Invesco Ltd. — FY 2010 Form 10-K
Business context and reporting period. Invesco is a global investment manager with one reported operating segment. This annual filing covers the year ended December 31, 2010; the fourth quarter is included in the annual results. On June 1, 2010, Invesco acquired Morgan Stanley’s retail asset management business, including Van Kampen, for $770 million in cash and 30.9 million shares. The acquisition added $114.6 billion of AUM at closing.
Financial and operating performance
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Operating revenue | $3,487.7 million | $2,627.3 million | +32.7% |
| Net revenue (non-GAAP) | $2,602.2 million | $1,984.6 million | +31.1% |
| Operating income | $589.9 million | $484.3 million | +21.8% |
| Operating margin | 16.9% | 18.4% | Down 1.5 percentage points |
| Adjusted operating income (non-GAAP) | $897.7 million | $565.6 million | +58.7% |
| Adjusted operating margin (non-GAAP) | 34.5% | 28.5% | Up 6.0 percentage points |
| Net income attributable to common shareholders | $465.7 million | $322.5 million | +44.4% |
| Diluted EPS | $1.01 | $0.76 | +32.9% |
| Adjusted net income / adjusted EPS (non-GAAP) | $639.7 million / $1.38 | $378.1 million / $0.89 | Both increased |
Revenue growth reflected the acquisition, higher average AUM and market recovery. The acquired business contributed an estimated $468 million of operating revenue from June 1 through year-end; this is an incremental estimate, not stand-alone acquisition results. Operating expenses rose 35.2% to $2,897.8 million, including $150.0 million of transaction and integration charges. Performance fees fell 13.0% to $26.1 million.
- AUM: Year-end AUM was $616.5 billion, up 34.2% from $459.5 billion. Drivers included acquisitions (+$121.5 billion net), market gains and reinvestment (+$43.9 billion), long-term net inflows (+$5.5 billion), foreign exchange (+$1.6 billion), and institutional money market outflows (-$15.5 billion). Average AUM was $532.3 billion versus $415.8 billion.
- Flows and mix: Long-term flows were positive overall, but retail had $1.2 billion of net outflows; institutional and private wealth had inflows of $5.6 billion and $1.1 billion. Equity represented 48% of ending AUM, versus 42% in 2009. Money market AUM declined 18.2% year over year.
- Cash flow: Operating cash flow was $379.2 million on a consolidated basis; before consolidated investment products it was $601.2 million, compared with $325.8 million in 2009. Investing activities used $337.8 million and financing activities used $65.9 million. Acquisition spending was a major investing outflow.
- Liquidity and debt: Company cash and cash equivalents were $740.5 million, down from $762.0 million. Company debt was $1,315.7 million, up from $745.7 million, including $570 million drawn on a new $1.25 billion revolving facility due May 2013. The company reported covenant compliance, a 1.34x leverage ratio and 17.26x interest coverage. Ratings were A3/Stable from Moody’s and A-/Stable from S&P.
- Capital returns and balance sheet: Dividends attributable to 2010 were $0.44 per share, up from $0.41. Invesco repurchased 9.4 million shares for $192.2 million. Total assets were $20.44 billion and common shareholders’ equity was $8.26 billion.
Material changes, outlook and risks
Invesco adopted consolidation guidance in 2010, requiring consolidation of certain CLOs without restating prior periods. This materially increased reported assets and liabilities: at year-end, consolidated investment products included $7.2 billion of investments and $5.9 billion of debt. Management states these CLO assets are restricted to meeting CLO obligations, and their debt is nonrecourse to Invesco; they are not considered company assets or obligations for liquidity purposes. Compare GAAP results with the company’s non-GAAP measures, which adjust for these effects and specified acquisition-related and other items.
Management cited stronger investment performance and client momentum; 68% of ranked assets were ahead of peers on a three-year basis, though rankings covered 61% of total AUM. No specific earnings or revenue guidance was provided. Management said available cash, operating cash flow, remaining credit-facility capacity and potential capital-market access should meet expected needs. It also noted that acquired finite-lived intangibles are expected to add approximately $23 million of annual amortization for the first two years after the acquisition.
- Results remain sensitive to market levels, asset flows, investment performance, product mix, fee pressure and foreign exchange. Investment advisory contracts are generally terminable on 30 or fewer days’ notice.
- Regulatory changes—including Dodd-Frank, money-market-fund rules and European directives—may increase compliance costs or affect products and distribution.
- Goodwill was $6.98 billion and indefinite-lived intangibles were $1.16 billion; impairment depends on estimates of future cash flows, AUM and discount rates. No impairment was identified in the 2010 annual review.
- Legal matters include acquired-fund lawsuits alleging fiduciary breaches concerning auction-rate preferred securities redemptions. Management intends to defend the cases and did not consider a material adverse outcome probable, but the outcome is uncertain. A $12.3 million Canadian tax assessment remained at year-end; management recorded no provision. Support agreements for two investment trusts carried $36 million of committed support, potentially increasable to $66 million; no payment had been made.
- Other commitments included $136.4 million of undrawn investment commitments and $671.6 million of gross operating lease commitments. The auditors issued unqualified opinions, and management and auditors concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Separate acquisition-driven AUM and revenue growth from organic flows, market effects and the company’s updated AUM reporting definition.
- Review reconciliations and definitions for adjusted operating income, adjusted margin, adjusted net income and net revenue; these are non-GAAP measures.
- Distinguish Invesco’s $1.316 billion of company debt and $740.5 million of company cash from CLO balances consolidated for accounting purposes.
- Track retail outflows, institutional money-market withdrawals, fee yields, investment performance coverage and integration-related amortization and costs.
- Monitor the auction-rate securities litigation, Canadian tax assessments, support agreements, acquisition earn-outs, and the availability of cash held in regulated subsidiaries.