Invesco Ltd. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; interim financial statements are unaudited. Invesco is a global investment manager. Unless stated otherwise, dollar amounts are U.S. dollars.
Financial performance and key metrics
- Revenue: GAAP operating revenue was $719.1 million, up 31.1% from $548.6 million. Investment management fees rose 36.0% to $593.5 million; performance fees fell 87.2% to $1.4 million. Non-GAAP net revenue was $544.4 million, up 32.3%.
- Profit and margins: Operating income was $136.9 million versus $61.8 million; operating margin improved to 19.0% from 11.3%. Net income attributable to common shareholders was $95.0 million versus $30.7 million. Diluted EPS was $0.21 versus $0.08. Adjusted cash net income and adjusted cash EPS, both non-GAAP, were $120.0 million and $0.27, respectively, versus $42.4 million and $0.11.
- Consolidation effect: GAAP results include newly consolidated CLOs. Their $105.8 million net income contribution was largely offset by $104.4 million attributable to noncontrolling interests; the reported net impact to Invesco from its CLO investments was $1.4 million. CLO gains and losses should not be read as equivalent to investment-management earnings.
- AUM and flows: Period-end AUM was $419.6 billion, down from $423.1 billion at year-end 2009 but up from $348.2 billion a year earlier. Average AUM was $417.6 billion versus $351.0 billion. Q1 long-term net inflows were $3.7 billion, while institutional money-market net outflows were $10.6 billion. Market gains added $7.8 billion and currency translation reduced AUM by $4.4 billion.
- Cash flow and liquidity: Operating cash flow was a use of $177.0 million, compared with a use of $180.0 million a year earlier. It included a $116.1 million increase in cash held by consolidated investment products, which is not available for general corporate use; excluding that change, operating cash use was $60.9 million. Investing activities provided $134.1 million and financing activities used $109.3 million. Corporate cash and cash equivalents were $597.0 million, down from $762.0 million at December 31, 2009; management cited annual bonus payments as a principal reason.
- Debt and capital: Invesco’s own long-term debt was $745.7 million, unchanged from year-end; no amount was drawn on its credit facility. The company reported covenant compliance, a 0.99:1.00 leverage ratio and 13.06:1.00 interest coverage ratio. Separately, $5.1 billion of CLO debt was consolidated but, according to the filing, is nonrecourse to Invesco and supported by CLO assets unavailable to corporate creditors.
- Other: The declared dividend was $0.1025 per share in Q1; on April 27, the company declared a Q1 dividend of $0.11 per share. The effective tax rate, excluding noncontrolling interests, was 34.5%, down from 39.8%.
Material changes versus the prior comparable period
- Revenue growth and higher average AUM contributed to improved operating income, margins and EPS; foreign-exchange movements accounted for $36.3 million of the increase in operating revenue, according to management.
- Operating expenses increased 19.6% to $582.2 million. Key changes included third-party distribution expenses up 32.0% to $195.6 million, general and administrative expenses up 66.7% to $50.0 million, and $17.2 million of transaction and integration costs. Employee compensation was nearly flat at $237.6 million.
- Effective January 1, 2010, adoption of FASB Statement No. 167 required consolidation of certain CLOs. This added approximately $5.8 billion of assets and $5.1 billion of debt to the March 31 balance sheet; prior periods were not restated. The company recorded an initial $274.3 million appropriation of retained earnings and a $5.2 million reclassification from accumulated other comprehensive income.
- Consolidated assets rose to $16.8 billion from $10.9 billion at year-end, primarily reflecting CLO consolidation, rather than a comparable increase in assets available to Invesco. Corporate debt was unchanged.
Outlook, commentary, risks and contingencies
- Outlook: The filing provides no specific earnings or revenue guidance. Management said available cash, operating cash flows and credit-facility capacity should provide resources for expected needs, including the pending acquisition. Results remain sensitive to markets, AUM flows and mix, investment performance, and foreign exchange.
- Pending acquisition: Invesco expected to acquire Morgan Stanley’s retail asset management business, including Van Kampen, for an announced value of $1.5 billion, subject to adjustment. Consideration includes $500 million cash and approximately 44.1 million common and non-voting common-equivalent preferred shares; closing was expected June 1, 2010, subject to customary approvals. Transaction and integration costs were expected to total less than $175 million, including costs already incurred, with further costs anticipated in 2010–2011. The acquisition was expected to add $25–$35 million of annual amortization for approximately eight years.
- Commitments and claims: Undrawn investment-fund capital commitments were $84.5 million. Support agreements for two investment trusts carried $36 million of committed support, with an option to increase maximum support to $66 million; the agreements were extended through June 30, 2010. The recorded guarantee liability was $2.5 million, and no payments had been made. A Canadian GST assessment was $21.2 million; management believed it was unlikely to stand and recorded no provision. Proposed market-timing litigation settlements called for a $9.8 million payment previously expensed in 2007 and remained subject to court approval.
- Risk and controls: Market declines or underperformance could reduce AUM, fees and client flows; currency movements affect reported results, and the company does not hedge certain translation exposures. The filing also notes regulatory and litigation risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. Risk factors were reported as not significantly changed from the 2009 Form 10-K.
Important facts for investors to verify
- Separate underlying asset-management performance from CLO consolidation effects when assessing GAAP earnings, assets, liabilities and cash flows.
- Track AUM flows and composition, especially institutional money-market outflows, and the impact of markets and foreign exchange on fee revenue.
- Confirm the Morgan Stanley/Van Kampen acquisition’s closing, final consideration, client approvals, integration costs and expected amortization.
- Review corporate liquidity available after regulatory restrictions, acquisition funding and the timing of upcoming debt maturities; distinguish Invesco debt from nonrecourse CLO debt.
- Monitor the trust support agreements, Canadian tax dispute, market-timing settlement approval and other legal or regulatory developments.