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Section 1: 10-Q (10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 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 001-15253

 

 

Janus Capital Group Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

43-1804048

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

151 Detroit Street, Denver, Colorado

 

80206

(Address of principal executive offices)

 

(Zip Code)

 

(303) 333-3863

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. 

Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

 

As of April 22, 2013, there were 189,860,977 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,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

319.9

 

$

387.0

 

Investment securities

 

399.8

 

350.5

 

Accounts receivable

 

101.5

 

100.2

 

Income taxes receivable

 

1.1

 

3.5

 

Other current assets

 

36.3

 

47.2

 

Total current assets

 

858.6

 

888.4

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Property and equipment, net

 

31.6

 

33.3

 

Intangible assets, net

 

1,239.2

 

1,242.3

 

Goodwill

 

488.2

 

488.2

 

Other assets

 

6.8

 

8.2

 

 

 

 

 

 

 

Total assets

 

$

2,624.4

 

$

2,660.4

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3.1

 

$

3.7

 

Accrued compensation and benefits

 

36.3

 

91.2

 

Other accrued liabilities

 

43.1

 

64.6

 

Total current liabilities

 

82.5

 

159.5

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

Long-term debt

 

547.6

 

545.1

 

Deferred income taxes

 

436.3

 

436.0

 

Other liabilities

 

49.5

 

41.8

 

Total liabilities

 

1,115.9

 

1,182.4

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

41.5

 

42.9

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Common stock ($0.01 par, 1,000,000,000 shares authorized; 265,500,708 and 265,500,708 shares issued, respectively; 190,160,564 and 187,522,000 shares outstanding, respectively)

 

1.9

 

1.9

 

Retained earnings

 

1,449.1

 

1,415.4

 

Accumulated other comprehensive (loss) income

 

(0.5

)

0.6

 

Total JCG stockholders’ equity

 

1,450.5

 

1,417.9

 

Noncontrolling interests

 

16.5

 

17.2

 

Total equity

 

1,467.0

 

1,435.1

 

 

 

 

 

 

 

Total liabilities and equity

 

$

2,624.4

 

$

2,660.4

 

 

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

 

1



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 (Dollars in Millions, Except Per Share Data)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Investment management fees

 

$

198.2

 

$

202.0

 

Performance fees

 

(19.5

)

(19.0

)

Shareowner servicing fees and other

 

35.5

 

35.4

 

Total

 

214.2

 

218.4

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Employee compensation and benefits

 

74.3

 

72.0

 

Long-term incentive compensation

 

15.8

 

19.6

 

Marketing and advertising

 

4.9

 

4.8

 

Distribution

 

31.4

 

32.3

 

Depreciation and amortization

 

7.5

 

8.1

 

General, administrative and occupancy

 

25.6

 

25.1

 

Total

 

159.5

 

161.9

 

 

 

 

 

 

 

Operating income

 

54.7

 

56.5

 

 

 

 

 

 

 

Interest expense

 

(11.2

)

(11.8

)

Investment gains, net

 

4.6

 

6.3

 

Other income, net

 

1.8

 

0.1

 

Loss on early extinguishment of debt

 

 

(7.2

)

Income before taxes

 

49.9

 

43.9

 

 

 

 

 

 

 

Income tax provision

 

(20.2

)

(17.2

)

 

 

 

 

 

 

Net income

 

29.7

 

26.7

 

Noncontrolling interests

 

(1.7

)

(4.1

)

 

 

 

 

 

 

Net income attributable to JCG

 

$

28.0

 

$

22.6

 

 

 

 

 

 

 

Earnings per share attributable to JCG common shareholders:

 

 

 

 

 

Basic and diluted

 

$

0.15

 

$

0.12

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

Net unrealized gain on available-for-sale securities

 

$

0.5

 

$

1.2

 

Foreign currency items

 

 

0.4

 

Reclassifications for items included in net income

 

(1.6

)

(0.1

)

Other comprehensive (loss) income, net of tax

 

(1.1

)

1.5

 

Comprehensive income

 

28.6

 

28.2

 

Comprehensive income attributable to noncontrolling interests

 

(1.7

)

(4.1

)

Comprehensive income attributable to JCG

 

$

26.9

 

$

24.1

 

 

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

 

2



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in Millions)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

CASH FLOWS PROVIDED BY (USED FOR):

 

 

 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

Net income

 

$

29.7

 

$

26.7

 

Adjustments to net income:

 

 

 

 

 

Depreciation and amortization

 

7.5

 

8.1

 

Deferred income taxes

 

16.8

 

15.0

 

Amortization of stock-based compensation

 

5.5

 

9.7

 

Investment gains, net

 

(4.6

)

(6.3

)

Amortization of debt discount and deferred issuance costs

 

3.0

 

2.8

 

Loss on early extinguishment of debt

 

 

7.2

 

Payment of deferred commissions, net

 

(1.2

)

(1.3

)

Other, net

 

0.1

 

0.6

 

Changes in working capital items:

 

 

 

 

 

Accounts receivable

 

(1.3

)

(8.9

)

Other current assets

 

(0.1

)

(0.3

)

Accounts payable and accrued compensation payable

 

(52.7

)

(42.6

)

Other liabilities

 

(16.0

)

(15.6

)

Net operating activities

 

(13.3

)

(4.9

)

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(1.3

)

(1.8

)

Purchase of investment securities

 

(117.1

)

(62.0

)

Proceeds from sales and maturities of investment securities

 

68.2

 

39.5

 

Net investing activities

 

(50.2

)

(24.3

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Repayment of long-term debt

 

 

(65.8

)

Purchase of noncontrolling interests

 

(0.2

)

 

Proceeds from stock plans

 

2.7

 

1.1

 

Excess tax benefit from equity-based compensation

 

1.2

 

1.0

 

Repurchase of common stock

 

(3.6

)

(2.4

)

Distributions to noncontrolling interests

 

(3.5

)

(2.9

)

Principal payments under capital lease obligations

 

(0.2

)

(0.3

)

Dividends paid to shareholders

 

 

(9.4

)

Net financing activities

 

(3.6

)

(78.7

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Net decrease

 

(67.1

)

(107.9

)

At beginning of period

 

387.0

 

360.0

 

At end of period

 

$

319.9

 

$

252.1

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

2.8

 

$

3.9

 

Cash paid for income taxes

 

$

0.8

 

$

1.8

 

 

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

 

3



 

JANUS CAPITAL GROUP INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Amounts in Millions)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Nonredeemable

 

 

 

 

 

 

 

Common

 

Retained

 

Comprehensive

 

Noncontrolling

 

Total

 

 

 

Shares

 

Stock

 

Earnings

 

Income (Loss)

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011

 

187.0

 

$

1.9

 

$

1,311.8

 

$

(0.5

)

$

35.9

 

$

1,349.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

22.6

 

 

 

0.4

 

23.0

 

Other comprehensive income

 

 

 

 

 

 

 

1.5

 

 

 

1.5

 

Amortization of stock-based compensation

 

 

 

 

 

8.2

 

 

 

1.1

 

9.3

 

Issuance and forfeitures of restricted stock awards, net

 

1.3

 

 

 

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

0.2

 

 

1.1

 

 

 

 

 

1.1

 

Change in noncontrolling interests in consolidated investment products

 

 

 

 

 

 

 

 

 

13.0

 

13.0

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(0.6

)

(0.6

)

Change in fair value of redeemable noncontrolling interests

 

 

 

 

 

1.7

 

 

 

 

 

1.7

 

Vesting of noncontrolling interests

 

 

 

 

 

 

 

 

 

(1.2

)

(1.2

)

Common stock repurchases

 

(0.3

)

 

(2.4

)

 

 

 

 

(2.4

)

Common stock dividends

 

 

 

 

 

(9.4

)

 

 

 

 

(9.4

)

Balance at March 31, 2012

 

188.2

 

$

1.9

 

$

1,333.6

 

$

1.0

 

$

48.6

 

$

1,385.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

187.5

 

$

1.9

 

$

1,415.4

 

$

0.6

 

$

17.2

 

$

1,435.1

 

Net income

 

 

 

 

 

28.0

 

 

 

0.3

 

28.3

 

Other comprehensive income

 

 

 

 

 

 

 

(1.1

)

 

 

(1.1

)

Amortization of stock-based compensation

 

 

 

 

 

5.3

 

 

 

0.6

 

5.9

 

Issuance and forfeitures of restricted stock awards, net

 

2.5

 

 

 

 

 

 

 

 

 

Stock option exercises and employee stock purchases

 

0.5

 

 

2.7

 

 

 

 

 

2.7

 

Change in noncontrolling interests in consolidated investment products

 

 

 

 

 

 

 

 

 

0.9

 

0.9

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(1.1

)

(1.1

)

Change in fair value of redeemable noncontrolling interests

 

 

 

 

 

1.3

 

 

 

 

1.3

 

Vesting of noncontrolling interests

 

 

 

 

 

 

 

 

 

(1.2

)

(1.2

)

Purchase of noncontrolling interests

 

 

 

 

 

 

 

 

 

(0.2

)

(0.2

)

Common stock repurchases

 

(0.4

)

 

(3.6

)

 

 

 

 

(3.6

)

Balance at March 31, 2013

 

190.1

 

$

1.9

 

$

1,449.1

 

$

(0.5

)

$

16.5

 

$

1,467.0

 

 

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

 

4



 

JANUS CAPITAL GROUP INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

Note 1 — Basis of Presentation

 

In the opinion of Janus Capital Group Inc. (collectively, “JCG” or the “Company”) management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments necessary to fairly present the financial position, results of operations and cash flows of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All such adjustments are of a normal recurring nature. Such unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying condensed consolidated financial statements through the issuance date. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

The accompanying condensed consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Note 2 to the consolidated financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

Note 2 — Recent Accounting Guidance

 

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income”. The ASU requires an entity to disclose changes in accumulated other comprehensive income (“OCI”) balances by component and disaggregate the total change between current-period OCI and reclassification adjustments. For significant reclassifications out of accumulated OCI, an entity is required to identify each line item affected by the reclassification in the notes to the financial statements or on the statement where net income is presented. The ASU is effective for the Company’s fiscal period beginning January 1, 2013. The Company adopted ASU No. 2013-02 on January 1, 2013, and added related disclosure in Note 10 — Other Comprehensive (Loss) Income.

 

Note 3 — Investment Securities

 

JCG’s investment securities as of March 31, 2013, and December 31, 2012, are summarized as follows (in millions):

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Trading securities:

 

 

 

 

 

Seeded investment products

 

$

302.5

 

$

219.5

 

Investments in advised mutual funds

 

55.8

 

89.0

 

Deferred compensation plans

 

12.7

 

11.9

 

Total trading securities

 

371.0

 

320.4

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

Seeded investment products

 

28.8

 

30.1

 

 

 

 

 

 

 

Total investment securities

 

$

399.8

 

$

350.5

 

 

Trading Securities

 

Investment securities classified as trading include seeded investment products, investments in advised mutual funds and investments related to the economic hedging of deferred compensation plans. Investments in advised mutual funds represent those assets that had been previously utilized as economic hedges against the Company’s mutual fund share awards. Effective January 2013, the Company is no longer making dollar-for-dollar investments in advised mutual funds for purposes of economically hedging mutual fund share awards.

 

5



 

At March 31, 2013, seeded investment products represented $223.4 million in 16 mutual funds advised by the Company and $79.1 million in 25 separately managed accounts. At December 31, 2012, seeded investment products represented $155.3 million in 18 mutual funds advised by the Company and $64.2 million in 25 separately managed accounts.

 

The Company recognized $7.1 million and $17.3 million of net investment gains related to trading securities that were still held as of the reporting date for the three months ended March 31, 2013 and 2012, respectively.

 

Available-for-Sale Securities

 

At March 31, 2013, and December 31, 2012, seeded investment products advised by the Company classified as available-for-sale securities represented $28.8 million held in 34 mutual funds and $30.1 million held in 31 mutual funds, respectively.

 

The following is a summary of the cost, gross unrealized gains and losses and estimated fair value of seeded investment products classified as available-for-sale securities at March 31, 2013, and December 31, 2012 (in millions):

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Cost basis

 

$

28.6

 

$

32.2

 

Gross unrealized gains

 

2.3

 

1.0

 

Gross unrealized losses

 

(2.1

)

(3.1

)

Estimated fair value

 

$

28.8

 

$

30.1

 

 

The gross unrealized gains and losses in seeded investment products were recognized as a component of other comprehensive (loss) income, net of tax on the Condensed Consolidated Statements of Comprehensive Income. The Company reviewed the gross unrealized losses and determined that the losses were not other-than-temporary. No other-than-temporary impairment charges were recognized in the three months ended March 31, 2013 or 2012.

 

Realized gains and losses related to the disposition of seeded investment products classified as available-for-sale securities were recognized within investment gains, net on the Condensed Consolidated Statements of Comprehensive Income. The following is a summary of realized gains and losses upon disposition of seeded investment products classified as available-for-sale securities for the three months ended March 31, 2013 and 2012 (in millions):

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Realized gains

 

$

0.8

 

$

0.2

 

Realized losses

 

(0.6

)

 

Net realized gains

 

$

0.2

 

$

0.2

 

 

Derivative Instruments

 

Derivative instruments at March 31, 2013, and December 31, 2012, consisted of investments in futures contracts and foreign currency forward contracts. The futures contracts and foreign currency forward contracts were not designated as accounting hedge instruments. The futures contracts are part of an economic hedge strategy covering the majority of seed investments classified as trading securities. The hedge strategy utilizes futures contracts on various market indices to mitigate a portion of the net income volatility created by the mark-to-market accounting of these investment securities. These instruments are settled daily, with settlement amounts recognized in investment gains, net on the Condensed Consolidated Statements of Comprehensive Income.

 

6



 

JCG recognized the following net gains (losses) on the above noted hedged trading securities and associated futures contracts for the three months ended March 31, 2013 and 2012 (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Net gains (losses) in net income:

 

 

 

 

 

Hedged trading securities

 

$

4.5

 

$

8.2

 

Futures contracts

 

(6.8

)

(9.1

)

Total

 

$

(2.3

)

$

(0.9

)

 

Foreign currency forward contracts are utilized to mitigate currency exchange risk on securities denominated in a foreign currency. The fair value of the foreign currency forward contracts as of March 31, 2013, and December 31, 2012, was $0.7 million and $(0.2) million, respectively, and is included in other current assets on the Condensed Consolidated Balance Sheets. Fair value adjustments for the foreign currency forward contracts are recognized in other income, net on the Condensed Consolidated Statements of Comprehensive Income.

 

JCG recognized the following net gains (losses) on the above noted hedged trading securities denominated in a foreign currency and associated foreign currency forward contracts for the three months ended March 31, 2013 and 2012 (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Net gains (losses) in net income:

 

 

 

 

 

Translation (loss) gain

 

$

(2.4

)

$

0.5

 

Foreign currency forward contracts

 

1.8

 

 

Total

 

$

(0.6

)

$

0.5

 

 

Investment Gains, Net

 

Investment gains, net on the Condensed Consolidated Statements of Comprehensive Income includes the following for the three months ended March 31, 2013 and 2012 (in millions):

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Seeded investment products

 

$

5.4

 

$

11.4

 

Noncontrolling interests in seeded investment products

 

0.3

 

1.8

 

Investments in advised mutual funds

 

4.5

 

7.6

 

Futures contracts

 

(6.8

)

(9.1

)

Economic hedges for deferred compensation plans

 

1.0

 

 

Other

 

0.2

 

(5.4

)

Investment gains, net

 

$

4.6

 

$

6.3

 

 

7



 

Purchases, Sales and Maturities

 

Cash flows related to investment securities for the three months ended March 31, 2013 and 2012, are summarized as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

 

 

Purchases

 

Sales/
Maturities

 

Purchases

 

Sales/
Maturities

 

Trading securities

 

$

(98.1

)

$

50.0

 

$

(55.2

)

$

37.4

 

Available-for-sale securities

 

(0.1

)

8.9

 

(0.1

)

2.1

 

Seed capital derivative instruments

 

(18.9

)

9.3

 

(6.7

)

 

Total cash flows

 

$

(117.1

)

$

68.2

 

$

(62.0

)

$

39.5

 

 

Note 4 — Fair Value Measurements

 

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

 

 

 

Fair Value Measurements Using:

 

 

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

$

165.3

 

$

 

$

165.3

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

191.0

 

111.5

 

 

302.5

 

Investments in advised mutual funds

 

55.8

 

 

 

55.8

 

Deferred compensation plans hedge assets

 

12.7

 

 

 

12.7

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

10.0

 

18.8

 

 

28.8

 

Total investment securities

 

269.5

 

130.3

 

 

399.8

 

Total assets

 

$

269.5

 

$

295.6

 

$

 

$

565.1

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

 

$

620.4

 

$

 

$

620.4

 

Total liabilities

 

$

 

$

620.4

 

$

 

$

620.4

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

$

 

$

 

$

41.5

 

$

41.5

 

 

8



 

The following table presents assets, liabilities and redeemable noncontrolling interests measured at fair value on a recurring basis as of December 31, 2012 (in millions):

 

 

 

Fair Value Measurements Using:

 

 

 

Quoted prices in
active markets for
identical assets

 

Significant other
observable inputs

 

Significant
unobservable inputs

 

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

$

250.1

 

$

 

$

250.1

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

74.2

 

145.3

 

 

219.5

 

Investments in advised mutual funds

 

89.0

 

 

 

89.0

 

Deferred compensation plans hedge assets

 

11.9

 

 

 

11.9

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

Seeded investment products

 

7.5

 

22.6

 

 

30.1

 

Total investment securities

 

182.6

 

167.9

 

 

350.5

 

Total assets

 

$

182.6

 

$

418.0

 

$

 

$

600.6

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

 

$

618.3

 

$

 

$

618.3

 

Total liabilities

 

$

 

$

618.3

 

$

 

$

618.3

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

$

 

$

 

$

42.9

 

$

42.9

 

 

JCG’s Level 1 and Level 2 fair value measurements consist of debt securities with maturities of 90 days or less carried within cash and cash equivalents, exchange-traded equity and debt securities underlying separate accounts and consolidated mutual funds and shares of unconsolidated mutual funds, investments in advised mutual funds, investments in mutual funds related to the economic hedging of deferred compensation plans and long-term debt. The majority of investment securities classified as Level 2 are debt securities with values derived from evaluated pricing by independent third-party providers. Short-term securities with maturities of 60 days or less are valued at amortized cost, which approximates market value, and are also categorized as Level 2 in the hierarchy. The underlying securities of mutual funds and separate accounts may be denominated in a foreign currency. In some cases, the closing price of such securities may be adjusted to capture the effects of any post-closing activity impacting the markets in which they trade. Security prices are adjusted based upon historical impacts for similar post-close activity. These adjustments result in the securities being classified as Level 2 and may also result in movements of securities between Level 1 and Level 2.

 

Transfers between Level 1 and Level 2 classifications for the three months ended March 31, 2013 and 2012, are summarized as follows (in millions):

 

 

 

March 31,

 

 

 

2013

 

2012

 

Transfers from Level 1 to Level 2

 

$

0.2

 

$

0.3

 

Transfers from Level 2 to Level 1

 

$

19.8

 

$

1.9

 

 

Transfers from Level 2 to Level 1 primarily represented foreign securities whose quoted market prices at March 31, 2013, no longer required adjustment for subsequent fluctuations in active markets. Transfers are recognized at the end of each reporting period.

 

JCG’s Level 3 recurring fair value measurements represent redeemable noncontrolling interests in INTECH Investment Management LLC (“INTECH”) and Perkins Investment Management LLC (“Perkins”).

 

Redeemable noncontrolling interests in INTECH are measured at fair value on a semi-annual basis, or more frequently if events or circumstances indicate that material change in the fair value of INTECH has occurred. The fair value of INTECH is determined using a discounted cash flow methodology with probability-weighted scenarios. Discounted cash flow analyses are prepared internally within JCG’s finance organization by personnel with appropriate valuation experience and credentials. In preparing the analyses, JCG benchmarks its valuation metrics such as multiples of earnings against recent market transactions of a similar size and nature to ensure that the estimates are reasonable. The analyses are reviewed by senior JCG finance personnel and the Company’s Chief Financial Officer. The analyses are also reviewed by the holders of the noncontrolling interests in INTECH. If the valuation is agreed to by both JCG and the holders of noncontrolling interests, JCG utilizes this analysis to value the redeemable noncontrolling interests. If the holders of noncontrolling interests object to the analysis, a valuation is obtained from a third-party investment bank agreed upon by

 

9



 

the interested parties. JCG has engaged a third-party investment bank for such valuation in the past and may again in the future.

 

Significant unobservable inputs related to the INTECH discounted cash flow analysis include forecasted operating results, discount rate and terminal multiple of forecasted earnings before interest expense, taxes, depreciation and amortization. Significant increases or decreases in the forecasted operating results and terminal multiple inputs in isolation would result in a significantly higher or lower fair value measurement, respectively. A significant increase or decrease in the discount rate input would result in a significantly lower or higher fair value measurement, respectively. The terminal multiple input for each scenario is influenced by the growth rate contained in the forecasted operating results. Generally, a change in the assumptions used for forecasted operating results is accompanied by a directionally similar change in the terminal multiple. The INTECH redeemable noncontrolling interests were subject to fair value analysis during the first quarter 2013. The average discount rate and average terminal multiple used in the first quarter 2013 analysis were 13% and 7.50x, respectively.

 

Redeemable noncontrolling interests in Perkins are measured by a contractual formula intended to represent fair value on a monthly basis. The contractual formula is prepared internally within JCG’s finance organization and is reviewed by senior JCG finance personnel and the Company’s Chief Financial Officer. The analyses are also reviewed by the holders of the noncontrolling interests in Perkins. In the event either party objects to the valuation determined by the contractual formula, a valuation is obtained from a third-party investment bank agreed upon by the interested parties. JCG has not engaged a third-party investment bank for such valuation in the past but may do so in the future.

 

Significant unobservable inputs to the Perkins contractual formula include trailing 12-month revenues of Perkins investment products and the relative performance of Perkins investment products as compared to benchmark indices. The contractual formula applies defined revenue multiples to trailing 12-month Perkins revenues to arrive at fair value; the revenue multiples are subject to increases if certain performance targets are met. Due to the contractual nature of the formula, the revenue and performance inputs are relationally independent. The revenue multiples used in the March 31, 2013, and December 31, 2012, valuations were 3.41x and 3.43x, respectively.

 

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. There were no remeasurements of these assets during the three months ended March 31, 2013 and 2012.

 

The changes in fair value of JCG’s recurring Level 3 fair value measurements are as follows (in millions):

 

 

 

Three months ended

 

Three months ended

 

 

 

March 31, 2013

 

March 31, 2012

 

 

 

Redeemable

 

Redeemable

 

Other

 

 

 

Noncontrolling

 

Noncontrolling

 

Investment

 

 

 

Interests

 

Interests

 

Securities

 

Fair value at January 1

 

$

42.9

 

$

85.4

 

$

3.2

 

Distributions

 

(2.4

)

(2.3

)

 

Current earnings

 

1.1

 

1.9

 

 

Sale of investments

 

 

 

(3.2

)

Vesting of noncontrolling interets

 

1.2

 

1.2

 

 

Change in fair value

 

(1.3

)

(1.7

)

 

 

 

 

 

 

 

 

 

Fair value at March 31

 

$

41.5

 

$

84.5

 

$

 

 

10



 

Note 5 — Debt

 

Debt at March 31, 2013, and December 31, 2012, consisted of the following (in millions):

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

6.119% Senior Notes due 2014

 

$

38.9

 

$

40.5

 

$

38.9

 

$

40.7

 

3.250% Convertible Senior Notes due 2014

 

156.4

 

177.7

 

154.0

 

176.0

 

6.700% Senior Notes due 2017

 

352.3

 

402.2

 

352.2

 

401.6

 

Total long-term debt

 

$

547.6

 

$

620.4

 

$

545.1

 

$

618.3

 

 

Fair Value of Debt

 

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

 

3.250% Convertible Senior Notes

 

In July 2009, JCG issued $170.0 million of 3.250% Convertible Senior Notes (“Convertible Senior Notes”), which pay interest semiannually on July 15 and January 15 of each year and mature on July 15, 2014, unless earlier converted. The Convertible Senior Notes are convertible under certain circumstances into cash, shares of JCG common stock, or a combination of cash and shares of JCG common stock, at JCG’s election. The holders of the Convertible Senior Notes have the right to require JCG to repurchase their notes for cash under certain circumstances. The original conversion rate of 71.3 shares of JCG common stock per $1,000 principal amount of Convertible Senior Notes was most recently adjusted on December 31, 2012, when JCG paid a quarterly cash dividend of $0.06 per share. As a result of the December 31, 2012, dividend, the conversion rate changed to 74.6 shares of JCG common stock per $1,000 principal amount of Convertible Senior Notes, equivalent to a conversion price of approximately $13.41 per share of common stock. The Company is required to continue to adjust the conversion rate to the extent there are future dividend payments above $0.04 per share on an annual basis. The Convertible Senior Notes are not callable by JCG.

 

The $125.7 million initial debt component was determined by discounting future contractual cash flows at a 10.0% rate, which is consistent with the estimated market rate at the time of issuance for similar senior notes with no conversion option. The debt component will accrete up to the face value over the five-year expected term through interest expense. The unamortized discount at March 31, 2013, is $13.6 million and will be amortized over the remaining period of 15 months. Interest expense related to the Convertible Senior Notes includes interest on the outstanding principal balance as well as amortization of capitalized issuance costs and totaled $4.0 million and $3.8 million for the three months ended March 31, 2013 and 2012, respectively.

 

Interest Rate Adjustment Covenant

 

All of JCG’s senior notes, excluding the Convertible Senior Notes, are subject to an interest rate adjustment covenant that provides that the interest rate payable will increase by 25 basis points for each level that the Company’s debt rating is decreased by Moody’s Investors Service Inc. from Baa3 or by Standard & Poor’s Rating Service (“S&P”) from BBB-, up to a maximum increase of 200 basis points. On January 9, 2013, S&P reaffirmed its BBB- credit rating for JCG’s unsecured senior debt and revised its outlook from stable to negative. No interest rate adjustments occurred during the three months ended March 31, 2013.

 

Credit Facility

 

At March 31, 2013, JCG had a $250 million, unsecured, revolving credit facility (the “Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent and swingline lender. Under the Credit Facility, JCG’s financing leverage ratio cannot exceed 3.00x, and its interest coverage ratio must equal or exceed 4.00x. At March 31, 2013, JCG was in compliance with all covenants, and there were no borrowings under the Credit Facility. The Credit Facility has a maturity date of October 14, 2014.

 

11



 

Capital Lease Obligations

 

JCG’s capital lease obligations represent leased computer equipment. The carrying values of the obligations totaled $2.4 million and $2.9 million at March 31, 2013, and December 31, 2012, respectively, and are included in other accrued liabilities and other liabilities on the Condensed Consolidated Balance Sheets. The related lease terms extend through 2017.

 

Note 6 — Income Tax Contingencies

 

As of March 31, 2013, JCG had $5.9 million of accrued reserves for income tax contingencies. JCG accrued additional reserves for income tax contingencies in the amount of $0.2 million during the first quarter 2013, creating a net tax expense of $0.1 million. During the three months ended March 31, 2013, JCG decreased its income tax contingency reserves by $0.2 million as a result of the expiration of statutes of limitations and audit settlements, creating a net tax benefit of $0.1 million. JCG anticipates that its income tax contingency reserves will decrease by approximately $1.4 million in the next 12 months, primarily from the expiration of statutes of limitations and the resolution of audits. Accrued reserves for income tax contingencies are presented in other accrued liabilities and other liabilities on the Condensed Consolidated Balance Sheets.

 

Note 7 — Noncontrolling Interests

 

Noncontrolling interests in net income consist of the following:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Nonredeemable noncontrolling interests in subsidiaries

 

$

0.3

 

$

0.4

 

Nonredeemable noncontrolling interests in consolidated seeded investment products

 

0.3

 

1.8

 

Redeemable noncontrolling interests in subsidiaries

 

1.1

 

1.9

 

 

 

 

 

 

 

Total noncontrolling interests in net income

 

$

1.7

 

$

4.1

 

 

Noncontrolling interests on the Condensed Consolidated Balance Sheets consist of the following:

 

Noncontrolling Interests That Are Not Subject to Redemption Rights

 

Noncontrolling interests that are not subject to redemption rights totaled $16.5 million as of March 31, 2013, representing third-party investors’ ownership in consolidated seeded investment products of $13.3 million and the value of certain INTECH ownership interests held by employees of $3.2 million. Noncontrolling interests that are not subject to redemption rights totaled $17.2 million as of December 31, 2012, representing third-party investors’ ownership in consolidated seeded investment products of $12.4 million and the value of certain INTECH and Perkins ownership interests held by employees of $4.8 million. Certain of the Perkins ownership interests granted to employees became subject to redemption rights upon vesting in the first quarter 2013 at which time such interests were reclassified to redeemable noncontrolling interests.

 

Changes in noncontrolling interests in consolidated seeded investment products were driven by two factors: changes in the market value of the underlying seeded investment products and changes in ownership of the underlying seeded investment products.

 

12



 

The following table presents a rollforward of noncontrolling interests in consolidated seeded investment products (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Noncontrolling interests in consolidated seeded investment products at January 1

 

$

12.4

 

$

29.2

 

Change in market value

 

0.3

 

1.8

 

Change in ownership

 

0.6

 

11.2

 

 

 

 

 

 

 

Noncontrolling interests in consolidated seeded investment products at March 31

 

$

13.3

 

$

42.2

 

 

Seeded investment products attracted significant third-party investment during the three months ended March 31, 2012. Increased third-party investment increases third-party ownership in consolidated seeded investment products, and increases the related noncontrolling interests in those products.

 

Redeemable Noncontrolling Interests

 

Redeemable noncontrolling interests as of March 31, 2013, consist of INTECH and Perkins interests that are currently redeemable by JCG or will become subject to redemption rights at certain future dates of $40.1 million and undistributed earnings of $1.4 million. Redeemable noncontrolling interests as of December 31, 2012, consist of INTECH and Perkins interests that are currently redeemable by JCG or will become subject to redemption rights at certain future dates of $40.1 million and undistributed earnings of $2.8 million.

 

INTECH

 

INTECH ownership interests held by a founding member had an estimated value of approximately $5.2 million and $4.8 million as of March 31, 2013, and December 31, 2012, respectively, representing approximately 1.0% aggregate ownership of INTECH. This founding member is entitled to retain his remaining INTECH interests until his death and has the option to require JCG to purchase from him his ownership interest of INTECH at fair value.

 

At March 31, 2013, and December 31, 2012, no ownership interests subject to redemption rights were held by other INTECH employees.

 

Perkins

 

The total Perkins noncontrolling interests subject to redemption rights had an estimated fair value of approximately $34.9 million and $35.3 million as of March 31, 2013, and December 31, 2012, respectively.

 

On February 1, 2013, the noncontrolling owners of Perkins (who own 22.2% of the equity units of Perkins) exercised their right to put 98% of their interests to JCG. Under the terms of the put, the noncontrolling ownership interests will be redeemed at fair value as determined six months from the date of the put exercise. The noncontrolling interests are primarily held by founding members who are not involved in the management of Perkins. Perkins management will continue to hold the majority of their interests in Perkins through senior profits interests awards or long-term incentive compensation plans. The Perkins senior profits interests generally receive 5% of Perkins annual taxable income and have a terminal value based on Perkins revenue and relative investment performance of products managed by Perkins. The Perkins senior profits interests awards and long-term incentive compensation plans provide active members of Perkins management an ongoing stake in the success of Perkins.

 

13



 

Note 8 — Long-Term Incentive Compensation

 

JCG generally grants annual long-term incentive awards in February of each year. JCG granted $47.6 million in long-term incentive awards in the first quarter 2013, which vest and will be recognized ratably over a four-year period. The 2013 awards consisted of $26.2 million of restricted stock (2.7 million shares at a weighted-average price of $9.77 per share), $21.2 million of mutual fund share awards and $0.2 million of stock option awards.

 

JCG records compensation expense associated with long-term incentive awards based on the amount of awards expected to vest at the end of the stated service period, comprising the total value of the awards less an estimate for forfeitures.

 

During the three months ended March 31, 2013 and 2012, JCG recognized $2.9 million and $2.0 million of long-term incentive compensation expense related to mark-to-market adjustments of mutual fund share awards and deferred compensation plans, respectively.

 

Note 9 — Other Income, Net

 

The components of other income, net are as follows (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Dividend income

 

$

0.4

 

$

0.3

 

Interest income

 

0.1

 

0.1

 

Foreign currency items

 

1.2

 

(0.5

)

Other, net

 

0.1

 

0.2

 

Total

 

$

1.8

 

$

0.1

 

 

Note 10 — Other Comprehensive (Loss) Income

 

Changes in accumulated other comprehensive (loss) income, net of tax, for the three months ended March 31, 2013 and 2012, are as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

 

 

Unrealized gains
(losses) on
available-for-sale
securities

 

Foreign
currency
items

 

Total

 

Unrealized gains
(losses) on
available-for-sale
securities

 

Foreign
currency
items

 

Total

 

Beginning balance

 

$

1.4

 

$

(0.8

)

$

0.6

 

$

0.7

 

$

(1.2

)

$

(0.5

)

Other comprehensive income (loss) before reclassifications

 

0.5

 

 

0.5

 

1.2

 

0.4

 

1.6

 

Amounts reclassified from accumulated other comprehensive income (loss) to:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment gains (losses), net

 

(0.1

)

 

(0.1

)

(0.1

)

 

(0.1

)

Other income, net

 

 

(1.5

)

(1.5

)

 

 

 

Net current period other comprehensive income

 

0.4

 

(1.5

)

(1.1

)

1.1

 

0.4

 

1.5

 

Ending balance

 

$

1.8

 

$

(2.3

)

$

(0.5

)

$

1.8

 

$

(0.8

)

$

1.0

 

 

Note 11 — Earnings Per Share

 

Basic earnings per common share is calculated by dividing net income attributable to JCG common shareholders by the weighted-average number of common shares outstanding during the period. The calculation of diluted earnings per common share adjusts the weighted-average shares outstanding by the dilutive impact of shares underlying stock options, unvested restricted stock awards and price-vesting units.

 

14



 

The following is a summary of the earnings per share calculation for the three months ended March 31, 2013 and 2012 (in millions, except per share data):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net income attributable to JCG common shareholders

 

$

28.0

 

$

22.6

 

 

 

 

 

 

 

Basic earnings per share attributable to JCG common shareholders:

 

 

 

 

 

Weighted-average common shares outstanding

 

184.8

 

184.0

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.15

 

$

0.12

 

 

 

 

 

 

 

Diluted earnings per share attributable to JCG common shareholders:

 

 

 

 

 

Weighted-average common shares outstanding

 

184.8

 

184.0

 

 

 

 

 

 

 

Dilutive effect of stock options and unvested restricted stock using the treasury stock method

 

1.5

 

1.4

 

Weighted-average diluted common shares outstanding

 

186.3

 

185.4

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.15

 

$

0.12

 

 

 

 

 

 

 

Dividends paid per share

 

$

 

$

0.05

 

 

On December 10, 2012, JCG’s Board of Directors declared a regular quarterly cash dividend of $0.06 per share, which was paid on December 31, 2012. This accelerated quarterly cash dividend replaced the quarterly cash dividend that would have otherwise been declared and paid in the first quarter 2013.

 

The following stock options, unvested restricted stock and price-vesting units are anti-dilutive and have not been included in the weighted-average diluted shares outstanding calculation (in millions):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2013

 

2012

 

Employee stock options

 

8.5

 

10.4

 

Other stock options

 

14.0

 

 

Unvested restricted stock and price-vesting units

 

3.8

 

3.4

 

 

All shares held in the JCG Employee Stock Ownership Plan are treated as outstanding for purposes of computing basic earnings per share. The computation of diluted earnings per share does not include the impact of the Convertible Senior Notes because the effect would be anti-dilutive as the conversion criteria have not been satisfied.

 

Note 12 — Litigation and Other Regulatory Matters

 

JCG is periodically involved in various legal proceedings and other regulatory matters. At March 31, 2013, JCG has a $0.5 million litigation accrual for all pending litigation matters. Possible losses in addition to the litigation accrual cannot be currently estimated, and as such, no additional accruals have been made. Although there can be no assurances, based on information currently available, management believes that it is probable that the ultimate outcome of matters that are pending or threatened will not have a material effect on JCG’s consolidated financial condition.

 

15



 

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate,” “forecast” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts. Any statements that refer to expectations or other characterizations of future events, circumstances or results are forward-looking statements. These statements are based on the beliefs and assumptions of Company management based on information currently available to management.

 

Various risks, uncertainties, assumptions and factors that could cause future results to differ materially from those expressed by the forward-looking statements included in this Quarterly Report on Form 10-Q include, but are not limited to, risks, uncertainties, assumptions and factors specified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and this Quarterly Report on Form 10-Q included under headings such as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other filings and furnishings made by the Company with the SEC from time to time. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. Many of these factors are beyond the control of the Company and its management. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by applicable law or regulation.

 

AVAILABLE INFORMATION

 

Copies of Janus Capital Group Inc.’s (collectively, “JCG” or the “Company”) filings with the Securities and Exchange Commission (“SEC”) can be obtained from the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information can be obtained about the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

 

JCG makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments thereto as soon as reasonably practical after such filing has been made with the SEC. Reports may be obtained through the Investor Relations section of JCG’s website (http://ir.janus.com) or by contacting JCG at (888) 834-2536. The contents of JCG’s website are not incorporated herein for any purpose.

 

JCG’s Officer Code of Ethics for Principal Executive Officer and Senior Financial Officers (including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer) (the “Officer Code”); Corporate Code of Business Conduct and Ethics for all employees; corporate governance guidelines; and the charters of key committees of the board of directors (including the Audit, Compensation, Nominating, Corporate Governance, and Planning and Strategy committees) are available on its website (http://ir.janus.com/documents.cfm). Any future amendments to or waivers of the Officer Code will be posted to the Investor Relations section of JCG’s website.

 

16



 

RESULTS OF OPERATIONS

 

Overview

 

JCG provides investment management, administration, distribution and related services to financial advisors, individuals and institutional clients through mutual funds, other pooled investment vehicles, separate accounts and subadvised relationships (collectively referred to as “investment products”) in both domestic and international markets. Over the last several years, JCG has expanded its business to become a more diversified manager with increased investment product offerings and distribution capabilities. JCG provides investment management competencies across a range of disciplines, including fundamental U.S. and global equities (growth and value), mathematical equities, fixed income and alternatives through its subsidiaries, Janus Capital Management LLC (“Janus”), INTECH Investment Management LLC (“INTECH”) and Perkins Investment Management LLC (“Perkins”). Each of JCG’s subsidiaries specializes in specific investment styles and has its own unique and independent perspective. JCG’s investment products are distributed through three primary channels: retail intermediary, institutional and international. Each distribution channel focuses on specific investor groups and the unique requirements of each group.

 

Revenues are generally based upon a percentage of the market value of assets under management and are calculated as a percentage of the daily average asset balance in accordance with contractual agreements. Certain investment products are also subject to performance fees, which vary based on a product’s relative performance as compared to a benchmark index and the level of assets subject to such fees. Assets under management primarily consist of domestic and international equity and fixed income securities. Accordingly, fluctuations in domestic and international financial markets, relative investment performance, sales and redemptions of investment products, and changes in the composition of assets under management are all factors that have a direct effect on JCG’s operating results.

 

First Quarter 2013 Summary

 

Average assets under management for the first quarter 2013 of $161.8 billion increased $6.2 billion, or 4.0%, over the fourth quarter 2012 as a result of favorable market conditions, partially offset by long-term net outflows. First quarter 2013 revenues of $214.2 million decreased $2.4 million, or 1.1%, from the fourth quarter 2012 due to decreased performance fees from separate accounts, offset by increased investment management fee revenue driven by higher average assets under management. Negative performance fees on mutual funds remained unchanged from the fourth quarter 2012 to the first quarter 2013. The Company achieved an operating margin of 25.5% and net income of $0.15 per diluted share in the first quarter 2013.

 

Investment Performance

 

Investment products are generally evaluated based on their investment performance relative to other investment products with similar disciplines and strategies or benchmark indices. The following table is a summary of investment performance as of March 31, 2013:

 

 

 

Percentage of Mutual Fund Assets

 

 

 

Outperforming Majority of Morningstar Peers (1)

 

 

 

1-Year

 

3-Year

 

5-Year

 

 

 

 

 

 

 

 

 

Complex-wide mutual fund assets

 

57

%

31

%

46

%

Fundamental equity mutual fund assets

 

57

%

24

%

38

%

Fixed income mutual fund assets

 

54

%

74

%

100

%

 

 

 

Percentage of Strategies Outperforming Respective Benchmarks (2)

 

 

 

1-Year

 

3-Year

 

5-Year

 

 

 

 

 

 

 

 

 

Mathematical equity strategies

 

89

%

93

%

82

%

 


(1) References Morningstar relative performance on an asset-weighted basis.

(2) References relative performance, net of fees.

 

17



 

Assets Under Management and Flows

 

Valuation

 

The pricing policies for mutual funds advised by JCG’s subsidiaries (the “Funds”) are established by the Funds’ Independent Board of Trustees and are designed to test and validate fair value measurements. Responsibility for pricing securities held within separate and subadvised accounts may be delegated by the separate or subadvised clients to JCG or another party. JCG validates pricing received from third-party providers by comparing pricing between primary and secondary vendors. Any discrepancies are identified and resolved. All pricing vendors are subject to an annual onsite due diligence review that includes a detailed discussion about the methodologies used, particularly for evaluated prices, and any changes to the methodologies.

 

The value of assets under management is derived from the cash and investment securities underlying JCG’s investment products. The value of the majority of the equity securities underlying JCG’s investment products is derived from readily available and reliable market price quotations while the value of a majority of the fixed income securities is derived from evaluated pricing from independent third-party providers.

 

When market quotations are not readily available or deemed unreliable, or events or circumstances that may affect the value of portfolio securities are identified between the closing of their principal markets and the time the net asset value is determined, securities may be valued under procedures established and supervised by the Funds’ Independent Board of Trustees. Circumstances in which fair value pricing may be utilized include, but are not limited to: (i) a significant event that may affect the securities of a single issuer, such as a merger or bankruptcy; (ii) an event that may affect an entire market, such as a natural disaster; and (iii) pricing of a non-valued security or a restricted or non-public security. Systematic fair valuation models provided by independent third-parties may be used to value international equity securities in order to adjust for stale pricing, which may occur between the close of certain foreign exchanges and the close of the New York Stock Exchange.

 

Assets Under Management and Flows

 

Total Company assets under management of $163.8 billion at March 31, 2013, decreased $0.2 billion, or 0.1%, from March 31, 2012, as a result of long-term net outflows of $13.5 billion, offset by net market appreciation of $13.3 billion. Long-term net flows represent total Company net sales and redemptions, excluding money market assets.

 

Fundamental equity long-term net outflows were $1.8 billion in the first quarter 2013, compared with long-term net outflows of $1.9 billion in the first quarter 2012.

 

Fixed income long-term net flows were positive for the 17th consecutive quarter, with $0.3 billion in the first quarter 2013 compared with $1.2 billion in the first quarter 2012.

 

Mathematical equity long-term net outflows were $2.4 billion in the first quarter 2013 compared with $1.8 billion of long-term net outflows in the first quarter 2012.

 

18



 

The following tables present the components of JCG’s assets under management for the three months ended March 31, 2013 and 2012 (in billions):

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Beginning of period assets

 

$

156.8

 

$

148.2

 

Long-term sales:

 

 

 

 

 

Fundamental equity

 

5.3

 

5.2

 

Fixed income

 

3.5

 

3.0

 

Mathematical equity

 

0.8

 

0.5

 

Long-term redemptions:

 

 

 

 

 

Fundamental equity

 

(7.1

)

(7.1

)

Fixed income

 

(3.2

)

(1.8

)

Mathematical equity

 

(3.2

)

(2.3

)

Long-term net flows: (1)

 

 

 

 

 

Fundamental equity

 

(1.8

)

(1.9

)

Fixed income

 

0.3

 

1.2

 

Mathematical equity

 

(2.4

)

(1.8

)

Total long-term net flows

 

(3.9

)

(2.5

)

Net money market flows

 

(0.1

)

 

Market/fund performance

 

11.0

 

18.3

 

End of period assets

 

$

163.8

 

$

164.0

 

 


(1)    Excludes money market flows. Sales and redemptions of money market funds are presented net on a separate line due to the short-term nature of the investments.

 

 

 

Three months ended
March 31,

 

 

 

2013

 

2012

 

Average assets under management

 

 

 

 

 

Fundamental equity

 

$

92.1

 

$

94.3

 

Fixed income

 

27.0

 

21.7

 

Mathematical equity

 

41.3

 

41.4

 

Money market

 

1.4

 

1.5

 

Total

 

$

161.8

 

$

158.9

 

 

19



 

Assets and Flows by Investment Discipline

 

JCG, through its primary subsidiaries, offers investment products based on a diversified set of investment disciplines. Janus offers growth and core equity, global and international equity as well as balanced, fixed income and retail money market investment products. INTECH offers mathematical-based investment products and Perkins offers value-disciplined investment products. Assets and flows by investment discipline are as follows (in billions):

 

 

 

Three Months Ended
March 31,

 

 

 

2013

 

2012

 

Growth/Core (1)

 

 

 

 

 

Beginning of period assets

 

$

53.8

 

$

49.7

 

Sales

 

3.5

 

3.0

 

Redemptions

 

(3.4

)

(3.9

)

Net sales (redemptions)

 

0.1

 

(0.9

)

Market/fund performance

 

3.9

 

7.8

 

End of period assets

 

$

57.8

 

$

56.6

 

 

 

 

 

 

 

Global/International

 

 

 

 

 

Beginning of period assets

 

$

17.9

 

$

18.4

 

Sales

 

0.9

 

1.0

 

Redemptions

 

(1.6

)

(1.5

)

Net redemptions

 

(0.7

)

(0.5

)

Market/fund performance

 

0.7

 

3.3

 

End of period assets

 

$

17.9

 

$

21.2

 

 

 

 

 

 

 

Mathematical Equity

 

 

 

 

 

Beginning of period assets

 

$

40.2

 

$

39.9

 

Sales

 

0.8

 

0.5

 

Redemptions

 

(3.2

)

(2.3

)

Net redemptions

 

(2.4

)

(1.8

)

Market/fund performance

 

3.9

 

4.6

 

End of period assets

 

$

41.7

 

$

42.7

 

 

 

 

 

 

 

Fixed Income (1)

 

 

 

 

 

Beginning of period assets

 

$

26.4

 

$

20.6

 

Sales

 

3.5

 

3.0

 

Redemptions

 

(3.2

)

(1.8

)

Net sales

 

0.3

 

1.2

 

Market/fund performance

 

0.7

 

0.9

 

End of period assets

 

$

27.4

 

$

22.7

 

 

 

 

 

 

 

Value

 

 

 

 

 

Beginning of period assets

 

$

17.0

 

$

18.1

 

Sales

 

0.9

 

1.2

 

Redemptions

 

(2.1

)

(1.7

)

Net redemptions

 

(1.2

)

(0.5

)

Market/fund performance

 

1.8

 

1.7

 

End of period assets

 

$

17.6

 

$

19.3

 

 

 

 

 

 

 

Money Market

 

 

 

 

 

Beginning of period assets

 

$

1.5

 

$

1.5

 

Sales

 

0.2

 

0.2

 

Redemptions

 

(0.3

)

(0.2

)

Net redemptions

 

(0.1

)

 

Market/fund performance

 

 

 

End of period assets

 

$

1.4

 

$

1.5

 

 


(1)    Growth/core and fixed income assets reflect a 50%/50% split of the Janus Balanced Fund between the two categories.

 

20



 

Results of Operations

 

Three Months Ended March 31, 2013, Compared with Three Months Ended March 31, 2012

 

Revenues

 

Investment Management Fees

 

Investment management fees decreased $3.8 million, or 1.9%, primarily as a result of a product mix shift toward lower yielding products.

 

Performance Fees

 

Negative performance fees were driven by underperformance of certain mutual funds against their respective benchmarks. A summary of mutual fund and private account assets subject to performance fees as of March 31, 2013 and 2012, is as follows (in billions):

 

 

 

March 31,

 

 

 

2013

 

2012

 

Mutual fund assets

 

$

55.2

 

$

61.1

 

Private account assets

 

$

11.6

 

$

8.6

 

 

Expenses

 

Long-Term Incentive Compensation

 

Long-term incentive compensation decreased $3.8 million, or 19.4%, due to a decrease of $2.1 million as a result of JCG revising its estimate for forfeitures during the first quarter 2012, a net decrease of $1.2 million from the vesting of awards granted in previous years and an increase of expense from the 2013 grant. Long-term incentive awards granted during 2013 totaled $47.6 million and will generally be recognized ratably over a four-year period.

 

Investment Gains, Net

 

Net investment gains totaling $4.6 million for the first quarter 2013 primarily include $9.1 million of mark-to-market gains related to trading securities and $1.6 million of gains from the sale of trading securities. The investment gains on seed capital were partially offset by $6.8 million of losses generated by the Company’s economic hedging strategy. The hedging strategy utilizes futures contracts to mitigate a portion of the volatility created by the mark-to-market accounting of seed capital investments.

 

Loss on Early Extinguishment of Debt

 

JCG recognized a $7.2 million loss on early extinguishment of debt in the first quarter 2012 related to the repurchase of $59.4 million aggregate principal amount of the Company’s outstanding 2014 and 2017 Senior Notes.

 

Income Tax Provision

 

JCG’s income tax provision for each of the three months ended March 31, 2013 and 2012, included $2.5 million related to the reversal of unrealized deferred tax assets upon the expiration and vesting of certain equity-based compensation awards.

 

Noncontrolling Interests

 

Noncontrolling interests in net income decreased from $4.1 million in the first quarter 2012 to $1.7 million in the first quarter 2013 primarily due to $1.4 million of losses associated with the noncontrolling interest in consolidated investment products and a decline of $0.6 million in the noncontrolling interest share of Perkins earnings.

 

21



 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

A summary of cash flow data for the three months ended March 31, 2013 and 2012, is as follows (in millions):

 

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

Cash flows used for:

 

 

 

 

 

Operating activities

 

$

(13.3

)

$

(4.9

)