Invesco Ltd. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; filed February 26, 2010. Invesco is a global, single-segment asset manager operating in 20 countries. It reported $423.1 billion in assets under management (AUM) at year-end.
Financial performance
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Operating revenues | $2,627.3 million | $3,307.6 million |
| Net revenues (non-GAAP) | $1,978.7 million | $2,489.4 million |
| Operating income | $484.3 million | $747.8 million |
| Net income attributable to common shareholders | $322.5 million | $481.7 million |
| Diluted EPS | $0.76 | $1.21 |
| Operating margin | 18.4% | 22.6% |
| Net operating margin (non-GAAP) | 25.9% | 31.6% |
- Operating revenues fell 20.6%; management attributed $152.0 million of the decline to foreign exchange, with lower average AUM and a less favorable asset mix also weighing on fees. Average AUM fell 11.8% to $388.7 billion.
- Operating expenses declined 16.3% to $2,143.0 million, less than the revenue decline. Performance fees fell 60.1% to $30.0 million.
- Year-end AUM rose 18.4% from $357.2 billion in 2008, reflecting $46.1 billion of market gains, $10.9 billion of favorable currency effects, and $8.9 billion of net inflows. Retail had $11.0 billion of net inflows; institutional had $2.5 billion of net outflows.
- In the unaudited fourth-quarter data, revenue was $747.8 million, operating income $160.5 million, common-shareholder net income $110.9 million, and diluted EPS $0.25. For Q4 2008, the respective figures were $634.4 million, $84.5 million, $31.9 million, and $0.08.
Cash flow, balance sheet and liquidity
- Operating cash flow was $362.7 million, down from $525.5 million in 2008. Investing cash outflow was $102.4 million; financing cash outflow was $100.7 million. Year-end cash and cash equivalents were $762.0 million.
- Total debt declined to $745.7 million from $1,159.2 million; shareholders’ equity attributable to common shareholders was $6,912.9 million. The company had no borrowings outstanding on its $500 million revolving credit facility at year-end, which could be increased to $750 million subject to conditions.
- Debt covenants were met: leverage was 1.11x, interest coverage 11.01x, and long-term AUM $343.6 billion, compared with a $194.8 billion minimum covenant. Some cash is subject to local regulatory capital requirements; the European sub-group held $333.5 million, much of it for such requirements.
- Annual dividends attributable to 2009 were $0.41 per share, versus $0.40 in 2008. No shares were repurchased under the public buyback program in 2009.
Material developments, outlook and risks
- In October 2009, Invesco agreed to acquire Morgan Stanley’s retail asset management business, including Van Kampen, for an announced $1.5 billion subject to adjustment: $500 million cash plus approximately 44.1 million common and non-voting equivalent shares. Closing was expected in mid-2010, subject to regulatory, client and fund shareholder approvals. Estimated transaction and integration costs were less than $175 million, versus an initial estimate of approximately $125 million.
- Management said markets rebounded after March 2009 lows and reported positive net flows in each quarter. It expressed a positive outlook, but the filing gives no quantified earnings or revenue guidance. Management cited investment performance, client focus and cost discipline as priorities.
- Key risks include market declines and outflows reducing fee revenue; investment underperformance, fee pressure and competition; foreign-exchange exposure; regulatory change; dependence on key personnel and distribution channels; and acquisition execution, integration and financing. Money-market liquidity and possible regulatory changes to money-market funds were also identified as risks.
- Invesco had $77.6 million of undrawn investment commitments. Support agreements for two investment trusts had $51.0 million committed at year-end, with possible authorization up to $66.0 million; no payments had been made. The filing reported $36.0 million committed as of the report date.
- The company had $6.47 billion of goodwill and reported no impairment in its 2009 tests. A 40% decline in reporting-unit fair value or a 500-basis-point increase in the discount-rate assumption would have required the next impairment-testing step.
- Effective January 1, 2010, the company expected new consolidation rules to bring certain CLOs with approximately $6 billion of AUM onto its financial statements. The filing cautioned that this would eliminate related management and performance fees and add CLO assets, non-recourse debt and cash flows, although those assets are unavailable to Invesco and it is not obligated for the debt.
- Market-timing lawsuits had settlements in principle requiring a $9.8 million payment, already expensed in 2007 and subject to court approval. Management did not believe other pending matters were likely to have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Progress and final terms of the Morgan Stanley/Van Kampen acquisition, including approvals, closing adjustments, integration costs and share issuance.
- Whether AUM inflows, market levels and asset mix support a recovery in fee revenue, margins and operating cash flow.
- Availability of cash across jurisdictions, compliance with credit covenants, and the capacity to fund the acquisition while maintaining investment-grade ratings.
- The financial-statement presentation and analyst impact of the 2010 CLO consolidation rules.
- Developments in the investment-trust support agreements, legal matters and regulatory proposals affecting money-market funds and asset managers.