Invesco Ltd. — Q1 2012 Form 10-Q
Business context and reporting period. Invesco is a global investment manager serving retail, institutional and high-net-worth clients. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise stated. Invesco reported $672.8 billion of ending assets under management (AUM), up from $641.9 billion a year earlier. Because consolidation of investment products materially affects GAAP presentation, the company also presents non-GAAP measures that exclude or adjust for those products; these measures are not substitutes for GAAP.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Operating revenue | $1,033.7 million | $1,027.3 million; up 0.6% |
| Net revenue, non-GAAP | $736.3 million | $724.3 million; up 1.7% |
| Operating income / GAAP margin | $229.8 million / 22.2% | $225.7 million / 22.0% |
| Adjusted operating income / margin, non-GAAP | $269.2 million / 36.6% | $272.1 million / 37.6% |
| Net income / common shareholders’ net income | $74.8 million / $193.9 million | $99.3 million / $177.5 million |
| Diluted EPS / adjusted diluted EPS, non-GAAP | $0.43 / $0.44 | $0.38 / $0.41 |
| Dividend declared per share during quarter | $0.1225 | $0.1100 |
Common shareholders’ net income exceeded consolidated net income because losses attributable to noncontrolling interests in consolidated entities were added back in arriving at the common-shareholder figure. Consolidated investment-product results include substantial market-sensitive gains and losses that management says largely accrue to third-party investors.
- Revenue and profitability: Investment management fees were nearly flat at $791.4 million; service and distribution fees fell 4.9% to $189.0 million. Performance fees rose to $20.5 million from $3.8 million. Operating expenses increased 0.3% to $803.9 million; employee compensation rose 4.1%, partly offset by lower distribution and transaction/integration expenses.
- AUM and fee yields: Average AUM increased 4.4% to $658.2 billion. Long-term net inflows were $7.0 billion, including $7.9 billion of passive inflows, while market movements added $37.3 billion. Net revenue yield declined to 44.7 basis points from 46.0, reflecting a greater share of lower-fee passive and non-equity assets. Alternatives had $1.2 billion of net outflows.
- Cash flow: GAAP net cash used in operating activities was $158.3 million, compared with $105.1 million used in Q1 2011; this includes consolidated investment-product cash flows. Before consolidation, operating cash used was $38.0 million versus $152.4 million. Investing activities used $164.7 million and financing activities provided $179.0 million. Cash and cash equivalents ended at $592.3 million, down $135.1 million from year-end.
- Debt and liquidity: Corporate debt was $1.326 billion at quarter-end, including $580 million drawn under a floating-rate credit facility; weighted-average debt cost was 3.64%. The company reported compliance with covenants, a 1.03:1 leverage ratio and 22.06:1 interest coverage ratio. The $215.1 million senior notes due April 17, 2012 were repaid after quarter-end using the facility and cash. A further $333.5 million of notes was due in February 2013. Separately reported CLO debt of $5.345 billion is associated with consolidated funds and, according to the company, is nonrecourse and not a company obligation.
- Balance sheet: Total assets were $19.329 billion and total equity $9.134 billion at March 31. These totals include consolidated investment products and should not be read as wholly available to Invesco. Goodwill was $6.997 billion. Current maturities of debt rose to $548.6 million, mainly from reclassifying the 2013 notes as current.
Material changes and management commentary
- Reported operating income and GAAP operating margin improved slightly; adjusted operating income and adjusted margin declined. Adjusted net income and adjusted diluted EPS increased year over year.
- The company attributed the weak fee response to higher average AUM to a lower-fee asset mix, passive-product growth, U.S. mutual-fund fee waivers and foreign-exchange effects. Management said some acquisition-related fee waivers were expected to lapse in mid-2012.
- Management described stronger equity markets in Q1, easing European sovereign-debt concerns and positive U.S. employment trends. These conditions contributed to market-driven AUM growth; they are not company guidance.
- Capital priorities are to reinvest in the business, grow dividends steadily, continue share repurchases and build an approximately $1 billion cash buffer above regulatory requirements. Acquisitions are no longer a strategic priority, though opportunities may be considered.
- On April 26, the company announced a $0.1725 per-share Q1 dividend, payable June 8, a 41% increase over the prior quarterly dividend. It repurchased 3.1 million shares for $75.0 million during the quarter; approximately $657 million remained authorized under the repurchase plan.
Risks, contingencies and unusual items
- Results are sensitive to market levels, investment performance, client flows and asset mix; declines or underperformance could reduce AUM, fee revenue and performance fees. Foreign-exchange movements affect reported results, and the company does not hedge its foreign-operation translation exposure.
- A 1% interest-rate change on quarter-end debt levels would change annualized interest expense by an estimated $5.8 million. Forty-four percent of corporate borrowings were floating rate.
- Undrawn capital commitments were $163.5 million. Support agreements for two investment trusts represented $36 million of committed support, with internal approval to increase potential support to $66 million; the recorded estimated liability was $1.0 million. Management considered funding unlikely, but redemptions or credit deterioration could change that assessment.
- A Canadian tax authority assessment, including interest and penalties, was approximately $19.9 million; management disputed the claim and recorded no provision. The filing also discusses acquired-fund lawsuits concerning past auction-rate preferred-security redemptions; outcomes and potential damages could not be predicted.
- Consolidated investment products generated a $121.9 million net loss in Q1, versus an $85.5 million loss in Q1 2011, primarily from real-estate investment and CLO-debt losses. These results were substantially attributable to noncontrolling interests. CLO collateral and notes include significant fair-value estimates and unobservable inputs.
- No material change in previously disclosed risk factors was reported. Management stated disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Reconcile GAAP net income of $74.8 million to $193.9 million attributable to common shareholders, and distinguish reported from adjusted earnings and margins.
- Assess whether net flows and market-driven AUM gains can offset lower fee yields, passive-product mix and the scheduled lapse of fee waivers.
- Review cash available for corporate use separately from cash and assets of consolidated funds, and consider the April repayment and February 2013 note maturity alongside the stated cash-buffer goal.
- Monitor the $19.9 million Canadian tax assessment, auction-rate securities litigation, trust support exposure and undrawn capital commitments.
- Examine assumptions and valuation sensitivity for goodwill, CLOs, private-equity holdings and real-estate assets, including the effects of market and credit deterioration.