Invesco Ltd. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also presents unaudited fourth-quarter results. Invesco is a global investment manager operating in more than 20 countries, with one reported operating segment: investment management.
Financial and operating performance
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Operating revenues | $4,092.2 million | $3,487.7 million | Up 17.3% |
| Net revenues (non-GAAP) | $2,898.4 million | $2,521.1 million | Up 15.0% |
| Operating income | $898.1 million | $589.9 million | Up 52.2% |
| Operating margin | 21.9% | 16.9% | GAAP measure |
| Adjusted operating income (non-GAAP) | $1,068.9 million | $897.7 million | Up 19.1% |
| Adjusted operating margin (non-GAAP) | 36.9% | 35.6% | Calculated on net revenues |
| Net income attributable to common shareholders | $729.7 million | $465.7 million | Up; reported net income before attribution was $622.0 million versus $636.8 million |
| Diluted EPS | $1.57 | $1.01 | Adjusted diluted EPS was $1.68 versus $1.38 |
| Cash from operating activities | $964.8 million | $379.2 million | Before consolidated investment products, $802.8 million versus $601.2 million |
| Cash and cash equivalents | $727.4 million | $740.5 million | Company cash; some cash is subject to regulatory or jurisdictional limits |
| Company debt | $1,284.7 million | $1,315.7 million | Excludes $5,512.9 million of consolidated investment-product debt, which Invesco says is non-recourse to the company |
| Ending AUM | $625.3 billion | $616.5 billion | Average AUM was $634.3 billion versus $532.3 billion |
Investment management fees were $3,138.5 million, up 15.3%; service and distribution fees were $780.3 million, up 20.9%. Net revenue yield declined 1.7 basis points to 45.7 basis points, reflecting asset mix, growth in lower-fee ETF, UIT and passive assets, and acquisition-related fee waivers. FY 2011 diluted EPS was $1.57; fourth-quarter revenue was $997.1 million, operating income $211.6 million, net income attributable to common shareholders $202.3 million and diluted EPS $0.44.
At year end, AUM included $373.9 billion retail, $233.5 billion institutional and $17.9 billion private wealth. Long-term net inflows were $19.2 billion, plus $5.3 billion of institutional money-market inflows; market movements reduced AUM by $15.3 billion. Equity AUM fell $7.9 billion from net outflows and $14.8 billion from market losses. ETF, UIT and passive AUM grew 19.2% to $96.3 billion.
Company operating cash flow before consolidated investment products was $802.8 million. Investing activities used $138.4 million before those products; financing activities used $673.6 million, including $436.5 million of share repurchases and $220.9 million of dividends paid. Company cash decreased $13.1 million to $727.4 million. FY 2011 dividends declared were $0.4775 per share in selected financial data; the company separately describes the fiscal-year-attributable dividend as $0.49 per share, up 11.4% from 2010. The board declared a $0.1225 fourth-quarter dividend payable in March 2012.
Material changes versus the prior period
- Revenue and operating income increased, supported by higher average AUM, a full year of results from the 2010 Morgan Stanley retail asset-management acquisition, and currency translation. The acquisition’s standalone contribution to 2011 results was not quantified.
- Operating expenses rose 10.2% to $3,194.1 million; transaction and integration costs declined to $29.4 million from $150.0 million in 2010. Adjusted operating margin improved, while net revenue yield weakened.
- AUM rose $8.8 billion overall, as net flows partly offset negative market returns. By comparison, 2010 AUM benefited from $121.5 billion of net acquisition/disposition activity and positive market movements.
- Net income attributable to common shareholders increased, although reported net income before attribution to noncontrolling interests decreased. Consolidation of investment products, chiefly CLOs, significantly affects GAAP presentation; management states that their collateral and debt are not available to, or obligations of, Invesco generally.
- Invesco repurchased 18.8 million shares for $436.5 million, versus 9.4 million shares for $192.2 million in 2010. Company debt decreased by $31.0 million.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no formal earnings, revenue or AUM guidance. Management expected to fund the $215.1 million 5.625% senior-note maturity due April 17, 2012, using operating cash flow and its credit facility, with no planned new senior-note issuance.
- European infrastructure initiative: Outsourcing the European transfer agency function was expected to be completed by December 2012. Invesco reported $18.8 million of 2011 implementation costs, estimated total costs of up to $40 million, and projected approximately $15 million in annual savings, expected to offset implementation costs within three years after completion. These are management estimates, not guarantees.
- Markets and business risks: Fee revenue depends on AUM and its mix, exposing results to market declines, client outflows, investment performance, fee competition and lower-fee product shifts. Management highlighted 2011 market volatility, European sovereign-debt concerns and currency translation exposure. Advisory contracts are generally terminable on 30 or fewer days’ notice.
- Debt and liquidity: The $1.25 billion unsecured credit facility was extended to June 3, 2016. Invesco reported covenant compliance at year end, with a 1.01:1 leverage ratio and 20.93:1 interest coverage ratio. Its $440.0 million European subsidiary cash balance was largely maintained for regulatory requirements; cash transfers may be restricted.
- Contingencies: Litigation relating to redemptions of auction-rate preferred securities at certain acquired closed-end funds remained pending; damages were unspecified and the outcome uncertain. Invesco also had $161.2 million of undrawn capital commitments and contingent support agreements with $41.0 million committed support (potentially up to $66.0 million with internal approval); no support payment had been made.
- Subsequent tax matter: On February 23, 2012, the Canada Revenue Agency notified a subsidiary of a potential assessment of approximately $20 million, including interest and penalties, concerning prior-period goods and services tax on revenue where management-fee rebates were applied. Management considered the claim unfounded and recorded no provision.
- Unusual items and accounting: 2011 included a $45.0 million litigation-settlement credit, a $10.4 million marketing credit related to termination of Denver stadium naming rights, and $18.8 million of European infrastructure costs. The 2011 GAAP results also included a $138.9 million net loss from consolidated investment products, largely offset by noncontrolling interests. Non-GAAP measures exclude or adjust for selected items and should not be treated as substitutes for GAAP results.
Important facts for investors to verify
- Reconcile GAAP and non-GAAP earnings and margins, including the effects of CLO consolidation, noncontrolling interests, the settlement credit and other adjustments.
- Track AUM flows, market effects, asset mix and fee yield—especially the growth and profitability contribution of ETFs, UITs and passive products.
- Assess whether the European transformation meets its cost, timing and savings estimates, and whether acquisition integration and fee waivers continue to affect results.
- Review the April 2012 note repayment, ongoing liquidity and covenant headroom, and the availability of cash held in regulated subsidiaries.
- Monitor the auction-rate-preferred-securities litigation, Canadian tax assessment, support agreements and undrawn investment commitments for changes in estimated exposure.