millions, except per share data):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to JCG common shareholders

 

$

25.1

 

$

27.4

 

$

71.1

 

$

107.2

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share attributable to JCG common shareholders:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

183.4

 

182.6

 

183.8

 

182.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.14

 

$

0.15

 

$

0.39

 

$

0.59

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to JCG common shareholders:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

183.4

 

182.6

 

183.8

 

182.3

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options, unvested restricted stock and price-vesting units using the treasury stock method

 

1.9

 

1.4

 

1.3

 

1.9

 

Weighted-average diluted common shares outstanding

 

185.3

 

184.0

 

185.1

 

184.2

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.14

 

$

0.15

 

$

0.38

 

$

0.58

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per share

 

$

0.06

 

$

0.05

 

$

0.17

 

$

0.10

 

 

The following stock options, unvested restricted stock and price-vesting units are anti-dilutive and have not been included in the weighted-average diluted shares outstanding calculation (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Employee stock options

 

9.6

 

10.8

 

9.6

 

10.8

 

Other stock options

 

14.0

 

 

14.0

 

 

Unvested restricted stock and price-vesting units

 

1.4

 

2.1

 

1.5

 

1.8

 

 

All shares held in the JCG Employee Stock Ownership Plan are treated as outstanding for purposes of computing basic earnings per share. The computation of diluted earnings per share does not include the impact of the convertible senior notes because the effect would be anti-dilutive as the conversion criteria have not been satisfied. Other stock options at September 30, 2012, consisted of options purchased by Dai-ichi as described in Note 12.

 

14



 

Note 11 — Litigation and Other Regulatory Matters

 

JCG is periodically involved in various legal proceedings and other regulatory matters. At September 30, 2012, JCG has an insignificant litigation accrual for all pending litigation matters. The accrual decreased $1.2 million during the third quarter 2012 due to the dismissal of certain previously pending litigation matters. Possible losses in addition to the litigation accrual cannot be currently estimated, and as such, no additional accruals have been made. Although there can be no assurances, based on information currently available, management believes that it is probable that the ultimate outcome of matters that are pending or threatened will not have a material effect on JCG’s consolidated financial condition.

 

Note 12 — Investment and Strategic Cooperation Agreement with The Dai-ichi Life Insurance Company, Limited

 

On August 10, 2012, JCG entered into an Investment and Strategic Cooperation Agreement (the “Agreement”) with Dai-ichi whereby Dai-ichi agreed to acquire at least 15%, and no more than 20%, of JCG’s issued and outstanding common stock. In conjunction with the Agreement, JCG sold Dai-ichi options to acquire up to 14.0 million shares of JCG’s common stock for a purchase price of $10.25 per share. The options are exercisable only after Dai-ichi owns at least 8% of JCG’s issued and outstanding common stock and expire on the first anniversary of the Agreement. The options were sold to Dai-ichi at agreed upon fair value for cash consideration of $4.9 million.

 

As of October 19, 2012, Dai-ichi owned approximately 9% of JCG’s issued and outstanding common stock. Also, as of October 19, 2012, Dai-ichi had not exercised any of its options.

 

The options are classified within stockholders’ equity on the Condensed Consolidated Balance Sheets. Fair value was determined using the Black-Scholes model with certain adjustments for consideration of the significant number of shares contemplated by the options, and for the restrictions placed on the exercise of the options. The fair value measurement of the options is classified as Level 3 based on the significance of the unobservable inputs.

 

15



 

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

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate,” “forecast” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts. Any statements that refer to expectations or other characterizations of future events, circumstances or results are forward-looking statements. These statements are based on the beliefs and assumptions of Company management based on information currently available to management.

 

Various risks, uncertainties, assumptions and factors that could cause future results to differ materially from those expressed by the forward-looking statements included in this Quarterly Report on Form 10-Q include, but are not limited to, risks, uncertainties, assumptions and factors specified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and this Quarterly Report on Form 10-Q included under headings such as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other filings and furnishings made by the Company with the SEC from time to time. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. Many of these factors are beyond the control of the Company and its management. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by applicable law or regulation.

 

AVAILABLE INFORMATION

 

Copies of Janus Capital Group Inc.’s (collectively, “JCG” or the “Company”) filings with the Securities and Exchange Commission (“SEC”) can be obtained from the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information can be obtained about the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

JCG makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments thereto as soon as reasonably practical after such filing has been made with the SEC. Reports may be obtained through the Investor Relations section of JCG’s website (http://ir.janus.com) or by contacting JCG at (888) 834-2536. The contents of JCG’s website are not incorporated herein for any purpose.

 

JCG’s Officer Code of Ethics for Principal Executive Officer and Senior Financial Officers (including its chief executive officer, chief financial officer and controller) (the “Officer Code”); Corporate Code of Business Conduct and Ethics for all employees; corporate governance guidelines; and the charters of key committees of the board of directors (including the Audit, Compensation, Nominating, Corporate Governance, and Planning and Strategy committees) are available on its website (http://ir.janus.com/documents.cfm). Any future amendments to or waivers of the Officer Code will be posted to the Investor Relations section of JCG’s website.

 

16



 

RESULTS OF OPERATIONS

 

Overview

 

JCG provides investment management, administration, distribution and related services to individual and institutional investors through mutual funds, other pooled investment vehicles, separate accounts and subadvised relationships (collectively referred to as “investment products”) in both domestic and international markets. Over the last several years, JCG has expanded its business to become a more diversified manager with increased product offerings and distribution capabilities. JCG offers three distinct types of investment advisory services, including fundamental equity (includes growth and core equity, global and international equity, and value investment disciplines), fixed income and mathematical equity, through its primary subsidiaries, Janus Capital Management LLC (“Janus”), INTECH Investment Management LLC (“INTECH”) and Perkins Investment Management LLC (“Perkins”). Each of JCG’s three primary subsidiaries specializes in specific investment styles and disciplines. JCG’s investment products are distributed through three channels: retail intermediary, institutional and international. Each distribution channel focuses on specific investor groups and the unique requirements of each group.

 

Revenues are generally based upon a percentage of the market value of assets under management and are calculated as a percentage of the daily average asset balance in accordance with contractual agreements. Certain investment products are also subject to performance fees, which vary based on a product’s relative performance as compared to a benchmark index and the level of assets subject to such fees. Assets under management primarily consist of domestic and international equity and debt securities. Accordingly, fluctuations in domestic and international financial markets, relative investment performance, sales and redemptions of investment products, and changes in the composition of assets under management are all factors that have a direct effect on JCG’s operating results.

 

Third Quarter 2012 Summary

 

Average assets under management for the third quarter 2012 of $155.5 billion increased $0.5 billion, or 0.3%, over the second quarter 2012 as a result of favorable market conditions, offset by long-term net outflows. Third quarter 2012 revenues of $209.0 million increased $3.0 million, or 1.5%, from the second quarter 2012 due to increased management fees from higher average assets under management and increased performance fees from separate accounts. Negative mutual fund performance fees remained unchanged from the second quarter 2012 to the third quarter 2012. The Company achieved an operating margin of 22.9% and net income of $0.14 per diluted share in the third quarter 2012.

 

Investment and Strategic Cooperation Agreement with The Dai-ichi Life Insurance Company, Limited

 

On August 10, 2012, JCG entered into an Investment and Strategic Cooperation Agreement (the “Agreement”) with The Dai-ichi Life Insurance Company, Limited (“Dai-ichi”). Pursuant to the terms of the Agreement, Dai-ichi will acquire at least 15% and no more than 20% of JCG’s issued and outstanding common stock no later than the first anniversary of the Agreement.

 

Dai-ichi’s acquisitions will be made through open market transactions and potentially through the exercise of options issued by JCG in conjunction with the Agreement. The options allow Dai-ichi to purchase up to 14.0 million shares of JCG’s common stock for a purchase price of $10.25 per share. The options are exercisable only after Dai-ichi owns at least 8% of JCG’s issued and outstanding common stock and expire on the first anniversary of the Agreement. The options were sold to Dai-ichi at agreed upon fair value for cash consideration of $4.9 million.

 

In accordance with the terms of the Agreement, Dai-ichi committed to invest a minimum of $2.0 billion in investment products managed by JCG’s subsidiaries. The initial investment of $302.5 million was made in early October 2012. The remaining balance will be invested within approximately one year following the date on which Dai-ichi achieves a 15% ownership interest in JCG’s issued and outstanding common stock (the “Effective Date”). Additionally, Dai-ichi will have the right to appoint a representative to the JCG Board of Directors following the Effective Date.

 

As of October 19, 2012, Dai-ichi owned approximately 9% of JCG’s issued and outstanding common stock. Also, as of October 19, 2012, Dai-ichi had not exercised any of its options.

 

17



 

Investment Performance

 

Investment products are generally evaluated based on their investment performance relative to other investment products with similar disciplines and strategies or benchmark indices. The following is a summary of investment performance as of September 30, 2012:

 

 

 

Percentage of Mutual Fund Assets

 

 

 

Outperforming Majority of Lipper Peers (1)

 

 

 

1-Year

 

3-Year

 

5-Year

 

Complex-wide mutual fund assets

 

41

%

32

%

56

%

Fundamental equity mutual fund assets

 

38

%

26

%

49

%

Fixed income mutual fund assets

 

54

%

75

%

100

%

 

 

 

 

 

 

 

 

 

 

Percentage of Strategies Outperformaing Respective Benchmarks (2)

 

 

 

1-Year

 

3-Year

 

5-Year

 

Mathematical equity strategies

 

82

%

93

%

75

%

 


(1) References Lipper relative performance on a weighted basis.

(2) References relative performance, net of fees.

 

Assets Under Management and Flows

 

Valuation

 

The value of assets under management is derived from the cash and investment securities held by JCG’s investment products. Investment security values are determined using unadjusted or adjusted quoted market prices and independent third-party price quotes in active markets. For debt securities with maturities of 60 days or less, the amortized cost method is used to determine the value. Securities for which market prices are not readily available or are considered unreliable are internally valued using appropriate methodologies for each security type or by engaging third-party specialists. The value of the majority of the equity and derivative securities underlying JCG’s investment products is derived from readily available and reliable market price quotations while the value of a majority of the fixed income securities is derived from evaluated pricing from independent third-party providers.

 

The pricing policies for mutual funds advised by JCG’s subsidiaries (the “Funds”) are established by the Funds’ Independent Board of Trustees and are designed to test and validate fair value measurements. Responsibility for pricing securities held within separate and subadvised accounts may be delegated by separate or subadvised clients to JCG or another party.

 

Assets Under Management and Flows

 

Total Company assets under management of $158.2 billion at September 30, 2012, increased $17.2 billion, or 12.2%, from September 30, 2011, as a result of net market appreciation of $29.7 billion, offset by long-term net outflows of $12.5 billion. Long-term net flows represent total Company net sales and redemptions, excluding money market assets.

 

Fundamental equity long-term net outflows were $3.3 billion in the third quarter 2012 compared with long-term net outflows of $3.8 billion in the third quarter 2011. The decrease in net outflows was primarily driven by lower redemptions.

 

Fixed income long-term net flows were positive for the 15th consecutive quarter, with $1.0 billion in the third quarter 2012 compared with $2.1 billion in the third quarter 2011.

 

Mathematical equity long-term net inflows were $0.3 billion in the third quarter 2012 compared with $0.7 billion of long-term net outflows in the third quarter 2011.

 

18



 

The following tables present the components of JCG’s assets under management (in billions):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Beginning of period assets

 

$

152.4

 

$

169.8

 

$

148.2

 

$

169.5

 

Long-term sales:

 

 

 

 

 

 

 

 

 

Fundamental equity

 

4.0

 

4.9

 

13.4

 

17.4

 

Fixed income

 

2.8

 

3.8

 

9.0

 

7.8

 

Mathematical equity (1)

 

2.6

 

1.0

 

3.7

 

3.8

 

Long-term redemptions:

 

 

 

 

 

 

 

 

 

Fundamental equity

 

(7.3

)

(8.7

)

(21.1

)

(26.3

)

Fixed income

 

(1.8

)

(1.7

)

(5.7

)

(4.3

)

Mathematical equity (1)

 

(2.3

)

(1.7

)

(7.7

)

(6.6

)

Long-term net flows: (2)

 

 

 

 

 

 

 

 

 

Fundamental equity

 

(3.3

)

(3.8

)

(7.7

)

(8.9

)

Fixed income

 

1.0

 

2.1

 

3.3

 

3.5

 

Mathematical equity

 

0.3

 

(0.7

)

(4.0

)

(2.8

)

Total long-term net flows

 

(2.0

)

(2.4

)

(8.4

)

(8.2

)

Net money market flows

 

 

 

(0.1

)

 

Market/fund performance

 

7.8

 

(26.4

)

18.5

 

(20.3

)

End of period assets

 

$

158.2

 

$

141.0

 

$

158.2

 

$

141.0

 

 


(1) Gross sales and redemptions for the nine months ended September 30, 2011, exclude the transfer of $1.1 billion within mathematical equity strategies.

(2) Excludes money market flows. Sales and redemptions of money market funds are presented net on a separate line due to the short-term nature of the investments.

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Average assets under management

 

 

 

 

 

 

 

 

 

Fundamental equity

 

$

89.0

 

$

94.6

 

$

91.2

 

$

104.9

 

Fixed income

 

24.8

 

17.9

 

23.2

 

16.8

 

Mathematical equity

 

40.3

 

41.9

 

40.7

 

43.5

 

Money market

 

1.4

 

1.5

 

1.4

 

1.5

 

Total

 

$

155.5

 

$

155.9

 

$

156.5

 

$

166.7

 

 

19



 

Assets and Flows by Investment Discipline

 

JCG, through its primary subsidiaries, offers investment products based on a diversified set of investment disciplines.  Janus offers growth and core equity, global and international equity as well as balanced, fixed income and retail money market investment products. INTECH offers mathematical-based investment products and Perkins offers value-disciplined investment products. Assets and flows by investment discipline are as follows (in billions):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Growth/Core (1)

 

 

 

 

 

 

 

 

 

Beginning of period assets

 

$

52.7

 

$

58.5

 

$

49.7

 

$

60.9

 

Sales

 

2.3

 

2.9

 

7.5

 

9.1

 

Redemptions

 

(3.9

)

(4.7

)

(11.3

)

(15.3

)

Net redemptions

 

(1.6

)

(1.8

)

(3.8

)

(6.2

)

Market/fund performance

 

3.1

 

(9.4

)

8.3

 

(7.4

)

End of period assets

 

$

54.2

 

$

47.3

 

$

54.2

 

$

47.3

 

 

 

 

 

 

 

 

 

 

 

Global/International

 

 

 

 

 

 

 

 

 

Beginning of period assets

 

$

17.6

 

$

26.1

 

$

18.4

 

$

27.9

 

Sales

 

0.7

 

0.8

 

2.7

 

3.9

 

Redemptions

 

(1.5

)

(2.2

)

(4.7

)

(6.1

)

Net redemptions

 

(0.8

)

(1.4

)

(2.0

)

(2.2

)

Market/fund performance

 

0.7

 

(6.1

)

1.1

 

(7.1

)

End of period assets

 

$

17.5

 

$

18.6

 

$

17.5

 

$

18.6

 

 

 

 

 

 

 

 

 

 

 

Mathematical Equity (2)

 

 

 

 

 

 

 

 

 

Beginning of period assets

 

$

39.2

 

$

45.5

 

$

39.9

 

$

44.1

 

Sales

 

2.6

 

1.0