Invesco Ltd. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010. Invesco is a global investment manager. Financial statements are unaudited. Unless noted otherwise, amounts are U.S. dollars.
Financial results and key metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $787.0 million | $625.1 million | $1,506.1 million | $1,173.7 million |
| Operating income | $71.4 million | $110.4 million | $208.3 million | $172.2 million |
| Operating margin | 9.1% | 17.7% | 13.8% | 14.7% |
| Net income attributable to common shareholders | $40.8 million | $75.7 million | $135.8 million | $106.4 million |
| Diluted EPS | $0.09 | $0.18 | $0.30 | $0.26 |
| Adjusted operating margin (non-GAAP) | 32.0% | 26.9% | 32.8% | 23.3% |
| Adjusted EPS (non-GAAP) | $0.27 | $0.21 | $0.55 | $0.32 |
Q2 operating revenue rose 25.9%, while operating income fell 35.3% and common-shareholder net income fell 46.1%. The decline in operating margin primarily reflects $79.3 million of transaction and integration costs. For the first half, revenue increased 28.3% and operating income 21.0%; common-shareholder net income rose 27.6%. Non-GAAP adjusted results exclude specified items and should not be treated as GAAP results.
- Revenue drivers: Investment management fees were $627.9 million in Q2, up 25.2%; service and distribution fees were $139.4 million, up 38.8%. Performance fees fell 56.3% to $3.5 million. Acquisition contribution, higher average assets under management (AUM), and product mix supported revenue growth.
- AUM and flows: AUM ended the quarter at $557.7 billion, including $114.6 billion added by the June acquisition. Q2 net flows added $13.9 billion, but market movements reduced AUM by $24.2 billion and foreign exchange by $3.4 billion. Average AUM was $480.5 billion versus $401.5 billion.
- Cash flow: First-half operating cash flow was negative $63.4 million, including consolidated investment product cash flows; investing cash flow was negative $559.1 million, including $712.2 million net cash paid for the acquisition; financing cash flow was positive $434.3 million, including $650 million of credit-facility borrowing. Cash and cash equivalents ended at $555.6 million, down from $762.0 million at year-end 2009.
- Debt and liquidity: Company debt was $1,395.7 million, including $650 million drawn on a new $1.25 billion revolving facility maturing May 2013. The company reported compliance with covenants; leverage was 1.60x and interest coverage 13.03x. It reported $600 million of remaining facility capacity. The $5.4 billion of consolidated CLO debt is non-recourse to Invesco and is supported by CLO assets, not available for general corporate use.
- Margins and dividends: GAAP operating margin contracted in Q2, while adjusted operating margin improved. Dividends declared were $0.11 per share in Q2; a second-quarter dividend of $0.11 was declared July 27, payable September 9, 2010.
Material changes and unusual items
- On June 1, 2010, Invesco acquired Morgan Stanley’s retail asset management business, including Van Kampen, for $770 million cash and 30.9 million common shares and common-share equivalents. The acquired business contributed approximately $67 million of revenue and $11.2 million of net income from June 1 through June 30.
- Transaction and integration charges were $79.3 million for Q2 and $96.5 million for the first half. Management expected additional 2010–2011 costs of $13.4 million for severance and $54.3 million for other integration. The filing estimated total transaction and integration costs would be less than $175 million, including costs incurred in 2009.
- Management estimated first-year adjusted earnings accretion from the acquisition of 22–24 cents per share. This is an estimate, not a guarantee.
- Adoption of new consolidation guidance brought certain CLOs onto the balance sheet: approximately $6.5 billion of assets and $5.4 billion of debt at June 30. Their gains, losses, interest income and interest expense substantially accrue to outside investors; Invesco said the net impact to the company was $3.8 million for the first half. Prior periods were not restated, limiting comparability.
- An $8.9 million charge related to correcting historical foreign-exchange allocations in fund accounting reduced Q2 and first-half results; management excluded it from adjusted measures. Seed investment impairment charges were $4.0 million in Q2 and $6.1 million for the first half.
- Markets weakened in Q2 amid European sovereign-debt concerns. The S&P 500 fell 11.9% and the FTSE 100 fell 13.4% during the quarter. Management noted exposure to market levels, AUM flows and composition, and currency movements.
Outlook, risks and contingencies
Management said cash flows, available cash, the new credit facility and access to capital markets should provide resources for expected needs, while noting that timely market access depends on credit ratings, economic conditions, investor demand, rates, credit spreads and equity valuations. S&P upgraded Invesco to A-/Stable on July 28, 2010. No formal earnings or revenue guidance was provided beyond the acquisition accretion estimate and expected integration costs.
- Investment-management revenue is sensitive to market performance, client flows, asset mix and foreign exchange. The company does not hedge its foreign-operation translation exposure.
- Two investment-trust support agreements had $36 million committed support, with an option to increase the maximum to $66 million. The agreements were extended through December 31, 2010; no payments had been made, and management said required support was below $15 million as of the report date.
- Undrawn capital commitments to investment partnerships were $85.5 million. Potential acquisition earn-outs include up to $500 million for PowerShares and up to $110 million remaining for W.L. Ross, subject to contractual conditions.
- A Canadian tax assessment of $20.9 million was being contested; no provision was recorded. Market-timing litigation settlements in principle, including a proposed $9.8 million payment already recorded in 2007, remained subject to court approval. Management said other pending litigation was not believed probable to have a material adverse effect.
- Management identified goodwill, intangible-asset and investment valuation as areas requiring significant estimates. Goodwill was $6.69 billion; a substantial decline in AUM or related fees could affect impairment assessments.
Most important facts for investors to verify
- Whether acquisition synergies and the estimated 22–24 cents of first-year adjusted EPS accretion materialize, and whether remaining integration costs stay within expectations.
- Underlying operating performance excluding acquisition costs and CLO consolidation effects; compare GAAP results with the company’s non-GAAP reconciliations.
- Post-acquisition AUM flows, particularly whether the large Japanese institutional mandate is sustained and whether retail outflows continue.
- Cash generation, debt levels and covenant headroom after funding the acquisition; distinguish Invesco’s own debt from non-recourse CLO debt.
- Developments in the support agreements, W.L. Ross and PowerShares earn-outs, Canadian tax dispute and pending litigation.