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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, 2014

 

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 17, 2014, there were 185,995,017 shares of the Company’s common stock, $0.01 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, Except Share Data)

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

434.9

 

$

344.5

 

Investment securities

 

341.2

 

485.5

 

Accounts receivable

 

116.2

 

108.8

 

Other current assets

 

51.4

 

52.0

 

Total current assets

 

943.7

 

990.8

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Property and equipment, net

 

29.8

 

29.9

 

Intangible assets, net

 

1,222.7

 

1,230.1

 

Goodwill

 

488.2

 

488.2

 

Other non-current assets

 

7.6

 

8.3

 

Total assets

 

$

2,692.0

 

$

2,747.3

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

8.1

 

$

4.1

 

Accrued compensation and benefits

 

113.6

 

122.7

 

Current portion of long-term debt

 

 

96.9

 

Other accrued liabilities

 

53.9

 

78.0

 

Total current liabilities

 

175.6

 

301.7

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

Long-term debt

 

449.8

 

447.7

 

Deferred income taxes, net

 

463.0

 

447.7

 

Other non-current liabilities

 

30.9

 

32.4

 

Total liabilities

 

1,119.3

 

1,229.5

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

4.8

 

7.3

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

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

 

 

 

Common stock ($0.01 par, 1,000,000,000 shares authorized; 265,500,708 and 265,500,708 shares issued, respectively; 186,386,184 and 188,603,875 shares outstanding, respectively)

 

1.9

 

1.9

 

Retained earnings

 

1,523.3

 

1,496.0

 

Accumulated other comprehensive loss, net of tax

 

(1.1

)

(1.1

)

Total JCG shareholders’ equity

 

1,524.1

 

1,496.8

 

Noncontrolling interests

 

43.8

 

13.7

 

Total equity

 

1,567.9

 

1,510.5

 

 

 

 

 

 

 

Total liabilities and equity

 

$

2,692.0

 

$

2,747.3

 

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

213.3

 

$

204.0

 

$

632.0

 

$

605.0

 

Performance fees

 

(14.0

)

(22.0

)

(47.2

)

(63.7

)

Shareowner servicing fees and other

 

37.7

 

35.7

 

113.6

 

106.4

 

Total revenue

 

237.0

 

217.7

 

698.4

 

647.7

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

82.2

 

73.3

 

240.5

 

222.0

 

Long-term incentive compensation

 

11.6

 

15.8

 

36.1

 

45.3

 

Marketing and advertising

 

4.1

 

4.6

 

13.6

 

14.3

 

Distribution

 

33.2

 

30.8

 

98.5

 

94.0

 

Depreciation and amortization

 

6.2

 

7.1

 

19.0

 

21.9

 

General, administrative and occupancy

 

28.1

 

27.1

 

81.5

 

78.1

 

Total operating expenses

 

165.4

 

158.7

 

489.2

 

475.6

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

71.6

 

59.0

 

209.2

 

172.1

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(7.6

)

(9.5

)

(25.9

)

(31.7

)

Investment gains, net

 

1.3

 

7.9

 

1.1

 

6.4

 

Other (expense) income, net

 

(1.1

)

0.8

 

(0.1

)

1.8

 

Loss on early extinguishment of debt

 

 

(0.9

)

 

(13.5

)

Income before taxes

 

64.2

 

57.3

 

184.3

 

135.1

 

Income tax provision

 

(23.6

)

(21.7

)

(75.7

)

(53.0

)

Net income

 

40.6

 

35.6

 

108.6

 

82.1

 

Noncontrolling interests

 

0.3

 

(3.0

)

(0.9

)

(5.7

)

Net income attributable to JCG

 

$

40.9

 

$

32.6

 

$

107.7

 

$

76.4

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to JCG common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

0.18

 

$

0.57

 

$

0.41

 

Diluted

 

$

0.22

 

$

0.17

 

$

0.57

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

Net unrealized gain on available-for-sale securities

 

$

 

$

0.7

 

$

2.3

 

$

0.6

 

Reclassifications for items included in net income

 

(1.8

)

(0.7

)

(2.3

)

(2.4

)

Total other comprehensive loss, net of tax

 

(1.8

)

 

 

(1.8

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

38.8

 

35.6

 

108.6

 

80.3

 

Comprehensive loss (income) attributable to noncontrolling interests

 

0.3

 

(3.0

)

(0.9

)

(5.7

)

Comprehensive income attributable to JCG

 

$

39.1

 

$

32.6

 

$

107.7

 

$

74.6

 

 

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,

 

 

 

2014

 

2013

 

CASH FLOWS PROVIDED BY (USED FOR):

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

108.6

 

$

82.1

 

Adjustments to net income:

 

 

 

 

 

Depreciation and amortization

 

19.0

 

21.9

 

Deferred income taxes

 

29.2

 

13.5

 

Amortization of stock-based compensation

 

11.7

 

18.5

 

Investment gains, net

 

(1.1

)

(6.4

)

Amortization of debt discounts, premiums and deferred issuance costs

 

7.0

 

7.9

 

Loss on early extinguishment of debt

 

 

13.5

 

Payment of deferred commissions, net

 

(4.5

)

(3.3

)

Other, net

 

0.2

 

(1.0

)

Changes in working capital items:

 

 

 

 

 

Accounts receivable

 

(7.3

)

2.6

 

Other current assets

 

(29.0

)

(6.6

)

Accounts payable and accrued compensation payable

 

8.0

 

(5.1

)

Other current and non-current liabilities

 

(11.8

)

(5.6

)

Net operating activities

 

130.0

 

132.0

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(7.5

)

(5.0

)

Purchases and settlements of investment securities

 

(159.4

)

(167.8

)

Proceeds from sales, settlements and maturities of investment securities

 

331.5

 

112.2

 

Net investing activities

 

164.6

 

(60.6

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Repayment of long-term debt

 

(98.9

)

(8.9

)

Proceeds from issuance of stock warrants

 

 

10.5

 

Purchase of convertible note hedge

 

 

(16.1

)

Debt issuance costs

 

 

(3.3

)

Purchase of noncontrolling interests

 

(1.5

)

(34.1

)

Distributions to noncontrolling interests

 

(1.6

)

(5.9

)

Proceeds from stock option exercises and employee stock purchases

 

3.7

 

7.1

 

Excess tax benefit from equity-based compensation

 

1.0

 

1.6

 

Principal payments under capital lease obligations

 

(1.0

)

(0.8

)

Repurchase of common stock

 

(62.2

)

(22.2

)

Dividends paid to JCG shareholders

 

(43.6

)

(26.5

)

Net financing activities

 

(204.1

)

(98.6

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Effect of foreign exchange rate changes

 

(0.1

)

(1.6

)

Net change

 

90.4

 

(28.8

)

At beginning of period

 

344.5

 

387.0

 

At end of period

 

$

434.9

 

$

358.2

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

15.6

 

$

18.4

 

Cash paid for income taxes, net of refunds

 

$

74.1

 

$

46.2

 

 

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

 

3



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(Amounts in Millions)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

Nonredeemable

 

 

 

 

 

 

 

Common

 

Retained

 

comprehensive

 

noncontrolling

 

Total

 

 

 

Shares

 

stock

 

earnings

 

income (loss)

 

interests

 

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

187.5

 

$

1.9

 

$

1,415.4

 

$

0.6

 

$

17.2

 

$

1,435.1

 

Net income

 

 

 

76.4

 

 

0.8

 

77.2

 

Other comprehensive loss

 

 

 

 

(1.8

)

 

(1.8

)

Amortization of stock-based compensation

 

 

 

16.1

 

 

1.7

 

17.8

 

Issuance and forfeitures of restricted stock awards, net

 

3.0

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

1.3

 

 

7.1

 

 

 

7.1

 

Convertible senior notes issuance

 

 

 

14.7

 

 

 

14.7

 

Extinguishment of convertible senior notes

 

 

 

(2.0

)

 

 

(2.0

)

Convertible senior note hedge issuance

 

 

 

(16.1

)

 

 

(16.1

)

Stock warrants issuance

 

 

 

10.5

 

 

 

10.5

 

Changes in noncontrolling interests in consolidated investment products

 

 

 

 

 

21.5

 

21.5

 

Distributions to noncontrolling interests

 

 

 

 

 

(1.6

)

(1.6

)

Change in fair value of redeemable noncontrolling interests

 

 

 

1.7

 

 

 

1.7

 

Vesting of nonredeemable noncontrolling interests

 

 

 

 

 

(1.2

)

(1.2

)

Purchase of noncontrolling interests

 

 

 

 

 

(0.3

)

(0.3

)

Repurchase of common stock

 

(2.5

)

 

(22.2

)

 

 

(22.2

)

Dividends paid to JCG shareholders

 

 

 

(26.5

)

 

 

(26.5

)

Balance at September 30, 2013

 

189.3

 

$

1.9

 

$

1,475.1

 

$

(1.2

)

$

38.1

 

$

1,513.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

188.6

 

$

1.9

 

$

1,496.0

 

$

(1.1

)

$

13.7

 

$

1,510.5

 

Net income

 

 

 

107.7

 

 

0.7

 

108.4

 

Amortization of stock-based compensation

 

 

 

20.1

 

 

1.2

 

21.3

 

Issuance and forfeitures of restricted stock awards, net

 

2.6

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

0.5

 

 

3.7

 

 

 

3.7

 

Changes in noncontrolling interests in consolidated investment products

 

 

 

 

 

30.0

 

30.0

 

Distributions to noncontrolling interests

 

 

 

 

 

(0.9

)

(0.9

)

Change in fair value of redeemable noncontrolling interests

 

 

 

1.6

 

 

 

1.6

 

Purchase of noncontrolling interests

 

 

 

 

 

(0.9

)

(0.9

)

Repurchase of common stock

 

(5.3

)

 

(62.2

)

 

 

(62.2

)

Dividends paid to JCG shareholders

 

 

 

(43.6

)

 

 

(43.6

)

Balance at September 30, 2014

 

186.4

 

$

1.9

 

$

1,523.3

 

$

(1.1

)

$

43.8

 

$

1,567.9

 

 

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 interim condensed consolidated financial statements contain all adjustments necessary to fairly present the financial position, results of operations and cash flows of JCG in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All such adjustments are of a normal recurring nature. Such 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 and the Company has determined that there were no subsequent events that require disclosure other than the items set forth in Notes 7 and 12. The Company operates one business segment, its Investment Management Operations. These interim condensed consolidated financial statements should be read in conjunction with JCG’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

The accompanying interim 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 JCG’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued a new revenue recognition standard. The standard’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting standard.

 

Note 2 — Investment Securities

 

JCG’s investment securities as of September 30, 2014, and December 31, 2013, are summarized as follows (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Trading securities:

 

 

 

 

 

Seeded investment products

 

$

315.9

 

$

312.9

 

Investments in advised mutual funds

 

4.3

 

45.5

 

Investments related to deferred compensation plans

 

12.5

 

14.9

 

Total trading securities

 

332.7

 

373.3

 

Available-for-sale securities:

 

 

 

 

 

Seeded investment products

 

8.5

 

10.7

 

Debt securities

 

 

101.5

 

Total available-for-sale securities

 

8.5

 

112.2

 

Total investment securities

 

$

341.2

 

$

485.5

 

 

Trading Securities

 

Seeded investment products represented $247.2 million in 17 mutual funds advised by the Company and $68.7 million in 30 separately managed accounts at September 30, 2014. Seeded investment products

 

5



 

represented $230.0 million in 12 mutual funds advised by the Company and $82.9 million in 28 separately managed accounts at December 31, 2013.

 

The Company recognized $4.7 million and $14.5 million of net investment gains related to trading securities still held as of September 30, 2014 and 2013, respectively.

 

Available-for-Sale Securities

 

Seeded investment products advised by the Company designated as available-for-sale securities represented $8.5 million held in 38 mutual funds and $10.7 million held in 34 mutual funds at September 30, 2014, and December 31, 2013, respectively.

 

During the three and nine months ended September 30, 2014, one debt security with a principal value of $12.0 million and nine debt securities with an aggregate principal value of $100.0 million matured, respectively.

 

The following is a summary of available-for-sale securities at September 30, 2014, and December 31, 2013 (in millions):

 

 

 

September 30, 2014

 

 

 

 

 

Gross unrealized

 

Foreign

 

 

 

 

 

 

 

 

 

investment

 

currency

 

Estimated

 

Carrying

 

 

 

Cost

 

Gains

 

Losses

 

translation

 

fair value

 

value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Seeded investment products

 

$

8.2

 

$

0.5

 

$

(0.1

)

$

(0.1

)

$

8.5

 

$

8.5

 

 

 

 

December 31, 2013

 

 

 

 

 

Gross unrealized

 

Foreign

 

 

 

 

 

 

 

 

 

investment

 

currency

 

Estimated

 

Carrying

 

 

 

Cost

 

Gains

 

Losses

 

translation

 

fair value

 

value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Seeded investment products

 

$

9.9

 

$

0.9

 

$

 

$

(0.1

)

$

10.7

 

$

10.7

 

Debt securities

 

101.6

 

 

(0.1

)

 

101.5

 

101.5

 

Total available-for-sale securities

 

$

111.5

 

$

0.9

 

$

(0.1

)

$

(0.1

)

$

112.2

 

$

112.2

 

 

The Company reviewed the gross unrealized losses on available-for-sale securities and determined that the losses were not other-than-temporary. No other-than-temporary impairment charges were recognized in the nine months ended September 30, 2014 or 2013.

 

Realized gains and losses related to the disposition of seeded investment products classified as available-for-sale securities were recognized within investment gains, net on JCG’s Condensed Consolidated Statements of Comprehensive Income. The following is a summary of realized gains and losses upon disposition of seeded investment products classified as available-for-sale securities for the three and nine months ended September 30, 2014 and 2013 (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Realized gains

 

$

2.6

 

$

1.8

 

$

2.8

 

$

2.6

 

Realized losses

 

 

(0.5

)

(0.1

)

(1.1

)

Net realized gains

 

$

2.6

 

$

1.3

 

$

2.7

 

$

1.5

 

 

6



 

Derivative Instruments

 

The Company maintains an economic hedge program that uses derivative instruments to hedge against market volatility of certain seed investments. Fluctuations in equity markets, debt markets and foreign currency markets are hedged by using index swaps, index futures and foreign currency forward contracts.

 

JCG was party to the following derivative instruments as of September 30, 2014, and December 31, 2013:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Number of
contracts

 

Notional value
(in millions)

 

Number of
contracts

 

Notional value
(in millions)

 

Index swaps

 

4

 

$

55.5

 

6

 

$

184.3

 

Index futures

 

6

 

$

89.8

 

6

 

$

66.6

 

Foreign currency forward contracts

 

6

 

$

3.2

 

6

 

$

93.6

 

 

The above derivative instruments are not designated as hedges for accounting purposes. Changes in fair value of the index swaps and index futures are recognized in investment gains, net on JCG’s Condensed Consolidated Statements of Comprehensive Income while changes in the fair value of the foreign currency forward contracts are recognized in other (expense) income, net on JCG’s Condensed Consolidated Statements of Comprehensive Income.

 

Index swaps are subject to a master netting arrangement. The values of the individual index swap contracts, including any associated cash collateral, are combined and are included on a net basis in other current assets on JCG’s Condensed Consolidated Balance Sheets. Index futures are also subject to a master netting arrangement and are presented in the same manner as the index swaps. Foreign currency forward contracts are not subject to a master netting arrangement, and as such, fair values of individual contracts are not netted and are included separately within either other current assets or other accrued liabilities on JCG’s Condensed Consolidated Balance Sheets.

 

The Company posted $2.1 million and $4.8 million in cash collateral with the counterparty of the index futures as of September 30, 2014, and December 31, 2013, respectively. The cash collateral is included in other current assets on JCG’s Condensed Consolidated Balance Sheets.

 

The following tables illustrate the effect of offsetting derivative instruments on JCG’s Condensed Consolidated Balance Sheets as of September 30, 2014, and December 31, 2013 (in millions):

 

 

 

September 30, 2014

 

 

 

 

 

Gross amounts

 

 

 

 

 

Gross amounts

 

offset

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

Index futures

 

$

0.9

 

$

 

$

0.9

 

 

 

 

December 31, 2013

 

 

 

 

 

Gross amounts

 

 

 

 

 

Gross amounts

 

offset

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

Index swaps

 

$

0.1

 

$

(0.1

)

$

 

Index futures

 

0.9

 

(0.4

)

0.5

 

Total

 

$

1.0

 

$

(0.5

)

$

0.5

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Index swaps

 

$

1.5

 

$

(1.5

)

$

 

Index futures

 

0.4

 

(0.4

)

 

Foreign currency forward contracts

 

1.5

 

 

1.5

 

Total

 

$

3.4

 

$

(1.9

)

$

1.5

 

 

7



 

JCG recognized the following net gains (losses) on hedged seed investments and net gains (losses) on associated index futures and index swaps for the three and nine months ended September 30, 2014 and 2013 (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Hedged seed investments classified as trading securities

 

$

(2.1

)

$

15.4

 

$

4.4

 

$

18.6

 

Hedged seed investments classified as available-for-sale securities

 

 

0.6

 

3.2

 

0.6

 

Total hedged seed investments

 

(2.1

)

16.0

 

7.6

 

19.2

 

Index futures

 

(0.8

)

(13.7

)

(5.2

)

(20.5

)

Index swaps

 

1.7

 

(0.7

)

(3.1

)

(2.1

)

Total

 

$

(1.2

)

$

1.6

 

$

(0.7

)

$

(3.4

)

 

JCG recognized the following net (losses) gains on hedged seed investments denominated in a foreign currency and net gains (losses) on associated foreign currency forward contracts for the three and nine months ended September 30, 2014 and 2013 (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net (losses) gains in net income related to:

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

$

(0.7

)

$

3.4

 

$

(1.7

)

$

2.7

 

Foreign currency forward contracts

 

0.4

 

(3.7

)

1.2

 

(2.9

)

Total

 

$

(0.3

)

$

(0.3

)

$

(0.5

)

$

(0.2

)

 

Investment Gains, Net

 

Investment gains, net on JCG’s Condensed Consolidated Statements of Comprehensive Income included the following for the three and nine months ended September 30, 2014 and 2013 (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Seeded investment products

 

$

1.0

 

$

17.4

 

$

8.9

 

$

18.0

 

Noncontrolling interests in seeded investment products

 

(0.6

)

2.0

 

(0.2

)

2.1

 

Investments in advised mutual funds

 

(0.1

)

2.2

 

(0.1

)

7.0

 

Index swaps and index futures

 

0.9

 

(14.4

)

(8.3

)

(22.6

)

Economic hedge for deferred compensation plans

 

0.1

 

0.7

 

0.8

 

1.9

 

Investment gains, net

 

$

1.3

 

$

7.9

 

$

1.1

 

$

6.4

 

 

8



 

Purchases, Sales, Settlements and Maturities

 

Cash flows related to investment securities for the three and nine months ended September 30, 2014 and 2013, are summarized as follows (in millions):

 

 

 

Three months ended September 30,

 

 

 

2014

 

2013

 

 

 

Purchases

 

Sales,

 

Purchases

 

Sales,

 

 

 

and

 

settlements and

 

and

 

settlements and

 

 

 

settlements

 

maturities

 

settlements

 

maturities

 

Trading securities

 

$

(106.0

)

$

27.3

 

$

(2.1

)

$

2.2

 

Available-for-sale securities

 

 

76.9

 

(0.1

)

8.1

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

Seed capital economic hedge

 

(3.6

)

5.3

 

(19.2

)

8.0

 

Total cash flows

 

$

(109.6

)

$

109.5

 

$

(21.4

)

$

18.3

 

 

 

 

Nine months ended September 30,

 

 

 

2014

 

2013

 

 

 

Purchases

 

Sales,

 

Purchases

 

Sales,

 

 

 

and

 

settlements and

 

and

 

settlements and

 

 

 

settlements

 

maturities

 

settlements

 

maturities

 

Trading securities

 

$

(138.1

)

$

143.5

 

$

(113.5

)

$

62.5

 

Available-for-sale securities

 

(0.2

)

174.8

 

(0.4

)

18.2

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

Seed capital economic hedge

 

(21.1

)

13.2

 

(53.9

)

31.5

 

Total cash flows

 

$

(159.4

)

$

331.5

 

$

(167.8

)

$

112.2

 

 

During the third quarter 2014, seeding of investment products included a $100.0 million investment in the Global Unconstrained Bond strategy. The investment included $48.0 million and $52.0 million allocated to JCG’s domestic and international trusts, respectively.

 

Note 3 — Fair Value Measurements

 

The following table presents assets, liabilities and redeemable noncontrolling interests measured or disclosed at fair value on a recurring basis as of September 30, 2014 (in millions):

 

 

 

Fair value measurements using:

 

 

 

 

 

Quoted prices in

 

 

 

 

 

 

 

 

 

active markets for

 

Significant other

 

Significant

 

 

 

 

 

identical assets

 

observable inputs

 

unobservable inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

$

275.9

 

$

 

$

275.9

 

Index futures

 

0.9

 

 

 

0.9

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

159.5

 

156.4

 

 

315.9

 

Investments in advised mutual funds

 

4.3

 

 

 

4.3

 

Investments related to deferred compensation plans

 

12.5

 

 

 

12.5

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

8.5

 

 

 

8.5

 

Total investment securities

 

184.8

 

156.4

 

 

341.2

 

Total assets

 

$

185.7

 

$

432.3

 

$

 

$

618.0

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

 

$

548.6

 

$

 

$

548.6

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

$

 

$

 

$

4.8

 

$

4.8

 

 

9



 

The following table presents assets, liabilities and redeemable noncontrolling interests measured or disclosed at fair value on a recurring basis as of December 31, 2013 (in millions):

 

 

 

Fair value measurements using:

 

 

 

 

 

Quoted prices in

 

 

 

 

 

 

 

 

 

active markets for

 

Significant other

 

Significant

 

 

 

 

 

identical assets

 

observable inputs

 

unobservable inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

$

199.0

 

$

 

$

199.0

 

Index swaps

 

 

0.1

 

 

0.1

 

Index futures

 

 

0.9

 

 

0.9

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

265.9

 

47.0

 

 

312.9

 

Investments in advised mutual funds

 

45.5

 

 

 

45.5

 

Investments related to deferred compensation plans

 

14.9

 

 

 

14.9

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

10.7

 

 

 

10.7

 

Debt securities

 

 

101.5

 

 

101.5

 

Total investment securities

 

337.0

 

148.5

 

 

485.5

 

Total assets

 

$

337.0

 

$

348.5

 

$

 

$

685.5

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

$

101.3

 

$

 

$

101.3

 

Long-term debt

 

 

532.5

 

 

532.5

 

Index swaps

 

 

1.5

 

 

1.5

 

Index futures

 

 

0.4

 

 

0.4

 

Foreign currency forward contracts

 

 

1.5

 

 

1.5

 

Total liabilities

 

$

 

$

637.2

 

$

 

$

637.2

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

$

 

$

 

$

7.3

 

$

7.3

 

 

JCG’s Level 1 fair value measurements consist of trading securities and available-for-sale securities with quoted market prices in active markets. The majority of investment securities classified as Level 2 are debt securities with values derived from evaluated pricing by independent third-party providers. The underlying securities of mutual funds and separate accounts may be denominated in a foreign currency. In some cases, 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. Security prices are adjusted based upon historical impacts for similar post-close activity. These adjustments result in the securities being classified as Level 2 and may also result in movements of securities between Level 1 and Level 2.

 

Transfers are recognized at the end of each reporting period. Transfers from Level 1 and Level 2 classifications for the nine months ended September 30, 2014 and 2013, are summarized as follows (in millions):

 

 

 

September 30,

 

 

 

2014

 

2013

 

Transfers from Level 1 to Level 2

 

$

5.5

 

$

 

Transfers from Level 2 to Level 1

 

$

0.4

 

$

13.4

 

 

JCG’s Level 3 recurring fair value measurements represent redeemable noncontrolling interests in INTECH Investment Management LLC (“INTECH”) as of September 30, 2014.

 

Redeemable noncontrolling interests in INTECH are measured at fair value on a quarterly basis or more frequently if events or circumstances indicate that a material change in the fair value of INTECH has occurred. The fair value of INTECH is determined using a relative value methodology that incorporates observable metrics from publicly traded peer companies as valuation comparables, and adjustments related to investment performance and changes in assets under management. The relative value analysis is prepared internally within JCG’s finance organization by personnel with appropriate valuation experience and credentials. In preparing the analysis, JCG benchmarks valuation metrics such as multiples of earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) against current market observables and recent market transactions of a similar size and nature to ensure that the estimates are reasonable. The analysis is reviewed by senior JCG finance personnel and JCG’s Chief Financial Officer. The analysis is also reviewed by the holders of the noncontrolling interests in INTECH. If the valuation is agreed to by both JCG and the holders of noncontrolling interests, JCG utilizes the analysis to value the redeemable noncontrolling interests.

 

10



 

Significant inputs related to the relative value analysis include INTECH’s trailing twelve-month operating results, performance fees, investment performance and trends in assets under management. In addition, market trading comparables from a relevant publicly traded peer set are included to complete the relative valuation process. Publicly available comparables utilized for the third quarter 2014 valuation analysis ranged from approximately 8.0x to 13.0x EBITDA. Significant increases or decreases in historical INTECH operating results would result in a significantly higher or lower fair value measurement, respectively. Additionally, a significant increase or decrease in market trading comparables would result in a significantly higher or lower fair value measurement, respectively. Generally, any period-over-period change in INTECH performance or level of assets under management in isolation is accompanied by a directionally similar change in the fair value measurement.

 

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.

 

The changes in fair value of JCG’s redeemable noncontrolling interests, which are classified as recurring Level 3 fair value measurements, for the three and nine months ended September 30, 2014 and 2013, are as follows (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Beginning of period fair value

 

$

4.6

 

$

40.3

 

$

7.3

 

$

42.9

 

Distributions

 

(0.2

)

(0.1

)

(0.7

)

(4.3

)

Current earnings

 

0.1

 

0.7

 

0.4

 

2.8

 

Purchase of redeemable noncontrolling interests

 

 

(33.8

)

(0.6

)

(33.8

)

Vesting of noncontrolling interests

 

 

 

 

1.2

 

Change in fair value

 

0.3

 

 

(1.6

)

(1.7

)

End of period fair value

 

$

4.8

 

$

7.1

 

$

4.8

 

$

7.1

 

 

Note 4 — Debt

 

Debt at September 30, 2014, and December 31, 2013, consisted of the following (in millions):

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

value

 

value

 

value

 

value

 

6.700% Senior Notes due 2017

 

$

344.4

 

$

384.3

 

$

344.4

 

$

383.7

 

0.750% Convertible Senior Notes due 2018

 

105.4

 

164.3

 

103.3

 

148.8

 

3.250% Convertible Senior Notes due 2014

 

 

 

58.0

 

61.8

 

6.119% Senior Notes due 2014

 

 

 

38.9

 

39.5

 

Total debt

 

449.8

 

548.6

 

544.6

 

633.8

 

Less: Current maturities

 

 

 

(96.9

)

(101.3

)

Total long-term debt

 

$

449.8

 

$

548.6

 

$

447.7

 

$

532.5

 

 

Fair Value of Debt

 

The fair value of debt was determined using broker quotes and any recent trading activity for each of the notes listed above, which are considered Level 2 inputs.

 

6.119% Senior Notes due 2014

 

On April 15, 2014, the 6.119% Senior Notes due 2014 matured and JCG paid the principal balance of $38.9 million with cash on hand.

 

11



 

3.250% Convertible Senior Notes due 2014

 

On July 15, 2014, the 3.250% Convertible Senior Notes due 2014 matured and JCG paid the principal balance of $60.0 million with cash on hand.

 

0.750% Convertible Senior Notes due 2018

 

The initial conversion rate of the 0.750% Convertible Senior Notes due 2018 (“2018 Convertible Notes”) was 92.06 shares of JCG common stock per $1,000 principal amount of the 2018 Convertible Notes, which is equivalent to an initial conversion price of approximately $10.86 per share of common stock. The initial conversion rate was most recently adjusted during the third quarter 2014 when JCG paid a quarterly cash dividend of $0.08 per share, which was greater than the quarterly dividend of $0.07 per share at the time of issuance. As a result of the quarterly cash dividend paid on August 22, 2014, the conversion rate changed to 92.22 shares of JCG common stock per $1,000 principal amount of 2018 Convertible Notes, equivalent to a conversion price of approximately $10.84 per share of common stock.

 

Holders of the 2018 Convertible Notes may convert the notes early if the last reported sale price of JCG’s common stock is greater than or equal to $14.10 per share of common stock for at least 20 trading days during a period of 30 trading days.

 

Convertible Note Hedge and Warrants

 

In connection with the 2018 Convertible Notes issuance in June 2013, JCG entered into convertible note hedge and warrant transactions which, in combination, are intended to reduce the potential for future dilution to existing shareholders by effectively increasing the initial conversion price of the 2018 Convertible Notes to JCG from $10.86 to $12.60 per share of common stock.

 

The initial $10.86 and $12.60 per share of common stock exercise prices of the call options and warrants, respectively, were adjusted during the third quarter 2014 when JCG paid a quarterly cash dividend of $0.08 per share. As a result of the quarterly cash dividend paid on August 22, 2014, which was greater than the quarterly dividend of $0.07 per share at the time of issuance, the exercise price of the call options changed to $10.84 per share of common stock and the exercise price of the warrants changed to $12.58 per share of common stock.

 

Interest Rate Adjustment Covenant

 

The 6.700% Senior Notes due 2017 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 Investor Services Inc. (“Moody’s”) from Baa3 or by Standard and Poor’s Rating Service (“S&P”) from BBB-, up to a maximum increase of 200 basis points. If the interest rate has been 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. On March 18, 2014, S&P reaffirmed JCG’s credit rating of BBB-, with a negative outlook. On August 27, 2014, Moody’s reaffirmed JCG’s credit rating of Baa3, with a stable outlook.

 

Credit Facility

 

At September 30, 2014, JCG had a $200 million, unsecured, revolving credit facility (“the Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent and swingline lender. The Credit Facility can be used by JCG and its subsidiaries for working capital needs and general corporate purposes. The Credit Facility bears interest on borrowings outstanding at the London Interbank Offered Rate plus a spread, which is based on JCG’s credit rating. JCG is required to pay a quarterly commitment fee on any unused portion of the Credit Facility, which is also based on JCG’s credit rating. Under the Credit Facility, the financing leverage ratio cannot exceed 3.00x, and the interest coverage ratio must equal or exceed 4.00x. At September 30, 2014, JCG was in compliance with all covenants, and there were no borrowings under the Credit Facility at September 30, 2014, or during the nine months ended September 30, 2014. The Credit Facility has a maturity date of November 23, 2018.

 

12



 

Capital Lease Obligations

 

JCG’s capital lease obligations relate to leased computer equipment. The carrying values of the capital lease obligations totaled $1.1 million and $1.8 million at September 30, 2014, and December 31, 2013, respectively, and are included in other accrued liabilities and other non-current liabilities on JCG’s Condensed Consolidated Balance Sheets. The related lease terms extend through 2017.

 

Note 5 — Income Taxes

 

The Company’s effective tax rates for the three and nine months ended September 30, 2014 and 2013, are as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Effective tax rate

 

36.7

%

37.8

%

41.1

%

39.2

%

 

The Company’s effective tax rate decreased by 1.1% for the three months ended September 30, 2014, and increased 1.9% for the nine months ended September 30, 2014. The three-month period decrease and nine-month period increase are due largely to the reversal of unrealized deferred tax assets upon the expiration and vesting of certain equity-based compensation awards and changes in tax reserves and ownership in noncontrolling interests.

 

As of September 30, 2014, JCG had $5.7 million of accrued reserves for income tax contingencies. JCG accrued additional reserves for income tax contingencies in the amount of $0.2 million during the third quarter 2014, creating a net tax expense of $0.1 million. JCG also decreased its income tax contingency reserves by $0.1 million during the third quarter 2014, creating a net tax benefit of $0.1 million. JCG anticipates that its income tax contingency reserves will decrease by approximately $1.3 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 non-current liabilities on JCG’s Condensed Consolidated Balance Sheets.

 

Note 6 — Noncontrolling Interests

 

Noncontrolling interests in net income consisted of the following (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Nonredeemable noncontrolling interests in INTECH

 

$

0.2

 

$

0.3

 

$

0.7

 

$

0.8

 

Nonredeemable noncontrolling interests in consolidated seeded investment products

 

(0.6

)

2.0

 

(0.2

)

2.1

 

Redeemable noncontrolling interests in subsidiaries

 

0.1

 

0.7

 

0.4

 

2.8

 

Total noncontrolling interests in net income

 

$

(0.3

)

$

3.0

 

$

0.9

 

$

5.7

 

 

Nonredeemable Noncontrolling Interests

 

At September 30, 2014, noncontrolling interests that are not subject to redemption rights included employee ownership interests in INTECH and third-party investors’ ownership in consolidated seeded investment products.

 

13



 

Nonredeemable noncontrolling interests as of September 30, 2014, and December 31, 2013, are summarized as follows (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Nonredeemable noncontrolling interests in consolidated seeded investment products

 

$

38.8

 

$

8.8

 

Nonredeemable noncontrolling interests in INTECH

 

5.0