Invesco Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Invesco is a global investment manager; it reported $598.4 billion of assets under management (AUM) at quarter-end. Comparisons with 2010 are affected by the June 2010 acquisition of Morgan Stanley’s retail asset management business, including Van Kampen, and by consolidation of investment products.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $997.8 million | $953.1 million | $3,095.1 million | $2,459.2 million |
| Operating income | $227.8 million | $182.9 million | $686.5 million | $391.2 million |
| Operating margin | 22.8% | 19.2% | 22.2% | 15.9% |
| Net income attributable to common shareholders | $166.9 million | $154.7 million | $527.4 million | $290.5 million |
| Diluted EPS | $0.36 | $0.32 | $1.13 | $0.63 |
| Adjusted operating margin (non-GAAP) | 36.2% | 36.0% | 37.2% | 34.6% |
| Adjusted diluted EPS (non-GAAP) | $0.42 | $0.39 | $1.27 | $0.94 |
- Revenue and profit: Q3 operating revenue rose 4.7% and operating income rose 24.5% year over year. For the first nine months, revenue increased 25.9%, operating income 75.5%, and adjusted operating income 31.6%.
- Drivers and mix: Q3 investment management fees increased 7.4%, supported by higher average AUM, while lower equity exposure reduced fee yield. Q3 net revenue yield fell to 44.6 basis points from 46.8. Nine-month results also reflect the acquisition and foreign exchange; management attributed $73.0 million of the revenue increase to currency movements.
- Cash flow: Reported operating cash flow was $642.0 million for nine months, versus $375.5 million in 2010. Excluding consolidated investment products, operating cash flow was $517.3 million versus $281.9 million. Company cash flow before consolidation was investing outflow of $87.3 million and financing outflow of $409.5 million.
- Liquidity and debt: Cash and cash equivalents were $757.0 million at September 30. Company debt was $1.390 billion, including $215.1 million due April 2012; the $1.25 billion credit facility had $644.0 million drawn and $606.0 million of remaining capacity. Management reported covenant compliance, a 1.13x leverage ratio and 19.78x interest coverage. These company debt figures exclude debt of consolidated investment products.
- Balance sheet: Total assets were $19.738 billion and total equity $8.968 billion. The balance sheet includes $6.970 billion of investments and $5.866 billion of debt belonging to consolidated investment products; the company says those assets are unavailable to its general creditors and the related debt is not its obligation.
Material changes and operating trends
- Quarter-end AUM declined from $653.7 billion at June 30 to $598.4 billion at September 30. Q3 long-term net inflows of $3.3 billion were outweighed by $52.2 billion of market losses and $5.3 billion of adverse currency translation. Equity AUM fell to $253.2 billion from $294.4 billion a year earlier.
- Nine-month long-term net inflows were $13.6 billion, including $11.7 billion in ETF, UIT and passive products; equity long-term flows were negative $8.7 billion. Average AUM was $638.5 billion versus $504.5 billion, with the prior-period comparison affected by the acquisition.
- Q3 operating expenses were essentially flat at $770.0 million. Nine-month expenses rose 16.5% to $2.409 billion, reflecting the acquired business, currency and higher compensation and distribution costs; transaction and integration expense fell from $123.3 million to $23.9 million.
- GAAP net income was $83.4 million in Q3 and $312.1 million for nine months, distinct from net income attributable to common shareholders. Results include large consolidated-investment-product gains/losses and offsetting noncontrolling-interest allocations. The company provides non-GAAP measures to separate these effects; those measures are not substitutes for GAAP.
Outlook, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management expects to complete outsourcing of European transfer agency by December 2012, with implementation costs of up to $40 million and approximately 330 employee reductions. It expects ongoing savings to more than offset implementation expense within three years after completion; the estimate may change as regulations become clearer.
- Market and business risks: Management noted sharp Q3 equity-market declines amid European sovereign-debt concerns and the U.S. sovereign downgrade. Revenue and AUM are sensitive to market prices, client flows, asset mix, investment performance and foreign exchange. Regulatory changes, including proposed European and U.K. reforms, may affect distribution and operating models.
- Contingencies: Undrawn capital commitments were $168.9 million. Support agreements for two investment trusts committed $36 million, with possible internal authorization up to $66 million; no payments had been made, and management assessed funding likelihood as low. Acquisition earn-outs include a potential PowerShares payment of up to $500 million in Q4 2011; management said acquisition-contingency payments were not expected to be material to liquidity or financial position.
- Legal matters: Lawsuits and demand letters concerning past auction-rate preferred-security redemptions at acquired Van Kampen-related funds remained unresolved. Motions to dismiss were filed October 4, 2011; Invesco intended to defend the cases, but could not predict outcomes or material impact.
- Unusual item: Termination of a Denver stadium sponsorship and naming-rights commitment produced a $10.4 million Q3 marketing expense credit. The commitment was ended after ten years of a planned twenty-year term. Management excluded the credit from adjusted results.
- Capital return: In the first nine months, Invesco repurchased 13.4 million shares for $333.0 million and paid $165.0 million in dividends. The board declared a Q3 dividend of $0.1225 per share, payable December 7, 2011.
Key facts for investors to verify
- Reconcile GAAP and non-GAAP earnings, particularly the impact of consolidated investment products and noncontrolling interests.
- Track AUM, flows, equity-market exposure and net revenue yield as indicators of future fee revenue.
- Assess refinancing or repayment plans for the $215.1 million April 2012 note maturity and the company’s remaining credit-facility capacity.
- Monitor European transformation costs, delivery of expected savings, and the effect of evolving regulation.
- Follow the PowerShares earn-out, auction-rate securities litigation, and potential trust-support funding exposure.