AMG_09.30.2013_10Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
(Mark One)
 
 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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 001-13459
 
Affiliated Managers Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3218510
(State or other jurisdiction
of incorporation or organization)
 
(IRS Employer Identification Number)
600 Hale Street, P.O. Box 1000, Prides Crossing, Massachusetts 01965
(Address of principal executive offices)
(617) 747-3300
(Registrant's telephone number, including area code)
 
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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
There were 52,978,842 shares of the registrant's common stock outstanding on November 5, 2013.
 




PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
(unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Revenue
$
467.3

 
$
551.6

 
$
1,314.5

 
$
1,594.8

Operating expenses:
 
 
 
 
 
 
 
Compensation and related expenses
196.8

 
229.8

 
565.9

 
679.7

Selling, general and administrative
93.9

 
106.4

 
267.7

 
298.2

Intangible amortization and impairments
24.0

 
32.7

 
169.1

 
98.1

Depreciation and other amortization
3.5

 
3.4

 
10.6

 
10.3

Other operating expenses
9.4

 
10.2

 
27.7

 
27.5

 
327.6

 
382.5

 
1,041.0

 
1,113.8

Operating income
139.7

 
169.1

 
273.5

 
481.0

Income from equity method investments
19.4

 
34.1

 
47.3

 
121.0

Other non-operating (income) and expenses:
 
 
 
 
 
 
 
Investment and other income
(6.9
)
 
(8.0
)
 
(20.3
)
 
(20.0
)
Interest expense
21.8

 
19.9

 
58.8

 
68.5

Imputed interest and contingent payment arrangements
6.7

 
3.9

 
(35.7
)
 
26.5

 
21.6

 
15.8

 
2.8

 
75.0

Income before income taxes
137.5

 
187.4

 
318.0

 
527.0

Income taxes
19.4

 
31.0

 
46.0

 
106.6

Net income
118.1

 
156.4

 
272.0

 
420.4

Net income (non-controlling interests)
(63.2
)
 
(81.2
)
 
(173.1
)
 
(218.1
)
Net income (controlling interest)
$
54.9

 
$
75.2

 
$
98.9

 
$
202.3

Average shares outstanding—basic
51.7

 
53.2

 
51.6

 
53.0

Average shares outstanding—diluted
53.0

 
56.9

 
52.9

 
54.7

Earnings per share—basic
$
1.06

 
$
1.41

 
$
1.92

 
$
3.82

Earnings per share—diluted
$
1.04

 
$
1.37

 
$
1.87

 
$
3.70

The accompanying notes are an integral part of the Consolidated Financial Statements.

2



AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Net income
$
118.1

 
$
156.4

 
$
272.0

 
$
420.4

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
15.2

 
18.1

 
19.7

 
(14.4
)
Change in net realized and unrealized gain (loss) on derivative securities, net of tax
(0.3
)
 

 
(0.9
)
 
0.8

Change in net unrealized loss on investment securities, net of tax
1.2

 
6.3

 
(1.1
)
 
(3.9
)
Other comprehensive income (loss)
16.1

 
24.4

 
17.7

 
(17.5
)
Comprehensive income
134.2

 
180.8

 
289.7

 
402.9

Comprehensive income (non-controlling interests)
(63.4
)
 
(80.8
)
 
(174.8
)
 
(216.3
)
Comprehensive income (controlling interest)
$
70.8

 
$
100.0

 
$
114.9

 
$
186.6

The accompanying notes are an integral part of the Consolidated Financial Statements.

3



AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
(unaudited)
 
December 31,
2012
 
September 30,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
430.4

 
$
522.4

Investment advisory fees receivable
255.5

 
269.9

Investments in marketable securities
128.9

 
132.9

Unsettled fund shares receivable
40.1

 
159.3

Prepaid expenses and other current assets
57.4

 
62.9

Total current assets
912.3

 
1,147.4

Fixed assets, net
81.5

 
88.1

Equity method investments in Affiliates
1,031.3

 
982.5

Acquired client relationships, net
1,585.5

 
1,485.4

Goodwill
2,355.2

 
2,345.9

Other assets
221.3

 
211.8

Total assets
$
6,187.1

 
$
6,261.1

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
324.7

 
$
387.8

Unsettled fund shares payable
39.8

 
162.1

Payables to related party
11.3

 
32.9

Total current liabilities
375.8

 
582.8

Senior bank debt
325.0

 
575.0

Senior notes
340.0

 
340.0

Senior convertible securities
450.1

 

Junior convertible trust preferred securities
515.5

 
517.9

Deferred income taxes
497.1

 
461.4

Other long-term liabilities
164.7

 
167.3

Total liabilities
2,668.2

 
2,644.4

Redeemable non-controlling interests
477.5

 
614.1

Equity:
 
 
 
Common stock
0.5

 
0.5

Additional paid-in capital
868.5

 
548.0

Accumulated other comprehensive income
79.1

 
63.4

Retained earnings
1,350.7

 
1,553.0

 
2,298.8

 
2,164.9

Less treasury stock, at cost
(214.6
)
 
(132.6
)
Total stockholders' equity
2,084.2

 
2,032.3

Non-controlling interests
957.2

 
970.3

Total equity
3,041.4

 
3,002.6

Total liabilities and equity
$
6,187.1

 
$
6,261.1

The accompanying notes are an integral part of the Consolidated Financial Statements.

4



AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in millions)
(unaudited)
 
Total Stockholders' Equity
 
 
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock at
Cost
 
Non-
controlling
interests
 
Total
Equity
December 31, 2012
$
0.5

 
$
868.5

 
$
79.1

 
$
1,350.7

 
$
(214.6
)
 
$
957.2

 
$
3,041.4

Stock issued under option and other incentive plans

 
(52.5
)
 

 

 
97.7

 

 
45.2

Tax benefit of option exercises

 
17.9

 

 

 

 

 
17.9

Changes in the value of Affiliate equity and other

 
(162.0
)
 

 

 

 
15.4

 
(146.6
)
Share-based payment arrangements

 
29.3

 

 

 

 

 
29.3

Settlement of senior convertible securities

 
(130.7
)
 

 

 

 

 
(130.7
)
Forward equity transactions

 
(22.5
)
 

 

 

 

 
(22.5
)
Share repurchases

 

 

 

 
(15.7
)
 

 
(15.7
)
Distributions to non-controlling interests

 

 

 

 

 
(218.6
)
 
(218.6
)
Net income

 

 

 
202.3

 

 
218.1

 
420.4

Other comprehensive loss

 

 
(15.7
)
 

 

 
(1.8
)
 
(17.5
)
September 30, 2013
$
0.5

 
$
548.0

 
$
63.4

 
$
1,553.0

 
$
(132.6
)
 
$
970.3

 
$
3,002.6

The accompanying notes are an integral part of the Consolidated Financial Statements.

5



AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Cash flow from operating activities:
 
 
 
 
 
 
 
Net income
$
118.1

 
$
156.4

 
$
272.0

 
$
420.4

Adjustments to reconcile Net income to net cash flow from operating activities:
 
 
 
 
 
 
 
Intangible amortization and impairments
24.0

 
32.7

 
169.1

 
98.1

Amortization of issuance costs
2.0

 
2.1

 
5.7

 
7.8

Depreciation and other amortization
3.5

 
3.4

 
10.6

 
10.3

Deferred income tax provision
7.8

 
(4.8
)
 
5.8

 
24.0

Imputed interest and contingent payment arrangements
6.7

 
3.9

 
(35.7
)
 
26.5

Income from equity method investments, net of amortization
(19.4
)
 
(34.1
)
 
(47.3
)
 
(121.0
)
Distributions received from equity method investments
20.8

 
40.9

 
79.4

 
187.2

Share-based compensation
8.0

 
9.0

 
24.1

 
26.7

Affiliate equity expense
2.3

 
2.5

 
9.4

 
10.9

Other adjustments
2.6

 
(1.6
)
 
2.7

 
7.6

Changes in assets and liabilities:
 
 
 
 
 
 
 
(Increase) decrease in investment advisory fees receivable
2.4

 

 
(21.3
)
 
(14.2
)
Increase in prepaids and other current assets
(3.8
)
 
(3.4
)
 
(12.9
)
 
(10.0
)
Increase in other assets
(1.6
)
 
(0.4
)
 
(2.5
)
 
(0.3
)
Increase in unsettled fund shares receivable
(5.6
)
 
(48.3
)
 
(15.3
)
 
(114.8
)
Increase in unsettled fund shares payable
4.4

 
48.2

 
10.7

 
117.8

Increase (decrease) in accounts payable, accrued liabilities and other long-term liabilities
38.9

 
76.3

 
(7.4
)
 
70.6

Cash flow from operating activities
211.1

 
282.8

 
447.1

 
747.6

Cash flow used in investing activities:
 
 
 
 
 
 
 
Investments in Affiliates
(350.0
)
 
(26.3
)
 
(755.3
)
 
(26.3
)
Purchase of fixed assets
(4.9
)
 
(7.1
)
 
(9.9
)
 
(15.9
)
Purchase of investment securities
(2.7
)
 
(1.7
)
 
(13.8
)
 
(6.3
)
Sale of investment securities
3.6

 
1.0

 
31.1

 
4.7

Cash flow used in investing activities
(354.0
)
 
(34.1
)
 
(747.9
)
 
(43.8
)
Cash flow from (used in) financing activities:
 
 
 
 
 
 
 
Borrowings of senior bank debt
360.0

 
475.0

 
555.0

 
595.0

Repayments of senior bank debt
(360.0
)
 

 
(360.0
)
 
(345.0
)
Issuance of senior notes
200.0

 

 
200.0

 

Settlement of senior convertible securities

 
(572.3
)
 

 
(641.3
)
Issuance of common stock
23.3

 
11.7

 
45.7

 
47.7

Repurchase of common stock

 
(15.7
)
 
(60.9
)
 
(15.7
)
Issuance costs
(6.0
)
 
(0.2
)
 
(6.0
)
 
(7.4
)
Excess tax benefit from exercise of stock options
6.9

 
7.0

 
11.6

 
17.1

Note and contingent payments
(1.8
)
 
(0.1
)
 
(2.1
)
 
(36.7
)
Distributions to non-controlling interests
(18.0
)
 
(39.2
)
 
(137.7
)
 
(218.6
)
Affiliate equity issuances and repurchases
(2.2
)
 
(11.7
)
 
(25.1
)
 
(6.7
)
Cash flow from (used in) financing activities
202.2

 
(145.5
)
 
220.5

 
(611.6
)
Effect of foreign exchange rate changes on cash and cash equivalents
2.3

 
5.4

 
3.4

 
(0.2
)
Net increase (decrease) in cash and cash equivalents
61.6

 
108.6

 
(76.9
)
 
92.0

Cash and cash equivalents at beginning of period
311.0

 
413.8

 
449.5

 
430.4

Cash and cash equivalents at end of period
$
372.6

 
$
522.4

 
$
372.6

 
$
522.4

Supplemental disclosure of non-cash financing activities:
 
 
 
 
 
 
 
Notes received for Affiliate equity sales
$

 
$

 
$
3.0

 
$

Payables recorded for Affiliate equity purchases
0.9

 
21.5

 
14.5

 
30.5

Payables recorded under contingent payment arrangements

 

 
24.8

 

Payables recorded for forward equity sale settlements

 
22.5

 

 
22.5

The accompanying notes are an integral part of the Consolidated Financial Statements.

6

AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.
Basis of Presentation
The consolidated financial statements of Affiliated Managers Group, Inc. ("AMG" or the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by GAAP. In the opinion of management, all adjustments considered necessary for a fair statement of the results have been included. All intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the prior period's financial statements to conform to the current period's presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for any other period or for the full year. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012 includes additional information about AMG, its operations, financial position and accounting policies, and should be read in conjunction with this Quarterly Report on Form 10-Q.
All amounts in these notes, except per share data in the text and tables herein, are stated in millions unless otherwise indicated.
2.
Recent Accounting Developments
In February 2013, the Financial Accounting Standards Board issued an update to the guidance for reporting reclassifications out of accumulated other comprehensive income. The new guidance requires companies to present the impact of significant amounts reclassified from accumulated other comprehensive income and the income statement line items affected by the reclassification. The new guidance is effective for interim and fiscal periods beginning after December 15, 2012. The Company adopted this guidance in the first quarter of 2013. Adoption of this new guidance did not have a significant impact on the Company's Consolidated Financial Statements.
In June 2013, the Financial Accounting Standards Board issued an update to the guidance for determining whether a public or private company is an investment company. The new guidance clarifies the characteristics of an investment company and amends certain disclosure and measurement requirements. The new guidance is effective for interim and fiscal periods beginning after December 15, 2013 (early application is prohibited). The Company is evaluating the impact of this guidance and does not expect it to have a significant impact on the Company's Consolidated Financial Statements.
3.
Investments in Marketable Securities
Investments in marketable securities at December 31, 2012 and September 30, 2013 were $128.9 million and $132.9 million, respectively. These investments are comprised of the Company's investment in Value Partners Group Limited, a publicly-traded asset management firm based in Hong Kong, and investments held by Affiliates.
The following is a summary of the cost, gross unrealized gains and losses and fair value of investments classified as available-for-sale and trading at December 31, 2012 and September 30, 2013:
 
Available-for-Sale
 
Trading
 
December 31,
2012
 
September 30,
2013
 
December 31,
2012
 
September 30,
2013
Cost
$
103.2

 
$
104.0

 
$
10.3

 
$
18.2

Unrealized Gains
15.3

 
9.5

 
6.5

 
3.7

Unrealized Losses
(3.2
)
 
(2.5
)
 
(3.2
)
 

Fair Value
$
115.3

 
$
111.0

 
$
13.6

 
$
21.9

The following is a summary of the Company's realized gains and losses on investments classified as available-for-sale and trading:

7



 
Available-for-Sale
 
Trading
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
Gains
$
0.1

 
$

 
$
0.1

 
$
2.1

 
$
0.2

 
$
0.2

 
$
0.8

 
$
0.6

Losses

 

 

 

 
0.0

 

 
(0.3
)
 

Net realized gains
$
0.1

 
$

 
$
0.1

 
$
2.1

 
$
0.2

 
$
0.2

 
$
0.5

 
$
0.6

4.
Variable Interest Entities
Sponsored Investment Funds
The Company's Affiliates act as the investment manager for certain investment funds that are considered variable interest entities ("VIEs"). Affiliates are entitled to receive management fees and may be eligible, under certain circumstances, to receive performance fees. The Affiliates' exposure to risk in these entities is generally limited to any equity investment and any uncollected management or performance fees, neither of which were material at September 30, 2013. The Affiliates do not have any investment performance guarantees to these VIEs.
The Affiliates are not the primary beneficiary of any of these VIEs as their involvement is limited to that of a service provider and their investment, if any, represents an insignificant interest in the fund's assets under management. Since the Affiliates' variable interests will not absorb the majority of the variability of the entity's net assets, these entities are not consolidated.
Trust Preferred Vehicles
The Company established wholly-owned trusts in connection with the 2006 and 2007 issuances of junior convertible trust preferred securities. These entities are considered VIEs and the Company is not the primary beneficiary, therefore these entities are not consolidated in the Company's financial statements.
The net assets and liabilities of the Company's unconsolidated VIEs and its maximum risk of loss related thereto are as follows:
 
December 31, 2012
 
September 30, 2013
Category of Investment
Unconsolidated
VIE Net Assets
 
Carrying Value and
Maximum Exposure
to Loss
 
Unconsolidated
VIE Net Assets
 
Carrying Value and
Maximum Exposure
to Loss
Sponsored investment funds
$
7,186.9

 
$
0.8

 
$
7,994.4

 
$
1.6

Trust preferred vehicles
9.0

 
9.0

 
9.0

 
9.0

5.
Long-Term Debt
Senior Bank Debt
The Company entered into a $1.25 billion senior unsecured revolving credit facility in April 2013 (the "credit facility") which matures in April 2018. As of September 30, 2013, the current outstanding balance under the credit facility is $575.0 million.
The credit facility is unsecured and contains financial covenants with respect to leverage and interest coverage, as well as customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends, asset dispositions and fundamental corporate changes.
Convertible Securities
In the second and third quarters of 2013, the Company repurchased $79.5 million principal amount outstanding of its 3.95% senior convertible notes due 2038 (“2008 senior convertible notes”). Subsequent to the repurchases, the Company called the remaining 2008 senior convertible notes ($380.5 million principal amount) for redemption on August 15, 2013 at their principal amount. In lieu of redemption, holders of the 2008 senior convertible notes elected to convert their securities. The Company elected to settle such conversions in cash. In connection with its call and prior repurchases, the Company paid an aggregate of $641.3 million. All of the Company's 2008 senior convertible notes have been canceled and retired.

8


6.
Forward Equity Sales
In 2012, the Company amended its forward equity agreement with its counterparties to increase the amount of shares of common stock it may sell to an aggregate of $400.0 million. During 2012, the Company entered into contracts to sell a notional amount of $147.2 million at an average share price of $121.37. The Company has the ability to settle the contracts either by delivering shares of common stock and receiving cash or net settling for cash or shares of common stock. During the three months ended September 30, 2013, the Company agreed to net settle $37.6 million notional amount of forward equity contracts for cash at an average share price of $185.13 and, in October 2013, agreed to net settle an additional $39.4 million notional amount at an average share price of $185.98. In total, the Company has agreed to net settle $77.0 million notional amount of forward equity contracts for cash at an average share price of $185.56.
7.
Derivative Financial Instruments
From time to time, the Company seeks to offset its exposure to changing interest rates under its debt financing arrangements by entering into interest rate hedging contracts.
The following summarizes the amount of derivative instrument gains and losses reported in the Consolidated Statements of Comprehensive Income:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
Cash Flow Hedges
2012
 
2013
 
2012
 
2013
Interest rate swaps
$
(0.5
)
 
$ (0.0)
 
$
(1.4
)
 
$
1.3

The following summarizes the location and fair values of derivative instruments on the Consolidated Balance Sheets:
Cash Flow Hedges
December 31,
2012
 
September 30,
2013
Interest rate swaps(1)
$
(4.0
)
 
$
(2.7
)
___________________________________________________________

(1)
Presented within Other long-term liabilities.
The Company's derivative contracts contain provisions that may require the Company or the counterparties to post collateral based upon the current fair value of the derivative contracts. As of September 30, 2013, the Company had posted collateral of $3.6 million related to its interest rate swap contracts.
The Company does not generally hold or issue derivative financial instruments for trading purposes. Interest rate swaps are intended to enable the Company to achieve a level of variable-rate and fixed-rate debt that limits interest rate exposure.
8.
Commitments and Contingencies
The Company and its Affiliates are subject to claims, legal proceedings and other contingencies in the ordinary course of their business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved in a manner unfavorable to the Company or its Affiliates. The Company and its Affiliates establish accruals for matters for which the outcome is probable and the amount of the liability can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the Company.
Certain Affiliates operate under regulatory authorities which require that they maintain minimum financial or capital requirements. Management is not aware of any significant violations of such financial requirements occurring during the period.
In connection with a past acquisition agreement, the Company has committed to co-invest in certain investment partnerships where it serves as the general partner. As of September 30, 2013, these commitments totaled approximately $71.6 million and may be called in future periods. The Company is contractually entitled to reimbursement from the prior owner for $33.8 million of these commitments if they are called.
Under past acquisition agreements, the Company is contingently liable, upon achievement by Affiliates of specified financial targets, to make payments of up to $474.0 million through 2017. As of September 30, 2013, the Company expects to

9


make payments of $226.0 million (none in 2013) to settle these contingent obligations, including $151.0 million related to the Company's equity method investments. The net present value of the expected payments for consolidated Affiliates totals $46.1 million as of September 30, 2013.
9.
Fair Value Measurements
The following table summarizes the Company's financial assets and liabilities that are measured at fair value on a recurring basis:
 
 
 
Fair Value Measurements
 
December 31,
2012
 
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Other Unobservable Inputs (Level 3)
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
13.5

 
$
13.5

 
$

 
$

Investments in marketable securities(1)
 
 
 
 
 
 
 
Trading securities
13.6

 
13.6

 

 

Available-for-sale securities
115.3

 
115.3

 

 

Other investments(2)
155.4

 
15.7

 
20.8

 
118.9

Financial Liabilities
 
 
 
 
 
 
 
Contingent payment arrangements(3)
$
31.0

 
$

 
$

 
$
31.0

Obligations to related parties(4)
77.8

 

 

 
77.8

Interest rate derivatives(5)
4.0

 

 
4.0

 

 
 
 
Fair Value Measurements
 
September 30,
2013
 
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Other Unobservable Inputs (Level 3)
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
32.1

 
$
32.1

 
$

 
$

Investments in marketable securities(1)
 
 
 
 
 
 
 
Trading securities
21.9

 
21.9

 

 

Available-for-sale securities
111.0

 
111.0

 

 

Other investments(2)
157.9

 
13.1

 
18.5

 
126.3

Financial Liabilities
 
 
 
 
 
 
 
Contingent payment arrangements(3)
$
46.1

 
$

 
$

 
$
46.1

Obligations to related parties(4)
98.7

 

 

 
98.7

Interest rate derivatives(5)
2.7

 

 
2.7

 

___________________________________________________________

(1)
Principally investments in equity securities.
(2)
Other investments are reported within Prepaid expenses and other current assets and Other assets.
(3)
Net present value of expected payments under contingent payment arrangements are reported in Accounts payable and accrued liabilities and Other long-term liabilities.
(4)
Obligations to related parties are presented within Payables to related party and Other long-term liabilities.
(5)
Interest rate derivatives are presented within Other long-term liabilities.

10


The following is a description of the significant financial assets and liabilities measured at fair value and the fair value methodologies used.
Cash equivalents consist primarily of highly liquid investments in money market funds. Cash investments in daily redeeming money market funds are classified as Level 1.
Investments in marketable securities consist primarily of investments in publicly traded securities and in funds advised by Affiliates which are valued using net asset value ("NAV"). Publicly traded securities and investments in daily redeeming funds that calculate NAVs are classified as Level 1.
Other investments consist primarily of funds advised by Affiliates and are valued using NAV. Investments in daily redeeming funds that calculate NAVs are classified as Level 1. Investments in funds that permit redemptions monthly or quarterly are classified as Level 2. Investments in funds that are subject to longer redemption restrictions are classified as Level 3. The fair value of Level 3 assets is determined using NAV one quarter in arrears (adjusted for current period calls and distributions).
Contingent payment arrangements represent the present value of the expected future settlement of contingent payment arrangements related to the Company's investments in Affiliates. The significant unobservable inputs that are used in the fair value measurement of these obligations are growth and discount rates. Increases in the growth rate result in a higher obligation while an increase in the discount rate results in a lower obligation.
Obligations to related parties include agreements to repurchase Affiliate equity and liabilities offsetting certain investments which are held by the Company but economically attributable to a related party. The significant unobservable inputs that are used in the fair value measurement for the repurchase of Affiliate equity are growth and discount rates. Increases in the growth rate result in a higher obligation while an increase in the discount rate results in a lower obligation. The liability to a related party is measured based upon certain investments held by the Company, the fair value of which is determined using NAV one quarter in arrears.
Interest rate derivatives include interest rate swaps. The fair value of these assets is determined by model-derived valuations in which all significant inputs are observable in active markets.
It is the Company's policy to value financial assets or liabilities transferred as of the beginning of the period in which the transfer occurs. There were no significant transfers of financial assets or liabilities from Level 1 to Level 2 in the three and nine months ended September 30, 2013. During the three months ended September 30, 2012, no financial assets were transferred from Level 1 to Level 2. During the nine months ended September 30, 2012, financial assets valued at $2.0 million were transferred from Level 1 to Level 2.
Level 3 Financial Assets and Liabilities
The following table presents the changes in Level 3 financial assets and liabilities for the three and nine months ended September 30, 2012 and 2013:
 
For the Three Months Ended
 
 
September 30, 2012
 
 
September 30, 2013
 
 
Other Investments
 
Contingent Payment Arrangements
 
Obligations to Related Parties
 
 
Other Investments
 
Contingent Payment Arrangements
 
Obligations to Related Parties
 
Balance, beginning of period
$
113.0

 
$
62.5

 
$
79.5

 
 
$
124.4

 
$
44.3

 
$
96.6

 
Net realized gains/losses
(0.1
)
(1) 

 
0.5

(3) 
 
(0.5
)
(1) 

 
1.1

(3) 
Net unrealized gains/losses relating to instruments still held at the reporting date
1.6

(1) 
3.5

(2) 
0.2

(3) 
 
4.7

(1) 
1.8

(2) 
(0.1
)
(3) 
Purchases and issuances
3.5

 

 
1.7

 
 
2.2

 

 
23.1

 
Settlements and reductions
(1.3
)
 

 
(6.1
)
 
 
(4.5
)
 

 
(22.0
)
 
Net transfers in and/or out of Level 3

 

 

 
 

 

 

 
Balance, end of period
$
116.7

 
$
66.0

 
$
75.8

 
 
$
126.3

 
$
46.1

 
$
98.7

 


11


 
For the Nine Months Ended
 
 
September 30, 2012
 
 
September 30, 2013
 
 
Other Investments
 
Contingent Payment Arrangements
 
Obligations to related parties
 
 
Other Investments
 
Contingent Payment Arrangements
 
Obligations to related parties
 
Balance, beginning of period
$
103.4

 
$
87.1

 
$
92.0

 
 
$
118.9

 
$
31.0

 
$
77.8

 
Net realized gains/losses
(1.7
)
(1) 

 
0.9

(3) 
 
(1.9
)
(1) 

 
3.1

(3) 
Net unrealized gains/losses relating to instruments still held at the reporting date
7.7

(1) 
(45.9
)
(2) 
0.9

(3) 
 
11.1

(1) 
15.1

(2) 
0.1

(3) 
Purchases and issuances
13.4

 
24.8

 
22.1

 
 
9.9

 

 
55.1

 
Settlements and reductions
(6.1
)
 

 
(40.1
)
 
 
(11.7
)
 

 
(37.4
)
 
Net transfers in and/or out of Level 3

 

 

 
 

 

 

 
Balance, end of period
$
116.7

 
$
66.0

 
$
75.8

 
 
$
126.3

 
$
46.1

 
$
98.7

 
___________________________________________________________

(1)
Gains and losses on Other investments are recorded in Investment and other income.
(2)
Accretion and changes to payment estimates under the Company's contingent payment arrangements are recorded in Imputed interest and contingent payment arrangements and foreign currency translation adjustments related to such arrangements are recorded as Other comprehensive income.
(3)
Gains and losses associated with agreements to repurchase Affiliate equity are recorded in Imputed interest and contingent payment arrangements. Gains and losses related to liabilities offsetting certain investments are recorded in Investment and other income.
The following table presents certain quantitative information about the significant unobservable inputs used in valuing our Level 3 financial liabilities:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Valuation
Techniques
 
Unobservable
Input
 
Fair Value at
December 31,
2012
 
Range at
December 31, 2012
 
Fair Value at September 30, 2013
 
Range at September 30, 2013
Contingent payment arrangements
Discounted cash flow
 
Growth rates
 
$
31.0

 
6.0% – 12.0%
 
$
46.1

 
0.4% - 10.5%
 
 
 
Discount rates
 
 

 
14.0% – 18.0%
 
 

 
14.0% – 18.0%
Affiliate equity repurchase obligations
Discounted cash flow
 
Growth rates
 
9.4

 
(10.0)% – 17.0%
 
30.5

 
4.2% - 12.3%
 
 
 
Discount rates
 
 

 
15.0% – 24.0%
 
 

 
16.0% - 18.0%
Investments in Certain Entities that Calculate Net Asset Value
The Company relies on the NAV of certain investments as their fair value. The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments. The following table summarizes, as of December 31, 2012 and September 30, 2013, the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized:
 
December 31, 2012
 
September 30, 2013
Category of Investment
Fair Value
 
Unfunded
Commitments
 
Fair Value
 
Unfunded
Commitments
Private equity fund-of-funds(1)
$
118.9

 
$
75.4

 
$
126.3

 
$
71.6

Other funds(2)
68.9

 

 
79.9

 

 
$
187.8

 
$
75.4

 
$
206.2

 
$
71.6

___________________________________________________________

(1)
These funds primarily invest in a broad range of private equity funds, as well as making direct investments. Distributions will be received as the underlying assets are liquidated over the life of the funds.  

12


(2)
These are multi-disciplinary funds that invest across various asset classes and strategies, including long/short equity, credit and real estate. Investments are generally redeemable on a daily or quarterly basis.
There are no current plans to sell any of these investments.
Other Financial Assets and Liabilities Not Carried at Fair Value
The carrying amount of cash, cash equivalents, advisory fees receivable, short-term investments, unsettled fund shares receivable and payable, accounts payable and accrued liabilities approximates fair value because of the short-term nature of these instruments. The carrying value of notes receivable approximates fair value because interest rates and other terms are at market rates. The carrying value of senior bank debt approximates fair value because the debt is a credit facility with variable interest based on selected short-term rates. The following table summarizes the Company's other financial liabilities not carried at fair value:
 
December 31, 2012
 
September 30, 2013
 
 
 
Carrying Value
 
Fair Market Value
 
Carrying Value
 
Fair Market Value
 
Fair Value Hierarchy
Senior notes
$
340.0

 
$
351.8

 
$
340.0

 
$
324.2

 
Level 2
Senior convertible securities
450.1

 
510.6

 

 

 
Level 2
Junior convertible trust preferred securities
515.5

 
719.9

 
517.9

 
870.2

 
Level 2

10.
Intangible Assets
Consolidated Affiliates
The intangible assets of our consolidated Affiliates consist of definite and indefinite-lived acquired client relationships and goodwill. Definite-lived acquired client relationships are amortized over their expected useful lives. As of September 30, 2013, these relationships were being amortized over a weighted average life of approximately eleven years. The Company recognized amortization expense and a reduction in the carrying value of an indefinite-lived asset at one of its Affiliates of $24.0 million and $169.1 million, respectively, for the three and nine months ended September 30, 2012. The Company recognized amortization expense of $32.7 million and $98.1 million, respectively, for the three and nine months ended September 30, 2013. The Company estimates that its consolidated annual amortization expense will be approximately $100.0 million for each of the next five years, assuming no additional investments in new or existing Affiliates. Other than changes related to foreign currency translation, there were no significant changes to goodwill or indefinite-lived acquired client relationships during the three and nine months ended September 30, 2013.
The Company performed its annual goodwill assessment as of September 30, 2013 and no impairments were identified.
Equity Method Investments in Affiliates
The intangible assets at our equity method Affiliates consist of definite-lived acquired client relationships and goodwill. Definite-lived acquired client relationships are amortized over their expected useful lives. As of September 30, 2013, these relationships were being amortized over a weighted average life of approximately nine years. The Company recognized amortization expense for these relationships of $10.2 million and $26.5 million, respectively, for three and nine months ended September 30, 2012 as compared to $10.4 million and $31.1 million, respectively, for the three and nine months ended September 30, 2013. Assuming no additional investments in new or existing Affiliates, the Company estimates the annual amortization expense for the next five years will be approximately $42.0 million in 2013, $20.0 million in 2014 and $10.0 million in each of 2015, 2016 and 2017. There were no significant changes to goodwill during the three and nine months ended September 30, 2013.
11.
Share-Based Compensation
Net income (controlling interest) for the three and nine months ended September 30, 2012 includes compensation expense of $5.0 million and $14.9 million, respectively (net of income tax benefits of $3.1 million and $9.2 million, respectively), related to the Company's Stock Option and Incentive, Executive Incentive, Long-Term Equity Interests and Deferred Compensation Plans as compared to compensation expense of $5.5 million and $16.4 million, respectively (net of income tax benefits of $3.5 million and $10.3 million, respectively), for the three and nine months ended September 30, 2013.

13


As of September 30, 2013, the Company expects to recognize compensation expense related to these share-based compensation arrangements of $53.4 million over a period of approximately three years (assuming no forfeitures).
Stock Options
The following table summarizes the transactions of the Company's stock options:
 
Stock Options
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Life
(years)
Unexercised options outstanding—December 31, 2012
3.8

 
$
74.04

 
 
Options granted
0.0

 
175.28

 
 
Options exercised
(0.8
)
 
62.45

 
 
Unexercised options outstanding—September 30, 2013
3.0

 
77.38

 
3.7
Exercisable at September 30, 2013
1.8

 
71.69

 
3.3
Restricted Stock
The following table summarizes the transactions of the Company's restricted stock units:
 
Restricted
Stock
 
Weighted
Average
Grant Date
Value
Unvested units—December 31, 2012
0.4

 
$
84.53

Units granted
0.0

 
174.91

Units issued
(0.1
)
 
85.63

Unvested units—September 30, 2013
0.3

 
86.31

Long-Term Equity Interests Plan
During the nine months ended September 30, 2013, the Company repurchased $3.2 million of these awards, and no awards were granted or forfeited.
12.
Affiliate Equity
The Company recognized compensation expense related to Affiliate equity of $6.5 million and $21.6 million, respectively ($2.3 million and $9.4 million attributable to the controlling interest), for the three and nine months ended September 30, 2012 as compared to $4.7 million and $22.2 million, respectively ($2.5 million and $10.9 million attributable to the controlling interest), for the three and nine months ended September 30, 2013.
The Company has a conditional right to call and holders of non-controlling interests have a conditional right to put their equity interests at certain intervals. The current redemption value of these interests has been presented as Redeemable non-controlling interests on the Consolidated Balance Sheets. Changes in the current redemption value are recorded to Additional paid-in capital. The following table presents the changes in Redeemable non-controlling interests during the period:
Balance, as of December 31, 2012
$
477.5

Transactions in Redeemable non-controlling interests
(40.0
)
Changes in redemption value
176.6

Balance, as of September 30, 2013
$
614.1

During the three and nine months ended September 30, 2012 and 2013, the Company acquired interests from, and transferred interests to, Affiliate management partners. The following schedule discloses the effect of changes in the Company's ownership interest in its Affiliates on the controlling interest's equity:

14


 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Net income (controlling interest)
$
54.9

 
$
75.2

 
$
98.9

 
$
202.3

Increase (decrease) in controlling interest paid-in capital from purchases and sales of Affiliate equity
1.1

 
0.9

 
(7.5
)
 
(23.1
)
Change from Net income (controlling interest) and net transfers with non-controlling interests
$
56.0

 
$
76.1

 
$
91.4

 
$
179.2

13.
Income Taxes
The consolidated income tax provision includes taxes attributable to the controlling interest and, to a lesser extent, taxes attributable to non-controlling interests as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Controlling Interests:
 
 
 
 
 
 
 
Current tax
$
8.8

 
$
32.7

 
$
31.1

 
$
73.6

Intangible-related deferred taxes
11.7

 
5.2

 
0.1

 
29.4

Other deferred taxes
(1.2
)
 
(6.3
)
 
4.9

 
(1.4
)
Total controlling interests
19.3

 
31.6

 
36.1

 
101.6

Non-controlling Interests:
 
 
 
 
 
 
 
Current tax
$
2.8

 
$
3.1

 
$
9.1

 
$
9.0

Deferred taxes
(2.7
)
 
(3.7
)
 
0.8

 
(4.0
)
Total non-controlling interests
0.1

 
(0.6
)
 
9.9

 
5.0

Provision for income taxes
$
19.4

 
$
31.0

 
$
46.0

 
$
106.6

Income before income taxes (controlling interest)
$
74.2

 
$
106.8

 
$
135.0

 
$
303.9

Effective tax rate attributable to controlling interests(1)
26.0
%
 
29.6
%
 
26.7
%
 
33.4
%
___________________________________________________________

(1)
Taxes attributable to the controlling interest divided by Income before income taxes (controlling interest).
During the three and nine months ended September 30, 2012, the Company recognized a deferred tax benefit of $7.2 million ($4.8 million attributable to the controlling interest) from the revaluation of its deferred taxes as a result of a reduction of corporate tax rates in the United Kingdom and reduced its deferred tax valuation allowance by $3.1 million and $8.3 million, respectively, primarily related to indirect tax benefits from foreign tax positions.
During the three and nine months ended September 30, 2013, the Company recognized a deferred tax benefit of $11.1 million ($7.5 million attributable to the controlling interest) from the revaluation of its deferred taxes as a result of a reduction of corporate tax rates in the United Kingdom. The Company also reduced its deferred tax valuation allowance by $1.6 million in the nine months ended September 30, 2013, primarily related to indirect tax benefits from foreign tax positions.
The components of deferred tax assets and liabilities are as follows:


15



 
December 31,
2012
 
September 30,
2013
Deferred Tax Assets
 
 
 
State net operating loss carryforwards
$
23.9

 
$
27.5

Deferred compensation
23.9

 
27.2

Foreign tax credit carryforwards
20.1

 
10.2

Tax benefit of uncertain tax positions
17.6

 
16.3

Accrued expenses
6.0

 
11.3

Capital loss carryforwards
1.5

 
1.5

Total deferred tax assets
93.0

 
94.0

Valuation allowance
(21.3
)
 
(24.9
)
Deferred tax assets, net of valuation allowance
71.7

 
69.1

Deferred Tax Liabilities
 
 
 
Intangible asset amortization
$
(238.2
)
 
$
(265.4
)
Convertible securities interest
(189.2
)
 
(142.1
)
Non-deductible intangible amortization
(120.1
)
 
(103.1
)
Deferred revenue
(18.5
)
 
(17.1
)
Other
(2.8
)
 
(2.8
)
Total deferred tax liabilities
(568.8
)
 
(530.5
)
Net deferred tax liability
$
(497.1
)
 
$
(461.4
)
Deferred tax liabilities are primarily the result of tax deductions for the Company's intangible assets and convertible securities. The Company amortizes most of its intangible assets for tax purposes only, reducing its tax basis below its carrying value for financial statement purposes and generating deferred taxes each reporting period. The Company's 2008 senior convertible notes and junior convertible trust preferred securities also generate deferred taxes because the Company's tax deductions are higher than the interest expense recorded for financial statement purposes. In the nine months ended September 30, 2013, $50.6 million of deferred tax liabilities were reclassified to stockholders' equity related to the settlement of the 2008 senior convertible notes.
At September 30, 2013, the Company has state net operating loss carryforwards that expire over a 15-year period beginning in 2013. The Company also has foreign tax credit carryforwards that expire over a 10-year period beginning in 2013. The valuation allowances at December 31, 2012 and September 30, 2013 were principally related to the Company's projections of taxable income prior to the expiration of these state and federal carryforwards.
As of September 30, 2013, the Company carried a liability for uncertain tax positions of $20.9 million, including $2.1 million for interest and related charges. At September 30, 2013 this liability also included $17.7 million for tax positions that, if recognized, would affect the Company's effective tax rate.
The Company periodically has tax examinations in the United States and foreign jurisdictions. Examination outcomes, and any related settlements, are subject to significant uncertainty. The completion of examinations may result in the payment of additional taxes and/or the recognition of tax benefits.
14.
Earnings Per Share
The calculation of basic earnings per share is based on the weighted average number of shares of the Company's common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but adjusts for the dilutive effect of the potential issuance of incremental shares of the Company's common stock. The following is a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share available to common stockholders.


16


 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Numerator
 
 
 
 
 
 
 
Net income (controlling interest)
$
54.9

 
$
75.2

 
$
98.9

 
$
202.3

Convertible securities interest expense, net

 
2.6

 

 

Net income (controlling interest), as adjusted
$
54.9

 
$
77.8

 
$
98.9

 
$
202.3

Denominator
 
 
 
 
 
 
 
Average shares outstanding—basic
51.7

 
53.2

 
51.6

 
53.0

Effect of dilutive instruments:
 
 
 
 
 
 
 
Contingently convertible securities

 
2.0

 

 

Stock options and restricted stock
1.3

 
1.3

 
1.3

 
1.4

Forward equity sales

 
0.4

 

 
0.3

Average shares outstanding—diluted
53.0

 
56.9

 
52.9

 
54.7

The diluted earnings per share calculations in the table above exclude the anti-dilutive effect of the following shares:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2013
 
2012
 
2013
Stock options and restricted stock
0.6

 
0.0

 
0.6

 
0.0

Senior convertible securities
3.7

 
1.3

 
3.7

 
2.9

Junior convertible trust preferred securities
4.2

 
2.2

 
4.2

 
4.2

Forward equity sales
0.3

 

 
0.3

 

The Company had convertible securities outstanding during the periods presented and is required to apply the if-converted method to these securities in its calculation of diluted earnings per share. Under the if-converted method, shares that are issuable upon conversion are deemed outstanding, regardless of whether the securities are contractually convertible into the Company's common stock at that time. For this calculation, the interest expense (net of tax) attributable to these dilutive securities is added back to Net income (controlling interest), reflecting the assumption that the securities have been converted. Issuable shares for these securities and related interest expense are excluded from the calculation if an assumed conversion would be anti-dilutive to diluted earnings per share.
The Company may settle portions of its Affiliate equity and Long-Term Equity Interests Plan awards in shares of its common stock. Because it is the Company's intent to settle these potential repurchases in cash, the calculation of diluted earnings per share excludes any potential dilutive effect from possible share settlements.
15.
Comprehensive Income
The following table shows the tax effects allocated to each component of Other comprehensive income:

 
For the Three Months Ended
 
September 30, 2012
 
September 30, 2013
 
Pre-Tax
 
Tax Benefit
(Expense)
 
Net of Tax
 
Pre-Tax
 
Tax Benefit
(Expense)
 
Net of Tax
Foreign currency translation adjustment
$
15.2

 
$

 
$
15.2

 
$
18.1

 
$

 
$
18.1

Change in net realized and unrealized loss on derivative securities
(0.5
)
 
0.2

 
(0.3
)
 

 

 

Change in net unrealized gain on investment securities
1.9

 
(0.7
)
 
1.2

 
10.2

 
(3.9
)
 
6.3

Other comprehensive income
$
16.6

 
$
(0.5
)
 
$
16.1

 
$
28.3

 
$
(3.9
)
 
$
24.4


17


 
For the Nine Months Ended
 
September 30, 2012
 
September 30, 2013
 
Pre-Tax
 
Tax Benefit
(Expense)
 
Net of Tax
 
Pre-Tax
 
Tax Benefit
(Expense)
 
Net of Tax
Foreign currency translation adjustment
$
19.7

 
$

 
$
19.7

 
$
(14.4
)
 
$

 
$
(14.4
)
Change in net realized and unrealized gain (loss) on derivative securities
(1.4
)
 
0.5

 
(0.9
)
 
1.3

 
(0.5
)
 
0.8

Change in net unrealized loss on investment securities
(1.8
)
 
0.7

 
(1.1
)
 
(5.6
)
 
1.7

 
(3.9
)
Other comprehensive income (loss)
$
16.5

 
$
1.2

 
$
17.7

 
$
(18.7
)
 
$
1.2

 
$
(17.5
)
The components of Accumulated other comprehensive income, net of taxes, are as follows:
 
Foreign
Currency
Translation
Adjustment
 
Realized and
Unrealized Losses
on Derivative
Securities
 
Unrealized
Gain (Loss)
on Investment
Securities
 
Total
Balance, as of December 31, 2012
$
76.2

 
$
(2.9
)
 
$
8.0

 
$
81.3

Other comprehensive income before reclassifications
(14.4
)
 
0.8

 
(2.4
)
 
(16.0
)
Amounts reclassified from other comprehensive income

 

 
(1.5
)
 
(1.5
)
Net other comprehensive income
(14.4
)
 
0.8

 
(3.9
)
 
(17.5
)
Balance, as of September 30, 2013
$
61.8

 
$
(2.1
)
 
$
4.1

 
$
63.8

16.
Segment Information
Management has assessed and determined that the Company operates in three business segments representing the Company's three principal distribution channels: Institutional, Mutual Fund and High Net Worth, each of which has different client relationships.
Revenue in the Institutional distribution channel is earned from relationships with public and private client entities, including pension plans, foundations, endowments and sovereign wealth funds. Revenue in the Mutual Fund distribution channel is earned from advisory and sub-advisory relationships with all domestically-registered investment products as well as non-institutional investment products that are registered abroad. Revenue in the High Net Worth distribution channel is earned from relationships with ultra-high net worth individuals, families and charitable foundations.
Revenue earned from client relationships managed by Affiliates accounted for under the equity method is not consolidated with the Company's reported Revenue but instead is included (net of operating expenses, including amortization) in Income from equity method investments, and reported in the distribution channel in which the Affiliate operates. Income tax attributable to the profits of the Company's equity method Affiliates is reported within the Company's consolidated income tax provision.
In firms with revenue sharing arrangements, a certain percentage of revenue is allocated for use by management of an Affiliate in paying operating expenses of that Affiliate, including salaries and bonuses, and is called an "Operating Allocation." In reporting segment operating expenses, Affiliate expenses are allocated to a particular segment on a pro rata basis with respect to the revenue generated by that Affiliate in such segment. Generally, as revenue increases, additional compensation is typically paid to Affiliate management partners from the Operating Allocation. As a result, the contractual expense allocation pursuant to a revenue sharing arrangement may result in the characterization of any growth in profit margin beyond the Company's Owners' Allocation as an operating expense. All other operating expenses (excluding intangible amortization) and interest expense have been allocated to segments based on the proportion of cash flow distributions reported by Affiliates in each segment.

18


Statements of Income
 
Three Months Ended September 30, 2012
 
Institutional
 
Mutual Fund
 
High Net Worth
 
Total
Revenue
$
210.7

 
$
208.3

 
$
48.3

 
$
467.3

Operating expenses:
 
 
 
 
 
 
 
Depreciation, intangible amortization and impairments
19.0

 
5.4

 
3.1

 
27.5

Other operating expenses
131.5

 
139.1

 
29.5

 
300.1

 
150.5

 
144.5

 
32.6

 
327.6

Operating income
60.2

 
63.8

 
15.7

 
139.7

Income from equity method investments
14.8

 
3.2

 
1.4

 
19.4

Other non-operating (income) and expenses:
 
 
 
 
 
 
 
Investment and other income
(2.8
)
 
(3.2
)
 
(0.9
)
 
(6.9
)
Interest expense
12.0

 
7.5

 
2.3

 
21.8

Imputed interest and contingent payment arrangements
3.0

 
3.2

 
0.5

 
6.7

 
12.2

 
7.5

 
1.9

 
21.6

Income before income taxes
62.8

 
59.5

 
15.2

 
137.5

Income taxes
9.4

 
7.5

 
2.5

 
19.4

Net income
53.4

 
52.0

 
12.7

 
118.1

Net income (non-controlling interests)
(28.5
)
 
(27.3
)
 
(7.4
)
 
(63.2
)
Net income (controlling interest)
$
24.9

 
$
24.7

 
$
5.3

 
$
54.9

 
Three Months Ended September 30, 2013
 
Institutional
 
Mutual Fund
 
High Net Worth
 
Total
Revenue
$
229.1

 
$
268.0

 
$
54.5

 
$
551.6

Operating expenses:
 
 
 
 
 
 
 
Depreciation, intangible amortization and impairments
17.6

 
15.6

 
2.9

 
36.1

Other operating expenses
140.3

 
174.7

 
31.4

 
346.4

 
157.9

 
190.3

 
34.3

 
382.5

Operating income
71.2

 
77.7

 
20.2

 
169.1

Income from equity method investments
27.7

 
4.0

 
2.4

 
34.1

Other non-operating (income) and expenses:
 
 
 
 
 
 
 
Investment and other income
(3.9
)
 
(3.8
)
 
(0.3
)
 
(8.0
)
Interest expense
10.6

 
7.3

 
2.0

 
19.9

Imputed interest and contingent payment arrangements
1.2

 
2.5

 
0.2

 
3.9

 
7.9

 
6.0

 
1.9

 
15.8

Income before income taxes
91.0

 
75.7

 
20.7

 
187.4

Income taxes
17.9

 
8.8

 
4.3

 
31.0

Net income
73.1

 
66.9

 
16.4

 
156.4

Net income (non-controlling interests)
(33.3
)
 
(39.1
)
 
(8.8
)
 
(81.2
)
Net income (controlling interest)
$
39.8

 
$
27.8

 
$
7.6

 
$
75.2


19