Invesco Ltd. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet figures are as of March 31, 2011. Invesco provides investment management services globally and reported $641.9 billion in assets under management (AUM). Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and condition
- Revenue: GAAP operating revenue was $1,027.3, up 42.9% from $719.1. Non-GAAP net revenue was $751.8, up 38.1% from $544.4. Growth reflected the June 2010 Morgan Stanley retail asset management/Van Kampen acquisition, higher average AUM and favorable foreign exchange; the acquired business contributed an estimated $204 of Q1 2011 operating revenue.
- Profit and EPS: Operating income rose 64.9% to $225.7; operating margin increased to 22.0% from 19.0%. Net income attributable to common shareholders was $177.5 versus $95.0, and diluted EPS was $0.38 versus $0.21. Adjusted operating margin was 36.2% versus 33.6%; adjusted net income was $191.7 versus $120.0 and adjusted EPS was $0.41 versus $0.27. Adjusted figures are non-GAAP.
- Cash flow: Net cash used in operating activities was $105.1, versus $177.0 used in Q1 2010. Before consolidated investment products, operating cash use was $152.4, compared with $101.1; management attributed much of the period’s cash use to annual staff bonuses, payroll taxes and pension contributions. Investing activities provided $33.4 and financing activities used $208.8. Cash and cash equivalents ended the quarter at $471.9, down from $740.5 at year-end 2010.
- AUM and fees: Average AUM increased to $630.2 billion from $449.6 billion, including the acquired business. Ending AUM rose from $616.5 billion at year-end 2010; net flows added $6.6 billion, market gains/reinvestment added $12.9 billion and currency translation added $3.3 billion. Net revenue yield fell to 47.7 basis points from 48.4 basis points year over year, partly reflecting the acquired business and growth in lower-fee ETF, UIT and passive assets.
- Debt and liquidity: Company debt was $1,332.7, compared with $1,315.7 at December 31, 2010; the increase primarily reflected a $17.0 net credit-facility draw. Cash was $471.9 and remaining credit-facility capacity was $663.0. The company reported covenant compliance, a 1.27x leverage ratio and 17.35x interest coverage. Its credit-facility limits were 3.25x leverage through 2011 and 4.00x minimum interest coverage.
- Balance sheet: Total assets were $21,138.6 and total liabilities $11,725.4. These totals include consolidated investment products, including $6,291.0 of their debt; Invesco states those product assets and obligations are ring-fenced and not available to, or obligations of, the company’s general creditors. Common-shareholder equity was $8,333.6.
Changes versus the prior comparable period
- Revenue, operating income, common-shareholder net income and diluted EPS increased substantially year over year. The acquisition completed in June 2010 is a major driver, so the comparison is not solely organic growth.
- Operating expenses rose 37.7% to $801.6, including higher compensation, distribution, marketing and administrative costs; transaction and integration expense declined to $7.9 from $17.2.
- GAAP income before tax fell to $174.9 from $264.6, and net income including noncontrolling interests fell to $99.3 from $214.5. Consolidated investment products recorded net losses of $85.5 versus gains of $103.1 a year earlier, largely from changes in the fair value of CLO debt; attribution to outside investors materially affects the reported comparison.
- Net cash used in operating activities improved on a consolidated basis, while operating cash use before consolidated investment products increased. Cash declined from year-end, and company debt increased modestly.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management said existing cash, operating cash generation, available credit capacity and potential capital-market access should provide sufficient resources for expected needs. It noted that the integration of the acquired business was largely complete and expected significant product mergers to be largely completed in Q2 2011.
- Market and business risks: Revenue depends on AUM levels, investment performance, client flows, asset mix and currency movements. The filing highlights securities-market, interest-rate and foreign-exchange exposures; it also notes that underperformance could intensify client withdrawals or reallocations. A 1% change in interest rates on current debt levels was estimated to change annualized interest expense by $5.9.
- Consolidation and valuation: Consolidation accounting for certain CLOs significantly affects reported GAAP assets, liabilities and results, but management says it does not materially affect Invesco’s underlying liquidity or capital resources. CLO and other Level 3 valuations rely partly on unobservable inputs; the filing reports less than 1% of consolidated CLO collateral assets in default and an approximately $309 difference between unpaid principal and fair value for senior secured loans and bonds.
- Contingencies: Support agreements for two investment trusts ran through June 30, 2011, with further extensions considered likely. Committed support was $36.0, potentially increasable to $66.0; the recorded estimated liability was $1.0, and no payments had been made. Undrawn investment commitments were $127.0. A remaining Canada Revenue Agency GST assessment was $6.6; Invesco disputes it and recorded no provision. The filing also describes litigation involving acquired closed-end funds and ongoing regulatory and litigation exposure.
- Other items: Q1 2011 share repurchases were $53.1; the board subsequently declared a $0.1225-per-share dividend payable June 8, 2011. The effective tax rate excluding noncontrolling interests was 29.9%, down from 34.5%, partly because the prior-year period included nondeductible transaction and integration costs.
Important facts for investors to verify
- Separate the acquired business’s contribution from organic growth, and assess the effects of the acquisition on revenue, expenses, AUM and fee yield.
- Review the non-GAAP reconciliations and the treatment of consolidated investment products when interpreting margins, earnings and cash flow.
- Track operating cash generation before consolidated investment products, cash balances, credit-facility availability, debt maturities and covenant headroom.
- Monitor AUM flows, investment performance, revenue yield and exposure to market, currency and interest-rate changes.
- Follow the trust support agreements, CRA assessment, acquisition-related litigation and any changes in CLO valuation, collateral quality or default levels.