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JNS > SEC Filings for JNS > Form 10-Q on 26-Jul-2012All Recent SEC Filings

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Form 10-Q for JANUS CAPITAL GROUP INC


26-Jul-2012

Quarterly Report


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, 2011, 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 controller) (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.


RESULTS OF OPERATIONS

Overview

JCG provides investment management, administration, distribution and related services to individual and institutional investors 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 product offerings and distribution capabilities. JCG offers three distinct types of investment advisory services, including fundamental equity (includes growth and core equity, global and international equity, and value investment disciplines), fixed income and mathematical equity, through its primary subsidiaries, Janus Capital Management LLC ("Janus"), INTECH Investment Management LLC ("INTECH") and Perkins Investment Management LLC ("Perkins"). Each of JCG's three primary subsidiaries specializes in specific investment styles and disciplines. JCG's investment products are distributed through three 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 debt 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.

Second Quarter 2012 Summary

Average assets under management for the second quarter 2012 of $155.0 billion decreased $3.9 billion, or 2.5%, over the first quarter 2012 as a result of unfavorable market conditions and long-term net outflows. Second quarter 2012 revenues of $206.0 million declined $12.4 million, or 5.7%, from the first quarter 2012 due to decreased management fees from lower average assets under management and an increase in negative mutual fund performance fees. The Company achieved an operating margin of 25.3% and net income of $0.13 per diluted share in the second quarter 2012.

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.

48%, 29% and 75% of complex-wide mutual fund assets ranked in the top half of their Lipper categories on a one-, three- and five-year total return basis, respectively, as of June 30, 2012.

40%, 18% and 72% of fundamental equity mutual fund assets ranked in the top half of their Lipper categories on a one-, three- and five-year total return basis, respectively, as of June 30, 2012.

100% of fixed income mutual fund assets ranked in the top half of their Lipper categories on a one-, three- and five-year total return basis as of June 30, 2012.

35%, 79% and 75% of mathematical equity strategies surpassed their respective benchmarks, net of fees, over the one-, three- and five-year periods, respectively, as of June 30, 2012.


Assets Under Management and Flows

Valuation

The value of assets under management is derived from the cash and investment securities held by JCG's investment products. Investment security values are determined using unadjusted or adjusted quoted market prices and independent third-party price quotes in active markets. For debt securities with maturities of 60 days or less, the amortized cost method is used to determine the value. Securities for which market prices are not readily available or are considered unreliable are internally valued using appropriate methodologies for each security type or by engaging third-party specialists. The value of the majority of the equity and derivative 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.

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 separate or subadvised clients to JCG or another party.

Assets Under Management and Flows

Total Company assets under management of $152.4 billion at June 30, 2012, decreased $17.4 billion, or 10.2%, from June 30, 2011, primarily as a result of long-term net outflows of $12.8 billion and net market depreciation of $4.6 billion. Long-term net flows represent total Company net sales and redemptions, excluding money market assets.

Fundamental equity long-term net outflows were $2.5 billion in the second quarter 2012 compared with long-term net outflows of $4.6 billion in the second quarter 2011. The decrease in net outflows was primarily driven by lower redemptions.

Fixed income long-term net flows were positive for the 14th consecutive quarter, with $1.1 billion in the second quarter 2012 compared with $1.0 billion in the second quarter 2011.

Mathematical equity long-term net outflows were $2.5 billion in the second quarter 2012 compared with $0.5 billion of long-term net inflows in the second quarter 2011 as a result of decreased sales and increased redemptions.


The following tables present the components of JCG's assets under management (in billions):

                                     Three months ended June 30,          Six months ended June 30,
                                      2012                2011              2012             2011

Beginning of period assets       $         164.0     $         173.5    $       148.2    $       169.5
Long-term sales:
Fundamental equity                           4.2                 5.0              9.4             12.5
Fixed income                                 3.2                 2.1              6.2              4.0
Mathematical equity (1)                      0.6                 2.3              1.1              2.8
Long-term redemptions:
Fundamental equity                          (6.7 )              (9.6 )          (13.8 )          (17.6 )
Fixed income                                (2.1 )              (1.1 )           (3.9 )           (2.6 )
Mathematical equity (1)                     (3.1 )              (1.8 )           (5.4 )           (4.9 )
Long-term net flows: (2)
Fundamental equity                          (2.5 )              (4.6 )           (4.4 )           (5.1 )
Fixed income                                 1.1                 1.0              2.3              1.4
Mathematical equity                         (2.5 )               0.5             (4.3 )           (2.1 )
Total long-term net flows                   (3.9 )              (3.1 )           (6.4 )           (5.8 )
Net money market flows                      (0.1 )                 -             (0.1 )              -
Market/fund performance                     (7.6 )              (0.6 )           10.7              6.1
End of period assets             $         152.4     $         169.8    $       152.4    $       169.8

                                       Three months ended June 30,          Six months ended June 30,
                                        2012                2011              2012             2011
Average assets under management
Fundamental equity                 $          90.4     $         108.9    $        92.4    $       110.1
Fixed income                                  22.9                16.8             22.3             16.2
Mathematical equity                           40.2                44.4             40.8             44.3
Money market                                   1.5                 1.5              1.5              1.5
Total                              $         155.0     $         171.6    $       157.0    $       172.1



(1) Gross sales and redemptions for the six months ended June 30, 2011, exclude the transfer of $1.1 billion within mathematical equity strategies.
(2) 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.


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 June 30,           Six Months Ended June 30,
                                            2012               2011              2012               2011
Growth/Core (1)
Beginning of period assets             $         56.6     $         61.8    $         49.7     $         60.9
Sales                                             2.2                2.4               5.2                6.2
Redemptions                                      (3.5 )             (5.9 )            (7.4 )            (10.6 )
Net redemptions                                  (1.3 )             (3.5 )            (2.2 )             (4.4 )
Market/fund performance                          (2.6 )              0.2               5.2                2.0
End of period assets                   $         52.7     $         58.5    $         52.7     $         58.5

Global/International
Beginning of period assets             $         21.2     $         28.6    $         18.4     $         27.9
Sales                                             1.0                1.2               2.0                3.1
Redemptions                                      (1.7 )             (2.2 )            (3.2 )             (3.9 )
Net redemptions                                  (0.7 )             (1.0 )            (1.2 )             (0.8 )
Market/fund performance                          (2.9 )             (1.5 )             0.4               (1.0 )
End of period assets                   $         17.6     $         26.1    $         17.6     $         26.1

Mathematical Equity (2)
Beginning of period assets             $         42.7     $         44.2    $         39.9     $         44.1
Sales                                             0.6                2.3               1.1                2.8
Redemptions                                      (3.1 )             (1.8 )            (5.4 )             (4.9 )
Net sales (redemptions)                          (2.5 )              0.5              (4.3 )             (2.1 )
Market/fund performance                          (1.0 )              0.8               3.6                3.5
End of period assets                   $         39.2     $         45.5    $         39.2     $         45.5

Fixed Income (1)
Beginning of period assets             $         22.7     $         16.1    $         20.6     $         15.3
Sales                                             3.2                2.1               6.2                4.0
Redemptions                                      (2.1 )             (1.1 )            (3.9 )             (2.6 )
Net sales                                         1.1                1.0               2.3                1.4
Market/fund performance                             -                0.1               0.9                0.5
End of period assets                   $         23.8     $         17.2    $         23.8     $         17.2

Value
Beginning of period assets             $         19.3     $         21.3    $         18.1     $         19.8
Sales                                             1.0                1.4               2.2                3.2
Redemptions                                      (1.5 )             (1.5 )            (3.2 )             (3.1 )
Net sales (redemptions)                          (0.5 )             (0.1 )            (1.0 )              0.1
Market/fund performance                          (1.1 )             (0.2 )             0.6                1.1
End of period assets                   $         17.7     $         21.0    $         17.7     $         21.0

Money Market
Beginning of period assets             $          1.5     $          1.5    $          1.5     $          1.5
Sales                                             0.1                0.2               0.3                0.5
Redemptions                                      (0.2 )             (0.2 )            (0.4 )             (0.5 )
Net redemptions                                  (0.1 )                -              (0.1 )                -
Market/fund performance                             -                  -                 -                  -
End of period assets                   $          1.4     $          1.5    $          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.
(2) Gross sales and redemptions for the six months ended June 30, 2011, exclude the transfer of $1.1 billion within mathematical equity strategies.


Results of Operations

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

Revenues

Investment management fees decreased $33.6 million, or 14.9%, primarily as a result of the 9.7% decrease in average assets under management driven by long-term net outflows and market depreciation. Revenue decreased at a higher rate than average assets primarily due to a product mix shift toward lower yielding products.

Performance fee revenue is derived from certain mutual funds and separate accounts. The decline in total performance fee revenue of $21.7 million was primarily due to an increase in negative mutual fund performance fees. These negative mutual fund performance fees totaled $23.0 million in the second quarter 2012 and were driven by underperformance compared to the mutual funds' respective benchmarks. Mutual fund performance fees represent up to a positive or negative 15 basis point adjustment to the base management fee.

At June 30, 2012 and 2011, $54.9 billion and $38.9 billion of mutual fund assets were subject to performance fees, respectively. As approved by mutual fund shareholders in 2010, six additional mutual funds became subject to performance fees in 2011, with the first fee adjustment for the impacted funds calculated at various points during the second, third and fourth quarters of 2011. The first quarter 2012 represented the first quarter in which all mutual fund assets subject to performance fees were subject to such fees for an entire quarter.

Expenses

Employee compensation and benefits decreased $13.3 million, or 16.6%, principally due to lower investment team incentive compensation as a result of lower profits. The investment team incentive compensation plan is designed to link variable compensation to operating income.

Long-term incentive compensation decreased $2.5 million, or 14.1%, primarily due to a decrease of $4.7 million in Perkins senior profits interest awards expense, which was driven by a decline in performance. The Perkins senior profits interest awards have a formula-driven terminal value based on revenue and relative investment performance of products subadvised by Perkins. The decrease was partially offset by $3.3 million of expense from new awards granted.

Marketing and advertising declined $2.1 million, or 25.6%, primarily due to timing of sponsorships and lower print advertising expenses.

Distribution expense declined $8.2 million, or 20.7%, as a result of a similar decrease in assets under management subject to third-party concessions. Distribution fees are calculated based on a contractual percentage of the market value of assets under management distributed through third-party intermediaries.

Interest expense declined $2.1 million, or 16.0%, primarily as a result of the retirement of the $92.2 million principal amount of outstanding debt in the third quarter 2011 and the March 2012 debt tender, which reduced long-term debt by $59.4 million.

JCG's income tax provision for the three months ended June 30, 2012 includes the reversal of $3.9 million of income tax contingency reserves as a result of the expiration of statutes of limitations, creating a net tax benefit of $2.4 million.

Net investment losses totaling $7.0 million for the second quarter 2012 primarily include $5.5 million of mark-to-market losses on seed capital classified as trading securities, $4.8 million of mark-to-market loss on the mutual fund share award economic hedge and $0.5 million of investment losses generated by put spread option contracts. The put spread option contracts were purchased by the Company in the fourth quarter 2011 to mitigate potential negative impacts on 2012 profitability in the case of a market downturn. The investment losses were partially offset by $0.4 million of gains from the sale of trading securities and $4.0 million of gains generated by the Company's economic hedging strategy. The hedging strategy utilizes futures contracts to mitigate a portion of the earnings volatility created by the mark-to-market accounting of seed capital investments. JCG may modify or discontinue this hedging strategy at any time.

Noncontrolling interests in net income decreased from $3.6 million in second quarter 2011 to $1.3 million in second quarter 2012 primarily due to a decline of $1.2 million in the noncontrolling interest share of Perkins earnings and $1.0 million of losses associated with the noncontrolling interests in consolidated investment products.


Six Months Ended June 30, 2012 Compared with Six Months Ended June 30, 2011

Revenues

Investment management fees decreased $56.8 million, or 12.6%, primarily as a result of the 8.8% decrease in average assets under management driven by long-term net outflows and unfavorable market conditions. Revenue decreased at a higher rate than average assets primarily due to a product mix shift toward lower yielding products.

The decline in total performance fee revenue of $41.5 million was primarily due to an increase in negative mutual fund performance fees. These negative mutual fund performance fees totaled $42.5 million for the six months ended June 30, 2012.

Expenses

Employee compensation and benefits decreased $23.0 million, or 14.2%, principally due to lower investment team incentive compensation as a result of lower profits.

Long-term incentive compensation decreased $1.1 million, or 3.1%, primarily due to a decrease of $6.4 million in Perkins senior profits interest awards expense and $4.7 million from the vesting of awards granted in previous years. The decrease was partially offset by $7.2 million of expense from new awards granted. Additionally, long-term incentive compensation increased $2.1 million as a result of JCG revising its estimate for forfeitures during the first quarter 2012 as a result of lower than expected employee departures.

Long-term incentive awards granted during 2012 totaled $55.9 million and will generally be recognized ratably over a four-year period.

Marketing and advertising declined $3.4 million, or 23.8%, primarily due to reduced marketing activity.

Distribution expense declined $12.0 million, or 15.9%, as a result of a similar decrease in assets under management subject to third-party concessions. Distribution fees are calculated based on a contractual percentage of the market value of assets under management distributed through third-party intermediaries.

Interest expense declined $3.5 million, or 13.3%, primarily as a result of the retirement of the $92.2 million principal amount of outstanding debt in the third quarter 2011 and the March 2012 debt tender in which $59.4 million aggregate principal amount of the Company's outstanding 2014 and 2017 Senior Notes were repurchased with cash on hand. JCG recognized a $7.2 million net loss on early extinguishment of debt related to the repurchase of these notes.

During the fourth quarter 2010, JCG exercised its redemption right on the $120.9 million carrying value of the 6.250% Senior Notes and retired the notes in January 2011. Under the terms of the redemption, JCG was required to pay the principal and the present value of the interest that would have been paid if the debt had remained outstanding through scheduled maturity. As a result, JCG recognized a $9.9 million net loss on early extinguishment of debt in the first quarter 2011.

JCG's income tax provision for the six months ended June 30, 2012, includes the reversal of $4.3 million of income tax contingency reserves as a result of the expiration of statutes of limitations, creating a net tax benefit of $2.7 million. Also included in the six months ended June 30, 2012, is tax expense of $2.7 million related to expiration and vesting of certain equity-based compensation awards.

Net investment losses totaling $0.7 million for the six months ended June 30, 2012 primarily include $6.0 million of investment losses generated by put spread option contracts and $5.1 million of mark-to-market losses generated by the Company's economic hedging strategy. The investment losses were offset by $1.2 million of gains from the sale of trading securities, $7.0 million of mark-to-market gains on seed capital classified as trading securities and $2.8 million of mark-to-market gain on the mutual fund share award economic hedge.

Noncontrolling interests in net income decreased from $6.6 million for the six months ended June 30, 2011 to $5.4 million for the six months ended June 30, 2012, primarily due to a decline of $1.6 million in the noncontrolling interest share of Perkins earnings, partially offset by $0.6 million of gains associated with the noncontrolling interests in consolidated investment products.


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