Toggle SGML Header (+)


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, 2018

 

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 001-38103

 

 

Janus Henderson Group plc

(Exact name of registrant as specified in its charter)

 

Jersey, Channel Islands

 

98-1376360

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

201 Bishopsgate EC2M 3AE
United Kingdom

 

N/A

(Address of principal executive offices)

 

(Zip Code)

 

+44 (0) 20 7818 1818

(Registrant’s telephone number, including area code)

 

N/A

(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 every Interactive Data File required to be submitted 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 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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  o

Accelerated Filer  o

Non-Accelerated Filer  x

Smaller Reporting Company  o

 

 

 

Emerging Growth Company   o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 26, 2018, there were 198,632,634 shares of the Group’s common stock, $1.50 par value per share, issued and outstanding.

 

 

 


 

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

 

JANUS HENDERSON GROUP PLC

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in Millions, Except Share Data)

 

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

754.8

 

$

760.1

 

Investment securities

 

310.3

 

280.4

 

Fees and other receivables

 

333.3

 

419.6

 

OEIC and unit trust receivables

 

174.4

 

239.9

 

Assets of consolidated VIEs:

 

 

 

 

 

Cash and cash equivalents

 

41.3

 

34.1

 

Investment securities

 

303.9

 

419.7

 

Other current assets

 

10.0

 

12.9

 

Other current assets

 

68.4

 

75.9

 

Total current assets

 

1,996.4

 

2,242.6

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

Property, equipment and software, net

 

65.0

 

70.6

 

Intangible assets, net

 

3,146.2

 

3,204.8

 

Goodwill

 

1,495.1

 

1,533.9

 

Retirement benefit asset, net

 

204.9

 

199.3

 

Other non-current assets

 

15.9

 

21.5

 

Total assets

 

$

6,923.5

 

$

7,272.7

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

220.9

 

$

292.9

 

Current portion of accrued compensation, benefits and staff costs

 

287.1

 

398.7

 

Current portion of long-term debt

 

 

57.2

 

OEIC and unit trust payables

 

166.7

 

234.8

 

Liabilities of consolidated VIEs:

 

 

 

 

 

Accounts payable and accrued liabilities

 

15.0

 

21.5

 

Total current liabilities

 

689.7

 

1,005.1

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

Accrued compensation, benefits and staff costs

 

48.2

 

23.0

 

Long-term debt

 

319.8

 

322.0

 

Deferred tax liabilities, net

 

744.8

 

752.6

 

Retirement benefit obligations, net

 

4.5

 

4.6

 

Other non-current liabilities

 

78.8

 

99.6

 

Total liabilities

 

1,885.8

 

2,206.9

 

 

 

 

 

 

 

Commitments and contingencies (See Note 13)

 

 

 

 

 

 

 

 

 

 

 

REDEEMABLE NONCONTROLLING INTERESTS

 

139.2

 

190.3

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Common stock ($1.50 par, 480,000,000 shares authorized and 198,632,634 and 200,406,138 shares issued and outstanding, respectively)

 

297.9

 

300.6

 

Additional paid-in-capital

 

3,800.1

 

3,842.9

 

Treasury shares (4,534,011 and 4,071,284 shares held, respectively)

 

(171.2

)

(155.8

)

Accumulated other comprehensive loss, net of tax

 

(377.8

)

(301.8

)

Retained earnings

 

1,322.9

 

1,151.4

 

Total shareholders’ equity

 

4,871.9

 

4,837.3

 

Nonredeemable noncontrolling interests

 

26.6

 

38.2

 

Total equity

 

4,898.5

 

4,875.5

 

Total liabilities, redeemable noncontrolling interests and equity

 

$

6,923.5

 

$

7,272.7

 

 

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

 

2


 

JANUS HENDERSON GROUP PLC

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in Millions, Except per Share Data)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

Management fees

 

$

498.7

 

$

481.8

 

$

1,495.1

 

$

982.8

 

Performance fees

 

(6.0

)

(2.1

)

3.6

 

70.4

 

Shareowner servicing fees

 

33.1

 

30.2

 

96.4

 

40.1

 

Other revenue

 

55.4

 

57.0

 

166.2

 

103.2

 

Total revenue

 

581.2

 

566.9

 

1,761.3

 

1,196.5

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

159.5

 

176.7

 

457.2

 

370.7

 

Long-term incentive plans

 

61.1

 

50.9

 

156.3

 

114.6

 

Distribution expenses

 

112.3

 

112.3

 

344.3

 

235.4

 

Investment administration

 

12.2

 

11.7

 

35.3

 

31.6

 

Marketing

 

7.1

 

8.1

 

25.1

 

21.4

 

General, administrative and occupancy

 

59.9

 

54.2

 

191.3

 

146.6

 

Depreciation and amortization

 

20.8

 

14.8

 

52.0

 

30.5

 

Total operating expenses

 

432.9

 

428.7

 

1,261.5

 

950.8

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

148.3

 

138.2

 

499.8

 

245.7

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(4.0

)

(4.7

)

(11.7

)

(7.8

)

Investment gains (losses), net

 

(8.3

)

6.1

 

(25.6

)

15.0

 

Other non-operating income, net

 

2.3

 

8.7

 

55.1

 

8.0

 

Income before taxes

 

138.3

 

148.3

 

517.6

 

260.9

 

Income tax provision

 

(33.2

)

(46.1

)

(118.8

)

(74.6

)

Net income

 

105.1

 

102.2

 

398.8

 

186.3

 

Net loss (income) attributable to noncontrolling interests

 

6.1

 

(2.7

)

18.2

 

(2.5

)

Net income attributable to JHG

 

$

111.2

 

$

99.5

 

$

417.0

 

$

183.8

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to JHG common shareholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.55

 

$

0.49

 

$

2.08

 

$

1.20

 

Diluted

 

$

0.55

 

$

0.49

 

$

2.07

 

$

1.19

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

$

(22.6

)

$

41.6

 

$

(74.6

)

$

116.1

 

Net unrealized gains (losses) on available-for-sale securities

 

 

0.2

 

 

(0.2

)

Other comprehensive income (loss), net of tax

 

(22.6

)

41.8

 

(74.6

)

115.9

 

Other comprehensive loss attributable to noncontrolling interests

 

0.3

 

2.8

 

1.1

 

19.1

 

Other comprehensive income (loss) attributable to JHG

 

$

(22.3

)

$

44.6

 

$

(73.5

)

$

135.0

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

82.5

 

$

144.0

 

$

324.2

 

$

302.2

 

Total comprehensive loss attributable to noncontrolling interests

 

6.4

 

0.1

 

19.3

 

16.6

 

Total comprehensive income attributable to JHG

 

$

88.9

 

$

144.1

 

$

343.5

 

$

318.8

 

 

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

 

3


 

JANUS HENDERSON GROUP PLC

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Millions)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2018

 

2017

 

CASH FLOWS PROVIDED BY (USED FOR):

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

398.8

 

$

186.3

 

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

 

 

 

 

 

Depreciation and amortization

 

52.0

 

30.5

 

Stock-based compensation plan expense

 

64.5

 

57.3

 

Investment (gains) losses, net

 

25.6

 

(15.0

)

Gain from BNP Paribas transaction

 

(22.3

)

 

Dai-ichi option fair value adjustments

 

(26.8

)

 

Contributions to pension plans in excess of costs recognized

 

(13.2

)

(14.7

)

Other, net

 

(2.6

)

(5.1

)

Changes in operating assets and liabilities:

 

 

 

 

 

OEIC and unit trust receivables and payables

 

(2.6

)

(4.8

)

Other assets

 

109.9

 

(88.1

)

Other accruals and liabilities

 

(155.8

)

71.8

 

Net operating activities

 

427.5

 

218.2

 

Investing activities:

 

 

 

 

 

Cash acquired from acquisition

 

 

417.2

 

Proceeds from (purchases of):

 

 

 

 

 

Property, equipment and software

 

(17.6

)

(9.1

)

Investment securities, net

 

38.1

 

102.6

 

Investment securities by consolidated seeded investment products, net

 

25.6

 

23.9

 

Proceeds from BNP Paribas transaction, net

 

36.5

 

 

Dividends received from equity-method investments

 

 

0.2

 

Net cash received (paid) on settled hedges

 

1.0

 

(16.3

)

Proceeds from sale of Volantis

 

4.3

 

0.5

 

Net investing activities

 

87.9

 

519.0

 

Financing activities:

 

 

 

 

 

Proceeds from settlement of convertible note hedge

 

 

59.3

 

Settlement of stock warrant

 

 

(47.8

)

Proceeds from issuance of option

 

 

25.7

 

Proceeds from stock-based compensation plans

 

0.4

 

2.4

 

Purchase of common stock for stock-based compensation plans

 

(85.2

)

(44.3

)

Purchase of common stock for share buyback program

 

(49.9

)

 

Dividends paid to shareholders

 

(205.9

)

(192.3

)

Repayment of long-term debt

 

(95.3

)

(50.2

)

Payment of contingent consideration

 

(22.8

)

 

Distributions to noncontrolling interests

 

(3.6

)

(0.8

)

Third-party redemptions in consolidated seeded investment products, net

 

(25.6

)

(122.7

)

Principal payments under capital lease obligations

 

(1.1

)

(0.4

)

Net financing activities

 

(489.0

)

(371.1

)

Cash and cash equivalents:

 

 

 

 

 

Effect of foreign exchange rate changes

 

(24.5

)

10.4

 

Net change

 

1.9

 

376.5

 

At beginning of period

 

794.2

 

323.2

 

At end of period

 

$

796.1

 

$

699.7

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

14.8

 

$

8.0

 

Cash paid for income taxes, net of refunds

 

$

143.9

 

$

55.7

 

 

 

 

 

 

 

Reconciliation of cash and cash equivalents

 

 

 

 

 

Cash and cash equivalents

 

$

754.8

 

$

650.1

 

Cash and cash equivalents held in consolidated VIEs

 

41.3

 

49.6

 

Total cash and cash equivalents

 

$

796.1

 

$

699.7

 

 

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

 

4


 

JANUS HENDERSON GROUP PLC

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

(Amounts in Millions)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

other

 

 

 

Nonredeemable

 

 

 

 

 

Number

 

Common

 

paid-in-

 

Treasury

 

comprehensive

 

Retained

 

noncontrolling

 

Total

 

 

 

of shares

 

stock

 

capital

 

shares

 

loss

 

earnings

 

interests

 

equity

 

Balance at December 31, 2016

 

1,131.8

 

$

234.4

 

$

1,237.9

 

$

(155.1

)

$

(434.5

)

$

764.8

 

$

44.8

 

$

1,692.3

 

Share consolidation

 

(1,018.6

)

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

183.8

 

1.6

 

185.4

 

Other comprehensive income (loss)

 

 

 

 

 

135.0

 

 

(19.1

)

115.9

 

Dividends paid to shareholders

 

 

 

 

 

 

(192.3

)

 

(192.3

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(0.6

)

(0.6

)

Fair value adjustments to Intech redeemable noncontrolling interests

 

 

 

 

 

 

(0.2

)

 

(0.2

)

Derivative instruments acquired on acquisition

 

 

 

31.4

 

 

 

 

 

31.4

 

Noncontrolling interests recognized on acquisition

 

 

 

 

 

 

 

16.5

 

16.5

 

Redemptions of convertible debt and settlement of derivative instruments

 

 

 

(6.4

)

 

 

 

 

(6.4

)

Tax impact of convertible debt redemptions and settlement of derivative instruments

 

 

 

(5.7

)

 

 

 

 

(5.7

)

Purchase of common stock for stock-based compensation plans

 

 

 

 

(44.3

)

 

 

 

(44.3

)

Issuance of common stock

 

87.2

 

130.8

 

2,551.2

 

 

 

 

 

2,682.0

 

Redenomination and reduction of par value of stock

 

 

(64.6

)

64.6

 

 

 

 

 

 

Acquisition adjustment in relation to unvested awards

 

 

 

(81.3

)

 

 

 

 

(81.3

)

Vesting of stock-based compensation plans

 

 

 

(17.8

)

40.2

 

 

(22.4

)

 

 

Stock-based compensation plan expense

 

 

 

47.4

 

 

 

9.9

 

 

57.3

 

Proceeds from stock-based compensation plans

 

 

 

2.4

 

 

 

 

 

2.4

 

Balance at September 30, 2017

 

200.4

 

$

300.6

 

$

3,823.7

 

$

(159.2

)

$

(299.5

)

$

743.6

 

$

43.2

 

$

4,452.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

200.4

 

$

300.6

 

$

3,842.9

 

$

(155.8

)

$

(301.8

)

$

1,151.4

 

$

38.2

 

$

4,875.5

 

Cumulative-effect adjustment

 

 

 

 

 

(2.5

)

2.7

 

 

0.2

 

Balance at December 31, 2017 - Adjusted

 

200.4

 

$

300.6

 

$

3,842.9

 

$

(155.8

)

$

(304.3

)

$

1,154.1

 

$

38.2

 

$

4,875.7

 

Net income

 

 

 

 

 

 

417.0

 

(8.4

)

408.6

 

Other comprehensive loss

 

 

 

 

 

(73.5

)

 

 

(73.5

)

Dividends paid to shareholders

 

 

 

0.1

 

 

 

(201.1

)

 

(201.0

)

Share buyback program

 

(1.8

)

(2.7

)

 

 

 

(47.2

)

 

(49.9

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(3.2

)

(3.2

)

Fair value adjustments to redeemable noncontrolling interests

 

 

 

 

 

 

0.1

 

 

0.1

 

Redemptions of convertible debt

 

 

 

(38.0

)

 

 

 

 

(38.0

)

Purchase of common stock for stock-based compensation plans

 

 

 

(37.3

)

(47.9

)

 

 

 

(85.2

)

Vesting of stock-based compensation plans

 

 

 

(32.5

)

32.5

 

 

 

 

 

Stock-based compensation plan expense

 

 

 

64.5

 

 

 

 

 

64.5

 

Proceeds from stock-based compensation plans

 

 

 

0.4

 

 

 

 

 

0.4

 

Balance at September 30, 2018

 

198.6

 

$

297.9

 

$

3,800.1

 

$

(171.2

)

$

(377.8

)

$

1,322.9

 

$

26.6

 

$

4,898.5

 

 

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

 

5


 

JANUS HENDERSON GROUP PLC

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1 — Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation

 

In the opinion of management of Janus Henderson Group plc (“JHG” or “the Group”), the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary to fairly state the financial position, results of operations and cash flows of JHG in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such 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. These financial statements should be read in conjunction with the annual consolidated financial statements and notes presented in JHG’s Annual Report on Form 10-K for the year ended December 31, 2017. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying financial statements through the issuance date and are included in the notes to the condensed consolidated financial statements.

 

On May 30, 2017, JHG completed a merger of equals with Janus Capital Group Inc. (“JCG”) (the “Merger”). As a result of the Merger, JCG and its consolidated subsidiaries became subsidiaries of JHG.

 

Recent Accounting Pronouncements Adopted

 

Revenue Recognition

 

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 at 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 revenue standard became effective on January 1, 2018.

 

In March 2016, the FASB issued an amendment to its principal-versus-agent guidance in the FASB’s new revenue standard. The key provisions of the amendment are assessing the nature of the entity’s promise to the customer, identifying the specified goods or services, and applying the control principle and indicators of control. The amendment became effective on January 1, 2018. In addition, entities are required to adopt the amendment by using the same transition method they used to adopt the new revenue standard.

 

The Group adopted the new revenue recognition standard, along with the updated principal-versus-agent guidance, effective January 1, 2018, using the retrospective method, which required adjustments to be reflected as of January 1, 2016. In connection with the adoption of this guidance, the Group determined that the new guidance does not change the timing of when the Group recognizes revenue. However, management did conclude that certain distribution and servicing fees earned from its U.S. mutual funds associated with mutual fund transfer agent, accounting, shareholder servicing and participant recordkeeping activities could no longer be reported net of the expenses paid to third-party intermediaries that perform such services. Under the new guidance, the Group is deemed to have control over the distribution and servicing activities before they are transferred to the U.S. mutual funds. As such, distribution and servicing fees collected from the Group’s U.S. mutual funds are reported separately from distribution and servicing fees paid to third-party intermediaries on the Group’s Condensed Consolidated Statements of Comprehensive Income.

 

6


 

The adoption of the standard increased management fees, other revenue and distribution expenses on the Group’s Condensed Consolidated Statements of Comprehensive Income as follows (in millions):

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Increase in:

 

 

 

 

 

 

 

 

 

Management fees

 

$

4.7

 

$

4.1

 

$

12.8

 

$

11.6

 

Other revenue

 

$

26.2

 

$

25.4

 

$

77.7

 

$

33.2

 

Distribution expenses

 

$

30.9

 

$

29.5

 

$

90.5

 

$

44.8

 

 

The adoption of the standard did not have an impact to net income attributable to JHG on the Group’s Condensed Consolidated Statements of Comprehensive Income.

 

Financial Instruments

 

In January 2016, the FASB issued amendments to its financial instruments standard, including changes relating to the accounting for equity investments and the presentation and disclosure requirements for financial instruments. Under the amended guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values. The amended guidance also requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or market value) and form of financial asset (e.g., loans, securities). The standard became effective on January 1, 2018.

 

On January 1, 2018, the Group adopted the financial instruments accounting standard on a modified retrospective basis. The accounting standard required the Group to reclassify a $2.5 million unrealized gain related to available-for-sale securities in accumulated other comprehensive loss to retained earnings as a beginning of period cumulative-effect adjustment. As of January 1, 2018, the balance in accumulated other comprehensive loss related to available-for-sale securities is zero, and gains and losses associated with all equity securities are recognized in investment gains (losses), net on the Group’s Condensed Consolidated Statements of Comprehensive Income.

 

Retirement Benefit Plans

 

In March 2017, the FASB issued an Accounting Standards Update (“ASU”) that requires the bifurcation of net periodic pension costs. The service cost component will be presented with other employee compensation costs in operating income, while the other components of net periodic pension costs will be presented separately outside of operations. The guidance became effective on January 1, 2018. The impact to other components of net periodic pension costs (presented separately outside of operating expenses) for the nine months ended September 30, 2018 was $4.7 million.

 

Statements of Cash Flows

 

In August 2016, the FASB issued an ASU to clarify guidance on the classification of certain cash receipts and cash payments in the statements of cash flows. The FASB issued the ASU with the intent of reducing diversity in practice regarding eight types of cash flows. The ASU became effective on January 1, 2018. The adoption of the new accounting standard did not have a material impact on the Group’s Condensed Consolidated Statements of Cash Flows.

 

Fair Value Measurement Disclosures

 

In August 2018, the FASB issued an ASU in order to modify the disclosure requirements on fair value measurements. The ASU provides for the removal of disclosure requirements related to (1) transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfer between levels and (3) the valuation processes for Level 3 fair value measurements. The ASU modifies disclosure requirements to report liquidation events for investments in entities that calculate net asset value. The ASU also adds requirements related to unrealized gains and losses included in other comprehensive income, and requirements related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

 

7


 

The ASU is effective January 1, 2020, and allows for early adoption of the disclosure removals and modifications separate from the additions. The Group early adopted the removal and modification provisions effective September 30, 2018, has removed its disclosures related to Level 1 and Level 2 transfers. The Group is currently evaluating the impact of adopting the disclosure additions.

 

Recent Accounting Pronouncements Not Yet Adopted

 

Leases

 

In February 2016, the FASB issued a new standard on accounting for leases. The new standard represents a significant change to lease accounting and introduces a lessee model that brings most leases onto the balance sheet. The standard also aligns certain of the underlying principles of the new lessor model with those in the FASB’s new revenue recognition standard. Furthermore, the new standard addresses other concerns related to the current leases model. The standard is effective for fiscal years beginning after December 15, 2018.

 

The Group is evaluating the effect of adopting this new accounting standard and has focused its efforts on determining the impact of the guidance on its property leases. The Group’s property leases represent the vast majority of its lease commitments, with office spaces in Denver and London representing a significant portion of its property. The Group will adopt the guidance as of January 1, 2019, using the modified retrospective approach. Comparative prior periods will not be adjusted upon adoption, and the Group will utilize the practical expedients available under the guidance. Specifically, the Group will not (1) reassess existing contracts for embedded leases, (2) reassess existing lease agreements for finance or operating classification, and (3) reassess existing lease agreements in consideration of initial direct costs. Although subject to further analysis, the Group anticipates recording right of use assets of approximately $180 million upon adoption of the guidance and a corresponding lease liability of approximately the same amount.

 

Hedge Accounting

 

In August 2017, the FASB issued an ASU that amends hedge accounting. The ASU expands the strategies eligible for hedge accounting, changes how companies assess hedge effectiveness and will require new disclosures and presentation. The ASU is effective on January 1, 2019, for calendar year-end companies; however, early adoption is permitted. The Group is evaluating the effect of adopting this new accounting standard.

 

Retirement Benefit Plans

 

In August 2018, the FASB issued an ASU that modifies the disclosure requirements for employers that sponsor defined benefit pension plans. The ASU removes, adds and clarifies a number of disclosure requirements related to sponsored benefit plans. The standard is effective January 1, 2021, for calendar year-end companies, and early adoption is permitted. The Group is evaluating the effect of adopting this new accounting standard.

 

Implementation Costs — Cloud Computing Arrangements

 

In August 2018, the FASB issued an ASU that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU is effective January 1, 2020, for calendar year-end companies, and for the interim periods within those years. Early adoption is permitted. The ASU allows either a retrospective or prospective approach to all implementation costs incurred after adoption. The Group is evaluating the effect of adopting this new accounting standard.

 

Revenue Recognition Policy — Updated January 1, 2018

 

Revenue is measured and recognized based on the five-step process outlined in US GAAP. Revenue is determined based on the transaction price negotiated with the customer, net of rebates. Management fees, performance fees, shareowner servicing fees and other revenue are derived from providing professional services to manage investment products.

 

Management fees are earned over time as services are provided and are generally based on a percentage of the market value of assets under management (“AUM”). These fees are calculated as a percentage of either the daily, month-end or quarter-end average asset balance in accordance with contractual agreements.

 

8


 

Performance fees are specified in certain fund and client contracts and are based on investment performance either on an absolute basis or compared to an established index over a specified period of time. Performance fees are generated on certain management contracts when performance hurdles or other specified criteria are achieved. Performance fees for all fund ranges and separate accounts are recognized when it is probable that a significant reversal of revenue recognized will not occur in future periods. There are no performance fee contracts where revenue can be clawed back. There are no cumulative revenues recognized that would be reversed if all of the existing investments became worthless.

 

Management fees are primarily received monthly or quarterly, while performance fees are usually received monthly, quarterly or annually by the Group, although the frequency of receipt varies between agreements. Management and performance fee revenue not yet received is recognized within fees and other receivables on the Group’s Condensed Consolidated Balance Sheets.

 

Shareowner servicing fees are earned for services rendered related to transfer agent and administrative activities performed for investment products. These services are transferred over time and are generally based on a percentage of the market value of AUM.

 

Other revenue includes distribution and servicing fees earned from U.S. mutual funds associated with mutual fund transfer agent, accounting, shareholder servicing and participant recordkeeping activities. These services are transferred over time and are generally based on a percentage of the market value of AUM.

 

U.S. Mutual Fund Performance Fees

 

The investment management fee paid by each U.S. mutual fund subject to a performance fee is the base management fee plus or minus a performance fee adjustment as determined by the relative investment performance of the fund compared to a specified benchmark index. Under the performance-based fee structure, the investment advisory fee paid by each fund consists of two components: (1) a base fee calculated by applying the contractual fixed rate of the advisory fee to the fund’s average daily net assets during the previous month, plus or minus (2) a performance fee adjustment calculated by applying a variable rate of up to 0.15% to the fund’s average daily net assets during the performance measurement period. The performance measurement period begins as a trailing period ranging from 12 to 18 months, and each subsequent month is added to each successive performance measurement period until a 36-month period is achieved. At that point, the measurement period becomes a rolling 36-month period.

 

The addition of performance fees to all funds without such fees is subject to the approval of both a majority of the shareholders of such funds and the funds’ independent board of trustees.

 

Principal versus Agent

 

The Group utilizes third-party intermediaries to fulfill certain performance obligations in its revenue agreements. Generally, JHG is deemed to be the principal in these arrangements because the Group controls the investment management and other related services before they are transferred to customers. Such control is evidenced by the Group’s primary responsibility to customers, the ability to negotiate the third-party contract price and select and direct third-party service providers, or a combination of these factors. Therefore, distribution and service fee revenues and the related third-party distribution and service expenses are reported on a gross basis.

 

Note 2 — Consolidation

 

Variable Interest Entities

 

Consolidated Variable Interest Entities

 

JHG’s consolidated variable interest entities (“VIEs”) as of September 30, 2018, and December 31, 2017, include certain consolidated seeded investment products in which the Group has an investment and acts as the investment manager. The assets of these VIEs are not available to JHG or the creditors of JHG. JHG may not, under any circumstances, access cash and cash equivalents held by consolidated VIEs to use in its operating activities or otherwise. In addition, the investors in these VIEs have no recourse to the credit of the Group.

 

9


 

Unconsolidated Variable Interest Entities

 

At September 30, 2018, and December 31, 2017, JHG’s carrying values of investment securities included on the Condensed Consolidated Balance Sheets pertaining to unconsolidated VIEs were $3.7 million and $6.2 million, respectively. JHG’s total exposure to unconsolidated VIEs represents the value of its economic ownership interest in the investment securities.

 

Voting Rights Entities

 

Consolidated Voting Rights Entities

 

The following table presents the balances related to consolidated voting rights entities (“VREs”) that were recorded on JHG’s Condensed Consolidated Balance Sheets, including JHG’s net interest in these products (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

Investment securities

 

$

17.9

 

$

18.9

 

Cash and cash equivalents

 

0.5

 

5.9

 

Other current assets

 

0.2

 

0.6

 

Accounts payable and accrued liabilities

 

(0.3

)

(2.2

)

Total

 

18.3

 

23.2

 

Redeemable noncontrolling interests in consolidated VREs

 

(7.6

)

(6.6

)

JHG’s net interest in consolidated VREs

 

$

10.7

 

$

16.6

 

 

JHG’s total exposure to consolidated VREs represents the value of its economic ownership interest in these seeded investment products. JHG may not, under any circumstances, access cash and cash equivalents held by consolidated VREs to use in its operating activities or for any other purpose.

 

Unconsolidated Voting Rights Entities

 

At September 30, 2018, and December 31, 2017, JHG’s carrying values of investment securities included on the Condensed Consolidated Balance Sheets pertaining to unconsolidated VREs were $53.6 million and $50.0 million, respectively. JHG’s total exposure to unconsolidated VREs represents the value of its economic ownership interest in the investment securities.

 

Note 3 — Investment Securities

 

JHG’s investment securities as of September 30, 2018, and December 31, 2017, are summarized as follows (in millions):

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

Seeded investment products:

 

 

 

 

 

Consolidated VIEs

 

$

303.9

 

$

419.7

 

Consolidated VREs

 

17.9

 

18.9

 

Unconsolidated VIEs and VREs

 

57.3

 

56.2

 

Separate accounts

 

76.5

 

75.6

 

Pooled investment funds

 

25.7

 

27.5

 

Total seeded investment products

 

481.3

 

597.9

 

Investments related to deferred compensation plans

 

128.9

 

94.0

 

Other investments

 

4.0

 

8.2

 

Total investment securities

 

$

614.2

 

$

700.1

 

 

10


 

Net unrealized gains (losses) on investment securities held as of September 30, 2018 and 2017, are summarized as follows (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Unrealized gains (losses) on investment securities held at period end

 

$

(4.1

)

$

19.7

 

$

(25.6

)

$

15.2

 

 

Derivative Instruments

 

JHG maintains an economic hedge program that uses derivative instruments to mitigate against market volatility of certain seeded investments by using index and commodity futures (“futures”), index swaps, total return swaps (“TRSs”) and credit default swaps. Foreign currency exposures associated with the Group’s seeded investment products are also hedged by using foreign currency forward contracts. The Group also has a net investment hedge related to foreign currency translation on hedged seed investments denominated in currencies other than the Group’s functional currency.

 

JHG was party to the following derivative instruments as of September 30, 2018, and December 31, 2017 (in millions):

 

 

 

Notional value

 

 

 

September 30, 2018

 

December 31, 2017

 

Futures

 

$

155.5

 

$

190.6

 

Credit default swaps

 

143.0

 

117.5

 

Index swaps

 

 

76.7

 

Total return swaps and index swaps

 

79.8

 

70.3

 

Foreign currency forward contracts

 

131.6

 

118.8

 

 

The derivative instruments are not designated as hedges for accounting purposes, with the exception of foreign currency forward contracts used for net investment hedging. Changes in fair value of the futures, index swaps, TRSs and credit default swaps are recognized in investment gains (losses), net on JHG’s Condensed Consolidated Statements of Comprehensive Income. Changes in the fair value of the foreign currency forward contracts designated as hedges for accounting purposes are recognized in other comprehensive income, net of tax on JHG’s Condensed Consolidated Statements of Comprehensive Income.

 

The value of the individual derivative contracts is recognized on a gross basis and included in other current assets or accounts payable and accrued liabilities on the Condensed Consolidated Balance Sheets and are immaterial individually and in aggregate.

 

The Group recognized the following net foreign currency translation gains and losses on hedged seed investments denominated in currencies other than the Group’s functional currency and net gains and losses associated with foreign currency forward contracts under net investment hedge accounting for the three and nine months ended September 30, 2018 and 2017 (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Foreign currency translation

 

$

(1.2

)

$

1.1

 

$

(5.0

)

$

1.8

 

Foreign currency forward contracts

 

1.2

 

(1.1

)

5.0

 

(1.8

)

Total

 

$

 

$

 

$

 

$

 

 

 

Derivative Instruments in Consolidated Seeded Investment Products

 

Certain of the Group’s consolidated seeded investment products utilize derivative instruments to contribute to the achievement of defined investment objectives. These derivative instruments are classified within other current

 

11


 

assets or accounts payable and accrued liabilities on JHG’s Condensed Consolidated Balance Sheets and are immaterial individually and in aggregate. Gains and losses on these derivative instruments are classified within investment gains (losses), net on JHG’s Condensed Consolidated Statements of Comprehensive Income.

 

JHG’s consolidated seeded investment products were party to the following derivative instruments as of September 30, 2018, and December 31, 2017 (in millions):

 

 

 

Notional value

 

 

 

September 30, 2018

 

December 31, 2017

 

Futures

 

$

211.9

 

$

241.2

 

Contracts for differences

 

13.5

 

10.2

 

Credit default swaps

 

13.2

 

15.0

 

Total return swaps

 

39.3

 

36.7

 

Interest rate swaps

 

53.5

 

58.3

 

Options

 

64.5

 

144.3

 

Swaptions

 

8.3

 

2.7

 

Foreign currency forward contracts

 

133.5

 

135.9

 

 

As of September 30, 2018, certain consolidated seeded investment products sold credit protection through the use of credit default swap contracts. The contracts provide alternative credit risk exposure to individual companies and countries outside of traditional bond markets. The terms of the credit default swap contracts range from one to five years.

 

As sellers in credit default swap contracts, the consolidated seeded investment products would be required to pay the notional value of a referenced debt obligation to the counterparty in the event of a default on the debt obligation by the issuer. The notional value represents the estimated maximum potential undiscounted amount of future payments required upon the occurrence of a credit default event. As of September 30, 2018, and December 31, 2017, the notional values of the agreements totaled $3.9 million and $4.0 million, respectively. The credit default swap contracts include recourse provisions that allow for recovery of a certain percentage of amounts paid upon the occurrence of a credit default event. As of September 30, 2018, and December 31, 2017, the fair value of the credit default swap contracts selling protection was $0.1 million for both periods.

 

Investment Gains (Losses), Net

 

Investment gains (losses), net on JHG’s Condensed Consolidated Statements of Comprehensive Income included the following for the three and nine months ended September 30, 2018 and 2017 (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Seeded investment products and derivatives, net

 

$

(14.2

)

$

6.0

 

$

(32.4

)

$

4.8

 

Gain on sale of Volantis

 

 

 

 

10.2

 

Other

 

5.9

 

0.1

 

6.8

 

 

Investment gains (losses), net

 

$

(8.3

)

$

6.1

 

$

(25.6

)

$

15.0

 

 

Cash Flows

 

Cash flows related to investment securities for the nine months ended September 30, 2018 and 2017, are summarized as follows (in millions):

 

 

 

Nine months ended September 30,

 

 

 

2018

 

2017

 

 

 

Purchases

 

Sales,

 

Purchases

 

Sales,

 

 

 

and

 

settlements and

 

and

 

settlements and

 

 

 

settlements

 

maturities

 

settlements

 

maturities

 

Investment securities

 

$

(24.9

)

88.6

 

(73.0

)

199.5

 

 

12


 

Note 4 — Fair Value Measurements

 

The following table presents assets, liabilities and redeemable noncontrolling interests presented in the financial statements or disclosed in the notes to the financial statements at fair value on a recurring basis as of September 30, 2018 (in millions):

 

 

 

Fair value measurements using:

 

 

 

 

 

Quoted prices in

 

 

 

 

 

 

 

 

 

active markets for

 

 

 

 

 

 

 

 

 

identical assets

 

Significant other

 

Significant

 

 

 

 

 

and liabilities

 

observable inputs

 

unobservable inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

328.6

 

$

 

$

 

$

328.6

 

Investment securities:

 

 

 

 

 

 

 

 

 

Consolidated VIEs

 

113.9

 

169.4

 

20.6

 

303.9

 

Other investment securities

 

215.6

 

94.7

 

 

310.3

 

Total investment securities

 

329.5

 

264.1

 

20.6

 

614.2

 

Seed hedge derivatives

 

 

0.4

 

 

0.4

 

Derivatives in consolidated seeded investment products

 

 

2.5

 

 

2.5

 

Volantis contingent consideration

 

 

 

5.3

 

5.3

 

Total assets

 

$

658.1

 

$

267.0

 

$

25.9

 

$

951.0

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives in consolidated seeded investment products

 

$

 

$

2.6

 

$

 

$

2.6

 

Financial liabilities in consolidated seeded investment products

 

2.6

 

 

 

2.6

 

Seed hedge derivatives

 

 

3.9

 

 

3.9

 

Long-term debt(1)

 

 

304.0

 

 

304.0

 

Deferred bonuses

 

 

 

63.8

 

63.8

 

Contingent consideration

 

 

 

59.1

 

59.1

 

Total liabilities

 

$

2.6

 

$

310.5

 

$

122.9

 

$

436.0

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests:

 

 

 

 

 

 

 

 

 

Consolidated seeded investment products

 

$

 

$

 

$

124.2

 

$

124.2

 

Intech

 

 

 

15.0

 

15.0

 

Total redeemable noncontrolling interests

 

$

 

$

 

$

139.2

 

$

139.2

 

 


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

 

13


 

The following table presents assets, liabilities and redeemable noncontrolling interests presented in the financial statements or disclosed in the notes to the financial statements at fair value on a recurring basis as of December 31, 2017 (in millions):

 

 

 

Fair value measurements using:

 

 

 

 

 

Quoted prices in

 

 

 

 

 

 

 

 

 

active markets for

 

 

 

 

 

 

 

 

 

identical assets

 

Significant other

 

Significant

 

 

 

 

 

and liabilities

 

observable inputs

 

unobservable inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

422.5

 

$

 

$

 

$

422.5

 

Investment securities:

 

 

 

 

 

 

 

 

 

Consolidated VIEs

 

131.0

 

251.4

 

37.3

 

419.7

 

Other investment securities

 

185.7

 

94.5

 

0.2

 

280.4

 

Total investment securities

 

316.7

 

345.9

 

37.5

 

700.1

 

Seed hedge derivatives

 

0.9

 

 

 

0.9

 

Derivatives in consolidated seeded investment products

 

2.9

 

3.6

 

 

6.5

 

Contingent consideration

 

 

 

9.0

 

9.0

 

Total assets

 

$

743.0

 

$

349.5

 

$

46.5

 

$

1,139.0

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Derivatives in consolidated seeded investment products

 

$

1.8

 

$

2.5

 

$

 

$

4.3

 

Financial liabilities in consolidated seeded investment products

 

11.6

 

 

 

11.6

 

Seed hedge derivatives

 

5.9

 

4.2

 

 

10.1

 

Current portion of long-term debt(1)

 

 

57.3

 

 

57.3

 

Long-term debt(1)

 

 

323.4

 

 

323.4

 

Deferred bonuses

 

 

 

64.7

 

64.7

 

Contingent consideration

 

 

 

76.6

 

76.6

 

Dai-ichi options

 

 

 

26.1

 

26.1

 

Total liabilities

 

$

19.3

 

$

387.4

 

$

167.4

 

$

574.1

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests:

 

 

 

 

 

 

 

 

 

Consolidated seeded investment products

 

$

 

$

 

$

174.9

 

$

174.9

 

Intech

 

 

 

15.4

 

15.4

 

Total redeemable noncontrolling interests

 

$

 

$

 

$

190.3

 

$

190.3

 

 

Level 1 Fair Value Measurements

 

JHG’s Level 1 fair value measurements consist mostly of seeded investment products, investments in advised mutual funds, cash equivalents and investments related to deferred compensation plans with quoted market prices in active markets. The fair value level of consolidated seeded investment products is determined by the underlying securities of the product. The fair value level of unconsolidated seeded investment products is determined using the respective net asset value (“NAV”) of each product.

 

Level 2 Fair Value Measurements

 

JHG’s Level 2 fair value measurements consist mostly of consolidated seeded investment products, derivative instruments and JHG’s long-term debt. The fair value of consolidated seeded investment products is determined by the underlying securities of the product. The fair value of JHG’s long-term debt is determined using broker quotes and recent trading activity, which are considered Level 2 inputs.

 

Level 3 Fair Value Measurements

 

Investment Securities

 

As of September 30, 2018, and December 31, 2017, certain securities within consolidated VIEs were valued using significant unobservable inputs, resulting in Level 3 classification.

 


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

 

14


 

Valuation techniques and significant unobservable inputs used in the valuation of JHG’s material Level 3 assets included within consolidated VIEs as of September 30, 2018, and December 31, 2017, were as follows (in millions):

 

As of September 30, 2018

 

Fair value

 

Valuation
technique

 

Significant
unobservable
inputs

 

Inputs

 

Investment securities of consolidated VIEs

 

$

20.6

 

Discounted

 

Discount rate

 

15%

 

 

 

 

 

cash flow

 

EBITDA multiple

 

19.3

 

 

 

 

 

 

 

Price-earnings ratio

 

30.1

 

 

As of December 31, 2017

 

Fair value

 

Valuation
technique

 

Significant
unobservable
inputs

 

Inputs - Range
(weighted average)

 

Investment securities of consolidated VIEs

 

$

37.3

 

Discounted

 

Discount rate

 

12.0% - 15.0% (14.3)%

 

 

 

 

 

cash flow

 

EBITDA multiple

 

11.6 - 15.1 (14.3)

 

 

 

 

 

 

 

Price-earnings ratio

 

22.6 - 61.3 (52.4)

 

 

Contingent Consideration

 

The maximum amount payable and fair value of Geneva, Perennial, Kapstream and VelocityShares contingent consideration is summarized below (in millions):

 

 

 

As of September 30, 2018

 

 

 

Geneva

 

Perennial

 

Kapstream

 

VelocityShares

 

Maximum amount payable

 

$

61.3

 

$

43.4

 

$

28.0

 

$

8.0

 

 

 

 

 

 

 

 

 

 

 

Fair value included in:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

 

$

 

$

13.7

 

$

 

Other non-current liabilities

 

24.6

 

8.5

 

12.3

 

 

Total fair value

 

$

24.6

 

$

8.5

 

$

26.0

 

$

 

 

 

 

As of December 31, 2017

 

 

 

Geneva

 

Perennial

 

Kapstream

 

VelocityShares

 

Fair value included in:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

 

$

 

$

18.8

 

$

6.1

 

Other non-current liabilities

 

19.3

 

7.0

 

25.4

 

 

Total fair value

 

$

19.3

 

$

7.0

 

$

44.2

 

$

6.1

 

 

Acquisition of Geneva

 

The fair value of the contingent consideration payable upon the acquisition of Geneva Capital Management LLC (“Geneva”) is estimated at each reporting date by forecasting revenue, as defined by the sale and purchase agreement, over the contingency period and by determining whether targets will be met. Significant unobservable inputs used in the valuation are limited to forecast revenues, which factor in expected growth in AUM based on performance and industry trends. Fair value adjustments to the contingent consideration during the three and nine months ended September 30, 2018, resulted in a $3.9 million increase in the liability. The fair value adjustment was recorded to other non-operating income (expenses), net on the Group’s Condensed Consolidated Statements of Comprehensive Income.

 

Acquisition of Perennial

 

The consideration payable on the acquisition of Perennial Fixed Interest Partners Pty Ltd and Perennial Growth Management Pty Ltd (together “Perennial”) included contingent consideration payable in 2019 if revenues of the Perennial equities business meet certain targets. The total maximum payment over the remaining contingent consideration period is $5.4 million as of September 30, 2018. In addition, there is a maximum amount of

 

15


 

$38.0 million payable in two tranches in 2019 and 2020, which have employee service conditions attached (“earn-out”). The earn-out is accrued over the service period as compensation expense and is based on net management fee revenue.

 

The fair value of the Perennial contingent consideration and earn-out is calculated at each reporting date by forecasting Perennial revenues over the contingency period and determining whether the forecasted amounts meet the defined targets. The significant unobservable input used in the valuation is forecasted revenue. No fair value adjustments were made to the contingent consideration during the three and nine months ended September 30, 2018.

 

Acquisition of Kapstream

 

The outstanding Kapstream Capital Pty Limited (“Kapstream”) contingent cash consideration in respect to the initial acquisition of a 51% controlling interest was payable in the third quarter of 2018 if certain Kapstream AUM reach defined targets. On June 30, 2018 (36 months after acquisition), Kapstream reached defined AUM targets and the Group paid $3.8 million in July 2018.

 

The purchase of the remaining 49% had contingent consideration of up to $43.0 million. Payment of the contingent consideration is subject to all Kapstream products and certain products advised by the Group, reaching defined revenue targets on the first, second and third anniversaries of January 31, 2017. The contingent consideration is payable in three equal installments on the anniversary dates and is indexed to the performance of the premier share class of the Kapstream Absolute Return Income Fund. When Kapstream achieves the defined revenue targets, the holders receive the value of the contingent consideration adjusted for gains or losses attributable to the mutual fund to which the contingent consideration is indexed, subject to tax withholding. On January 31, 2018, the first anniversary of the acquisition, Kapstream reached defined revenue targets, and the Group paid $15.3 million in February 2018.

 

The fair value of the Kapstream contingent consideration is calculated at each reporting date by forecasting certain Kapstream AUM or defined revenue over the contingency period and determining whether the forecasted amounts meet the defined targets. Significant unobservable inputs used in the valuation are limited to forecasted Kapstream AUM and performance against defined revenue targets. No fair value adjustment was necessary during the three and nine months ended September 30, 2018.

 

Acquisition of VelocityShares

 

JCG’s acquisition of VS Holdings Inc. (“VelocityShares”) in 2014 included contingent consideration. The payment is contingent on certain VelocityShares’ exchange-traded products (“ETPs”) reaching defined net revenue targets. VelocityShares reached defined net revenue targets in November 2017, and the Group paid $3.6 million in January 2018.

 

The fair value of the VelocityShares contingent consideration is calculated at each reporting date by forecasting net ETP revenue, as defined by the purchase agreement, over the contingency period and by determining whether net forecasted ETP revenue targets are achieved. Significant unobservable inputs used in the valuation are considered non-public data and limited to forecasted gross revenues and certain expense items, which are deducted from these revenues. No fair value adjustment was necessary during the three months ended September 30, 2018. Fair value adjustments to the consideration during the nine months ended September 30, 2018, resulted in a $2.7 million decrease to the liability, which reduced the fair value to nil as of September 30, 2018. The fair value adjustment was recorded to other non-operating income (expenses), net on the Group’s Condensed Consolidated Statements of Comprehensive Income.

 

Disposal of Volantis

 

On April 1, 2017, the Group completed the sale of the Volantis UK Small Cap alternative team assets. Consideration for the sale was a 10% share of the management and performance fees generated by Volantis for a period of three years.

 

The fair value of the Volantis contingent consideration is estimated at each reporting date by forecasting revenues over the contingency period of three years. Significant unobservable inputs used in the valuation are limited to

 

16


 

forecast revenues, which factor in expected growth in AUM based on performance and industry trends. Increases in forecast revenue increase the fair value of the consideration, while decreases in forecast revenue decrease the fair value. The forecasted share of revenues is then discounted back to the valuation date using an 11.8% discount rate.

 

During the nine months ended September 30, 2018, JHG received $4.3 million contingent consideration payment in relation to Volantis. As of September 30, 2018, the fair value of the Volantis contingent consideration was $5.3 million.

 

Deferred Bonuses

 

Deferred bonuses represent liabilities to employees over the vesting period that will be settled by investments in JHG products. The significant unobservable inputs are investment designations and vesting periods.

 

Dai-ichi Options

 

As of September 30, 2018, the fair value of the options sold to Dai-ichi Life Holdings Inc. (“Dai-ichi”) was nil. The fair value was determined using a Black-Scholes option pricing model. The Black-Scholes model requires management to estimate certain variables, primarily the volatility of the underlying shares. Changes in the fair value of the options are recognized in other non-operating income (expenses), net on JHG’s Condensed Consolidated Statements of Comprehensive Income. The options expired on October 3, 2018.

 

Redeemable Noncontrolling Interests in Intech

 

Redeemable noncontrolling interests in Intech Investment Management LLC (“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 AUM. Changes in fair value are recognized in other non-operating income (expenses), net on JHG’s Condensed Consolidated Statements of Comprehensive Income.

 

Redeemable Noncontrolling Interests in Consolidated Seeded Investment Products

 

Redeemable noncontrolling interests in consolidated seeded investment products are measured at fair value. Their fair values are primarily driven by the fair value of the investments in consolidated funds. The significant unobservable inputs are investment designations. The fair value of redeemable noncontrolling interests may also fluctuate from period to period based on changes in the Group’s relative ownership percentage of seed investments. Changes in fair value are recognized in investment gains (losses), net on JHG’s Condensed Consolidated Statements of Comprehensive Income.

 

Changes in Fair Value

 

Changes in fair value of JHG’s Level 3 assets for the three and nine months ended September 30, 2018 and 2017, are as follows (in millions):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Beginning of period fair value

 

$

38.7

 

$

57.4

 

$

46.5

 

$

42.7

 

Balance acquired from the Merger

 

 

 

 

3.0

 

Additions

 

 

0.7

 

 

10.9

 

Disposals

 

(7.6

)

 

(7.6

)

 

Settlements

 

(2.1

)

(0.8

)

(4.3

)

(0.8

)

Movements recognized in net income

 

(3.0

)

2.5

 

(8.3

)

1.7

 

Movements recognized in other comprehensive income

 

(0.1

)

(2.0

)

(0.4

)

0.3

 

End of period fair value

 

$

25.9

 

$

57.8

 

$

25.9

 

$

57.8

 

 

17


 

Changes in fair value of JHG’s individual Level 3 liabilities and redeemable noncontrolling interests for the three and nine months ended September 30, 2018 and 2017, are as follows (in millions):

 

 

 

Three months ended September 30,

 

 

 

2018

 

2017

 

 

 

Contingent
consideration

 

Deferred
bonuses

 

Dai-ichi
options

 

Redeemable
noncontrolling
interests

 

Contingent
consideration

 

Deferred
bonuses

 

Dai-ichi
options

 

Redeemable
noncontrolling
interests

 

Beginning of period fair value

 

$

57.3

 

$

64.3

 

$

2.1

 

$

177.8

 

$

76.0

 

$

50.3

 

$

26.9

 

$

172.0

 

Balances acquired from the Merger

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

 

 

 

Changes in ownership

 

 

 

 

(34.0

)

 

 

 

18.2

 

Net movement in bonus deferrals

 

 

(0.5

)

 

 

 

3.2

 

 

 

Fair value adjustments

 

6.3

 

 

(2.1

)

(0.3

)

(0.5

)

 

(10.3

)

0.9

 

Unrealized gains (losses)

 

 

 

 

(4.4

)

 

 

 

16.2

 

Amortization and vesting of Intech appreciation rights

 

 

 

 

0.4

 

 

 

 

1.1

 

Distributions

 

(4.0

)

 

 

 

 

 

 

(0.2

)

Foreign currency translation

 

(0.5

)