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 nine months ended September 30, 2012. Unless otherwise stated, financial amounts are in U.S. dollars; financial statement figures are in millions.
Assets under management (AUM) were $683.0 billion at quarter-end, up from $598.4 billion a year earlier. Management attributed the quarter’s market recovery partly to central-bank actions in the U.S. and Europe. Consolidated investment products, principally CLOs, materially increase reported GAAP assets and liabilities; Invesco says their assets are not available to its general creditors and their debt is not an obligation of Invesco.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $1,041.4 | $997.8 | $3,084.1 | $3,095.1 |
| Operating income | $216.0 | $227.8 | $648.7 | $686.5 |
| Operating margin | 20.7% | 22.8% | 21.0% | 22.2% |
| Net income attributable to common shareholders | $170.6 | $166.9 | $518.4 | $527.4 |
| Diluted EPS | $0.38 | $0.36 | $1.14 | $1.13 |
| Adjusted operating income (non-GAAP) | $250.4 | $255.7 | $768.6 | $812.6 |
| Adjusted operating margin (non-GAAP) | 34.1% | 36.2% | 35.2% | 37.2% |
| Adjusted diluted EPS (non-GAAP) | $0.42 | $0.42 | $1.26 | $1.27 |
Non-GAAP figures are management-defined measures and should not be treated as substitutes for GAAP results.
- Revenue and fees: Q3 investment management fees rose 4.9% to $818.0; nine-month fees were essentially flat at $2,390.0. Performance fees were $3.0 in Q3 and $38.9 for the nine months. Net revenue, a non-GAAP measure, was $734.7 in Q3 and $2,183.1 year to date.
- Profit and margins: Q3 operating income fell 5.2% as expenses grew faster than revenue. Nine-month operating income fell 5.5%. Q3 net income attributable to common shareholders increased, while the nine-month amount declined.
- Cash flow: GAAP operating cash flow was $317.7 for the nine months, versus $642.0 in 2011. Excluding consolidated investment products, operating cash flow was $605.5 versus $517.3. Capital expenditures were $68.4. Cash and cash equivalents ended at $880.1, compared with $727.4 at year-end 2011.
- Debt and liquidity: Invesco’s debt was $1,285.1, excluding $3,855.0 of consolidated investment product debt. The $333.5 of 5.375% senior notes due February 2013 is current. The credit-facility balance was $754.5, at a weighted-average rate of 1.395%. Debt-to-equity was 15.7% excluding consolidated products; the reported ratio including them was 55.9%. The company reported compliance with its debt covenants, a 1.04 leverage ratio against a 3.25 maximum, and 23.86 interest coverage against a 4.00 minimum.
- Shareholder returns: Nine-month dividends paid were $211.5; the declared quarterly dividend was $0.1725 per share. The company repurchased 8.1 million shares for $190.0 during the nine months; approximately $542.0 remained authorized.
Material changes versus comparable periods
- Q3 revenue increased 4.4%, but expenses rose 7.2%, compressing GAAP operating margin by 2.1 percentage points. Nine-month revenue declined 0.4% and expenses rose 1.1%, reducing operating margin by 1.2 percentage points.
- AUM increased to $683.0 billion, with Q3 long-term net inflows of $9.4 billion and market gains of $22.1 billion. For the nine months, long-term net inflows were $11.5 billion, including $12.0 billion of passive inflows offset by $0.5 billion of active outflows. A $1.7 billion disposition related to European CLO products reduced AUM.
- Net revenue yield declined to 44.0 basis points in Q3 from 44.6, and to 44.2 basis points for the nine months from 45.6. Management cited the growing share of lower-fee passive AUM; passive products represented 17.3% of AUM at quarter-end versus 14.6% a year earlier.
- Q3 other gains and losses included an $8.3 gain on sale of CLO management contracts and gains on deferred compensation investments; these helped offset weaker operating income. Nine-month operating cash flow excluding consolidated products improved, although reported GAAP operating cash flow fell substantially because of consolidated-product cash movements.
- Reported total assets declined to $17,861.0 from $19,347.0 at year-end 2011, principally alongside lower consolidated-product balances. Consolidated CLO debt fell to $3,855.0 from $5,512.9. The company repaid $215.1 of senior notes due in April 2012 and increased credit-facility borrowings.
Outlook, risks, contingencies and unusual items
The filing gives no specific earnings or revenue guidance. Management’s stated capital priorities are reinvestment in the business, steady annual dividend growth, share repurchases and a target cash buffer of approximately $1 billion above regulatory requirements, while maintaining an investment-grade credit profile. Management identified investment performance, AUM flows and mix, market levels and foreign-exchange rates as important drivers of future results.
- Management agreed to acquire 49% of Religare Asset Management Limited in India, subject to regulatory approval; it expected closing within three to four months of signing.
- Undrawn capital and purchase commitments were $217.3. Support agreements for two investment trusts committed $21.0, with an internal option to raise the maximum to $66.0. No support payments had been made; management assessed funding likelihood as low, but redemptions or credit deterioration could change that assessment.
- A Canadian tax assessment, including interest and penalties, was approximately $20.8; management considered the claim unfounded and recorded no provision. Gross unrecognized tax benefits were $18.6.
- Closed-end fund lawsuits related to past auction-rate preferred securities redemptions remained pending on motions to dismiss. Damages were unspecified; the company said outcomes could not be predicted. The filing also describes ongoing regulatory and ordinary-course litigation risks.
- Market risks include declines in equity or fixed-income markets and AUM, redemptions, fee pressure, interest-rate and credit volatility, currency movements, regulatory change, and possible impairment of goodwill or intangible assets. Goodwill was $7,039.9 and net intangible assets were $1,295.8. Forty-one percent of company borrowings had fixed rates; a 1% interest-rate change would change annualized interest expense by about $7.5.
- Unusual items included $5.6 of nine-month transaction and integration charges; $0.8 of other-than-temporary impairment charges on available-for-sale investments; and the $8.3 CLO management-contract sale gain. Management also described a prior-year $10.4 marketing-expense reduction from termination of a stadium sponsorship, affecting comparisons.
Most important facts for investors to verify
- Whether AUM inflows persist and whether passive-product growth and asset mix continue to pressure fee yields.
- Whether expense growth moderates sufficiently to stabilize operating and adjusted margins.
- Funding and repayment plans for the $333.5 senior notes due February 2013, and continued compliance with credit-facility covenants.
- Regulatory approval and closing terms for the proposed Religare investment, and any resulting capital commitment.
- Developments in the Canadian tax assessment, auction-rate securities litigation and investment-trust support exposure.
- Cash available for general corporate purposes, given regulatory and jurisdictional limits on some subsidiary cash balances; also compare reported GAAP cash flow with the company’s non-GAAP, consolidated-product-excluded measure.
- The valuation sensitivity of level 3 CLO, private-equity and real-estate positions, and the annual impairment assessment of substantial goodwill and intangible assets.