Business context and reporting period
Invesco Ltd. is a global investment manager serving retail, institutional and high-net-worth clients. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2009; financial statement amounts are in millions of U.S. dollars unless stated otherwise.
Assets under management (AUM) were $388.7 billion at quarter-end, up from $348.2 billion at March 31, 2009, but down from $461.3 billion a year earlier. Quarterly AUM growth reflected market gains of $24.8 billion, favorable foreign exchange of $11.0 billion and net inflows of $4.7 billion.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenues | $625.1 | $935.6 | $1,173.7 | $1,846.0 |
| Operating income | $110.4 | $240.0 | $172.2 | $468.1 |
| Operating margin | 17.7% | 25.6% | 14.7% | 25.4% |
| Net revenues (non-GAAP) | $469.9 | $705.3 | $879.9 | $1,389.5 |
| Net operating margin (non-GAAP) | 25.1% | 35.2% | 21.1% | 35.5% |
| Net income attributable to common shareholders | $75.7 | $162.8 | $106.4 | $318.0 |
| Diluted EPS | $0.18 | $0.41 | $0.26 | $0.79 |
Six-month consolidated net loss, including noncontrolling interests, was $29.6, while net income attributable to common shareholders was $106.4. The difference primarily reflects losses attributable to noncontrolling interests in consolidated investment products.
For the six months, operating cash flow was negative $28.6, investing cash flow was positive $23.7, and financing cash flow was positive $224.2. Cash and cash equivalents ended at $817.7, versus $585.2 at year-end 2008. Operating cash flow was pressured by working-capital movements, including annual bonuses, payroll taxes and pension contributions.
Total debt was $1,039.9 ($294.2 due December 2009), down from $1,159.2 at December 31, 2008. The company had no borrowings outstanding on its new $500 million revolving facility. It reported covenant compliance, with leverage of 1.63:1 and interest coverage of 9.64:1. Current assets were $3,056.0 and current liabilities $2,408.2; these include matching policyholder assets and payables of $1,057.3 each.
Changes versus the prior comparable period
- Q2 revenue fell 33.2% and six-month revenue fell 36.4%; lower average AUM, a less favorable asset mix and foreign exchange effects were significant factors. Management attributed $62.2 of the quarterly and $147.9 of the six-month revenue decline to currency movements.
- Q2 operating income declined 54.0%; six-month operating income declined 63.2%. Expense reductions did not offset the revenue contraction, and operating margins narrowed.
- Average AUM was $376.5 billion in Q2 versus $482.6 billion a year earlier; six-month average AUM was $365.4 billion versus $479.5 billion.
- Long-term net flows turned positive: $3.0 billion in Q2 versus outflows of $6.2 billion in Q2 2008, and $3.8 billion for the first half versus outflows of $14.6 billion. Institutional money market inflows remained positive.
- Cash increased primarily following a May share offering that raised $441.8 net. The offering issued 32.9 million shares. Debt declined after a $100 million tender-offer cash expenditure retired $104.3 million principal amount.
Outlook, management commentary, risks and unusual items
- Management said expense control would remain a focus and reported expenses approximately $50 million below the level referenced in prior guidance through June 30. It expected an approximately $10 million noncash property, office and technology charge related to vacating leased space, largely offset during the year by lower property and compensation costs and higher service and distribution fee revenue. No specific revenue or earnings forecast is provided in the supplied filing text.
- Management expected to repay the $294.2 million 4.5% notes due December 15, 2009 using available cash and/or a draw on the revolving facility. It said available cash, operating cash generation and credit capacity should provide sufficient resources, while noting capital-market access depends on economic conditions, credit ratings, investor demand, rates, spreads and equity valuations.
- Market and business risks include AUM sensitivity to securities prices, client flows, asset mix and investment performance, as well as foreign exchange exposure. The filing notes that cash transfers between some jurisdictions may be restricted or have adverse tax consequences; $303.5 million of cash was held by the European sub-group, much of it for regulatory requirements.
- Fixed-income-market support agreements for two trusts were extended through December 31, 2009. Committed support was $55.0 million, with an option to increase the maximum to $65.0 million; the recorded guarantee liability was $2.5 million. No payments or losses had occurred through the report date.
- Invesco recorded six-month other-than-temporary impairment charges of $4.4 million on CLO investments and $2.7 million on seed investments. Level 3 CLO holdings were $13.4 million; management said it did not intend to sell them before maturity. Consolidated investment products recorded six-month net losses of $134.9 million, largely offset by noncontrolling interests.
- A Canadian tax authority assessment of $15.9 million related to GST on certain mutual-fund redemption charges was not provided for; management considered the claim unfounded and unlikely to stand. Proposed settlements of market-timing lawsuits required court approval; the previously recorded settlement amount was $9.8 million. Management did not consider other current litigation outcomes probable to have a material adverse effect.
- Goodwill was $6,272.4 million, including a $299.1 million increase from foreign-currency translation. Interim impairment reviews through March 31 found fair value above carrying value; management reported no impairment indicators at June 30 and did not perform another interim test.
- New accounting guidance on VIE consolidation was expected to apply from January 1, 2010 and could significantly affect presentation by requiring consolidation of managed investment products not then consolidated. The company was assessing the impact.
Important facts for investors to verify
- Whether AUM recovery, positive long-term flows and investment performance persist, and whether the lower fee yield caused by asset mix reverses.
- How the company will fund the December 2009 note maturity and maintain compliance with the revolving facility’s leverage, coverage and minimum-AUM covenants.
- Underlying assumptions and sensitivity in CLO and goodwill valuations, including the credit quality, cash-flow forecasts and unobservable valuation inputs.
- Potential funding needs under the $55 million trust-support commitments and the outcome of the $15.9 million GST assessment and pending litigation settlements.
- The effect of the 2010 VIE accounting changes on reported assets, liabilities, earnings volatility and noncontrolling interests.
- The filing states disclosure controls were effective as of June 30, 2009 and that no material change in internal control over financial reporting occurred during the first half.