JANUS HENDERSON GROUP PLC FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q not based on historical
facts are "forward-looking statements" within the meaning of the federal
securities laws, including the Private Securities Litigation Reform Act of 1995,
as amended, Section 21E of the Securities Exchange Act of 1934, as amended
("Exchange Act"), and Section 27A of the Securities Act of 1933, as amended
("Securities Act"). Such forward-looking statements involve known and unknown
risks and uncertainties that are difficult to predict and could cause our actual
results, performance or achievements to differ materially from those discussed.
These include statements as to our future expectations, beliefs, plans,
strategies, objectives, events, conditions, financial performance, prospects or
future events. In some cases, forward-looking statements can be identified by
the use of words such as "may," "could," "expect," "intend," "plan," "seek,"
"anticipate," "believe," "estimate," "predict," "potential," "continue,"
"likely," "will," "would" and similar words and phrases. Forward-looking
statements are necessarily based on estimates and assumptions that, while
considered reasonable by us and our management, are inherently uncertain.
Accordingly, you should not place undue reliance on forward-looking statements,
which speak only as of the date they are made, and are not guarantees of future
performance. We do not undertake any obligation to publicly update or revise
these forward-looking statements.
Various risks, uncertainties, assumptions and factors that could cause our
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 discussed in our
Annual Report on Form 10-K for the year ended December 31, 2019 , and this
Quarterly Report on Form 10-Q under headings such as "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures About Market Risk,"
and in other filings or furnishings made by the Company with the SEC from time
to time.
AVAILABLE INFORMATION
We make available free of charge our 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 practicable after such filing has been made with theSEC . These reports may be obtained through our Investor Relations website (http://janushenderson.com/ir) and are available in print at no charge upon request by any shareholder. The contents of our website are not incorporated herein for any purpose. TheSEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with theSEC at http://www.sec.gov. Charters for the Audit Committee, Compensation Committee, Risk Committee, andNominating and Corporate Governance Committee of our Board of Directors, our Corporate Governance Guidelines, our Code of Business Conduct, and our Officer Code of Ethics for the Chief Executive Officer ("CEO") and Senior Financial Officers (our "Senior Officer Code") are posted on our Investor Relations website (janushenderson.com/ir) and are available in print at no charge upon request by any shareholder. Within the time period prescribed bySEC andNew York Stock Exchange ("NYSE") regulations, we will post on our website any amendment to our Senior Officer Code and our Code of Business Conduct or any waivers thereof. The information on our website is not incorporated by reference into this report. Business Overview We are an independent global asset manager, specializing in active investment across all major asset classes. We actively manage a broad range of investment products for institutional and retail investors across five capabilities: Equities, Fixed Income,Quantitative Equities , Multi-Asset and Alternatives. OnMay 30, 2017 , JHG completed a merger of equals with JCG (the "Merger"). As a result of the Merger, JCG and its consolidated subsidiaries became subsidiaries of JHG. 26 Segment Considerations We are a global asset manager and manage a range of investment products, operating across various product lines, distribution channels and geographic regions. However, information is reported to the chief operating decision-maker, the CEO, on an aggregated basis. Strategic and financial management decisions are determined centrally by the CEO and, on this basis, we operate as a single segment investment management business.
Impact of COVID-19
InMarch 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") a pandemic. COVID-19 is having a significant impact on the global economy primarily through preventative measures taken by businesses and governments to restrict its spread. We are addressing the challenges of COVID-19 by protecting the health and well-being of our employees while continuing to service our clientswho rely on us to invest and manage their money. However, COVID-19 is impacting our financial statements, capital and liquidity, and business operations, and each of these impacts is discussed below.
Financial Statement Impact
The economic impact of COVID-19 adversely affected our financial results during the six months endedJune 30, 2020 . Our revenues are primarily derived from management fees and performance fees, which are in turn dependent on the value and composition of our AUM, which has been negatively impacted by the significant decline in the global financial markets, which primarily occurred during the first quarter of 2020. COVID-19 has also led to volatility in foreign currency exchange rates, which directly impacts our revenue and expenses as well as the valuation of assets and liabilities denominated in foreign currencies. We have significant AUM and subsidiary balances denominated in Great British pounds ("GBP"), AUD and EUR, and the translation of these items toU.S. dollars ("USD") had financial statement implications during the reporting period. Further, the decline in AUM and the economic uncertainty of COVID-19 also affected the value of our intangible assets and goodwill, which resulted in impairments of$363.8 million and$123.5 million , respectively, during the first quarter of 2020. If our AUM is further impacted by the global economic conditions caused by COVID-19, such as adverse and significant declines in the value of global financial markets, additional impairments of goodwill or intangible assets are possible in future periods. Refer to Note 6 -Goodwill and Intangible Assets for additional information on our intangible asset and goodwill impairment assessment.
Capital and Liquidity Impact
Our financial condition is stable, allowing us to effectively manage the financial impacts of COVID-19. We hold surplus capital and liquidity over our requirements, which provides resilience against market downturns. We believe our capital structure should provide us with sufficient resources and flexibility to meet present and future cash needs, including access to an unsecured revolving$200 million credit facility. However, given the uncertainty surrounding the current economic environment, we are tightly controlling all costs and capital expenditures. We currently do not expect to suspend quarterly dividend payments to shareholders or our share buyback program, however, the assessment of these items is ongoing.
Business Operations Impact
COVID-19 is also affecting our business operations, however, we have a robust
and detailed business continuity plan in place to ensure that our operations can
continue effectively during the COVID-19 pandemic, including processes to limit
the spread of the virus between employees. For the health and well-being of our
employees, we have modified our business practices in accordance with social
distancing guidelines to allow work-from-home arrangements and flexible work
schedules, and to restrict business-related travel. Our employees are following
the guidelines and over 95% are working remotely from their homes. Our
technology capabilities have the capacity to support remote working arrangements
for our employees. The number of employees working remotely will likely decrease
in the second half of 2020 as we start to provide employees the option to safely
return to the office. We will manage employees' return to the office with
caution, and their health and safety will be a priority. We are also open to
evolve and learn from our experiences over the past few months to become more
agile with increased flexibility in how and where we work. While
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COVID-19 has created a new and challenging landscape for our business operations, our ability to adequately maintain our operations, internal controls and client relationships has not been adversely affected by these modifications.
The extent of the impact of COVID-19 on our business, financial condition and results of operations also depends on future developments, including the duration of the pandemic and the volatility of the global financial markets, all of which are highly uncertain. We continue to assess the risks associated with COVID-19 and to mitigate them where possible.
Revenue
Revenue primarily consists of management fees and performance fees. Management fees are generally based on a percentage of the market value of our AUM and are calculated using either the daily, month-end or quarter-end average asset balance in accordance with contractual agreements. Accordingly, fluctuations in the financial markets have a direct effect on our operating results. Additionally, our AUM may outperform or underperform the financial markets and, therefore, may fluctuate in varying degrees from that of the general market. Performance fees are specified in certain fund and client contracts, and are based on investment performance either on an absolute basis or compared to an established index over a specified period of time. These fees are often subject to a hurdle rate. Performance fees are recognized at the end of the contractual period (typically monthly, quarterly or annually) if the stated performance criteria are achieved. Certain fund and client contracts allow for negative performance fees where there is underperformance against the relevant index.
SECOND QUARTER 2020 SUMMARY
Second Quarter 2020 Highlights
Solid long-term investment performance, with 62% and 68% of our AUM
? outperforming relevant benchmarks on a three- and five-year basis,
respectively, as of
AUM decreased to
?
currency translation.
Second quarter 2020 diluted earnings per share was
? adjusted basis. Refer to the Non-GAAP Financial Measures section for
information on adjusted non-GAAP figures.
? On
quarter 2020.
? During the second quarter 2020, we acquired 1,061,633 shares of our common
stock for
Financial Summary
Results are reported on a
Revenue for the second quarter 2020 was
Total operating expenses for the second quarter 2020 were$411.3 million , a decrease of$6.1 million , or (1%), compared to operating expenses in the second quarter 2019, primarily driven by decreases of$9.7 million and$4.4 million in general, administrative and occupancy expenses and marketing expenses, respectively. These decreases were partially offset by an increase of$8.4 million in intangible asset impairment charges quarter over quarter.
Operating income for the second quarter 2020 was
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Net income attributable to JHG in the second quarter 2020 was $102.9 million , a
decrease of $6.5 million , or (6%), compared to the second quarter 2019 due to
the factors impacting revenue and operating expense discussed above. In
addition, net loss (income) attributable to noncontrolling interests declined
$26.5 million and other non-operating income, net declined $19.9 million due to
a $20.0 million contingent consideration adjustment related to Geneva during the
second quarter 2019. These decreases were partially offset by an improvement of
$45.5 million in investment gains (losses), net from the second quarter 2019,
primarily driven by fair value adjustments in relation to our seeded investment
products and derivative instruments and third-party ownership interests in
seeded investment products.
Our ordinary dividend in respect of the second quarter 2020 totaled
Investment Performance of Assets Under Management
The following table is a summary of investment performance as of
Percentage of AUM outperforming benchmark 1 year 3 years 5 years Equities 52 % 54 % 64 % Fixed Income 83 % 87 % 96 % Quantitative Equities 23 % 22 % 9 % Multi-Asset 93 % 91 % 94 % Alternatives 96 % 96 % 99 %Total Group 60 % 62 % 68 % Assets Under Management Our AUM as ofJune 30, 2020 , was$336.7 billion , a decrease of$38.1 billion , or (10%), fromDecember 31, 2019 , driven primarily by adverse market movements of$8.3 billion , net redemptions of$20.4 billion and unfavorable foreign currency translation of$5.2 billion . Our non-USD AUM is primarily denominated in GBP, EUR and AUD. During the three months endedJune 30, 2020 , the USD weakened against the AUD and the EUR and strengthened against the GBP, resulting in a$2.6 billion increase to our AUM. During the six months endedJune 30, 2020 , the USD weakened against the EUR and strengthened against the AUD and the GBP, resulting in a$5.2 billion decrease to our AUM. As ofJune 30, 2020 , approximately 32% of our AUM was non-USD denominated, resulting in a net unfavorable currency effect, particularly in products exposed to GBP. VelocityShares ETNs and certain index products are not included within our AUM as we are not the named adviser or subadviser to ETNs or index products. VelocityShares ETN assets totaled$2.6 billion and$3.1 billion as ofJune 30, 2020 , andDecember 31, 2019 , respectively.VelocityShares index product assets not included within our AUM totaled$3.0 billion and$3.0 billion as ofJune 30, 2020 , andDecember 31, 2019 , respectively. InJune 2020 , a third-party issuer announced its intent to delist and suspend further issuances of the majority of VelocityShares ETNs. The affected ETNs were delisted onJuly 12, 2020 . While there will likely continue to be short-term revenue associated with the ETNs after they are delisted, the asset value is expected to decrease until the products become fully liquidated. 29
Our AUM and flows by capability for the three and six months ended
Closing AUM Closing AUM
March 31, Net sales Reclassifications June 30,
2020 Sales Redemptions(1) (redemptions) Markets FX(2) & disposals(3) 2020
By capability
Equities $ 149.9 $ 7.9 $ (12.1) $ (4.2) $ 32.9 $ 0.6 $ (0.1) $ 179.1
Fixed Income 65.3 6.3 (7.0) (0.7) 3.7 1.9 - 70.2
Quantitative Equities 34.6 0.4 (4.3) (3.9) 6.8 - - 37.5
Multi-Asset 35.3 2.5 (1.8) 0.7 4.3 - - 40.3
Alternatives 9.3 0.8 (0.9) (0.1) 0.2 0.1 0.1 9.6
Total $ 294.4 $ 17.9 $ (26.1) $ (8.2) $ 47.9 $ 2.6 $ 0.0 $ 336.7
Closing AUM Closing AUM
December 31, Net sales Reclassifications June 30,
2019 Sales Redemptions(1) (redemptions) Markets FX(2) & disposals(3) 2020
By capability
Equities $ 204.0 $ 16.7 $ (27.8) $ (11.1) $ (7.4) $ (2.3) $ (4.1) $ 179.1
Fixed Income 74.8 14.3 (18.4) (4.1) 1.6 (2.1) - 70.2Quantitative Equities 45.2 0.8 (6.7)
(5.9) (1.7) (0.1) - 37.5
Multi-Asset 39.8 6.0 (4.3) 1.7 (0.7) (0.3) (0.2) 40.3
Alternatives 11.0 1.5 (2.5) (1.0) (0.1) (0.4) 0.1 9.6
Total $ 374.8 $ 39.3 $ (59.7) $ (20.4) $ (8.3) $ (5.2) $ (4.2) $ 336.7
Closing AUM Closing AUM
March 31, Net sales Reclassifications June 30,
2019 Sales Redemptions(1) (redemptions) Markets FX(2) & disposals(3) 2019
By capability
Equities $ 188.8 $ 6.9 $ (12.9) $ (6.0) $ 9.2 $ (0.7) $ - $ 191.3
Fixed Income 72.5 5.5 (5.2) 0.3 1.5 (0.8) - 73.5Quantitative Equities 49.6 0.2 (4.3)
(4.1) 2.1 - - 47.6
Multi-Asset 33.4 2.1 (1.5) 0.6 1.2 (0.1) - 35.1
Alternatives 13.0 0.9 (1.5) (0.6) - (0.1) - 12.3
Total $ 357.3 $ 15.6 $ (25.4) $ (9.8) $ 14.0 $ (1.7) $ - $ 359.8
30
Closing AUM Closing AUM
December 31, Net sales Reclassifications June 30,
2018 Sales Redemptions(1) (redemptions) Markets FX(2) & disposals(3) 2019
By capability
Equities $ 167.6 $ 13.8 $ (22.7) $ (8.9) $ 32.9 $ (0.3) $ - $ 191.3
Fixed Income 72.4 10.4 (12.9) (2.5) 3.7 (0.1) - 73.5Quantitative Equities 44.3 0.9 (6.0)
(5.1) 8.4 - - 47.6
Multi-Asset 30.2 4.3 (3.0) 1.3 3.6 - - 35.1
Alternatives 14.0 1.8 (3.8) (2.0) 0.3 - - 12.3
Total $ 328.5 $ 31.2 $ (48.4) $ (17.2) $ 48.9 $ (0.4) $ - $ 359.8 (1) Redemptions include the impact of client transfers, which could result in a
positive balance on occasion.
(2) FX reflects movements in AUM resulting from changes in foreign currency rates
as non-USD denominated AUM is translated into USD.
Reclassifications relate to a reclassification of an existing fund from
(3) Equities to Alternatives and disposals relate to the sale of
Note 2 - Dispositions for information regarding the sale.
Closing Assets Under Management
The following table presents the closing AUM, split by client type and client
location, as of
Closing AUM
By client type June 30, 2020
Intermediary $ 159.7
Institutional 109.5
Self-directed 67.5
Total $ 336.7
Closing AUM
By client location June 30, 2020
North America $ 187.6
EMEA & LatAm 100.5
Asia-Pacific 48.6
Total $ 336.7 Valuation of Assets Under Management
The fair value of our AUM is based on the value of the underlying cash and
investment securities of our funds, trusts and segregated mandates. A
significant proportion of these securities is listed or quoted on a recognized
securities exchange or market and is regularly traded thereon; these investments
are valued based on unadjusted quoted market prices. Other investments,
including over the counter derivative contracts (which are dealt in or through a
clearing firm, exchanges or financial institutions), will be valued by reference
to the most recent official settlement price quoted by the appointed market
vendor, and in the event no price is available from this source, a broker
quotation may be used. Physical property held is valued monthly by a specialist
independent appraiser.
When a readily ascertainable market value does not exist for an investment, the
fair value is calculated using a variety of methodologies, including the
expected cash flows of its underlying net asset base, taking into account
applicable discount rates and other factors; comparable securities or relevant
indices; recent financing rounds; revenue multiples; or a combination thereof.
Judgment is used to ascertain if a formerly active market has become inactive
and to determine
31
fair values when markets have become inactive. Our Fair Value Pricing Committee
is responsible for determining or approving these unquoted prices, which are
reported to those charged with governance of the funds and trusts. For funds
that invest in markets that are closed at their valuation point, an assessment
is made daily to determine whether a fair value pricing adjustment is required
to the fund's valuation. This may be due to significant market movements in
other correlated open markets, scheduled market closures or unscheduled market
closures as a result of natural disaster or government intervention.
Third-party administrators hold a key role in the collection and validation of
prices used in the valuation of the securities. Daily price validation is
completed using techniques such as day-on-day tolerance movements, invariant
prices, excessive movement checks and intra-vendor tolerance checks. Our data
management team performs oversight of this process and completes annual due
diligence on the processes of third-parties.
In other cases, we and the sub-administrators perform a number of procedures to
validate the pricing received from third-party providers. For actively traded
equity and fixed income securities, prices are received daily from both a
primary and secondary vendor. Prices from the primary and secondary vendors are
compared to identify any discrepancies. In the event of a discrepancy, a price
challenge may be issued to both vendors. Securities with significant day-to-day
price changes require additional research, which may include a review of all
news pertaining to the issue and issuer, and any corporate actions. All fixed
income prices are reviewed by our fixed income trading desk to incorporate
market activity information available to our traders. In the event the traders
have received price indications from market makers for a particular issue, this
information is transmitted to the pricing vendors.
We leverage the expertise of our fund management teams across the business to
cross-invest assets and create value for our clients. Where cross investment
occurs, assets and flows are identified and the duplication is removed.
Results of Operations
Foreign Currency Translation
Foreign currency translation impacts our Results of Operations. The translation of GBP to USD is the primary driver of foreign currency translation in expenses. The GBP weakened against the USD during the three and six months endedJune 30, 2020 , compared to the three and six months endedJune 30, 2019 . Meaningful impacts to our operating expenses are discussed in the Operating Expenses section below. Revenue is also impacted by foreign currency translation, but the impact is generally determined by the primary currency of the individual funds. Revenue Three months Six months Three months ended Six months ended ended ended June 30, June 30, June 30, June 30, 2020 2019 2020 2019 2020 vs. 2019 2020 vs. 2019
Revenue (in millions): Management fees$ 407.7 $ 446.4 $ 847.3 $ 888.3 (9) % (5) % Performance fees 17.2 3.5 31.8 (2.1) 391 % 1,614 % Shareowner servicing fees 47.3 38.3 97.6 74.2 23 % 32 % Other revenue 45.8 47.7 96.2 94.8 (4) % 1 % Total revenue$ 518.0 $ 535.9 $ 1,072.9 $ 1,055.2 (3) % 2 % Management fees Management fees decreased by$38.7 million during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to the impact of a decline in average AUM, which contributed$43.3 million to the decrease in management fees. This decrease was partially offset by an increase of$5.0 million in management fees due to the impact of higher management fee margins quarter over quarter. 32 Management fees decreased by$41.0 million during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily from the impact of a decline in average AUM and lower management fee margins, which decreased management fees by$40.2 million and$3.0 million , respectively.
Performance fees
Performance fees are derived across a number of product ranges. Pooled fund and segregated mandate performance fees are recognized on a quarterly or annual basis, while mutual fund performance fees are recognized on a monthly basis. Performance fees by product type consisted of the following for the three and six months endedJune 30, 2020 and 2019 (in millions): Three months Six months Three months ended Six months ended ended ended June 30, June 30, June 30, June 30, 2020 2019 2020 2019 2020 vs. 2019 2020 vs. 2019 Performance fees (in millions): SICAVs$ 9.2 $ 1.5 $ 9.4 $ 1.5 513 % 527 % UK OEICs and unit trusts 2.3 - 3.6 - n/m * n/m * Offshore absolute return - - 4.0 - n/m * n/m * Segregated mandates 9.3 5.5 20.3 8.8 69 % 131 % Mutual funds (3.6) (3.5) (5.5) (12.4) (3) % 56 % Total performance fees$ 17.2 $ 3.5 $ 31.8 $ (2.1) 391 % 1,614 % * n/m - Not meaningful. For the three months endedJune 30, 2020 , performance fees improved$13.7 million compared to the three months endedJune 30, 2019 , primarily due to performance fee increases of$10.6 million on segregated mandates and SICAVs due to higher performance fee crystallizations and$2.3 million inUK OEICs and unit trusts. For the six months endedJune 30, 2020 , performance fees improved$33.9 million compared to the six months endedJune 30, 2019 , primarily due to performance fee increases of$21.1 million on segregated mandates, SICAVs and offshore absolute return due to higher performance fee crystallizations,$7.1 million in mutual fund performance in relation to the benchmarks and$3.6 million inUK OEICs
and unit trusts. Shareowner servicing fees Shareowner servicing fees are primarily composed ofU.S. mutual fund servicing fees. For the three months endedJune 30, 2020 , shareowner servicing fees increased$9.0 million compared to the three months endedJune 30, 2019 , primarily due to a$10.9 million increase in relation to correcting the presentation of certain servicing fees and expenses. The presentation for the three months endedJune 30, 2020 , reflects these fees on a gross basis in shareowner servicing fees on the Condensed Consolidated Statements of Comprehensive Income (Loss), while the fees were netted in distribution expenses in the three months endedJune 30, 2019 . The correction is offset in distribution expenses on the Condensed Consolidated Statements of Comprehensive Income (Loss). This increase was partially offset by a decrease of$1.5 million in transfer agent servicing fees. For the six months endedJune 30, 2020 , shareowner servicing fees increased$23.4 million compared to the six months endedJune 30, 2019 , primarily due to a$22.1 million increase in relation to correcting the presentation of certain servicing fees and expenses as discussed above. Transfer agent servicing fees of$1.3 million also contributed to the increase during the six months endedJune 30, 2020 .
Other revenue
Other revenue is primarily composed of VelocityShares ETN fees, 12b-1 distribution fees, general administration charges and other fee revenue. Refer to the discussion under the "Assets Under Management" section for details of the
33
delisting of VelocityShares ETNs, which will have a negative impact on future
ETN fees. Other revenue decreased by $1.9 million during the three months ended
June 30, 2020 , compared to the three months ended June 30, 2019 , primarily due
to decreases of $0.7 million in 12b-1 fees and $0.7 million in licensing fees.
Other revenue increased by $1.4 million during the six months ended
June 30, 2020 , compared to the six months ended June 30, 2019 , primarily due to
increases of $1.8 million in 12b-1 fees and $1.2 million in licensing fees,
partially offset by $0.8 million reduction in general administration charges and
a $0.5 million decrease in other fee revenue.
Operating Expenses
Three months Six months
Three months ended Six months ended ended ended
June 30, June 30, June 30, June 30,
2020 2019 2020 2019 2020 vs. 2019 2020 vs. 2019Operating expenses (in millions): Employee compensation and benefits$ 145.8 $ 146.5 $ 301.4 $ 291.5 (0) % 3 % Long-term incentive plans 49.1 49.2 82.7 97.6 (0) % (15) % Distribution expenses 104.7 101.5 216.9 203.4 3 % 7 % Investment administration 12.6 11.1 24.3 22.9 14 % 6 % Marketing 3.7 8.1 10.4 15.6 (54) % (33) % General, administrative and occupancy 58.0 67.7 123.2 132.9 (14) % (7) % Impairment of goodwill and intangible assets 26.4 18.0 513.7 18.0 47 % 2,754 % Depreciation and amortization 11.0 15.3 26.0 30.3 (28) % (14) % Total operating expenses$ 411.3 $ 417.4 $ 1,298.6 $ 812.2 (1) % 60 %
Employee compensation and benefits
Employee compensation and benefits decreased by$0.7 million during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to a decrease of$1.7 million in variable compensation and favorable foreign currency translation of$1.4 million . These decreases were partially offset by increases of$1.7 million in temporary staffing charges and project costs and$1.6 million in annual base-pay increases. Employee compensation and benefits increased by$9.9 million during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily driven by increases of$7.5 million in variable compensation mainly due to higher operating profit,$3.9 million in temporary staffing charges and project costs, and$3.2 million in annual base-pay increases. These increases were partially offset by favorable foreign currency translation of$2.7 million .
Long-term incentive plans
Long-term incentive plans were consistent quarter over quarter. The significant items impacting these periods include a$3.2 million decrease in payroll taxes on vestings and favorable foreign currency translation of$0.7 million . These decreases were partially offset by$4.0 million in fair value adjustments related to mutual fund share awards and certain Intech long-term incentive awards during the three months endedJune 30, 2020 . Long-term incentive plans decreased$14.9 million during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , primarily driven by$13.1 million in fair value adjustments related to mutual fund share awards and certain Intech long-term incentive awards, and favorable foreign currency translation of$1.5 million during the six months endedJune 30, 2020 . 34
Distribution expenses
Distribution expenses are paid to financial intermediaries for the distribution of our retail investment products and are typically calculated based on the amount of the intermediary-sourced AUM. Distribution expenses increased$3.2 million during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . The increase was primarily due to$10.9 million in relation to correcting the presentation of certain services fees and expenses as discussed above in shareowner servicing fees, and an increase of$2.9 million due to the impact of higher management fee margins. The increase is partially offset by a decrease of$9.8 million due to the impact of a decline in average AUM. Distribution expenses increased$13.5 million during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 . The increase was primarily due to$22.1 million in relation to correcting the presentation of certain services fees and expenses as discussed above in shareowner servicing fees. The increase was partially offset by a decrease of$9.2 million due to the impact of a decline in average AUM.
Investment administration
Investment administration expenses, which represent back-office operations (including fund administration and fund accounting), increased by$1.5 million and$1.4 million during the three and six months endedJune 30, 2020 , compared to the three and six months endedJune 30, 2019 , respectively, primarily due to an increase in custodial and money market administration fees.
Marketing
Marketing expenses decreased by$4.4 million and$5.2 million during the three and six months endedJune 30, 2020 , compared to the three and six months endedJune 30, 2019 , respectively, primarily due to fewer marketing events and advertising campaigns during the COVID-19 pandemic.
General, administrative and occupancy
General, administrative and occupancy expenses decreased by$9.7 million during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , due to a decrease of$5.3 million in travel expenses as a result of the COVID-19 pandemic and favorable foreign currency translation of$1.1 million . There were no other significant items driving the decrease in general, administrative and occupancy expenses quarter over quarter. General, administrative and occupancy expenses decreased by$9.7 million during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , due to a$6.3 million decrease in travel expenses as a result of the COVID-19 pandemic, a$4.7 million impairment of sub-leased office space that was recognized during the six months endedJune 30, 2019 , and favorable foreign currency translation of$1.8 million . These decreases were partially offset by increases of$2.6 million in consultancy fees and$2.0 million in software licensing costs during the six months endedJune 30, 2020 .
Impairment of goodwill and intangible assets
Goodwill and intangible asset impairment charges increased by$8.4 million during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . The increase is due to a$26.4 million impairment of the VelocityShares ETN definite-lived intangible asset during the three months endedJune 30, 2020 , partially offset by an$18.0 million impairment related to certain mutual fund investment management agreements recognized during the
three months endedJune 30, 2019 . 35Goodwill and intangible asset impairment charges increased by$495.7 million during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , due to the impairment charges discussed above and a$487.3 million impairment of our goodwill and certain mutual fund investment management agreements and client relationships during the six months endedJune 30, 2020 .
Depreciation and amortization
Depreciation and amortization expenses decreased by
Non-Operating Income and Expenses
Three months Six months
Three months ended Six months ended ended ended
June 30, June 30, June 30, June 30,
2020 2019 2020 2019 2020 vs. 2019 2020 vs. 2019
Non-operating income and expenses
(in millions):
Interest expense $ (3.2) $ (4.2) $ (6.5) $ (8.3) 24 % 22 %
Investment gains (losses), net 50.3 4.8 (0.2) 18.1 948 % (101) %
Other non-operating income, net 8.6 28.5 40.8 24.6 (70) % 66 %
Income tax benefit (provision) (30.1) (35.3) 38.7 (65.2) 15 % 159 % Interest expense Interest expense decreased$1.0 million and$1.8 million during the three and six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , respectively. The decreases are primarily due to a decrease in the unwind of the discount related toGeneva contingent consideration during the three and six months endedJune 30, 2020 . Additionally, the three and six months endedJune 30, 2019 , also included interest expense in relation to thePerennial Fixed Interest Partners Ltd andPerennial Growth Management Pty Ltd (together "Perennial") earn-out, which was fully paid during the year endedDecember 31, 2019 .
Investment gains (losses), net
The components of investment gains (losses), net for the three and six months
ended
Three months Six months
Three months ended Six months ended ended ended
June 30, June 30, June 30, June 30,
2020 2019 2020 2019 2020 vs. 2019 2020 vs. 2019
Investment gains (losses), net
(in millions):
Seeded investment products and
derivatives, net $ 11.1 $ 0.8 $ 6.0 $ 3.4 1,288 % 76 %
Third-party ownership interests
in seeded investment products 29.0 2.6 (9.4)
8.2 1,015 % (215) %
Long Tail Alpha 4.4 0.3 5.7 0.7 1,367 % 714 %
Deferred equity plan 4.7 1.7 (2.6) 5.4 176 % (148) %
Other 1.1 (0.6) 0.1 0.4 283 % (75) %Investment gains (losses), net$ 50.3 $ 4.8 $ (0.2)
$ 18.1 948 % (101) % 36
Investment gains (losses), net moved favorably by$45.5 million during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , primarily due to fair value adjustments in relation to our seeded investment products and derivative instruments and third-party ownership interests in seeded investment products.
Investment gains (losses), net moved unfavorably by
Other non-operating income, net
Other non-operating income, net declined$19.9 million during the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 . The decrease was primarily due to a$20.0 million contingent consideration adjustment associated withGeneva due to an updated forecast recognized during the three months endedJune 30, 2019 , and a$2.9 million decrease in interest income during the three months endedJune 30, 2020 . These decreases were partially offset by favorable foreign currency translation of$4.9 million during the three months endedJune 30, 2020 . Other non-operating income, net improved$16.2 million during the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 . The increase was primarily due to a$16.2 million gain and$7.1 million contingent consideration adjustment in relation to the sale ofGeneva , and favorable foreign currency translation of$16.9 million recognized during the six months endedJune 30, 2020 . These increases were partially offset by the$20.0 million contingent consideration adjustment discussed above and a$5.5 million decrease in interest income during the six months endedJune 30, 2020 .
Income tax benefit (provision)
Our effective tax rates for the three and six months ended
Three months ended Six months ended
June 30, June 30,
2020 2019 2020 2019
Effective tax rate 18.5 % 24.0 % 20.2 % 23.5 %
The effective tax rate for the three and six months ended June 30, 2020 ,
compared to the three and six months ended June 30, 2019 , was impacted by a
significant reduction in pre-tax income, primarily due to a pre-tax loss from
the impairment of intangible assets and goodwill. Most of the impairment charges
were temporary in nature and did not have a direct impact on the effective tax
rate. The effective tax rate was also impacted by a tax shortfall on
non-deductible equity-based compensation and non-deductible goodwill.
Non-GAAP Financial Measures
We report our financial results in accordance with GAAP. However, JHG management
evaluates our profitability and our ongoing operations using additional non-GAAP
financial measures. These measures are not in accordance with, or a substitute
for, GAAP, and our financial measures may be different from non-GAAP financial
measures used by other companies. Management uses these performance measures to
evaluate the business, and adjusted values are consistent with internal
management reporting. We have provided a reconciliation below of our non-GAAP
financial measures to the most directly comparable GAAP measures.
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Alternative performance measures
The following is a reconciliation of revenue, operating expenses, operating income, net income attributable to JHG and diluted earnings per share to adjusted revenue, adjusted operating expenses, adjusted operating income, adjusted net income attributable to JHG and adjusted diluted earnings per share, respectively, for the three months endedJune 30, 2020 and 2019 (in millions, except per share and operating margin data): Three months ended Three months ended June 30, June 30, 2020 2019 Reconciliation of revenue to adjusted revenue Revenue $ 518.0 $ 535.9 Management fees (40.2) (46.4) Shareowner servicing fees (39.0) (29.1) Other revenue (25.5) (26.0) Adjusted revenue(1) $ 413.3 $ 434.4 Reconciliation of operating expenses to adjusted operating expenses Operating expenses $ 411.3 $ 417.4 Employee compensation and benefits(2) (0.5)
(3.1)
Long-term incentive plans(2) 0.2 0.2
Distribution expenses(1) (104.7) (101.5)General, administrative and occupancy(2) (2.8) (5.3) Impairment of goodwill and intangible assets(3) (26.4) (18.0) Depreciation and amortization(3) (2.2)
(7.3)
Adjusted operating expenses $ 274.9 $ 282.4
Adjusted operating income 138.4 152.0
Operating margin(4) 20.6% 22.1%
Adjusted operating margin(5) 33.5% 35.0%Reconciliation of net income attributable to JHG to adjusted net income attributable to JHG Net income attributable to JHG
$ 102.9 $ 109.4
Employee compensation and benefits(2) 0.5 3.1
Long-term incentive plans(2) (0.2) (0.2)
General, administrative and occupancy(2) 2.8 5.3
Impairment of goodwill and intangible assets(3) 26.4 18.0
Depreciation and amortization(3) 2.2 7.3
Interest expense(6) - 1.0
Investment gains (losses), net(6) - 1.0
Other non-operating income, net(6) (0.6) (22.6)
Income tax benefit (provision)(7) (7.4) (2.6)
Adjusted net income attributable to JHG 126.6 119.7
Less: allocation of earnings to participating
stock-based awards (3.7) (3.5)
Adjusted net income attributable to JHG common
shareholders $ 122.9 $ 116.2
Weighted-average common shares outstanding -
diluted (two class) 182.1 190.7
Diluted earnings per share (two class)(8) $ 0.55 $ 0.56
Adjusted diluted earnings per share (two class)(9) $ 0.67$ 0.61
We contract with third-party intermediaries to distribute and service certain (1) of our investment products. Fees for distribution and servicing related
activities are either provided for separately in an investment product's
prospectus
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or are part of the management fee. Under both arrangements, the fees are
collected by us and passed through to third-party intermediaries
responsible for performing the applicable services. The majority of distribution
and servicing fees we collect are passed through to third-party intermediaries.
JHG management believes that the deduction of distribution and servicing fees
from revenue in the computation of adjusted revenue reflects the pass-through
nature of these revenues. In certain arrangements, we perform the distribution
and servicing activities and retain the applicable fee. Revenues for
distribution and servicing activities performed by us are not deducted from GAAP
revenue.
Adjustments primarily represent integration costs in relation to the Merger, (2) including severance costs, legal costs and consulting fees. JHG management
believes these costs are not representative of our ongoing operations.
Investment management contracts have been identified as a separatelyidentifiable intangible asset arising on the acquisition of subsidiaries and
businesses. Such contracts are recognized at the net present value of the
expected future cash flows arising from the contracts at the date of
acquisition. For segregated mandate contracts, the intangible asset is (3) amortized on a straight-line basis over the expected life of the contracts.
Adjustments for the three months ended
impairment charges of
to certain mutual fund investment management agreements and client
relationships. JHG management believes these non-cash and acquisition-related
costs are not representative of our ongoing operations.
(4) Operating margin is operating income divided by revenue.
(5) Adjusted operating margin is adjusted operating income divided by adjusted
revenue.
Adjustments primarily relate to contingent consideration adjustmentsassociated with prior acquisitions and increased debt expense as a (6) consequence of the fair value uplift on debt due to acquisition accounting.
JHG management believes these costs are not representative of our ongoing
operations.
The tax impact of the adjustments is calculated based on the applicable
adjustments are either not taxable or not tax-deductible.
(8) Diluted earnings per share is net income attributable to JHG common
shareholders divided by weighted-average diluted common shares outstanding.
Adjusted diluted earnings per share is adjusted net income attributable to (9) JHG common shareholders divided by weighted-average diluted common shares
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Our capital structure, together with available cash balances, cash flows generated from operations, and further capital and credit market activities, if necessary, should provide us with sufficient resources to meet present and future cash needs, including operating and other obligations as they fall due and anticipated future capital requirements. The following table summarizes key balance sheet data relating to our liquidity and capital resources as ofJune 30, 2020 , andDecember 31, 2019 (in millions): June 30, December 31, 2020 2019 Cash and cash equivalents held by the Group$ 835.8 $ 732.4 Investment securities held by the Group$ 203.9 $ 223.6 Fees and other receivables$ 284.5 $ 334.8 Debt$ 314.8 $ 316.2 39 Cash and cash equivalents consist primarily of cash at banks and in money market funds. Cash and cash equivalents and investment securities held by consolidated VIEs and VREs are not available for general corporate purposes and have been excluded from the table above.
Investment securities held by us represent seeded investment products (exclusive of investments held by consolidated VIEs and VREs), investments related to deferred compensation plans and other less significant investments.
We believe that existing cash and cash from operations should be sufficient to satisfy our short-term capital requirements. Expected short-term uses of cash include ordinary operating expenditures, seed capital investments, interest expense, dividend payments, income tax payments and common stock repurchases. We may also use available cash for other general corporate purposes and acquisitions.
We are subject to regulatory oversight by theSEC , theFinancial Industry Regulatory Authority ("FINRA"), theU.S. Commodity Futures Trading Commission ("CFTC"), theFinancial Conduct Authority ("FCA") and other international regulatory bodies. We strive to ensure that we are compliant with our regulatory obligations at all times. Our primary capital requirement relates to theFCA -supervised regulatory group (a sub-group of our company), comprisingHenderson Group Holdings Asset Management Limited , all of its subsidiaries andJanus Capital International Limited ("JCIL"). JCIL is included to meet the requirements of certain regulations under the Banking Consolidation Directive. The combined capital requirement is £327.1 million ($404.2 million ), resulting in capital above the regulatory group's regulatory requirement of £193.2 million ($238.7 million ) as ofJune 30, 2020 , based on internal calculations and taking into account the effect of dividends related to second quarter 2020 results that will be paid in the third quarter 2020. Capital requirements in other jurisdictions are not significant.
Short-Term Liquidity and Capital Resources
Common Stock Repurchases
OnFebruary 3, 2020 , the Board approved a new on-market share buyback program pursuant to which we are authorized to repurchase up to$200 million of our common stock on the NYSE and CHESS Depository Interests ("CDIs") on theAustralian Securities Exchange ("ASX") at any time prior to the date of our 2021 Annual General Meeting. At our Annual General Meeting held onApril 30, 2020 , JHG shareholders voted to renew our authorization for on-market purchases through the date of our 2021 Annual General Meeting. We commenced repurchases under the buyback program inMarch 2020 and repurchased a total of 1,061,633 shares of our common stock and CDIs for$22.0 million during the three months endedJune 30, 2020 . Some of our executives and employees receive rights over our common stock as part of their remuneration arrangements and employee entitlements. These entitlements are usually satisfied by the transfer of existing common stock acquired on-market. We purchased 427,401 shares at an average price of$18.69 in satisfaction of employee awards and entitlements during the three months endedJune 30, 2020 . Dividends
The payment of cash dividends is within the discretion of our Board of Directors and depends on many factors, including our results of operations, financial condition, capital requirements, general business conditions and legal requirements.
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Dividends declared and paid during the six months ended June 30, 2020 , were as
follows:
Dividend Date Dividends paid Date
per share declared (in US$ millions) paid
$ 0.36 February 3, 2020 $ 66.2 March 5, 2020
$ 0.36 April 29, 2020 $ 66.1 June 3, 2020
OnJuly 28, 2020 , our Board of Directors declared a cash dividend of$0.36 per share. The quarterly dividend will be paid onAugust 26, 2020 , to shareholders of record at the close of business onAugust 10, 2020 .
Long-Term Liquidity and Capital Resources
Expected long-term commitments as ofJune 30, 2020 , include principal and interest payments related to the 2025 Senior Notes, operating and finance lease payments, Intech senior profits interests awards, Intech appreciation rights and phantom interests, and Intech noncontrolling interests. We expect to fund our long-term commitments with existing cash and cash generated from operations or by accessing capital and credit markets as necessary.
2025 Senior Notes
The 2025 Senior Notes have a principal amount of
Intech
Intech has granted long-term incentive awards to retain and incentivize employees. The awards consist of appreciation rights, profits interests and phantom interests, and are designed to give recipients an equity-like stake in Intech. The grant date fair value of the appreciation rights is amortized using a graded basis over the 10-year vesting period. The awards are exercisable upon termination of employment from Intech to the extent vested. The profits interests and phantom interests awards entitle recipients to 9.1% of Intech's pre-incentive profits. Defined Benefit Pension Plan
The latest triennial valuation of our defined benefit pension plan resulted in a
surplus of £12.0 million (
We believe that we will have sufficient resources to satisfy our long-term liquidity requirements.
Off-Balance Sheet Arrangements
We are not party to any off-balance sheet arrangements that may provide, or require us to provide, financing, liquidity, market or credit risk support that are not reflected in our condensed consolidated financial statements.
Other Sources of Liquidity
AtJune 30, 2020 , we had a$200 million Credit Facility. The Credit Facility includes an option for us to request an increase to the overall amount of the Credit Facility of up to an additional$50.0 million . The maturity date of the Credit Facility isFebruary 16, 2024 .
The Credit Facility may be used for general corporate purposes and bears interest on borrowings outstanding at the relevant interbank offer rate plus a spread.
The Credit Facility contains a financial covenant with respect to leverage. The
financing leverage ratio cannot exceed 3.00x EBITDA. At the latest practicable
date before the date of this report, we were in compliance with all covenants
and there were no borrowings under the Credit Facility.
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