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 March 31, 2017

 

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 website, 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

x

Accelerated filer o

 

 

 

 

 

Non-accelerated filer 

o

(Do not check if a smaller reporting company)

 

 

 

 

 

 

 

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 April 17, 2017, there were 184,281,427 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)

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

358.7

 

$

485.9

 

Investment securities

 

203.2

 

212.1

 

Investment management fees and other receivables

 

141.3

 

129.6

 

Other current assets

 

41.9

 

37.4

 

Assets of consolidated VIEs:

 

 

 

 

 

Cash and cash equivalents

 

2.0

 

6.1

 

Investment securities

 

91.9

 

91.6

 

Accounts receivable

 

1.1

 

0.3

 

Total current assets

 

840.1

 

963.0

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

Property, equipment and software, net

 

32.8

 

34.2

 

Intangible assets, net

 

1,341.8

 

1,339.0

 

Goodwill

 

607.3

 

601.9

 

Other non-current assets

 

11.8

 

11.8

 

Total assets

 

$

2,833.8

 

$

2,949.9

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

95.7

 

$

92.7

 

Accrued compensation and benefits

 

48.9

 

138.5

 

Current portion of long-term debt

 

111.9

 

 

Liabilities of consolidated VIEs:

 

 

 

 

 

Accounts payable and accrued liabilities

 

1.7

 

0.5

 

Total current liabilities

 

258.2

 

231.7

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

Long-term debt

 

295.5

 

406.3

 

Deferred income taxes, net

 

527.1

 

502.8

 

Other non-current liabilities

 

55.4

 

46.7

 

Total liabilities

 

1,136.2

 

1,187.5

 

 

 

 

 

 

 

Commitments and contingencies (See Note 14)

 

 

 

 

 

 

 

 

 

 

 

REDEEMABLE NONCONTROLLING INTERESTS

 

38.7

 

43.1

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

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

 

 

 

Common stock ($0.01 par, 1,000,000,000 shares authorized; 184,284,047 and 182,671,008 shares outstanding, respectively)

 

1.8

 

1.8

 

Retained earnings

 

1,652.3

 

1,636.5

 

Accumulated other comprehensive loss, net of tax

 

(2.0

)

(7.9

)

Total JCG shareholders’ equity

 

1,652.1

 

1,630.4

 

Noncontrolling interests

 

6.8

 

88.9

 

Total equity

 

1,658.9

 

1,719.3

 

Total liabilities, redeemable noncontrolling interests and equity

 

$

2,833.8

 

$

2,949.9

 

 

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

 

 

 

March 31,

 

 

 

2017

 

2016

 

Operating revenues:

 

 

 

 

 

Investment management fees

 

$

229.8

 

$

210.3

 

Performance fees

 

(13.7

)

(2.4

)

Shareowner servicing fees and other

 

41.5

 

40.6

 

Total operating revenues

 

257.6

 

248.5

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Employee compensation and benefits

 

90.9

 

87.9

 

Long-term incentive compensation

 

18.1

 

19.5

 

Marketing and advertising

 

18.6

 

5.3

 

Distribution

 

33.4

 

32.4

 

Depreciation and amortization

 

7.8

 

9.1

 

General, administrative and occupancy

 

33.5

 

31.7

 

Total operating expenses

 

202.3

 

185.9

 

 

 

 

 

 

 

Operating income

 

55.3

 

62.6

 

 

 

 

 

 

 

Interest expense

 

(5.2

)

(5.2

)

Investment gains, net

 

2.1

 

2.2

 

Investment losses within consolidated VIEs, net

 

(0.9

)

(0.5

)

Other income, net

 

2.2

 

1.8

 

Income before taxes

 

53.5

 

60.9

 

Income tax provision

 

(21.2

)

(23.9

)

Net income

 

32.3

 

37.0

 

Net income attributable to noncontrolling interests

 

(1.4

)

(1.9

)

Net income attributable to JCG

 

$

30.9

 

$

35.1

 

 

 

 

 

 

 

Earnings per share attributable to JCG common shareholders:

 

 

 

 

 

Basic and diluted

 

$

0.17

 

$

0.19

 

 

 

 

 

 

 

Other comprehensive income, net of tax:

 

 

 

 

 

Net unrealized gains on available-for-sale securities

 

$

0.5

 

$

0.7

 

Foreign currency translation adjustment

 

9.5

 

4.8

 

Reclassifications for items included in net income

 

0.2

 

 

Total other comprehensive income, net of tax

 

10.2

 

5.5

 

 

 

 

 

 

 

Comprehensive income

 

42.5

 

42.5

 

Comprehensive income attributable to noncontrolling interests

 

(5.7

)

(1.9

)

Comprehensive income attributable to JCG

 

$

36.8

 

$

40.6

 

 

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)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

CASH FLOWS PROVIDED BY (USED FOR):

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

32.3

 

$

37.0

 

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

 

 

 

 

 

Depreciation and amortization

 

7.8

 

9.1

 

Deferred income taxes

 

22.1

 

22.3

 

Amortization of stock-based compensation

 

10.6

 

15.2

 

Investment gains, net

 

(2.1

)

(2.2

)

Investment losses within consolidated VIEs, net

 

0.9

 

0.5

 

Amortization of debt discounts, premiums and deferred issuance costs

 

1.1

 

1.1

 

Payment of deferred commissions, net

 

(1.3

)

(1.9

)

Other, net

 

(3.7

)

0.4

 

Changes in operating assets and liabilities:

 

 

 

 

 

Investment management fees and other receivables

 

(11.3

)

2.1

 

Other assets

 

(8.0

)

(6.5

)

Accounts payable and accrued liabilities

 

(8.2

)

(21.9

)

Accrued compensation and benefits

 

(89.7

)

(100.5

)

Other liabilities

 

(0.6

)

1.3

 

Net operating activities

 

(50.1

)

(44.0

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property, equipment and software

 

(1.8

)

(1.9

)

Purchases and settlements of investment securities

 

(8.7

)

(23.7

)

Purchases and settlements of investment securities by consolidated VIEs

 

(1.2

)

 

Proceeds from sales, settlements and maturities of investment securities

 

17.3

 

8.2

 

Proceeds from sales, settlements and maturities of investments by consolidated VIEs

 

6.6

 

48.2

 

Sales of securities by consolidated seeded investment products, net

 

5.9

 

10.6

 

Net investing activities

 

18.1

 

41.4

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Purchase of noncontrolling interests in Kapstream

 

(42.5

)

 

Distributions to noncontrolling interests

 

(0.2

)

(0.6

)

Payment of contingent consideration

 

(15.6

)

 

Proceeds from stock option exercises and employee stock purchases

 

2.6

 

6.2

 

Principal payments under capital lease obligations

 

(0.2

)

(0.3

)

Third-party redemptions in consolidated seeded investment products, net

 

(5.9

)

(10.6

)

Repurchase of common stock

 

(13.4

)

(32.6

)

Dividends paid to JCG shareholders

 

(20.3

)

(16.7

)

Net financing activities

 

(95.5

)

(54.6

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Effect of foreign exchange rate changes

 

0.3

 

 

Net change

 

(127.2

)

(57.2

)

At beginning of period

 

485.9

 

364.4

 

At end of period

 

$

358.7

 

$

307.2

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

7.7

 

$

7.8

 

Cash paid for income taxes, net of refunds

 

$

10.8

 

$

3.7

 

 

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

 

loss

 

interests

 

equity

 

Balance at December 31, 2015

 

183.7

 

$

1.8

 

$

1,589.8

 

$

(8.9

)

$

89.4

 

$

1,672.1

 

Net income

 

 

 

35.1

 

 

1.1

 

36.2

 

Other comprehensive income

 

 

 

 

5.5

 

4.6

 

10.1

 

Amortization of stock-based compensation

 

 

 

10.4

 

 

0.1

 

10.5

 

Amortization of INTECH appreciation rights

 

 

 

 

 

0.1

 

0.1

 

Issuance and forfeitures of restricted stock awards, net

 

2.9

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

0.8

 

 

6.2

 

 

 

6.2

 

Tax impact of stock-based compensation

 

 

 

1.0

 

 

 

1.0

 

Distributions to noncontrolling interests

 

 

 

 

 

(0.5

)

(0.5

)

Change in fair value of INTECH redeemable noncontrolling interests

 

 

 

0.9

 

 

 

0.9

 

Repurchase of common stock

 

(2.5

)

 

(32.6

)

 

 

(32.6

)

Dividends paid to JCG shareholders

 

 

 

(16.7

)

 

 

(16.7

)

Balance at March 31, 2016

 

184.9

 

$

1.8

 

$

1,594.1

 

$

(3.4

)

$

94.8

 

$

1,687.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

182.7

 

$

1.8

 

$

1,636.5

 

$

(7.9

)

$

88.9

 

$

1,719.3

 

Net income

 

 

 

30.9

 

 

0.5

 

31.4

 

Other comprehensive income

 

 

 

 

5.9

 

4.3

 

10.2

 

Amortization of stock-based compensation

 

 

 

10.0

 

 

 

10.0

 

Issuance and forfeitures of restricted stock awards, net

 

2.5

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

0.2

 

 

2.6

 

 

 

2.6

 

Distributions to noncontrolling interests

 

 

 

 

 

(0.1

)

(0.1

)

Purchase of noncontrolling interests in Kapstream

 

 

 

6.0

 

 

(86.8

)

(80.8

)

Repurchase of common stock

 

(1.1

)

 

(13.4

)

 

 

(13.4

)

Dividends paid to JCG shareholders

 

 

 

(20.3

)

 

 

(20.3

)

Balance at March 31, 2017

 

184.3

 

$

1.8

 

$

1,652.3

 

$

(2.0

)

$

6.8

 

$

1,658.9

 

 

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 the management of Janus Capital Group Inc. (collectively, “JCG” or “the Company”), 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 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 financial statements through the issuance date and the Company determined that there were no subsequent events that require disclosure. These financial statements should be read in conjunction with the annual consolidated financial statements presented in JCG’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

The accompanying interim condensed consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Note 2 to the annual consolidated financial statements presented in JCG’s Form 10-K for the year ended December 31, 2016.

 

Recently Adopted Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) that simplified several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements as well as classification in the statements of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company adopted the ASU as of January 1, 2017. The adoption of the ASU impacted JCG’s financial statements and accounting policies as follows: (1) Excess tax benefits and tax deficiencies related to share-based payment awards are recognized as part of the income tax provision line in the Statements of Comprehensive Income. (2) Excess tax benefits related to share-based payment awards are classified in operating activities in the Condensed Consolidated Statements of Cash Flows. Historically, JCG reported this activity as a financing activity on its statements of cash flows. JCG applied this provision of the ASU on a modified retrospective basis. (3) JCG elected to account for forfeitures related to share-based payment awards when they occur and will apply the accounting policy change on a modified retrospective basis, as required by the ASU. A cumulative effect adjustment was not necessary due to forfeiture adjustments that occurred as of December 31, 2016.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In May 2014, the 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. The revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting standard, including the amending ASUs, and is currently focused on the assessment of its mutual fund performance fees and the related applicability of the new guidance. The Company’s evaluation is ongoing and not complete. The Company does not expect significant changes in revenue recognition for the majority of its revenues as a result of adopting the standard.

 

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.

 

6



 

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) and form of financial asset (e.g., loans, securities). The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the effect of adopting this new accounting standard.

 

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 on to 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 Company is evaluating the effect of adopting this new accounting standard.

 

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, application of the control principle and indicators of control. The amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. In addition, entities are required to adopt the amendment by using the same transition method they used to adopt the new revenue standard. The Company is evaluating the effect of adopting this new accounting standard.

 

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 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company is evaluating the effect of adopting this new accounting standard.

 

In November 2016, the FASB issued an ASU to clarify guidance on the classification and presentation of restricted cash in the statements of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company is evaluating the effect of adopting this new accounting standard.

 

In January 2017, the FASB issued an ASU which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. The ASU requires goodwill impairments to be measured on the basis of the fair value of the reporting unit relative to the reporting unit’s carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. The ASU is effective for annual and interim impairment tests for periods beginning after December 15, 2021. Early adoption is allowed for annual and interim impairment tests occurring after January 1, 2017. The Company is evaluating the effect of adopting this new accounting standard.

 

Note 2 — Merger Agreement

 

On October 3, 2016, JCG and Henderson Group plc (“Henderson”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) relating to the business combination of JCG and Henderson. Under the terms of the agreement, the businesses of JCG and Henderson will be combined under Henderson, which will be renamed Janus Henderson Group plc (“Janus Henderson”). The merger will be effected via a share exchange, with each share of JCG common stock converted into the right to receive 4.7190 Janus Henderson ordinary shares, subject to the following adjustments. Effective immediately prior to the closing of the merger, Henderson will implement a share consolidation of Henderson ordinary shares at a ratio of one Janus Henderson ordinary share for every 10 Henderson ordinary shares outstanding (so that at closing of the merger each JCG stockholder will receive 0.4719 Janus Henderson ordinary shares for each share of JCG common stock). Janus Henderson shares will be delivered to JCG shareholders as merger consideration, with Janus Henderson applying for admission to trade on the New York Stock Exchange (“NYSE”) as its primary listing and with the existing listing on the Australian Securities Exchange retained. Henderson and JCG shareholders are expected to own approximately 57% and 43%, respectively, of Janus Henderson shares upon closing.

 

The closing of the merger is subject to, among other things, (a) the approval of the shareholders of JCG of the merger; (b) the approval of the shareholders of Henderson of (i) the merger, (ii) the name change of Henderson,

 

7



 

(iii) the amended and restated memorandum and articles of association of Henderson, (iv) the delisting of Henderson ordinary shares from the London Stock Exchange and (v) the payment of a dividend in respect to the second half of the 2016 fiscal year; (c) the receipt of the required regulatory approvals; (d) the approval by the board of trustees and shareholders for JCG advised U.S. mutual funds of new investment advisory agreements with JCG to take effect at the closing of the merger representing at least 67.5% of the assets under management of those funds as of September 30, 2016; (e) the absence of any stop order or proceedings by the SEC; (f) approval for listing on the NYSE of the Henderson ordinary shares; and (g) the absence of governmental restraints or prohibitions preventing the consummation of the merger. The obligation of each of JCG and Henderson to consummate the merger is also conditioned on, among other things, the truth and correctness of the representations and warranties made by the other party as of the closing date (subject to certain “materiality” and “material adverse effect” qualifiers). Subject to the satisfaction or, if applicable, waiver of these conditions, the merger is expected to close on or about May 30, 2017.

 

JCG incurred $19.7 million of merger-related expenses during the quarter ended March 31, 2017; $14.5 million is included in marketing and advertising, $4.9 million is included in general, administrative and occupancy, and $0.3 million is included in employee compensation and benefits on JCG’s Condensed Consolidated Statements of Comprehensive Income. Merger-related employee terminations are contingent on the consummation of the merger and no accruals have been made as of March 31, 2017.

 

Note 3 — Acquisitions

 

Acquisition of Kapstream

 

On January 31, 2017, JCG acquired the remaining 49% voting interest in Kapstream Capital Pty Limited (“Kapstream”). The noncontrolling interests were held by the founders of Kapstream, who are current Kapstream employees. The transaction included initial upfront cash consideration of $42.5 million and contingent consideration of up to $42.5 million. Payment of the contingent consideration is subject to all Kapstream products and certain products advised by Janus Capital Management LLC (“Janus”), reaching defined revenue targets on the first, second and third anniversaries of January 31, 2017. The contingent consideration will be payable in three equal installments of $14.2 million on the anniversary dates and are indexed to the performance of the Kapstream Absolute Return Income Fund. Upon achieving 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.

 

The acquisition of a controlling 51% voting interest in Kapstream in July 2015 also included contingent cash consideration payable at 18 and 36 months after acquisition if certain Kapstream assets under management reach defined targets. In December 2016, Kapstream assets under management reached defined targets for the 18-month anniversary of the acquisition and JCG paid contingent consideration of $5.6 million in February 2017.

 

Fair value adjustments to the contingent consideration associated with the acquisition of the 49% and 51% voting interests in Kapstream during the three months ended March 31, 2017 and 2016, resulted in a $3.9 million and $0.1 million increase to the liability and expense, including the monthly accretion of the liability to the future value of the consideration, respectively. Fair value adjustments are included in general, administrative and occupancy on the Condensed Consolidated Statements of Comprehensive Income. As of March 31, 2017, the contingent consideration had a fair value of $39.6 million; $13.2 million is included in accounts payable and accrued liabilities, and $26.4 million is included in other non-current liabilities on JCG’s Condensed Consolidated Balance Sheets. As of March 31, 2017, the total maximum payment over the remaining contingent consideration period is $46.7 million.

 

Acquisition of VelocityShares

 

The acquisition of VelocityShares, LLC (“VelocityShares”) in 2014 included contingent consideration. The contingent consideration is payable on the first, second, third and fourth anniversaries of the acquisition, in amounts up to $10.0 million each for the first and second anniversaries, and $8.0 million each for the third and fourth anniversaries. The payments are contingent on certain VelocityShares’ exchange traded products (“ETPs”) reaching defined net revenue targets. VelocityShares reached the defined net ETP revenue targets for the first and second anniversaries of the acquisition, and JCG paid contingent consideration of $10.0 million in both December 2015 and January 2017. The contingent consideration payments represent the maximum amount for

 

8



 

the first and second anniversaries. As of March 31, 2017, the total maximum payment over the remaining contingent consideration period (third and fourth anniversaries of the acquisition) is $16.0 million.

 

Fair value adjustments to the contingent consideration during the three months ended March 31, 2017 and 2016, resulted in a decrease of $3.0 million and an increase of $3.2 million to the liability and expense, including the monthly accretion of the liability to the future value of the consideration, respectively. Fair value adjustments are included in general, administrative and occupancy on the Condensed Statements of Comprehensive Income. As of March 31, 2017, the contingent consideration had a fair value of $5.9 million; $4.8 million is included in accounts payable and accrued liabilities, and $1.1 million is included in other non-current liabilities on JCG’s Condensed Consolidated Balance Sheets.

 

Note 4 — Consolidation

 

Variable Interest Entities

 

Consolidated Variable Interest Entities

 

JCG’s consolidated variable interest entities (“VIEs”) as of March 31, 2017, include certain consolidated seeded investment products in which the Company has an investment and acts as the investment manager. The assets of these VIEs are not available to JCG or the creditors of JCG. JCG 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 Company.

 

Consolidated VIE assets and liabilities are presented after intercompany eliminations at March 31, 2017, and December 31, 2016, in the following table (in millions):

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

Investment securities

 

$

91.9

 

$

91.6

 

Cash and cash equivalents

 

2.0

 

6.1

 

Accounts receivable

 

1.1

 

0.3

 

Accounts payable and accrued liabilities

 

(1.7

)

(0.5

)

Total

 

93.3

 

97.5

 

Noncontrolling interests in consolidated VIEs

 

(26.5

)

(31.9

)

JCG’s net interest in consolidated VIEs

 

$

66.8

 

$

65.6

 

 

Unconsolidated Variable Interest Entities

 

At March 31, 2017, and December 31, 2016, JCG’s carrying values of investment securities included on the Condensed Consolidated Balance Sheets pertaining to unconsolidated VIEs was $8.2 million and $7.7 million, respectively. JCG’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 JCG’s Condensed Consolidated Balance Sheets, including JCG’s net interest in these products (in millions):

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

Investment securities

 

$

5.6

 

$

6.3

 

Cash and cash equivalents

 

0.7

 

 

Accounts receivable and other current assets

 

0.2

 

0.1

 

Accounts payable and accrued liabilities

 

(0.1

)

(0.2

)

Total

 

6.4

 

6.2

 

Noncontrolling interests in consolidated VREs

 

(1.3

)

(1.2

)

JCG’s net interest in consolidated VREs

 

$

5.1

 

$

5.0

 

 

9



 

JCG’s total exposure to consolidated VREs represents the value of its economic ownership interest in these seeded investment products. Valuation changes associated with investments held at fair value by these consolidated VREs are reflected in investment gains, net on the Company’s Condensed Consolidated Statements of Comprehensive Income. Valuation changes are partially offset in net income attributable to noncontrolling interests for the portion not attributable to JCG. Refer to Note 5 — Investment Securities.

 

JCG 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 Variable Rights Entities

 

At March 31, 2017, and December 31, 2016, JCG’s carrying value of investment securities included on the Condensed Consolidated Balance Sheets pertaining to unconsolidated VREs was $58.9 million and $73.5 million, respectively. JCG’s total exposure to unconsolidated VREs represents the value of its economic ownership interest in the investment securities.

 

Note 5 — Investment Securities

 

JCG’s investment securities as of March 31, 2017, and December 31, 2016, are summarized as follows (in millions):

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

Trading securities:

 

 

 

 

 

Seeded investment products

 

$

254.9

 

$

255.6

 

Investments in advised mutual funds

 

5.1

 

4.7

 

Investments related to deferred compensation plans

 

18.4

 

17.2

 

Total trading securities

 

278.4

 

277.5

 

Available-for-sale securities:

 

 

 

 

 

Seeded investment products

 

16.7

 

26.2

 

Total investment securities

 

$

295.1

 

$

303.7

 

 

Trading Securities

 

Seeded investment products classified as trading securities consisted of the following as of March 31, 2017, and December 31, 2016:

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Fair value
(in millions)

 

Number of
products

 

Fair value
(in millions)

 

Number of
products

 

Mutual funds advised by the Company:

 

 

 

 

 

 

 

 

 

Consolidated VREs

 

$

6.4

 

1

 

$

6.2

 

1

 

Consolidated VIEs

 

91.9

 

10

 

91.6

 

11

 

Unconsolidated VREs(1)

 

50.4

 

5

 

55.0

 

5

 

Total mutual funds advised by the Company

 

148.7

 

16

 

152.8

 

17

 

Separate accounts

 

80.1

 

26

 

77.0

 

27

 

Pooled investment funds

 

26.1

 

18

 

25.8

 

18

 

Total trading securities

 

$

254.9

 

60

 

$

255.6

 

62

 

 


(1)         Represents unconsolidated seeded investment products for which JCG’s ownership percentage is between 20% and 50%. The investments are classified as equity-method, which approximates fair value due to the nature of the underlying investments.

 

10



 

Net unrealized gains on trading securities still held as of March 31, 2017 and 2016, are summarized as follows (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

Net unrealized gains on trading securities still held at period end

 

$

7.2

 

$

3.8

 

 

Available-for-Sale Securities

 

Seeded investment products classified as available-for-sale securities consisted of the following as of March 31, 2017, and December 31, 2016:

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Fair value
(in millions)

 

Number of
products

 

Fair value
(in millions)

 

Number of
products

 

Mutual funds advised by the Company:

 

 

 

 

 

 

 

 

 

Unconsolidated VREs

 

$

8.5

 

21

 

$

18.5

 

19

 

Unconsolidated VIEs

 

8.2

 

22

 

7.7

 

22

 

Total mutual funds advised by the Company

 

$

16.7

 

43

 

$

26.2

 

41

 

 

The following is a summary of available-for-sale securities as of March 31, 2017, and December 31, 2016 (in millions):

 

 

 

 

 

Gross unrealized

 

Foreign

 

 

 

 

 

 

 

investment

 

currency

 

 

 

 

 

Cost

 

Gains

 

Losses

 

translation

 

Fair value

 

March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

Unconsolidated VREs

 

$

8.3

 

$

0.3

 

$

(0.1

)

$

 

$

8.5

 

Unconsolidated VIEs

 

$

8.9

 

$

0.4

 

$

(0.6

)

$

(0.5

)

$

8.2

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

Unconsolidated VREs

 

$

18.8

 

$

0.1

 

$

(0.4

)

$

 

$

18.5

 

Unconsolidated VIEs

 

$

8.9

 

$

0.3

 

$

(1.0

)

$

(0.5

)

$

7.7

 

 

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 three months ended March 31, 2017 or 2016.

 

Derivative Instruments

 

The Company maintains an economic hedge program that uses derivative instruments to hedge against market volatility of certain seeded investments. Fluctuations in equity markets, debt markets and commodity markets are hedged by using index and commodity futures (“futures”) and credit default swaps. Certain foreign currency translation associated with the Company’s seeded investment products is also hedged by using foreign currency forward contracts.

 

11



 

JCG was party to the following derivative instruments as of March 31, 2017, and December 31, 2016:

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Number of
contracts

 

Notional value
(in millions)

 

Number of
contracts

 

Notional value
(in millions)

 

Futures

 

52

 

$

184.5

 

50

 

$

171.7

 

Credit default swaps

 

2

 

$

152.0

 

2

 

$

128.5

 

Foreign currency forward contracts

 

2

 

$

34.2

 

2

 

$

34.1

 

 

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

 

Futures and credit default swaps are subject to a master netting arrangement. The values of the individual futures and credit default swaps, 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. Foreign currency forward contracts are not subject to a master netting arrangement, and as such, fair values of the individual contracts are not netted and are included separately within other current assets or accounts payable and accrued liabilities on JCG’s Condensed Consolidated Balance Sheets.

 

The Company posted $8.8 million and $8.0 million in cash collateral and margin with the counterparty of the futures and credit default swaps as of March 31, 2017, and December 31, 2016, respectively. The cash collateral and margin are 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 March 31, 2017, and December 31, 2016 (in millions):

 

 

 

March 31, 2017

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

 

 

offset by

 

Gross amounts

 

 

 

 

 

 

 

derivative

 

offset by cash

 

 

 

 

 

Gross amounts

 

instruments

 

collateral

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

 

 

Futures

 

$

0.7

 

$

(0.7

)

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Futures

 

$

1.6

 

$

(0.7

)

$

(0.9

)

$

 

Credit default swaps

 

3.6

 

 

(1.4

)

2.2

 

Foreign currency forward contracts

 

0.1

 

 

 

0.1

 

Total liabilities

 

$

5.3

 

$

(0.7

)

$

(2.3

)

$

2.3

 

 

 

 

December 31, 2016

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

 

 

offset by

 

Gross amounts

 

 

 

 

 

 

 

derivative

 

offset by cash

 

 

 

 

 

Gross amounts

 

instruments

 

collateral

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

 

 

Futures

 

$

0.8

 

$

(0.8

)

$

 

$

 

Foreign currency forward contracts

 

0.3

 

 

 

0.3

 

Total assets

 

1.1

 

(0.8

)

 

0.3

 

Liabilities:

 

 

 

 

 

 

 

 

 

Futures

 

$

1.1

 

$

(0.8

)

$

(0.3

)

$

 

Credit default swaps

 

2.4

 

 

(1.3

)

1.1

 

Total liabilities

 

$

3.5

 

$

(0.8

)

$

(1.6

)

$

1.1

 

 

12



 

JCG recognized the following net gains (losses) on hedged seeded investments and associated futures, credit default swaps and index swaps for the three months ended March 31, 2017 and 2016 (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

Hedged seeded investments classified as trading securities(1)

 

$

6.3

 

$

3.4

 

Hedged seeded investments classified as available-for-sale securities(1)

 

0.7

 

 

Total hedged seeded investments

 

7.0

 

3.4

 

Futures

 

(7.0

)

(3.0

)

Credit default swaps

 

(1.1

)

(0.3

)

Index swaps

 

 

(0.3

)

Total

 

$

(1.1

)

$

(0.2

)

 

JCG recognized the following net gains on hedged seed investments denominated in a foreign currency and net losses on associated foreign currency forward contracts for the three months ended March 31, 2017 and 2016 (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

Foreign currency translation

 

$

0.5

 

$

 

Foreign currency forward contracts

 

(0.3

)

 

Total

 

$

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, net on JCG’s Condensed Consolidated Statements of Comprehensive Income. The consolidated seeded investment products posted $2.7 million and $2.1 million in cash collateral and margin with the counterparty of the derivative instruments as of March 31, 2017, and December 31, 2016, respectively.

 

JCG’s consolidated seeded investment products were party to the following derivative instruments as of March 31, 2017, and December 31, 2016:

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Number of
contracts

 

Notional value
(in millions)

 

Number of
contracts

 

Notional value
(in millions)

 

Swaps

 

73

 

$

41.7

 

67

 

$

35.5

 

Futures

 

122

 

$

35.0

 

123

 

$

25.3

 

Foreign currency forward contracts

 

168

 

$

27.2

 

161

 

$

32.0

 

Options

 

48

 

$

0.1

 

29

 

$

0.1

 

 


(1)        Includes net gains associated with hedged equity, fixed income and asset allocation seeded investment products. Hedging activity is limited to the systematic market risk associated with equity products and the interest rate and credit risk associated with fixed income products.

 

13



 

The following table illustrates the effect of offsetting derivative instruments within consolidated seeded investment products on JCG’s Condensed Consolidated Balance Sheets as of March 31, 2017 (in millions):

 

 

 

March 31, 2017

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

 

 

offset by

 

Gross amounts

 

 

 

 

 

 

 

derivative

 

offset by cash

 

 

 

 

 

Gross amounts

 

instruments

 

collateral

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

 

 

Swaps

 

$

1.0

 

$

 

$

 

$

1.0

 

Futures

 

0.5

 

(0.4

)

 

0.1

 

Foreign currency forward contracts

 

0.1

 

(0.1

)

 

 

Total assets

 

$

1.6

 

$

(0.5

)

$

 

$

1.1

 

Liabilities:

 

 

 

 

 

 

 

 

 

Futures

 

$

0.4

 

$

(0.4

)

$

 

$

 

Foreign currency forward contracts

 

0.3

 

(0.1

)

 

0.2

 

Total liabilities

 

$

0.7

 

$

(0.5

)

$

 

$

0.2

 

 

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, 2016 (in millions):

 

 

 

 

December 31, 2016

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

 

 

offset by

 

Gross amounts

 

 

 

 

 

 

 

derivative

 

offset by cash

 

 

 

 

 

Gross amounts

 

instruments

 

collateral

 

Net amounts

 

Assets:

 

 

 

 

 

 

 

 

 

Swaps

 

$

0.7

 

$

 

$

 

$

0.7

 

Futures

 

0.4

 

(0.4

)

 

 

Foreign currency forward contracts

 

0.2

 

(0.2

)

 

 

Total assets

 

$

1.3

 

$

(0.6

)

$

 

$

0.7

 

Liabilities:

 

 

 

 

 

 

 

 

 

Futures

 

$

0.5

 

$

(0.4

)

$

(0.1

)

$

 

Foreign currency forward contracts

 

0.2

 

(0.2

)

 

 

Total liabilities

 

$

0.7

 

$

(0.6

)

$

(0.1

)

$

 

 

As of March 31, 2017, and December 31, 2016, 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 March 31, 2017, and December 31, 2016, the notional values of the agreements totaled $7.8 million and $8.5 million. 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 March 31, 2017, and December 31, 2016, the fair value of the credit default swap contracts selling protection was $0.2 million and $0.1 million, respectively.

 

14



 

Investment Gains, Net

 

Investment gains, net on JCG’s Condensed Consolidated Statements of Comprehensive Income included the following for the three months ended March 31, 2017 and 2016 (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

2016

 

Seeded investment products

 

$

8.2

 

$

5.1

 

Noncontrolling interests in seeded investment products

 

0.8

 

0.6

 

Investments in advised mutual funds

 

0.4

 

0.1

 

Economic hedge of certain seeded investment products

 

(8.1

)

(3.6

)

Economic hedge for deferred compensation plans

 

0.8

 

 

Investment gains, net

 

$

2.1

 

$

2.2

 

 

Purchases, Sales, Settlements and Maturities

 

Cash flows related to investment securities for the three months ended March 31, 2017 and 2016, are summarized as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2017

 

2016

 

 

 

Purchases

 

Sales,

 

Purchases

 

Sales,

 

 

 

and

 

settlements and

 

and

 

settlements and

 

 

 

settlements

 

maturities

 

settlements

 

maturities

 

Trading securities

 

$

(2.1

)

$

13.2

 

$

(14.4

)

$

54.1

 

Available-for-sale securities

 

(0.1

)

10.4

 

(0.4

)

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

Seed capital economic hedge

 

(7.7

)

0.3

 

(8.9

)

2.3

 

Total cash flows

 

$

(9.9

)

$

23.9

 

$

(23.7

)

$

56.4

 

 

15



 

Note 6 — 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 March 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

 

$

59.2

 

$

188.2

 

$

 

$

247.4

 

Futures

 

0.7

 

 

 

0.7

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products:

 

 

 

 

 

 

 

 

 

Consolidated VREs

 

1.3

 

5.1

 

 

6.4

 

Consolidated VIEs

 

61.6

 

27.6

 

2.7

 

91.9

 

Unconsolidated VREs

 

50.4

 

 

 

50.4

 

Separate accounts

 

45.8

 

34.3

 

 

80.1

 

Pooled investment funds

 

3.8

 

22.3

 

 

26.1

 

Investments in advised mutual funds

 

5.1

 

 

 

5.1

 

Investments related to deferred compensation plans

 

18.4

 

 

 

18.4

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products:

 

 

 

 

 

 

 

 

 

Unconsolidated VREs

 

8.5

 

 

 

8.5

 

Unconsolidated VIEs

 

8.2

 

 

 

8.2

 

Total investment securities

 

203.1

 

89.3

 

2.7

 

295.1

 

Total assets

 

$

263.0

 

$

277.5

 

$

2.7

 

$

543.2

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Futures

 

$

1.6

 

$

 

$

 

$

1.6

 

Foreign currency forward contracts

 

0.1

 

 

 

0.1

 

Credit default swaps

 

3.6

 

 

 

3.6

 

Current portion of long-term debt(1)

 

 

151.9

 

 

151.9

 

Long-term debt(1)

 

 

318.2

 

 

318.2

 

Kapstream contingent consideration

 

 

 

39.6

 

39.6

 

VelocityShares contingent consideration

 

 

 

5.9

 

5.9

 

Total liabilities

 

$

5.3

 

$

470.1

 

$

45.5

 

$

520.9

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests:

 

 

 

 

 

 

 

 

 

Consolidated seeded investment products

 

$

13.6

 

$

14.2

 

$

 

$

27.8

 

INTECH

 

 

 

10.9

 

10.9

 

Total redeemable noncontrolling interests

 

$

13.6

 

$

14.2

 

$

10.9

 

$

38.7

 

 


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

 

16



 

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, 2016 (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

 

$

78.5

 

$

287.1

 

$

 

$

365.6

 

Futures

 

0.8

 

 

 

0.8

 

Foreign currency forward contracts

 

0.3

 

 

 

0.3

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products:

 

 

 

 

 

 

 

 

 

Consolidated VREs

 

0.3

 

5.9

 

 

6.2

 

Consolidated VIEs

 

13.2

 

75.1

 

3.3

 

91.6

 

Unconsolidated VREs

 

55.0

 

 

 

55.0

 

Separate accounts

 

47.5

 

29.5

 

 

77.0

 

Pooled investment funds

 

3.2

 

22.6

 

 

25.8

 

Investments in advised mutual funds

 

4.7

 

 

 

4.7

 

Investments related to deferred compensation plans

 

17.2

 

 

 

17.2

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products:

 

 

 

 

 

 

 

 

 

Unconsolidated VREs

 

18.5

 

 

 

18.5

 

Unconsolidated VIEs

 

7.7

 

 

 

7.7

 

Total investment securities

 

167.3

 

133.1

 

3.3

 

303.7

 

Total assets

 

$

246.9

 

$

420.2

 

$

3.3

 

$

670.4

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Futures

 

$

1.1

 

$

 

$

 

$

1.1

 

Credit default swaps

 

2.4

 

 

 

2.4

 

Long-term debt(1)

 

 

463.1

 

 

463.1

 

Kapstream contingent consideration

 

 

 

5.5

 

5.5

 

VelocityShares contingent consideration

 

 

 

18.9

 

18.9

 

Total liabilities

 

$

3.5

 

$

463.1

 

$

24.4

 

$

491.0

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests:

 

 

 

 

 

 

 

 

 

Consolidated seeded investment products

 

$

6.6

 

$

26.1

 

$

0.4

 

$

33.1

 

INTECH

 

 

 

10.0

 

10.0

 

Total redeemable noncontrolling interests

 

$

6.6

 

$

26.1

 

$

10.4

 

$

43.1

 

 

Level 1 Fair Value Measurements

 

JCG’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 and available-for-sale seeded investment products is determined using the respective net asset value (“NAV”) of each product. All seeded investment products for which the NAV is used to determine their fair value are classified as Level 1 and primarily represent seeded mutual funds where JCG’s ownership level is under 50% or where JCG is not considered the primary beneficiary.

 

Level 2 Fair Value Measurements

 

JCG’s Level 2 fair value measurements consist mostly of cash equivalents, consolidated 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, certificates of deposit and other short-term investments. The fair value of consolidated seeded investment products in which JCG’s ownership level is above 50%, or JCG is the primary beneficiary, 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.

 


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

 

17



 

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 consideration related to the acquisition of Kapstream and 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.

 

Kapstream Contingent Consideration

 

The fair value of the Kapstream contingent consideration is calculated on a quarterly basis by forecasting certain Kapstream assets under management or defined revenue over the contingency period and determining whether the forecasted amounts meet the defined targets. Forecasted contingent payments are then discounted back to the valuation date using a 10.0% discount rate. Significant unobservable inputs used in the valuation are limited to forecasted Kapstream assets under management and defined revenue targets, which are considered non-public data.

 

VelocityShares Contingent Consideration

 

The fair value of the VelocityShares contingent consideration is calculated on a quarterly basis by forecasting net ETP revenue, as defined by the purchase agreement, over the contingency period and determining whether net forecasted ETP revenue targets are achieved. Forecasted contingent payments are then discounted back to the valuation date using a 15% discount rate. 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. Increases in forecasted net ETP revenue would increase the fair value of the consideration, subject to payment limitations, while decreases in forecasted net ETP revenue would decrease the fair value.

 

Seeded Investment Products

 

As of March 31, 2017, and December 31, 2016, a single security within the portfolio of a consolidated seeded investment product was valued using significant unobservable inputs, resulting in Level 3 classification. The fair value of the security as of March 31, 2017, and December 31, 2016, was $2.7 million and $3.3 million, respectively.

 

18



 

JCG’s Level 3 recurring fair value measurements for the three months ended March 31, 2017 and 2016, are as follows (in millions):

 

 

 

Three months ended March 31, 2017

 

 

 

Redeemable
noncontrolling
interests in
INTECH

 

VelocityShares
contingent
consideration

 

Kapstream
contingent
consideration

 

Beginning of period fair value

 

$

10.0

 

$

18.9

 

$

5.5

 

Distributions

 

(0.1

)

(10.0

)

(5.6

)

Current earnings

 

0.1

 

 

 

Amortization of INTECH appreciation rights

 

0.9

 

 

 

Issuance

 

 

 

35.2

 

Foreign currency translation

 

 

 

0.6

 

Change in fair value

 

 

(3.0

)

3.9

 

End of period fair value

 

$

10.9

 

$

5.9

 

$

39.6

 

 

 

 

Three months ended March 31, 2016

 

 

 

Redeemable
noncontrolling
interests in
INTECH

 

VelocityShares
contingent
consideration

 

Kapstream
contingent
consideration

 

Beginning of period fair value

 

$

8.0

 

$

13.1

 

$

6.9

 

Distributions

 

(0.2

)

 

 

Current earnings

 

0.2

 

 

 

Amortization of INTECH appreciation rights

 

 0.7

 

 

 

Foreign currency translation

 

 

 

0.4

 

Change in fair value

 

(0.9

)

3.2

 

0.1

 

End of period fair value

 

$

7.8

 

$

16.3

 

$

7.4

 

 

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.

 

Transfers Between Fair Value Levels

 

The underlying securities of mutual funds and separate accounts may trade on a foreign stock exchange. 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 movement of securities between Level 1 and Level 2.

 

19



 

Transfers are recognized at the end of each reporting period. Transfers between Level 1 and Level 2 classifications for the three months ended March 31, 2017 and 2016, are summarized as follows (in millions):

 

 

 

March 31,

 

 

 

2017

 

2016

 

Transfers from Level 1 to Level 2

 

$

 

$

 

Transfers from Level 2 to Level 1

 

$

44.6

 

$

 

 

In addition to the transfers disclosed above, the deconsolidation of a seeded investment product can cause changes to its fair value level classification. 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 three months ended March 31, 2016, certain seeded investment products were deconsolidated and $7.9 million of Level 2 assets were reclassified to Level 1.

 

Note 7 — Debt

 

Debt at March 31, 2017, and December 31, 2016, consisted of the following (in millions):

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

value

 

value

 

value

 

value

 

4.875% Senior Notes due 2025

 

$

295.5

 

$

318.2

 

$

295.3

 

$

309.9

 

0.750% Convertible Senior Notes due 2018

 

111.9

 

151.9

 

111.0

 

153.2

 

Total debt

 

407.4

 

470.1

 

406.3

 

463.1

 

Less: Current portion of long-term debt

 

111.9

 

151.9

 

 

 

Total long-term debt

 

$

295.5

 

$

318.2

 

$

406.3

 

$

463.1

 

 

4.875% Senior Notes Due 2025

 

In July 2015, JCG issued $300.0 million of 4.875% Senior Notes due 2025 (“2025 Senior Notes”), which pay interest at 4.875% semiannually on February 1 and August 1 of each year and mature on August 1, 2025. The 2025 Senior Notes include unamortized debt issuance costs and debt discount at March 31, 2017, of $2.1 million and $2.4 million, respectively, which will be amortized over the remaining life of the notes. The unamortized debt issuance costs and debt discount are recorded as a contra liability within long-term debt on the Condensed Consolidated Balance Sheets.

 

0.750% Convertible Senior Notes Due 2018

 

The initial conversion rate of the 0.750% Convertible Senior Notes due 2018 (“2018 Convertible Notes”) was 92.06 shares of JCG common stock per $1,000 principal amount of the 2018 Convertible Notes, which is equivalent to an initial conversion price of approximately $10.86 per share of common stock. The initial conversion rate was most recently adjusted during the first quarter 2017 when JCG paid a quarterly cash dividend of $0.11 per share, which was greater than the quarterly dividend of $0.07 per share at the time of issuance. As a result of the quarterly cash dividend paid on February 17, 2017, the conversion rate changed to 93.96 shares of JCG common stock per $1,000 principal amount of 2018 Convertible Notes, equivalent to a conversion price of approximately $10.64 per share of common stock.

 

Holders of the 2018 Convertible Notes may convert the notes during a particular calendar quarter if the last reported sale price of JCG’s common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding quarter. As of March 31, 2017, the 2018 Convertible Notes did not meet the conversion criteria. However, as a result of making a formal notice of intent to merge with Henderson to the 2018 Convertible Note holders, among other factors, the 2018 Convertible Notes may be converted, regardless of whether or not the conversion criteria have been satisfied, for a period of 35 trading days in advance of and 35 trading days following the merger completion. Due to this provision associated with the merger, the 2018 Convertible Notes are classified as current portion of long-term debt on JCG’s Condensed Consolidated Balance Sheets.

 

20



 

Merger implications notwithstanding, the 2018 Convertible Notes conversion criteria are reassessed on a quarterly basis. Fluctuations in the price of JCG’s common stock may cause reclassification of the 2018 Convertible Notes between long-term debt and current portion of long-term debt on JCG’s Condensed Consolidated Balance Sheets on a quarter-to-quarter basis.

 

The 2018 Convertible Notes include unamortized debt issuance costs and debt discount at March 31, 2017, of $0.7 million and $4.0 million, respectively, which will be amortized over the remaining life of the notes. The unamortized debt issuance costs and debt discount are recorded as a contra liability within current portion of long-term debt on JCG’s Condensed Consolidated Balance Sheets.

 

Convertible Note Hedge and Warrants

 

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

 

The initial $10.86 and $12.60 per share of common stock exercise prices of the call options and warrants, respectively, were adjusted during the first quarter 2017 when JCG paid a quarterly cash dividend of $0.11 per share. As a result of the quarterly cash dividend paid on February 17, 2017, which was greater than the quarterly dividend of $0.07 per share at the time of issuance, the exercise price of the call options changed to $10.64 per share of common stock, and the exercise price of the warrants changed to $12.35 per share of common stock.

 

The counterparty of the convertible note hedge has the right to terminate the hedge upon completion of the merger with Henderson.

 

Credit Facility

 

At March 31, 2017, JCG had a $200 million, unsecured, revolving credit facility (“Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent and swingline lender. The Credit Facility can be used by JCG and its subsidiaries for working capital needs and general corporate purposes. The Credit Facility bears interest on borrowings outstanding at the London Interbank Offered Rate (“LIBOR”) plus a spread, which is based on JCG’s long-term unsecured debt credit rating (“credit rating”). JCG is required to pay a quarterly commitment fee on any unused portion of the Credit Facility, which is also based on JCG’s credit rating. Under the Credit Facility, the financing leverage ratio cannot exceed 3.00x, and the interest coverage ratio must equal or exceed 4.00x. At March 31, 2017, JCG was in compliance with all covenants, and there were no borrowings under the Credit Facility at March 31, 2017, or during the three months ended March 31, 2017. The Credit Facility has a maturity date of November 23, 2018; however, the Credit Facility will terminate upon completion of the Merger with Henderson.

 

Note 8 — Income Taxes

 

The Company’s effective tax rates for the three months ended March 31, 2017 and 2016, are as follows: