Invesco Ltd. — 2009 Third-Quarter Form 10-Q
Business and period: Invesco is a global investment manager serving retail, institutional and high-net-worth clients. This unaudited report covers the quarter and nine months ended September 30, 2009; amounts are in U.S. dollars, generally millions unless noted. Management states the interim statements include normal recurring adjustments.
Financial results and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Operating revenue | $705.8 | $827.2 | $1,879.5 | $2,673.2 |
| Operating income | $151.6 | $195.2 | $323.8 | $663.3 |
| Operating margin | 21.5% | 23.6% | 17.2% | 24.8% |
| Net income attributable to common shareholders | $105.2 | $131.8 | $211.6 | $449.8 |
| Diluted EPS | $0.24 | $0.33 | $0.51 | $1.12 |
| Net operating margin (non-GAAP) | 29.9% | 32.7% | 24.4% | 34.7% |
- Q3 revenue declined 14.7%; nine-month revenue declined 29.7%. Investment management fees were down 14.2% and 29.5%, respectively. In the nine-month period, performance fees fell 54.8% to $23.2 million.
- Operating expenses fell 12.3% in Q3 and 22.6% year to date. Reported revenue and expense declines were partly attributable to a stronger U.S. dollar; foreign exchange accounted for $36.9 million of the Q3 revenue decline and $184.8 million of the nine-month decline.
- Average assets under management (AUM) were $406.9 billion in Q3 and $378.2 billion year to date, versus $448.3 billion and $468.6 billion in the comparable 2008 periods. Ending AUM was $416.9 billion, up from $388.7 billion at June 30, 2009. Q3 long-term net inflows were $2.6 billion, while institutional money-market funds had $2.6 billion of net outflows.
- Operating cash flow was $134.0 million for the first nine months, down from $338.0 million. Investing activities used $12.4 million; financing activities provided $203.4 million. Cash and cash equivalents ended at $923.8 million, versus $585.2 million at year-end 2008.
- Total debt was $1,039.9 million, including $294.2 million of 4.5% notes due December 15, 2009. Invesco had no borrowing outstanding on its new $500 million revolving facility. It reported covenant leverage of 1.77x and interest coverage of 9.12x and stated it was in compliance.
- Total assets were $10.95 billion and total equity $7.42 billion at September 30. Goodwill was $6.38 billion, up $411.9 million from year-end, primarily due to foreign-currency translation.
Changes, outlook and management commentary
- Management attributed lower fees mainly to lower average AUM, asset mix, foreign exchange and weaker performance-fee revenue. It reported stronger global markets during Q3 and positive market-related AUM gains, while emphasizing that market levels, flows and asset mix can materially affect revenue.
- Management forecast 2009 operating expenses of approximately $2.110 billion, based on flat markets from December 31, 2008 and unchanged exchange rates. Through September, expenses were about $27 million below the company’s forecasted pace; management said it was generally tracking to the original guidance and noted possible acquisition-related costs of about $5 million in Q4. No specific revenue or EPS guidance is provided in the filing.
- A $12 million charge for vacating leased property, including Denver space, increased Q3 property, office and technology costs. Management expected lower property and compensation costs to largely offset it over the remainder of the year. Headcount was 4,908, down from 5,354 a year earlier.
- In May, Invesco issued 32.9 million shares, receiving $441.8 million net. In June, it retired $104.3 million of senior notes in a tender offer, recognizing a $3.3 million net gain. The new $500 million revolving facility replaced a $900 million facility.
- After quarter-end, Invesco agreed to acquire Morgan Stanley’s retail asset management business, including Van Kampen, for an initially stated $1.5 billion: $500 million cash and 44.1 million Invesco shares. Closing was expected in mid-2010, subject to approvals; the cash portion was expected to be funded from available cash.
- Key risks include sensitivity of fee revenue and AUM to markets, client flows, investment performance and product mix; foreign exchange exposure; and restricted transferability of some local cash. The European sub-group held $368.6 million of cash, much of it for regulatory requirements. Invesco also disclosed $85.5 million of undrawn investment commitments and $20 million committed under support agreements for two trusts, with company authority to increase that support to $65 million. No support payments had been made.
- A Canadian tax authority assessment of $19.9 million is disputed by management; no provision was recorded. Market-timing litigation settlements in principle call for a $9.8 million payment already recorded, subject to court approval. Management said other litigation was not considered probable to have a material adverse effect based on information available.
- Management reported no goodwill impairment indicators at June 30 or September 30, 2009. It warned that new VIE consolidation guidance effective January 1, 2010 could significantly affect presentation because it may require consolidation of managed investment products not then consolidated.
Important facts for investors to verify
- Whether the $294.2 million December 2009 note maturity was repaid or refinanced, and the resulting cash and debt position.
- Progress, approvals, funding and share dilution associated with the Morgan Stanley/Van Kampen acquisition.
- Subsequent AUM flows, fee yields and investment performance, particularly in light of lower average AUM and revenue yields.
- Actual full-year operating expenses versus the $2.110 billion forecast, including restructuring and acquisition-related costs.
- Exposure and potential funding under the trust support agreements, and the status of the $19.9 million Canadian tax assessment and pending litigation.
- Effects of the forthcoming VIE accounting guidance and the valuation assumptions for goodwill, CLOs and other illiquid investments.