Janus Henderson(JHG) - 2019 Q4 - Annual Report

PART I Business JHG is a global asset manager with $374.8 billion in AUM as of December 31, 2019, operating across diverse capabilities and distribution channels within a highly competitive and regulated industry - JHG is a global asset manager with approximately 2,300 employees and operations in North America, the UK, Europe, Latin America, Japan, Asia, and Australia[15] Assets Under Management (AUM) by Capability as of December 31, 2019 | Capability | Closing AUM (in billions) | | :--- | :--- | | Equities | $204.0 | | Fixed Income | $74.8 | | Quantitative Equities | $45.2 | | Multi-Asset | $39.8 | | Alternatives | $11.0 | | Total | $374.8 | AUM by Distribution Channel as of December 31, 2019 | Channel | AUM (in billions) | % of Total AUM | | :--- | :--- | :--- | | Intermediary | $172.7 | 46% | | Institutional | $132.1 | 35% | | Self-Directed | $70.0 | 19% | - The company's strategy, termed "Simple Excellence," focuses on producing dependable investment outcomes, excelling in client experience, increasing operational efficiency, maintaining a proactive risk environment, and developing new growth initiatives[21][26] - The investment management industry is highly regulated globally, with JHG's subsidiaries subject to oversight by numerous agencies including the SEC and FCA, leading to significant and growing compliance costs[41][44][53] Risk Factors The company faces a wide range of risks that could materially affect its financial condition and results, including market fluctuations, intense competition, dependency on key personnel, operational vulnerabilities, and extensive regulatory and tax complexities - Market & Investment Risks: Revenues are primarily dependent on AUM, which is subject to market fluctuations, investment performance, and client redemptions, with approximately 17% of AUM subject to performance fees as of year-end 2019[76][77][79] - Business & Strategic Risks: The company operates in a highly competitive environment with downward pressure on fees, is highly dependent on retaining key personnel, and relies significantly on third-party channels for product distribution[95][96][97] - Operational & Technology Risks: The company is vulnerable to cyberattacks and data breaches, its subsidiary Intech's investment process relies heavily on proprietary software and key employees, and failures in third-party vendor support systems could disrupt business[114][119][124] - Legal & Regulatory Risks: The business is highly regulated, and changes in laws (e.g., Dodd-Frank Act, MiFID II) could increase costs and impact operations, while Brexit could adversely impact the business through increased costs, new impediments, and market volatility[132][136][152] - Tax & Jurisdictional Risks: Changes to tax laws could adversely affect the company, and there is a risk the IRS could assert JHG should be treated as a U.S. corporation for tax purposes under Section 7874, potentially leading to substantial additional U.S. tax liabilities[161][163] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[172] Properties The company leases 30 offices globally, with its corporate headquarters in London and significant operations in Denver, Colorado, all considered adequate for current needs - JHG's main offices are leased properties in London (corporate headquarters) and Denver, Colorado[174] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 19 of the Financial Statements and Supplementary Data in Part II, Item 8 of this report - Details on legal proceedings are located in Note 19 of the financial statements[175] Mine Safety Disclosures This item is not applicable to the company - Not applicable[176] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities JHG's common stock trades on the NYSE and its CDIs trade on the ASX, with the company completing a $200 million share buyback in 2019 and approving a new $200 million program in February 2020 - The company's common stock is listed on the New York Stock Exchange (NYSE) and its CDIs are traded on the Australian Securities Exchange (ASX)[179] - In March 2019, JHG initiated a $200 million on-market buyback program, which was completed during the year with the repurchase of 9,437,071 shares for $199.9 million[181] - A new on-market share buyback program of up to $200 million was approved by the Board on February 3, 2020[182] Selected Financial Data The company presents five years of selected financial data, with 2017-2019 reflecting post-merger results and 2015-2016 being pre-merger and not comparable Selected Financial Data (2017-2019) | (dollars in millions, except per share data) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenues | $2,192.4 | $2,306.4 | $1,818.3 | | Operating income | $540.9 | $649.8 | $442.3 | | Net income attributable to JHG | $427.6 | $523.8 | $655.5 | | Diluted EPS | $2.21 | $2.61 | $3.93 | | Ending AUM (in billions) | $374.8 | $328.5 | $370.8 | - Data for 2017 includes the impact of the merger with JCG from May 30, 2017, while data for 2016 and 2015 are pre-merger and not comparable to subsequent years[187] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, JHG's AUM increased 14% to $374.8 billion despite net outflows, driven by positive markets and strong investment performance, though total revenue and operating income decreased due to lower average AUM and fee margins 2019 Financial Highlights vs. 2018 | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $2,192.4M | $2,306.4M | (5)% | | Operating Income | $540.9M | $649.8M | (17)% | | Operating Margin | 24.7% | 28.2% | (3.5) p.p. | | Net Income (attributable to JHG) | $427.6M | $523.8M | (18)% | | Diluted EPS | $2.21 | $2.61 | (15)% | | Adjusted Diluted EPS | $2.47 | $2.74 | (10)% | AUM Roll-Forward for Year Ended Dec 31, 2019 (in billions) | | Amount | | :--- | :--- | | Closing AUM Dec 31, 2018 | $328.5 | | Net Sales (Redemptions) | ($27.4) | | Market Performance | $71.7 | | Foreign Exchange (FX) | $2.0 | | Closing AUM Dec 31, 2019 | $374.8 | - Investment performance strengthened in 2019, with 76% and 77% of AUM outperforming benchmarks on a three- and five-year basis, respectively[199] - Management fees decreased by 8% in 2019 due to a decline in average AUM and lower management fee margins, while performance fees increased to $17.6 million from $7.1 million in 2018, primarily due to improved mutual fund performance[221][225] - The company maintains a strong capital position, with cash and cash equivalents of $732.4 million and a $200 million undrawn revolving credit facility as of year-end 2019[271][288] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market price risk from AUM fluctuations and investment securities totaling $1.18 billion at year-end 2019, with derivative instruments used to mitigate volatility and foreign currency risk impacting net income and other comprehensive income - The company's primary market risk is the fluctuation of its AUM due to financial market movements, which directly impacts management fee revenue[333] Hypothetical 10% Market Price Change on Investment Securities (Dec 31, 2019) | (in millions) | Fair Value | Fair Value (+10%) | Fair Value (-10%) | | :--- | :--- | :--- | :--- | | Seeded investment products | $1,047.0 | $1,151.7 | $942.3 | | Investments for deferred comp | $125.9 | $138.5 | $113.3 | | Total | $1,178.3 | $1,296.1 | $1,060.5 | - Derivative instruments, including futures, swaps, and foreign currency forwards, are used to mitigate market volatility of certain seeded investments[336] - The company is exposed to foreign currency risk, where a hypothetical 10% weakening of the British pound against the USD would positively impact net income by $4.3 million and other comprehensive income by $271.5 million[339] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal year ended December 31, 2019, providing a comprehensive view of its financial position, performance, and cash flows in accordance with U.S. GAAP Consolidated Balance Sheet Highlights (as of Dec 31, 2019) | (in millions) | Amount | | :--- | :--- | | Total Assets | $7,621.7 | | Goodwill & Intangible Assets | $4,592.9 | | Total Liabilities | $2,037.6 | | Long-Term Debt | $316.2 | | Total Equity | $4,906.2 | Consolidated Statement of Comprehensive Income Highlights (Year ended Dec 31, 2019) | (in millions) | Amount | | :--- | :--- | | Total Revenue | $2,192.4 | | Total Operating Expenses | $1,651.5 | | Operating Income | $540.9 | | Net Income | $445.7 | | Net Income Attributable to JHG | $427.6 | - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting, identifying the impairment assessment of indefinite-lived intangible assets as a critical audit matter[344][351] - Note 7 details Goodwill and Intangible Assets, which totaled $4.59 billion, with an impairment of $18.0 million recorded in 2019 related to certain indefinite-lived investment management agreements[501][506] - Note 19 describes legal proceedings, including several class-action lawsuits related to VelocityShares ETNs, which the company believes are without merit[648][655] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[664] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2019, with no material changes in internal control over financial reporting during the fourth quarter - Based on an evaluation as of December 31, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[665] - No changes in internal control over financial reporting occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, internal controls[667] Other Information The company reports no other information for this item - None[668] PART III Directors, Executive Officers and Corporate Governance This section provides detailed biographies for the company's ten directors and five executive officers, highlighting their experience and qualifications, with the board largely compliant with NYSE requirements and all directors, except the CEO, determined to be independent - The Board of Directors consists of 10 members, led by Chairman Richard Gillingwater, and the executive team is led by CEO Richard Weil[671][705] - The company has an Officer Code of Ethics for its CEO and Senior Financial Officers, which is available on its website[713] - Corporate governance practices are substantially compliant with NYSE requirements, with a noted exception for shareholder approval of equity compensation plans, which follows ASX rules[718] - The Audit Committee is composed of four independent directors, and the Board has determined that Jeffrey Diermeier and Kalpana Desai qualify as "audit committee financial experts"[720][721] Executive Compensation The company's executive compensation program is performance-based, aligning pay with strategic priorities and shareholder interests, with 91% of the CEO's 2019 total compensation being variable and determined by a scorecard approach - The compensation philosophy emphasizes pay-for-performance, with variable compensation making up the vast majority of executive pay (91% for the CEO in 2019)[724][729] - CEO performance is evaluated using a scorecard with three categories: Investment Excellence (30% weight), Financial Results (40% weight), and Strategic Results (30% weight)[738] 2019 CEO Compensation Summary | Component | Amount ($) | | :--- | :--- | | Base Salary | 725,000 | | Variable Comp (Cash) | 3,712,500 | | Variable Comp (Deferred) | 3,712,500 | | Total Variable Comp | 7,425,000 | - 50% of the CEO's variable compensation is deferred, split equally between time-vested fund units and performance-vested PSUs, with PSUs cliff vesting after three years based on relative TSR against a peer group, with potential payout from 0% to 200%[731][732] - The CEO's 2019 variable compensation was set at $7.425 million, a 6% decrease from 2018, reflecting strong investment performance but weaker financial results, resulting in an overall performance multiplier of 0.99 against the target[747][756] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the beneficial ownership of JHG's common stock as of February 21, 2020, reporting four entities owning more than 5% of the company's stock, with all directors and executive officers as a group beneficially owning 1.04% of outstanding shares Principal Shareholders (as of Feb 21, 2020) | Name | Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | Dai-ichi Life Holdings, Inc. | 30,668,922 | 16.40% | | BlackRock, Inc. | 18,685,728 | 9.99% | | Silchester International Investors LLP | 17,761,063 | 9.50% | | The Vanguard Group Inc. | 15,175,829 | 8.12% | | All directors and executive officers as a Group | 1,941,635 | 1.04% | - Information is provided on various equity compensation plans, including the Deferred Equity Plan (DEP), Long-Term Incentive Plan (LTIP), and Restricted Share Plan (RSP), outlining their purpose and mechanics[790][791][792] Certain Relationships and Related Transactions, and Director Independence The company has a formal policy for pre-approving related party transactions, with its most significant relationship being with Dai-ichi Life Holdings, Inc., a major shareholder, governed by a strategic cooperation agreement, and all directors except the CEO are deemed independent - The company maintains a strategic cooperation agreement with its largest shareholder, Dai-ichi Life Holdings, Inc[801] - Key terms of the Dai-ichi agreement include an ownership limit of 20%, the right for Dai-ichi to designate one representative to the JHG Board, an agreement for Dai-ichi to maintain at least $2.5 billion in JHG investment products, and standstill and transfer restrictions on Dai-ichi's shareholding[802][803][804][805] - As of December 31, 2019, Dai-ichi beneficially owned approximately 16.4% of JHG's issued and outstanding shares[815] - The Board of Directors has determined that all directors are independent from management, except for CEO Richard Weil[818] Principal Accountant Fees and Services This section details the fees paid to PricewaterhouseCoopers for fiscal years 2019 and 2018, totaling $4.55 million and $4.48 million respectively, with all services pre-approved by the Audit Committee Accountant Fees (2019 vs. 2018) | Fee Category | 2019 ($) | 2018 ($) | | :--- | :--- | :--- | | Audit fees | 3,023,000 | 3,028,000 | | Audit-related fees | 916,957 | 922,100 | | Tax fees | 13,867 | 13,500 | | All other fees | 595,155 | 514,371 | | Total | 4,548,979 | 4,477,971 | - The Audit Committee has a policy for pre-approving all audit and non-audit services provided by the independent auditor to ensure compatibility with maintaining auditor independence[821] PART IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including financial statements, the auditor's report, and a detailed list of exhibits such as governance documents, material contracts, and certifications - The financial statements and the auditor's report are referenced as appearing in Part II, Item 8[826] - A comprehensive list of exhibits filed with or incorporated by reference into the report is provided, including material contracts such as the credit facility agreement and the strategic cooperation agreement with Dai-ichi[828][830] Form 10-K Summary The company did not provide a summary for this item - None[841]