Invesco Ltd. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; filed July 29, 2011. Invesco is a global investment manager. It reported $653.7 billion in assets under management (AUM) at quarter-end. Unless indicated otherwise, financial amounts are in U.S. dollars.
Financial performance and key metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $1,070.0m | $787.0m | $2,097.3m | $1,506.1m |
| Operating income | $233.0m | $71.4m | $458.7m | $208.3m |
| Operating margin | 21.8% | 9.1% | 21.9% | 13.8% |
| Net income | $129.4m | $238.2m | $228.7m | $452.7m |
| Net income attributable to common shareholders | $183.0m | $40.8m | $360.5m | $135.8m |
| Diluted EPS | $0.39 | $0.09 | $0.77 | $0.30 |
| Adjusted diluted EPS (non-GAAP) | $0.44 | $0.27 | $0.85 | $0.55 |
- Q2 operating revenue rose 36.0%; investment management fees increased 30.5%, while service and distribution fees increased 51.6%. Growth reflected the acquired Van Kampen business, higher average AUM, and foreign exchange effects.
- Q2 operating expenses increased 17.0% to $837.0 million. Transaction and integration costs fell to $11.3 million from $79.3 million in the prior-year quarter, contributing to improved operating margin. Adjusted operating margin, a non-GAAP measure, rose to 37.9% from 33.0%.
- GAAP net income declined in both comparison periods, while income attributable to common shareholders and EPS increased. The divergence principally reflects volatile gains and losses in consolidated investment products and their offsetting noncontrolling interests; consolidated-product results are substantially attributable to outside investors and, management says, have limited effect on Invesco’s underlying results.
- Net revenue, a non-GAAP measure, was $751.2 million for Q2, up 31.5%, and $1,475.5 million for the half year, up 33.7%. Net revenue yield was 46.0 basis points for both the quarter and half year, compared with 47.6 and 47.4 basis points, respectively, in 2010. Management cited AUM mix, including a lower equity share and lower-fee ETF, UIT and passive assets.
- Q2 long-term net inflows were $3.8 billion; institutional money-market inflows were $3.5 billion. For the half year, long-term net inflows were $10.4 billion and institutional money-market inflows were $6.1 billion. Quarter-end AUM increased from $641.9 billion at March 31 and $557.7 billion a year earlier. AUM growth also reflected market gains and currency translation.
- Cash and cash equivalents were $621.5 million at June 30, down from $740.5 million at year-end. Total company debt was $1,583.7 million, including $215.1 million due in April 2012; credit-facility borrowings were $838.0 million. The facility had $412.0 million of remaining capacity. Covenant leverage was 1.33x against a 3.25x maximum, and interest coverage was 18.89x against a 4.00x minimum; the company reported compliance.
- For the six months, reported operating cash flow was $146.0 million; before consolidated investment products, it was $94.5 million, versus $8.6 million used in the prior-year period. Reported investing cash flow was positive $229.9 million, but before consolidated investment products it was negative $67.3 million. Financing used $509.5 million, including $333.0 million of share repurchases and $108.5 million of dividends.
Material changes versus the prior comparable period
- Revenue and operating profit rose sharply, with margin expansion, as revenue growth exceeded expense growth. Acquisition-related integration charges were materially lower than in 2010.
- The 2010 comparison includes the June 2010 acquisition of Van Kampen; its results are included from the acquisition date. Management said integration was largely complete, with 67 of 71 planned U.S. fund mergers completed by June 30, 2011.
- Consolidated investment-product gains shifted to losses: a $64.7 million net loss in Q2 2011 versus a $187.2 million gain in Q2 2010; for the half year, a $150.2 million loss versus a $290.3 million gain. These movements chiefly explain why GAAP net income moved differently from common-shareholder income and operating results.
- Debt increased from $1,315.7 million at December 31, 2010, mainly due to credit-facility borrowing. The existing $1.25 billion unsecured credit agreement was amended and extended to June 3, 2016.
- Invesco repurchased 13.4 million shares for $333.0 million during the first half; approximately $835.4 million remained authorized under its repurchase plan at June 30.
- Marketing support expenses were reclassified from marketing to third-party distribution, service and advisory expenses. Prior periods were recast; the change did not affect total operating expenses, net income, or common equity.
Outlook, management commentary, and risks
- No specific earnings or AUM guidance is provided. Management said revenue depends on AUM levels and mix, market performance, net flows, and foreign exchange rates; it cautioned that forward-looking statements are uncertain.
- A European infrastructure initiative includes outsourcing European transfer agency, expected to be completed by December 2012. Invesco estimated implementation costs of up to $40 million, including costs related to systems, product and distribution changes, and an approximately 330-employee headcount reduction. Management expects material ongoing savings to more than offset implementation costs within three years after completion. Q2 included $5.8 million of related costs.
- Fee waivers agreed with fund boards as part of U.S. product alignment are expected to reduce annual management fees by approximately $30 million beginning June 1, 2011.
- Market, interest-rate, currency, and investment-performance risks may affect AUM and fee revenue. The company does not hedge its foreign-operation translation exposures. A 1% interest-rate change at current debt levels would change annualized interest expense by approximately $8.4 million.
- Contingencies include $183.9 million of undrawn partnership capital commitments; support agreements for two investment trusts with $36.0 million committed support and potential authorization up to $66.0 million; and unresolved litigation, including claims involving auction-rate preferred securities. Management considered funding under the support agreements unlikely, but redemptions or credit defaults could change that assessment. A remaining $2.9 million Canadian tax assessment is being contested, with no provision recorded.
- Management cited no significant changes to previously disclosed risk factors. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Underlying operating momentum: reconcile GAAP results with non-GAAP adjusted earnings and assess the effects of acquisition contributions, fee waivers, and lower net revenue yield.
- AUM quality and persistence: track net flows by channel and asset class, investment performance, and sensitivity of fee revenue to market and currency movements.
- Liquidity and refinancing: monitor the April 2012 note maturity, credit-facility usage and capacity, covenant headroom, and cash subject to regulatory or jurisdictional restrictions.
- European transformation execution: compare actual costs, workforce changes, timing, and realized savings with the up-to-$40 million estimate and management’s savings outlook.
- Contingent exposures: follow trust-support requirements, acquisition earn-outs, capital commitments, tax disputes, and litigation outcomes.
- Consolidated investment products: distinguish their assets and debt from Invesco’s own resources; the filing says CLO collateral is ring-fenced and unavailable to general company creditors, and CLO investors have no recourse to Invesco’s general credit.