Business Context and Reporting Period
This Form 20-F is the Annual Report for AMVESCAP PLC (trading as Invesco) for the fiscal year ended December 31, 2006. AMVESCAP is a leading independent global investment manager operating under brands including AIM, Invesco Perpetual, PowerShares, and WL Ross & Co. The company manages assets for retail, institutional, and private wealth clients across 19 countries. In 2006, the company realigned its management structure to operate as a single global segment and completed two significant acquisitions: PowerShares Capital Management LLC (September 2006) and WL Ross & Co. LLC (October 2006).
Key Financial Metrics
| Metric | 2006 | 2005 | Change |
|---|---|---|---|
| Net Revenues | $2,414.6 million | $2,173.2 million | +11.1% |
| Operating Profit | $785.4 million | $424.6 million | +84.9% |
| Operating Profit (Adjusted*) | $785.4 million | $500.3 million | +57.0% |
| Net Operating Margin | 32.5% | 23.0% (Adjusted) | +9.5 pts |
| Diluted EPS | $0.60 | $0.26 | +130.8% |
| Diluted EPS (Adjusted*) | $0.60 | $0.34 | +76.5% |
| Assets Under Management (AUM) | $462.6 billion | $386.3 billion | +19.8% |
| Net Debt | $486.5 million | $733.7 million | -33.7% |
| Cash Flow from Operations | $506.7 million | $430.1 million | +17.8% |
*Adjusted figures exclude the 2005 restructuring charge of $75.7 million and the 2004 U.S. regulatory settlement of $413.2 million to provide a consistent measure of performance.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 11.1% driven by higher management fees from market appreciation and increased AUM, as well as a 145.4% increase in performance fees.
- Expense Discipline: Operating expenses (excluding the 2005 restructuring charge) decreased 2.6% year-over-year due to cost controls and efficiency initiatives, despite a $84.2 million increase in share-based compensation amortization.
- Acquisitions: The acquisition of PowerShares added $6.3 billion in AUM and $8.5 billion by year-end. The acquisition of WL Ross & Co. added $2.6 billion in AUM. These deals expanded the company's ETF and alternative asset capabilities.
- Net Flows: The company experienced net outflows of $1.4 billion in 2006, a significant improvement from net outflows of $16.2 billion in 2005. Retail net flows turned positive ($0.5 billion inflow) compared to significant outflows in the prior year.
- Investment Performance: Relative investment performance improved across most regions, with U.K. retail performance remaining strong and U.S. retail performance showing improvement across one, three, and five-year periods.
Guidance, Outlook, and Risks
Outlook and Strategy: Management expects continued growth driven by global economic expansion and the growing middle class. The company is executing a multi-year transformation program to integrate operations, reduce costs, and leverage its global platform. The Board has recommended a final dividend of $0.104 per share for 2006.
Key Risks:
- Market Volatility: Revenues are directly tied to AUM, which fluctuates with market values. A decline in equity markets could significantly reduce fees.
- Net Outflows: Continued net outflows or poor relative performance could lead to further AUM erosion.
- Competition: The industry is highly competitive, potentially forcing fee reductions or increased distribution costs.
- Regulatory Environment: The company is subject to extensive regulation globally. Changes in laws or adverse regulatory actions (including ongoing litigation regarding market timing) could increase costs or limit operations.
- Debt Levels: While net debt decreased, the company carries significant indebtedness ($1.27 billion total), which could limit financial flexibility if credit ratings are downgraded.
Important Facts for Investor Verification
- Adjusted vs. GAAP Earnings: Verify the reconciliation between reported GAAP earnings and the "adjusted" earnings presented by management, which excludes significant one-time charges from prior years (2005 restructuring, 2004 regulatory settlement).
- Share-Based Compensation: Note the significant increase in share-based compensation expense ($148.5 million in 2006 vs. $64.3 million in 2005), driven by the vesting of performance-based options granted in 2003.
- Goodwill Impairment: Confirm the status of the $5.0 billion goodwill balance on the balance sheet and the assumptions used in the annual impairment testing, particularly regarding the Private Wealth Management unit which was impaired in 2005.
- Acquisition Earn-outs: Review the provisions for contingent consideration (earn-outs) related to the PowerShares and WL Ross acquisitions, which total approximately $484 million and are subject to future performance targets.
- Foreign Exchange Exposure: Assess the impact of currency fluctuations, as the company operates globally but reports in U.S. dollars, and does not actively hedge operational foreign exchange exposures.