Invesco Ltd. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Invesco is a global investment manager; it reported $646.6 billion of assets under management (AUM) at quarter-end. Financial amounts below are in U.S. dollars; income and cash-flow amounts are for the three or six months ended June 30, as indicated.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenues | $1,009.0m | $1,070.0m | $2,042.7m | $2,097.3m |
| Operating income | $202.9m | $233.0m | $432.7m | $458.7m |
| Operating margin | 20.1% | 21.8% | 21.2% | 21.9% |
| Net income attributable to common shareholders | $153.9m | $183.0m | $347.8m | $360.5m |
| Diluted EPS | $0.34 | $0.39 | $0.76 | $0.77 |
| Net revenues (non-GAAP) | $712.1m | $751.2m | $1,448.4m | $1,475.5m |
| Adjusted operating income (non-GAAP) | $249.0m | $284.8m | $518.2m | $556.9m |
| Adjusted operating margin (non-GAAP) | 35.0% | 37.9% | 35.8% | 37.7% |
| Adjusted diluted EPS (non-GAAP) | $0.41 | $0.44 | $0.85 | $0.85 |
Q2 GAAP net income was $227.6m versus $129.4m a year earlier, but the amount attributable to common shareholders declined. The difference reflects the results and allocation of earnings from consolidated investment products; those products’ gains and losses largely belong to outside investors and are not representative of Invesco’s underlying asset-management performance.
- Cash flow: Six-month operating cash flow was $247.2m, including consolidated investment products; management’s pre-consolidation presentation showed $281.9m. Investing activities used $186.9m and financing activities used $73.1m. Cash and cash equivalents ended the period at $718.4m, down from $727.4m at year-end 2011.
- Balance sheet and debt: Total assets were $18.61bn and total equity $9.12bn. Company debt was $1.342bn, including $333.5m current maturities and $1.008bn long-term debt. The $811m revolving credit-facility balance carried a weighted-average rate of 1.385%. Excluding consolidated investment products, debt/equity was 16.9%; the reported 70.3% ratio includes product debt that management says is non-recourse to Invesco.
- Liquidity: Management said available cash, operating cash flow and credit-facility capacity should meet current and anticipated needs. The company was in compliance with debt covenants and regulatory minimum-capital requirements. It targets an approximately $1bn cash buffer above regulatory requirements; the filing does not state that this target had been reached.
- Margins and AUM: Q2 ending AUM was $646.6bn, down from $672.8bn at March 31 and $653.7bn a year earlier. Average quarterly AUM was $651.2bn. Q2 net revenue yield was 43.7 basis points versus 46.0 basis points a year earlier; six-month yield was 44.2 versus 46.0 basis points.
Material changes versus prior periods
- Q2 operating revenue fell 5.7% year over year and operating income fell 12.9%; six-month declines were 2.6% and 5.7%, respectively. Common-shareholder net income declined 15.9% in Q2 and 3.5% for the first half.
- Investment-management and service/distribution fees weakened, reflecting AUM mix, foreign-exchange effects, U.S. mutual-fund mergers and fee waivers, and continued conversion of B-share fee structures to lower-fee A shares. Performance fees rose to $15.4m in Q2 from $7.6m and to $35.9m for six months from $11.4m.
- Operating expenses decreased 3.7% in Q2 and 1.7% for six months. Lower distribution and transaction/integration costs were partly offset by increased property, technology and general and administrative expenses.
- Q2 markets were weak amid renewed European sovereign-debt concerns and signs of slower growth. Quarterly long-term net outflows were $4.9bn, institutional money-market outflows were $3.4bn, market movements reduced AUM by $15.5bn, and foreign exchange reduced it by $2.4bn. For the first half, long-term net inflows were $2.1bn, but institutional money-market outflows were $2.3bn.
- Q2 GAAP results included $77.2m of net gains from consolidated investment products, compared with a $64.7m loss in the prior-year quarter. For the first half, those products recorded a $44.7m net loss versus a $150.2m loss in 2011. These volatile items contributed materially to differences between GAAP net income and underlying operating trends.
- The company repaid $215.1m of 5.625% senior notes in April, funding repayment with credit-facility borrowings and cash. It repurchased $150m of shares in the first half, down from $333m a year earlier, and paid $133.7m in dividends. The quarterly dividend was increased to $0.1725 per share from $0.1225 a year earlier.
Outlook, commentary, risks and contingencies
- Outlook and priorities: The filing provides no quantified earnings, revenue or AUM guidance. Management’s stated priorities are reinvestment in the business, steady annual dividend growth, continued share repurchases, and building the targeted cash buffer while maintaining an investment-grade credit rating. Management emphasized investment performance and continued demand for balanced-risk-allocation strategies, which had recorded eleven consecutive quarters of positive flows.
- Market and business risks: Revenue depends on AUM levels and mix, investment performance, net flows and currency translation. Market declines, client withdrawals, underperformance, or shifts toward lower-fee products may reduce fees and performance revenues. The company has significant foreign-currency exposure; it purchased four sterling put options, with a maximum contract loss of $2.5m, to hedge part of sterling-denominated earnings.
- Debt and liquidity risks: $333.5m of senior notes mature February 27, 2013. Sixty percent of company borrowings were floating-rate; management estimated a 1% rate change would alter annualized interest expense by $8.1m. Cash transfers can be constrained by regulatory capital requirements and may have tax consequences. Credit-market access also depends on market conditions and the company’s ratings.
- Investment-product exposure: Consolidated investment products included $5.07bn of CLO debt, which management considers obligations of the products, not Invesco; investors have no recourse to Invesco’s general credit. Approximately 2% of CLO collateral assets were in default, versus less than 1% at year-end 2011. Product valuations include illiquid and Level 3 inputs, and CLO fair values may be adversely affected by higher yields or defaults and lower recoveries.
- Commitments and litigation: Undrawn investment commitments were $127.6m. Support agreements for two trusts carried $36m of committed support, with an option to raise the maximum to $66m; no payments or losses had occurred. A Canadian GST assessment, including interest and penalties, was approximately $19.8m; management disputed the claim and recorded no provision. Auction-rate-preferred-securities litigation involving acquired closed-end funds remained pending; damages were unspecified, and outcomes could not be predicted.
- Other items: The company recorded $0.9m of other-than-temporary impairment charges on available-for-sale investments during the first half. Management said no significant changes had occurred in previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether AUM flows, market performance and asset mix support a recovery in fee revenue and net revenue yield, particularly given quarterly outflows and the growing lower-yield passive share.
- The sustainability of earnings after separating core operating performance from consolidated-product valuation changes, noncontrolling interests and other adjustments; review the company’s non-GAAP reconciliations and definitions.
- Funding and refinancing plans for the $333.5m February 2013 note maturity, credit-facility usage, covenant headroom and progress toward the $1bn excess-cash target.
- Developments in the Canadian GST assessment, ARPS litigation and trust-support agreements, including any change in estimated exposure or required provision.
- Changes in CLO defaults, collateral and note valuations, Level 3 assumptions, and the distinction between consolidated product balances and Invesco’s own assets, debt and liquidity.