Business Context and Reporting Period
Company: Invesco Ltd.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Invesco provides global investment management capabilities to retail, institutional, and high-net-worth clients. The company's sole business is investment management. As of June 30, 2008, Assets Under Management (AUM) totaled $461.3 billion, a 7.8% decrease from December 31, 2007, primarily due to the downturn in global equity markets during the second quarter.
Key Financial Metrics
| Metric ($ in millions) | Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|
| Total Operating Revenues | $935.6 | $1,846.0 | $1,879.2 |
| Operating Income | $240.0 | $468.1 | $494.1 |
| Net Income | $162.8 | $318.0 | $330.7 |
| Diluted EPS | $0.41 | $0.80 | $0.81 |
| Operating Margin | 25.6% | 25.4% | 26.3% |
| Cash and Cash Equivalents | $644.8 (Balance) | $644.8 (Balance) | $791.8 (Balance) |
| Long-Term Debt | $1,337.0 (Balance) | $1,337.0 (Balance) | $1,276.4 (Balance) |
| Net Cash from Operating Activities | N/A | $68.2 | $280.5 |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 4.4% ($43.4 million) for the quarter and 1.8% ($33.2 million) for the six months compared to the prior year. This was driven by a decrease in average AUM and a 35.5% drop in performance fees for the quarter.
- Expense Management: Operating expenses decreased 3.0% for the quarter and 0.5% for the six months. Employee compensation declined due to lower bonuses, offset by increased share-based compensation. Marketing expenses increased 12.8% for the six months due to advertising and new fund launches.
- Net Income: Net income decreased 7.2% for the quarter and 3.8% for the six months year-over-year. The effective tax rate decreased to 32.2% from 34.2% (quarter) and 34.4% (six months) due to lower statutory rates in Canada and the U.K.
- Assets Under Management: Average AUM for the six months was $479.5 billion, up 0.7% from the prior year, but ending AUM dropped to $461.3 billion due to market losses of $39.6 billion and net outflows of $0.3 billion.
- Impairment Charges: The company incurred $7.5 million in "other than temporary impairment" charges related to Collateralized Loan Obligations (CLOs) during the six months ended June 30, 2008.
Guidance, Outlook, Risks, and Unusual Items
- Share Repurchases: The company completed a $500 million repurchase program in March 2008 and authorized a new $1.5 billion program in April 2008. During the six months ended June 30, 2008, the company repurchased 7.6 million shares for $193.9 million. Approximately $1.46 billion remains available under the new program.
- Dividends: The company declared a quarterly dividend of $0.10 per share for the second quarter of 2008, payable in September 2008. This marks a shift to quarterly dividend payments starting in 2008.
- Acquisition Contingencies: The company paid $130.9 million in earn-out payments related to the Invesco PowerShares acquisition. Additionally, a $40.1 million earn-out related to the WL Ross acquisition was recorded as a note payable.
- Legal Proceedings: An ERISA lawsuit regarding market timing allegations, previously dismissed, was reversed by an appellate court in June 2008 and remanded for further proceedings. The company intends to defend vigorously. A settlement of $9.8 million for shareholder class action and derivative lawsuits was reached in principle.
- Contingent Support: The company has contingent support agreements for two investment trusts with a maximum committed support of $33.0 million, extendable to $49.5 million. No payments have been made to date.
- Deconsolidation: Certain real estate partnerships were deconsolidated effective April 1, 2008, due to amendments in limited partnership agreements, reducing consolidated assets and liabilities.
Investor Verification Checklist
- AUM Trends: Verify the impact of continued market volatility on Assets Under Management and fee revenue in subsequent quarters.
- CLO Exposure: Monitor the valuation and potential further impairment of the $30.7 million investment in Collateralized Loan Obligations (CLOs), classified as Level 3 assets.
- Legal Outcomes: Track the status of the remanded ERISA lawsuit and the final court approval of the $9.8 million market timing settlement.
- Share Repurchase Execution: Confirm the pace of share buybacks under the new $1.5 billion authorization and its impact on earnings per share.
- Joint Venture Performance: Assess the growth trajectory of the China joint venture (Invesco Great Wall), which contributed significantly to the increase in proportional share of revenues.