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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 June 30, 2015

 

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 July 17, 2015, there were 186,624,340 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)

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

299.2

 

$

452.5

 

Investment securities

 

355.1

 

344.0

 

Accounts receivable

 

135.8

 

130.9

 

Other current assets

 

81.7

 

59.8

 

Total current assets

 

871.8

 

987.2

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Property and equipment, net

 

34.4

 

31.1

 

Intangible assets, net

 

1,252.3

 

1,257.4

 

Goodwill

 

509.7

 

509.7

 

Other non-current assets

 

93.8

 

7.8

 

Total assets

 

$

2,762.0

 

$

2,793.2

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

9.4

 

$

8.8

 

Accrued compensation and benefits

 

84.9

 

142.8

 

Current portion of long-term debt

 

107.5

 

 

Other accrued liabilities

 

54.7

 

78.0

 

Total current liabilities

 

256.5

 

229.6

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

Long-term debt

 

344.5

 

450.5

 

Deferred income taxes, net

 

489.8

 

478.4

 

Other non-current liabilities

 

45.8

 

41.2

 

Total liabilities

 

1,136.6

 

1,199.7

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

28.6

 

5.4

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

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

 

 

 

Common stock ($0.01 par, 1,000,000,000 shares authorized; 186,857,313 and 185,153,490 shares outstanding, respectively)

 

1.9

 

1.9

 

Retained earnings

 

1,591.3

 

1,540.3

 

Accumulated other comprehensive loss, net of tax

 

(2.1

)

(1.4

)

Total JCG shareholders’ equity

 

1,591.1

 

1,540.8

 

Noncontrolling interests

 

5.7

 

47.3

 

Total equity

 

1,596.8

 

1,588.1

 

Total liabilities, redeemable noncontrolling interests and equity

 

$

2,762.0

 

$

2,793.2

 

 

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

 

2



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in Millions, Except per Share Data)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

233.7

 

$

210.5

 

$

456.3

 

$

418.7

 

Performance fees

 

(4.4

)

(17.3

)

(6.7

)

(33.2

)

Shareowner servicing fees and other

 

42.6

 

38.0

 

85.0

 

75.9

 

Total revenue

 

271.9

 

231.2

 

534.6

 

461.4

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

91.2

 

77.8

 

182.6

 

158.3

 

Long-term incentive compensation

 

19.7

 

12.5

 

39.9

 

24.5

 

Marketing and advertising

 

5.5

 

4.5

 

11.2

 

9.5

 

Distribution

 

34.7

 

32.5

 

68.9

 

65.3

 

Depreciation and amortization

 

7.6

 

6.2

 

15.0

 

12.8

 

General, administrative and occupancy

 

31.1

 

27.0

 

58.9

 

53.4

 

Total operating expenses

 

189.8

 

160.5

 

376.5

 

323.8

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

82.1

 

70.7

 

158.1

 

137.6

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(7.2

)

(8.9

)

(14.5

)

(18.3

)

Investment gains (losses), net

 

(3.1

)

0.9

 

1.3

 

(0.2

)

Other income (expense), net

 

(2.2

)

0.4

 

(2.3

)

1.0

 

Income before taxes

 

69.6

 

63.1

 

142.6

 

120.1

 

Income tax provision

 

(24.7

)

(26.2

)

(51.5

)

(52.1

)

Net income

 

44.9

 

36.9

 

91.1

 

68.0

 

Noncontrolling interests

 

(0.2

)

(0.6

)

(1.8

)

(1.2

)

Net income attributable to JCG

 

$

44.7

 

$

36.3

 

$

89.3

 

$

66.8

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to JCG common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

$

0.19

 

$

0.48

 

$

0.35

 

Diluted

 

$

0.23

 

$

0.19

 

$

0.46

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per share

 

$

0.09

 

$

0.08

 

$

0.17

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on available-for-sale securities

 

$

(1.0

)

$

1.1

 

$

(0.7

)

$

2.3

 

Reclassifications for items included in net income

 

 

(0.3

)

 

(0.5

)

Total other comprehensive income (loss), net of tax

 

(1.0

)

0.8

 

(0.7

)

1.8

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

43.9

 

37.7

 

90.4

 

69.8

 

Comprehensive income attributable to noncontrolling interests

 

(0.2

)

(0.6

)

(1.8

)

(1.2

)

Comprehensive income attributable to JCG

 

$

43.7

 

$

37.1

 

$

88.6

 

$

68.6

 

 

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

 

3



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Millions)

 

 

 

Six months ended

 

 

 

June 30,

 

 

 

2015

 

2014

 

CASH FLOWS PROVIDED BY (USED FOR):

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

91.1

 

$

68.0

 

Adjustments to reconcile net income to net cash used for operating activities:

 

 

 

 

 

Depreciation and amortization

 

15.0

 

12.8

 

Deferred income taxes

 

31.9

 

32.6

 

Amortization of stock-based compensation

 

26.0

 

7.8

 

Investment (gains) losses, net

 

(1.3

)

0.2

 

Amortization of debt discounts, premiums and deferred issuance costs

 

2.1

 

5.8

 

Payment of deferred commissions, net

 

(6.6

)

(2.9

)

Other, net

 

3.9

 

0.1

 

Changes in working capital items:

 

 

 

 

 

Accounts receivable

 

(3.2

)

(11.2

)

Other current assets

 

(54.4

)

(34.5

)

Accounts payable and accrued compensation payable

 

(61.6

)

(26.1

)

Other current and non-current liabilities

 

(14.5

)

(22.7

)

Net operating activities

 

28.4

 

29.9

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(4.6

)

(5.1

)

Purchases and settlements of investment securities

 

(61.9

)

(49.8

)

Proceeds from sales, settlements and maturities of investment securities

 

30.4

 

222.0

 

Escrow of cash for acquisition

 

(88.7

)

 

Net investing activities

 

(124.8

)

167.1

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Repayment of long-term debt

 

 

(38.9

)

Purchase of noncontrolling interests

 

(0.1

)

(1.0

)

Distributions to noncontrolling interests

 

(1.5

)

(1.3

)

Proceeds from stock option exercises and employee stock purchases

 

7.8

 

3.0

 

Excess tax benefit from equity-based compensation

 

7.6

 

0.9

 

Principal payments under capital lease obligations

 

(0.4

)

(0.6

)

Repurchase of common stock

 

(34.7

)

(36.7

)

Dividends paid to JCG shareholders

 

(31.8

)

(28.6

)

Net financing activities

 

(53.1

)

(103.2

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Effect of foreign exchange rate changes

 

(3.8

)

(0.1

)

Net change

 

(153.3

)

93.7

 

At beginning of period

 

452.5

 

344.5

 

At end of period

 

$

299.2

 

$

438.2

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

12.0

 

$

14.2

 

Cash paid for income taxes, net of refunds

 

$

67.5

 

$

55.6

 

 

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

 

4



 

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, 2013

 

188.6

 

$

1.9

 

$

1,496.0

 

$

(1.1

)

$

13.7

 

$

1,510.5

 

Net income

 

 

 

66.8

 

 

0.5

 

67.3

 

Other comprehensive income

 

 

 

 

1.8

 

 

1.8

 

Amortization of stock-based compensation

 

 

 

13.2

 

 

0.8

 

14.0

 

Issuance and forfeitures of restricted stock awards, net

 

2.6

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

0.5

 

 

3.0

 

 

 

3.0

 

Changes in noncontrolling interests in consolidated investment products

 

 

 

 

 

5.6

 

5.6

 

Distributions to noncontrolling interests

 

 

 

 

 

(0.8

)

(0.8

)

Change in fair value of redeemable noncontrolling interests

 

 

 

1.9

 

 

 

1.9

 

Purchase of noncontrolling interests

 

 

 

 

 

(0.4

)

(0.4

)

Repurchase of common stock

 

(3.2

)

 

(36.7

)

 

 

(36.7

)

Dividends paid to JCG shareholders

 

 

 

(28.6

)

 

 

(28.6

)

Balance at June 30, 2014

 

188.5

 

$

1.9

 

$

1,515.6

 

$

0.7

 

$

19.4

 

$

1,537.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

185.2

 

$

1.9

 

$

1,540.3

 

$

(1.4

)

$

47.3

 

$

1,588.1

 

Net income

 

 

 

89.3

 

 

0.6

 

89.9

 

Other comprehensive loss

 

 

 

 

(0.7

)

 

(0.7

)

Amortization of stock-based compensation

 

 

 

18.1

 

 

0.5

 

18.6

 

Amortization of INTECH appreciation rights

 

 

 

 

 

(0.6

)

(0.6

)

Issuance and forfeitures of restricted stock awards, net

 

2.8

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

0.9

 

 

7.8

 

 

 

7.8

 

Tax impact of stock-based compensation

 

 

 

2.5

 

 

 

2.5

 

Changes in noncontrolling interests in consolidated investment products

 

 

 

 

 

(41.1

)

(41.1

)

Distributions to noncontrolling interests

 

 

 

 

 

(0.9

)

(0.9

)

Change in fair value of redeemable noncontrolling interests

 

 

 

(0.2

)

 

 

(0.2

)

Purchase of noncontrolling interests

 

 

 

 

 

(0.1

)

(0.1

)

Repurchase of common stock

 

(2.0

)

 

(34.7

)

 

 

(34.7

)

Dividends paid to JCG shareholders

 

 

 

(31.8

)

 

 

(31.8

)

Balance at June 30, 2015

 

186.9

 

$

1.9

 

$

1,591.3

 

$

(2.1

)

$

5.7

 

$

1,596.8

 

 

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

 

5



 

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 acquisition discussed below. 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, 2014.

 

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, 2014.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) 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. On July 9, 2015, the FASB reaffirmed its April 2015 proposal to defer the effective date of the new revenue standard by one year. The revenue standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. The Company is evaluating the effect of adopting this new accounting standard.

 

In February 2015, the FASB issued amendments to its consolidation standard that eliminate the deferral for investment funds and modify the analysis for determining if an entity is a variable interest entity (“VIE”). The amendments also include a scope exception for money market funds and change how related party interests affect the consolidation analysis of VIEs. The amended VIE analysis changes the assessment of kick-out rights and fees paid to a service provider when decision-making over an entity’s most significant activities has been outsourced. Additionally, limited partnerships and similar entities will be considered VIEs under the amended standard unless limited partners hold substantive kick-out rights or participation rights. The standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting standard.

 

In April 2015, the FASB issued an amendment to its debt standard requiring debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts and premiums. The standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. At June 30, 2015, the Company had approximately $2.3 million of debt issuance costs in other current and other non-current assets on its Condensed Consolidated Balance Sheets that meet the criteria of this amendment.

 

6



 

Note 2 — Acquisition of Kapstream

 

On July 1, 2015, JCG announced and closed the acquisition of a 51% interest in Kapstream Capital Pty Limited (“Kapstream”), a global unconstrained fixed income asset manager. The acquisition serves to further expand JCG’s fixed income capabilities and build-out its global unconstrained fixed income team.

 

The transaction included initial upfront cash consideration of $84.8 million and contingent consideration of $9.6 million, with the contingent consideration payable at 18 and 36 months after acquisition if certain performance targets are achieved. JCG has an option to purchase the remaining 49% interest from Kapstream management on the third and fourth anniversaries of the acquisition. The Company also acquired certain distribution rights for additional cash consideration of $3.9 million. The Company incurred $2.1 million in bank advisory fees and other deal costs during the second quarter 2015 related to the acquisition. The deal costs are included in general, administrative and occupancy on JCG’s Condensed Consolidated Statements of Comprehensive Income. JCG will complete an allocation of the purchase price to the acquired assets during the third quarter 2015.

 

In conjunction with the acquisition, the Company purchased Australian dollars during the second quarter 2015 in anticipation of the transaction which closed on July 1, 2015. As of June 30, 2015, the foreign currency was held in escrow and included in other non-current assets on the Company’s Condensed Consolidated Balance Sheets. During the second quarter there was a mark-to-market loss of $3.4 million on currency translation on those funds. The loss is included in other income (expense), net on JCG’s Condensed Consolidated Statements of Comprehensive Income.

 

Note 3 — Investment Securities

 

JCG’s investment securities as of June 30, 2015, and December 31, 2014, are summarized as follows (in millions):

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Trading securities:

 

 

 

 

 

Seeded investment products

 

$

256.0

 

$

258.3

 

Investments in advised mutual funds

 

4.5

 

4.4

 

Investments related to deferred compensation plans

 

12.4

 

13.0

 

Total trading securities

 

272.9

 

275.7

 

Available-for-sale securities:

 

 

 

 

 

Seeded investment products

 

82.2

 

68.3

 

Total investment securities

 

$

355.1

 

$

344.0

 

 

Trading Securities

 

Seeded investment products classified as trading securities consisted of the following as of June 30, 2015, and December 31, 2014:

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Fair value
(in millions)

 

Number of
products

 

Fair value
(in millions)

 

Number of
products

 

Mutual funds advised by the Company

 

$

155.8

 

17

 

$

191.8

 

17

 

Separately managed accounts

 

100.2

 

32

 

66.5

 

31

 

Total seeded investment products classified as trading securities

 

$

256.0

 

 

 

$

258.3

 

 

 

 

Gains and (losses) recognized on trading securities still held as of June 30, 2015 and 2014, are summarized as follows (in millions):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Gains (losses) on trading securities still held at period end

 

$

(8.8

)

$

7.9

 

$

(3.1

)

$

8.8

 

 

7



 

Available-for-Sale Securities

 

Seeded investment products classified as available-for-sale securities consisted of the following as of June 30, 2015, and December 31, 2014:

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Fair value
(in millions)

 

Number of
products

 

Fair value
(in millions)

 

Number of
products

 

Mutual funds advised by the Company

 

$

82.2

 

42

 

$

68.3

 

40

 

 

The following is a summary of available-for-sale securities as of June 30, 2015, and December 31, 2014 (in millions):

 

 

 

 

 

Gross unrealized
investment

 

Foreign
currency

 

Estimated

 

Carrying

 

 

 

Cost

 

Gains

 

Losses

 

translation

 

fair value

 

value

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Seeded investment products

 

$

84.4

 

$

0.5

 

$

(2.3

)

$

(0.4

)

$

82.2

 

$

82.2

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Seeded investment products

 

$

68.6

 

$

0.4

 

$

(0.6

)

$

(0.1

)

$

68.3

 

$

68.3

 

 

The Company reviewed the gross unrealized losses on available-for-sale securities and determined that the losses were not other-than-temporary. The Company considered the duration, extent and circumstances of any decline in fair value as well as JCG’s intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in the market value. No other-than-temporary impairment charges were recognized in the six months ended June 30, 2015 or 2014.

 

Realized gains and losses related to the disposition of seeded investment products classified as available-for-sale securities were recognized within investment gains (losses), 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 six months ended June 30, 2015 and 2014 (in millions):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Realized gains

 

$

 

$

0.2

 

$

 

$

0.2

 

Realized losses

 

 

 

 

(0.1

)

Net realized gains

 

$

 

$

0.2

 

$

 

$

0.1

 

 

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, commodity markets and foreign currency markets are hedged by using index swaps, index futures, commodity futures and foreign currency forward contracts.

 

JCG was party to the following derivative instruments as of June 30, 2015, and December 31, 2014:

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Number of
contracts

 

Notional value
(in millions)

 

Number of
contracts

 

Notional value
(in millions)

 

Index swaps

 

6

 

$

67.9

 

4

 

$

56.8

 

Futures

 

33

 

$

90.1

 

6

 

$

74.9

 

Foreign currency forward contracts

 

4

 

$

2.8

 

7

 

$

3.6

 

 

8



 

The above derivative instruments are not designated as hedges for accounting purposes. Changes in fair value of the index swaps and futures are recognized in investment gains (losses), 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 income (expense), 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. 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 $1.5 million and $1.7 million in cash collateral with the counterparty of the futures as of June 30, 2015, and December 31, 2014, 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 June 30, 2015, and December 31, 2014 (in millions):

 

 

 

June 30, 2015

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

 

 

offset by

 

Gross amounts

 

 

 

 

 

 

 

derivative

 

offset by cash

 

 

 

 

 

Gross amounts

 

instruments

 

collateral

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

 

 

Futures

 

$

0.8

 

$

(0.1

)

$

 

$

0.7

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Futures

 

$

0.1

 

$

(0.1

)

$

 

$

 

 

 

 

December 31, 2014

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

 

 

offset by

 

Gross amounts

 

 

 

 

 

 

 

derivative

 

offset by cash

 

 

 

 

 

Gross amounts

 

instruments

 

collateral

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

 

 

Index swaps

 

$

0.3

 

$

 

$

 

$

0.3

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Index futures

 

$

1.2

 

$

 

$

(1.2

)

$

 

 

9



 

JCG recognized the following net gains (losses) on hedged seed investments and net gains (losses) on associated futures and index swaps for the three and six months ended June 30, 2015 and 2014 (in millions):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Gains (losses) on hedged seed investments classified as trading securities(1)

 

$

(2.8

)

$

6.0

 

$

1.7

 

$

6.5

 

Gains (losses) on hedged seed investments classified as available-for-sale securities(1)

 

(0.5

)

1.5

 

(0.4

)

3.2

 

Total gains (losses) on hedged seed investments

 

(3.3

)

7.5

 

1.3

 

9.7

 

Gains (losses) on futures

 

2.2

 

(2.8

)

0.6

 

(4.4

)

Losses on index swaps

 

(0.3

)

(5.0

)

(1.7

)

(4.8

)

Total

 

$

(1.4

)

$

(0.3

)

$

0.2

 

$

0.5

 

 


(1)         Includes net gains (losses) associated with hedged equity and fixed income seed investment products. Hedging activity is limited to the systematic market risk associated with equity products and the interest rate risk associated with fixed income products.

 

JCG recognized the following net gains (losses) on hedged seed investments denominated in a foreign currency and net gains on associated foreign currency forward contracts for the three and six months ended June 30, 2015 and 2014 (in millions):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Foreign currency translation gains (losses)

 

$

0.1

 

$

(0.4

)

$

(0.4

)

$

(1.0

)

Foreign currency forward contract gains

 

 

0.1

 

0.2

 

0.8

 

Total

 

$

0.1

 

$

(0.3

)

$

(0.2

)

$

(0.2

)

 

Derivative Instruments in Consolidated Seeded Investment Products

 

Certain of the Company’s consolidated seeded investment products utilize derivative instruments to contribute to the achievement of defined investment objectives. These derivative instruments are classified within investment securities on JCG’s Condensed Consolidated Balance Sheets. Gains and losses on these derivative instruments are classified within investment gains (losses), net on JCG’s Condensed Consolidated Statements of Comprehensive Income. The consolidated seeded investment products posted $3.6 million and $1.8 million in cash collateral with the counterparty of the derivative instruments as of June 30, 2015, and December 31, 2014, respectively.

 

JCG’s consolidated seeded investment products were party to the following derivative instruments as of June 30, 2015, and December 31, 2014:

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Number of
contracts

 

Notional value
(in millions)

 

Number of
contracts

 

Notional value
(in millions)

 

Swaps

 

136

 

$

54.7

 

117

 

$

65.8

 

Futures

 

78

 

$

37.8

 

32

 

$

41.5

 

Foreign currency forward contracts

 

45

 

$

11.4

 

37

 

$

2.4

 

Options

 

81

 

$

0.4

 

29

 

$

0.5

 

 

10



 

The following table illustrates the effect of offsetting derivative instruments within consolidated seeded investment products on JCG’s Condensed Consolidated Balance Sheets as of June 30, 2015 (in millions):

 

 

 

June 30, 2015

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

 

 

offset by

 

Gross amounts

 

 

 

 

 

 

 

derivative

 

offset by cash

 

 

 

 

 

Gross amounts

 

instruments

 

collateral

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

 

 

Swaps

 

$

2.1

 

$

(0.1

)

$

 

$

2.0

 

Futures

 

0.2

 

(0.2

)

 

 

Options

 

0.1

 

(0.1

)

 

 

Total

 

$

2.4

 

$

(0.4

)

$

 

$

2.0

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Swaps

 

$

0.1

 

$

(0.1

)

$

 

$

 

Futures

 

0.2

 

(0.2

)

 

 

Options

 

0.1

 

(0.1

)

 

 

Total

 

$

0.4

 

$

(0.4

)

$

 

$

 

 

The following table illustrates the effect of offsetting derivative instruments within consolidated seeded investment products on JCG’s Condensed Consolidated Balance Sheets as of December 31, 2014 (in millions):

 

 

 

December 31, 2014

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

 

 

offset by

 

Gross amounts

 

 

 

 

 

 

 

derivative

 

offset by cash

 

 

 

 

 

Gross amounts

 

instruments

 

collateral

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

 

 

Swaps

 

$

1.4

 

$

(0.4

)

$

 

$

1.0

 

Futures

 

0.6

 

(0.4

)

 

0.2

 

Options

 

0.2

 

 

 

0.2

 

Total

 

$

2.2

 

$

(0.8

)

$

 

$

1.4

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Swaps

 

$

0.4

 

$

(0.4

)

$

 

$

 

Futures

 

0.4

 

(0.4

)

 

 

Total

 

$

0.8

 

$

(0.8

)

$

 

$

 

 

Investment Gains (Losses), Net

 

Investment gains (losses), net on JCG’s Condensed Consolidated Statements of Comprehensive Income included the following for the three and six months ended June 30, 2015 and 2014 (in millions):

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Seeded investment products

 

$

(4.8

)

$

7.7

 

$

1.1

 

$

7.9

 

Noncontrolling interests in seeded investment products

 

(0.1

)

0.2

 

1.0

 

0.4

 

Investments in advised mutual funds

 

 

0.3

 

0.1

 

 

Index swaps and futures

 

1.9

 

(7.8

)

(1.1

)

(9.2

)

Economic hedge for deferred compensation plans

 

(0.1

)

0.5

 

0.2

 

0.7

 

Investment gains (losses), net

 

$

(3.1

)

$

0.9

 

$

1.3

 

$

(0.2

)

 

11



 

Purchases, Sales, Settlements and Maturities

 

Cash flows related to investment securities for the three and six months ended June 30, 2015 and 2014, are summarized as follows (in millions):

 

 

 

Three months ended June 30,

 

 

 

2015

 

2014

 

 

 

Purchases

 

Sales,

 

Purchases

 

Sales,

 

 

 

and

 

settlements and

 

and

 

settlements and

 

 

 

settlements

 

maturities

 

settlements

 

maturities

 

Trading securities

 

$

(35.6

)

$

23.8

 

$

(18.0

)

$

19.8

 

Available-for-sale securities

 

(10.5

)

 

(0.1

)

80.7

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

Seed capital economic hedge

 

(1.4

)

3.3

 

(8.6

)

1.2

 

Total cash flows

 

$

(47.5

)

$

27.1

 

$

(26.7

)

$

101.7

 

 

 

 

Six months ended June 30,

 

 

 

2015

 

2014

 

 

 

Purchases

 

Sales,

 

Purchases

 

Sales,

 

 

 

and

 

settlements and

 

and

 

settlements and

 

 

 

settlements

 

maturities

 

settlements

 

maturities

 

Trading securities

 

$

(46.0

)

$

25.9

 

$

(32.1

)

$

116.2

 

Available-for-sale securities

 

(10.8

)

 

(0.2

)

97.9

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

Seed capital economic hedge

 

(5.1

)

4.5

 

(17.5

)

7.9

 

Total cash flows

 

$

(61.9

)

$

30.4

 

$

(49.8

)

$

222.0

 

 

Note 4 — 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 June 30, 2015 (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

 

$

69.6

 

$

134.8

 

$

 

$

204.4

 

Futures

 

0.8

 

 

 

0.8

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

177.0

 

79.0

 

 

256.0

 

Investments in advised mutual funds

 

4.5

 

 

 

4.5

 

Investments related to deferred compensation plans

 

12.4

 

 

 

12.4

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

82.2

 

 

 

82.2

 

Total investment securities

 

276.1

 

79.0

 

 

355.1

 

Total assets

 

$

346.5

 

$

213.8

 

$

 

$

560.3

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Futures

 

$

0.1

 

$

 

$

 

$

0.1

 

Current portion of long-term debt(1)

 

 

188.3

 

 

188.3

 

Long-term debt(1)

 

 

376.9

 

 

376.9

 

VelocityShares contingent consideration

 

 

 

18.5

 

18.5

 

Total liabilities

 

$

0.1

 

$

565.2

 

$

18.5

 

$

583.8

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests:

 

 

 

 

 

 

 

 

 

Consolidated seeded investment products

 

$

9.6

 

$

11.8

 

$

 

$

21.4

 

INTECH

 

 

 

7.2

 

7.2

 

Total redeemable noncontrolling interests

 

$

9.6

 

$

11.8

 

$

7.2

 

$

28.6

 

 


(1)         Carried at amortized cost and disclosed at fair value.

 

12



 

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

 

$

7.7

 

$

292.5

 

$

 

$

300.2

 

Index swaps

 

 

0.3

 

 

0.3

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

136.6

 

121.7

 

 

258.3

 

Investments in advised mutual funds

 

4.4

 

 

 

4.4

 

Investments related to deferred compensation plans

 

13.0

 

 

 

13.0

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

68.3

 

 

 

68.3

 

Total investment securities

 

222.3

 

121.7

 

 

344.0

 

Total assets

 

$

230.0

 

$

414.5

 

$

 

$

644.5

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt(1)

 

$

 

$

558.0

 

$

 

$

558.0

 

VelocityShares contingent consideration

 

 

 

17.9

 

17.9

 

Index futures

 

1.2

 

 

 

1.2

 

Total liabilities

 

$

1.2

 

$

558.0

 

$

17.9

 

$

577.1

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests in INTECH

 

$

 

$

 

$

5.4

 

$

5.4

 

 


(1)         Carried at amortized cost and disclosed at fair value.

 

Level 1 Fair Value Measurements

 

JCG’s Level 1 fair value measurements consist mostly of seeded investment products, investments in advised mutual funds, investments in money market funds and investments related to deferred compensation plans with quoted market prices in active markets. The fair value level of seeded investment products classified as trading securities is determined by the underlying securities of the product. The fair value level of equity-method and unconsolidated seeded investment products is determined using the respective net asset value (“NAV”) of each product. All seeded investment products that use the NAV to determine their fair value are classified as Level 1 and primarily represent seeded mutual funds where JCG’s ownership level is under 50%.

 

Level 2 Fair Value Measurements

 

JCG’s Level 2 fair value measurements consist mostly of cash equivalents, seeded investment products and JCG’s long-term debt. Cash equivalents are short-term, highly liquid investments with an initial maturity of three months or less when purchased and consist primarily of commercial paper and certificates of deposits. The fair value of consolidated seeded investment products where JCG’s ownership level is above 50% is determined by the underlying securities of the product. The fair value of JCG’s long-term debt is determined using broker quotes and recent trading activity, which are considered Level 2 inputs.

 

Level 3 Fair Value Measurements

 

JCG’s Level 3 recurring fair value measurements largely represent redeemable noncontrolling interests in INTECH Investment Management LLC (“INTECH”) and contingent cash consideration related to the acquisition of VS Holdings Inc., the parent company of VelocityShares, LLC (“VelocityShares”).

 

INTECH

 

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 valuation 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 valuation 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

 

13



 

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 uses the analysis to value the redeemable noncontrolling interests.

 

Significant inputs related to the valuation analysis include INTECH’s trailing 12-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 valuation process. Publicly available comparables used for the second quarter 2015 valuation analysis ranged from approximately 8.0x to 14.0x 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.

 

VelocityShares

 

Contingent cash consideration was a component of the purchase price of VelocityShares. The contingent consideration is payable on the first, second, third and fourth anniversaries of the acquisition, in amounts up to $10 million each for the first and second anniversaries, and $8 million each for the third and fourth anniversaries. The payments are contingent on certain VelocityShares’ exchange-traded products reaching defined net revenue targets. The fair value of the contingent cash consideration is calculated on a quarterly basis by forecasting net exchange-traded product revenue, as defined by the purchase agreement, over the contingency period, and determining whether targets are met given forecasted VelocityShares operating results. Forecasted contingent payments are then discounted back to the valuation date. Significant unobservable inputs used in the valuation are limited to forecasted gross revenues and certain expense items, which are deducted from these revenues. Increases in forecasted net revenue would increase the fair value of the consideration, subject to payment limitations, while decreases in net revenues would decrease the fair value.

 

Nonrecurring Level 3 Fair Value Measurements

 

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.

 

14



 

The changes in fair value of JCG’s Level 3 items, for the three and six months ended June 30, 2015 and 2014, are as follows (in millions):

 

 

 

Three months ended June 30,

 

 

 

2015

 

2014

 

 

 

Redeemable
noncontrolling
interests in
INTECH

 

VelocityShares
contingent
consideration

 

Seeded
investment
products

 

Redeemable
noncontrolling
interests in
subsidiaries

 

Beginning of period fair value

 

$

5.3

 

$

18.1

 

$

0.2

 

$

4.8

 

Distributions

 

(0.4

)

 

 

(0.4

)

Current earnings

 

0.1

 

 

 

0.2

 

Amortization of INTECH appreciation rights

 

1.9

 

 

 

 

Change in fair value

 

0.3

 

0.4

 

(0.2

)

 

End of period fair value

 

$

7.2

 

$

18.5

 

$

 

$

4.6

 

 

 

 

Six months ended June 30,

 

 

 

2015

 

2014

 

 

 

Redeemable
noncontrolling
interests in
INTECH

 

VelocityShares
contingent
consideration

 

Redeemable
noncontrolling
interests in
subsidiaries

 

Beginning of period fair value

 

$

5.4

 

$

17.9

 

$

7.3

 

Distributions

 

(0.6

)

 

(0.5

)

Current earnings

 

0.3

 

 

0.3

 

Purchase of redeemable noncontrolling interests

 

 

 

(0.6

)

Amortization of INTECH appreciation rights

 

1.9

 

 

 

Change in fair value

 

0.2

 

0.6

 

(1.9

)

End of period fair value

 

$

7.2

 

$

18.5

 

$

4.6

 

 

Transfers Between Fair Value Levels

 

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 affecting 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.

 

Additionally, the deconsolidation of a seeded investment product can cause investment securities held by the product to be removed from Level 2. Upon deconsolidation, the entire seeded investment product is valued using the NAV rather than valued using its underlying securities. Generally, seeded investment products that use the NAV to determine their fair value are classified as Level 1. During the first quarter 2015, the Global Unconstrained Bond Fund in the Company’s international trust was deconsolidated and its $44.3 million of Level 2 assets were reclassified to Level 1.

 

Transfers are recognized at the end of each reporting period. Transfers from Level 1 and Level 2 classifications for the six months ended June 30, 2015 and 2014, are summarized as follows (in millions):

 

 

 

June 30,

 

 

 

2015

 

2014

 

Transfers from Level 1 to Level 2

 

$

 

$

 

Transfers from Level 2 to Level 1

 

$

47.2

 

$

 

 

15



 

Note 5 — Debt

 

Debt at June 30, 2015, and December 31, 2014, consisted of the following (in millions):

 

 

 

June 30, 2015

 

December 31, 2014

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

value

 

value

 

value

 

value

 

6.700% Senior Notes due 2017

 

$

344.5

 

$

376.9

 

$

344.5

 

$