INVESCO LTD.
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
Commission file number 1-13908
Invesco Ltd.
(Exact Name of Registrant as Specified in Its Charter)
| Bermuda | 98-0557567 | |
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) | |
| 1555 Peachtree Street, NE, Suite 1800, Atlanta, GA | 30309 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(404) 892-0896
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Exchange on Which Registered | |
| Common Shares, $0.20 par value per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
o
No
þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes
o
No
þ
At June 30, 2010, the aggregate market value of the voting stock held by non-affiliates was
$6.3 billion, based on the closing price of the registrant’s Common Shares, par value U.S. $0.20
per share, on the New York Stock Exchange. At January 31, 2011, the most recent practicable date,
the number of Common Shares outstanding was 460,382,514.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant will incorporate by reference information required in response to Part III,
Items 10-14 in its definitive Proxy Statement for its annual meeting of shareholders, to be filed
with the Securities and Exchange Commission within 120 days after December 31, 2010.
TABLE OF CONTENTS
We include cross references to captions elsewhere in this Annual Report on Form 10-K, which we
refer to as this “Report,” where you can find related additional information. The following table
of contents tells you where to find these captions.
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PART I
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PART II
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PART III
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PART IV
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| EX-10.11 | ||||||||
| EX-10.12 | ||||||||
| EX-21 | ||||||||
| EX-23.1 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
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SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report, the documents incorporated by reference herein, other public filings and oral and
written statements by us and our management, may include statements that constitute
“forward-looking statements” within the meaning of the United States securities laws. These
statements are based on the beliefs and assumptions of our management and on information available
to us at the time such statements are made. Forward-looking statements include information
concerning possible or assumed future results of our operations, expenses, earnings, liquidity,
cash flows and capital expenditures, industry or market conditions, assets under management,
acquisition activities and the effect of completed acquisitions, debt levels and our ability to
obtain additional financing or make payments on our debt, legal and regulatory developments, demand
for and pricing of our products and other aspects of our business or general economic conditions.
In addition, when used in this Report, the documents incorporated by reference herein or such other
documents or statements, words such as “believes,” “expects,” “anticipates,” “intends,” “plans,”
“estimates,” “projects,” “forecasts,” and future or conditional verbs such as “will,” “may,”
“could,” “should,” and “would,” and any other statement that necessarily depends on future events,
are intended to identify forward-looking statements.
Forward-looking statements are not guarantees of performance or other outcomes. They involve
risks, uncertainties and assumptions. Although we make such statements based on assumptions that we
believe to be reasonable, there can be no assurance that actual results will not differ materially
from our expectations. We caution investors not to rely unduly on any forward-looking statements.
The following important factors, and other factors described elsewhere in this Report or
incorporated by reference into this Report or contained in our other filings with the U.S.
Securities and Exchange Commission (SEC), among others, could cause our results to differ
materially from any results described in any forward-looking statements:
| • | variations in demand for our investment products or services, including termination or non-renewal of our investment advisory agreements; | ||
| • | significant changes in net asset flows into or out of the accounts we manage or declines in market value of the assets in, or redemptions or other withdrawals from, those accounts; | ||
| • | enactment of adverse state, federal or foreign legislation or changes in government policy or regulation (including accounting standards) affecting our operations, our capital requirements or the way in which our profits are taxed; | ||
| • | significant fluctuations in the performance of debt and equity markets worldwide; | ||
| • | exchange rate fluctuations, especially as against the U.S. Dollar; | ||
| • | the effect of economic conditions and interest rates in the U.S. or globally; | ||
| • | our ability to compete in the investment management business; | ||
| • | the effect of consolidation in the investment management business; | ||
| • | limitations or restrictions on access to distribution channels for our products; | ||
| • | our ability to attract and retain key personnel, including investment management professionals; | ||
| • | the investment performance of our investment products; | ||
| • | our ability to acquire and integrate other companies into our operations successfully and the extent to which we can realize anticipated cost savings and synergies from such acquisitions; | ||
| • | changes in regulatory capital requirements; | ||
| • | our debt and the limitations imposed by our credit facility; | ||
| • | the effect of failures or delays in support systems or customer service functions, and other interruptions of our operations; | ||
| • | the occurrence of breaches and errors in the conduct of our business, including any failure to properly safeguard confidential and sensitive information; | ||
| • | the execution risk inherent in our ongoing company-wide transformational initiatives; | ||
| • | the effect of political or social instability in the countries in which we invest or do business; |
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| • | the effect of terrorist attacks in the countries in which we invest or do business and the escalation of hostilities that could result therefrom; | ||
| • | war and other hostilities in or involving countries in which we invest or do business; and | ||
| • | adverse results in litigation, including private civil litigation related to mutual fund fees and any similar potential regulatory or other proceedings. |
Other factors and assumptions not identified above were also involved in the derivation of
these forward-looking statements, and the failure of such other assumptions to be realized may also
cause actual results to differ materially from those projected. For more discussion of the risks
affecting us, please refer to Part I, Item 1A, “Risk Factors.”
You should consider the areas of risk described above in connection with any forward-looking
statements that may be made by us and our businesses generally. We expressly disclaim any
obligation to update any of the information in this or any other public report if any
forward-looking statement later turns out to be inaccurate, whether as a result of new information,
future events or otherwise. For all forward-looking statements, we claim the “safe harbor” provided
by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934.
In this Annual Report on Form 10-K, unless otherwise specified, the terms “we,” “our,” “us,”
“company,” “Invesco,” and “Invesco Ltd.” refer to Invesco Ltd., a company incorporated in Bermuda,
and its subsidiaries.
Item 1.
Business
Introduction
Invesco is a leading independent global investment manager, dedicated to helping investors
worldwide achieve their financial objectives. By delivering the combined power of our distinctive
investment management capabilities, Invesco provides a comprehensive range of investment strategies
and vehicles to our retail, institutional and high-net-worth clients around the world. Operating in
more than 20 countries, Invesco had $616.5 billion in assets under management (AUM) as of December
31, 2010.
The key drivers of success for Invesco are long-term investment performance, effective
distribution relationships, and high-quality client service delivered across a diverse spectrum of
investment management capabilities, distribution channels, geographic areas and market exposures.
By achieving success in these areas, we seek to generate competitive investment results, positive
net flows, increased AUM and associated revenues. We are affected significantly by market
movements, which are beyond our control; however, we endeavor to mitigate the impact of market
movement by maintaining broad diversification across asset classes, client domiciles and
geographies. We measure relative investment performance by comparing our investment capabilities to
competitors’ products, industry benchmarks and client investment objectives. Generally,
distributors, investment advisors and consultants take into consideration longer-term investment
performance (e.g., three-year and five-year performance) in their selection of investment product
and manager recommendations to their clients, although shorter-term performance may also be an
important consideration. Third-party ratings may also influence client investment decisions.
Quality of client service is monitored in a variety of ways, including periodic client satisfaction
surveys, analysis of response times and redemption rates, competitive benchmarking of services and
feedback from investment consultants.
Invesco Ltd. is organized under the laws of Bermuda, and our common shares are listed and
traded on the New York Stock Exchange under the symbol “IVZ.” We maintain a Web site at
www.invesco.com. (Information contained on our Web site shall not be deemed to be part of, or be
incorporated into, this document).
Strategy
The company focuses on four key strategic priorities that are designed to strengthen our
business over time and help ensure our long-term success:
| • | Achieve strong investment performance over the long term for our clients; | ||
| • | Deliver our investment capabilities anywhere in the world to meet our clients’ needs; |
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| • | Harness the power of our global operating platform by continuously improving our processes and procedures and further integrating the support structures of our business globally; and | ||
| • | Perpetuate a high-performance organization by driving greater transparency, accountability and execution at all levels. |
Since 2005 Invesco has taken a number of steps to further unify our business and present the
organization as a single firm to our clients around the world. We believe these changes have
strengthened Invesco’s ability to operate more efficiently and effectively as an integrated, global
organization.
Since we take a unified approach to our business, we present our financial statements and
other disclosures under the single operating segment “investment management.”
Recent Developments
On June 1, 2010, Invesco acquired Morgan Stanley’s retail asset management business, including
Van Kampen Investments. The addition of this diversified business brought $114.6 billion in AUM
across equity, fixed income and alternative asset classes (including mutual funds, variable
insurance funds, separate accounts and unit investment trusts (UITs)). Furthermore, Invesco gained
the experience, knowledge and expertise of nearly 600 investment, distribution and operations
support professionals globally. This transformational combination:
| • | Expanded the depth and breadth of our investment strategies, enabling us to offer an even more comprehensive range of investment capabilities and vehicles to our clients around the world; | ||
| • | Enhanced our ability to serve U.S. clients by positioning Invesco among the leading U.S. investment managers by AUM, diversity of investment teams and client profiles; | ||
| • | Deepened Invesco’s relationships with clients and strengthened our overall distribution capabilities; and | ||
| • | Further strengthened our position in the Japanese investment management market. |
Our goal from the day we announced the transaction was to complete the preparatory integration
work prior to close. With a focused effort across Invesco, we accomplished our goal and were able
to deliver the value of the combined organization to clients from Day 1. Throughout the second half
of 2010, we saw strong momentum in the combined business.
In addition to our acquisition of Morgan Stanley’s retail asset management business, Invesco’s
commitment to a multi-year strategy set a firm foundation for the company’s many achievements
throughout the year. During 2010:
| • | Relative investment performance remained strong across the enterprise, with 68% of ranked assets* performing ahead of peers on a 3-year basis at year end; | ||
| • | We focused on strengthening and deepening relationships with clients in key markets. For example, we maintained a market share ranking in the top three on all major platforms in the U.K. retail market and strengthened relationships with leading financial institutions in all U.S. retail channels, where 70% of AUM is with top 20 distributors; | ||
| • | We expanded our presence and improved our competitive advantage as a global investment manager in fast-growing, high-priority markets and segments; | ||
| • | We resumed our share repurchase program, purchasing 9.4 million shares for $192.2 million; and | ||
| • | We maintained strong inflows at Invesco PowerShares, and expanded our offering of intelligent exchange-traded funds (ETFs) within the Canadian marketplace through an innovative suite of mutual funds. |
| * | As of December 31, 2010, 68% of ranked assets were performing ahead of peers on a 3-year basis. Of total Invesco AUM, 61% were ranked at year-end. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investment Capabilities Performance Overview,” for more discussion of AUM rankings by investment capability. |
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Together, these efforts resulted in positive net flows for our business in 2010. Adjusted
operating margin improved to 34.5% in 2010 from 28.5% in 2009. See Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Schedule of Non-GAAP
Information” for a reconciliation of operating income to net operating income, and by calculation,
a reconciliation of operating margin to adjusted operating margin, and important additional
disclosures.
Throughout 2010, we continued to execute our long-term strategy, making disciplined capital
and resource allocation decisions, which we believe further improved our ability to serve our
clients, reinforced our reputation as a premier global investment manager, and helped to deliver
competitive levels of operating income and margins as we progressed through the year. In addition,
we took steps to further strengthen our financial position and augment our capital flexibility
through the execution of a new credit facility and the maintenance of a balanced approach to
capital management. We have received credit ratings of A3/Stable and A-/Stable from Moody’s and
Standard & Poor’s credit rating agencies, respectively, as of the date of this Annual Report on
Form 10-K. In the fourth quarter, Standard & Poor’s increased Invesco’s enterprise risk management
(ERM) rating from “adequate” to “strong,” making Invesco one of only four publicly rated investment
managers with a “strong” ERM designation.
Certain Demographic and Industry Trends
Demographic and economic trends around the world continue to transform the investment
management industry and our business and underscore the need to be well-diversified with broad
capabilities globally and across asset classes:
| • | There is an increasing number of investors who seek external professional advice and investment managers to help them reach their financial goals. | ||
| • | As the “baby boomer” generation continues to mature, there is an increasingly large segment of the world population that is reaching retirement age. Economic growth in emerging market countries has created a large and rapidly expanding middle class and high net worth population with accelerating levels of wealth. As a result, globally, there is a high degree of demand for an array of investment solutions that span the breadth of investment capabilities, with a particular emphasis on savings vehicles for retirement. We believe Invesco, as one of the few truly global, independent investment managers, is very well-positioned to attract these retirement assets through its enduring products that are focused on long-term investment performance. | ||
| • | We have seen increasing demand from clients for alpha and beta to be separated as investment strategies in the investment management industry. (“Alpha” is defined as excess return attributable to a manager, and “beta” refers to the volatility in returns versus an underlying benchmark.) This trend reflects how clients are differentiating between low-cost beta solutions such as passive, index and ETF products and higher-priced alpha strategies such as those offered by many alternative products. | ||
| • | Investors are increasingly seeking to invest outside their domestic markets. They seek firms that operate globally and have investment expertise in markets around the world. | ||
| • | Although the U.S. and Europe are currently the two largest markets for financial assets by a wide margin, other markets in the world, such as China and India, are rapidly growing. As these population-heavy markets mature, investment managers that are truly global will be in the best position to capture this growth. Additionally, population age differences between emerging and developed markets will result in differing investment needs and horizons among countries. Asset allocation and pension type also differ substantially among countries. Invesco has a meaningful and expanding market presence in many of the world’s fastest growing and wealthiest regions, including the U.S., Canada, Western Europe and the UK, the Middle East and Asia-Pacific. Our strong U.S. presence and growing global presence represent significant long-term growth prospects for our business. | ||
| • | The global trend towards the provision of defined contribution retirement plans continues, although significant opportunity remains for managers to increase defined benefit market share. |
Invesco is well positioned to capture the opportunities created by global demographic and
industry trends. Through a variety of economic and market environments, our progress over the past
five years has significantly strengthened our competitive position. Our multi-year strategy is
designed to leverage our global presence, our distinctive worldwide investment management
capabilities and our talented people to further grow our business and ensure our long-term success.
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Investment Management Capabilities
Supported by a global operating platform, Invesco delivers a comprehensive array of investment
capabilities and services to retail, institutional and high-net-worth investors on a global basis.
We have a significant presence in the institutional and retail segments of the investment
management industry in North America, Europe and Asia-Pacific, serving clients in more than 150
countries.
We believe that the proven strength of our distinct and globally located investment centers
and their well-defined investment disciplines provide us with a competitive advantage. There are
few independent investment managers with teams as globally diverse as Invesco’s and with the same
breadth and depth of investment capabilities and vehicles. We offer multiple investment objectives
within the various asset classes and products that we manage. Our asset classes, broadly defined,
include money market, fixed income, balanced, equity and alternatives. Approximately 48% of our AUM
as of December 31, 2010, were invested in equity securities (December 31, 2009: 41%), and
approximately 52% was invested in fixed income and other investments (December 31, 2009: 59%).
The following table sets forth the investment objectives, sorted by asset class, which we
manage:
Investment Objectives by Asset Class
| Money Market | Fixed Income | Balanced | Equity | Alternatives | ||||
|
Cash Plus
Government/Treasury Prime Taxable Tax-Free |
Bank Loans
Convertibles Core/Core Plus Emerging Markets Enhanced Cash Government Bonds High-Yield Bonds Intermediate Term International/Global Investment Grade Credit Municipal Bonds Passive/Enhanced Short Term Stable Value Structured Securities (ABS, MBS, CMBS) |
Asset Allocation
Global Single Country Target Date Target Risk |
Enhanced Index/Quantitative
Global International Large Cap Core Large Cap Growth Large Cap Value Mid Cap Core Mid Cap Growth Mid Cap Value Regional/Single Country Sector Funds Small Cap Core Small Cap Growth Small Cap Value |
Absolute Return
Asian Direct Real Estate Commodities Currencies European Direct Real Estate Financial Structures Global Macro Global REITS Private Capital - Direct Private Capital - Fund of Funds Risk Premia Capture U.S. Direct Real Estate U.S. REITS |
The following table sets forth the categories of investment vehicles sold through our
three principal distribution channels:
Investment Vehicles by Distribution Channel
| Retail | Institutional | Private Wealth Management | ||
|
Closed-end Mutual Funds
Exchange-Traded Funds Individual Savings Accounts Investment Companies with Variable Capital Investment Trusts Open-end Mutual Funds Separately Managed Accounts Unit Investment Trusts Variable Insurance Funds |
Collective Trust Funds
Exchange-Traded Funds Institutional Separate Accounts Private Capital Funds |
Exchange-Traded Funds
Managed Accounts Mutual Funds Private Capital Funds Separate Accounts |
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One of Invesco’s greatest competitive strengths is the diversification in its AUM by client
domicile, distribution channel and asset class. Our distribution network has gathered assets of 61%
retail, 36% institutional, and 3% Private Wealth Management clients as of December 31, 2010. 32.6%
of client assets under management are outside the U.S., and we serve clients in more than 150
countries. The following tables present a breakdown of AUM by client domicile, distribution channel
and asset class as of December 31, 2010. Additionally, the fourth table below illustrates the split
of our higher-fee non-passive AUM as compared to our lower-fee ETF, UIT, and passive AUM.
AUM Diversification
By Client Domicile
| ($ billions) | 1-Yr Change | |||||||
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U.S.
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$ | 415.4 | 41.2 | % | ||||
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Canada
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$ | 27.9 | (3.8 | )% | ||||
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U.K.
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$ | 92.1 | 8.5 | % | ||||
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Continental Europe
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$ | 35.3 | 44.7 | % | ||||
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Asia
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$ | 45.8 | 69.0 | % | ||||
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Total
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$ | 616.5 | 34.2 | % | ||||
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By Distribution Channel
| ($ billions) | 1-Yr Change | |||||||
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Retail
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$ | 378.4 | 58.1 | % | ||||
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Institutional
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$ | 221.1 | 7.9 | % | ||||
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PWM
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$ | 17.0 | 11.8 | % | ||||
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Total
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$ | 616.5 | 34.2 | % | ||||
By Asset Class
| ($ billions) | 1-Yr Change | |||||||
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Equity
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$ | 294.1 | 52.6 | % | ||||
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Balanced
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$ | 43.5 | 9.0 | % | ||||
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Money Market
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$ | 68.3 | (18.2 | )% | ||||
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Fixed Income
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$ | 131.9 | 73.3 | % | ||||
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Alternative
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$ | 78.7 | 16.9 | % | ||||
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Total
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$ | 616.5 | 34.2 | % | ||||
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Non-Passive/Passive
| ($ billions) | 1-Yr Change | |||||||
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Non-Passive
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$ | 535.7 | 31.8 | % | ||||
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ETF, UIT, and Passive
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$ | 80.8 | 52.5 | % | ||||
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Total
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$ | 616.5 | 34.2 | % | ||||
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See Part II, Item 8, “Financial Statements and Supplementary Data — Note 18, Geographic
Information,” for a geographic breakdown of our consolidated operating revenues for the years ended
December 31, 2010, 2009 and 2008.
Distribution Channels
Channel refers to the distribution channel from which the AUM originated. Retail AUM arose
from client investments into funds available to the public with shares or units. Institutional AUM
originated from individual corporate clients, endowments, foundations, government authorities,
universities, or charities. Private Wealth Management AUM arose from high net worth client
investments.
Retail
Invesco is a significant provider of retail investment solutions to clients in all major
markets: Invesco in the U.S., Invesco Trimark in Canada, Invesco Perpetual in the U.K., Invesco in
Europe and Asia, and Invesco PowerShares (for our ETF products). Additionally, Invesco is now also
a market leading sponsor of UIT products as a result of the acquisition of Morgan Stanley’s retail
asset management business. Collectively, the retail investment management teams managed assets of
$378.4 billion as of December 31, 2010. We offer retail products within all of the major asset
classes (money market, fixed income, balanced, equity and alternatives). Our retail products are
primarily distributed through third-party financial intermediaries, including traditional
broker-dealers, fund “supermarkets,” retirement platforms, financial advisors, banks, insurance
companies and trust companies.
The U.K., U.S. and Canadian retail operations rank among the largest by AUM in their
respective markets. As of December 31, 2010, Invesco Perpetual was the No. 1 retail fund provider
in the U.K.; Invesco’s U.S. retail business was the 9th largest non-proprietary fund complex in the
U.S. by long-term assets, including the Invesco Powershares franchise; and Invesco Trimark was the
9th largest retail fund manager in Canada by long-term assets. Invesco Great Wall, our joint
venture in China, was one of the largest Sino-foreign managers of equity products in China, with
AUM of approximately $7.2 billion as of December 31, 2010. Invesco PowerShares adds a leading set
of ETF products (with $55.7 billion in AUM and 176 exchange-traded funds as of December 31, 2010)
to the extensive choices we make available to our retail investors. We provide our retail clients
with one of the industry’s most robust and comprehensive product lines.
Institutional
We provide investment solutions to institutional investors globally, with a major presence in
the U.S., U.K., Continental Europe and Asia-Pacific with $221.1 billion in AUM as of December 31,
2010. We offer a broad suite of domestic and global products, including traditional equities,
structured equities, fixed income (including money market funds for institutional clients), real
estate, private equity, distressed equities, financial structures and absolute return strategies.
Regional sales forces distribute our products and provide services to clients and intermediaries
around the world. We have a diversified client base that includes major public entities,
corporations, unions, non-profit organizations, endowments, foundations, pension funds and
financial institutions. Invesco’s institutional money market funds serve some of the largest
financial institutions and corporations in the world.
Private Wealth Management
Through Atlantic Trust, Invesco provides high-net-worth individuals and their families with a
broad range of personalized and sophisticated wealth management services, including financial
counseling, estate planning, asset allocation, investment management (including use of third-party
managed investment products), private equity, trust, custody and family office services. Atlantic
Trust also provides investment management services to foundations and endowments. Atlantic Trust
obtains new clients through referrals from existing clients, recommendations from other
professionals serving the high-net-worth market, such as attorneys and accountants, and from
financial intermediaries, such as brokers. Atlantic Trust has offices in 11 U.S. cities and managed
$17.0 billion as of December 31, 2010.
Employees
As of December 31, 2010, we had 5,617 employees across the globe. As of December 31, 2009 and
2008, we had 4,890 and 5,325 employees, respectively. None of our employees is covered under
collective bargaining agreements. Formal hiring of staff in our Hyderabad, India, facility
commenced with 83 individuals becoming our employees in late 2010. An additional 474 individuals
became our employees by the date of this Report.
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Competition
The investment management business is highly competitive, with points of differentiation
including investment performance, the range of products offered, brand recognition, business
reputation, financial strength, the depth and continuity of relationships, quality of service and
the level of fees charged for services. We compete with a large number of investment management
firms, commercial banks, investment banks, broker dealers, hedge funds, insurance companies and
other financial institutions. We believe that the quality and diversity of our investment styles,
product types and channels of distribution enable us to compete effectively in the investment
management business. We also believe being an independent investment manager is a competitive
advantage, as our business model avoids conflicts that are inherent within institutions that both
distribute and/or serve investment products and manage investment products. Lastly, we believe
continued execution against our multi-year strategy will further strengthen our long-term
competitive position.
Management Contracts
We derive substantially all of our revenues from investment management contracts with funds
and other clients. Fees vary with the type of assets being managed, with higher fees earned on
actively managed equity and balanced accounts, along with real estate and alternative asset
products, and lower fees earned on fixed income, money market and stable value accounts, as well as
certain ETFs. Investment management contracts are generally terminable upon thirty or fewer days’
notice. Typically, retail investors may withdraw their funds at any time without prior notice.
Institutional and private wealth management clients may elect to terminate their relationship with
us or reduce the aggregate amount of assets under management with very short notice periods.
Available Information
We file current and periodic reports, proxy statements and other information with the SEC,
copies of which can be obtained from the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by
calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC, at www.sec.gov. We make
available free of charge on our Web site, www.invesco.com, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
as soon as reasonably practicable after we electronically file such material with, or furnish it
to, the SEC.
Item 1A.
Risk Factors
Volatility and disruption in world capital and credit markets, as well as adverse changes in the
global economy, can negatively affect Invesco’s revenues and may continue to do so.
The capital and credit markets have been experiencing substantial volatility and disruption
since 2007. While these disruptions moderated to some extent following the March 2009 lows in
equity markets, historical norms have not returned and the potential for extreme disruptions
remains. These market events have materially impacted our results of operations, and may continue
to do so, and could materially impact our financial condition and liquidity. In this regard:
| • | The volatility of global market conditions around the world has resulted, and may continue to result, in significant volatility in our assets under management and in our revenues, driven by market value fluctuations on our managed portfolios. | ||
| • | In addition to the impact of the market values on client portfolios, the illiquidity and volatility of both the global fixed income and equity markets could negatively affect our ability to manage client inflows and outflows from pooled investment vehicles or to timely meet client redemption requests. | ||
| • | Our money market funds have always maintained a $1.00 net asset value (NAV); however, we do not guarantee such level. Market conditions could lead to severe liquidity issues in money market products, which could affect their NAVs. If the NAV of one of our money market funds were to decline below $1.00 per share, such funds could experience significant redemptions in assets under management, loss of shareholder confidence and reputational harm. In 2010 the SEC adopted new rules governing U.S. registered money market funds. These rules are designed to significantly strengthen the regulatory requirements governing money market funds, increase the resilience of such funds to economic stresses, and |
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| reduce the risk of runs on these funds. Regulators in the U.S. continue to evaluate whether to propose mandating a variable (“floating”) NAV for money market funds. The company believes such a change would have significant adverse consequences on the money market funds industry and the short-term credit markets. | |||
| • | Even if legislative or regulatory initiatives or other efforts successfully stabilize and add liquidity to the financial markets, we may need to modify our strategies, businesses or operations, and we may incur increased capital requirements and constraints or additional costs in order to satisfy new regulatory requirements or to compete in a changed business environment. | ||
| • | In the event of extreme circumstances, including economic, political, or business crises, such as a widespread systemic failure in the global financial system or additional failures of firms that have significant obligations as counterparties on financial instruments, we may suffer significant declines in assets under management and severe liquidity or valuation issues in the short-term sponsored investment products in which client and company assets are invested, all of which would adversely affect our operating results, financial condition, liquidity, credit ratings, ability to access capital markets, and retention and ability to attract key employees. Additionally, these factors could impact our ability to realize the carrying value of our goodwill and other intangible assets. |
We may not adjust our expenses quickly enough to match significant deterioration in global
financial markets.
If we are unable to effect appropriate expense reductions in a timely manner in response to
declines in our revenues, or if we are otherwise unable to adapt to rapid changes in the global
marketplace, our profitability, financial condition and results of operations would be adversely
affected.
Our revenues would be adversely affected by any reduction in assets under our management as a
result of either a decline in market value of such assets or net outflows, which would reduce the
investment management fees we earn.
We derive substantially all of our revenues from investment management contracts with clients.
Under these contracts, the investment management fees paid to us are typically based on the market
value of assets under management. Assets under management may decline for various reasons. For any
period in which revenues decline, our income and operating margin may decline by a greater
proportion because certain expenses remain fixed. Factors that could decrease assets under
management (and therefore revenues) include the following:
Declines in the market value of the assets in the funds and accounts managed.
These could be
caused by price declines in the securities markets generally or by price declines in the market
segments in which those assets are concentrated. Approximately 48% of our total assets under
management were invested in equity securities and approximately 52% were invested in fixed income
and other investments at December 31, 2010. Our AUM as of January 31, 2011, was $624.3 billion.
We cannot predict whether volatility in the markets will result in substantial or sustained
declines in the securities markets generally or result in price declines in market segments in
which our assets under management are concentrated. Any of the foregoing could negatively impact
our revenues, income and operating margin.
Redemptions and other withdrawals from, or shifting among, the funds and accounts managed.
These could be caused by investors (in response to adverse market conditions or pursuit of other
investment opportunities) reducing their investments in funds and accounts in general or in the
market segments on which Invesco focuses; investors taking profits from their investments; poor
investment performance of the funds and accounts managed by Invesco; and portfolio risk
characteristics, which could cause investors to move assets to other investment managers. Poor
performance relative to other investment management firms tends to result in decreased sales,
increased redemptions of fund shares, and the loss of private institutional or individual
accounts, with corresponding decreases in our revenues. Failure of our funds and accounts to
perform well could, therefore, have a material adverse effect on us. Furthermore, the fees we
earn vary with the types of assets being managed, with higher fees earned on actively managed
equity and balanced accounts, along with real estate and alternative asset products, and lower
fees earned on fixed income and stable return accounts. Therefore, our revenues may decline if
clients shift their investments to lower fee accounts.
Declines in the value of seed capital and partnership investments.
The company has
investments in sponsored investment products that invest in a variety of asset classes,
including, but not limited to equities, fixed income products, private equity, and real estate.
Investments in these products are generally made to establish a track record, meet purchase size
requirements for trading blocks, or demonstrate economic alignment with other investors in our
funds. Adverse market conditions may result in the need to write down the value of these seed
capital and partnership investments. As of December 31, 2010, the company had $198.0 million in
seed capital and partnership investments.
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Our investment advisory agreements are subject to termination or non-renewal, and our fund and
other investors may withdraw their assets at any time.
Substantially all of our revenues are derived from investment advisory agreements. Investment
advisory agreements are generally terminable upon 30 or fewer days’ notice. Agreements with U.S.
mutual funds may be terminated with notice, or terminated in the event of an “assignment” (as
defined in the Investment Company Act), and must be renewed annually by the disinterested members
of each fund’s board of directors or trustees, as required by law. In addition, the board of
trustees or directors of certain other fund accounts of Invesco or our subsidiaries generally may
terminate these investment advisory agreements upon written notice for any reason. Mutual fund and
unit trust investors may generally withdraw their funds at any time without prior notice.
Institutional clients may elect to terminate their relationships with us or reduce the aggregate
amount of assets under our management, and individual clients may elect to close their accounts,
redeem their shares in our funds, or shift their funds to other types of accounts with different
fee structures. Any termination of or failure to renew a significant number of these agreements, or
any other loss of a significant number of our clients or assets under management, would adversely
affect our revenues and profitability.
Our revenues and profitability from money market and other fixed income assets may be harmed by
interest rate, liquidity and credit volatility.
Certain institutional investors using money market products and other short-term duration
fixed income products for cash management purposes may shift these investments to direct
investments in comparable instruments in order to realize higher yields than those available in
money market and other fund products holding lower yielding instruments. These redemptions would
reduce managed assets, thereby reducing our revenues. In addition, rising interest rates will tend
to reduce the market value of bonds held in various investment portfolios and other products. Thus,
increases in interest rates could have an adverse effect on our revenues from money market
portfolios and from other fixed income products. If securities within a money market portfolio
default, or investor redemptions force the portfolio to realize losses, there could be negative
pressure on its net asset value. Although money market investments are not guaranteed instruments,
the company might decide, under such a scenario, that it is in its best interest to provide support
in the form of a support agreement, capital infusion, or other methods to help stabilize a
declining net asset value. Some of these methods could have an adverse impact on our profitability.
Additionally, we have $32.9 million invested in Invesco Mortgage Capital, Inc., $23.3 million of
equity at risk invested in our collateralized loan obligation products, and $7.1 million invested
in fixed income seed money at December 31, 2010, the valuation of which could change with changes
in interest and default rates.
We operate in an industry that is highly regulated in many countries, and any adverse changes in
the laws or regulations governing our business could decrease our revenues and profitability.
As with all investment management companies, our activities are highly regulated in almost all
countries in which we conduct business. Laws and regulations applied at the national, state or
provincial and local level generally grant governmental agencies and industry self-regulatory
authorities broad administrative discretion over our activities, including the power to limit or
restrict business activities. Subsidiaries operating in the European Union (EU) also are subject to
various EU Directives, which are implemented by member state national legislation. Possible
sanctions include the revocation of licenses to operate certain businesses, the suspension or
expulsion from a particular jurisdiction or market of any of our business organizations or their
key personnel, the imposition of fines and censures on us or our employees and the imposition of
additional capital requirements. It is also possible that laws and regulations governing our
operations or particular investment products could be amended or interpreted in a manner that is
adverse to us.
Certain of our subsidiaries are required to maintain minimum levels of capital. These and
other similar provisions of applicable law may have the effect of limiting withdrawals of capital,
repayment of intercompany loans and payment of dividends by such entities. A sub-group of Invesco
subsidiaries, including all of our regulated EU subsidiaries, is subject to consolidated capital
requirements under EU Directives, and capital is maintained within this sub-group to satisfy these
regulations. At December 31, 2010, the European sub-group had cash and cash equivalent balances of
$456.2 million, much of which is used to satisfy these regulatory requirements. Complying with our
regulatory commitments may result in an increase in the capital requirements applicable to the
European sub-group. As a result of corporate restructuring and the regulatory undertakings that we
have given, certain of these EU subsidiaries may be required to limit their dividends to the parent
company, Invesco Ltd. We cannot guarantee that further corporate restructuring will not be required
to comply with applicable legislation.
The regulatory environment in which we operate frequently changes and has seen significant
increased regulation in recent years. We may be adversely affected as a result of new or revised
legislation or regulations or by changes in the interpretation or enforcement of existing laws and
regulations. To the extent that existing regulations are amended or future regulations are adopted
that reduce the sale, or increase the redemptions, of our products and services, or that negatively
affect the investment performance of our products, our aggregate assets under management and our
revenues could be adversely affected. In addition, regulatory changes could impose additional
costs, which could negatively impact our profitability.
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Various changes in law and regulation have been enacted or adopted and are beginning to be
implemented or otherwise developed in multiple jurisdictions globally in response to the crisis in
the financial markets that began in 2007. Various other proposals remain under consideration by
various legislators, regulators, other government officials and other public policy commentators.
Certain enacted provisions and certain other proposals are potentially far reaching and, depending
upon their implementation, could have a material impact on Invesco’s business. While many of these
provisions appear designed to address perceived problems in the banking sector, certain of the
provisions will or may be applied to other financial services companies, including investment
managers.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) was signed into law on July 21, 2010. While Invesco does not at this time believe
that the Dodd-Frank Act will fundamentally change the investment management industry or cause
Invesco to reconsider its fundamental strategy, it does appear that certain provisions will, and
other provisions may, increase regulatory burdens and related compliance costs. In addition, the
scope of many provisions of the Dodd-Frank Act will be determined by implementing regulations, some
of which will require lengthy proposal and promulgation periods. Moreover, the Dodd-Frank Act
mandates many regulatory studies, some of which pertain directly to the investment management
industry, which could lead to additional legislation or regulation. As a result of these
uncertainties regarding implementation of the Dodd-Frank Act and such other future potential
legislative or regulatory changes, the impact of the Dodd-Frank Act on the investment management
industry and Invesco cannot be predicted at this time.
The European Union has promulgated or is considering various new or revised Directives
pertaining to financial services, including investment managers. Such Directives are progressing at
various stages, and are being or will or would be implemented by national legislation in member
states. As with the Dodd-Frank Act, Invesco does not believe implementation of these Directives
will fundamentally change our industry or cause us to reconsider our fundamental strategy, but it
does appear certain provisions will, and other provisions may, increase regulatory burdens and
compliance costs. Similar developments are being implemented or considered in other jurisdictions
where we do business; such developments could have similar effects.
Potential developments under enacted and proposed legal and regulatory changes, and related
matters, include:
| • | Expanded prudential regulation over investment management firms. | ||
| • | New or increased capital requirements and related regulation (including new capital requirements pertaining to money market funds). | ||
| • | Additional change to the regulation of money market funds in the U.S. The SEC has adopted changes to Rule 2a-7, the primary securities regulation governing U.S. registered money market funds. These new rules are designed to significantly strengthen the regulatory requirements governing money market funds, increase the resilience of such funds to economic stresses, and reduce the risk of runs on these funds. Regulators in the U.S. continue to evaluate whether to propose mandating a variable (“floating”) NAV for money market funds. Invesco believes such a change would have significant adverse consequences on the money market funds industry and the short-term credit markets, and is encouraged by the recognition of these concerns in the Report of the President’s Working Group on Financial Markets on Money Market Fund Reform Options issued October 21, 2010. | ||
| • | Changes to the distribution of investment funds and other investment products. In the U.S., the SEC has proposed significant changes to Rule 12b-1. Invesco believes these proposals would increase operational and compliance costs. The U.K. Financial Services Authority continues to develop its Retail Distribution Review, which is expected to reshape the manner in which retail investment funds are sold in the U.K. The EU adopted the Alternative Investment Fund Manager Directive; implementing legislation in member states could, among other elements, impose restrictions on the marketing and sale within the EU of private equity and other alternative investment funds sponsored by non-EU managers. Various regulators have promulgated or are considering other new disclosure and suitability requirements pertaining to the distribution of investment funds and other investment products, including enhanced standards and requirements pertaining to disclosures made to retail investors at the point of sale. | ||
| • | Guidelines regarding the structure and components of compensation, including under the Dodd-Frank Act and various EU Directives. | ||
| • | Additional resourcing for regulatory examinations and inspections, including enforcement reviews, and a more aggressive posture regarding commencing enforcement proceedings. | ||
| • | Changes impacting certain other products or markets (e.g., retirement savings). | ||
| • | Enhanced licensing and qualification requirements for key personnel. |
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| • | Other additional rules and regulations and disclosure requirements. Certain provisions impose additional disclosure burdens on public companies, including Invesco. Certain proposals could impose requirements for more widespread disclosures of compensation to highly-paid individuals. Depending upon the scope of any such requirements, Invesco could be disadvantaged in retaining key employees vis-à-vis private companies, including hedge fund sponsors. | ||
| • | Strengthening standards regarding various ethical matters, including enhanced focus of U.S. regulators and law enforcement agencies on compliance with the Foreign Corrupt Practices Act and the enactment of the U.K. Bribery Act. | ||
| • | Other changes impacting the identity or the organizational structure of regulators with supervisory authority over Invesco. |
Invesco cannot at this time predict the full impact of potential legal and regulatory changes
on its business. It is possible such changes could impose new compliance costs or capital
requirements or impact Invesco in other ways that could have a material adverse impact on Invesco’s
results of operations, financial condition or liquidity. Moreover, certain legal or regulatory
changes could require us to modify our strategies, businesses or operations, and we may incur other
new constraints or costs in order to satisfy new regulatory requirements or to compete in a changed
business environment.
To the extent that existing or future regulations affecting the sale of our products and
services or our investment strategies cause or contribute to reduced sales or increased redemptions
of our products or impair the investment performance of our products, our aggregate assets under
management and results of operations might be adversely affected.
Civil litigation and governmental enforcement actions and investigations could adversely affect
our assets under management and future financial results, and increase our costs of doing
business.
Invesco and certain related entities have in recent years been subject to various legal
proceedings arising from normal business operations and/or matters that have been the subject of
previous regulatory actions. See Part I, Item 3, “Legal Proceedings,” for additional information.
Our investment management professionals and other key employees are a vital part of our ability to
attract and retain clients, and the loss of key individuals or a significant portion of those
professionals could result in a reduction of our revenues and profitability.
Retaining highly skilled technical and management personnel is important to our ability to
attract and retain clients and retail shareholder accounts. The market for investment management
professionals is competitive and has grown more so in recent periods as the investment management
industry has experienced growth. The market for investment managers is also increasingly
characterized by the movement of investment managers among different firms. Our policy has been to
provide our investment management professionals with a supportive professional working environment
and compensation and benefits that we believe are competitive with other leading investment
management firms. However, we may not be successful in retaining our key personnel, and the loss of
key individuals or significant investment management personnel could reduce the attractiveness of
our products to potential and current clients and could, therefore, adversely affect our revenues
and profitability.
If our reputation is harmed, we could suffer losses in our business, revenues and net income.
Our business depends on earning and maintaining the trust and confidence of clients,
regulators and other market participants, and our good reputation is critical to our business. Our
reputation is vulnerable to many threats that can be difficult or impossible to control, and costly
or impossible to remediate. Regulatory inquiries, material errors in public reports, employee
dishonesty or other misconduct and rumors, among other things, can substantially damage our
reputation, even if they are baseless or satisfactorily addressed. Further, our business requires
us to continuously manage actual and potential conflicts of interest, including situations where
our services to a particular client conflict, or are perceived to conflict, with the interests of
another client or those of Invesco. We have procedures and controls that are designed to address
and manage conflicts of interest, but this task can be complex and difficult, and our reputation
could be damaged, and the willingness of clients to enter into transactions in which such a
conflict might arise may be affected, if we fail — or appear to fail — to deal appropriately with
conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation
or regulatory enforcement actions. Any damage to our reputation could impede our ability to attract
and retain clients and key personnel, and lead to a reduction in the amount of our assets under
management, any of which could have a material adverse effect on our revenues and net income.
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Failure to comply with client contractual requirements and/or guidelines could result in damage
awards against us and loss of revenues due to client terminations.
Many of the investment management agreements under which we manage assets or provide products
or services specify guidelines or contractual requirements that Invesco is required to observe in
the provision of its services. A failure to comply with these guidelines or contractual
requirements could result in damage to our reputation or in our clients seeking to recover losses,
withdrawing their assets or terminating their contracts, any of which could cause our revenues and
net income to decline. We maintain various compliance procedures and other controls to prevent,
detect and correct such errors. When an error is detected, we typically will make a payment into
the applicable client account to correct it. Significant errors could impact our results of
operations.
Competitive pressures may force us to reduce the fees we charge to clients, increase
commissions paid to our financial intermediaries or provide more support to those intermediaries,
all of which could reduce our profitability.
The investment management business is highly competitive, and we compete based on a variety of
factors, including investment performance, the range of products offered, brand recognition,
business reputation, financial strength, stability and continuity of client and intermediary
relationships, quality of service, level of fees charged for services and the level of compensation
paid and distribution support offered to financial intermediaries. We continue to face market
pressures regarding fee levels in certain products.
We face strong competition in every market in which we operate. Our competitors include a
large number of investment management firms, commercial banks, investment banks, broker-dealers,
hedge funds, insurance companies and other financial institutions. Some of these institutions have
greater capital and other resources, and offer more comprehensive lines of products and services,
than we do. Our competitors seek to expand their market share in many of the products and services
we offer. If these competitors are successful, our revenues and profitability could be adversely
affected. In addition, there are relatively few barriers to entry by new investment management
firms, and the successful efforts of new entrants into our various distribution channels around the
world have also resulted in increased competition.
In recent years there have been several instances of industry consolidation, both in the area
of distributors and manufacturers of investment products. Further consolidation may occur in these
areas in the future. The increasing size and market influence of certain distributors of our
products and of certain direct competitors may have a negative impact on our ability to compete at
the same levels of profitability in the future, should we find ourselves unable to maintain
relevance in the markets in which we compete.
We may engage in strategic transactions that could create risks.
As part of our business strategy, we regularly review, and from time to time have discussions
with respect to, potential strategic transactions, including potential acquisitions, dispositions,
consolidations, joint ventures or similar transactions, some of which may be material. There can be
no assurance that we will find suitable candidates for strategic transactions at acceptable prices,
have sufficient capital resources to pursue such transactions, be successful in negotiating the
required agreements, or successfully close transactions after signing such agreements.
Acquisitions also pose the risk that any business we acquire may lose customers or employees
or could underperform relative to expectations. We could also experience financial or other
setbacks if pending transactions encounter unanticipated problems, including problems related to
closing or integration. Following the completion of an acquisition, we may have to rely on the
seller to provide administrative and other support, including financial reporting and internal
controls, to the acquired business for a period of time. There can be no assurance that such
sellers will do so in a manner that is acceptable to us.
Our ability to access the capital markets in a timely manner should we seek to do so depends on a
number of factors.
Our access to the capital markets, including for purposes of financing potential acquisitions,
depends significantly on our credit ratings. We have received credit ratings of A3/Stable and
A-/Stable from Moody’s and Standard & Poor’s credit rating agencies, respectively, as of the date
of this Annual Report on Form 10-K. According to Moody’s, obligations rated ‘A’ are considered
upper medium grade and are subject to low credit risk. Invesco’s rating of A3 is at the low end of
the A range (A1, A2, A3), but three notches above the lowest investment grade rating of Baa3.
Standard and Poor’s rating of A- is at the lower end of the A rating, with BBB- representing
Standard and Poor’s lowest investment grade rating. According to Standard and Poor’s, A obligations
exhibit a strong capacity to meet financial commitments, but are somewhat susceptible to adverse
economic conditions or changing circumstances. We believe that rating agency concerns include but
are not limited to: our revenues are somewhat exposed to equity market volatility, negative
tangible equity, potential impact from regulatory changes to the industry, and integration risk
related to the acquisition of Morgan Stanley’s retail asset management business. Additionally, the
rating agencies could decide to downgrade the entire investment management industry, based on their
perspective of future growth and solvency. Material deterioration of these
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factors, and others defined by each rating agency, could result in downgrades to our credit
ratings, thereby limiting our ability to generate additional financing. Our credit facility
borrowing rates are tied to our credit ratings. Management believes that solid investment grade
ratings are an important factor in winning and maintaining institutional business and strives to
manage the company to maintain such ratings.
A reduction in our long- or short-term credit ratings could increase our borrowing costs,
limit our access to the capital markets, and may result in outflows thereby reducing AUM and
revenues. Continued volatility in global finance markets may also affect our ability to access the
capital markets should we seek to do so. If we are unable to access capital markets in a timely
manner, our business could be adversely affected.
Our indebtedness could adversely affect our financial position.
As of December 31, 2010, we had outstanding total debt of $1,315.7 million and total equity
attributable to common shareholders of $7,769.1 million, excluding retained earnings appropriated
for investors in consolidated investment products. The amount of indebtedness we carry could limit
our ability to obtain additional financing for working capital, capital expenditures, acquisitions,
debt service requirements or other purposes, increase our vulnerability to adverse economic and
industry conditions, limit our flexibility in planning for, or reacting to, changes in our business
or industry, and place us at a disadvantage in relation to our competitors. Any or all of the above
factors could materially adversely affect our financial position or results of operations.
Our credit facility imposes restrictions on our ability to conduct business and, if amounts
borrowed under it were subject to accelerated repayment, we might not have sufficient assets to
repay such amounts in full.
Our credit facility requires us to maintain specified financial ratios, including maximum
debt-to-earnings and minimum interest coverage ratios. This credit facility also contains customary
affirmative operating covenants and negative covenants that, among other things, restrict certain
of our subsidiaries’ ability to incur debt and restrict our ability to transfer assets, merge, make
loans and other investments and create liens. The breach of any covenant (either due to our actions
or due to a significant and prolonged market-driven decline in our operating results) would result
in a default under the credit facility. In the event of any such default, lenders that are party to
the credit facility could refuse to make further extensions of credit to us and require all amounts
borrowed under the credit facility, together with accrued interest and other fees, to be
immediately due and payable. If any indebtedness under the credit facility were subject to
accelerated repayment, we might not have sufficient liquid assets to repay such indebtedness in
full.
Changes in the distribution channels on which we depend could reduce our revenues and hinder our
growth.
We sell a significant portion of our investment products through a variety of financial
intermediaries, including major wire houses, regional broker-dealers, banks and financial planners
in North America, and independent brokers and financial advisors, banks and financial organizations
in Europe and Asia. Increasing competition for these distribution channels could cause our
distribution costs to rise, which would lower our net revenues. Following the financial crisis,
there has been consolidation of banks and broker-dealers, particularly in the U.S., and a limited
amount of migration of brokers and financial advisors away from major banks to independent firms
focused largely on providing advice. If these trends continue, our distribution costs could
increase as a percentage of our revenues generated. Additionally, particularly outside of the U.S.,
certain of the intermediaries upon whom we rely to distribute our investment products also sell
their own competing proprietary funds and investment products, which could limit the distribution
of our products. Increasingly, investors, particularly in the institutional market, rely on
external consultants and other unconflicted third parties for advice on the choice of investment
manager. These consultants and third parties tend to exert a significant degree of influence and
they may favor a competitor of Invesco as better meeting their particular client’s needs. There is
no assurance that our investment products will be among their recommended choices in the future. If
one of our major distributors were to cease operations, it could have a significant adverse effect
on our revenues and profitability. Any failure to maintain strong business relationships with these
distribution sources and the consultant community would impair our ability to sell our products,
which in turn could have a negative effect on our revenues and profitability.
We could be subject to losses if we fail to properly safeguard confidential and sensitive
information.
We maintain and transmit confidential information about our clients as well as proprietary
information relating to our business operations as part of our regular operations. Our systems
could be attacked by unauthorized users or corrupted by computer viruses or other malicious
software code, or authorized persons could inadvertently or intentionally release confidential or
proprietary information.
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Such disclosure could, among other things, damage our reputation, allow competitors to access
our proprietary business information, result in liability for failure to safeguard our clients’
data, result in the termination of contracts by our existing customers, subject us to regulatory
action, or require material capital and operating expenditures to investigate and remediate the
breach.
Our business is vulnerable to deficiencies and failures in support systems and customer service
functions that could lead to breaches and errors, resulting in loss of customers or claims against
us or our subsidiaries.
The ability to consistently and reliably obtain accurate securities pricing information,
process client portfolio and fund shareholder transactions and provide reports and other customer
service to fund shareholders and clients in other accounts managed by us is essential to our
continuing success. In recent periods, illiquid markets for certain types of securities have
required increased use of fair value pricing, which is dependent on certain subjective judgments
that have the potential to be challenged. Any delays or inaccuracies in obtaining pricing
information, processing such transactions or such reports, other breaches and errors, and any
inadequacies in other customer service, could result in reimbursement obligations or other
liabilities, or alienate customers and potentially give rise to claims against us. Our customer
service capability, as well as our ability to obtain prompt and accurate securities pricing
information and to process transactions and reports, is highly dependent on communications and
information systems and on third-party vendors. These systems or vendors could suffer deficiencies,
failures or interruptions due to various natural or man-made causes, and our back-up procedures and
capabilities may not be adequate to avoid extended interruptions in operations. Certain of these
processes involve a degree of manual input, and thus similar problems could occur from time to time
due to human error.
If we are unable to successfully recover from a disaster or other business continuity problem, we
could suffer material financial loss, loss of human capital, regulatory actions, reputational harm
or legal liability.
If we were to experience a local or regional disaster or other business continuity problem,
such as a pandemic or other natural or man-made disaster, our continued success will depend, in
part, on the availability of our personnel, our office facilities and the proper functioning of our
computer, telecommunication and other related systems and operations. In such an event, our
operational size, the multiple locations from which we operate, and our existing back-up systems
would provide us with an important advantage. Nevertheless, we could still experience near-term
operational challenges with regard to particular areas of our operations, such as key executive
officers or technology personnel. Further, as we strive to achieve cost savings by shifting certain
business processes to lower-cost geographic locations such as India, the potential for particular
types of natural or man-made disasters, political, economic or infrastructure instabilities, or
other country- or region-specific business continuity risks increases. Although we seek to
regularly assess and improve our existing business continuity plans, a major disaster, or one that
affected certain important operating areas, or our inability to successfully recover should we
experience a disaster or other business continuity problem, could materially interrupt our business
operations and cause material financial loss, loss of human capital, regulatory actions,
reputational harm or legal liability.
Since many of our subsidiary operations are located outside of the United States and have
functional currencies other than the U.S. dollar, changes in the exchange rates to the U.S. dollar
affect our reported financial results from one period to the next.
The largest component of our net assets, revenues and expenses, as well as our assets under
management, is presently derived from the United States. However, we have a large number of
subsidiaries outside of the United States whose functional currencies are not the U.S. dollar. As a
result, fluctuations in the exchange rates to the U.S. dollar affect our reported financial results
from one period to the next. We do not actively manage our exposure to such effects. Consequently,
significant strengthening of the U.S. dollar relative to the U.K. Pound Sterling, Euro, or Canadian
dollar, among other currencies, could have a material negative impact on our reported financial
results.
The carrying value of goodwill and other intangible assets on our balance sheet could become
impaired, which would adversely affect our results of operations.
We have goodwill and indefinite-lived intangible assets on our balance sheet that are subject
to annual impairment reviews. Goodwill and indefinite-lived intangible assets totaled $6,980.2
million and $1,161.7 million, respectively, at December 31, 2010 (2009: $6,467.6 million and $110.6
million, respectively). We may not realize the value of such assets. We perform impairment reviews
of the book values of these assets on an annual basis or more frequently if impairment indicators
are present. A variety of factors could cause such book values to become impaired. Should
valuations be deemed to be impaired, a write-down of the related assets would occur, adversely
affecting our results of operations for the period. See Part II, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies —
Goodwill” and “— Intangibles” for additional details of the company’s goodwill impairment analysis
process.
17
Table of Contents
Bermuda law differs from the laws in effect in the United States and may afford less protection to
shareholders.
Our shareholders may have more difficulty protecting their interests than shareholders of a
corporation incorporated in a jurisdiction of the United States. As a Bermuda company, we are
governed by the Companies Act 1981 of Bermuda (“Companies Act”). The Companies Act differs in some
material respects from laws generally applicable to United States corporations and shareholders,
including provisions relating to interested directors, mergers, amalgamations and acquisitions,
takeovers, shareholder lawsuits and indemnification of directors.
Under Bermuda law, the duties of directors and officers of a company are generally owed to the
company only. Shareholders of Bermuda companies do not generally have rights to take action against
directors or officers of the company, and may only do so in limited circumstances. Directors and
officers may owe duties to a company’s creditors in cases of impending insolvency. Directors and
officers of a Bermuda company must, in exercising their powers and performing their duties, act
honestly and in good faith with a view to the best interests of the company and must exercise the
care and skill that a reasonably prudent person would exercise in comparable circumstances.
Directors have a duty not to put themselves in a position in which their duties to the company and
their personal interests may conflict and also are under a duty to disclose any personal interest
in any material contract or proposed material contract with the company or any of its subsidiaries.
If a director or officer of a Bermuda company is found to have breached his duties to that company,
he may be held personally liable to the company in respect of that breach of duty.
Our Bye-Laws provide for indemnification of our directors and officers in respect of any loss
arising or liability attaching to them in respect of any negligence, default, breach of duty or
breach of trust of which a director or officer may be guilty in relation to us other than in
respect of his own fraud or dishonesty, which is the maximum extent of indemnification permitted
under the Companies Act. Under our Bye-Laws, each of our shareholders agrees to waive any claim or
right of action, both individually and on our behalf, other than those involving fraud or
dishonesty, against us or any of our officers, directors or employees. The waiver applies to any
action taken by a director, officer or employee, or the failure of such person to take any action,
in the performance of his duties, except with respect to any matter involving any fraud or
dishonesty on the part of the director, officer or employee. This waiver limits the right of
shareholders to assert claims against our directors, officers and employees unless the act or
failure to act involves fraud or dishonesty.
Legislative and other measures that may be taken by U.S. and/or other governmental authorities
could materially increase our tax burden or otherwise adversely affect our financial conditions,
results of operations or cash flows.
Under current laws, as the company is domiciled and tax resident in Bermuda, taxation in other
jurisdictions is dependent upon the types and the extent of the activities of the company
undertaken in those jurisdictions. There is a risk that changes in either the types of activities
undertaken by the company or changes in tax rules relating to tax residency could subject the
company and its shareholders to additional taxation.
We continue to assess the impact of various U.S. federal and state legislative proposals, and
modifications to existing tax treaties between the United States and foreign countries, that could
result in a material increase in our U.S. federal and state taxes. Proposals have been introduced
in the U.S. Congress that, if ultimately enacted, could either limit treaty benefits on certain
payments made by our U.S. subsidiaries to non-U.S. affiliates, treat the company as a U.S.
corporation and thereby subject the earnings from non-U.S. subsidiaries of the company to U.S.
taxation, or both. We cannot predict the outcome of any specific legislative proposals. However, if
such proposals were to be enacted, or if modifications were to be made to certain existing tax
treaties, the consequences could have a materially adverse impact on the company, including
increasing our tax burden, increasing costs of our tax compliance or otherwise adversely affecting
our financial condition, results of operations or cash flows.
Examinations and audits by tax authorities could result in additional tax payments for prior
periods.
The company and its subsidiaries’ income tax returns periodically are examined by various tax
authorities. The calculation of our tax liabilities involves dealing with uncertainties in the
application of complex tax regulations in a multitude of jurisdictions across our global
operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit
issues based on our estimate of whether, and the extent to which, additional income taxes will be
due. We adjust these liabilities in light of changing facts and circumstances. Due to the
complexity of some of these uncertainties, however, the ultimate resolution may result in a payment
that is materially different from our current estimate of the tax liabilities.
We have anti-takeover provisions in our Bye-Laws that may discourage a change of control.
Our Bye-Laws contain provisions that could make it more difficult for a third-party to acquire
us or to obtain majority representation on our board of directors without the consent of our board.
As a result, shareholders may be limited in their ability to obtain a premium for their shares
under such circumstances.
18
Table of Contents
| Item 1B. | Unresolved Staff Comments |
N/A
| Item 2. | Properties |
Our registered office is located in Hamilton, Bermuda, and our principal executive offices are
in leased office space at 1555 Peachtree Street N.E., Suite 1800, Atlanta, Georgia, 30309, U.S.A.
We own office facilities at Perpetual Park, Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom,
and at 301 W. Roosevelt, Wheaton, Illinois, 60187, and we lease our additional principal offices
located at 30 Finsbury Square, London, EC2A 1AG, United Kingdom; 11 Greenway Plaza, Houston, Texas
77046; 1166 Avenue of the Americas, New York, New York 10036; 17W110 22
nd
Street,
Oakbrook Terrace, Illinois 60181, and in Canada at 5140 Yonge Street, Toronto, Ontario M2N 6X7. We
lease office space in 18 other countries.
| Item 3. | Legal Proceedings |
In July 2010, various closed-end funds formerly advised by Van Kampen Investments or Morgan
Stanley Investment Management included in the acquired business had complaints filed against them
in New York State Court commencing derivative lawsuits purportedly brought on behalf of the common
shareholders of those funds. The funds are nominal defendants in these derivative lawsuits and the
defendants also include Van Kampen Investments (acquired by Invesco on June 1, 2010), Morgan
Stanley Investment Management and certain officers and trustees of the funds who are or were
employees of those firms. Invesco has certain obligations under the applicable acquisition
agreement regarding the defense costs and any damages associated with this litigation. The
plaintiffs allege breaches of fiduciary duties owed by the non-fund defendants to the funds’ common
shareholders related to the funds’ redemption in prior periods of Auction Rate Preferred Securities
(“ARPS”) theretofore issued by the funds. The complaints are similar to other complaints recently
filed against investment advisers, officers and trustees of closed-end funds in other fund
complexes which issued and redeemed ARPS. The complaints allege that the advisers, distributors and
certain officers and trustees of those funds breached their fiduciary duty by redeeming ARPS at
their liquidation value when there was no obligation to do so and when the value of ARPS in the
secondary marketplace were significantly below their liquidation value. The complaints also allege
that the ARPS redemptions were principally motivated by the fund sponsors’ interests to preserve
distribution relationships with brokers and other financial intermediaries who held ARPS after
having repurchased them from their own clients. Certain other funds included in the acquired
business have received demand letters expressing similar allegations. Such demand letters could be
precursors to additional similar lawsuits being commenced against those other funds. The Boards of
Trustees of the funds are evaluating the complaints and demand letters and have established special
committees of independent trustees to conduct an inquiry regarding the allegations. Invesco
believes the cases should be dismissed following completion of such review period, although there
can be no assurance of that result. Invesco intends to defend vigorously any cases which may
survive beyond initial motions to dismiss.
The investment management industry also is subject to extensive levels of ongoing regulatory
oversight and examination. In the United States and other jurisdictions in which the company
operates, governmental authorities regularly make inquiries, hold investigations and administer
market conduct examinations with respect to compliance with applicable laws and regulations.
Additional lawsuits or regulatory enforcement actions arising out of these inquiries may in the
future be filed against the company and related entities and individuals in the U.S. and other
jurisdictions in which the company and its affiliates operate. Any material loss of investor and/or
client confidence as a result of such inquiries and/or litigation could result in a significant
decline in assets under management, which would have an adverse effect on the company’s future
financial results and its ability to grow its business.
In the normal course of its business, the company is subject to various litigation matters.
Although there can be no assurances, at this time management believes, based on information
currently available to it, that it is not probable that the ultimate outcome of any of these
actions will have a material adverse effect on the consolidated financial condition or results of
operations of the company.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
19
Table of Contents
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Invesco Ltd. is organized under the laws of Bermuda, and our common shares are listed and
traded on the New York Stock Exchange under the symbol “IVZ.” At January 31, 2011, there were
approximately 6,777 holders of record of our common shares.
The following table sets forth, for the periods indicated, the high and low reported share
prices on the New York Stock Exchange, based on data reported by Bloomberg.
| Invesco Ltd. | ||||||||||||
| Common Shares | ||||||||||||
| Dividends | ||||||||||||
| High | Low | Declared* | ||||||||||
|
2010
|
||||||||||||
|
Fourth Quarter
|
$ | 24.24 | $ | 21.06 | $ | 0.1100 | ||||||
|
Third Quarter
|
$ | 21.90 | $ | 16.63 | $ | 0.1100 | ||||||
|
Second Quarter
|
$ | 23.66 | $ | 16.83 | $ | 0.1100 | ||||||
|
First Quarter
|
$ | 23.63 | $ | 18.32 | $ | 0.1025 | ||||||
|
2009
|
||||||||||||
|
Fourth Quarter
|
$ | 23.97 | $ | 20.04 | $ | 0.1025 | ||||||
|
Third Quarter
|
$ | 23.00 | $ | 15.72 | $ | 0.1025 | ||||||
|
Second Quarter
|
$ | 18.73 | $ | 13.60 | $ | 0.1025 | ||||||
|
First Quarter
|
$ | 15.00 | $ | 9.51 | $ | 0.1000 | ||||||
| * | Dividends declared represent amounts declared in the current quarter but are attributable to the prior fiscal quarter. |
The following graph illustrates the cumulative total shareholder return of our common shares
(ordinary shares prior to December 4, 2007) over the five-year period ending December 31, 2010, and
compares it to the cumulative total return of the Standard and Poor’s (S&P) 500 Index and to a
group of peer investment management companies. This table is not intended to forecast future
performance of our common shares.
| Note: | The above chart is the average annual total return for the period from December 31, 2005 through December 31, 2010. Asset Manager Index includes Affiliated Managers Group, Alliance Bernstein, BlackRock, Eaton Vance, Federated Investors, Franklin Resources, Gamco Investors, Invesco Ltd., Janus, Legg Mason, Schroders Plc, T. Rowe Price, and Waddell & Reed. |
20
Table of Contents
Important Information Regarding Dividend Payments
Invesco declares and pays dividends on a quarterly basis in arrears. On October 25, 2010, the
company declared a third quarter cash dividend of $0.11 per Invesco Ltd. common share which was
paid on December 8, 2010 to shareholders of record as of November 19, 2010. On January 27, 2011,
the company declared a fourth quarter 2010 cash dividend of $0.11 per Invesco Ltd. common share
which will be paid on March 9, 2011 to shareholders of record as of February 23, 2011.
The total dividend attributable to the 2010 fiscal year of $0.44 per share represented a 7.3%
increase over the total dividend attributable to the 2009 fiscal year of $0.41 per share. The
declaration, payment and amount of any future dividends will be determined by our board of
directors and will depend upon, among other factors, our earnings, financial condition and capital
requirements at the time such declaration and payment are considered. The board has a policy of
managing dividends in a prudent fashion, with due consideration given to profit levels, overall
debt levels and historical dividend payouts. See also Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources —
Dividends,” for additional details regarding dividends.
Repurchases of Equity Securities
The following table shows share repurchase activity during the three months ended December 31,
2010:
| Maximum Number at end of | ||||||||||||||||
| Total Number of | period (or Approximate | |||||||||||||||
| Shares Purchased as | Dollar Value) of Shares that | |||||||||||||||
| Part of Publicly | May Yet Be Purchased | |||||||||||||||
| Total Number of | Average Price | Announced Plans | Under the Plans | |||||||||||||
| Month | Shares Purchased (1) | Paid Per Share | or Programs (2) | or Programs (2) (millions) | ||||||||||||
|
October 1-31, 2010
|
160,181 | $ | 21.38 | — | $ | 1,232.9 | ||||||||||
|
November 1-30, 2010
|
2,934,853 | $ | 21.99 | 2,934,853 | $ | 1,168.4 | ||||||||||
|
December 1-31, 2010
|
33 | $ | 23.23 | — | $ | 1,168.4 | ||||||||||
|
|
||||||||||||||||
|
|
3,095,067 | 2,934,853 | ||||||||||||||
|
|
||||||||||||||||
| (1) | An aggregate of 160,214 restricted share awards included in the table above were surrendered to us by Invesco employees to satisfy tax withholding obligations or loan repayments in connection with the vesting of equity awards. | |
| (2) | On April 23, 2008, our board of directors authorized a share repurchase authorization of up to $1.5 billion of our common shares with no stated expiration date. |
21
Table of Contents
| Item 6. | Selected Financial Data |
The following tables present selected consolidated financial information for the company as of
and for each of the five fiscal years in the period ended December 31, 2010. Except as otherwise
noted below, the consolidated financial information has been prepared in accordance with U.S.
generally accepted accounting principles.
| As of and For The Years Ended December 31, | ||||||||||||||||||||
| $ in millions, except per share and other data | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Operating Data:
|
||||||||||||||||||||
|
Operating revenues
|
3,487.7 | 2,627.3 | 3,307.6 | 3,878.9 | 3,246.7 | |||||||||||||||
|
Net revenues
(1)
|
2,602.2 | 1,984.6 | 2,490.2 | 2,881.9 | 2,412.8 | |||||||||||||||
|
Operating income
|
589.9 | 484.3 | 747.8 | 994.3 | 759.2 | |||||||||||||||
|
Adjusted operating income
(2)
|
897.7 | 565.6 | 826.1 | 1,078.6 | 766.2 | |||||||||||||||
|
Operating margin
|
16.9 | % | 18.4 | % | 22.6 | % | 25.6 | % | 23.4 | % | ||||||||||
|
Adjusted operating margin
(2)
|
34.5 | % | 28.5 | % | 33.2 | % | 37.4 | % | 31.8 | % | ||||||||||
|
Net income attributable to common shareholders
|
465.7 | 322.5 | 481.7 | 673.6 | 482.7 | |||||||||||||||
|
Adjusted net income
(3)
|
639.7 | 378.1 | 527.1 | 718.2 | 499.7 | |||||||||||||||
|
Per Share Data:
|
||||||||||||||||||||
|
Earnings per share:
|
||||||||||||||||||||
|
-basic
|
1.01 | 0.77 | 1.24 | 1.68 | 1.22 | |||||||||||||||
|
-diluted
|
1.01 | 0.76 | 1.21 | 1.64 | 1.19 | |||||||||||||||
|
Adjusted EPS
(3)
|
1.38 | 0.89 | 1.32 | 1.74 | 1.23 | |||||||||||||||
|
Dividends declared per share
|
0.4325 | 0.4075 | 0.5200 | 0.3720 | 0.3570 | |||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Total assets
|
20,444.1 | 10,909.6 | 9,756.9 | 12,925.2 | 12,228.5 | |||||||||||||||
|
Long-term debt
|
1,315.7 | 745.7 | 1,159.2 | 1,276.4 | 1,279.0 | |||||||||||||||
|
Long-term debt of consolidated investment
products
|
5,865.4 | — | — | 116.6 | 37.0 | |||||||||||||||
|
Total equity attributable to common
shareholders
|
8,264.6 | 6,912.9 | 5,689.5 | 6,590.6 | 6,164.0 | |||||||||||||||
|
Total equity
|
9,360.9 | 7,620.8 | 6,596.2 | 7,711.8 | 7,668.6 | |||||||||||||||
|
Other Data:
|
||||||||||||||||||||
|
Ending AUM (in billions)
|
$ | 616.5 | $ | 459.5 | $ | 377.1 | $ | 529.3 | $ | 482.0 | ||||||||||
|
Average AUM (in billions)
|
$ | 532.3 | $ | 415.8 | $ | 468.9 | $ | 511.7 | $ | 430.7 | ||||||||||
|
Headcount
|
5,617 | 4,890 | 5,325 | 5,475 | 5,574 | |||||||||||||||
| (1) | Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of the net revenues of our joint venture investments, plus management fees earned from, less other revenue recorded by, consolidated investment products. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Schedule of Non-GAAP Information” for the reconciliation of operating revenues to net revenues. | |
| (2) | Adjusted operating margin is adjusted operating income divided by net revenues. Adjusted operating income includes operating income plus our proportional share of the operating income of our joint venture investments, transaction and integration charges, amortization of acquisition-related prepaid compensation and other intangibles, compensation expense related to market valuation changes in deferred compensation plans, the operating income impact of the consolidation of investment products, and other reconciling items. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Schedule of Non-GAAP Information” for the reconciliation of operating income to adjusted operating income. | |
| (3) | Adjusted net income is net income attributable to common shareholders adjusted to add back transaction and integration charges, amortization of acquisition-related prepaid compensation and other intangibles, and the tax cash flow benefits resulting from tax amortization of goodwill and indefinite-lived intangible assets. Adjusted net income excludes the net income of consolidated investment products, and the net income impact of deferred compensation plans and other reconciling items. By calculation, adjusted EPS is adjusted net income divided by the weighted average number of shares outstanding (for diluted EPS). See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Schedule of Non-GAAP Information” for the reconciliation of net income to adjusted net income. |
22
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Executive Overview
The following executive overview summarizes the significant trends affecting our results of
operations and financial condition for the periods presented. This overview and the remainder of
this management’s discussion and analysis supplements, and should be read in conjunction with, the
Consolidated Financial Statements of Invesco Ltd. and its subsidiaries (collectively, the “company”
or “Invesco”) and the notes thereto contained elsewhere in this Annual Report on Form 10-K.
Invesco is a leading independent global investment manager with offices in more than 20
countries. As of December 31, 2010, we managed $616.5 billion in assets for retail, institutional
and high-net-worth investors around the world. By delivering the combined power of our distinctive
worldwide investment management capabilities, Invesco provides a comprehensive array of enduring
solutions for our clients. We have a significant presence in the institutional and retail segments
of the investment management industry in North America, UK, Europe and Asia-Pacific, serving
clients in more than 150 countries.
Despite a number of challenges during the year, including the U.S. equity market flash crash
in May, the heightened risk of European sovereign default, and continued uncertainty about the
strength of the economic recovery, most global equity markets achieved positive returns in 2010
marking the second year of recovery from the financial crisis as illustrated in the chart below:
The response to these challenges by governments and central banks around the world of
providing additional fiscal and monetary stimulus led to an investor environment that favored
riskier assets as yields on less risky government bonds reached record lows. As a result, most
global equity markets achieved positive returns in 2010 with the S&P 500 climbing almost 13%, the
FTSE 100 rising 9%, and the MSCI EAFE index gaining nearly 5%. The exception was the equity market
in Japan which declined 3% as the strength in the Japanese Yen, up almost 15% against the U.S.
Dollar in 2010, negatively impacted the profits of Japanese exporters and multinational
corporations. The table below summarizes the year ended December 31 returns of several major market
indices for 2010, 2009, and 2008:
| Year ended December 31, | ||||||||||||
| Index | 2010 | 2009 | 2008 | |||||||||
|
S&P 500
|
12.8 | % | 23.5 | % | (37.0 | %) | ||||||
|
FTSE 100
|
9.0 | % | 22.1 | % | (28.0 | %) | ||||||
|
Nikkei 225
|
(3.0 | %) | 19.0 | % | (41.1 | %) | ||||||
|
MSCI EAFE
|
4.9 | % | 27.8 | % | (45.1 | %) | ||||||
23
Table of Contents
Both Treasury markets and corporate credit markets achieved positive returns in 2010 as well.
Treasury securities benefited from the combination of the “flight to quality” trade in the first
half of the year, coinciding with the U.S. equity market flash crash and increased risk of default
by some European governments, as well as the Federal Reserve beginning the second round of
quantitative easing, a process whereby the Federal Reserve creates new money to purchase Treasury
securities. For the year, 10-year Treasury notes gained 8% while shorter dated 3- and 5-year notes
gained 5% and 7% respectively. Corporate credit markets benefited from improved fundamentals as
earnings improved and corporations stockpiled cash. Further, the stimulus efforts from central
bankers around the globe provided support as yields on government securities reached record lows,
and fixed income investors moved out the credit risk curve in search of higher yields. For the
year, investment grade credit gained 9.0% while high-yield bonds returned 14.6%.
Invesco continued to make progress in a number of areas that better positioned our company as
the markets continue their measured return to pre-financial crisis levels. Throughout the course of
2010, the company’s financial performance strengthened. In addition, during this period, Invesco
continued to strengthen its competitive position with respect to investment performance, maintained
its focus on its clients, and enhanced its profile in the industry.
A critical factor in Invesco’s ability to weather the economic storms of the past three years
was our integrated approach to risk management. Our risk management framework provides the basis
for consistent and meaningful risk dialogue up, down and across the company. Our Global Performance
Measurement and Risk group provides senior management and the Board with insight into core
investment risks, while our Corporate Risk Management Committee facilitates a focus on strategic,
operational and all other business risks. Further, business component, functional, and geographic
risk management committees maintain an ongoing risk assessment process that provides a bottom-up
perspective on the specific risk areas existing in various domains of our business. Through this
regular and consistent risk communication, the Board has reasonable assurance that all material
risks of the company are being addressed and that the company is propagating a risk-aware culture
in which effective risk management is built into the fabric of the business.
In addition, we benefited from having a diversified asset base. One of Invesco’s core
strengths, and a key differentiator for the company within the industry, is our broad
diversification across client domiciles, asset classes and distribution channels. Our geographical
diversification recognizes growth opportunities in different parts of the world. Invesco is also
diversified by asset class, with approximately 48% of our assets under management in equities and
the remaining 52% invested in fixed income and other investments. This broad diversification
enables Invesco to withstand different market cycles and take advantage of growth opportunities in
various markets and channels.
On June 1, 2010, the company acquired Morgan Stanley’s retail asset management business,
including Van Kampen Investments (the “acquired business” or the “acquisition”) in exchange for a
combination of $770.0 million in cash paid and 30.9 million common shares and common share
equivalents, which were subsequently sold, as converted, to unrelated third parties. The
acquisition added assets under management across equity, fixed income and alternative asset classes
(including mutual funds, variable insurance funds, separate accounts and UITs). More specifically,
this acquisition:
| • | Expanded the depth and breadth of the company’s investment strategies, enabling the company to offer an even more comprehensive range of investment capabilities and vehicles to its clients around the world; | ||
| • | Enhanced the company’s ability to serve U.S. clients by positioning Invesco among the leading U.S. investment managers by assets under management (AUM), diversity of investment teams and client profiles; | ||
| • | Deepened Invesco’s relationships with clients and strengthen its overall distribution capabilities; and | ||
| • | Further strengthened its position in the Japanese investment management market. |
Presentation of Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The company provides investment management services to, and has transactions with, various
private equity, real estate, fund-of-funds, collateralized loan obligation products (CLOs), and
other investment entities sponsored by the company for the investment of client assets in the
normal course of business. The company serves as the investment manager, making day-to-day
investment decisions concerning the assets of the products. Certain of these entities are
consolidated under variable interest or voting interest entity consolidation guidance. See Part II,
Item 8, Financial Statements and Supplementary Data — Note 1, “Accounting Policies” and Note 20,
“Consolidated Investment Products,” for additional details.
24
Table of Contents
Effective January 1, 2010, the company adopted guidance now encompassed in Accounting
Standards Codification Topic 810, “Consolidation.” The adoption of this new guidance had a
significant impact on the presentation of the company’s financial statements in 2010, as its
provisions required the company to consolidate certain CLOs that were not previously consolidated.
In accordance with the standard, prior periods have not been restated to reflect the consolidation
of these CLOs. The majority of the company’s consolidated investment products balances were
CLO-related as of December 31, 2010. The collateral assets of the CLOs are held solely to satisfy
the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the
risks associated with, the collateral assets held by the CLOs, beyond the company’s minimal direct
investments in, and management fees generated from, the CLOs. If the company were to liquidate, the
collateral assets would not be available to the general creditors of the company, and as a result,
the company does not consider them to be company assets. Additionally, the investors in the CLOs
have no recourse to the general credit of the company for the notes issued by the CLOs. The company
therefore does not consider this debt to be a company liability.
The impact of consolidation of investment products is so significant to the presentation of
company’s financial statements (but not to the underlying financial condition or results of
operations of the company) that, combined with the presentation of newly-incurred transaction and
integration costs and additional intangible asset amortization resulting from the acquired
business, the company expanded its use of non-GAAP measures beginning with the presentation of the
company’s results for the three months ended March 31, 2010. The discussion that follows therefore
combines results presented under U.S. generally accepted accounting principles (GAAP) with the
company’s non-GAAP presentation. There are four distinct sections within this Management’s
Discussion and Analysis of Financial Condition and Results of Operations after the Assets Under
Management discussion:
| • | Results of Operations (for the year ended December 31, 2010, compared with the year ended December 31, 2009, and for the year ended December 31, 2009, compared with the year ended December 31, 2008); | ||
| • | Schedule of Non-GAAP Information; | ||
| • | Balance Sheet Discussion; and | ||
| • | Liquidity and Capital Resources. |
Each of the financial statement summary sections (Results of Operations, Balance Sheet Discussion,
and Liquidity and Capital Resources) begins with a table illustrating the impact of the
consolidation of investment products. The narrative that follows each of these sections separately
provides discussion of the underlying financial statement activity for the company, before
consolidation of investment products, as well as of the financial statement activity of
consolidated investment products. Additionally, wherever a non-GAAP measure is referenced, a
disclosure will follow in the narrative or in the note referring the reader to the Schedule of
Non-GAAP Information, where additional details regarding the use of the non-GAAP measure by the
company are disclosed, along with reconciliations of the most directly comparable U.S. GAAP
measures to the non-GAAP measures. To further enhance the readability of the Results of Operations
section, separate tables for each of the revenue, expense, and non-operating income/expense
sections of the income statement introduce the narrative that follows, providing a
section-by-section review of the company’s income statements for the periods presented.
25
Table of Contents
Summary Operating Information
Summary operating information for 2010, 2009 and 2008 is presented in the table below.
| Year ended December 31, | ||||||||||||
| U.S. GAAP Financial Measures Summary | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues
|
$ | 3,487.7 | m | $ | 2,627.3 | m | $ | 3,307.6 | m | |||
|
Operating margin
|
16.9 | % | 18.4 | % | 22.6 | % | ||||||
|
Net income attributable to common shareholders
|
$ | 465.7 | m | $ | 322.5 | m | $ | 481.7 | m | |||
|
Diluted EPS
|
$ | 1.01 | $ | 0.76 | $ | 1.21 | ||||||
|
Average assets under management (in billions)
|
$ | 532.3 | $ | 415.8 | $ | 468.9 | ||||||
| Year ended December 31, | ||||||||||||
| Non-GAAP Financial Measures Summary | 2010 | 2009 | 2008 | |||||||||
|
Net revenues
(1)
|
$ | 2,602.2 | m | $ | 1,984.6 | m | $ | 2,490.2 | m | |||
|
Adjusted operating margin
(2)
|
34.5 | % | 28.5 | % | 33.2 | % | ||||||
|
Adjusted net income
(3)
|
$ | 639.7 | m | $ | 378.1 | m | $ | 527.1 | m | |||
|
Adjusted EPS
(3)
|
$ | 1.38 | $ | 0.89 | $ | 1.32 | ||||||
|
Average assets under management (in billions)
|
$ | 532.3 | $ | 415.8 | $ | 468.9 | ||||||
| (1) | Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of the net revenues of our joint venture investments, plus management fees earned from, less other revenue recorded by, consolidated investment products. See “Schedule of Non-GAAP Information” for the reconciliation of operating revenues to net revenues. | |
| (2) | Adjusted operating margin is adjusted operating income divided by net revenues. Adjusted operating income includes operating income plus our proportional share of the operating income of our joint venture investments, transaction and integration charges, amortization of acquisition-related prepaid compensation and other intangibles, compensation expense related to market valuation changes in deferred compensation plans, the operating income impact of the consolidation of investment products, and other reconciling items. See “Schedule of Non-GAAP Information” for the reconciliation of operating income to adjusted operating income. | |
| (3) | Adjusted net income is net income attributable to common shareholders adjusted to add back transaction and integration charges, amortization of acquisition-related prepaid compensation and other intangibles, and the tax cash flow benefits resulting from tax amortization of goodwill and indefinite-lived intangible assets. Adjusted net income excludes the net income of consolidated investment products, and the net income impact of deferred compensation plans and other reconciling items. By calculation, adjusted EPS is adjusted net income divided by the weighted average number of shares outstanding (for diluted EPS). See “Schedule of Non-GAAP Information” for the reconciliation of net income to adjusted net income. |
A significant portion of our business and AUM is based outside of the U.S. The strengthening
or weakening of the U.S. dollar against other currencies, primarily the Pound Sterling and the
Canadian dollar, will impact our reported revenues and expenses from period to period.
Additionally, our revenues are directly influenced by the level and composition of our AUM.
Therefore, movements in global capital market levels, net new business inflows (or outflows) and
changes in the mix of investment products between asset classes and geographies may materially
affect our revenues from period to period. The returns from most global capital markets increased
in the year ended December 31, 2010, which also contributed to net increases in AUM of $35.7
billion (excluding acquisitions) during the year. AUM at January 31, 2011, was $624.3 billion.
26
Table of Contents
Investment Capabilities Performance Overview
Invesco’s first strategic priority is to achieve strong investment performance over the
long-term for our clients. Long-term performance in our equities capabilities, as measured by the
percentage of AUM ahead of benchmark and ahead of peer median, is generally strong with some
pockets of outstanding performance. Within our equity asset class, Asian, Continental European, and
U.S. Core have had strong relative performance versus competitors and versus benchmark over three-
and five-year periods. Our U.S. Value and Global Ex-U.S. and Emerging Markets have exceptional
long-term performance with over 92% of assets ahead of benchmarks and peer group medians. Within
our fixed income asset class, Global fixed income products have achieved strong long-term
performance with at least 80% of AUM ahead of benchmarks and 77% of AUM ahead of peers on a 3-year
and 5-year basis.
| Benchmark Comparison | Peer Group Comparison | |||||||||||||||||||||||||||
| % of AUM Ahead of | % of AUM In Top Half of | |||||||||||||||||||||||||||
| Benchmark | Peer Group | |||||||||||||||||||||||||||
| 1yr | 3yr | 5yr | 1yr | 3yr | 5yr | |||||||||||||||||||||||
| Equities |
U.S. Core
|
20 | % | 72 | % | 95 | % | 24 | % | 62 | % | 78 | % | |||||||||||||||
|
U.S. Growth
|
43 | % | 31 | % | 69 | % | 59 | % | 46 | % | 53 | % | ||||||||||||||||
|
U.S. Value
|
59 | % | 95 | % | 94 | % | 61 | % | 92 | % | 94 | % | ||||||||||||||||
|
Sector
|
56 | % | 74 | % | 71 | % | 22 | % | 42 | % | 63 | % | ||||||||||||||||
|
U.K.
|
9 | % | 44 | % | 92 | % | 1 | % | 1 | % | 90 | % | ||||||||||||||||
|
Canadian
|
49 | % | 77 | % | 30 | % | 42 | % | 93 | % | 25 | % | ||||||||||||||||
|
Asian
|
55 | % | 76 | % | 95 | % | 37 | % | 73 | % | 72 | % | ||||||||||||||||
|
Continental European
|
63 | % | 84 | % | 93 | % | 53 | % | 76 | % | 77 | % | ||||||||||||||||
|
Global
|
56 | % | 77 | % | 78 | % | 19 | % | 49 | % | 44 | % | ||||||||||||||||
|
Global Ex U.S. and Emerging Markets
|
69 | % | 94 | % | 98 | % | 26 | % | 93 | % | 94 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||
| Balanced |
Balanced
|
27 | % | 87 | % | 76 | % | 27 | % | 78 | % | 71 | % | |||||||||||||||
|
|
||||||||||||||||||||||||||||
| Money Market |
Money Market
|
37 | % | 77 | % | 74 | % | 96 | % | 93 | % | 93 | % | |||||||||||||||
|
|
||||||||||||||||||||||||||||
| Fixed Income |
U.S. Fixed Income
|
71 | % | 38 | % | 43 | % | 69 | % | 60 | % | 60 | % | |||||||||||||||
|
Global Fixed Income
|
48 | % | 80 | % | 83 | % | 40 | % | 77 | % | 77 | % | ||||||||||||||||
| Note: | AUM measured in the one-, three-, and five-year peer group rankings represents 62%, 61%, and 59% of total Invesco AUM, respectively, and AUM measured versus benchmark on a one-, three-, and five-year basis represents 73%, 72%, and 68% of total Invesco AUM, respectively, as of 12/31/10. Peer group rankings are sourced from a widely-used third party ranking agency in each fund’s market (Lipper, Morningstar, Russell, Mercer, eVestment Alliance, SITCA) and asset-weighted in USD. Rankings are as of prior quarter-end for most institutional products and prior month-end for Australian retail funds due to their late release by third parties. Rankings for the most representative fund in each GIPS composite are applied to all products within each GIPS composite. Excludes Invesco PowerShares, W.L. Ross & Co., Invesco Private Capital, non-discretionary direct real estate products and CLOs. Certain other funds and products were excluded from the analysis because of limited benchmark or peer group data. Had these been available, results may have been different. These results are preliminary and subject to revision. Performance assumes the reinvestment of dividends. Past performance is not indicative of future results and may not reflect an investor’s experience. |
27
Table of Contents
Assets Under Management
The company’s rolling presentation of AUM from period to period (on the following pages)
illustrates long-term inflows and outflows separately from the net flows into institutional money
market funds. Long-term inflows and the underlying reasons for the movements in this line item
include investments from new clients, existing clients adding new accounts/funds or
contributions/subscriptions into existing accounts/funds, and new funding commitments into private
equity funds. We present net flows into institutional money market funds separately, because
shareholders of those funds typically utilize them as short-term funding vehicles and because their
flows are particularly sensitive to short-term interest rate movements.
There are numerous drivers of AUM inflows and outflows, including individual investor
decisions to change their investment preferences, fiduciaries making broad asset allocation
decisions on behalf of advised clients and reallocation of investments within portfolios. We are
not a party to these asset allocation decisions, as the company does not generally have access to
the underlying investor’s decision-making process, including their risk appetite or liquidity
needs. Therefore, the company is not in a position to provide meaningful information regarding the
drivers of inflows and outflows.
To align our external reporting of AUM with how Invesco is portrayed in the industry and to
reflect more fully the company’s revenue drivers, in the three months ended June 30, 2010, the
company changed its definition of AUM to include assets with which the company is also associated:
the PowerShares QQQQ ETF, PowerShares DB ETFs, and other passive assets. These products previously
were not included in the company’s reported AUM because the company does not receive investment
management fees from these assets. These assets are marketed as Invesco products, and to include
them as part of our AUM more accurately reflects the full size and capabilities of Invesco.
Additionally, the company may receive meaningful performance service, distribution, or transaction
revenues from these assets. The inclusion of these assets as AUM changed the following data points
from those previously disclosed:
| Previously | Post-Reporting | |||||||
| $ in billions | Disclosed | Alignment | ||||||
|
Ending AUM:
|
||||||||
|
December 31, 2006
|
462.6 | 482.0 | ||||||
|
December 31, 2007
|
500.1 | 529.3 | ||||||
|
December 31, 2008
|
357.2 | 377.1 | ||||||
|
December 31, 2009
|
423.1 | 459.5 | ||||||
|
Average AUM:
|
||||||||
|
Year ended December 31, 2006
|
424.2 | 430.7 | ||||||
|
Year ended December 31, 2007
|
489.1 | 511.7 | ||||||
|
Year ended December 31, 2008
|
440.6 | 468.9 | ||||||
|
Year ended December 31, 2009
|
388.7 | 415.8 | ||||||
|
Net revenue yield on AUM*:
|
||||||||
|
Year ended December 31, 2006
|
56.9 | bps | 55.9 | bps | ||||
|
Year ended December 31, 2007
|
59.1 | bps | 56.5 | bps | ||||
|
Year ended December 31, 2008
|
56.5 | bps | 53.1 | bps | ||||
|
Year ended December 31, 2009
|
50.9 | bps | 47.7 | bps | ||||
|
Net revenue yield on AUM before performance fees*:
|
||||||||
|
Year ended December 31, 2006
|
55.0 | bps | 54.0 | bps | ||||
|
Year ended December 31, 2007
|
57.7 | bps | 55.2 | bps | ||||
|
Year ended December 31, 2008
|
54.8 | bps | 51.5 | bps | ||||
|
Year ended December 31, 2009
|
50.1 | bps | 47.0 | bps | ||||
|
Gross revenue yield on AUM*:
|
||||||||
|
Year ended December 31, 2006
|
N/A | 75.6 | bps | |||||
|
Year ended December 31, 2007
|
80.0 | bps | 76.5 | bps | ||||
|
Year ended December 31, 2008
|
75.8 | bps | 71.2 | bps | ||||
|
Year ended December 31, 2009
|
68.2 | bps | 63.8 | bps | ||||
|
Gross revenue yield on AUM before performance fees*:
|
||||||||
|
Year ended December 31, 2006
|
N/A | 73.6 | bps | |||||
|
Year ended December 31, 2007
|
78.5 | bps | 75.1 | bps | ||||
|
Year ended December 31, 2008
|
74.1 | bps | 69.6 | bps | ||||
|
Year ended December 31, 2009
|
67.5 | bps | 63.0 | bps | ||||
| * | Net and gross revenue yield are defined in the paragraphs that follow this table. |
28
Table of Contents
Additionally, as a result of the acquisition, the company now manages unit investment trust
(UIT) products, which are categorized in this passive asset group, and for which we earn revenues
related to transactional sales charges from the sale of these products and trading income arising
from securities temporarily held to form new UIT products.
AUM at December 31, 2010 were $616.5 billion (December 31, 2009: $459.5 billion; December 31,
2008: $377.1 billion). The acquisition added $114.6 billion in AUM at June 1, 2010. Additionally,
during the year ended December 31, 2010, other acquisitions added $6.9 billion of AUM, net of
dispositions. During the year ended December 31, 2010, net inflows increased AUM by $5.5 billion,
while positive market movements increased AUM by $43.9 billion. We experienced net outflows in
institutional money market funds of $15.5 billion and increases in AUM of $1.6 billion due to
changes in foreign exchange rates during the year ended December 31, 2010. During the year ended
December 31, 2009, net inflows increased AUM by $16.6 billion and positive market movements
increased AUM by $54.7 billion. We experienced net outflows in institutional money market funds of
$0.1 billion and increases in AUM of $11.2 billion due to changes in foreign exchange rates during
the year ended December 31, 2009. During the year ended December 31, 2008, net outflows decreased
AUM by $20.3 billion and negative market movements decreased AUM by $113.0 billion. We experienced
net inflows in institutional money market funds of $8.4 billion and decreases in AUM of $27.3
billion due to changes in foreign exchange rates during the year ended December 31, 2008. Average
AUM during the year ended December 31, 2010 included the impact of the acquired business and were
$532.3 billion, compared to $415.8 billion for the year ended December 31, 2009 and $468.9 billion
for the year ended December 31, 2008.
Net inflows during the year ended December 31, 2010 included net long-term inflows of ETF, UIT
and passive AUM of $4.3 billion and other net long-term inflows of $1.2 billion. Net flows were
driven by net inflows into our institutional and high net worth distribution channels of $5.6
billion and $1.1 billion, respectively, primarily in the fixed income asset class, while our Retail
distribution channel experienced net outflows of $1.2 billion.
Market gains and losses/reinvestment of AUM includes the net change in AUM resulting from
changes in market values of the underlying investments from period to period and reinvestment of
client dividends. Of the total increase in AUM resulting from market gains during the year ended
December 31, 2010, $33.4 billion of this increase was due to the change in value of our equity
asset class across all of our business components. Our balanced and alternatives asset classes were
also positively impacted by the change in market valuations during the period. During the year
ended December 31, 2010, our equity AUM increased in line with equity markets globally. As
discussed in the “Executive Overview” section of this Management’s Discussion and Analysis, the S&P
500 and the FTSE 100 indices increased 12.8% and 9.0%, respectively, during the year ended December
31, 2010. Of the $54.7 billion increase in AUM resulting from market increases during the year
ended December 31, 2009, $42.1 billion of this increase was due to the change in value of our
equity asset class, in line with increases in the S&P 500 and the FTSE 100 indices of 23.5% and
22.1%, respectively, during that period. Of the $113.0 billion decrease in AUM resulting from
market declines during the year ended December 31, 2008, $94.7 billion of this decrease was due to
the change in value of our equity asset class, in line with decreases in the S&P 500 and the FTSE
100 indices of 37.0% and 28.0%, respectively, during that period.
Foreign exchange rate movements in our AUM result from the effect of changes in foreign
exchange rates from period to period as non-U.S. Dollar denominated AUM is translated into U.S.
Dollars, the reporting currency of the company. The impact of the change in foreign exchange rates
at December 31, 2010 was driven primarily by the weakening of the Pound Sterling relative to the
U.S. Dollar, which was reflected in the translation of our Pound Sterling-based AUM into U.S.
Dollars, the strengthening of the Canadian Dollar relative to the U.S. Dollar, which was reflected
in the translation of our Canadian Dollar-based AUM into U.S. Dollars, and to the weakening of the
Euro relative to the U.S. Dollar, which was reflected in the translation of our Euro-based AUM into
U.S. Dollars. The impact of the change in foreign exchange rates at December 31, 2009 was driven by
the strengthening of the Pound Sterling, Canadian Dollar and Euro relative to the U.S. Dollar. The
impact of the change in foreign exchange rates at December 31, 2008 was driven by the weakening of
the Pound Sterling, Canadian Dollar and Euro relative to the U.S. Dollar.
The table below illustrates the spot foreign exchange rates for translation into the U.S.
Dollar, the reporting currency of the company, at December 31, 2010, 2009, and 2008:
| December 31, 2010 | December 31, 2009 | December 31, 2008 | ||||||||||
|
Pound Sterling ($ per £)
|
1.56 | 1.61 | 1.45 | |||||||||
|
Canadian Dollar (CAD per $)
|
0.99 | 1.05 | 1.23 | |||||||||
|
Euro ($ per Euro)
|
1.34 | 1.43 | 1.39 | |||||||||
29
Table of Contents
Net revenue yield increased slightly to 48.9 basis points in the year ended December 31, 2010
from the year ended December 31, 2009 level of 47.7 basis points. The acquired business added
$114.6 billion in AUM at June 1, 2010 with an approximate effective fee rate of 47 basis points.
Market driven changes in our asset mix significantly impact our net revenue yield calculation. Our
equity AUM generally earn a higher net revenue rate than money market AUM. At December 31, 2010,
equity AUM were $294.1 billion, representing 48% of our total AUM at that date; whereas at December
31, 2009, equity AUM were $192.7 billion, representing 42% of our total AUM at that date. In
addition, ETF, UIT and Passive AUM generally earn a lower effective fee rate than AUM excluding
ETF, UIT and Passive asset classes. At December 31, 2010, ETF, UIT and Passive AUM were $80.8
billion, representing 13.1% of total AUM at that date; whereas at December 31, 2009, ETF, UIT and
Passive AUM were $53.0 billion, representing 11.5% of our total AUM at that date.
Gross revenue yield on AUM increased 2.2 basis points to 66.0 basis points in the year ended
December 31, 2010 from the year ended December 31, 2009 level of 63.8 basis points. Management does
not consider gross revenue yield, the most comparable U.S. GAAP-based measure to net revenue yield,
to be a meaningful effective fee rate measure. The numerator of the gross revenue yield measure,
operating revenues, excludes the management fees earned from consolidated investment products;
however the denominator of the measure includes the AUM of these investment products. Therefore,
the gross revenue yield measure is not considered representative of the company’s true effective
fee rate from AUM. See “Schedule of Non-GAAP Information” for a reconciliation of operating
revenues (gross revenues) to net revenues.
Changes in AUM were as follows:
| AUM ex | AUM ex | |||||||||||||||||||||||||||||||||||
| AUM ex ETF, | ETF, UIT & | ETF, UIT & | ETF, UIT & | ETF, UIT & | ETF, UIT & | |||||||||||||||||||||||||||||||
| Total AUM | UIT & Passive | Passive | Total AUM | Passive | Passive | Total AUM | Passive | Passive | ||||||||||||||||||||||||||||
| $ in billions | 2010 | 2010 | 2010 | 2009 | 2009 | 2009 | 2008 | 2008 | 2008 | |||||||||||||||||||||||||||
|
January 1
|
459.5 | 406.5 | 53.0 | 377.1 | 346.6 | 30.5 | 529.3 | 484.0 | 45.3 | |||||||||||||||||||||||||||
|
Long-term inflows
|
154.7 | 84.6 | 70.1 | 106.1 | 65.7 | 40.4 | 136.5 | 66.0 | 70.5 | |||||||||||||||||||||||||||
|
Long-term outflows
|
(149.2 | ) | (83.4 | ) | (65.8 | ) | (89.5 | ) | (59.9 | ) | (29.6 | ) | (156.8 | ) | (89.9 | ) | (66.9 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Long-term net flows
|
5.5 | 1.2 | 4.3 | 16.6 | 5.8 | 10.8 | (20.3 | ) | (23.9 | ) | 3.6 | |||||||||||||||||||||||||
|
Net flows in institutional
money market funds
|
(15.5 | ) | (15.5 | ) | — | (0.1 | ) | (0.1 | ) | — | 8.4 | 8.4 | — | |||||||||||||||||||||||
|
Market gains and
losses/reinvestment
|
43.9 | 36.3 | 7.6 | 54.7 | 43.3 | 11.4 | (113.0 | ) | (95.2 | ) | (17.8 | ) | ||||||||||||||||||||||||
|
Acquisitions/dispositions,
net
|
121.5 | 107.1 | 14.4 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Foreign currency translation
|
1.6 | 0.1 | 1.5 | 11.2 | 10.9 | 0.3 | (27.3 | ) | (26.7 | ) | (0.6 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
December 31
|
616.5 | 535.7 | 80.8 | 459.5 | 406.5 | 53.0 | 377.1 | 346.6 | 30.5 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Average long-term AUM
|
463.5 | 393.8 | 69.7 | 328.8 | 291.2 | 37.6 | 389.1 | 363.9 | 25.2 | |||||||||||||||||||||||||||
|
Average institutional money
market AUM
|
68.8 | 68.8 | — | 87.0 | 87.0 | — | 79.8 | 79.8 | — | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Average AUM
|
532.3 | 462.6 | 69.7 | 415.8 | 378.2 | 37.6 | 468.9 | 443.7 | 25.2 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Gross revenue yield on
AUM
(1)
|
66.0 | bps | 74.3 | bps | 10.8 | bps | 63.8 | bps | 68.8 | bps | 13.4 | bps | 71.2 | bps | 74.1 | bps | 20.1 | bps | ||||||||||||||||||
|
Gross revenue yield on AUM
before performance
fees
(1)
|
65.5 | bps | 73.8 | bps | 10.8 | bps | 63.0 | bps | 68.0 | bps | 13.4 | bps | 69.6 | bps | 72.2 | bps | 20.1 | bps | ||||||||||||||||||
|
Net revenue yield on
AUM
(2)
|
48.9 | bps | 54.6 | bps | 10.8 | bps | 47.7 | bps | 51.1 | bps | 13.4 | bps | 53.1 | bps | 55.0 | bps | 20.1 | bps | ||||||||||||||||||
|
Net revenue yield on AUM
before performance
fees
(2)
|
48.4 | bps | 54.1 | bps | 10.8 | bps | 47.0 | bps | 50.4 | bps | 13.4 | bps | 51.5 | bps | 53.3 | bps | 20.1 | bps | ||||||||||||||||||
| (1) | Gross revenue yield on AUM is equal to annualized total operating revenues divided by average AUM, excluding joint venture (JV) AUM. Our share of the average AUM in 2010 for our JVs in China was $3.6 billion (2009: $3.7 billion, 2008: $4.5 billion). It is appropriate to exclude the average AUM of our JVs for purposes of computing gross revenue yield on AUM, because the revenues resulting from these AUM are not presented in our operating revenues. Under U.S. GAAP, our share of the pre-tax earnings of the JVs is recorded as equity in earnings of unconsolidated affiliates on our Consolidated Statements of Income. | |
| (2) | Net revenue yield on AUM is equal to annualized net revenues divided by average AUM. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues. |
30
Table of Contents
Our AUM by channel, by asset class, and by client domicile were as follows:
Total AUM by Channel
(1)
| Private | ||||||||||||||||
| Wealth | ||||||||||||||||
| $ in billions | Total | Retail | Institutional | Management | ||||||||||||
|
January 1, 2010 AUM
|
459.5 | 239.4 | 204.9 | 15.2 | ||||||||||||
|
Long-term inflows
|
154.7 | 106.2 | 45.2 | 3.3 | ||||||||||||
|
Long-term outflows
|
(149.2 | ) | (107.4 | ) | (39.6 | ) | (2.2 | ) | ||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
5.5 | (1.2 | ) | 5.6 | 1.1 | |||||||||||
|
Net flows in institutional money market funds
|
(15.5 | ) | — | (15.5 | ) | — | ||||||||||
|
Market gains and losses/reinvestment
|
43.9 | 36.8 | 6.4 | 0.7 | ||||||||||||
|
Acquisitions/dispositions, net
|
121.5 | 104.0 | 17.5 | — | ||||||||||||
|
Foreign currency translation
|
1.6 | (0.6 | ) | 2.2 | — | |||||||||||
|
|
||||||||||||||||
|
December 31, 2010 AUM
|
616.5 | 378.4 | 221.1 | 17.0 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
January 1, 2009 AUM
(2)
|
377.1 | 165.9 | 197.8 | 13.4 | ||||||||||||
|
Long-term inflows
|
106.1 | 85.1 | 16.1 | 4.9 | ||||||||||||
|
Long-term outflows
|
(89.5 | ) | (67.0 | ) | (18.0 | ) | (4.5 | ) | ||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
16.6 | 18.1 | (1.9 | ) | 0.4 | |||||||||||
|
Net flows in institutional money market funds
|
(0.1 | ) | — | (0.1 | ) | — | ||||||||||
|
Market gains and losses/reinvestment
|
54.7 | 45.7 | 7.6 | 1.4 | ||||||||||||
|
Foreign currency translation
|
11.2 | 9.7 | 1.5 | — | ||||||||||||
|
|
||||||||||||||||
|
December 31, 2009 AUM
|
459.5 | 239.4 | 204.9 | 15.2 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
January 1, 2008 AUM
(2)
|
529.3 | 287.9 | 224.0 | 17.4 | ||||||||||||
|
Long-term inflows
|
136.5 | 111.6 | 20.1 | 4.8 | ||||||||||||
|
Long-term outflows
|
(156.8 | ) | (121.1 | ) | (31.1 | ) | (4.6 | ) | ||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
(20.3 | ) | (9.5 | ) | (11.0 | ) | 0.2 | |||||||||
|
Net flows in institutional money market funds
|
8.4 | 0.6 | 7.8 | — | ||||||||||||
|
Market gains and losses/reinvestment
|
(113.0 | ) | (87.5 | ) | (21.3 | ) | (4.2 | ) | ||||||||
|
Foreign currency translation
|
(27.3 | ) | (25.6 | ) | (1.7 | ) | — | |||||||||
|
|
||||||||||||||||
|
December 31, 2008 AUM
|
377.1 | 165.9 | 197.8 | 13.4 | ||||||||||||
|
|
||||||||||||||||
| See accompanying notes to these AUM tables on the following page. |
31
Table of Contents
ETF, UIT & Passive AUM by Channel
(1)
| Private | ||||||||||||||||
| Wealth | ||||||||||||||||
| $ in billions | Total | Retail | Institutional | Management | ||||||||||||
|
January 1, 2010 AUM
|
53.0 | 48.0 | 5.0 | — | ||||||||||||
|
Long-term inflows
|
70.1 | 51.2 | 18.9 | — | ||||||||||||
|
Long-term outflows
|
(65.8 | ) | (47.2 | ) | (18.6 | ) | — | |||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
4.3 | 4.0 | 0.3 | — | ||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | ||||||||||||
|
Market gains and losses/reinvestment
|
7.6 | 4.8 | 2.8 | — | ||||||||||||
|
Acquisitions/dispositions, net
|
14.4 | 13.7 | 0.7 | — | ||||||||||||
|
Foreign currency translation
|
1.5 | — | 1.5 | — | ||||||||||||
|
|
||||||||||||||||
|
December 31, 2010 AUM
|
80.8 | 70.5 | 10.3 | — | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
January 1, 2009 AUM
(2)
|
30.5 | 27.1 | 3.4 | — | ||||||||||||
|
Long-term inflows
|
40.4 | 40.1 | 0.3 | — | ||||||||||||
|
Long-term outflows
|
(29.6 | ) | (29.6 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
10.8 | 10.5 | 0.3 | — | ||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | ||||||||||||
|
Market gains and losses/reinvestment
|
11.4 | 10.3 | 1.1 | — | ||||||||||||
|
Foreign currency translation
|
0.3 | 0.1 | 0.2 | — | ||||||||||||
|
|
||||||||||||||||
|
December 31, 2009 AUM
|
53.0 | 48.0 | 5.0 | — | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
January 1, 2008 AUM
(2)
|
45.3 | 41.1 | 4.2 | — | ||||||||||||
|
Long-term inflows
|
70.5 | 70.3 | 0.2 | — | ||||||||||||
|
Long-term outflows
|
(66.9 | ) | (66.9 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
3.6 | 3.4 | 0.2 | — | ||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | ||||||||||||
|
Market gains and losses/reinvestment
|
(17.8 | ) | (17.4 | ) | (0.4 | ) | — | |||||||||
|
Foreign currency translation
|
(0.6 | ) | — | (0.6 | ) | — | ||||||||||
|
|
||||||||||||||||
|
December 31, 2008 AUM
|
30.5 | 27.1 | 3.4 | — | ||||||||||||
|
|
||||||||||||||||
| See accompanying notes to these AUM tables on the following page. |
32
Table of Contents
Total AUM by Asset Class
(3)
| Fixed | Money | |||||||||||||||||||||||
| $ in billions | Total | Equity | Income | Balanced | Market | Alternatives (4) | ||||||||||||||||||
|
January 1, 2010 AUM
|
459.5 | 192.7 | 76.1 | 39.9 | 83.5 | 67.3 | ||||||||||||||||||
|
Long-term inflows
|
154.7 | 95.8 | 32.7 | 8.2 | 1.5 | 16.5 | ||||||||||||||||||
|
Long-term outflows
|
(149.2 | ) | (104.4 | ) | (19.1 | ) | (7.4 | ) | (1.9 | ) | (16.4 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
5.5 | (8.6 | ) | 13.6 | 0.8 | (0.4 | ) | 0.1 | ||||||||||||||||
|
Net flows in institutional money market funds
|
(15.5 | ) | — | — | — | (15.5 | ) | — | ||||||||||||||||
|
Market gains and losses/reinvestment
|
43.9 | 33.4 | 4.2 | 2.5 | 0.1 | 3.7 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
121.5 | 75.1 | 37.9 | 0.3 | 0.6 | 7.6 | ||||||||||||||||||
|
Foreign currency translation
|
1.6 | 1.5 | 0.1 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2010 AUM
|
616.5 | 294.1 | 131.9 | 43.5 | 68.3 | (5) | 78.7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
January 1, 2009 AUM
(2)
|
377.1 | 140.7 | 61.4 | 31.7 | 84.2 | 59.1 | ||||||||||||||||||
|
Long-term inflows
|
106.1 | 58.4 | 19.4 | 8.2 | 2.2 | 17.9 | ||||||||||||||||||
|
Long-term outflows
|
(89.5 | ) | (55.2 | ) | (12.6 | ) | (8.0 | ) | (3.1 | ) | (10.6 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
16.6 | 3.2 | 6.8 | 0.2 | (0.9 | ) | 7.3 | |||||||||||||||||
|
Net flows in institutional money market funds
|
(0.1 | ) | — | — | — | (0.1 | ) | — | ||||||||||||||||
|
Market gains and losses/reinvestment
|
54.7 | 42.1 | 6.5 | 6.0 | — | 0.1 | ||||||||||||||||||
|
Foreign currency translation
|
11.2 | 6.7 | 1.4 | 2.0 | 0.3 | 0.8 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009 AUM
|
459.5 | 192.7 | 76.1 | 39.9 | 83.5 | 67.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
January 1, 2008 AUM
(2)
|
529.3 | 269.6 | 69.1 | 45.9 | 75.3 | 69.4 | ||||||||||||||||||
|
Long-term inflows
|
136.5 | 93.2 | 14.8 | 8.9 | 3.9 | 15.7 | ||||||||||||||||||
|
Long-term outflows
|
(156.8 | ) | (109.4 | ) | (17.5 | ) | (10.2 | ) | (3.6 | ) | (16.1 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
(20.3 | ) | (16.2 | ) | (2.7 | ) | (1.3 | ) | 0.3 | (0.4 | ) | |||||||||||||
|
Net flows in institutional money market funds
|
8.4 | — | — | — | 8.4 | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
(113.0 | ) | (94.7 | ) | (2.5 | ) | (8.5 | ) | 0.7 | (8.0 | ) | |||||||||||||
|
Foreign currency translation
|
(27.3 | ) | (18.0 | ) | (2.5 | ) | (4.4 | ) | (0.5 | ) | (1.9 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
|
377.1 | 140.7 | 61.4 | 31.7 | 84.2 | 59.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| See accompanying notes to these AUM tables on the following page. |
33
Table of Contents
ETF, UIT and Passive AUM by Asset Class
(3)
| Fixed | Money | |||||||||||||||||||||||
| $ in billions | Total | Equity | Income | Balanced | Market | Alternatives (4) | ||||||||||||||||||
|
January 1, 2010 AUM
|
53.0 | 31.1 | 4.0 | — | — | 17.9 | ||||||||||||||||||
|
Long-term inflows
|
70.1 | 56.5 | 7.4 | — | — | 6.2 | ||||||||||||||||||
|
Long-term outflows
|
(65.8 | ) | (56.3 | ) | (1.4 | ) | — | — | (8.1 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
4.3 | 0.2 | 6.0 | — | — | (1.9 | ) | |||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
7.6 | 5.6 | 0.6 | — | — | 1.4 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
14.4 | 4.5 | 9.2 | — | — | 0.7 | ||||||||||||||||||
|
Foreign currency translation
|
1.5 | 1.4 | — | — | — | 0.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2010 AUM
|
80.8 | 42.8 | 19.8 | — | — | 18.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
January 1, 2009 AUM
(2)
|
30.5 | 21.6 | 0.9 | — | — | 8.0 | ||||||||||||||||||
|
Long-term inflows
|
40.4 | 26.4 | 2.5 | — | — | 11.5 | ||||||||||||||||||
|
Long-term outflows
|
(29.6 | ) | (25.7 | ) | — | — | — | (3.9 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
10.8 | 0.7 | 2.5 | — | — | 7.6 | ||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
11.4 | 8.8 | 0.6 | — | — | 2.0 | ||||||||||||||||||
|
Foreign currency translation
|
0.3 | — | — | — | — | 0.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009 AUM
|
53.0 | 31.1 | 4.0 | — | — | 17.9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
January 1, 2008 AUM
(2)
|
45.3 | 37.3 | 0.1 | — | — | 7.9 | ||||||||||||||||||
|
Long-term inflows
|
70.5 | 61.8 | 0.9 | — | — | 7.8 | ||||||||||||||||||
|
Long-term outflows
|
(66.9 | ) | (61.1 | ) | — | — | — | (5.8 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
3.6 | 0.7 | 0.9 | — | — | 2.0 | ||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
(17.8 | ) | (16.4 | ) | (0.1 | ) | — | — | (1.3 | ) | ||||||||||||||
|
Foreign currency translation
|
(0.6 | ) | — | — | — | — | (0.6 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
|
30.5 | 21.6 | 0.9 | — | — | 8.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| See accompanying notes to these AUM tables on the following page. |
34
Table of Contents
Total AUM by Client Domicile
(6)
| Continental | ||||||||||||||||||||||||
| $ in billions | Total | U.S. | Canada | U.K. | Europe | Asia | ||||||||||||||||||
|
January 1, 2010 AUM
|
459.5 | 294.1 | 29.0 | 84.9 | 24.4 | 27.1 | ||||||||||||||||||
|
Long-term inflows
|
154.7 | 94.1 | 2.1 | 16.2 | 15.7 | 26.6 | ||||||||||||||||||
|
Long-term outflows
|
(149.2 | ) | (88.8 | ) | (6.8 | ) | (14.1 | ) | (12.3 | ) | (27.2 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
5.5 | 5.3 | (4.7 | ) | 2.1 | 3.4 | (0.6 | ) | ||||||||||||||||
|
Net flows in institutional money market funds
|
(15.5 | ) | (16.5 | ) | — | (1.5 | ) | 3.5 | (1.0 | ) | ||||||||||||||
|
Market gains and losses/reinvestment
|
43.9 | 30.0 | 2.2 | 7.0 | 2.0 | 2.7 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
121.5 | 102.6 | 0.1 | 1.8 | 2.9 | 14.1 | ||||||||||||||||||
|
Foreign currency translation
|
1.6 | (0.1 | ) | 1.3 | (2.2 | ) | (0.9 | ) | 3.5 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2010 AUM
|
616.5 | 415.4 | 27.9 | 92.1 | 35.3 | 45.8 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
January 1, 2009 AUM
(2)
|
377.1 | 252.7 | 23.8 | 57.1 | 22.3 | 21.2 | ||||||||||||||||||
|
Long-term inflows
|
106.1 | 68.7 | 1.9 | 18.4 | 9.9 | 7.2 | ||||||||||||||||||
|
Long-term outflows
|
(89.5 | ) | (58.3 | ) | (5.3 | ) | (7.5 | ) | (10.8 | ) | (7.6 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
16.6 | 10.4 | (3.4 | ) | 10.9 | (0.9 | ) | (0.4 | ) | |||||||||||||||
|
Net flows in institutional money market funds
|
(0.1 | ) | 2.8 | (0.1 | ) | — | (1.4 | ) | (1.4 | ) | ||||||||||||||
|
Market gains and losses/reinvestment
|
54.7 | 28.2 | 4.4 | 11.2 | 3.8 | 7.1 | ||||||||||||||||||
|
Foreign currency translation
|
11.2 | — | 4.3 | 5.7 | 0.6 | 0.6 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009 AUM
|
459.5 | 294.1 | 29.0 | 84.9 | 24.4 | 27.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
January 1, 2008 AUM
(2)
|
529.3 | 318.8 | 46.3 | 90.9 | 36.2 | 37.1 | ||||||||||||||||||
|
Long-term inflows
|
136.5 | 99.9 | 3.0 | 17.0 | 10.7 | 5.9 | ||||||||||||||||||
|
Long-term outflows
|
(156.8 | ) | (108.4 | ) | (9.7 | ) | (10.0 | ) | (17.1 | ) | (11.6 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
(20.3 | ) | (8.5 | ) | (6.7 | ) | 7.0 | (6.4 | ) | (5.7 | ) | |||||||||||||
|
Net flows in institutional money market funds
|
8.4 | 4.1 | — | (0.7 | ) | 2.1 | 2.9 | |||||||||||||||||
|
Market gains and losses/reinvestment
|
(113.0 | ) | (61.7 | ) | (8.5 | ) | (21.5 | ) | (8.1 | ) | (13.2 | ) | ||||||||||||
|
Foreign currency translation
|
(27.3 | ) | — | (7.3 | ) | (18.6 | ) | (1.5 | ) | 0.1 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
|
377.1 | 252.7 | 23.8 | 57.1 | 22.3 | 21.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| See accompanying notes to these AUM tables on the following page. |
35
Table of Contents
ETF, UIT and Passive AUM by Client Domicile
(6)
| Continental | ||||||||||||||||||||||||
| $ in billions | Total | U.S. | Canada | U.K. | Europe | Asia (7) | ||||||||||||||||||
|
January 1, 2010 AUM
|
53.0 | 50.4 | — | — | 1.0 | 1.6 | ||||||||||||||||||
|
Long-term inflows
|
70.1 | 54.1 | — | — | 0.2 | 15.8 | ||||||||||||||||||
|
Long-term outflows
|
(65.8 | ) | (46.9 | ) | — | — | (0.3 | ) | (18.6 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
4.3 | 7.2 | — | — | (0.1 | ) | (2.8 | ) | ||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
7.6 | 6.2 | — | — | 0.2 | 1.2 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
14.4 | 13.7 | — | — | — | 0.7 | ||||||||||||||||||
|
Foreign currency translation
|
1.5 | — | — | — | — | 1.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2010 AUM
|
80.8 | 77.5 | — | — | 1.1 | 2.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
January 1, 2009 AUM
(2)
|
30.5 | 29.0 | — | — | 0.5 | 1.0 | ||||||||||||||||||
|
Long-term inflows
|
40.4 | 40.0 | — | — | 0.4 | — | ||||||||||||||||||
|
Long-term outflows
|
(29.6 | ) | (29.5 | ) | — | — | (0.1 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
10.8 | 10.5 | — | — | 0.3 | — | ||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
11.4 | 10.8 | — | — | 0.2 | 0.4 | ||||||||||||||||||
|
Foreign currency translation
|
0.3 | 0.1 | — | — | — | 0.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009 AUM
|
53.0 | 50.4 | — | — | 1.0 | 1.6 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
January 1, 2008 AUM
(2)
|
45.3 | 42.9 | — | — | 0.3 | 2.1 | ||||||||||||||||||
|
Long-term inflows
|
70.5 | 69.9 | — | — | 0.6 | — | ||||||||||||||||||
|
Long-term outflows
|
(66.9 | ) | (66.5 | ) | — | — | (0.4 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
3.6 | 3.4 | — | — | 0.2 | — | ||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
(17.8 | ) | (17.2 | ) | — | — | — | (0.6 | ) | |||||||||||||||
|
Foreign currency translation
|
(0.6 | ) | (0.1 | ) | — | — | — | (0.5 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
|
30.5 | 29.0 | — | — | 0.5 | 1.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| (1) | Channel refers to the distribution channel from which the AUM originated. Retail AUM arose from client investments into funds available to the public with shares or units. Institutional AUM originated from individual corporate clients, endowments, foundations, government authorities, universities, or charities. Private Wealth Management AUM arose from high net worth client investments. | |
| (2) | The beginning balances were adjusted to reflect certain asset reclassifications, including the previously discussed AUM reporting alignment to include ETF, UIT and passive AUM. | |
| (3) | Asset classes are descriptive groupings of AUM by common type of underlying investments. | |
| (4) | See Part I, Item 1, “Business — Objectives by Asset Class” for a description of the investment objectives included within the Alternatives asset class. | |
| (5) | Ending Money Market AUM includes $64.2 billion in institutional money market AUM and $4.1 billion in retail money market AUM. | |
| (6) | Client domicile disclosure groups AUM by the domicile of the underlying clients. | |
| (7) | Net flows in Asia in 2010 were driven by an inflow of $15.8 billion in the three months ended June 30, 2010 and an outflow of $18.6 billion in the three months ended December 31, 2010 related to a passive mandate in Japan which was a post-close direct consequence of the acquired business. |
36
Table of Contents
Results of Operations for the Year Ended December 31, 2010, compared with the Year Ended December 31, 2009
Adoption of Guidance now encompassed in Accounting Standards Codification (ASC) Topic 810,
“Consolidation”
The company provides investment management services to, and has transactions with, various
private equity, real estate, fund-of-funds, collateralized loan obligation products (CLOs), and
other investment entities sponsored by the company for the investment of client assets in the
normal course of business. The company serves as the investment manager, making day-to-day
investment decisions concerning the assets of the products. Certain of these entities are
consolidated under variable interest or voting interest entity consolidation guidance. See Part II,
Item 8, Financial Statements and Supplementary Data — Note 1, “Accounting Policies” and Note 20,
“Consolidated Investment Products,” for additional details.
The guidance now encompassed in ASC Topic 810, which was effective January 1, 2010, had a
significant impact on the presentation of the company’s financial statements in 2010, as its
provisions required the company to consolidate certain CLOs that were not previously consolidated.
In accordance with the standard, prior periods have not been restated to reflect the consolidation
of these CLOs.
The majority of the company’s consolidated investment products balances were CLO-related as of
December 31, 2010. The collateral assets of the CLOs are held solely to satisfy the obligations of
the CLOs. The company has no right to the benefits from, nor does it bear the risks associated
with, the collateral assets held by the CLOs, beyond the company’s minimal direct investments in,
and management fees generated from, the CLOs. If the company were to liquidate, the collateral
assets would not be available to the general creditors of the company, and as a result, the company
does not consider them to be company assets. Additionally, the investors in the CLOs have no
recourse to the general credit of the company for the notes issued by the CLOs. The company
therefore does not consider this debt to be a company liability. The discussion that follows will
separate consolidated investment product results of operations from the company’s investment
management operations through the use of non-GAAP financial measures. See “Schedule of Non-GAAP
Information” for additional details and reconciliations of the most directly comparable U.S. GAAP
measures to the non-GAAP measures.
37
Table of Contents
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation (1) | Products (2) | Adjustments (1)(3) | Total | ||||||||||||
|
Year ended December 31, 2010
|
||||||||||||||||
|
Total operating revenues
|
3,532.7 | 0.3 | (45.3 | ) | 3,487.7 | |||||||||||
|
Total operating expenses
|
2,887.8 | 55.3 | (45.3 | ) | 2,897.8 | |||||||||||
|
|
||||||||||||||||
|
Operating income
|
644.9 | (55.0 | ) | — | 589.9 | |||||||||||
|
Equity in earnings of unconsolidated affiliates
|
40.8 | — | (0.6 | ) | 40.2 | |||||||||||
|
Interest and dividend income
|
10.4 | 246.0 | (5.1 | ) | 251.3 | |||||||||||
|
Other investment income/(losses)
|
15.6 | 107.6 | 6.4 | 129.6 | ||||||||||||
|
Interest expense
|
(58.6 | ) | (123.7 | ) | 5.1 | (177.2 | ) | |||||||||
|
|
||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
653.1 | 174.9 | 5.8 | 833.8 | ||||||||||||
|
Income tax provision
|
(197.0 | ) | — | — | (197.0 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
456.1 | 174.9 | 5.8 | 636.8 | ||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.2 | ) | (170.8 | ) | (0.1 | ) | (171.1 | ) | ||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
455.9 | 4.1 | 5.7 | 465.7 | ||||||||||||
|
|
||||||||||||||||
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation (1) | Products (2) | Adjustments (3) | Total | ||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||
|
Total operating revenues
|
2,633.3 | 1.9 | (7.9 | ) | 2,627.3 | |||||||||||
|
Total operating expenses
|
(2,139.5 | ) | (11.4 | ) | 7.9 | (2,143.0 | ) | |||||||||
|
|
||||||||||||||||
|
Operating income
|
493.8 | (9.5 | ) | — | 484.3 | |||||||||||
|
Equity in earnings of unconsolidated affiliates
|
24.5 | — | 2.5 | 27.0 | ||||||||||||
|
Interest and dividend income
|
9.8 | — | — | 9.8 | ||||||||||||
|
Other investment income/(losses)
|
7.8 | (106.9 | ) | — | (99.1 | ) | ||||||||||
|
Interest expense
|
(64.5 | ) | — | — | (64.5 | ) | ||||||||||
|
|
||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
471.4 | (116.4 | ) | 2.5 | 357.5 | |||||||||||
|
Income tax provision
|
(148.2 | ) | — | — | (148.2 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
323.2 | (116.4 | ) | 2.5 | 209.3 | |||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.7 | ) | 113.9 | — | 113.2 | |||||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
322.5 | (2.5 | ) | 2.5 | 322.5 | |||||||||||
|
|
||||||||||||||||
| (1) | The Before Consolidation column includes Invesco’s equity interests in the investment products accounted for as equity method (private equity and real estate partnership funds) and available-for-sale investments (CLOs). Upon consolidation of the CLOs, the company’s and the CLOs’ accounting policies were effectively aligned, resulting in the reclassification of the company’s gain for the year ended December 31, 2010 of $6.4 million (representing the increase in the market value of the company’s holding in the consolidated CLOs) from other comprehensive income into other gains/losses. The company’s gain on its investment in the CLOs (before consolidation) eliminates with the company’s share of the offsetting loss on the CLOs’ debt. The net income arising from consolidation of CLOs is therefore completely attributed to other investors in these CLOs, as the company’s share has been eliminated through consolidation. The Before Consolidation column does not include any other adjustments related to non-GAAP financial measure presentation. | |
| (2) | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010 resulting in the consolidation of certain CLOs. In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. Prior to January 1, 2010, the company was not deemed to be the primary beneficiary of these CLOs. | |
| (3) | Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company. |
38
Table of Contents
Operating Revenues and Net Revenues
The main categories of revenues, and the dollar and percentage change between the periods, are
as follows:
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Investment management fees
|
2,720.9 | 2,120.2 | 600.7 | 28.3 | % | |||||||||||
|
Service and distribution fees
|
645.5 | 412.6 | 232.9 | 56.4 | % | |||||||||||
|
Performance fees
|
26.1 | 30.0 | (3.9 | ) | (13.0 | )% | ||||||||||
|
Other
|
95.2 | 64.5 | 30.7 | 47.6 | % | |||||||||||
|
|
||||||||||||||||
|
Total operating revenues
|
3,487.7 | 2,627.3 | 860.4 | 32.7 | % | |||||||||||
|
Third-party distribution, service and advisory expenses
|
(972.7 | ) | (693.4 | ) | 279.3 | 40.3 | % | |||||||||
|
Proportional share of revenues, net of third-party
distribution expenses, from joint venture investments
|
42.2 | 44.7 | (2.5 | ) | (5.6 | )% | ||||||||||
|
Management fees earned from consolidated investment products
|
45.3 | 8.0 | 37.3 | N/A | ||||||||||||
|
Other revenues recorded by consolidated investment products
|
(0.3 | ) | (2.0 | ) | 1.7 | 85.0 | % | |||||||||
|
|
||||||||||||||||
|
Net revenues
|
2,602.2 | 1,984.6 | 617.6 | 31.1 | % | |||||||||||
|
|
||||||||||||||||
Operating revenues increased by 32.7% in 2010 to $3,487.7 million (year ended December 31,
2009: $2,627.3 million). Net revenues increased by 31.1% in 2010 to $2,602.2 million (year ended
December 31, 2009: $1,984.6 million). Net revenues are operating revenues less third-party
distribution, service and advisory expenses, plus our proportional share of net revenues from joint
venture arrangements. See “Schedule of Non-GAAP Information” for additional important disclosures
regarding the use of net revenues. A significant portion of our business and managed AUM are based
outside of the U.S. The income statements of foreign currency subsidiaries are translated into U.S.
dollars, the reporting currency of the company, using average foreign exchange rates. The impact of
foreign exchange rate movements accounted for $18.0 million (2.1%) of the increase in operating
revenues, and was 0.5% of total operating revenues, during the year ended December 31, 2010 when
compared to the year ended December 31, 2009. Additionally, our revenues are directly influenced by
the level and composition of our AUM as more fully discussed below. Movements in global capital
market levels, net new business inflows (or outflows) and changes in the mix of investment products
between asset classes and geographies may materially affect our revenues from period to period.
As discussed in the company’s Form 10-Q filings for the June 30, 2010 and September 30, 2010
periods, the company acquired Morgan Stanley’s retail asset management business, including Van
Kampen Investments (the “acquired business” or the “acquisition”) on June 1, 2010. The acquisition
had a significant impact on our results for the 2010 period. The operating results for the year
ended December 31, 2010 include the operating results of the acquired business from the purchase
date of June 1, 2010 through December 31, 2010. The integration of the acquired business is largely
complete; as such, accurate segregated expense information for the acquired business is not
available. Prior to any significant product mergers, revenues associated with the acquired business
can be separately identified, and as a result, the impact can be estimated. Operating revenues of
the acquired business for the year ended December 31, 2010 were approximately $468 million, which
represents the incremental impact of the acquired business and does not represent the stand-alone
results of the acquired business.
Investment Management Fees
Investment management fees are derived from providing professional services to manage client
accounts and include fees earned from retail mutual funds, unit trusts, investment companies with
variable capital (ICVCs), exchange-traded funds, investment trusts and institutional and private
wealth management advisory contracts. Investment management fees for products offered in the retail
distribution channel are generally calculated as a percentage of the daily average asset balances
and therefore vary as the levels of AUM change resulting from inflows, outflows and market
movements. Investment management fees for products offered in the institutional and private wealth
management distribution channels are calculated in accordance with the underlying investment
management contracts and also vary over contractually determined periods in relation to the level
of client assets managed.
Investment management fees increased by $600.7 million (28.3%) in the year ended December 31,
2010, to $2,720.9 million (year ended December 31, 2009: $2,120.2 million) due to the acquisition,
increases in average AUM, primarily retail AUM, changes in the mix of AUM between asset classes and
foreign exchange rate movement. The acquisition contributed to the increase in investment
management fees with an estimated $257 million in these fees during the year ended December 31,
2010. Average long-term AUM, which generally earn higher fee rates than money market AUM, increased
41.0% to $463.5 billion for the year ended December 31, 2010 from $328.8 billion for the year ended
December 31, 2009, while average institutional money market AUM decreased 20.9% to $68.8 billion
for the year ended December 31, 2010 from $87.0 billion for the year ended December 31, 2009. The
increase in average
39
Table of Contents
long-term AUM includes the impact of the acquired business. See the company’s disclosures
regarding the changes in AUM during the year ended December 31, 2010 in the “Assets Under
Management” section above for additional information regarding the movements in AUM. Foreign
exchange rate movements led to an increase in investment management fees of $17.0 million (2.8%)
during the year ended December 31, 2010 as compared to the year ended December 31, 2009.
Additionally, the change in investment management fee revenues reflects the adoption of
guidance now encompassed in ASC Topic 810 on January 1, 2010. As part of the consolidation,
management fees earned from consolidated CLOs and other products of $45.3 million were eliminated
from the company’s operating revenues for the year ended December 31, 2010. In accordance with the
standard, prior periods have not been restated to reflect the consolidation of these CLOs. The
company uses a non-GAAP financial measure, net revenues, to add back these eliminated management
fees as part of net revenues, as the company has earned them for providing investment management
services to the consolidated investment products. See “Schedule of Non-GAAP Information” for the
reconciliation of operating revenues to net revenues.
Service and Distribution Fees
Service fees are generated through fees charged to cover several types of expenses, including
fund accounting fees and other maintenance costs for mutual funds, unit trusts and ICVCs, and
administrative fees earned from closed-ended funds. Service fees also include transfer agent fees,
which are fees charged to cover the expense of processing client share purchases and redemptions,
call center support and client reporting. U.S. distribution fees include 12b-1 fees earned from
certain mutual funds to cover allowable sales and marketing expenses for those funds and also
include asset-based sales charges paid by certain mutual funds for a period of time after the sale
of those funds. Distribution fees typically vary in relation to the amount of client assets
managed. Generally, retail products offered outside of the U.S. do not generate a separate
distribution fee, as the quoted management fee rate is inclusive of these services.
In 2010, service and distribution fees increased by $232.9 million (56.4%) to $645.5 million
(year ended December 31, 2009: $412.6 million). The acquisition contributed an estimated $172
million of the increase in service and distribution fees in the year ended December 31, 2010. The
remaining increase is largely attributable to the increase in average AUM during the year.
Performance Fees
Performance fee revenues are generated on certain management contracts when performance
hurdles are achieved. Such fee revenues are recorded in operating revenues as of the performance
measurement date, when the contractual performance criteria have been met and when the outcome of
the transaction can be measured reliably in accordance with Method 1 of ASC Topic 605-20-S99,
“Revenue Recognition — Services — SEC Materials.” Cash receipt of earned performance fees occurs
after the measurement date. The performance measurement date is defined in each contract in which
incentive and performance fee revenue agreements are in effect. We have performance fee
arrangements that include monthly, quarterly and annual measurement dates. Given the uniqueness of
each transaction, performance fee contracts are evaluated on an individual basis to determine if
revenues can and should be recognized. Performance fees are not recorded if there are any future
performance contingencies. If performance arrangements require repayment of the performance fee for
failure to perform during the contractual period, then performance fee revenues are recognized no
earlier than the expiration date of these terms. Performance fees will fluctuate from period to
period and may not correlate with general market changes, since most of the fees are driven by
relative performance to the respective benchmark rather than by absolute performance. Of our $616.5
billion in AUM at December 31, 2010, only approximately $36.8 billion, or 5.9%, could potentially
earn performance fees. Of the $114.6 billion AUM acquired on June 1, 2010 through the acquisition,
$2.7 billion, or 2.4%, are eligible to earn performance fees.
In the year ended December 31, 2010, performance fees decreased by $3.9 million (13.0%) to
$26.1 million (year ended December 31, 2009: $30.0 million). The performance fees generated in 2010
arose primarily due to products managed by the European Real Estate group ($4.3 million), Invesco
Perpetual ($3.4 million), and Atlantic Trust ($11.8 million). The performance fees generated in
2009 arose primarily due to products managed by the Invesco Global Strategies group ($2.4 million),
Invesco Perpetual ($13.4 million), and Atlantic Trust ($5.7 million).
Other Revenues
Other revenues include fees derived from our UIT operations, transaction commissions earned
upon the sale of new investments into certain of our funds, and fees earned upon the completion of
transactions in our direct real estate and private equity asset groups. Real estate transaction
fees are derived from commissions earned through the buying and selling of properties. Private
equity
40
Table of Contents
transaction fees include commissions associated with the restructuring of, and fees from
providing advice to, portfolio companies held by the funds. These transaction fees are recorded in
our financial statements on the date when the transactions are legally closed. Other revenues also
include the revenues of consolidated investment products.
Following the acquisition, the company is the sponsor of UITs. In its capacity as sponsor of
UITs, the company earns other revenues related to transactional sales charges resulting from the
sale of UIT products and from the difference between the purchase or bid and offer price of
securities temporarily held to form new UIT products. These revenues are recorded as other revenues
net of concessions to dealers who distribute UITs to investors.
In the year ended December 31, 2010, other revenues increased by $30.7 million (47.6%) to
$95.2 million (year ended December 31, 2009: $64.5 million). Increases in other revenues included
$38.9 million in UIT revenues during the year, a result of the acquired business, and higher real
estate acquisition and disposition fees of $2.4 million which were offset by a $5.2 million decline
in transaction commissions.
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses include periodic “renewal” commissions
paid to brokers and independent financial advisors for their continuing oversight of their clients’
assets, over the time they are invested, and are payments for the servicing of client accounts.
Renewal commissions are calculated based upon a percentage of the AUM value. Third-party
distribution expenses also include the amortization of upfront commissions paid to broker-dealers
for sales of fund shares with a contingent deferred sales charge (a charge levied to the investor
for client redemption of AUM within a certain contracted period of time). The distribution
commissions are amortized over the redemption period. Also included in third-party distribution,
service and advisory expenses are sub-transfer agency fees that are paid to third parties for
processing client share purchases and redemptions, call center support and client reporting.
Third-party distribution, service and advisory expenses may increase or decrease at a rate
different from the rate of change in service and distribution fee revenues due to the inclusion of
distribution, service and advisory expenses for the U.K. and Canada, where the related revenues are
recorded as investment management fee revenues, as noted above.
Third-party distribution, service and advisory expenses increased by $279.3 million (40.3%) in
the year ended December 31, 2010 to $972.7 million (year ended December 31, 2009: $693.4 million),
which is consistent with the increase in investment management and service and distribution fee
revenues. Foreign exchange rate movements increased third-party distribution, service and advisory
expenses by $5.3 million (1.9%) during the year ended December 31, 2010 as compared to the year
ended December 31, 2009.
Proportional share of revenues, net of third-party distribution expenses, from joint venture
investments
Management believes that the addition of our proportional share of revenues, net of
third-party distribution expenses, from joint venture arrangements should be added to operating
revenues to arrive at net revenues, as it is important to evaluate the contribution to the business
that our joint venture arrangements are making. See “Schedule of Non-GAAP Information” for
additional disclosures regarding the use of net revenues. The company’s most significant joint
venture arrangement is our 49.0% investment in Invesco Great Wall Fund Management Company Limited
(the “Invesco Great Wall” joint venture).
The 5.6% decrease in our proportional share of revenues, net of third-party distribution
expenses, to $42.2 million in 2010 (year ended December 31, 2009: $44.7 million), is driven by the
decline in average AUM of the Invesco Great Wall joint venture. Our share of the Invesco Great Wall
joint venture’s average AUM for the year ended December 31, 2010, was $3.6 billion, a 2.7% decline
in average AUM from $3.7 billion for the year ended December 31, 2009.
Management fees earned from consolidated investment products
Management believes that the consolidation of investment products may impact a reader’s
analysis of our underlying results of operations and could result in investor confusion or the
production of information about the company by analysts or external credit rating agencies that is
not reflective of the underlying results of operations and financial condition of the company.
Accordingly, management believes that it is appropriate to adjust operating revenues for the impact
of consolidated investment products in calculating net revenues. As management and performance fees
earned by Invesco from the consolidated products are eliminated upon consolidation of the
investment products, management believes that it is appropriate to add these operating revenues
back in the calculation of net revenues. See “Schedule of Non-GAAP Information” for additional
disclosures regarding the use of net revenues.
41
Table of Contents
Management fees earned from consolidated investment products increased by $37.3 million to
$45.3 million in the year ended December 31, 2010 (year ended December 31, 2009: $8.0 million). The
increase reflects the adoption of guidance now encompassed in ASC Topic 810 on January 1, 2010. CLO
management fees of $35.4 million were eliminated from the company’s operating revenues for the year
ended December 31, 2010. In accordance with the standard, prior periods have not been restated to
reflect the consolidation of these CLOs.
Other revenues recorded by consolidated investment products
Operating revenues of consolidated investment products are included in U.S. GAAP operating
revenues resulting from the consolidation of investment products into the company’s results of
operations. Management believes that this consolidation could impact a reader’s analysis of our
underlying results of operations. Therefore, management believes that it is appropriate to deduct
operating revenues of consolidated investment products in calculating net revenues. See “Schedule
of Non-GAAP Information” for additional disclosures regarding the use of net revenues.
Operating Expenses
The main categories of operating expenses are as follows:
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Employee compensation
|
1,114.9 | 950.8 | 164.1 | 17.3 | % | |||||||||||
|
Third-party distribution, service and advisory
|
972.7 | 693.4 | 279.3 | 40.3 | % | |||||||||||
|
Marketing
|
159.6 | 108.9 | 50.7 | 46.6 | % | |||||||||||
|
Property, office and technology
|
238.4 | 212.3 | 26.1 | 12.3 | % | |||||||||||
|
General and administrative
|
262.2 | 166.8 | 95.4 | 57.2 | % | |||||||||||
|
Transaction and integration
|
150.0 | 10.8 | 139.2 | N/A | ||||||||||||
|
|
||||||||||||||||
|
Total operating expenses
|
2,897.8 | 2,143.0 | 754.8 | 35.2 | % | |||||||||||
|
|
||||||||||||||||
The table below sets forth these expense categories as a percentage of total operating
expenses and operating revenues, which we believe provides useful information as to the relative
significance of each type of expense.
| % of Total | % of | % of Total | % of | |||||||||||||||||||||
| Operating | Operating | Operating | Operating | |||||||||||||||||||||
| $ in millions | 2010 | Expenses | Revenues | 2009 | Expenses | Revenues | ||||||||||||||||||
|
Employee compensation
|
1,114.9 | 38.5 | % | 32.0 | % | 950.8 | 44.4 | % | 36.2 | % | ||||||||||||||
|
Third-party distribution, service and advisory
|
972.7 | 33.6 | % | 27.9 | % | 693.4 | 32.3 | % | 26.4 | % | ||||||||||||||
|
Marketing
|
159.6 | 5.5 | % | 4.6 | % | 108.9 | 5.1 | % | 4.1 | % | ||||||||||||||
|
Property, office and technology
|
238.4 | 8.2 | % | 6.8 | % | 212.3 | 9.9 | % | 8.1 | % | ||||||||||||||
|
General and administrative
|
262.2 | 9.0 | % | 7.5 | % | 166.8 | 7.8 | % | 6.3 | % | ||||||||||||||
|
Transaction and integration
|
150.0 | 5.2 | % | 4.3 | % | 10.8 | 0.5 | % | 0.4 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total operating expenses
|
2,897.8 | 100.0 | % | 83.1 | % | 2,143.0 | 100.0 | % | 81.5 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
During 2010, operating expenses increased by $754.8 million (35.2%) to $2,897.8 million (year
ended December 31, 2009: $2,143.0 million), reflecting increases in all cost categories from 2009
expense levels. As discussed above, the Morgan Stanley acquisition took place on June 1, 2010,
which increased expenses across all categories. As the integration of the acquired business is
largely complete, segregated expense data is not available.
In addition to the acquired business, foreign exchange differences have a large impact on our
expenses. A significant portion of our business and managed AUM are based outside of the U.S. The
income statements of foreign currency subsidiaries are translated into U.S. dollars, the reporting
currency of the company, using average foreign exchange rates. The impact of foreign exchange rate
movements accounted for $13.2 million (1.7%) of the increase in operating expenses, and was 0.5% of
total operating expenses, during the year ended December 31, 2010.
Employee Compensation
Employee compensation includes salary, cash bonuses and share-based payment plans designed to
attract and retain the highest caliber employees. Employee staff benefit plan costs and payroll
taxes are also included in employee compensation.
42
Table of Contents
Employee compensation increased $164.1 million (17.3%) to $1,114.9 million in the year ended
December 31, 2010 (year ended December 31, 2009: $950.8 million). Base salaries and variable
compensation increased $114.3 million during the year ended December 31, 2010 from the year ended
December 31, 2009 due to incremental costs associated with the acquisition, the impact of annual
merit increases, and the increase in variable compensation accruals to reflect the overall earnings
growth of the company, including improving operating results and sales. Included in compensation
expenses during the year ended December 31, 2010 are share-based costs of $114.1 million compared
to $90.8 million during the year ended December 31, 2009, also due to the incremental impact of the
acquisition and to the additional amortization of share awards granted February 28, 2010 as part of
the company’s annual share award cycle. Foreign exchange rate movement led to an increase in
employee compensation expenses of $6.3 million (3.9%) in the year ended December 31, 2010 compared
to the year ended December 31, 2009. Additionally, employee compensation costs for the year ended
December 31, 2010 and 2009 included $20.0 million of prepaid compensation amortization expenses
related to the 2006 acquisition of W.L. Ross & Co. This acquisition-related asset will be fully
amortized by the third quarter of 2011.
Headcount at December 31, 2010 was 5,617 (year ended December 31, 2009: 4,890). The
acquisition added 580 employees at June 1, 2010. Formal hiring of staff in our Hyderabad, India,
facility commenced with 83 individuals becoming our employees in late 2010. An additional 474
individuals became our employees by the date of this Report.
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses are discussed above in the operating
and net revenues section.
Marketing
Marketing expenses include marketing support payments, which are payments made to distributors
of certain of our retail products over and above the 12b-1 distribution payments. These fees are
calculated based on a percentage of assets and/or sales, will generally vary based on movements in
the markets or actual sales, and are contracted separately with each distributor. Marketing
expenses also include the cost of direct advertising of our products through trade publications,
television and other media, and public relations costs, such as the marketing of the company’s
products through conferences or other sponsorships, and the cost of marketing-related employee
travel.
Marketing expenses increased by $50.7 million (46.6%) in 2010 to $159.6 million (year ended
December 31, 2009: $108.9 million) due primarily to the increase in marketing support payments of
$37.4 million as compared to year ended December 31, 2009. Additionally, travel/client events and
sales literature/research expenses increased $11.3 million and $4.3 million, respectively, during
the year ended December 31, 2010 from the year ended December 31, 2009, offset by a decrease in
advertising expenses of $3.2 million during the year ended December 31, 2010 as compared to the
year ended December 31, 2009.
Property, Office and Technology
Property, office and technology expenses include rent and utilities for our various leased
facilities, depreciation of company-owned property and capitalized computer equipment costs, minor
non-capitalized computer equipment and software purchases and related maintenance payments, and
costs related to externally provided operations, technology, and other back office management
services.
Property, office and technology costs increased by $26.1 million (12.3%) to $238.4 million in
2010 from $212.3 million in 2009. Increases in property, office and technology costs include
increases in outsourced administration expense and depreciation expense of $14.7 million and $7.1
million, respectively, along with other additional costs resulting from the acquisition.
General and Administrative
General and administrative expenses include professional services costs, such as information
service subscriptions, consulting fees, professional insurance costs, audit, tax and legal fees,
non-marketing related employee travel expenditures, recruitment and training costs, and the
amortization of certain intangible assets.
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Table of Contents
General and administrative expenses increased by $95.4 million (57.2%) to $262.2 million in
2010 from $166.8 million in 2009, due to several factors, including an increase in amortization of
certain intangible assets related to the acquisition of $18.0 million, a charge recorded in the
three months ended December 31, 2010, relating to a levy from the UK Financial Services
Compensation Scheme of $15.3 million to cover claims resulting from failures of non-affiliated
investment firms, a charge representing reimbursement costs from the correction of historical
foreign exchange allocations in the fund accounting process that impacted the reporting of fund
performance of certain funds of $8.9 million, an increase in non-marketing travel and entertainment
costs of $10.4 million and an increase in market information services of $10.1 million for
increased services across the business. Additionally, general and administrative expenses increased
in 2010 from 2009 due to an insurance recovery received in 2009 related to legal costs associated
with the market-timing regulatory settlement which offset 2009 expenses by $9.5 million.
Transaction and integration
Transaction and integration expenses include acquisition-related charges incurred during the
period to effect a business combination, including legal, regulatory, advisory, valuation,
integration-related employee incentive awards and other professional or consulting fees, general
and administrative costs, including travel costs related to the transaction and the costs of
temporary staff involved in executing the transaction, and post-closing costs of integrating the
acquired business into the company’s existing operations. Additionally, transaction and integration
expenses include legal costs related to the defense of auction rate preferred securities complaints
raised in the pre-acquisition period with respect to various closed-end funds included in the
acquisition. See Item 3, “Legal Proceedings” for additional information.
Transaction and integration charges were $150.0 million in 2010, as compared to $10.8 million
in 2009 ($26.7 million of these costs were recorded in the three months ended December 31, 2010)
and relate primarily to the acquisition of Morgan Stanley’s retail asset management business,
including Van Kampen Investments. The acquisition was announced in October 2009 and closed on June
1, 2010. Transaction and integration charges incurred during the year ended December 31, 2010
include $39.1 million of staff costs, $53.4 million of technology contractor and related costs, and
$57.5 million of professional services, principally legal, proxy solicitation, consultancy and
insurance.
Operating Income, Adjusted Operating Income, Operating Margin and Adjusted Operating Margin
Operating income increased 21.8% to $589.9 million in 2010 from $484.3 million in 2009, driven
by the increase in operating revenues from increased AUM. Operating margin (operating income
divided by operating revenues) was 16.9% in 2010, down from 18.4% in 2009. Adjusted operating
margin increased to 34.5% in 2010 from 28.5% in 2009. See “Schedule of Non-GAAP Information” for a
reconciliation of operating revenues to net revenues, a reconciliation of operating income to
adjusted operating income and additional important disclosures regarding net revenues, adjusted
operating income and adjusted operating margin.
Other Income and Expenses
The main categories of other income and expenses, and the dollar and percentage changes
between periods are as follows:
| Year ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
40.2 | 27.0 | 13.2 | 48.9 | % | |||||||||||
|
Interest and dividend income
|
10.4 | 9.8 | 0.6 | 6.1 | % | |||||||||||
|
Interest income of consolidated investment products
|
240.9 | — | 240.9 | N/A | ||||||||||||
|
Gains/(losses) of consolidated investment products, net
|
114.0 | (106.9 | ) | 220.9 | N/A | |||||||||||
|
Interest expense
|
(58.6 | ) | (64.5 | ) | 5.9 | 9.1 | % | |||||||||
|
Interest expense of consolidated investment products
|
(118.6 | ) | — | (118.6 | ) | N/A | ||||||||||
|
Other gains and losses, net
|
15.6 | 7.8 | 7.8 | 100.0 | % | |||||||||||
|
|
||||||||||||||||
|
Total other income and expenses
|
243.9 | (126.8 | ) | 370.7 | N/A | |||||||||||
|
|
||||||||||||||||
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Table of Contents
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates increased by $13.2 million (48.9%) to $40.2
million in the year ended December 31, 2010 (year ended December 31, 2009: $27.0 million). Included
in equity in earnings from affiliates is our share of the income from our joint ventures in China,
which declined by $5.5 million to $23.9 million in the year ended December 31, 2010 from $29.4
million earned during the year ended December 31, 2009. Declines in equity in earnings from our
joint ventures are due to declines in average AUM in those entities during the year. Earnings from
our affiliate in Poland also decreased by $1.1 million to $1.1 million in year ended December 31,
2010 from $2.2 million earned in the year ended December 31, 2009. These declines were more than
offset by our share of the market-driven valuation changes in the underlying holdings of certain
partnership investments which increased by $19.6 million to $15.1 million earned in the year ended
December 31, 2010 from $4.5 million of losses during the year ended December 31, 2009.
Interest and dividend income and interest expense
Interest and dividend income increased by $0.6 million (6.1%) to $10.4 million in the year
ended December 31, 2010 (year ended December 31, 2009: $9.8 million). The year ended December 31,
2010 includes dividend income of $2.7 million on investments held to hedge economically deferred
compensation plans. This dividend income is passed through to employee participants in the deferred
compensation plans. See “Schedule of Non-GAAP Information” for additional details. Higher yields
during the year ended December 31, 2010 offset lower average cash and cash equivalent balances.
Interest expense decreased by $5.9 million (9.1%) to $58.6 million in the year ended December 31,
2010 (year ended December 31, 2009: $64.5 million). Higher average debt balances were more than
offset by lower average cost of debt during the year ended December 31, 2010 following the
restructuring of our debt versus the comparative period.
Interest income and interest expense of consolidated investment products
Interest income of consolidated investment products results from interest generated by the
collateral assets held by consolidated CLOs, which is used to satisfy the interest expenses of the
notes issued by the consolidated CLOs and other CLO operating expense requirements, including the
payment of the management and performance fees to the company as investment manager. See Part II,
Item 8, Financial Statements and Supplementary Data — Note 20, “Consolidated Investment Products,”
for additional details.
In the year ended December 31, 2010, interest income and interest expense of consolidated
investment products were $240.9 million and $118.6 million, respectively. The balances reflect the
adoption of guidance now encompassed in ASC Topic 810 on January 1, 2010. In accordance with the
standard, prior periods have not been restated to reflect the consolidation.
| Gains and losses of consolidated investment products, net income impact of consolidated investment products, and noncontrolling interests in consolidated entities |
Included in other income and expenses are gains and losses of consolidated investment
products, net, which are driven by realized and unrealized gains and losses of underlying
investments held by consolidated investment products. In the year ended December 31, 2010 other
gains and losses of consolidated investment products were a net gain of $114.0 million, as compared
to a net loss of $106.9 million in the year ended December 31, 2009. The net gain in the period is
primarily due to changes in market values of investments held by consolidated private equity funds.
As illustrated in the Condensed Consolidating Statements of Income for the year ended December
31, 2010 and 2009 at the beginning of this Results of Operations section, the consolidation of
investment products during the year ended December 31, 2010 resulted in an increase to net income
of $180.7 million before attribution to noncontrolling interests. Invesco invests in only a portion
of these products, and as a result this net gain is offset by noncontrolling interests of $170.9
million, resulting in a net increase in net income of the company of $9.8 million. Consolidated
investment products had no material net income impact to the company for the year ended December
31, 2009.
Noncontrolling interests in consolidated entities represent the profit or loss amounts
attributed to third party investors in consolidated investment products. Movements in amounts
attributable to noncontrolling interests in consolidated entities on the company’s Consolidated
Statements of Income generally offset the gains and losses, interest income and interest expense of
consolidated investment products.
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Table of Contents
Other gains and losses, net
Other gains and losses, net were a net gain of $15.6 million in the year ended December 31,
2010 as compared to a net gain of $7.8 million in the year ended December 31, 2009. Included in
other gains and losses is a net gain of $14.2 million as a result of the appreciation of assets
held for our deferred compensation plans (year ended December 31, 2009: none), together with $9.2
million of net realized gains from seed investments (year ended December 31, 2009: $3.7 million net
realized gains). The 2010 other gains and losses also included $6.6 million in other-than-temporary
impairment charges related to other seed money in affiliated funds (year ended December 31, 2009:
$3.0 million) and $0.4 million in other-than-temporary impairment charges related to the valuations
of investments in certain of our CLO products (year ended December 31, 2009: $5.2 million). In the
year ended December 31, 2010, we incurred $0.2 million in net foreign exchange losses (year ended
December 31, 2009: $8.4 million in net foreign exchange gains) on the revaluation of intercompany
foreign currency denominated loans into the various functional currencies of our subsidiaries. In
addition, included in the 2009 net gain is a gross gain generated upon a debt tender offer of $4.3
million ($3.3 million net of related expenses).
Income Tax Expense
Our subsidiaries operate in several taxing jurisdictions around the world, each with its own
statutory income tax rate. As a result, our effective tax rate will vary from year to year
depending on the mix of the profits and losses of our subsidiaries. The majority of our profits are
earned in the U.S., Canada and the U.K. The current U.K. statutory tax rate is 28%, the Canadian
statutory tax rate is 31% and the U.S. Federal statutory tax rate is 35%.
On December 14, 2007, legislation was enacted to reduce the Canadian income tax rate over five
years, which changed the rate to 33.5% in 2008 and 33.0% in 2009. The legislation was revised in
December 2009, further reducing the rate to 31.0% in 2010, 28.25% in 2011, 26.25% in 2012, 25.5% in
2013, and 25% thereafter. On July 27, 2010, legislation was introduced to reduce the UK income tax
rate to 27% on April 1, 2011. Further reductions to the rate are proposed to reduce the rate by 1%
per year to 24% by April 1, 2014. These reductions are expected to be introduced in future Finance
Bills for each annual reduction.
Our effective tax rate, excluding noncontrolling interests in consolidated entities, for 2010
was 29.7%, down from 31.5% for 2009. The rate decrease was primarily due to the mix of pre-tax
income and favorable adjustments to reconcile our tax provisions to reflect actual tax returns
filed. The rate decrease was partially offset by non-deductible transaction and integration costs
related to the acquired business and a smaller benefit from the release of provisions for uncertain
tax positions in 2010 versus 2009.
The inclusion of income from noncontrolling interests in consolidated entities decreased our
effective tax rate to 23.6% in 2010 and increased it to 41.5% in 2009. The 2009 rate was higher
than 2008 due to a larger impact from losses in non-controlling interests.
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Table of Contents
Results of Operations for the Year Ended December 31, 2009, compared with the Year Ended December
31, 2008
Condensed Consolidating Statements of Income
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation (1) | Products (2) | Adjustments (3) | Total | ||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||
|
Total operating revenues
|
2,633.3 | 1.9 | (7.9 | ) | 2,627.3 | |||||||||||
|
Total operating expenses
|
(2,139.5 | ) | (11.4 | ) | 7.9 | (2,143.0 | ) | |||||||||
|
|
||||||||||||||||
|
Operating income
|
493.8 | (9.5 | ) | — | 484.3 | |||||||||||
|
Equity in earnings of unconsolidated affiliates
|
24.5 | — | 2.5 | 27.0 | ||||||||||||
|
Interest and dividend income
|
9.8 | — | — | 9.8 | ||||||||||||
|
Other investment income/(losses)
|
7.8 | (106.9 | ) | — | (99.1 | ) | ||||||||||
|
Interest expense
|
(64.5 | ) | — | — | (64.5 | ) | ||||||||||
|
|
||||||||||||||||
|
Income before income taxes, including gains and losses attributable to
noncontrolling interests
|
471.4 | (116.4 | ) | 2.5 | 357.5 | |||||||||||
|
Income tax provision
|
(148.2 | ) | — | — | (148.2 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income, including gains and losses attributable to noncontrolling interests
|
323.2 | (116.4 | ) | 2.5 | 209.3 | |||||||||||
|
(Gains)/losses attributable to noncontrolling interests in consolidated
entities, net
|
(0.7 | ) | 113.9 | — | 113.2 | |||||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
322.5 | (2.5 | ) | 2.5 | 322.5 | |||||||||||
|
|
||||||||||||||||
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation (1) | Products (2) | Adjustments (3) | Total | ||||||||||||
|
Year ended December 31, 2008
|
||||||||||||||||
|
Total operating revenues
|
3,308.4 | 5.5 | (6.3 | ) | 3,307.6 | |||||||||||
|
Total operating expenses
|
(2,555.3 | ) | (10.8 | ) | 6.3 | (2,559.8 | ) | |||||||||
|
|
||||||||||||||||
|
Operating income
|
753.1 | (5.3 | ) | — | 747.8 | |||||||||||
|
Equity in earnings of unconsolidated affiliates
|
45.9 | — | 0.9 | 46.8 | ||||||||||||
|
Interest and dividend income
|
37.2 | — | — | 37.2 | ||||||||||||
|
Other investment income/(losses)
|
(39.9 | ) | (58.0 | ) | — | (97.9 | ) | |||||||||
|
Interest expense
|
(76.9 | ) | 0 | — | (76.9 | ) | ||||||||||
|
|
||||||||||||||||
|
Income/(loss) before income taxes, including
gains and losses attributable to
noncontrolling interests
|
719.4 | (63.3 | ) | 0.9 | 675.0 | |||||||||||
|
Income tax provision
|
(236.0 | ) | — | — | (236.0 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income/(loss), including gains and losses
attributable to noncontrolling interests
|
483.4 | (63.3 | ) | 0.9 | 421.0 | |||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(1.7 | ) | 62.4 | — | 60.7 | |||||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
481.7 | (0.9 | ) | 0.9 | 481.7 | |||||||||||
|
|
||||||||||||||||
| (1) | The Before Consolidation column includes Invesco’s equity interest in the investment products, accounted for as equity method and available-for-sale investments and does not include any other adjustments related to non-GAAP financial measure presentation. | |
| (2) | The company adopted guidance now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, resulting in the consolidation of certain CLOs. In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. Prior to January 1, 2010, the company was not deemed to be the primary beneficiary of these CLOs. | |
| (3) | Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company. |
47
Table of Contents
Operating Revenues and Net Revenues
The main categories of revenues, and the dollar and percentage change between the periods,
were as follows:
| Year ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| $ in millions | 2009 | 2008 | $ Change | % Change | ||||||||||||
|
Investment management fees
|
2,120.2 | 2,617.8 | (497.6 | ) | (19.0 | )% | ||||||||||
|
Service and distribution fees
|
412.6 | 512.5 | (99.9 | ) | (19.5 | )% | ||||||||||
|
Performance fees
|
30.0 | 75.1 | (45.1 | ) | (60.1 | )% | ||||||||||
|
Other
|
64.5 | 102.2 | (37.7 | ) | (36.9 | )% | ||||||||||
|
|
||||||||||||||||
|
Total operating revenues
|
2,627.3 | 3,307.6 | (680.3 | ) | (20.6 | )% | ||||||||||
|
Third-party distribution, service and advisory expenses
|
(693.4 | ) | (875.5 | ) | 182.1 | (20.8 | )% | |||||||||
|
Proportional share of revenues, net of third-party
distribution expenses, from joint venture investments
|
44.7 | 57.3 | (12.6 | ) | (22.0 | )% | ||||||||||
|
Management fees earned from consolidated investment products
|
8.0 | 6.2 | 1.8 | 29.0 | % | |||||||||||
|
Other revenues recorded by consolidated investment products
|
(2.0 | ) | (5.4 | ) | 3.4 | (63.0 | )% | |||||||||
|
|
||||||||||||||||
|
Net revenues
|
1,984.6 | 2,490.2 | (505.6 | ) | (20.3 | )% | ||||||||||
|
|
||||||||||||||||
Operating revenues decreased by 20.6% in 2009 to $2,627.3 million (2008: $3,307.6 million).
Net revenues decreased by 20.3% in 2009 to $1,984.6 million (2008: $2,490.6 million). Net revenues
are operating revenues less third-party distribution, service and advisory expenses, plus our
proportional share of net revenues from joint venture arrangements, plus management fees earned
from, less other revenue recorded by, consolidated investment products. See “Schedule of Non-GAAP
Information” for additional important disclosures regarding the use of net revenues. A significant
portion of our business and managed AUM are based outside of the U.S. The income statements of
foreign currency subsidiaries are translated into U.S. dollars, the reporting currency of the
company, using average foreign exchange rates. The impact of foreign exchange rate movements
accounted for $152.0 million (22.3%) of the decline in operating revenues during the year ended
December 31, 2009. Additionally, our revenues are directly influenced by the level and composition
of our AUM as more fully discussed in “Assets Under Management.” Movements in global capital market
levels, net new business inflows (or outflows) and changes in the mix of investment products
between asset classes and geographies may materially affect our revenues from period to period.
Investment Management Fees
Investment management fees decreased by $497.6 million (19.0%) in the year ended December 31,
2009, to $2,120.2 million (year ended December 31, 2008: $2,617.8 million) due a decrease in
average AUM, changes in the mix of AUM between asset classes, and the impact of foreign exchange
rate movement. Average AUM for the year ended December 31, 2009 were $415.8 billion, down $53.1
billion (11.3%) from $468.9 billion for 2008. Average long-term AUM, which generally earn higher
fee rates than money market AUM, for the year ended December 31, 2009 decreased 25.4% to $328.8
billion from $440.6 billion for the year ended December 31, 2008, while average institutional money
market AUM decreased 3.1% to $87.0 billion for the year ended December 31, 2009, from $79.8 billion
for the year ended December 31, 2008. See the company’s disclosures regarding the changes in AUM
during the year ended December 31, 2009 in the “Assets Under Management” section above for
additional information regarding the movements in AUM. Foreign exchange rate movements led to a
decrease in investment management fees of $124.8 million during the year ended December 31, 2009,
compared to the year ended December 31, 2008.
Service and Distribution Fees
In 2009, service and distribution fees decreased 19.5% to $412.6 million (2008: $512.5
million) primarily due to decreases in average AUM during the year. Included in the decline in
service and distribution fees in the three months ended December 31, 2009, was a reduction of $5.4
million reflecting the full-year impact of a reduction in transfer agency and administrative
revenues in Canada, as certain fund expense recovery limits were reached.
Performance Fees
Of our $459.5 billion in AUM at December 31, 2009, only approximately $30.0 billion, or 6.5%,
could potentially earn performance fees. In 2009, performance fees decreased 60.1% to $30.0 million
(2008: $75.1 million). The performance fees generated in 2009 arose primarily due to products
managed by the Invesco Global Strategies group ($2.4 million), Invesco Perpetual ($13.4 million),
and
Atlantic Trust ($5.7 million). The performance fees generated in 2008 arose primarily due to
products managed by the Invesco Global Strategies ($22.3 million) and Real Estate ($14.5 million)
groups, as well as by Invesco Perpetual ($21.1 million).
48
Table of Contents
Other Revenues
In 2009, other revenues decreased 36.9% to $64.5 million (2008: $102.2 million), driven by
decreases in transaction commissions of $17.7 million, due to the tightening of the credit markets
and fewer real estate transactions, and foreign exchange rate movements $0.5 million.
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses decreased 20.8% in 2009 to $693.4
million (2008: $875.5 million), consistent with the declines in investment management and service
and distribution fee revenues.
Proportional share of revenues, net of third-party distribution expenses, from joint venture
investments
The 21.8% decrease in our proportional share of revenues, net of third-party distribution
expenses, to $44.8 million in 2009 (2008: $57.3 million), is driven by the declines in average AUM
of the Invesco Great Wall joint venture. Our share of the Invesco Great Wall joint venture’s
average AUM at December 31, 2009, was $3.7 billion, a 17.8% decline in average AUM from $4.5
billion at December 31, 2008.
Operating Expenses
The main categories of operating expenses are as follows:
| $ in millions | 2009 | 2008 | $ Change | % Change | ||||||||||||
|
Employee compensation
|
950.8 | 1,055.8 | (105.0 | ) | (9.9 | )% | ||||||||||
|
Third-party distribution, service and advisory
|
693.4 | 875.5 | (182.1 | ) | (20.8 | )% | ||||||||||
|
Marketing
|
108.9 | 148.2 | (39.3 | ) | (26.5 | )% | ||||||||||
|
Property, office and technology
|
212.3 | 214.3 | (2.0 | ) | (0.9 | )% | ||||||||||
|
General and administrative
|
166.8 | 266.0 | (99.2 | ) | (37.3 | )% | ||||||||||
|
Transaction and integration
|
10.8 | — | 10.8 | N/A | ||||||||||||
|
|
||||||||||||||||
|
Total operating expenses
|
2,143.0 | 2,559.8 | (416.8 | ) | (16.3 | )% | ||||||||||
|
|
||||||||||||||||
The table below sets forth these expense categories as a percentage of total operating
expenses and operating revenues, which we believe provides useful information as to the relative
significance of each type of expense.
| % of Total | % of | % of Total | % of | |||||||||||||||||||||
| Operating | Operating | Operating | Operating | |||||||||||||||||||||
| $ in millions | 2009 | Expenses | Revenues | 2008 | Expenses | Revenues | ||||||||||||||||||
|
Employee compensation
|
950.8 | 44.4 | % | 36.2 | % | 1,055.8 | 41.2 | % | 31.9 | % | ||||||||||||||
|
Third-party distribution, service and advisory
|
693.4 | 32.3 | % | 26.4 | % | 875.5 | 34.2 | % | 26.5 | % | ||||||||||||||
|
Marketing
|
108.9 | 5.1 | % | 4.1 | % | 148.2 | 5.8 | % | 4.5 | % | ||||||||||||||
|
Property, office and technology
|
212.3 | 9.9 | % | 8.1 | % | 214.3 | 8.4 | % | 6.5 | % | ||||||||||||||
|
General and administrative
|
166.8 | 7.8 | % | 6.3 | % | 266.0 | 10.4 | % | 8.0 | % | ||||||||||||||
|
Transaction and integration
|
10.8 | 0.5 | % | 0.4 | % | — | — | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total operating expenses
|
2,143.0 | 100.0 | % | 81.5 | % | 2,559.8 | 100.0 | % | 77.4 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
During 2009, operating expenses decreased 16.3% to $2,143.0 million (2008: $2,559.8 million),
reflecting declines in all cost categories from 2008 expense levels. As discussed above, a
significant portion of our business and managed AUM are based outside of the U.S. The income
statements of foreign currency subsidiaries are translated into U.S. dollars, the reporting
currency of the company, using average foreign exchange rates. The impact of foreign exchange rate
movements accounted for $108.0 million (25.9%) of the decline in operating expenses during the year
ended December 31, 2009. Additionally, operating expenses were lower in 2009 as compared to 2008
reflecting the impact of general cost containment measures and costs that move in line with
revenues.
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Employee Compensation
Employee compensation decreased $105.0 million, or 9.9%, in 2009 from 2008 due predominantly
to overall decreases in base salaries and variable compensation of $86.3 million, including
decreases in discretionary and investment performance-based staff bonuses, decreases in base salary
costs resulting from decreases in headcount, and foreign exchange rate movements of $36.4 million.
Headcount declined 8.2% to 4,890 at December 31, 2009 from 5,325 at December 31, 2008. Included in
compensation expenses during the year ended December 31, 2009 are share-based payment costs of
$90.8 million, compared to $97.7 million during the year ended December 31, 2008. Additionally,
employee compensation costs for the years ended December 31, 2009 and 2008 included $20.0 million
of prepaid compensation amortization expenses related to the 2006 acquisition of W.L. Ross & Co.
Compensation expenses in the three months ended December 31, 2009, included a $4.1 million
increase in pension costs related to the plans’ actuarial annual valuation updates and a $4.3
million increase in payroll taxes associated with the vesting of share-based payment awards.
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses are discussed above in the operating
and net revenues section.
Marketing
Marketing expenses decreased 26.5% in 2009 to $108.9 million (2008: $148.2 million) due to a
decrease in marketing support payments of $12.2 million related to the decline in average AUM in
the U.S., a lower level of advertising of $7.7 million, and a reduction in travel/client events and
sales literature/research expenses of $8.8 million and $2.8 million, respectively. Additionally,
foreign exchange rate movement decreased marketing expenses by $4.5 million (11.5%) for the year
ended December 31, 2009 compared to December 31, 2008.
Property, Office and Technology
Property, office and technology costs decreased 0.9% to $212.3 million in 2009 from $214.3
million in 2008. Decreases in technology costs resulting from general disciplined expense
management measures and foreign exchange rate movement were offset by increases in property and
office costs during the year. Property and office expenses for the year ended December 31, 2009,
included $12.0 million in charges relating to vacating leased property, including our Denver,
Colorado, operations facility. Property and office expenses during 2008 included a $5.1 million
rent charge related to vacating leased property, offset by downward adjustments in rent costs for
sublet office property of $8.2 million.
General and Administrative
General and administrative expenses decreased by $99.2 million (37.3%) to $166.8 million in
2009 from $266.0 million in 2008, due to a focus on expense reduction and management during 2009.
During 2009, the most significant decrease in this area was a decrease of $50.2 million in
professional services expenses, which included an insurance recovery of $9.5 million related to
legal costs associated with the market-timing regulatory settlement. General disciplined expense
management measures also led to a reduction in travel and entertainment expenses of $14.2 million
during the year ended December 31, 2009. Foreign exchange rate movement decreased general and
administrative expenses by $6.9 million during 2009 as compared to 2008.
Transaction and Integration
Transaction and integration charges were $10.8 million in 2009 ($9.8 million of these costs
were recorded in the three months ended December 31, 2009) and relate to the acquisition of Morgan
Stanley’s retail asset management business, including Van Kampen Investments. The acquisition was
announced in October 2009 and closed on June 1, 2010. There were no transaction and integration
changes for the year ended December 31, 2008.
Operating Income, Adjusted Operating Income, Operating Margin and Adjusted Operating Margin
Operating income decreased 35.2% to $484.3 million in 2009 from $747.8 million in 2008, driven
by the declines in operating revenues from reduced AUM. As a result of the decline in our operating
revenues, adjusted operating income, operating margin and adjusted operating margin also declined.
Operating margin was 18.4% in 2009, down from 22.6% in 2008. Adjusted operating income
50
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decreased 31.5% to $565.6 million in 2009 from $826.1 million in 2008. Adjusted operating
margin was 28.5% in 2009, down from 33.2% in 2008. See “Schedule of Non-GAAP Information” for a
reconciliation of operating revenues to net revenues, a reconciliation of operating income to
adjusted operating income, and additional important disclosures regarding net revenues, adjusted
operating income and adjusted operating margin.
Other Income and Expenses
The main categories of other income and expenses, and the dollar and percentage changes
between periods are as follows:
| Year ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| $ in millions | 2009 | 2008 | $ Change | % Change | ||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
27.0 | 46.8 | (19.8 | ) | (42.3 | )% | ||||||||||
|
Interest and dividend income
|
9.8 | 37.2 | (27.4 | ) | (73.7 | )% | ||||||||||
|
Gains/(losses) of consolidated investment products, net
|
(106.9 | ) | (58.0 | ) | (48.9 | ) | 84.3 | % | ||||||||
|
Interest expense
|
(64.5 | ) | (76.9 | ) | 12.4 | (16.1 | )% | |||||||||
|
Other gains and losses, net
|
7.8 | (39.9 | ) | 47.7 | N/A | |||||||||||
|
|
||||||||||||||||
|
Total other income and expenses
|
(126.8 | ) | (90.8 | ) | (36.0 | ) | 39.6 | % | ||||||||
|
|
||||||||||||||||
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates decreased by $19.8 million (42.3%) to $27.0
million in the year ended December 31, 2009 (December 31, 2008: $46.8 million), due primarily from
declines in our share of the pre-tax earnings of our joint venture investments in China of $11.9
million, as well as, net losses in certain of our partnership investments of $7.8 million.
Interest and dividend income and interest expense
Interest and dividend income decreased by $27.4 million to $9.8 million in 2009 (2008: $37.2
million), as a result of the combination of lower interest rates and lower average cash and cash
equivalents balances in 2009. The decrease in yields was consistent with market movement from 2008
to 2009. Interest expense decreased 16.1% to $64.5 million in 2009 from $76.9 million in 2008 due
to decreases in the average debt balance in 2009.
Gains and losses of consolidated investment products
Included in other income and expenses are net realized and unrealized gains of consolidated
investment products. In 2009, the net losses of consolidated investment products were $106.9
million, compared to net losses of $58.0 million in 2008, reflecting the changes in market values
of the investments held by consolidated investment products. Invesco invests in only a small equity
portion of these products, and as a result these losses are offset by noncontrolling interests of
$113.2 million.
Other gains and losses, net
Other gains and losses, net were a net gain of $7.8 million in 2009, compared to a net loss of
$39.9 million in 2008. Included in the 2009 net gain is a gross gain generated upon a debt tender
offer of $4.3 million ($3.3 million net of related expenses) and net gains of $4.3 million realized
upon the disposal of other investments (2008: $7.4 million gain on maturity of a CLO investment,
offset by a loss of $4.1 million realized upon the disposal of a private equity investment). The
2009 net gain also included $5.2 million in other-than-temporary impairment charges related to the
valuations of investments in certain of our CLO products (2008: $22.7 million) and $3.0 million in
other-than-temporary impairment charges related to other seed money in affiliated funds (2008: $8.5
million). The CLO impairments arose principally from adverse changes in the timing of estimated
cash flows used in the valuation models. In the year ended December 31, 2009, we also benefited
from $8.4 million in net foreign exchange gains whereas in 2008, we incurred $13.0 million in net
foreign exchange losses. See Item 8, Financial Statements and Supplementary Data — Note 15, “Other
Gains and Losses, Net,” for additional details related to other gains and losses.
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Income Tax Expense
Our subsidiaries operate in several taxing jurisdictions around the world, each with its own
statutory income tax rate. As a result, our effective tax rate will vary from year to year
depending on the mix of the profits and losses of our subsidiaries. The majority of our profits are
earned in the U.S., Canada and the U.K. The 2009 U.K. statutory tax rate was 28%, the Canadian
statutory tax rate was 33% and the U.S. Federal statutory tax rate was 35%. On December 14, 2007,
legislation was enacted to reduce the Canadian income tax rate over five years, which changed the
rate to 33.5% in 2008, 33.0% in 2009, 31% in 2010, 28.25% in 2011, 26.25% in 2012, 25.5% in 2013,
and 25% thereafter.
Our effective tax rate, excluding noncontrolling interests in consolidated entities, for 2009
was 31.5%, down from 32.9% for 2008. The rate decrease was primarily due to the mix of pre-tax
income and a larger benefit from the release of provisions for uncertain tax positions in 2009
versus 2008. The rate decrease was partially offset by an increase in the net valuation allowance
for subsidiary operating losses and additional state taxes.
The inclusion of income from noncontrolling interests in consolidated entities increased our
effective tax rate to 41.5% in 2009 and to 35.9% in 2008. The 2009 rate was higher than 2008 due to
a larger impact from losses in non-controlling interests.
Schedule of Non-GAAP Information
Beginning with the presentation of the company’s results for the three months ended March 31,
2010, the company has expanded its use of non-GAAP measures to include reconciling items primarily
relating to guidance now encompassed in the Accounting Standards Codification Topic 810 (discussed
in Part II, Item 8, Financial Statements and Supplementary Data — Note 1, “Accounting Policies”)
and the acquisition of Morgan Stanley’s retail asset management business, including Van Kampen
Investments (the “acquired business” or the “acquisition”). We are presenting the following
non-GAAP measures: net revenue (and by calculation, net revenue yield on AUM), adjusted operating
income (and by calculation, adjusted operating margin), adjusted net income (and by calculation,
adjusted earnings per share (EPS)). Prior to June 30, 2010, adjusted operating income, adjusted
operating margin, adjusted net income, and adjusted earnings per share were described as “adjusted
cash operating income,” “adjusted cash operating margin,” “adjusted cash net income,” and “adjusted
cash earnings per share,” respectively. We believe these non-GAAP measures provide greater
transparency into our business and allow more appropriate comparisons with industry peers.
Management uses these performance measures to evaluate the business, and they are consistent with
internal management reporting. Effective June 30, 2010, the company removed “cash” from the names
of these measures to emphasize that these measures are performance measures and not liquidity
measures. The most directly comparable U.S. GAAP measures are operating revenues (and by
calculation, gross revenue yield on AUM), operating income (and by calculation, operating margin),
net income (and by calculation, diluted EPS). Each of these measures is discussed more fully below.
Also beginning with the presentation of the company’s results for the three months ended March
31, 2010, the net revenue measure has been redefined from that previously used to adjust for the
impact of consolidating certain investment products. The presentation of net revenue in this Report
for the years ended December 31, 2006, 2007, 2008 and 2009 have been restated to conform the
calculation to the current period’s methodology.
These non-GAAP measures should not be considered as substitutes for any measures derived in
accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other
companies. Additional reconciling items may be added in the future to these non-GAAP measures if
deemed appropriate.
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The following are reconciliations of operating revenues, operating income (and by calculation,
operating margin), and net income (and by calculation, diluted EPS) on a U.S. GAAP basis to net
revenues, adjusted operating income (and by calculation, adjusted operating margin), and adjusted
net income (and by calculation, adjusted EPS):
| $ in millions, except per share data | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Operating revenues, U.S. GAAP basis
|
3,487.7 | 2,627.3 | 3,307.6 | 3,878.9 | 3,246.7 | |||||||||||||||
|
Third-party distribution, service and advisory
expenses
(1)
|
(972.7 | ) | (693.4 | ) | (875.5 | ) | (1,051.1 | ) | (826.8 | ) | ||||||||||
|
Proportional share of net revenues from joint venture
arrangements
(2)
|
42.2 | 44.7 | 57.3 | 60.6 | 8.1 | |||||||||||||||
|
Management fees earned from consolidated investment products
eliminated upon consolidation
(3)
|
45.3 | 8.0 | 6.2 | 8.7 | 11.3 | |||||||||||||||
|
Other revenues recorded by consolidated investment
products
(3)
|
(0.3 | ) | (2.0 | ) | (5.4 | ) | (15.2 | ) | (26.5 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Net revenues
|
2,602.2 | 1,984.6 | 2,490.2 | 2,881.9 | 2,412.8 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Operating income, U.S. GAAP basis
|
589.9 | 484.3 | 747.8 | 994.3 | 759.2 | |||||||||||||||
|
Proportional share of operating income from joint venture
investments
(2)
|
22.9 | 28.4 | 39.7 | 45.5 | 2.9 | |||||||||||||||
|
Transaction and integration charges
(4)
|
150.0 | 10.8 | — | — | — | |||||||||||||||
|
Amortization of acquisition-related prepaid
compensation
(4)
|
20.0 | 20.0 | 20.0 | 25.0 | — | |||||||||||||||
|
Amortization of other intangibles
(4)
|
30.3 | 12.6 | 13.3 | 12.0 | 10.0 | |||||||||||||||
|
Change in contingent consideration estimates
|
(3.8 | ) | — | — | — | — | ||||||||||||||
|
Compensation expense related to market valuation changes in
deferred compensation plans
(5)
|
9.3 | — | — | — | — | |||||||||||||||
|
Consolidation of investment products
(3)
|
54.9 | 9.5 | 5.3 | 1.8 | (5.9 | ) | ||||||||||||||
|
Other reconciling items
(6)
|
24.2 | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Adjusted operating income
|
897.7 | 565.6 | 826.1 | 1,078.6 | 766.2 | |||||||||||||||
|
|
||||||||||||||||||||
|
Operating margin*
|
16.9 | % | 18.4 | % | 22.6 | % | 25.6 | % | 23.4 | % | ||||||||||
|
Adjusted operating margin**
|
34.5 | % | 28.5 | % | 33.2 | % | 37.4 | % | 31.8 | % | ||||||||||
|
|
||||||||||||||||||||
|
Net income attributable to common shareholders, U.S. GAAP
basis
|
465.7 | 322.5 | 481.7 | 673.6 | 482.7 | |||||||||||||||
|
Transaction and integration charges, net of tax
(4)
|
103.1 | 8.9 | — | — | — | |||||||||||||||
|
Amortization of acquisition-related prepaid
compensation
(4)
|
20.0 | 20.0 | 20.0 | 25.0 | — | |||||||||||||||
|
Amortization of other intangibles, net of tax
(4)
|
27.4 | 12.3 | 13.0 | 11.7 | 9.8 | |||||||||||||||
|
Change in contingent consideration estimates, net of tax
|
(2.5 | ) | — | — | — | — | ||||||||||||||
|
Deferred compensation plan market valuation changes and
dividend income less compensation expense, net of
tax
(5)
|
(5.3 | ) | — | — | — | — | ||||||||||||||
|
Deferred income taxes on intangible assets
(4)
|
21.1 | 14.4 | 12.4 | 7.9 | 7.2 | |||||||||||||||
|
Consolidation of investment products
(3)
|
(6.8 | ) | — | — | — | — | ||||||||||||||
|
Other reconciling items, net of tax
(6)
|
17.0 | — | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Adjusted net income
|
639.7 | 378.1 | 527.1 | 718.2 | 499.7 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Average shares outstanding — diluted
|
463.2 | 423.6 | 399.1 | 411.9 | 406.1 | |||||||||||||||
|
Diluted EPS
|
$ | 1.01 | $ | 0.76 | $ | 1.21 | $ | 1.64 | $ | 1.19 | ||||||||||
|
Adjusted EPS***
|
$ | 1.38 | $ | 0.89 | $ | 1.32 | $ | 1.74 | $ | 1.23 | ||||||||||
| * | Operating margin is equal to operating income divided by operating revenues. | |
| ** | Adjusted operating margin is equal to adjusted operating income divided by net revenues. | |
| *** | Adjusted EPS is equal to adjusted net income divided by the weighted average shares outstanding amount used in the calculation of diluted EPS. |
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Table of Contents
| (1) | Third-party distribution, service and advisory expenses | |
| Third-party distribution, service and advisory expenses include renewal commissions, management fee rebates and distribution costs paid to brokers and independent financial advisors. While the terms used for these types of expense vary by geography, they are all expense items that are closely linked to the value of AUM and the revenue earned by Invesco from AUM. | ||
| Renewal commissions are paid to independent financial advisors for as long as the clients’ assets remain invested and are payments for the servicing of client accounts. These commissions, similar to our management fee revenues, are based upon a percentage of the AUM value and apply to much of our non-U.S. retail business. They can also take the form of management fee rebates, particularly outside of the U.S. | ||
| The revenues of our U.S. business include distribution fees earned from mutual funds, principally 12b-1 fees, which are passed through to brokers who sell our funds. Distribution costs are expenses paid to third-party brokers of our U.S. business. These include the amortization over the redemption period of upfront commissions paid to brokers for sales of fund shares with a contingent deferred sales charge (a charge levied on investors for redemptions within a certain contracted period of time). Both the revenues and the costs are dependent on the underlying AUM of the brokers’ clients. | ||
| Also included in third-party distribution, service and advisory expenses are sub-transfer agency fees that are paid to third parties for processing client share purchases and redemptions, call center support and client reporting. These costs are reimbursed by the related funds. | ||
| Since the company has been deemed to be the principal in the third-party arrangements, the company must reflect these expenses gross of operating revenues under U.S. GAAP. Management believes that the deduction of third-party distribution, service and advisory expenses from operating revenues in the computation of net revenues (and by calculation, net revenue yield on AUM) and the related computation of adjusted operating income (and by calculation, adjusted operating margin), is useful information for investors and other users of the company’s financial statements because such presentation appropriately reflects the nature of these expenses as revenue-sharing activities, as these costs are passed through to external parties who perform functions on behalf of the company’s managed funds. Further, these expenses vary extensively by geography due to the differences in distribution channels. The net presentation assists in identifying the revenue contribution generated by the business, removing distortions caused by the differing distribution channel fees and allowing for a fair comparison with U.S. peer investment managers and within the company. Additionally, management evaluates net revenue yield on AUM, which is equal to net revenues divided by average AUM during the reporting period. This financial measure is an indicator of the basis point net revenues we receive for each dollar of AUM we manage and is useful when evaluating the company’s performance relative to industry competitors and within the company for capital allocation purposes. | ||
| (2) | Proportional share of net revenues and operating income from joint venture investments | |
| The company has two joint venture investments in China. The Invesco Great Wall joint venture is one of the largest Sino-foreign managers of equity products in China, with AUM of approximately $7.2 billion as of December 31, 2010. The company has a 49.0% interest in Invesco Great Wall. The company also has a 50% joint venture with Huaneng Capital Services to assess private equity investment opportunities in power generation in China through Huaneng Invesco WLR Investment Consulting Company Ltd. Enhancing our operations in China is one effort that we believe could improve our competitive position over time. Accordingly, we believe that it is appropriate to evaluate the contribution of our joint venture investments to the operations of the business. | ||
| Management believes that the addition of our proportional share of revenues, net of distribution expenses, from joint venture investments in the computation of net revenues and the addition of our proportional share of operating income in the related computations of adjusted operating income and adjusted operating margin also provide useful information to investors and other users of the company’s financial statements, as management considers it appropriate to evaluate the contribution of its joint ventures to the operations of the business. It is also consistent with the presentation of AUM and net flows (where our proportional share of the ending balances and related activity are reflected) and therefore provides a more meaningful calculation of net revenue yield on AUM. | ||
| (3) | Consolidated investment products | |
| In June 2009, the FASB issued guidance now encompassed in ASC Topic 810 which was effective January 1, 2010. It has had a significant impact on the presentation of the company’s financial statements. The company’s Consolidated Statement of Income for the year ended December 31, 2010 reflects the elimination of management and performance fees earned from these CLOs and other consolidated investment products. See Part II, Item 8, Financial Statements and Supplementary Data — Note 20, |
54
Table of Contents
| “Consolidated Investment Products” for a detailed analysis of the impact to the company’s Consolidated Financial Statements from the consolidation of investment products. | ||
| Management believes that the consolidation of investment products may impact a reader’s analysis of our underlying results of operations and could result in investor confusion or the production of information about the company by analysts or external credit rating agencies that is not reflective of the underlying results of operations and financial condition of the company. Accordingly, management believes that it is appropriate to adjust operating revenues, operating income and operating margin for the impact of consolidated investment products in calculating the respective net revenues, adjusted operating income and adjusted operating margin. The reconciling items add back the management and performance fees earned by Invesco from the consolidated products and remove the revenues and expenses recorded by the consolidated products that have been included in the U.S. GAAP Consolidated Statements of Income. | ||
| (4) | Acquisition-related reconciling items | |
| Acquisition-related adjustments include transaction and integration expenses and intangible asset amortization related to acquired assets, amortization of prepaid compensation related to the 2006 acquisition of W.L. Ross & Co., and tax cash flow benefits resulting from tax amortization of goodwill and indefinite-lived intangible assets. These charges reflect the legal, regulatory, advisory, valuation, integration-related employee incentive awards and other professional or consulting fees, general and administrative costs, including travel costs related to the transaction and the costs of temporary staff involved in executing the transaction, and the post closing costs of integrating the acquired business into the company’s existing operations including incremental costs associated with achieving synergy savings. Additionally, transaction and integration expenses include legal costs related to the defense of auction rate preferred securities complaints raised in the pre-acquisition period with respect to various closed-end funds included in the acquisition. See Item 3, “Legal Proceedings” for additional information. | ||
| The acquisition will result in additional future amortization expenses of approximately $23 million per year for the first 2 years following June 1, 2010. The expense then reduces in future years as the acquired finite-lived intangible assets become fully expensed. The U.S. GAAP to non-GAAP reconciling items also include acquisition-related amortization charges related to previous business combinations. The tax benefit is recorded on a portion of the intangible amortization expense that does not generate a cash tax benefit. The W.L. Ross & Co. prepaid compensation expense will continue through 2010, and the acquisition-related asset will be fully amortized by the third quarter of 2011. | ||
| Management believes it is useful to investors and other users of our financial statements to adjust for the transaction and integration charges and the amortization expenses in arriving at adjusted operating income, adjusted operating margin and adjusted EPS, as this will aid comparability of our results period to period, and aid comparability with peer companies that may not have similar acquisition-related charges. | ||
| While finite-lived intangible assets are amortized under U.S. GAAP, there is no amortization charge on goodwill and indefinite-lived intangibles. In certain qualifying situations, these can be amortized for tax purposes, generally over a 15-year period, as is the case in the U.S. These cash flows (in the form of reduced taxes payable) represent tax benefits that are not included in the Consolidated Statements of Income absent an impairment charge or the disposal of the related business. We believe it is useful to include these tax cash flow benefits in arriving at the adjusted EPS measure. The company receives these cash flow benefits but does not anticipate a sale or impairment of these assets in the foreseeable future, and therefore the deferred tax liability recognized under U.S. GAAP is not expected to be used either through a credit in the Consolidated Statements of Income or through settlement of tax obligations. | ||
| (5) | Market movement on deferred compensation plan liabilities | |
| In 2009, Invesco introduced an incentive plan whereby certain of our investment team members can receive deferred cash compensation linked in value to the investment products being managed by the team. This is in lieu of share-based awards which were largely the only prior form of deferred compensation used by Invesco. | ||
| These awards involve a return to the employee linked to the appreciation (depreciation) of specified investments, typically the funds managed by the employee. Invesco hedges economically the exposure to market movements by holding these investments on its balance sheet. U.S. GAAP requires the appreciation (depreciation) in the compensation liability to be expensed over the award vesting period in proportion to the vested amount of the award as part of compensation expense. The full value of the investment appreciation (depreciation) is immediately recorded below operating income in other gains and losses. This creates a timing difference between the recognition of the compensation expense and the investment gain or loss impacting net income attributable to common shareholders and diluted EPS which will reverse over the life of the award and net to zero at the end of the multi-year vesting period. During periods of high market volatility these timing differences impact compensation expense, operating income and operating margin in a manner which, over the life of the award, will ultimately be offset by gains and losses recorded below operating income on the Consolidated Statements of Income. |
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| Since these plans are hedged economically, management believes it is useful to reflect the offset ultimately achieved from hedging the investment market exposure in the calculation of adjusted operating income (and by calculation, adjusted operating margin) and adjusted net income (and by calculation, adjusted EPS), to produce results that will be more comparable period to period. The related fund shares will have been purchased on or around the date of grant, eliminating any ultimate cash impact from market movements that occur over the vesting period. The non-GAAP measures therefore exclude the mismatch created by differing U.S. GAAP treatments of the market movement on the liability and the investments. | ||
| Additionally, dividend income from investments held to hedge economically deferred compensation plans is recorded as dividend income and as compensation expense on the company’s Consolidated Statements of Income on the record dates. This dividend income is passed through to the employee participants in the plan and is not retained by the company. The non-GAAP measures exclude this dividend income and related compensation expense. | ||
| No adjustments are being made for the prior period comparative non-GAAP measures presented above due to the relative insignificance of the amounts in those periods. | ||
| (6) | Other reconciling items | |
| Included within general and administrative expenses is a charge of $8.9 million ($6.0 million net of tax) for the year ended December 31, 2010, representing reimbursement costs from the correction of historical foreign exchange allocations in the fund accounting process that impacted the reporting of fund performance in certain funds. Also included within general and administrative expenses is a charge of $15.3 million ($11.0 million net of tax) recorded in the three months ended December 31, 2010, relating to a levy from the U.K. Financial Services Compensation Scheme. Assessments were levied upon all Financial Services Authority (FSA)-registered investment management companies in proposition to their “eligible income” (as defined by the FSA) to cover claims resulting from failures of non-affiliated investment firms. Management does not include these costs in internal reporting and these costs do not form part of the overall evaluation of the business. Management therefore believes that the exclusion of these costs, due to their unique character and magnitude, from total operating expenses provides useful information to investors, as this view is consistent with how management evaluates the performance of the business. Exclusion of these costs will aid in comparability of our results from period to period and the comparability of our results with those of peer investment managers. |
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Condensed Consolidating Balance Sheets are presented below and reflect the consolidation of
investment products, including the adoption of guidance now encompassed in ASC Topic 810 on January
1, 2010. The majority of the company’s consolidated investment products were CLOs as of December
31, 2010. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs.
The company has no right to the benefits from, nor does it bear the risks associated with, the
collateral assets held by the CLOs, beyond the company’s minimal direct investments in, and
management fees generated from, CLOs. If the company were to liquidate, the collateral assets would
not be available to the general creditors of the company, and as a result, the company does not
consider them to be company assets. Additionally, the investors in the CLOs have no recourse to the
general credit of the company for the notes issued by the CLOs. The company therefore does not
consider this debt to be a company liability.
Condensed Consolidating Balance Sheets
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation (1) | Products (2) | Adjustments (3) | Total | ||||||||||||
|
As of December 31, 2010
|
||||||||||||||||
|
Current assets
|
3,480.0 | 816.8 | (22.3 | ) | 4,274.5 | |||||||||||
|
Non-current assets
|
9,025.1 | 7,205.5 | (61.0 | ) | 16,169.6 | |||||||||||
|
|
||||||||||||||||
|
Total assets
|
12,505.1 | 8,022.3 | (83.3 | ) | 20,444.1 | |||||||||||
|
|
||||||||||||||||
|
Current liabilities
|
2,777.9 | 508.9 | (22.3 | ) | 3,264.5 | |||||||||||
|
Long-term debt of consolidated investment products
|
— | 5,888.2 | (22.8 | ) | 5,865.4 | |||||||||||
|
Other non-current liabilities
|
1,953.3 | — | — | 1,953.3 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities
|
4731.2 | 6,397.1 | (45.1 | ) | 11,083.2 | |||||||||||
|
|
||||||||||||||||
|
Retained earnings appropriated for investors in
consolidated investment products
|
— | 495.5 | — | 495.5 | ||||||||||||
|
Other equity attributable to common shareholders
|
7,769.1 | 38.2 | (38.2 | ) | 7,769.1 | |||||||||||
|
Equity attributable to noncontrolling interests
in consolidated entities
|
4.8 | 1,091.5 | — | 1,096.3 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities and equity
|
12,505.1 | 8,022.3 | (83.3 | ) | 20,444.1 | |||||||||||
|
|
||||||||||||||||
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation (1) | Products (2) | Adjustments (3) | Total | ||||||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
Current assets
|
3,089.8 | 31.2 | — | 3,121.0 | ||||||||||||
|
Non-current assets
|
7,111.8 | 685.0 | (8.2 | ) | 7,788.6 | |||||||||||
|
|
||||||||||||||||
|
Total assets
|
10,201.6 | 716.2 | (8.2 | ) | 10,909.6 | |||||||||||
|
|
||||||||||||||||
|
Current liabilities
|
2,293.6 | 4.8 | — | 2,298.4 | ||||||||||||
|
Non-current liabilities
|
990.4 | — | — | 990.4 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities
|
3,284.0 | 4.8 | — | 3,288.8 | ||||||||||||
|
|
||||||||||||||||
|
Total equity attributable to common shareholders
|
6,912.9 | 8.2 | (8.2 | ) | 6,912.9 | |||||||||||
|
Equity attributable to noncontrolling interests
in consolidated entities
|
4.7 | 703.2 | — | 707.9 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities and equity
|
10,201.6 | 716.2 | (8.2 | ) | 10,909.6 | |||||||||||
|
|
||||||||||||||||
| (1) | The Before Consolidation column includes Invesco’s equity interest in the investment products, accounted for as equity method and available-for-sale investments and does not include any other adjustments related to non-GAAP financial measure presentation. | |
| (2) | The company adopted guidance now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, resulting in the consolidation of certain CLOs. In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. Prior to January 1, 2010, the company was not deemed to be the primary beneficiary of these CLOs. | |
| (3) | Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of the company’s equity at risk recorded as investments by the company (before consolidation) against either equity (private equity and real estate partnership funds) or subordinated debt (CLOs) of the funds. |
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The following table presents a comparative analysis of significant detailed balance sheet line
items:
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Cash and cash equivalents
|
740.5 | 762.0 | (21.5 | ) | (2.8 | )% | ||||||||||
|
Unsettled fund receivables
|
513.4 | 383.1 | 130.3 | 34.0 | % | |||||||||||
|
Current investments
|
308.8 | 182.4 | 126.4 | 69.3 | % | |||||||||||
|
Assets held for policyholders
|
1,295.4 | 1,283.0 | 12.4 | 1.0 | % | |||||||||||
|
Non-current investments
|
164.4 | 157.4 | 7.0 | 4.4 | % | |||||||||||
|
Investments of consolidated investment products
|
7,206.0 | 685.0 | 6,521.0 | N/A | ||||||||||||
|
Goodwill
|
6,980.2 | 6,467.6 | 512.6 | 7.9 | % | |||||||||||
|
Policyholder payables
|
1,295.4 | 1,283.0 | 12.4 | 1.0 | % | |||||||||||
|
Long-term debt
|
1,315.7 | 745.7 | 570.0 | 76.4 | % | |||||||||||
|
Long-term debt of consolidated investment products
|
5,865.4 | — | 5,865.4 | N/A | ||||||||||||
|
Retained earnings appropriated for investors in consolidated investment
products
|
495.5 | — | 495.5 | N/A | ||||||||||||
|
Equity attributable to common shareholders
|
8,264.6 | 6,912.9 | 1,351.7 | 19.6 | % | |||||||||||
|
Equity attributable to noncontrolling interests in consolidated entities
|
1,096.3 | 707.9 | 388.4 | 54.9 | % | |||||||||||
Cash and cash equivalents
Cash and cash equivalents decreased by $21.5 million from $762.0 million at December 31, 2009
to $740.5 million at December 31, 2010. Significant cash activity in 2010 included the utilization
of cash balances to partly fund business acquisitions, to purchase treasury shares and to pay
quarterly dividends. During the year, the company paid $775.9 million net cash on business
acquisitions, and treasury share purchases during the year utilized $192.2 million of cash.
Dividend payments totaled $197.9 million during 2010. The company initially borrowed $650.0 million
from the credit facility in June 2010 to partly fund acquisition payments, this credit facility
balance reducing to $570.0 million by the end of 2010. The balance of cash outflows has been funded
from improved cash flows generated from operating activities. See “Cash Flows” in the following
section within this Management’s Discussion and Analysis for addition discussion regarding the
movements in cash flows during the periods.
Invesco has local capital requirements in several jurisdictions, as well as regional
requirements for entities that are part of the European sub-group. These requirements mandate the
retention of liquid resources in those jurisdictions, which we meet in part by holding cash and
cash equivalents. This retained cash can be used for general business purposes in the European
sub-group or in the countries where it is located. Due to the capital restrictions, the ability to
transfer cash between certain jurisdictions may be limited. In addition, transfers of cash between
international jurisdictions may have adverse tax consequences that may substantially limit such
activity. At December 31, 2010, the European sub-group had cash and cash equivalent balances of
$456.2 million, much of which is used to satisfy these regulatory requirements. We are in
compliance with all regulatory minimum net capital requirements.
In addition, the company is required to hold cash deposits with clearing organizations or to
otherwise segregate cash to maintain compliance with federal and other regulations in connection
with its UIT broker dealer entity, which was part of the acquired business. At December 31, 2010
these cash deposits totaled $14.9 million.
Unsettled fund receivables
Unsettled fund receivables increased by $130.3 million from $383.1 million at December 31,
2009 to $513.4 million at December 31, 2010, due to $60.3 million of unsettled balances associated
with the UIT products that formed part of the acquired business together with higher transaction
activity between funds and investors in late December 2010 when compared to late December 2009 in
our offshore funds. In the company’s capacity as sponsor of UITs, the company records receivables
from brokers, dealers, and clearing organizations for unsettled sell trades of securities and UITs
in addition to receivables from customers for unsettled trades of securities. In our U.K. and
offshore activities, unsettled fund receivables are created by the normal settlement periods on
transactions initiated by certain clients. The presentation of the unsettled fund receivables and
substantially offsetting payables ($504.8 million at December 31, 2010) at trade date reflects the
legal relationship between the underlying investor and the company.
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Investments (current and non-current)
As of December 31, 2010 we had $473.2 million in investments, of which $308.8 million were
current investments and $164.4 million were non-current investments. Included in current
investments are $99.5 million of seed money investments in affiliated funds used to seed funds as
we launch new products, and $165.5 million of investments related to assets held for deferred
compensation plans, which are also held primarily in affiliated funds. Seed investments increased
by $24.7 million during the year, primarily due to the $53.9 million of seed investments included
in the acquired business at the closing on June 1. Subsequently we have liquidated over half of
these acquired business seed investments as the related funds achieved the necessary third-party
funding levels. Investments held to hedge deferred compensation awards increased by $80.8 million
during the year as we purchased additional investments in affiliated funds to hedge economically
new employee plan awards. Included in non-current investments are $156.9 million in equity method
investments in our Chinese joint ventures and in certain of the company’s private equity, real
estate and other investments (December 31, 2009: $134.7 million). The increase of $22.2 million in
equity method investments includes an increase of $21.6 million in partnership investments due to
capital calls, valuation improvements exceeding distributions, capital returns and partnerships
acquired through acquisitions during the period. The value of the joint venture investments and
other non-controlling equity method investments increased by $0.6 million during the year as a
result of current year earnings of $19.4 million, foreign exchange rate movements which added $1.8
million to the value, offset by annual dividends paid of $20.6 million to the company.
Assets held for policyholders and policyholder payables
One of our subsidiaries, Invesco Perpetual Life Limited, is an insurance company that was
established to facilitate retirement savings plans in the U.K. The entity holds assets that are
managed for its clients on its balance sheet with an equal and offsetting liability. The increasing
balance in these accounts from $1,283.0 million at December 31, 2009, to $1,295.4 million at
December 31, 2010, was the result of increases in the market values of these assets and net flows
into the funds partially offset by foreign exchange movements.
Investments of consolidated investment products
Effective January 1, 2010, upon the adoption of guidance now encompassed in ASC Topic 810, the
company determined that it was the primary beneficiary of certain CLO variable interest entities.
See Part II, Item 8, Financial Statements and Supplementary Data — Note 20, “Consolidated
Investment Products,” for additional details. As of December 31, 2010, investments of consolidated
investment products totaled $7,206.0 million (December 31, 2009: $685.0 million). These investments
are offset primarily in long-term debt of consolidated investment products, noncontrolling
interests in consolidated entities, and retained earnings appropriated for investors in
consolidated investment products on the Consolidated Balance Sheets, as the company’s equity
investment in these structures is not significant. The increase from December 31, 2009, primarily
reflects adoption of the guidance on January 1, 2010. In accordance with the guidance, prior
periods have not been restated. As a result of various acquisitions, the company consolidated
additional CLOs with investments of $762.3 million at June 1, 2010 and an additional $289.9 million
in investments at December 31, 2010.
Goodwill
Goodwill increased from $6,467.6 million at December 31, 2009, to $6,980.2 million at December
31, 2010, primarily due to the acquisition, which added $372.8 million to the company’s goodwill
balance on June 1. The increase in goodwill was also due to foreign currency translation for
certain subsidiaries whose functional currency differs from that of the parent. The foreign
exchange rates at the end of 2010 used to translate the balance sheets of foreign currency
subsidiaries into U.S. dollars, the reporting currency of the company, reflect a weaker U.S. dollar
at the end of 2010, mainly against the Canadian dollar offset by a stronger U.S. dollar mainly
against and Pound Sterling, which resulted in a $71.0 million net increase in goodwill, upon
consolidation. Additional goodwill was recorded in 2010 related to other acquisition activity
($26.8 million) and the earn-out on the W.L. Ross & Co. acquisition ($40.4 million). The company’s
annual goodwill impairment review is performed as of October 1 of each year. As a result of that
analysis, the company determined that no impairment existed at that date. See “Critical Accounting
Policies — Goodwill” for additional details of the company’s goodwill impairment analysis process.
The non-current portion of our total debt, excluding long-term debt of consolidated investment
products, increased from $745.7 million at December 31, 2009, to $1,315.7 million at December 31,
2010, as the company utilized its credit facility to cover a portion
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of the cash consideration paid to Morgan Stanley in connection with the acquisition. As of
December 31, 2010 there was $570.0 million outstanding on the credit facility.
Long-term debt of consolidated investment products
Long-term debt of consolidated investment products relates to notes issued by consolidated
CLOs. Collateral assets of the CLOs, which are included in investments of consolidated investment
products, are held solely to satisfy the obligations of the CLOs. The investors in the CLO have no
recourse to the general credit of the company for the notes issued by the CLOs.
Long-term debt of consolidated investment products was $5,865.4 million at December 31, 2010,
primarily reflecting the adoption of guidance now encompassed in ASC Topic 810 on January 1, 2010.
In accordance with the standard, prior periods have not been restated to reflect the consolidation.
As a result of the acquisition, the company consolidated additional CLOs with notes issued of
$630.2 million at June 1, 2010.
Retained earnings appropriated for investors in consolidated investment products
The retained earnings appropriated for investors in consolidated investment products relates
primarily to the difference in value between the collateral assets held (which are included in
investments of consolidated investment products), and the debt issued, by consolidated CLOs. The
collateral assets held, and notes issued, by consolidated CLOs are measured at fair value in the
Consolidated Balance Sheet.
Retained earnings appropriated for investors in consolidated investment products was $495.5
million at December 31, 2010, reflecting the adoption gudiance now encompassed in ASC Topic 810,
“Consolidation,” on January 1, 2010, which resulted in the consolidation of certain CLOs with $6.9
billion of assets held and $5.9 billion in debt issued at December 31, 2010. In accordance with the
standard, prior periods have not been restated to reflect the consolidation. A beginning balance
adjustment of $274.3 million was made as of the beginning of the year to reflect existing equity
balances in newly consolidated CLOs. During 2010, increases in the balance resulted from the
acquisition ($149.4 million) and from net income earned over the period ($77.1 million).
Equity attributable to noncontrolling interests in consolidated entities
Equity attributable to noncontrolling interests in consolidated entities increased by $388.4
million from $707.9 million at December 31, 2009, to $1,096.3 million at December 31, 2010. The
majority of the increase relates to acquisitions, which added $363.6 million during the year. The
remainder of the variance relates to net gains attributable to noncontrolling interests in
consolidated entities of $94.0 million, which were offset by $69.2 million of net changes in the
partners’ capital of these entities during the period.
The noncontrolling interests in consolidated entities are generally offset by the net assets
of certain consolidated investment products, as the company’s equity investment in the investment
products is not significant.
Equity attributable to common shareholders
Equity attributable to common shareholders increased from $6,912.9 million at December 31,
2009, to $8,264.6 million at December 31, 2010, an increase of $1,351.7 million. $274.3 million of
this increase relates to the beginning balance adjustment to retained earnings appropriated for
investors in consolidated investment products, as discussed above. Additional increases to equity
included $718.6 million as a result of business combinations, net income attributable to common
shareholders of $465.7 million, share issuances upon employee option exercises of $19.6 million, a
share-based payment credit to capital of $117.8 million representing the accrual of share-based
payment expense during the year, and $77.3 million of changes in foreign currency rates. The
increase also includes $77.1 million of net income appropriated for investors in consolidated
investment products, as discussed above. The increases to equity were partially offset by $197.9
million in dividend payments and $240.1 million in treasury shares acquired through market
purchases ($192.2 million) and from staff to meet withholding tax obligations on share award
vesting ($47.9 million).
Liquidity and Capital Resources
The adoption guidance now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010,
which resulted in the consolidation of $6.9 billion and $5.9 billion of total assets and long-term
debt of certain CLO products as of December 31, 2010, respectively, did not impact the company’s
liquidity and capital resources. The collateral assets of the CLOs are held solely to satisfy the
obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks
associated with, the collateral
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Table of Contents
assets held by the CLOs, beyond the company’s minimal direct investments in, and management
fees generated from, these products, which are eliminated upon consolidation. If the company were
to liquidate, the collateral assets would not be available to the general creditors of the company,
and as a result, the company does not consider them to be company assets. Additionally, the
investors in the CLOs debt tranches have no recourse to the general credit of the company for the
notes issued by the CLOs. The company therefore does not consider this debt to be an obligation of
the company. See Part II, Item 8, Financial Statements and Supplementary Data — Note 20,
“Consolidated Investment Products,” for additional details.
On July 28, 2010 S&P announced an upgrade of our credit rating from BBB+/Positive to
A-/Stable. In October 2010, Invesco became one of only four public investment managers with a
“Strong” risk management rating from S&P. Standard & Poor’s rates companies’ enterprise risk
management capabilities on a scale of Fair, Adequate, Strong, and Excellent.
We believe that our capital structure, together with available cash balances, cash flows
generated from operations, existing capacity under our credit facility, proceeds from the public
offering of our shares and further capital market activities, if necessary, should provide us with
sufficient resources to meet present and future cash needs, including operating, debt and other
obligations as they come due and anticipated future capital requirements. On June 1, 2010, we used
a combination of existing cash balances and $650.0 million credit facility borrowing to satisfy the
$770.0 million cash consideration related to acquisition. We issued 30.9 million shares of new
equity, in the form of common and non-voting common equivalent preferred shares (with economic
rights identical to common stock, other than no right to vote such shares) to Morgan Stanley,
without holding restrictions, in conjunction with the close. (The preferred shares were
subsequently sold, as converted, to unrelated third parties.) The ultimate purchase price for the
business was lower than the $1.5 billion previously announced purchase price, due to depreciation
of Invesco’s common share price from the announcement date to the June 1, 2010 closing date. During
the last two quarters we repurchased 9.4 million common shares in open market transactions
utilizing $192.2 million in cash. We believe that the cash flow generated from operations of the
combined firm, the remaining $680.0 million in credit facility capacity, and our ability to access
the capital markets, will provide sufficient liquidity to meet future capital resource needs.
The following summary of our recent capital transactions confirms our ability to access
capital markets in a timely manner:
| • | The May 26, 2009 issuance of 32.9 million common shares in a public offering that produced gross proceeds of $460.5 million ($441.8 million net of related expenses); | ||
| • | The June 9, 2009 replacement of our $900.0 million credit facility, which was never fully utilized, with a $500.0 million credit facility (with an option to increase it to $750.0 million, subject to certain conditions), the amount of which was based upon our past and projected working capital needs; | ||
| • | The June 30, 2009 completion of a $100.0 million tender offer to purchase publicly traded debt with a principal value of $104.3 million; | ||
| • | The December 15, 2009 repayment of $294.2 million 4.5% senior notes that matured on that date through the utilization of existing cash balances, having repurchased $3.0 million of these notes earlier in the year; | ||
| • | The May 24, 2010 termination of the $500.0 million credit facility and entrance into a new three-year $1,250.0 million credit facility. |
Our ability to continue to access the capital markets in a timely manner depends on a number
of factors including our credit rating, the condition of the global economy, investors’ willingness
to purchase our securities, interest rates, credit spreads and the valuation levels of equity
markets. If we are unable to access capital markets in a timely manner, our business could be
adversely impacted.
Certain of our subsidiaries are required to maintain minimum levels of capital. These and
other similar provisions of applicable law may have the effect of limiting withdrawals of capital,
repayment of intercompany loans and payment of dividends by such entities. A sub-group of Invesco
subsidiaries, including all of our regulated EU subsidiaries, is subject to consolidated capital
requirements under applicable European Union (EU) directives, and capital is maintained within this
sub-group to satisfy these regulations. These requirements mandate the retention of liquid
resources in those jurisdictions, which we meet in part by holding cash and cash equivalents. This
retained cash can be used for general business purposes in the European sub-group or in the
countries where it is located. Due to the capital restrictions, the ability to transfer cash
between certain jurisdictions may be limited. In addition, transfers of cash between international
jurisdictions may have adverse tax consequences that may substantially limit such activity. At
December 31, 2010, the European sub-group had cash and cash equivalent balances of $456.2 million,
much of which is used to satisfy these regulatory requirements. We are in compliance with all
regulatory minimum net capital requirements.
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In addition, the company is required to hold cash deposits with clearing organizations or to
otherwise segregate cash to maintain compliance with federal and other regulations in connection
with its UIT broker dealer entity, which was included in the acquired business. At December 31,
2010 these cash deposits totaled $14.9 million.
Cash Flows Discussion
The ability to consistently generate cash from operations in excess of capital expenditures
and dividend payments is one of our company’s fundamental financial strengths. Operations continue
to be financed from current earnings and borrowings. Our principal uses of cash, other than for
operating expenses, include dividend payments, capital expenditures, acquisitions, purchase of our
shares in the open market and investments in certain new investment products.
Cash flows of consolidated investment products (discussed in Item 8, Financial Statements and
Supplementary Data — Note 20, “Consolidated Investment Products”) are reflected in Invesco’s cash
used in operating activities, provided by investing activities and provided by financing
activities. Cash held by consolidated investment products is not available for general use by
Invesco, nor is Invesco cash available for general use by its consolidated investment products.
Accordingly, the table below presents the cash flows of the company separately and before
consolidation of investment products, as the cash flows of consolidated investment products do not
form part of the company’s cash flow management processes, nor do they form part of the company’s
significant liquidity evaluations and decisions for the reasons noted. The discussion that follows
the table will focus on the company’s cash flows as presented in the “Before Consolidation” column
of the table.
Cash flows for the years ended December 31, 2010, 2009 and 2008 are summarized as follows:
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation | Products (1) | Adjustments (2) | Total | ||||||||||||
|
For the year ended December 31, 2010
|
||||||||||||||||
|
Net income
|
456.1 | 181.4 | (0.7 | ) | 636.8 | |||||||||||
|
Net purchases of trading investments
|
(60.4 | ) | — | — | (60.4 | ) | ||||||||||
|
Other adjustments to reconcile net income to net cash
provided by operating activities
|
232.6 | (114.0 | ) | 0.7 | 119.3 | |||||||||||
|
Changes in cash held by consolidated investment products
|
— | (336.2 | ) | — | (336.2 | ) | ||||||||||
|
Other changes in operating assets and liabilities
|
(27.1 | ) | 46.8 | — | 19.7 | |||||||||||
|
|
||||||||||||||||
|
Net cash provided by operating activities
|
601.2 | (222.0 | ) | — | 379.2 | |||||||||||
|
|
||||||||||||||||
|
Net proceeds of investments by consolidated investment
products
|
— | 498.6 | — | 498.6 | ||||||||||||
|
Purchases of available for sale and other investments
|
(109.1 | ) | — | 5.8 | (103.3 | ) | ||||||||||
|
Proceeds from sales and returns of capital of available
for sale and other investments
|
134.6 | — | (2.2 | ) | 132.4 | |||||||||||
|
Other investing activities
|
(865.5 | ) | — | — | (865.5 | ) | ||||||||||
|
|
||||||||||||||||
|
Net cash (used in)/provided by investing activities
|
(840.0 | ) | 498.6 | 3.6 | (337.8 | ) | ||||||||||
|
|
||||||||||||||||
|
Net capital distributed by consolidated investment products
|
— | (276.6 | ) | (3.6 | ) | (280.2 | ) | |||||||||
|
Other financing activities
|
214.3 | — | — | 214.3 | ||||||||||||
|
|
||||||||||||||||
|
Net cash provided by/(used in) financing activities
|
214.3 | (276.6 | ) | (3.6 | ) | (65.9 | ) | |||||||||
|
|
||||||||||||||||
|
Decrease in cash and cash equivalents
|
(24.5 | ) | — | — | (24.5 | ) | ||||||||||
|
Foreign exchange movement on cash and cash equivalents
|
3.0 | — | — | 3.0 | ||||||||||||
|
Cash and cash equivalents, beginning of period
|
762.0 | — | — | 762.0 | ||||||||||||
|
|
||||||||||||||||
|
Cash and cash equivalents, end of period
|
740.5 | — | — | 740.5 | ||||||||||||
|
|
||||||||||||||||
| (1) | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of certain CLOs. In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. Prior to January 1, 2010, the company was not deemed to be the primary beneficiary of these CLOs. | |
| (2) | Adjustments include reclassifications to align the presentation of the cash flows of the consolidated investment funds with those of the company. |
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| Consolidated | ||||||||||||
| Before | Investment | |||||||||||
| $ in millions | Consolidation | Products | Total | |||||||||
|
For the year ended December 31, 2009
|
||||||||||||
|
Net income
|
323.2 | (113.9 | ) | 209.3 | ||||||||
|
Net purchases of trading investments
|
(28.8 | ) | — | (28.8 | ) | |||||||
|
Other adjustments to reconcile net income to net cash provided
by operating activities
|
193.6 | 106.9 | 300.5 | |||||||||
|
Changes in cash held by consolidated investment products
|
— | 45.0 | 45.0 | |||||||||
|
Other changes in operating assets and liabilities
|
(162.2 | ) | (1.1 | ) | (163.3 | ) | ||||||
|
|
||||||||||||
|
Net cash (used in)/provided by operating activities
|
325.8 | 36.9 | 362.7 | |||||||||
|
|
||||||||||||
|
Net proceeds of investments by consolidated investment products
|
— | 8.0 | 8.0 | |||||||||
|
Other investing activities
|
(110.4 | ) | — | (110.4 | ) | |||||||
|
|
||||||||||||
|
Net cash (used in)/provided by investing activities
|
(110.4 | ) | 8.0 | (102.4 | ) | |||||||
|
|
||||||||||||
|
Net capital distributed by consolidated investment products
|
— | (44.9 | ) | (44.9 | ) | |||||||
|
Other financing activities
|
(55.8 | ) | — | (55.8 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by/(used in) financing activities
|
(55.8 | ) | (44.9 | ) | (100.7 | ) | ||||||
|
|
||||||||||||
|
Decrease in cash and cash equivalents
|
159.6 | — | 159.6 | |||||||||
|
Foreign exchange movement on cash and cash equivalents
|
17.2 | — | 17.2 | |||||||||
|
Cash and cash equivalents, beginning of period
|
585.2 | — | 585.2 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents, end of period
|
762.0 | — | 762.0 | |||||||||
|
|
||||||||||||
| Consolidated | ||||||||||||
| Before | Investment | |||||||||||
| $ in millions | Consolidation | Products | Total | |||||||||
|
For the year ended December 31, 2008
|
||||||||||||
|
Net income
|
483.4 | (62.4 | ) | 421.0 | ||||||||
|
Net purchases of trading investments
|
0.3 | — | 0.3 | |||||||||
|
Other adjustments to reconcile net income to net cash provided
by operating activities
|
224.3 | 58.0 | 282.3 | |||||||||
|
Changes in cash held by consolidated investment products
|
— | (37.1 | ) | (37.1 | ) | |||||||
|
Other changes in operating assets and liabilities
|
(132.2 | ) | (8.8 | ) | (141.0 | ) | ||||||
|
|
||||||||||||
|
Net cash (used in)/provided by operating activities
|
575.8 | (50.3 | ) | 525.5 | ||||||||
|
|
||||||||||||
|
Net proceeds of investments by consolidated investment products
|
— | 175.6 | 175.6 | |||||||||
|
Other investing activities
|
(274.0 | ) | — | (274.0 | ) | |||||||
|
|
||||||||||||
|
Net cash (used in)/provided by investing activities
|
(274.0 | ) | 175.6 | (98.4 | ) | |||||||
|
|
||||||||||||
|
Net capital distributed by consolidated investment products
|
— | (125.3 | ) | (125.3 | ) | |||||||
|
Other financing activities
|
(541.1 | ) | — | (541.1 | ) | |||||||
|
|
||||||||||||
|
Net cash provided by/(used in) financing activities
|
(541.1 | ) | (125.3 | ) | (666.4 | ) | ||||||
|
|
||||||||||||
|
Decrease in cash and cash equivalents
|
(239.3 | ) | — | (239.3 | ) | |||||||
|
Foreign exchange movement on cash and cash equivalents
|
(91.3 | ) | — | (91.3 | ) | |||||||
|
Cash and cash equivalents, beginning of period
|
915.8 | — | 915.8 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents, end of period
|
585.2 | — | 585.2 | |||||||||
|
|
||||||||||||
Operating Activities
Operating cash flows are generated by the receipt of investment management and other fees
generated from AUM, offset by operating expenses and changes in operating assets and liabilities.
Although some receipts and payments are seasonal, particularly bonus payments, in general, after
allowing for the change in cash held by consolidated investment products, our operating cash flows
move in the same direction as our operating income.
63
Table of Contents
In 2010, cash generated by operating activities increased $16.5 million to $379.2 million from
$362.7 million in 2009. As shown in the tables above, consolidated investment products used $222.0
million of cash in operating activities in 2010 compared to contributing $36.9 million in 2009. The
sum of the operating, investing and financing cash flows of consolidated investment products
offsets to a zero impact to the company’s change in cash and cash equivalent balances from period
to period. Excluding the impact of consolidated investment products, cash generated by operations
was $601.2 million in 2010 compared to $325.8 million in 2009.
The generation of $601.2 million of cash from operations in 2010 included:
| • | net purchases of trading investments of $60.4 million. Trading investments are held to provide an economic hedge against staff deferred compensation plan awards together with investments held for a short period, often only a few days, for the purpose of creating a UIT. | ||
| • | net cash generated from the other operating activities of $661.6 million, representing net income as adjusted for non-cash items and the changes in operating assets and liabilities. Annual staff bonus accruals at the end of 2010 exceeded the cash bonus payments made in 2010 by $66.7 million, the payments made in 2010 reflecting staff expenses accrued in 2009. This expense and cash paid timing difference results in operating cash flows in a calendar year differing from operating income reported in the Consolidated Statements of Income. This has contributed to the operating cash generated in 2010 exceeding operating income for the year. Related payroll taxes and annual pension contributions have similar, albeit less significant timing impacts. |
The $325.8 million of cash generated from operations in 2009 included:
| • | net purchases of trading investments of $28.8 million principally for staff deferred compensation plan awards. | ||
| • | cash generated from the other operating activities of $354.6 million, representing net income as adjusted for non-cash items and the changes in operating assets and liabilities. Cash payments made in 2009 related to staff bonuses exceeded the bonus expense accrual for 2009 by $71.4 million and contributed to operating cash flow being below operating income for the year. |
After excluding the net purchase of trading investments, cash generated from other operating
activities in 2010 improved by $307.0 million from $354.6 million in 2009 to $661.6 million in
2010. This reflects the improved operating income together with the timing differences on staff
bonus and other staff compensation related payments.
The 35.2% reduction in operating income for the year ended December 31, 2009, when compared to
2008 is a significant factor in the year-on-year reduced operating cash flows. After excluding the
impact of consolidated investment products, cash provided by operating activities in 2009 was
$325.8 million, a decrease of $250.0 million or 43.4% over 2008. The timing of the funding of
annual bonuses combined with the lower levels of accrued bonus awards at the end of 2009
contributed to operating cash falling by a greater percentage than operating income.
Investing Activities
Net cash used in investing activities totaled $337.8 million for the year ended December 31,
2010 (2009: net cash used of $102.4 million). As shown in the table above, consolidated investment
products, including investment purchases, sales and returns of capital, contributed $498.6 million
(2009: $8.0 million contributed). After allowing for these consolidated investment product cash
flows, net cash used in investing activities was $840.0 million (2009: net cash used of $110.4
million). The closing of the acquisition on June 1, 2010 resulted in the payment of cash
consideration of $770.0 million while the acquired business had cash and cash equivalents on its
balance sheet of $57.8 million on that date, giving a net cash outflow of $712.2 million. In 2010,
additional net acquisition payments were $37.4 million together with acquisition earn-out payments
of $26.3 million (2009: $34.2 million).
In addition, during the year ended December 31, 2010 the company purchased available-for-sale
investments and other investments of $109.1 million (2009: $104.1 million) and had capital
expenditures of $89.6 million (2009: $39.5 million). These cash outflows were partly offset from
collected proceeds of $134.6 million from sales and returns of capital of investments in 2010
(2009: $60.6 million).
64
Table of Contents
The increase in capital expenditure cash outflows in 2010 when compared to 2009 was primarily
related to technology and computer hardware needed for the acquired business. Our capital
expenditures related principally in each year to technology initiatives, including new platforms
from which we maintain our portfolio management systems and fund accounting systems, improvements
in computer hardware and software desktop products for employees, new telecommunications products
to enhance our internal information flow, and back-up disaster recovery systems. Also, in each
year, a portion of total capital expenditures were related to leasehold improvements made to the
various buildings and workspaces used in our offices. These projects have been funded with proceeds
from our operating cash flows. During the years ended December 31, 2010 and 2009, our capital
divestitures were not significant relative to our total fixed assets.
Net cash used in investing activities totaled $102.4 million for the year ended December 31,
2009 compared to $98.4 million for the year ended December 31, 2008. As shown in the table above,
consolidated investment products, including investment purchases, sales and returns of capital,
contributed $8.0 million (2008: $175.6 million contributed). After allowing for these consolidated
investment product cash flows, net cash used in investing activities was $110.4 million in 2009
compared to net cash used of $274.0 million in 2008. The increased use of investing activity cash
in 2008 reflected higher levels of acquisition earn-out payments and capital expenditure.
Acquisition earn-out cash payments were $34.2 million in 2009 compared to $174.3 million in 2008,
the payments relating to the 2006 acquisitions of PowerShares and WL Ross & Co. Capital expenditure
in 2009 was $39.5 million compared to $84.1 million in 2008, the 2008 amount including leasehold
improvements related to new headquarters space in Atlanta.
Financing Activities
Net cash used in financing activities totaled $65.9 million for the year ended December 31,
2010 (2009: $100.7 million). As shown in the table above, the financing activities of the
consolidated investment products used cash of $276.6 million during the year (2009: $44.9 million).
Excluding the impact of the consolidated investment products, financing activities provided cash of
$214.3 million in the year ended December 31, 2010 (2009: cash utilized $55.8 million).
To provide the cash funding needed to complete the business acquisition in late May 2010,
$650.0 million was borrowed from the company’s $1,250.0 million credit facility. The balance on the
facility at December 31, 2010 was $570.0 million as $80.0 million of cash generated from operating
activities was utilized to partially repay the initial amount borrowed. Financing cash activities
in 2009 included an equity issuance generating cash proceeds of $441.8 million and the redemption
of senior notes of $397.2 million.
Other financing cash flows during the year ended December 31, 2010 included $197.9 million of
dividend payments for the dividends declared in January, April, July and October 2010 (2009:
dividends paid of $168.9 million), the purchase of treasury shares through market transactions
totaling $192.2 million (2009: none), cash inflows from the exercise of options of $19.6 million
(2009: $80.0 million), and excess tax benefits cash inflows from share-based compensation of $14.8
million (2009: $9.4 million).
Net cash used by financing activities in 2009 of $100.7 million decreased from $666.4 million
utilized in 2008. As shown in the table above, the financing activities of the consolidated
investment products used cash of $44.9 million during 2009 (2008: $125.3 million). Excluding the
impact of the consolidated investment products, financing activities used cash of $55.8 million in
2009 compared to $541.1 million in 2008. During 2008 the company used $313.4 million of cash for
treasury share purchases through market transactions, there being no equivalent purchases in 2009.
Dividends paid in 2009 totaled $168.9 million compared to $207.1 million in 2008, the 2008 payments
including the annual dividend for 2007 (the company converting to a quarterly dividend payment
pattern from 2008). Repayments of $397.2 million and $12.0 million were made to senior notes and
the credit facility respectively in 2009 compared to $2.8 million and $114.4 million respectively
in 2008. There was no equity issuance in 2008.
Dividends
Invesco declares and pays dividends on a quarterly basis in arrears. The 2010 quarterly
dividend was $0.11 per Invesco Ltd. common share. On October 25, 2010, the company declared a third
quarter cash dividend, which was paid on December 8, 2010, to shareholders of record as of November
19, 2010. On January 27, 2011, the company declared a fourth quarter cash dividend, which will be
paid on March 9, 2011, to shareholders of record as of February 23, 2011. The total dividend
attributable to the 2010 fiscal year of $0.44 per share represented a 7.3% increase over the total
dividend attributable to the 2009 fiscal year of $0.41 per share.
The declaration, payment and amount of any future dividends will be declared by our board of
directors and will depend upon, among other factors, our earnings, financial condition and capital
requirements at the time such declaration and payment are considered. The board has a policy of
managing dividends in a prudent fashion, with due consideration given to profit levels, overall
debt levels, and historical dividend payouts.
65
Table of Contents
Share Repurchase Plan
On April 23, 2008, the board of directors authorized a share repurchase program of up to $1.5
billion with no stated expiration date. During the year ended December 31, 2010, the company
repurchased 9.4 million common shares utilizing $192.2 million (December 31, 2009: no purchases),
leaving approximately $1.2 billion authorized at the end of the year. Separately, an aggregate of
1.9 million shares were withheld on vesting events during the year ended December 31, 2010, to meet
employees’ tax obligations (December 31, 2009: 1.6 million). The carrying value of these shares
withheld was $47.9 million (December 31, 2009: $22.9 million).
Debt
Our total indebtedness at December 31, 2010 was $1,315.7 million (December 31, 2009 is $745.7
million) and was comprised of the following:
| December 31, | December 31, | |||||||
| $ in millions | 2010 | 2009 | ||||||
|
Unsecured Senior Notes:
|
||||||||
|
5.625% — due April 17, 2012
|
215.1 | 215.1 | ||||||
|
5.375% — due February 27, 2013
|
333.5 | 333.5 | ||||||
|
5.375% — due December 15, 2014
|
197.1 | 197.1 | ||||||
|
Floating rate credit facility expiring May 23, 2013
|
570.0 | — | ||||||
|
|
||||||||
|
Total debt
|
1,315.7 | 745.7 | ||||||
|
Less: current maturities of total debt
|
— | — | ||||||
|
|
||||||||
|
Long-term debt
|
1,315.7 | 745.7 | ||||||
|
|
||||||||
For the three months and year ended December 31, 2010, the company’s weighted average cost of
debt was 3.68% and 4.30%, respectively (three months and year ended December 31, 2009: 5.27% and
5.14%, respectively). Total debt increased from $745.7 million at December 31, 2009, to $1,315.7
million at December 31, 2010, due primarily to borrowings under our credit facility.
On June 2, 2009, the company commenced a tender offer for the maximum aggregate principal
amount of the outstanding 5.625% senior notes due 2012, the 5.375% senior notes due 2013, and the
5.375% senior notes due 2014 (collectively, the “Notes”) that it could purchase for $100.0 million
at a purchase price per $1,000 principal amount determined in accordance with the procedures of a
modified “Dutch Auction” (tender offer). The tender offer expired at midnight on June 29, 2009, and
on June 30, 2009, $104.3 million of the Notes had been retired, generating a gross gain of $4.3
million upon the retirement of debt at a discount.
On June 9, 2009, the company completed a three-year $500.0 million revolving bank credit
facility. The new facility replaced the $900.0 million credit facility that was scheduled to expire
on March 31, 2010, but was terminated concurrent with the entry into the new credit facility.
Financial covenants under the credit facility included: (i) the quarterly maintenance of a
debt/EBITDA ratio, as defined in the credit agreement, of not greater than 3.25:1.00 through
December 31, 2010, and not greater than 3.00:1.00 thereafter, (ii) a coverage ratio (EBITDA, as
defined in the credit agreement/interest payable for the four consecutive fiscal quarters ended
before the date of determination) of not less than 4.00:1.00, and (iii) maintenance on a monthly
basis of consolidated long term assets under management (as defined in the credit agreement) of not
less than $194.8 billion, which amount is subject to a one-time reset by the company under certain
conditions.
On May 24, 2010, the company terminated the $500.0 million credit facility and entered into a
new $1,250 million credit facility. Amounts borrowed under the credit facility are repayable at
maturity on May 23, 2013. Financial covenants under the credit agreement include: (i) the quarterly
maintenance of a debt/EBITDA ratio, as defined in the credit agreement, of not greater than
3.25:1.00 through December 31, 2011, and not greater than 3.00:1.00 thereafter, (ii) a coverage
ratio (EBITDA, as defined in the credit agreement/interest payable for the four consecutive fiscal
quarters ended before the date of determination) of not less than 4.00:1.00. As of December 31,
2010 we were in compliance with our financial covenants. At December 31, 2010 our leverage ratio
was 1.34:1.00 (December 31, 2009: 1.11:1.00), and our interest coverage ratio was 17.27:1.00
(December 31, 2009: 11.01:1.00).
66
Table of Contents
The coverage ratios, as defined in our credit facility, were as follows during 2010, 2009 and
2008:
| 2010 | ||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | |||||||||||||
|
Leverage Ratio
|
0.99 | 1.60 | 1.52 | 1.34 | ||||||||||||
|
Interest Coverage Ratio
|
13.06 | 13.03 | 16.43 | 17.26 | ||||||||||||
|
Long-term AUM
|
350.6 | N/A | * | N/A | * | N/A | * | |||||||||
| 2009 | ||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | |||||||||||||
|
Leverage Ratio
|
1.48 | 1.63 | 1.77 | 1.11 | ||||||||||||
|
Interest Coverage Ratio
|
11.31 | 9.64 | 9.12 | 11.01 | ||||||||||||
|
Long-term AUM
|
N/A | * | 299.0 | 329.7 | 343.6 | |||||||||||
| 2008 | ||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | |||||||||||||
|
Leverage Ratio
|
1.25 | 1.11 | 1.17 | 1.28 | ||||||||||||
|
Interest Coverage Ratio
|
16.99 | 16.53 | 15.19 | 12.20 | ||||||||||||
| * | Long-term AUM became a debt covenant measure as part of the June 9, 2009 credit facility agreement and was discontinued as a financial covenant measure as part of the May 24, 2010 credit facility agreement. Long-term AUM was not required to be restated as part of the agreement and therefore amounts have not been adjusted from what was previously reported. |
The December 31, 2010, coverage ratio calculations are as follows:
| $ millions | Total | Q4 2010 | Q3 2010 | Q2 2010 | Q1 2010 | |||||||||||||||
|
Net income attributable to common shareholders
|
465.7 | 175.2 | 154.7 | 40.8 | 95.0 | |||||||||||||||
|
Net income attributable to Consolidated Investment Products
|
(9.8 | ) | (4.2 | ) | (1.8 | ) | (2.2 | ) | (1.6 | ) | ||||||||||
|
Tax expense
|
197.0 | 55.7 | 54.5 | 36.7 | 50.1 | |||||||||||||||
|
Amortization/depreciation
|
96.7 | 31.3 | 26.3 | 20.8 | 18.3 | |||||||||||||||
|
Interest expense
|
58.6 | 16.0 | 16.1 | 14.1 | 12.4 | |||||||||||||||
|
Share-based compensation expense
|
117.8 | 30.8 | 31.5 | 31.3 | 24.2 | |||||||||||||||
|
Unrealized gains and losses from investments, net*
|
8.9 | 8.4 | (8.8 | ) | 7.7 | 1.6 | ||||||||||||||
|
Acquired business proforma EBITDA impact**
|
76.9 | — | — | 35.7 | 41.2 | |||||||||||||||
|
|
||||||||||||||||||||
|
EBITDA***
|
1,011.8 | 313.2 | 272.5 | 184.9 | 241.2 | |||||||||||||||
|
|
||||||||||||||||||||
|
Adjusted debt***
|
$ | 1,351.2 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Leverage ratio (Debt/EBITDA — maximum 3.25:1.00)
|
1.34 | |||||||||||||||||||
|
|
||||||||||||||||||||
|
Interest coverage (EBITDA/Interest Expense — minimum 4.00:1.00)
|
17.26 | |||||||||||||||||||
|
|
||||||||||||||||||||
| * | Adjustments for unrealized gains and losses from investments, as defined in our credit facility, include non-cash gains and losses on investments to the extent that they do not represent anticipated future cash receipts or expenditures. | |
| ** | The credit facility agreement requires that the company shall calculate EBITDA on a proforma basis including the impact of the acquired business as if the acquisition had occurred on the first day of the EBITDA period. | |
| *** | EBITDA and Adjusted debt are non-GAAP financial measures; however management does not use these measures for anything other than these debt covenant calculations. The calculation of EBTIDA above (a reconciliation from net income attributable to common shareholders) is defined by our credit agreement, and therefore net income attributable to common shareholders is the most appropriate GAAP measure from which to reconcile to EBITDA. The calculation of adjusted debt is defined in our credit facility and equals total long-term debt of $1,315.7 million plus $35.5 million in letters of credit. |
67
Table of Contents
We have received credit ratings of A3/Stable and A-/Stable from Moody’s and Standard & Poor’s
credit rating agencies, respectively, as of the date of this Annual Report on Form 10-K. According
to Moody’s, obligations rated ‘A’ are considered upper medium grade and are subject to low credit
risk. Invesco’s rating of A3 is at the low end of the A range (A1, A2, A3), but three notches above
the lowest investment grade rating of Baa3. Standard and Poor’s rating of A- is at the lower end of
the A rating, with BBB- representing Standard and Poor’s lowest investment grade rating. According
to Standard and Poor’s, A obligations exhibit a strong capacity to meet financial commitments, but
are somewhat susceptible to adverse economic conditions or changing circumstances. We believe that
rating agency concerns include but are not limited to: our revenues are somewhat exposed to equity
market volatility, negative tangible equity, potential impact from regulatory changes to the
industry, and integration risk related to the acquisition of Morgan Stanley’s retail asset
management business. Additionally, the rating agencies could decide to downgrade the entire
investment management industry, based on their perspective of future growth and solvency. Material
deterioration of these factors, and others defined by each rating agency, could result in
downgrades to our credit ratings, thereby limiting our ability to generate additional financing.
Our credit facility borrowing rates are tied to our credit ratings. However, management believes
that solid investment grade ratings are an important factor in winning and maintaining
institutional business and strives to manage the company to maintain such ratings. Disclosure of
these ratings is not a recommendation to buy, sell or hold our debt. These credit ratings may be
subject to revision or withdrawal at anytime by Moody’s or Standard & Poor’s. Each rating should be
evaluated independently.
The discussion that follows identifies risks associated with the company’s liquidity and
capital resources. The Executive Overview of this Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains a broader discussion of the company’s overall approach
to risk management.
Credit and Liquidity Risk
Capital management involves the management of the company’s liquidity and cash flows. The
company manages its capital by reviewing annual and projected cash flow forecasts and by monitoring
credit, liquidity and market risks, such as interest rate and foreign currency risks (as discussed
in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”), through measurement and
analysis. The company is primarily exposed to credit risk through its cash and cash equivalent
deposits, which are held by external firms. The company invests its cash balances in its own
institutional money market products, as well as with external high credit-quality financial
institutions; however, we have chosen to limit the number of firms with which we invest. These
arrangements create exposure to concentrations of credit risk.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation. The company is subject to credit risk in
the following areas of its business:
| • | All cash and cash equivalent balances are subject to credit risk, as they represent deposits made by the company with external banks and other institutions. As of December 31, 2010, our maximum exposure to credit risk related to our cash and cash equivalent balances is $740.5 million. Of this amount, cash and cash equivalents invested in affiliated money market funds (related parties) totaled $289.6 million at December 31, 2010. | ||
| • | Certain trust subsidiaries of the company accept deposits and place deposits with other institutions on behalf of our customers. As of December 31, 2010, our exposure to credit risk related to these transactions is $2.4 million. |
The company does not utilize credit derivatives or similar instruments to mitigate the maximum
exposure to credit risk. The company does not expect any counterparties to its financial
instruments to fail to meet their obligations.
Liquidity Risk
Liquidity risk is the risk that the company will encounter difficulty in meeting obligations
associated with its financial liabilities. The company is exposed to liquidity risk through its
$1,315.7 million in total debt. The company actively manages liquidity risk by preparing cash flow
forecasts for future periods, reviewing them regularly with senior management, maintaining a
committed credit facility, scheduling significant gaps between major debt maturities and engaging
external financing sources in regular dialog.
68
Table of Contents
Effects of Inflation
Inflation can impact our organization primarily in two ways. First, inflationary pressures can
result in increases in our cost structure, especially to the extent that large expense components
such as compensation are impacted. To the degree that these expense increases are not recoverable
or cannot be counterbalanced through pricing increases due to the competitive environment, our
profitability could be negatively impacted. Secondly, the value of the assets that we manage may be
negatively impacted when inflationary expectations result in a rising interest rate environment.
Declines in the values of these AUM could lead to reduced revenues as management fees are generally
calculated based upon the size of AUM.
Off Balance Sheet Commitments
The company has transactions with various private equity, real estate and other investment
entities sponsored by the company for the investment of client assets in the normal course of
business. Many of the company’s investment products are structured as limited partnerships. The
company’s investment may take the form of the general partner or a limited partner, and the
entities are structured such that each partner makes capital commitments that are to be drawn down
over the life of the partnership as investment opportunities are identified. At December 31, 2010,
the company’s undrawn capital commitments were $136.4 million (December 31, 2009: $77.6 million).
The volatility and valuation dislocations that have occurred from 2007 to the date of this
Report in certain sectors of the fixed income market have generated pricing issues in many areas of
the market. As a result of these valuation dislocations, during the fourth quarter of 2007, Invesco
elected to enter into contingent support agreements for two of its investment trusts to enable them
to sustain a stable pricing structure. These two trusts are unregistered trusts that invest in
fixed income securities and are available only to strictly limited types of investors. In December
2010, the agreements were amended to extend the term through June 30, 2011; further extensions are
likely. As of December 31, 2010, the total committed support under these agreements was $36.0
million with an internal approval mechanism to increase the maximum possible support to $66.0
million at the option of the company. The estimated value of these agreements at December 31, 2010
was $2.0 million (December 31, 2009: $2.5 million), which was recorded in other current liabilities
on the Consolidated Balance Sheet. The estimated value of these agreements is lower than the
maximum support amount, reflecting management’s estimation that the likelihood of funding under the
support agreements is low. Significant investor redemptions out of the trusts before the scheduled
maturity of the underlying securities or significant credit default issues of the securities held
within the trusts’ portfolios could change the company’s estimation of likelihood of funding. No
payment has been made under either agreement nor has Invesco realized any loss from the support
agreements through the date of this Report. These trusts were not consolidated because the company
was not deemed to be the primary beneficiary.
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Contractual Obligations
We have various financial obligations that require future cash payments. The following table
outlines the timing of payment requirements related to our commitments as of December 31, 2010:
| Within | 1-3 | 3-5 | More Than | |||||||||||||||||
| $ in millions | Total (4)(5) | 1 Year | Years | Years | 5 Years | |||||||||||||||
|
Total debt
|
1,315.7 | — | 1,118.6 | 197.1 | — | |||||||||||||||
|
Estimated interest payments on total debt
(1)
|
116.0 | 48.4 | 57.0 | 10.6 | — | |||||||||||||||
|
Operating leases
(2)
|
671.6 | 67.7 | 128.9 | 125.5 | 349.5 | |||||||||||||||
|
Defined benefit pension and postretirement medical obligations
(3)
|
388.5 | 9.0 | 20.0 | 23.0 | 336.5 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
2,604.7 | 135.0 | 1,344.4 | 375.6 | 749.7 | |||||||||||||||
|
|
||||||||||||||||||||
| (1) | Total debt includes $745.7 million of fixed rate debt. Fixed interest payments are therefore reflected in the table above in the periods they are due. The credit facility, $570.0 million at December 31, 2010, provides for borrowings of various maturities. Interest is payable based upon LIBOR, Prime, Federal Funds or other bank-provided rates in existence at the time of each borrowing. | |
| (2) | Operating leases reflect obligations for leased building space and sponsorship and naming rights agreements. See Item 8, Financial Statements and Supplementary Data — Note 14, “Operating Leases” for sublease information. | |
| (3) | The defined benefit obligation of $388.5 million is comprised of $336.1 million related to pension plans and $52.4 million related to a postretirement medical plan. The fair value of plan assets at December 31, 2010, was $286.0 million for the retirement plan and $8.1 million for the medical plan. See Item 8, Financial Statements and Supplementary Data — Note 13, “Retirement Benefit Plans” for detailed benefit pension and postretirement plan information. | |
| (4) | Other contingent payments at December 31, 2010, include up to $500.0 million related to the PowerShares acquisition and $40.9 million related to the WL Ross & Co. acquisition, which are excluded until such time as they are probable and reasonably estimable. Additionally, the company has capital commitments into co-invested funds that are to be drawn down over the life of the partnership as investment opportunities are identified. At December 31, 2010, the company’s undrawn capital commitments were $136.4 million. See Note 19, “Commitments and Contingencies” for additional details. Contingent commitments also include an acquired liability for deferred structuring fees of $20.8 million. See Note 2, “Business Combination and Integration” for additional details. | |
| (5) | Due to the uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits at December 31, 2010, the company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $27.1 million of gross unrecognized tax benefits have been excluded from the contractual obligations table above. See Item 8, Financial Statements and Supplementary Data, Note 16 — “Taxation” for a discussion on income taxes. |
Critical Accounting Policies and Estimates
Our significant accounting policies are disclosed in Item 8, Financial Statements and
Supplementary Data — Note 1, “Accounting Policies” to our Consolidated Financial Statements. The
accounting policies and estimates that we believe are the most critical to an understanding of our
results of operations and financial condition are those that require complex management judgment
regarding matters that are highly uncertain at the time policies were applied and estimates were
made. These accounting policies and estimates are discussed below. Different estimates reasonably
could have been used in the current period that would have had a material effect on these financial
statements, and changes in these estimates are likely to occur from period-to-period in the future.
Taxation.
We operate in several countries and several states through our various subsidiaries,
and must allocate our income, expenses, and earnings under the various laws and regulations of each
of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total
estimate of the liability that we have incurred for doing business each year in all of our
locations. Annually we file tax returns that represent our filing positions within each
jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those
returns and may take different positions with respect to income and expense allocations and taxable
earnings determinations. Because the determinations of our annual provisions are subject to
judgments and estimates, it is possible that actual results will vary from those recognized in our
financial statements. As a result, it is likely that additions to, or reductions of, income tax
expense will occur each year for prior reporting periods as actual tax returns and tax audits are
settled.
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Deferred tax assets and liabilities are recorded for temporary differences between the tax
basis of assets and liabilities and the reported amounts in the Consolidated Financial Statements,
using the statutory tax rates in effect for the year in which the differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the results of operations in the period that includes the enactment date. A valuation allowance
is recorded to reduce the carrying amounts of deferred tax assets to the amount that is more likely
than not to be realized.
As a multinational corporation, the company operates in various locations around the world and
we generate substantially all of our earnings from our subsidiaries. Under ASC 740-30, deferred tax
liabilities are recognized for taxes that would be payable on the unremitted earnings of the
company’s subsidiaries, consolidated investment products, and joint ventures, except where it is
our intention to and we continue to indefinitely reinvest the undistributed earnings. Our Canadian
and U.S. subsidiaries continue to be directly owned by Invesco Holding Company Limited (formerly
INVESCO PLC, our predecessor company), which is directly owned by Invesco Ltd. Our Canadian
unremitted earnings, for which we are indefinitely reinvested, are estimated to be $1,131 million
at December 31, 2010, compared with $1,016 million at December 31, 2009. If distributed as a
dividend, Canadian withholding tax of 5.0% would be due. Dividends from our investment in the U.S.
should not give rise to additional tax as we are not subject to withholding tax between the U.S.
and U.K. Deferred tax liabilities in the amount of $3.1 million (2009: $2.3 million) for additional
tax have been recognized for unremitted earnings of certain subsidiaries that have regularly
remitted earnings and are expected to continue to remit earnings in the foreseeable future. There
is no additional tax on dividends from the U.K. to Bermuda.
Net deferred tax assets have been recognized in the U.S., U.K., and Canada based on
management’s belief that taxable income of the appropriate character, more likely than not, will be
sufficient to realize the benefits of these assets over time. In the event that actual results
differ from our expectations, or if our historical trends of positive operating income in any of
these locations changes, we may be required to record a valuation allowance on deferred tax assets,
which may have a significant effect on our financial condition and results of operations.
The company utilizes a specific recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. The prescribed two-step process for evaluating a tax position involves first
determining whether it is more likely than not that a tax position will be sustained upon
examination by the appropriate taxing authorities. If it is, the second step then requires a
company to measure this tax position benefit as the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. The company recognizes any interest
and penalties related to unrecognized tax benefits on the Consolidated Statements of Income as
components of income tax expense.
Goodwill.
Goodwill represents the excess of the cost of an acquired entity over the net of the
amounts assigned to assets acquired and liabilities assumed and is recorded in the functional
currency of the acquired entity. Goodwill is tested for impairment at the single reporting unit
level on an annual basis, or more often if events or circumstances indicate that impairment may
exist. If the carrying amount of the reporting unit exceeds its fair value (the first step of the
goodwill impairment test), then the second step is performed to determine if goodwill is impaired
and to measure the amount of the impairment loss, if any. The second step of the goodwill
impairment test compares the implied fair value of goodwill with the carrying amount of goodwill.
If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss
is recognized in an amount equal to that excess. The company’s annual goodwill impairment review is
performed as of October 1 of each year. As a result of that analysis, the company determined that
no impairment existed at that date. Our goodwill impairment testing conducted during 2010 and 2009
indicated that the fair value of the reporting unit exceeded its carrying value, indicating that
step two of the goodwill impairment test was not necessary.
We have determined that we have one operating and reportable segment. The company evaluated
the components of its business, which are business units one level below the operating segment
level, and has determined that it has one reporting unit for purposes of goodwill impairment
testing. The company’s components include Invesco Institutional, Invesco North American Retail,
Invesco Perpetual, Invesco Continental Europe and Invesco Asia Pacific. The company’s operating
segment represents one reporting unit because all of the components are similar due to the common
nature of products and services offered, type of clients, methods of distribution, manner in which
each component is operated, extent to which they share assets and resources, and the extent to
which they support and benefit from common product development efforts. Traditional profit and loss
measures are not produced, and therefore not reviewed by component management, for any of the
components. Furthermore, the financial information that is available by component is not sufficient
for purposes of performing a discounted cash flow analysis at the component level in order to test
goodwill for impairment at that level. As none of our components are reporting units, we have
determined that our single operating segment, investment management, is also our single reporting
unit.
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The principal method of determining fair value of the reporting unit is an income approach
where future cash flows are discounted to arrive at a single present value amount. The discount
rate used is derived based on the time value of money and the risk profile of the stream of future
cash flows. Recent results and projections based on expectation regarding revenues, expenses,
capital expenditures and acquisition earn out payments produce a present value for the reporting
unit. While the company believes all assumptions utilized in our assessment are reasonable and
appropriate, changes in these estimates could produce different fair value amounts and therefore
different goodwill impairment assessments. The most sensitive of these assumptions are the
estimated cash flows and the use of a weighted average cost of capital as the discount rate to
determine present value. The present value produced for the reporting unit is the fair value of the
reporting unit. This amount is reconciled to the company’s market capitalization to determine an
implied control premium, which is compared to an analysis of historical control premiums
experienced by peer companies over a long period of time to assess the reasonableness of the fair
value of the reporting unit.
The company also utilizes a market approach to provide a secondary and corroborative fair
value of the reporting unit by using comparable company and transaction multiples to estimate
values for our single reporting unit. Discretion and judgment is required in determining whether
the transaction data available represents information for companies of comparable nature, scope and
size. The results of the secondary market approach to provide a fair value estimate are not
combined or weighted with the results of the income approach described above but are used to
provide an additional basis to determine the reasonableness of the income approach fair value
estimate.
The company cannot predict the occurrence of future events that might adversely affect the
reported value of goodwill that totaled $6,980.2 million and $6,467.6 million at December 31, 2010
and December 31, 2009, respectively. Such events include, but are not limited to, strategic
decisions made in response to economic and competitive conditions, the impact of the economic
environment on the company’s assets under management, or any other material negative change in
assets under management and related management fees.
Due to deteriorating market conditions, interim impairment tests were performed at October 31,
2008, and March 31, 2009, using the most recently available operating information. These interim
tests also concluded that no impairment had occurred. Following the March 31, 2009, interim test,
the general market conditions improved and the company did not identify the need for further
interim tests during 2009 as no indicators of impairment existed. The March 31, 2009, interim
impairment test adopted an income approach consistent with the annual 2008 impairment tests, but
utilized the company’s updated forecasts for changes in AUM due to market gains and long-term net
flows and the corresponding changes in revenues and expenses. The primary assumption changes from
the October 31, 2008, valuation test were increases in the anticipated rise in equity markets in
the near-term and in net AUM sales. The increase in equity markets was based on an analysis of the
Dow Jones Industrial Average for 10 recession events between 1945 and 2001. The October 31, 2008,
valuation had assumed an equity market rise in-line with more normal non-recessionary experience.
The higher AUM net sales reflects new flows into the equity markets as values stabilize and
confidence returns, and also took into account the company’s improved relative investment
performance. A discount rate of 13.7% was used for the March 31, 2009, test, similar to the October
31, 2008, rate of 13.6% (October 1, 2008: 11.6%). The discount rates used are estimates of the
weighted average cost of capital for the investment management sector reflecting the overall
industry risks associated with future cash flows and have been calculated consistently across the
various tests dates.
The October 1, 2009, annual goodwill impairment test was performed using a consistent
methodology to that used for the March 31, 2009, interim impairment test, with the exception that
adjustments were made to remove the near-term equity market rise assumption, since much of the
market rebound had been experienced in the period between March 31, 2009, and October 1, 2009. A
discount rate of 12.9% was used for the October 1, 2009, analysis. A 40% decline in the fair value
of our reporting unit, or a 500 basis point increase in the discount rate assumption used during
our October 1, 2009, goodwill impairment analysis, would have caused the carrying value of our
reporting unit to be in excess of its fair value, which would require the second step of the
goodwill impairment test to be performed, which would have required a comparison of the implied
fair value of goodwill with the carrying amount of goodwill. The second step could have resulted in
an impairment loss for goodwill.
The October 1, 2010 annual goodwill impairment test was performed using a consistent
methodology to that used for the 2009 annual impairment test, with assumptions updated for current
market conditions. The most significant change in assumptions from 2009 related to an increase in
the market risk premium, which resulted in a discount rate of 14.9% for the October 1, 2010
analysis. A 43% decline in market value or a 700 basis point increase in the discount rate
assumption used during our October 1, 2010 goodwill impairment analysis would be required to cause
the carrying value of the reporting unit to be in excess of the market value, thus triggering step
two of the goodwill impairment test. The second step could have resulted in an impairment loss for
goodwill.
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Intangible Assets.
Intangible assets identified on the acquisition of a business are
capitalized separately from goodwill if the fair value can be measured reliably on initial
recognition (transaction date) and, if they are determined to be finite-lived, are amortized and
recorded as operating expenses on a straight-line basis over their useful lives, from two to 12
years, which reflects the pattern in which the economic benefits are realized. The company
considers its own assumptions, which require management’s judgment, about renewal or extension of
the term of the arrangement, consistent with its expected use of the asset. A change in the useful
life of an intangible asset could have a significant impact on the company’s amortization expense.
Where evidence exists that the underlying management contracts have a high likelihood of
continued renewal at little or no cost to the company, the intangible asset is assigned an
indefinite life and reviewed for impairment on an annual basis. The company reevaluates the useful
life determination for intangible assets each reporting period to determine whether events and
circumstances warrant a revision to the remaining useful life or an indication of impairment. The
indicators in ASC Topic 350-30 paragraphs 35-23 and 24 were considered in making the determination
that the indefinite-lived intangibles that arose from the June 1, 2010, acquisition of Morgan
Stanley’s retail asset management business comprise one unit of account for impairment testing
purposes. None of the indicators were considered presumptive or determinative; however, due to the
fact that the retail fund management contracts are managed under Invesco’s single retail branding
strategy and are used by various business components within the organization, the single unit of
account was deemed appropriate.
Definite-lived intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable (i.e. carrying amount
exceeds the sum of the fair value of the intangible). Intangible assets not subject to amortization
are tested for impairment annually as of October 1 or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test consists of a
comparison of the fair value of an intangible asset with its carrying amount. If the carrying
amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an
amount equal to that excess. Fair value is generally determined using an income approach where
estimated future cash flows are discounted to arrive at a single present value amount. The income
approach includes inputs that require significant management judgment, including discount rates,
revenue multiples and AUM growth rates. Changes in these estimates could produce different fair
value amounts and therefore different impairment conclusions.
Investments.
Most of our investments are carried at fair value on our balance sheet with the
periodic mark-to-market recorded either in accumulated other comprehensive income in the case of
available-for-sale investments or directly to earnings in the case of trading assets. Fair value is
generally determined by reference to an active trading market, using quoted close or bid prices as
of each reporting period end. When a readily ascertainable market value does not exist for an
investment, the fair value is calculated based on the expected cash flows of its underlying net
asset base, taking into account applicable discount rates and other factors. Since assumptions are
made in determining the fair values of investments for which active markets do not exist, the
actual value that may be realized upon the sale or other disposition of these investments could
differ from the current carrying values. Fair value calculations are also required in association
with our quarterly impairment testing of investments. The accuracy of our other-than-temporary
impairment assessments is dependent upon the extent to which we are able to accurately determine
fair values. Of our $473.2 million total investments at December 31, 2010, those most susceptible
to impairment include $99.5 million seed money investments in our affiliated funds. Seed money
investments are investments held in Invesco managed funds with the purpose of providing capital to
the funds during their development periods. These investments are recorded at fair value using
quoted market prices in active markets; there is no modeling or additional information needed to
arrive at the fair values of these investments.
The value of investments may decline for various reasons. The market price may be affected by
general market conditions which reflect prospects for the economy as a whole or by specific
information pertaining to an industry or individual company. Such declines require further
investigation by management, which considers all available evidence to evaluate the realizable
value of the investment, including, but not limited to, the following factors:
| • | The probability that the company will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition; | ||
| • | The length of time and the extent to which the market value has been less than cost; | ||
| • | The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer; | ||
| • | The intent and ability of the company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value; |
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| • | The decline in the security’s value due to an increase in market interest rates or a change in foreign exchange rates since acquisition; | ||
| • | Determination that the security is not realizable; or | ||
| • | An adverse change in estimated cash flows of a beneficial interest. |
Our other-than-temporary impairment analysis of seed money holdings includes a review of the
market returns required for each fund portfolio to enable us to recover our original investment. As
part of the review, we analyze several scenarios to project the anticipated recovery period of our
original investments based on one-, three-, and five-year historical index returns and historical
trends in the equity markets. We also analyze the absolute amount of any loss to date, the trend of
the losses, and percent declines in values of the seed money investments. Along with intent and
ability to hold, all of these scenarios are considered as part of our other-than-temporary
impairment analysis of seed money holdings.
Consolidated Investment Products.
The primary beneficiary of variable interest entities (VIEs)
consolidate the VIEs. A VIE is an entity that does not have sufficient equity to finance its
operations without additional subordinated financial support, or an entity for which the risks and
rewards of ownership are not directly linked to voting interests. The company provides investment
management services to, and has transactions with, various private equity funds, real estate funds,
fund-of-funds, CLOs, and other investment entities sponsored by the company for the investment of
client assets in the normal course of business. The company serves as the investment manager,
making day-to-day investment decisions concerning the assets of the products. Certain of these
entities are considered to be VIEs.
For all investment funds with the exception of CLOs, if the company is deemed to have a
variable interest in these entities, the company is deemed to be the fund’s primary beneficiary if
the company has the majority of rewards/risks of ownership. For CLOs, if the company is deemed to
have a variable interest in these entities, the company is deemed to be the fund’s primary
beneficiary if it has the power to direct the activities of the CLO that most significantly impact
the CLO’s economic performance, and the obligation to absorb losses/right to receive benefits from
the CLO that could potentially be significant to the CLO.
Assessing if an entity is a VIE or voting interest entity (VOE) involves judgment and analysis
on a structure-by-structure basis. Factors included in this assessment include the legal
organization of the entity, the company’s contractual involvement with the entity and any related
party or de facto agent implications of the company’s involvement with the entity. Generally,
limited partnership entities where the general partner does not have substantive equity investment
at risk and where the other limited partners do not have substantive (greater than 50%) rights to
remove the general partner or to dissolve the limited partnership are VIEs. Additionally, certain
investment products are VOEs and are structured as limited partnerships of which the company is the
general partner and is deemed to have control with the lack of substantive kick-out, liquidation or
participation rights of the other limited partners. These investment products are also consolidated
into the company’s financial statements.
Determining if the company is the primary beneficiary of a VIE also requires significant
judgment, as the calculation of expected losses and residual returns (for investment products other
than CLOs) involves estimation and probability assumptions. For CLOs, there is judgment involved to
assess if the company has the power to direct the activities that most significantly effect the
CLOs economic results and to assess if the company’s interests could be deemed significant. If
current financial statements are not available for consolidated VIEs or VOEs, estimation of
investment valuation is required, which includes assessing available quantitative and qualitative
data. Significant changes in these estimates could impact the reported value of the investments
held by consolidated investment products and the related offsetting equity attributable to
noncontrolling interests in consolidated entities on the Consolidated Balance Sheets and the other
gains and losses of consolidated investment products, net, and related offsetting gains and losses
attributable to noncontrolling interests in consolidated entities, net, amounts on the Consolidated
Statements of Income.
As of December 31, 2010 the company consolidated VIEs that held investments of $6,264.2
million (December 31, 2009: $67.9 million) and VOE fund investments of $941.3 million (December 31,
2009: $617.1 million). As circumstances supporting estimates and factors change, the determination
of VIE and primary beneficiary status may change, as could the determination of the necessity of
consolidation of VOEs.
Contingencies.
Contingencies arise when we have a present obligation (legal or constructive)
as a result of a past event that is both probable and reasonably estimable. We must from time to
time make material estimates with respect to legal and other contingencies. The nature of our
business requires compliance with various state and federal statutes, as well as various
contractual obligations, and exposes us to a variety of legal proceedings and matters in the
ordinary course of business. While the outcomes of matters such as these are inherently uncertain
and difficult to predict, we maintain reserves reflected in other current and other non-current
liabilities,
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as appropriate, for identified losses that are, in our judgment, probable and reasonably
estimable. Management’s judgment is based on the advice of legal counsel, ruling on various motions
by the applicable court, review of the outcome of similar matters, if applicable, and review of
guidance from state or federal agencies, if applicable. Contingent consideration payable in
relation to a business acquisition is recorded as of the acquisition date as part of the fair value
transferred in exchange for the acquired business.
Recent Accounting Standards
See Part II, Item 8, Financial Statements and Supplementary Data — Note 1, “Accounting
Policies — Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements.”
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of its business, the company is primarily exposed to market risk in the
form of securities market risk, interest rate risk, and foreign exchange rate risk.
AUM Market Price Risk
The company’s investment management revenues are comprised of fees based on a percentage of
the value of AUM. Declines in equity or fixed income security market prices could cause revenues to
decline because of lower investment management fees by:
| • | Causing the value of AUM to decrease. | ||
| • | Causing the returns realized on AUM to decrease (impacting performance fees). | ||
| • | Causing clients to withdraw funds in favor of investments in markets that they perceive to offer greater opportunity and that the company does not serve. | ||
| • | Causing clients to rebalance assets away from investments that the company manages into investments that the company does not manage. | ||
| • | Causing clients to reallocate assets away from products that earn higher revenues into products that earn lower revenues. |
Underperformance of client accounts relative to competing products could exacerbate these
factors.
Securities Market Risk
The company has investments in sponsored investment products that invest in a variety of asset
classes. Investments are generally made to establish a track record or to hedge economically
exposure to certain deferred compensation plans. The company’s exposure to market risk arises from
its investments. The following table summarizes the fair values of the investments exposed to
market risk and provides a sensitivity analysis of the estimated fair values of those investments,
assuming a 20% increase or decrease in fair values:
| Fair Value | Fair Value | |||||||||||
| Carrying | assuming 20% | assuming 20% | ||||||||||
| $ in millions | Value | increase | decrease | |||||||||
|
December 31, 2010
|
||||||||||||
|
Trading investments:
|
||||||||||||
|
Investments related to deferred compensation plans
|
165.5 | 198.6 | 132.4 | |||||||||
|
Available-for-sale investments:
|
||||||||||||
|
Seed money in affiliated funds
|
99.5 | 119.4 | 79.6 | |||||||||
|
Equity method investments
|
156.9 | 188.3 | 125.5 | |||||||||
|
Other
|
7.5 | 9.0 | 6.0 | |||||||||
|
|
||||||||||||
|
Total market risk on investments
|
429.4 | 515.3 | 343.5 | |||||||||
|
|
||||||||||||
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| Fair Value | Fair Value | |||||||||||
| Carrying | assuming 20% | assuming 20% | ||||||||||
| $ in millions | Value | increase | decrease | |||||||||
|
December 31, 2009
|
||||||||||||
|
Trading investments:
|
||||||||||||
|
Investments related to deferred compensation plans
|
84.6 | 101.5 | 67.7 | |||||||||
|
Available-for-sale investments:
|
||||||||||||
|
Seed money in affiliated funds
|
74.8 | 89.8 | 59.8 | |||||||||
|
Equity method investments
|
134.7 | 161.6 | 107.8 | |||||||||
|
Other
|
5.3 | 6.4 | 4.2 | |||||||||
|
|
||||||||||||
|
Total market risk on investments
|
299.4 | 359.3 | 239.5 | |||||||||
|
|
||||||||||||
Interest Rate Risk
Interest rate risk relates to the risk that the fair value of future cash flows of a financial
instrument will fluctuate because of changes in market interest rates. The company is exposed to
interest rate risk primarily through its external debt and cash and cash equivalent investments. On
December 31, 2010, the interest rates on 56.7% of the company’s borrowings were fixed for a
weighted average period of 2.4 years. Borrowings under the credit facility will have floating
interest rates. The interest rate profile of the financial assets of the company on December 31,
2010, was:
| Fair Value | Fair Value | |||||||||||
| assuming a | assuming a | |||||||||||
| Carrying | +1% interest | -1% interest | ||||||||||
| $ in millions | Value | rate change | rate change | |||||||||
|
December 31, 2010
|
||||||||||||
|
Available-for-sale investments:
|
||||||||||||
|
Collateralized loan obligations
|
0.5 | 0.5 | 0.5 | |||||||||
|
Foreign time deposits
|
28.2 | 28.3 | 28.2 | |||||||||
|
|
||||||||||||
|
Total investments
|
28.7 | 28.3 | 28.2 | |||||||||
|
|
||||||||||||
|
December 31, 2009
|
||||||||||||
|
Available-for-sale investments:
|
||||||||||||
|
Collateralized loan obligations
|
17.9 | 18.5 | 17.3 | |||||||||
|
Foreign time deposits
|
22.5 | 22.6 | 22.5 | |||||||||
|
|
||||||||||||
|
Total investments
|
40.4 | 41.1 | 39.8 | |||||||||
|
|
||||||||||||
The interest rate profile of the financial liabilities of the company on December 31 was:
| Weighted | Weighted Average | |||||||||||||||||||
| Average | Period for Which | |||||||||||||||||||
| Interest | Rate is Fixed | |||||||||||||||||||
| $ in millions | Total | Floating Rate | Fixed Rate* | Rate (%) | (Years) | |||||||||||||||
|
2010
|
||||||||||||||||||||
|
Currency:
|
||||||||||||||||||||
|
U.S. dollar
|
1,315.7 | 570.0 | 745.7 | 4.3 | % | 2.4 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Currency:
|
||||||||||||||||||||
|
U.S. dollar
|
745.7 | — | 745.7 | 5.1 | % | 3.4 | ||||||||||||||
|
Japanese yen
|
0.1 | — | 0.1 | 9.7 | % | 1.3 | ||||||||||||||
|
|
||||||||||||||||||||
|
|
745.8 | — | 745.8 | 5.1 | % | 3.4 | ||||||||||||||
| * | Measured at amortized cost. |
76
Table of Contents
See Item 8, Financial Statements and Supplementary Data — Note 9, “Debt” for additional
disclosures relating to the U.S. dollar floating and fixed rate obligations.
The company’s only fixed interest financial assets at December 31, 2010, are foreign time
deposit investments of $28.2 million (2009: $22.5 million). The weighted average interest rate on
these investments is 0.57% (2009: 0.74%) and the weighted average time for which the rate is fixed
is 0.4 years (2009: 0.4 years).
Foreign Exchange Rate Risk
The company has transactional currency exposures that occur when any of the company’s
subsidiaries receives or pays cash in a currency different from its functional currency. Such
exposure arises from sales or purchases by an operating unit in currencies other than the unit’s
functional currency. These exposures are not actively managed.
The company also has certain investments in foreign operations, whose net assets and results
of operations are exposed to foreign currency translation risk when translated into U.S. dollars
upon consolidation into Invesco Ltd. The company does not hedge these exposures.
The company is exposed to foreign exchange revaluation into the income statement on monetary
assets and liabilities that are held by subsidiaries in different functional currencies than the
subsidiaries’ functional currencies. Net foreign exchange revaluation losses were $1.0 million in
2010 (2009: gains of $7.6 million), and are included in general and administrative expenses and
other gains and losses, net on the Consolidated Statements of Income. We continue to monitor our
exposure to foreign exchange revaluation.
77
Table of Contents
Supplementary Quarterly Financial Data
The following is selected unaudited consolidated data for Invesco Ltd. for the quarters
indicated:
| $ in millions, except per share data | Q410 | Q310 | Q210 | Q110 | Q409 | Q309 | Q209 | Q109 | ||||||||||||||||||||||||
|
Operating revenues:
|
||||||||||||||||||||||||||||||||
|
Investment management fees
|
$ | 773.7 | $ | 725.8 | $ | 627.9 | $ | 593.5 | $ | 611.8 | $ | 570.3 | $ | 501.6 | $ | 436.5 | ||||||||||||||||
|
Service and distribution fees
|
202.0 | 191.6 | 139.4 | 112.5 | 111.4 | 111.8 | 100.4 | 89.0 | ||||||||||||||||||||||||
|
Performance fees
|
18.7 | 2.5 | 3.5 | 1.4 | 6.8 | 4.3 | 8.0 | 10.9 | ||||||||||||||||||||||||
|
Other
|
34.1 | 33.2 | 16.2 | 11.7 | 17.8 | 19.4 | 15.1 | 12.2 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total operating revenues
|
1,028.5 | 953.1 | 787.0 | 719.1 | 747.8 | 705.8 | 625.1 | 548.6 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||||||||
|
Employee compensation
|
312.7 | 304.1 | 260.5 | 237.6 | 247.1 | 238.9 | 229.0 | 235.8 | ||||||||||||||||||||||||
|
Third-party distribution, service
and advisory
|
289.9 | 266.5 | 220.7 | 195.6 | 195.4 | 183.5 | 166.3 | 148.2 | ||||||||||||||||||||||||
|
Marketing
|
51.3 | 44.8 | 35.2 | 28.3 | 30.4 | 27.7 | 23.9 | 26.9 | ||||||||||||||||||||||||
|
Property, office and technology
|
65.6 | 63.5 | 55.8 | 53.5 | 54.8 | 63.0 | 48.6 | 45.9 | ||||||||||||||||||||||||
|
General and administrative
|
83.6 | 64.5 | 64.1 | 50.0 | 49.8 | 40.1 | 46.9 | 30.0 | ||||||||||||||||||||||||
|
Transaction and integration
|
26.7 | 26.8 | 79.3 | 17.2 | 9.8 | 1.0 | — | — | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total operating expenses
|
829.8 | 770.2 | 715.6 | 582.2 | 587.3 | 554.2 | 514.7 | 486.8 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Operating Income
|
198.7 | 182.9 | 71.4 | 136.9 | 160.5 | 151.6 | 110.4 | 61.8 | ||||||||||||||||||||||||
|
Other income/(expense):
|
||||||||||||||||||||||||||||||||
|
Equity in earnings of unconsolidated
affiliates
|
13.3 | 10.7 | 10.4 | 5.8 | 9.1 | 7.9 | 7.5 | 2.5 | ||||||||||||||||||||||||
|
Interest income
|
3.6 | 3.4 | 1.8 | 1.6 | 2.1 | 1.7 | 1.2 | 4.8 | ||||||||||||||||||||||||
|
Interest income of consolidated
investment products
|
65.0 | 70.3 | 53.1 | 52.5 | — | — | — | — | ||||||||||||||||||||||||
|
Gains/(losses) of consolidated
investment products, net
|
(28.0 | ) | (148.3 | ) | 187.2 | 103.1 | 25.9 | 2.1 | (48.4 | ) | (86.5 | ) | ||||||||||||||||||||
|
Interest expense
|
(16.0 | ) | (16.1 | ) | (14.1 | ) | (12.4 | ) | (15.2 | ) | (16.9 | ) | (16.5 | ) | (15.9 | ) | ||||||||||||||||
|
Interest expense of consolidated
investment products
|
(36.6 | ) | (35.6 | ) | (25.6 | ) | (20.8 | ) | — | — | — | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Other gains and losses, net
|
12.4 | 14.6 | (9.3 | ) | (2.1 | ) | — | 2.0 | 10.0 | (4.2 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Income/(loss) before income taxes,
including gains and losses attributable
to noncontrolling interests
|
212.4 | 81.9 | 274.9 | 264.6 | 182.4 | 148.4 | 64.2 | (37.5 | ) | |||||||||||||||||||||||
|
Income tax provision
|
(55.7 | ) | (54.5 | ) | (36.7 | ) | (50.1 | ) | (48.2 | ) | (43.7 | ) | (36.0 | ) | (20.3 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income/(loss), including gains and
losses attributable to noncontrolling
interests
|
156.7 | 27.4 | 238.2 | 214.5 | 134.2 | 104.7 | 28.2 | (57.8 | ) | |||||||||||||||||||||||
|
(Gains)/losses attributable to
noncontrolling interests in
consolidated entities, net
|
18.5 | 127.3 | (197.4 | ) | (119.5 | ) | (23.3 | ) | 0.5 | 47.5 | 88.5 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income attributable to common
shareholders
|
$ | 175.2 | $ | 154.7 | $ | 40.8 | $ | 95.0 | $ | 110.9 | $ | 105.2 | $ | 75.7 | $ | 30.7 | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Earnings per share*:
|
||||||||||||||||||||||||||||||||
|
— basic
|
$ | 0.37 | $ | 0.32 | $ | 0.09 | $ | 0.22 | $ | 0.26 | $ | 0.24 | $ | 0.18 | $ | 0.08 | ||||||||||||||||
|
— diluted
|
$ | 0.37 | $ | 0.32 | $ | 0.09 | $ | 0.21 | $ | 0.25 | $ | 0.24 | $ | 0.18 | $ | 0.08 | ||||||||||||||||
|
Average shares outstanding*:
|
||||||||||||||||||||||||||||||||
|
— basic
|
470.5 | 476.6 | 455.0 | 439.0 | 434.1 | 431.6 | 410.6 | 394.1 | ||||||||||||||||||||||||
|
— diluted
|
473.1 | 479.1 | 457.8 | 442.4 | 440.1 | 437.7 | 416.8 | 399.9 | ||||||||||||||||||||||||
|
Dividends declared per share:
|
$ | 0.11 | $ | 0.11 | $ | 0.11 | $ | 0.1025 | $ | 0.1025 | $ | 0.1025 | $ | 0.1025 | $ | 0.10 | ||||||||||||||||
| * | The sum of the quarterly earnings per share amounts may differ from the annual earnings per share amounts due to the required method of computing the weighted average number of shares in interim periods. |
78
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
Index to Financial Statements and Supplementary Data
| 80 | ||||
| 80 | ||||
| 81 | ||||
| 82 | ||||
| 83 | ||||
| 84 | ||||
| 85 | ||||
| 86 | ||||
| 88 |
79
Table of Contents
Annual Report of Management on Internal Control over Financial Reporting
Management of the company is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in the Securities Exchange Act of 1934, Rules
13a-15(f) and 15d-15(f). The company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of the chief executive officer and chief
financial officer, management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2010. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control — Integrated Framework. Based on this assessment, management concluded that our internal
control over financial reporting was effective as of December 31, 2010.
The company’s independent auditors, Ernst & Young LLP, have issued an audit report on the
effectiveness of our internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in the company’s internal control over financial reporting during the
fourth quarter of 2010 that have materially affected, or are reasonably likely to materially
affect, the company’s internal control over financial reporting.
80
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Invesco Ltd.
We have audited the accompanying consolidated balance sheets of Invesco Ltd. (the Company) as
of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2010. These
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Invesco Ltd. at December 31, 2010 and 2009, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Invesco Ltd.’s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February
25, 2011 expressed an unqualified opinion thereon.
/
s
/ Ernst & Young LLP
Atlanta, Georgia
February 25, 2011
February 25, 2011
81
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Invesco Ltd.
We have audited Invesco Ltd.’s internal control over financial reporting as of December 31,
2010, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Invesco
Ltd.’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Annual Report of Management on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Invesco Ltd. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Invesco Ltd. as of December 31,
2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2010, of Invesco Ltd. and our
report dated February 25, 2011 expressed an unqualified opinion thereon.
/
s
/ Ernst & Young LLP
Atlanta, Georgia
February 25, 2011
February 25, 2011
82
Table of Contents
Invesco Ltd.
Consolidated Balance Sheets
| As of | ||||||||
| December 31, | December 31, | |||||||
| $ in millions, except per share data | 2010 | 2009 | ||||||
|
ASSETS
|
||||||||
|
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
740.5 | 762.0 | ||||||
|
Cash and cash equivalents of consolidated investment products
|
636.7 | 28.0 | ||||||
|
Unsettled fund receivables
|
513.4 | 383.1 | ||||||
|
Accounts receivable
|
424.7 | 289.3 | ||||||
|
Accounts receivable of consolidated investment products
|
158.8 | — | ||||||
|
Investments
|
308.8 | 182.4 | ||||||
|
Prepaid assets
|
64.0 | 57.6 | ||||||
|
Other current assets
|
101.8 | 77.9 | ||||||
|
Deferred tax asset, net
|
30.4 | 57.7 | ||||||
|
Assets held for policyholders
|
1,295.4 | 1,283.0 | ||||||
|
|
||||||||
|
Total current assets
|
4,274.5 | 3,121.0 | ||||||
|
Non-current assets:
|
||||||||
|
Investments
|
164.4 | 157.4 | ||||||
|
Investments of consolidated investment products
|
7,206.0 | 685.0 | ||||||
|
Prepaid assets
|
0.9 | 16.2 | ||||||
|
Security deposit assets and receivables
|
146.3 | — | ||||||
|
Other non-current assets
|
20.0 | 13.0 | ||||||
|
Deferred sales commissions
|
42.2 | 23.8 | ||||||
|
Deferred tax asset, net
|
— | 65.8 | ||||||
|
Property and equipment, net
|
272.4 | 220.7 | ||||||
|
Intangible assets, net
|
1,337.2 | 139.1 | ||||||
|
Goodwill
|
6,980.2 | 6,467.6 | ||||||
|
|
||||||||
|
Total non-current assets
|
16,169.6 | 7,788.6 | ||||||
|
|
||||||||
|
Total assets
|
20,444.1 | 10,909.6 | ||||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND EQUITY
|
||||||||
|
|
||||||||
|
Current liabilities:
|
||||||||
|
Unsettled fund payables
|
504.8 | 367.9 | ||||||
|
Income taxes payable
|
72.2 | 82.8 | ||||||
|
Other current liabilities
|
905.7 | 559.9 | ||||||
|
Other current liabilities of consolidated investment products
|
486.4 | 4.8 | ||||||
|
Policyholder payables
|
1,295.4 | 1,283.0 | ||||||
|
|
||||||||
|
Total current liabilities
|
3,264.5 | 2,298.4 | ||||||
|
Non-current liabilities:
|
||||||||
|
Long-term debt
|
1,315.7 | 745.7 | ||||||
|
Long-term debt of consolidated investment products
|
5,865.4 | — | ||||||
|
Deferred tax liabilities, net
|
229.0 | — | ||||||
|
Security deposits payable
|
146.3 | — | ||||||
|
Other non-current liabilities
|
262.3 | 244.7 | ||||||
|
|
||||||||
|
Total non-current liabilities
|
7,818.7 | 990.4 | ||||||
|
|
||||||||
|
Total liabilities
|
11,083.2 | 3,288.8 | ||||||
|
|
||||||||
|
Commitments and contingencies (See Note 19)
|
||||||||
|
Equity:
|
||||||||
|
Equity attributable to common shareholders:
|
||||||||
|
Common shares ($0.20 par value; 1,050.0 million authorized; 490.4 million and
459.5 million shares issued as of December 31, 2010, and 2009, respectively)
|
98.1 | 91.9 | ||||||
|
Additional paid-in-capital
|
6,262.6 | 5,688.4 | ||||||
|
Treasury shares
|
(991.5 | ) | (892.4 | ) | ||||
|
Retained earnings
|
1,904.4 | 1,631.4 | ||||||
|
Retained earnings appropriated for investors in consolidated investment products
|
495.5 | — | ||||||
|
Accumulated other comprehensive income, net of tax
|
495.5 | 393.6 | ||||||
|
|
||||||||
|
Total equity attributable to common shareholders
|
8,264.6 | 6,912.9 | ||||||
|
Equity attributable to noncontrolling interests in consolidated entities
|
1,096.3 | 707.9 | ||||||
|
|
||||||||
|
Total equity
|
9,360.9 | 7,620.8 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
20,444.1 | 10,909.6 | ||||||
|
|
||||||||
See accompanying notes.
83
Table of Contents
Invesco Ltd.
Consolidated Statements of Income
| Years Ended December 31, | ||||||||||||
| $ in millions, except per share data | 2010 | 2009 | 2008 | |||||||||
|
Operating revenues:
|
||||||||||||
|
Investment management fees
|
2,720.9 | 2,120.2 | 2,617.8 | |||||||||
|
Service and distribution fees
|
645.5 | 412.6 | 512.5 | |||||||||
|
Performance fees
|
26.1 | 30.0 | 75.1 | |||||||||
|
Other
|
95.2 | 64.5 | 102.2 | |||||||||
|
|
||||||||||||
|
Total operating revenues
|
3,487.7 | 2,627.3 | 3,307.6 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating expenses:
|
||||||||||||
|
Employee compensation
|
1,114.9 | 950.8 | 1,055.8 | |||||||||
|
Third-party distribution, service and advisory
|
972.7 | 693.4 | 875.5 | |||||||||
|
Marketing
|
159.6 | 108.9 | 148.2 | |||||||||
|
Property, office and technology
|
238.4 | 212.3 | 214.3 | |||||||||
|
General and administrative
|
262.2 | 166.8 | 266.0 | |||||||||
|
Transaction and integration
|
150.0 | 10.8 | — | |||||||||
|
|
||||||||||||
|
Total operating expenses
|
2,897.8 | 2,143.0 | 2,559.8 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Operating income
|
589.9 | 484.3 | 747.8 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Other income/(expense):
|
||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
40.2 | 27.0 | 46.8 | |||||||||
|
Interest and dividend income
|
10.4 | 9.8 | 37.2 | |||||||||
|
Interest income of consolidated investment products
|
240.9 | — | — | |||||||||
|
Gains/(losses) of consolidated investment products, net
|
114.0 | (106.9 | ) | (58.0 | ) | |||||||
|
Interest expense
|
(58.6 | ) | (64.5 | ) | (76.9 | ) | ||||||
|
Interest expense of consolidated investment products
|
(118.6 | ) | — | — | ||||||||
|
Other gains and losses, net
|
15.6 | 7.8 | (39.9 | ) | ||||||||
|
|
||||||||||||
|
Income before income taxes, including gains and losses attributable to
noncontrolling interests
|
833.8 | 357.5 | 657.0 | |||||||||
|
Income tax provision
|
(197.0 | ) | (148.2 | ) | (236.0 | ) | ||||||
|
|
||||||||||||
|
Net income, including gains and losses attributable to noncontrolling interests
|
636.8 | 209.3 | 421.0 | |||||||||
|
(Gains)/losses attributable to noncontrolling interests in consolidated entities, net
|
(171.1 | ) | 113.2 | 60.7 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net income attributable to common shareholders
|
465.7 | 322.5 | 481.7 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings per share:
|
||||||||||||
|
— basic
|
$ | 1.01 | $ | 0.77 | $ | 1.24 | ||||||
|
— diluted
|
$ | 1.01 | $ | 0.76 | $ | 1.21 | ||||||
|
Dividends declared per share
|
$ | 0.4325 | $ | 0.4075 | $ | 0.520 | ||||||
See accompanying notes.
84
Table of Contents
Invesco Ltd.
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||||||
| $ in millions | 2010 | 2009 | 2008 | |||||||||
|
Operating activities:
|
||||||||||||
|
Net income, including gains attributable to noncontrolling interests of $171.1 million
in 2010 (losses of $113.2 million in 2009; losses of $60.7 million in 2008)
|
636.8 | 209.3 | 421.0 | |||||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||||||
|
Amortization and depreciation
|
96.7 | 77.6 | 67.6 | |||||||||
|
Share-based compensation expense
|
117.8 | 90.8 | 97.7 | |||||||||
|
Gains on disposal of property, equipment, and software, net
|
— | (1.2 | ) | (2.0 | ) | |||||||
|
Purchase of trading investments
|
(7,093.1 | ) | (41.9 | ) | (22.0 | ) | ||||||
|
Proceeds from sale of trading investments
|
7,032.7 | 13.1 | 22.3 | |||||||||
|
Other gains and losses, net
|
(15.6 | ) | (7.8 | ) | 39.9 | |||||||
|
(Gains)/losses of consolidated investment products, net
|
(114.0 | ) | 106.9 | 58.0 | ||||||||
|
Tax benefit from share-based compensation
|
63.4 | 42.3 | 54.9 | |||||||||
|
Excess tax benefits from share-based compensation
|
(14.8 | ) | (9.4 | ) | (16.8 | ) | ||||||
|
Equity in earnings of unconsolidated affiliates
|
(40.2 | ) | (27.0 | ) | (46.8 | ) | ||||||
|
Dividends from unconsolidated affiliates
|
26.0 | 28.3 | 29.8 | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
(Increase)/decrease in cash held by consolidated investment products
|
(336.2 | ) | 45.0 | (37.1 | ) | |||||||
|
Decrease/(increase)in receivables
|
(223.3 | ) | (468.4 | ) | 1,118.8 | |||||||
|
(Decrease)/increase in payables
|
243.0 | 305.1 | (1,259.8 | ) | ||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
379.2 | 362.7 | 525.5 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Investing activities:
|
||||||||||||
|
Purchase of property and equipment
|
(89.6 | ) | (39.5 | ) | (84.1 | ) | ||||||
|
Disposal of property and equipment
|
— | 6.8 | 0.2 | |||||||||
|
Purchase of available-for-sale investments
|
(33.9 | ) | (15.6 | ) | (71.1 | ) | ||||||
|
Proceeds from sale of available-for-sale investments
|
64.7 | 18.8 | 41.0 | |||||||||
|
Purchase of investments by consolidated investment products
|
(2,367.7 | ) | (44.1 | ) | (112.3 | ) | ||||||
|
Proceeds from sale of investments by consolidated investment products
|
2,784.8 | 34.2 | 188.7 | |||||||||
|
Returns of capital in investments of consolidated investment products
|
81.5 | 17.9 | 99.2 | |||||||||
|
Purchase of other investments
|
(69.4 | ) | (88.5 | ) | (65.4 | ) | ||||||
|
Proceeds from sale of other investments
|
42.4 | 31.8 | 68.9 | |||||||||
|
Returns of capital and distributions from equity method investments
|
25.3 | 10.0 | 10.8 | |||||||||
|
Acquisitions of businesses (cash paid $826.8 million, less cash acquired $77.2 million)
|
(749.6 | ) | — | — | ||||||||
|
Acquisition earn-out payments
|
(26.3 | ) | (34.2 | ) | (174.3 | ) | ||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(337.8 | ) | (102.4 | ) | (98.4 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Financing activities:
|
||||||||||||
|
Issuance of new shares
|
— | 441.8 | — | |||||||||
|
Proceeds from exercises of share options
|
19.6 | 80.0 | 79.8 | |||||||||
|
Purchases of treasury shares
|
(192.2 | ) | — | (313.4 | ) | |||||||
|
Dividends paid
|
(197.9 | ) | (168.9 | ) | (207.1 | ) | ||||||
|
Excess tax benefits from share-based compensation
|
14.8 | 9.4 | 16.8 | |||||||||
|
Capital invested into consolidated investment products
|
24.3 | 7.2 | 96.1 | |||||||||
|
Capital distributed by consolidated investment products
|
(97.2 | ) | (52.1 | ) | (241.0 | ) | ||||||
|
Borrowings of consolidated investment products
|
— | — | 28.9 | |||||||||
|
Repayments of debt of consolidated investment products
|
(207.3 | ) | — | (9.3 | ) | |||||||
|
Net borrowings/(repayments) under credit facility
|
570.0 | (12.0 | ) | (114.4 | ) | |||||||
|
Repayments of senior notes
|
— | (397.2 | ) | (2.8 | ) | |||||||
|
Acquisition of remaining noncontrolling interest in subsidiary
|
— | (8.9 | ) | — | ||||||||
|
|
||||||||||||
|
Net cash used in financing activities
|
(65.9 | ) | (100.7 | ) | (666.4 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Increase/(decrease) in cash and cash equivalents
|
(24.5 | ) | 159.6 | (239.3 | ) | |||||||
|
Foreign exchange movement on cash and cash equivalents
|
3.0 | 17.2 | (91.3 | ) | ||||||||
|
Cash and cash equivalents, beginning of year
|
762.0 | 585.2 | 915.8 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents, end of year
|
740.5 | 762.0 | 585.2 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Supplemental Cash Flow Information:
|
||||||||||||
|
Interest paid
|
(50.6 | ) | (60.4 | ) | (71.2 | ) | ||||||
|
Interest received
|
7.7 | 10.5 | 36.9 | |||||||||
|
Taxes paid
|
(172.3 | ) | (88.4 | ) | (238.4 | ) | ||||||
See accompanying notes.
85
Table of Contents
Invesco Ltd.
Consolidated Statements of Changes in Equity
| Equity Attributable to Common Shareholders | ||||||||||||||||||||||||||||||||||||
| Retained | ||||||||||||||||||||||||||||||||||||
| Earnings | ||||||||||||||||||||||||||||||||||||
| Appropriated for | ||||||||||||||||||||||||||||||||||||
| Investors in | Accumulated | Total Equity | Noncontrolling | |||||||||||||||||||||||||||||||||
| Additional | Consolidated | Other | Attributable to | Interests in | ||||||||||||||||||||||||||||||||
| Common | Paid-in- | Treasury | Retained | Investment | Comprehensive | Common | Consolidated | Total | ||||||||||||||||||||||||||||
| $ in millions | Shares | Capital | Shares | Earnings | Products | Income | Shareholders | Entities | Equity | |||||||||||||||||||||||||||
|
January 1, 2010
|
91.9 | 5,688.4 | (892.4 | ) | 1,631.4 | — | 393.6 | 6,912.9 | 707.9 | 7,620.8 | ||||||||||||||||||||||||||
|
Adoption of guidance now encompassed in ASC Topic 810
|
— | — | — | 5.2 | 274.3 | (5.2 | ) | 274.3 | — | 274.3 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
January 1, 2010, as adjusted
|
91.9 | 5,688.4 | (892.4 | ) | 1,636.6 | 274.3 | 388.4 | 7,187.2 | 707.9 | 7,895.1 | ||||||||||||||||||||||||||
|
Net income, including gains and losses attributable to noncontrolling interests
|
— | — | — | 465.7 | — | — | 465.7 | 171.1 | 636.8 | |||||||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||||||
|
Currency translation differences on investments in overseas subsidiaries
|
— | — | — | — | — | 82.6 | 82.6 | (5.3 | ) | 77.3 | ||||||||||||||||||||||||||
|
Change in accumulated OCI related to employee benefit plans
|
— | — | — | — | — | 18.7 | 18.7 | — | 18.7 | |||||||||||||||||||||||||||
|
Change in accumulated OCI of equity method investments
|
— | — | — | — | — | 2.9 | 2.9 | — | 2.9 | |||||||||||||||||||||||||||
|
Change in net unrealized gains on available-for-sale investments
|
— | — | — | — | — | 9.9 | 9.9 | — | 9.9 | |||||||||||||||||||||||||||
|
Tax impacts of changes in accumulated other comprehensive income balances
|
— | — | — | — | — | (7.0 | ) | (7.0 | ) | — | (7.0 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
572.8 | 165.8 | 738.6 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net income reclassified to appropriated retained earnings
|
— | — | — | — | 77.1 | — | 77.1 | (77.1 | ) | — | ||||||||||||||||||||||||||
|
Currency translation differences on investments in overseas subsidiaries reclassified to appropriated retained earnings
|
— | — | — | — | (5.3 | ) | — | (5.3 | ) | 5.3 | — | |||||||||||||||||||||||||
|
Change in noncontrolling interests in consolidated entities, net
|
— | — | — | — | — | — | — | (69.2 | ) | (69.2 | ) | |||||||||||||||||||||||||
|
Business Combinations
|
6.2 | 563.0 | — | — | 149.4 | — | 718.6 | 363.6 | 1,082.2 | |||||||||||||||||||||||||||
|
Dividends
|
— | — | — | (197.9 | ) | — | — | (197.9 | ) | — | (197.9 | ) | ||||||||||||||||||||||||
|
Employee share plans:
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Share-based compensation
|
— | 117.8 | — | — | — | — | 117.8 | — | 117.8 | |||||||||||||||||||||||||||
|
Vested shares
|
— | (94.5 | ) | 94.5 | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Exercise of options
|
— | (26.9 | ) | 46.5 | — | — | — | 19.6 | — | 19.6 | ||||||||||||||||||||||||||
|
Tax impact of share-based payment
|
— | 14.8 | — | — | — | — | 14.8 | — | 14.8 | |||||||||||||||||||||||||||
|
Purchase of shares
|
— | — | (240.1 | ) | — | — | — | (240.1 | ) | — | (240.1 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
December 31, 2010
|
98.1 | 6,262.6 | (991.5 | ) | 1,904.4 | 495.5 | 495.5 | 8,264.6 | 1,096.3 | 9,360.9 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
See accompanying notes.
86
Table of Contents
Invesco Ltd.
Consolidated Statements of Changes in Equity (continued)
Consolidated Statements of Changes in Equity (continued)
| Equity Attributable to Common Shareholders | ||||||||||||||||||||||||||||||||
| Accumulated | Total Equity | Non-controlling | ||||||||||||||||||||||||||||||
| Additional | Other | Attributable to | Interests in | |||||||||||||||||||||||||||||
| Common | Paid-in- | Treasury | Retained | Comprehensive | Common | Consolidated | Total | |||||||||||||||||||||||||
| $ in millions | Shares | Capital | Shares | Earnings | Income/(Loss) | Shareholders | Entities | Equity | ||||||||||||||||||||||||
|
January 1, 2009
|
85.3 | 5,352.6 | (1,128.9 | ) | 1,476.3 | (95.8 | ) | 5,689.5 | 906.7 | 6,596.2 | ||||||||||||||||||||||
|
Net income/(loss), including gains and losses attributable to noncontrolling interests
|
— | — | — | 322.5 | — | 322.5 | (113.2 | ) | 209.3 | |||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Currency translation differences on investments in overseas subsidiaries
|
— | — | — | — | 488.3 | 488.3 | — | 488.3 | ||||||||||||||||||||||||
|
Change in accumulated OCI related to employee benefit plans
|
— | — | — | — | (15.1 | ) | (15.1 | ) | — | (15.1 | ) | |||||||||||||||||||||
|
Change in net unrealized gains on available-for-sale investments
|
— | — | — | — | 14.6 | 14.6 | — | 14.6 | ||||||||||||||||||||||||
|
Adoption of guidance now encompassed in ASC Topic 320
|
— | — | — | — | (1.5 | ) | (1.5 | ) | — | (1.5 | ) | |||||||||||||||||||||
|
Tax impacts of changes in accumulated other comprehensive income balances
|
— | — | — | — | 3.1 | 3.1 | — | 3.1 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | — | — | — | 811.9 | (113.2 | ) | 698.7 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Adoption of guidance now encompassed in ASC Topic 320
|
— | — | — | 1.5 | — | 1.5 | — | 1.5 | ||||||||||||||||||||||||
|
Change in noncontrolling interests in consolidated entities, net
|
— | — | — | — | — | — | (84.2 | ) | (84.2 | ) | ||||||||||||||||||||||
|
Issuance of new shares
|
6.6 | 435.2 | — | — | — | 441.8 | — | 441.8 | ||||||||||||||||||||||||
|
Dividends
|
— | — | — | (168.9 | ) | — | (168.9 | ) | — | (168.9 | ) | |||||||||||||||||||||
|
Employee share plans:
|
||||||||||||||||||||||||||||||||
|
Share-based compensation
|
— | 90.8 | — | — | 90.8 | — | 90.8 | |||||||||||||||||||||||||
|
Vested shares
|
— | (127.6 | ) | 127.6 | — | — | — | — | — | |||||||||||||||||||||||
|
Exercise of options
|
— | (51.5 | ) | 131.8 | — | — | 80.3 | — | 80.3 | |||||||||||||||||||||||
|
Tax impact of share-based payment
|
— | 9.4 | — | — | — | 9.4 | — | 9.4 | ||||||||||||||||||||||||
|
Modification of share-based payment awards
|
— | (13.0 | ) | — | — | — | (13.0 | ) | — | (13.0 | ) | |||||||||||||||||||||
|
Purchase of shares
|
— | — | (22.9 | ) | — | — | (22.9 | ) | — | (22.9 | ) | |||||||||||||||||||||
|
Acquisition of remaining noncontrolling interest in subsidiary
|
— | (7.5 | ) | — | — | — | (7.5 | ) | (1.4 | ) | (8.9 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
December 31, 2009
|
91.9 | 5,688.4 | (892.4 | ) | 1,631.4 | 393.6 | 6,912.9 | 707.9 | 7,620.8 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| Equity Attributable to Common Shareholders | ||||||||||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||||||||||
| Accumulated | Total Equity | controlling | ||||||||||||||||||||||||||||||
| Additional | Other | Attributable to | Interests in | |||||||||||||||||||||||||||||
| Common | Paid-in- | Treasury | Retained | Comprehensive | Common | Consolidated | Total | |||||||||||||||||||||||||
| $ in millions | Shares | Capital | Shares | Earnings | Income/(Loss) | Shareholders | Entities | Equity | ||||||||||||||||||||||||
|
January 1, 2008
|
84.9 | 5,306.3 | (954.4 | ) | 1,201.7 | 952.1 | 6,590.6 | 1,121.2 | 7,711.8 | |||||||||||||||||||||||
|
Net income, including gains and losses attributable to noncontrolling interests
|
— | — | — | 481.7 | — | 481.7 | (60.7 | ) | 421.0 | |||||||||||||||||||||||
|
Other comprehensive income
|
||||||||||||||||||||||||||||||||
|
Currency translation differences on investments in overseas subsidiaries
|
— | — | — | — | (1,034.2 | ) | (1,034.2 | ) | — | (1,034.2 | ) | |||||||||||||||||||||
|
Change in accumulated OCI related to employee benefit plans
|
— | — | — | — | (0.3 | ) | (0.3 | ) | — | (0.3 | ) | |||||||||||||||||||||
|
Change in net unrealized losses on available-for-sale investments
|
— | — | — | — | (9.3 | ) | (9.3 | ) | — | (9.3 | ) | |||||||||||||||||||||
|
Tax impacts of changes in accumulated OCI balances
|
— | — | — | — | (4.1 | ) | (4.1 | ) | — | (4.1 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
(566.2 | ) | (60.7 | ) | (626.9 | ) | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Change in noncontrolling interests in consolidated entities, net
|
— | — | — | — | — | (153.8 | ) | (153.8 | ) | |||||||||||||||||||||||
|
Dividends
|
— | — | — | (207.1 | ) | — | (207.1 | ) | — | (207.1 | ) | |||||||||||||||||||||
|
Employee share plans:
|
||||||||||||||||||||||||||||||||
|
Share-based compensation
|
— | 97.7 | — | — | — | 97.7 | — | 97.7 | ||||||||||||||||||||||||
|
Vested shares
|
— | (55.7 | ) | 55.7 | — | — | — | — | — | |||||||||||||||||||||||
|
Exercise of options
|
0.4 | (12.5 | ) | 87.8 | — | — | 75.7 | — | 75.7 | |||||||||||||||||||||||
|
Tax impact of share-based payment
|
— | 16.8 | — | — | — | 16.8 | — | 16.8 | ||||||||||||||||||||||||
|
Purchase of shares
|
— | — | (318.0 | ) | — | — | (318.0 | ) | — | (318.0 | ) | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
December 31, 2008
|
85.3 | 5,352.6 | (1,128.9 | ) | 1,476.3 | (95.8 | ) | 5,689.5 | 906.7 | 6,596.2 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
See accompanying notes.
87
Table of Contents
Invesco Ltd.
Notes to the Consolidated Financial Statements
1. ACCOUNTING POLICIES
Corporate Information
Invesco Ltd. (Parent) and all of its consolidated entities (collectively, the company or
Invesco) provide retail, institutional and high-net-worth clients with an array of global
investment management capabilities. The company operates globally and its sole business is
investment management.
Basis of Accounting and Consolidation
In the opinion of management, the Consolidated Financial Statements reflect all adjustments,
consisting of normal recurring accruals, which are necessary for the fair presentation of the
financial condition and results of operations for the interim periods presented. All significant
intercompany transactions, balances, revenues and expenses are eliminated upon consolidation.
The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP and
consolidate the financial statements of the Parent, all of its controlled subsidiaries, any
variable interest entities (VIEs) required to be consolidated, and any non-VIE general partnership
investments where the company is deemed to have control. Control is deemed to be present when the
Parent holds a majority voting interest or otherwise has the power to govern the financial and
operating policies of the subsidiary so as to obtain the benefits from its activities. The company
provides investment management services to, and has transactions with, various private equity
funds, real estate funds, fund-of-funds, collateralized loan obligations (CLOs), and other
investment products sponsored by the company for the investment of client assets in the normal
course of business. The company serves as the investment manager, making day-to-day investment
decisions concerning the assets of these products. Certain of these entities are considered to be
VIEs.
The company follows the provisions of Accounting Standards Codification (ASC) Topic 810,
“Consolidation,” when accounting for VIEs, including Accounting Standards Update (ASU) No. 2010-10,
“Amendments for Certain Investment Funds” (ASU 2010-10), detailed in “Accounting Pronouncements
Recently Adopted and Pending Accounting Pronouncements” below. VIEs, or entities in which the risks
and rewards of ownership are not directly linked to voting interests, for which the company is the
primary beneficiary are consolidated. For all investment products with the exception of CLOs, if
the company is deemed to have a variable interest in, and to have the majority of rewards/risks of
ownership associated with, these entities, then the company is deemed to be their primary
beneficiary and is required to consolidate these entities. For CLOs, if the company is deemed to
have the power to direct the activities of the CLO that most significantly impact the CLO’s
economic performance, and the obligation to absorb losses/right to receive benefits from the CLO
that could potentially be significant to the CLO, then the company is deemed to be the CLO’s
primary beneficiary and is required to consolidate the CLO. Investment products that are
consolidated are referred to as “Consolidated Investment Products” in the accompanying Consolidated
Financial Statements.
All of the investments held and notes issued by consolidated investment products are presented
at fair value in the company’s Consolidated Balance Sheet at December 31, 2010, and interest income
and expense of consolidated CLOs are presented as other income/(expense) in the company’s
Consolidated Income Statement for the year ended December 31, 2010. The surplus of consolidated CLO
assets over consolidated CLO liabilities is reflected in the company’s Consolidated Balance Sheet
as retained earnings appropriated for investors in consolidated investment products. Current period
gains/(losses) attributable to investors in consolidated CLOs are included in (gains)/losses
attributable to noncontrolling interests in consolidated entities in the Consolidated Statement of
Income and in the retained earnings appropriated for investors in consolidated investment products
in the Consolidated Balance Sheet, as they are considered noncontrolling interests of the company.
See Note 20, “Consolidated Investment Products,” for additional details.
The company also consolidates certain private equity and real estate funds that are structured
as partnerships in which the company is the general partner receiving a management and/or
performance fee. Private equity investments made by the underlying funds consist of direct
investments in, or fund investments in other private equity funds that hold direct investments in,
equity or debt securities in operating companies that are generally not initially publicly traded.
Private equity funds are considered investment companies and are therefore accounted for under ASC
Topic 946, “Financial Services — Investment Companies.” The company has retained the specialized
industry accounting principles of these investment products in its Consolidated Financial
Statements. See Note 20, “Consolidated Investment Products,” for additional details.
88
Table of Contents
Non-VIE general partnership investments are deemed to be controlled by the company and are
consolidated under a voting interest entity (VOE) model, unless the limited partners have the
substantive ability to remove the general partner without cause based upon a simple majority vote
or can otherwise dissolve the partnership, or unless the limited partners have substantive
participating rights over decision-making.
If the company determines that it does not control the private equity and real estate
partnership funds in which it has invested, the equity method of accounting is used to account for
the company’s investment in these entities. The equity method of accounting is also used to account
for investments in joint ventures and noncontrolled subsidiaries in which the company’s ownership
is between 20 and 50 percent. Equity investments are carried initially at cost (subsequently
adjusted to recognize the company’s share of the profit or loss of the investee after the date of
acquisition) and are included in investments on the Consolidated Balance Sheets. The proportionate
share of income or loss is included in equity in earnings of unconsolidated affiliates in the
Consolidated Statements of Income. If the company determines that it does not control CLOs in which
it has invested, the company accounts for its investments as available-for-sale investments.
The financial statements have been prepared primarily on the historical cost basis; however,
certain items are presented using other bases such as fair value, where such treatment is required
or voluntarily elected. The financial statements of subsidiaries, with the exception of
consolidated investment products as discussed above, are prepared for the same reporting year as
the Parent and use consistent accounting policies, which, where applicable, have been adjusted to
U.S. GAAP from local generally accepted accounting principles or reporting regulations. The
financial information of the consolidated CLOs is included in the company’s consolidated financial
statements on a one-month lag. Noncontrolling interests in consolidated entities and retained
earnings appropriated for investors in consolidated investment products represent the interests in
certain entities consolidated by the company either because the company has control over the entity
or has determined that it is the primary beneficiary, but of which the company does not own all of
the entity’s equity.
Use of Estimates
In preparing the financial statements, management is required to make estimates and
assumptions that affect reported revenues, expenses, assets, liabilities and disclosure of
contingent liabilities. The primary estimates relate to investment valuation, goodwill impairment
and taxes. Use of available information and application of judgment are inherent in the formation
of estimates. Actual results in the future could differ from such estimates and the differences may
be material to the financial statements.
Acquisition Accounting
In accordance with ASC Topic 805, “Business Combinations” (ASC Topic 805), any excess of the
cost of the acquisition over the fair values of the identifiable net assets acquired attributable
to the company is recognized as goodwill. With certain exceptions, 100% of the fair values of
assets acquired, liabilities assumed, and noncontrolling interests is recognized in acquisitions of
less than 100% controlling interest when the acquisition constitutes a change in control of the
acquired entity. Additionally, when partial ownership in an acquiree is obtained, the assets
acquired, liabilities assumed and any noncontrolling interests are recognized and consolidated at
100% of their fair values at that date, regardless of the percentage ownership in the acquiree. As
goodwill is calculated as a residual, all goodwill of the acquired business, not just the company’s
share, is recognized under this “full-goodwill” approach. Noncontrolling interests are stated at
the noncontrolling shareholder’s proportion of the pre-acquisition carrying values of the acquired
net assets. The results of entities acquired or sold during the year are included from or to the
date control changes.
Contingent consideration obligations that are elements of consideration transferred are
recognized as of the acquisition date as part of the fair value transferred in exchange for the
acquired business. Acquisition-related costs incurred in connection with a business combination
shall be expensed.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash at banks, in hand and short-term investments with a
maturity upon acquisition of three months or less. Also included in cash and cash equivalents at
December 31, 2010, is $2.4 million in cash to facilitate trust operations and customer transactions
in the company’s affiliated funds. Cash and cash equivalents invested in affiliated money market
funds (related parties) totaled $289.6 million at December 31, 2010. Cash and cash equivalents of
consolidated investment products are not available for general use by the company.
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Cash balances may not be readily assessable to the Parent due to capital adequacy requirements
of certain of our subsidiaries. These and other similar provisions of applicable law may have the
effect of limiting withdrawals of capital, repayment of intercompany loans and payment of dividends
by such entities. A sub-group of Invesco subsidiaries, including all of our regulated EU
subsidiaries, is subject to consolidated capital requirements under applicable European Union (EU)
directives, and capital is maintained within this sub-group to satisfy these regulations. These
requirements mandate the retention of liquid resources in those jurisdictions, which we meet in
part by holding cash and cash equivalents. This retained cash can be used for general business
purposes in the European sub-group or in the countries where it is located. Due to the capital
restrictions, the ability to transfer cash between certain jurisdictions may be limited. In
addition, transfers of cash between international jurisdictions may have adverse tax consequences
that may substantially limit such activity. At December 31, 2010, the European sub-group had cash
and cash equivalent balances of $456.2 million, much of which is used to satisfy these regulatory
requirements. The company is in compliance with all regulatory minimum net capital requirements
.
In addition, the company is required to hold cash deposits with clearing organizations or to
otherwise segregate cash to maintain compliance with federal and other regulations in connection
with its unit investment trust (UIT) broker dealer entity, which was included in the acquired
business. At December 31, 2010 these cash deposits totaled $14.9 million.
Unsettled Fund Receivables and Payables
The company records unsettled fund receivables from underlying fund investors in certain fund
products outside the U.S. when these investors place unsettled investments into the funds.
Additionally, the company records unsettled fund receivables from certain non-U.S. funds during the
settlement period when underlying fund investors redeem their holdings. Settlement periods for both
receivables from underlying investors and funds is generally less than four days. Additionally, in
its capacity as sponsor of UITs which arose subsequent to the acquisition of Morgan Stanley’s
retail asset management business on June 1, 2010 (discussed in Note 2, “Business Combination and
Integration,”) the company records receivables from brokers, dealers, and clearing organizations
for unsettled sell trades of securities and UITs in addition to receivables from customers for
unsettled buy trades of securities and UITs. The company also records payables to brokers, dealers,
and clearing organization for unsettled buy trades of securities and UITs in addition to payables
to customers for unsettled sell trades of securities and UITs. The presentation of the unsettled
fund receivables and substantially offsetting payables at trade date reflects the legal
relationship between the underlying investor and the company. Unsettled fund receivables and
payables were $513.4 million and $504.8 million at December 31, 2010 (December 31, 2009: $383.1
million and $367.9 million).
Accounts Receivable and Payable
Accounts receivable and payable are recorded at their original invoice amounts. Accounts
receivable are also recorded less any allowance for uncollectible amounts. Accounts receivable
primarily represents fees receivable from affiliated funds.
Investments
Investments in equity securities that have readily determinable fair values and investments in
debt securities are classified as either trading or available-for-sale. Investments in debt
securities are classified as held-to-maturity investments if the company has the intent and ability
to hold the investments until maturity. Trading securities are securities bought and held
principally for the purpose of selling them in the near term. Available-for-sale securities are
those neither classified as trading nor as held-to-maturity. Trading and available-for-sale
investments are measured at fair value. Gains or losses arising from changes in the fair value of
trading investments are included in income, and gains or losses arising from changes in the fair
value of available-for-sale investments are recognized in accumulated other comprehensive income,
net of tax, until the investment is sold or otherwise disposed of, or until the investment is
determined to be other-than-temporarily impaired, at which time the cumulative gain or loss
previously reported in equity is included in income. The specific identification method is used to
determine the realized gain or loss on securities sold or otherwise disposed. Held-to-maturity
investments are measured at amortized cost, taking into account any discounts or premiums.
Investments in joint ventures, non-controlled subsidiaries and certain investment products
that are not consolidated under a VIE or VOE model are investments over which the company has
significant influence but not control and are accounted for using the equity method, where the
investment is initially recorded at cost and the carrying amount is increased or decreased to
recognize the company’s share of the after-tax profit or loss of the investee after the date of
acquisition. Investments in joint ventures are investments jointly controlled by the company and
external parties. Investments in joint ventures are also accounted for using the equity method to
reflect the substance and economic reality of the company’s interest in jointly controlled
entities. Equity investments
are included in investments on the Consolidated Balance Sheets. The proportionate share of
income or loss is included in equity in earnings of unconsolidated affiliates in the Consolidated
Statements of Income.
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Fair value is determined using a valuation hierarchy (discussed in Note 3, “Fair Value of
Assets and Liabilities,”) generally by reference to an active trading market, using quoted closing
or bid prices as of each reporting period end. When a readily ascertainable market value does not
exist for an investment, the fair value is calculated based on the expected cash flows of its
underlying net asset base, taking into account applicable discount rates and other factors.
Judgment is used to ascertain if a formerly active market has become inactive and in determining
fair values when markets have become inactive.
The company evaluates the carrying value of investments for impairment on a quarterly basis.
In its impairment analysis, the company takes into consideration numerous criteria, including the
duration and extent of any decline in fair value, the intent and ability of the company to hold the
security for a period of time sufficient for a recovery in value, recent events specific to the
issuer or industry and external credit ratings and recent downgrades with respect to issuers of
debt securities held. If the decline in value is determined to be other-than-temporary, the
carrying value of the security is generally written down to fair value through the income
statement. If the fair value of a debt security, however, is less than its amortized cost, the
decline in value is determined to be other-than-temporary, and the company intends to sell the debt
security or it is more likely than not that the company will be required to sell the debt security
before the recovery of its amortized cost basis, the entire difference between the investment’s
amortized cost basis and its fair value is recognized as an other-than-temporary impairment through
the income statement. If the company does not intend to sell the debt security, and it is not more
likely than not that the company will be required to sell the debt security before recovery of its
amortized cost basis, then the other-than-temporary impairment is separated into two components: a)
the amount representing the credit loss, which is recorded as a charge to the income statement, and
b) the amount related to all other factors, which is recognized in other comprehensive income, net
of tax.
Assets Held for Policyholders and Policyholder Payables
One of the company’s subsidiaries, Invesco Perpetual Life Limited, is an insurance entity that
was established to facilitate retirement savings plans in the U.K. The entity holds assets that are
managed for its clients on its balance sheet with an equal and offsetting liability to the
policyholders, which is linked to the value of the investments. The investments are legally
segregated and are generally not subject to claims that arise from any of the company’s other
businesses. Investments and policyholder payables held by this business meet the definition of
financial instruments and are carried in the Consolidated Balance Sheets as separate account assets
and liabilities at fair value in accordance with ASC Topic 944, “Financial Services — Insurance.”
At December 31, 2010, the assets held for policyholders and the linked policyholder payables were
$1,295.4 million (2009: $1,283.0 million). Changes in fair value are recorded and offset to zero in
the Consolidated Statements of Income in other operating revenues. Management fees earned from
policyholder investments are accounted for as described in the company’s revenue recognition
accounting policy.
Security Deposit Assets and Receivables and Security Deposits Payable
As a result of Invesco’s acquisition of the Asia fund and asset management business of AIG
Global Real Estate Investment Corp. (“AIG Asia Real Estate”), Invesco is an asset manager of
property portfolios, whereby the company provides services such as leasing management, building
management, building maintenance and administration activities. In order to carry out such
activities, Invesco is a party to master lease agreements with the property owners and is a party
to sublease agreements with the tenants of the properties. Under these agreements, Invesco collects
the security deposits and rent and remits the amounts, with no mark-up, to the property owners. The
security deposits remitted to the property owners and the security deposits payable to the tenants
are presented in the Consolidated Balance Sheet at December 31, 2010, as security deposit assets
and security deposits payable, respectively. Included in security deposit assets is $41.1 million
receivable from affiliated funds, which earns interest at TIBOR plus 0.1%.
Deferred Sales Commissions
Mutual fund shares sold without a sales commission at the time of purchase are commonly
referred to as “B shares.” B shares typically have an asset-based fee (12b-1 fee) that is charged
to the fund over a period of years and a contingent deferred sales charge (CDSC). The CDSC is an
asset-based fee that is charged to investors that redeem B shares during a stated period.
Commissions paid at the date of sale to brokers and dealers for sales of mutual funds that have a
CDSC are capitalized and amortized over a period not to exceed the redemption period of the related
fund (generally up to six years). The deferred sales commission asset is reviewed periodically for
impairment by reviewing the recoverability of the asset based on estimated future fees to be
collected.
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Property, Equipment and Depreciation
Property and equipment includes owned property, leasehold improvements, computer
hardware/software and other equipment and is stated at cost less accumulated depreciation or
amortization and any previously recorded impairment in value. Expenditures for major additions and
improvements are capitalized; minor replacements, maintenance and repairs are charged to expense as
incurred. Amounts incurred are presented as work-in-progress until the construction or purchase of
the property and equipment is substantially complete and ready for its intended use, which, at that
point, will begin to be depreciated or amortized. Depreciation is provided on property and
equipment at rates calculated to write off the cost, less estimated residual value, of each asset
on a straight-line basis over its expected useful life: owned buildings over 50 years, leasehold
improvements over the shorter of the lease term or useful life of the improvement; and computers
and other various equipment between three and seven years. Purchased and internally developed
software is capitalized where the related costs can be measured reliably, and it is probable that
the asset will generate future economic benefits, and amortized into operating expenses on a
straight-line basis over its useful life, usually five years. The company capitalizes qualified
internal and external costs incurred during the application development stage for internally
developed software in accordance with ASC Topic 350-40, “Intangibles — Goodwill and Other —
Internal-Use Software.” The company reevaluates the useful life determination for property and
equipment each reporting period to determine whether events and circumstances warrant a revision to
the remaining useful life. On sale or retirement, the asset cost and related accumulated
depreciation are removed from the financial statements and any related gain or loss is reflected in
income.
The carrying amounts of property and equipment are reviewed for impairment when events or
changes in circumstances indicate that the carrying values may not be recoverable. At each
reporting date, an assessment is made for any indication of impairment. If an indication of
impairment exists, recoverability is tested by comparing the carrying amount of the asset to the
net undiscounted cash flows expected to be generated from the asset. If those net undiscounted cash
flows do not exceed the carrying amount (i.e. the asset is not recoverable), the next step would be
performed, which is to determine the fair value of the asset and record an impairment charge, if
any.
Intangible Assets
Intangible assets identified on the acquisition of a business are capitalized separately from
goodwill if the fair value can be measured reliably on initial recognition (transaction date) and,
if they are determined to be finite-lived, are amortized and recorded as operating expenses on a
straight-line basis over their useful lives, from two to 12 years, which reflects the pattern in
which the economic benefits are realized. The company considers its own assumptions, which require
management’s judgment, about renewal or extension of the term of the arrangement, consistent with
its expected use of the asset. A change in the useful life of an intangible asset could have a
significant impact on the company’s amortization expense.
Where evidence exists that the underlying management contracts have a high likelihood of
continued renewal at little or no cost to the company, the intangible asset is assigned an
indefinite life and reviewed for impairment on an annual basis. The company reevaluates the useful
life determination for intangible assets each reporting period to determine whether events and
circumstances warrant a revision to the remaining useful life or an indication of impairment. The
indicators in ASC Topic 350-30 paragraphs 35-23 and 24 were considered in making the determination
that the indefinite-lived intangibles that arose from the June 1, 2010, acquisition of Morgan
Stanley’s retail asset management business comprise one unit of account for impairment testing
purposes. None of the indicators were considered presumptive or determinative; however, due to the
fact that the retail fund management contracts are managed under Invesco’s single retail branding
strategy and are used by various business components within the organization, the single unit of
account was deemed appropriate.
Definite-lived intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable (i.e. carrying amount
exceeds the sum of the fair value of the intangible). Intangible assets not subject to amortization
are tested for impairment annually as of October 1 or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test consists of a
comparison of the fair value of an intangible asset with its carrying amount. If the carrying
amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an
amount equal to that excess. Fair value is generally determined using an income approach where
estimated future cash flows are discounted to arrive at a single present value amount.
Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired
and is recorded in the functional currency of the acquired entity. Goodwill is recognized as an
asset and is reviewed for impairment annually as of October 1 and
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between annual tests when events and circumstances indicate that impairment may have occurred.
The company has determined that it has one reporting unit for goodwill impairment testing purposes,
the consolidated Invesco Ltd. single operating segment level, which is the level at which internal
reporting is generated that reflects the way that the company manages its operations and to which
goodwill is naturally associated. The company evaluated the components of its business, which are
business units one level below the operating segment level, and has determined that it has one
reporting unit for purposes of goodwill impairment testing. The company’s components include
Invesco Institutional, Invesco North American Retail, Invesco Perpetual, Invesco Continental Europe
and Invesco Asia Pacific. The company’s operating segment represents one reporting unit because all
of the components are similar due to the common nature of products and services offered, type of
clients, methods of distribution, manner in which each component is operated, extent to which they
share assets and resources, and the extent to which they support and benefit from common product
development efforts. Traditional profit and loss measures are not produced and therefore not
reviewed by component management for any of the components. Furthermore, the financial information
that is available by component is not sufficient for purposes of performing a discounted cash flow
analysis at the component level in order to test goodwill for impairment at that level. As none of
the company’s components are reporting units, the company has determined that its single operating
segment, investment management, is also its single reporting unit.
The impairment test for goodwill consists of a two-step approach, which is performed at the
reporting unit level. If the carrying amount of the reporting unit exceeds its fair value (the
first step of the goodwill impairment test), then the second step is performed to determine if
goodwill is impaired and to measure the amount of the impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of goodwill with the carrying amount
of goodwill. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an
impairment loss is recognized in an amount equal to that excess.
The principal method of determining fair value of the reporting unit is an income approach
where estimated future cash flows are discounted to arrive at a single present value amount. The
discount rate used is derived based on the time value of money and the risk profile of the stream
of future cash flows. Recent results and projections based on expectations regarding revenue,
expenses, capital expenditure and acquisition earn out payments produce a present value for the
reporting unit. The present value produced for the reporting unit is the fair value of the
reporting unit. This amount is reconciled to the company’s market capitalization to determine an
implied control premium, which is compared to an analysis of historical control premiums
experienced by peer companies over a long period of time to assess the reasonableness of the fair
value of the reporting unit.
The company also utilizes a market approach to provide a secondary and corroborative fair
value of the reporting unit by using comparable company and transaction multiples to estimate
values for our single reporting unit. Discretion and judgment is required in determining whether
the transaction data available represents information for companies of comparable nature, scope and
size. The results of the secondary market approach to provide a fair value estimate are not
combined or weighted with the results of the income approach described above but are used to
provide an additional basis to determine the reasonableness of the income approach fair value
estimate.
Debt and Financing Costs
Debt issuance costs are recognized as a deferred asset under ASC Topic 835, “Interest.” After
initial recognition, debt issuance costs are measured at amortized cost. Finance charges and debt
issuance costs are amortized over the term of the debt using the effective interest method.
Interest charges are recognized in the Consolidated Statement of Income in the period in which they
are incurred.
Treasury Shares
Treasury shares are valued at cost and are included as deductions from equity on the
settlement date.
Revenue Recognition
Revenue is measured at the fair value of consideration received or receivable and represents
amounts receivable for services provided in the normal course of business, net of discounts, value
added tax and other sales-related taxes. Revenue is recognized when there is persuasive evidence of
an arrangement, delivery has occurred or services have been provided, collectibility is reasonably
assured and the revenue can be reliably measured. Revenue represents management, service and
distribution, performance and other fees. Revenue is generally accrued over the period for which
the service is provided.
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Investment management fees are derived from providing professional services to manage client
accounts and include fees earned from retail mutual funds, unit trusts, investment companies with
variable capital (ICVCs), exchange-traded funds, investment trusts and institutional and private
wealth management advisory contracts. Investment management fees for products offered in the retail
distribution channel are generally calculated as a percentage of the daily average asset balances
and therefore vary as the levels of AUM change resulting from inflows, outflows and market
movements. Investment management fees for products offered in the institutional and private wealth
management distribution channels are calculated in accordance with the underlying investment
management contracts and also vary in relation to the level of client assets managed. For the year
ended December 31, 2010, management fees from affiliated fund products were $2,083.8 million (2009:
$1,571.1 million; 2008: $1,979.6 million).
Service fees are generated through fees charged to cover several types of expenses, including
fund accounting fees and other maintenance costs for mutual funds, unit trusts and ICVCs, and
administrative fees earned from closed-ended funds. Service fees also include transfer agent fees,
which are fees charged to cover the expense of processing client share purchases and redemptions,
call center support and client reporting. U.S. distribution fees can include 12b-1 fees earned from
certain mutual funds to cover allowable sales and marketing expenses for those funds and also
include asset-based sales charges paid by certain mutual funds for a period of time after the sale
of those funds. Distribution fees typically vary in relation to the amount of client assets
managed. Generally, retail products offered outside of the U.S. do not generate a separate
distribution fee, as the quoted management fee rate is inclusive of these services.
Performance fee revenues are generated on certain management contracts when performance
hurdles are achieved. Such fee revenues are recorded in operating revenues as of the performance
measurement date, when the contractual performance criteria have been met and when the outcome of
the transaction can be measured reliably in accordance with Method 1 of ASC Topic 605-20-S99,
“Revenue Recognition — Services — SEC Materials.” Cash receipt of earned performance fees occurs
after the measurement date. The performance measurement date is defined in each contract in which
incentive and performance fee revenue agreements are in effect, and therefore we have performance
fee arrangements that include monthly, quarterly and annual measurement dates. Given the uniqueness
of each transaction, performance fee contracts are evaluated on an individual basis to determine if
revenues can and should be recognized. Performance fees are not recorded if there are any future
performance contingencies. If performance arrangements require repayment of the performance fee for
failure to perform during the contractual period, then performance fee revenues are recognized no
earlier than the expiration date of these terms. Performance fees will fluctuate from period to
period and may not correlate with general market changes, since most of the fees are driven by
relative performance to the respective benchmark rather than by absolute performance.
Other revenues include fees derived primarily from transaction commissions earned upon the
sale of new investments into certain of our funds and fees earned upon the completion of
transactions in our real estate and private equity asset groups. Real estate transaction fees are
derived from commissions earned through the buying and selling of properties. Private equity
transaction fees include commissions associated with the restructuring of, and fees from providing
advice to, portfolio companies held by the funds. These transaction fees are recorded in the
Consolidated Financial Statements on the date when the transactions are legally closed. The company
is the sponsor of UITs. In its capacity as sponsor of UITs, the company earns other revenues
related to transactional sales charges resulting from the sale of UIT products and from the
difference between the purchase or bid and offer price of securities temporarily held to form new
UIT products. These revenues are recorded as other revenues net of concessions to dealers who
distribute UITs to investors. Other revenues also include the revenues of consolidated investment
products.
Distribution, service and advisory fees that are passed through to external parties are
presented separately as expenses in accordance with ASC Topic 605-45, “Revenue Recognition —
Principal Agent Considerations.” Third-party distribution, service and advisory expenses include
periodic “renewal” commissions paid to brokers and independent financial advisors for their
continuing oversight of their clients’ assets, over the time they are invested, and are payments
for the servicing of client accounts. Renewal commissions are calculated based upon a percentage of
the AUM value. Third-party distribution expenses also include the amortization of upfront
commissions paid to broker-dealers for sales of fund shares with a contingent deferred sales charge
(a charge levied to the investor for client redemption of AUM within a certain contracted period of
time). The distribution commissions are amortized over the redemption period. Also included in
third-party distribution, service and advisory expenses are sub-transfer agency fees that are paid
to third parties for processing client share purchases and redemptions, call center support and
client reporting. Third-party distribution, service and advisory expenses may increase or decrease
at a rate different from the rate of change in service and distribution fee revenues due to the
inclusion of distribution, service and advisory expenses for the U.K. and Canada, where the related
revenues are recorded as investment management fee revenues, as noted above.
Interest income is accrued on interest-bearing assets.
Dividend income from investments is recognized on the ex-dividend date.
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Share-Based Compensation
The company issues equity-settled share-based awards to certain employees, which are measured
at fair value at the date of grant. The fair value determined at the grant date is expensed, based
on the company’s estimate of shares that will eventually vest, on a straight-line or accelerated
basis over the vesting period. Fair value is measured by use of the stochastic (a lattice model) or
Black Scholes valuation models. The expected life of share-based compensation awards used in the
lattice model is adjusted, based on management’s best estimate, for the effects of
non-transferability, exercise restrictions and behavioral considerations.
Pensions
For defined contribution plans, contributions payable related to the accounting period are
charged to the income statement. For defined benefit plans, the cost of providing benefits is
separately determined for each plan using the projected unit credit method, based on actuarial
valuations performed at each balance sheet date. The company’s annual measurement date is December
31. A portion of actuarial gains and losses is recognized through the income statement if the net
cumulative unrecognized actuarial gain or loss at the end of the prior period exceeds the greater
of 10.0% of the present value of the defined benefit obligation (before deducting plan assets) at
that date and 10.0% of the fair value of any plan assets. Prior service costs are recognized over
the remaining service periods of active employees.
Advertising Costs
The company expenses the cost of all advertising and promotional activities as incurred. The
company incurred advertising costs of $17.9 million for the year ended December 31, 2010 (2009:
$21.0 million; 2008: $30.5 million). These amounts are included in marketing expenses in the
Consolidated Statements of Income.
Leases
Rentals under operating leases, where the lessor retains substantially all the risks and
benefits of ownership of the asset, are charged evenly to expense over the lease term. Benefits
received and receivable as an incentive to enter an operating lease are also spread evenly over the
lease term. The company accounts for lease termination costs in accordance with ASC Topic 420,
“Exit or Disposal Cost Obligations,” which requires that (1) a liability for costs to terminate a
contract before the end of its term shall be recognized at the time termination occurs and measured
at fair value and (2) a liability for costs that will continue to be incurred under a contract for
its remaining term without economic benefit to the company be recognized and measured at its fair
value when the company ceases to use the right conveyed by the contract, net of estimated sublease
rentals that could reasonably be obtained even if the company does not anticipate entering into any
subleasing arrangements.
Taxation
Income taxes are provided for in accordance with ASC Topic 740, “Income Taxes” (ASC Topic
740). Deferred tax assets and liabilities are recorded for temporary differences between the tax
basis of assets and liabilities and the reported amounts in the Consolidated Financial Statements,
using the statutory tax rates in effect for the year in which the differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the results of operations in the period that includes the enactment date. A valuation allowance
is recorded to reduce the carrying amounts of deferred tax assets to the amount that is more likely
than not to be realized. The company reports a liability for unrecognized tax benefits resulting
from uncertain tax positions taken or expected to be taken in a tax return. The company recognizes
interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Earnings Per Share
Basic earnings per share is calculated by dividing net income available to shareholders by the
weighted average number of shares outstanding during the periods, excluding treasury shares.
Diluted earnings per share is computed using the treasury stock method, which requires computing
share equivalents and dividing net income attributable to common shareholders by the total weighted
average number of shares and share equivalents outstanding during the period.
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Comprehensive Income
The company’s other comprehensive income/(loss) consists of changes in unrealized gains and
losses on investment securities classified as available-for-sale, the company’s share of other
comprehensive income of equity method investments, reclassification adjustments for realized
gains/(losses) on those investment securities classified as available-for-sale, foreign currency
translation adjustments and employee benefit plan liability adjustments. Such amounts are recorded
net of applicable taxes.
Dividends to Shareholders
Dividends to shareholders are recognized on the declaration date. Dividends are declared and
paid on a quarterly basis.
Translation of Foreign Currencies
Transactions in foreign currencies (currencies other than the functional currencies of the
company’s subsidiaries) are recorded at the rates of exchange prevailing on the dates of the
transactions. At each balance sheet date, monetary assets and liabilities that are denominated in
foreign currencies are remeasured into the functional currencies of the company’s subsidiaries at
the rates prevailing at the balance sheet date. Gains and losses arising on revaluation are
included in the income statement.
The company’s reporting currency and the functional currency of the Parent is U.S. dollars. On
consolidation, the assets and liabilities of company subsidiary operations whose functional
currencies are currencies other than the U.S. dollar (“foreign” operations) are translated at the
rates of exchange prevailing at the balance sheet date. Income statement figures are translated at
the weighted average rates for the year, which approximate actual exchange rates. Exchange
differences arising on the translation of the net assets of foreign operations are taken directly
to accumulated other comprehensive income in equity until the disposal of the net investment, at
which time they are recognized in the income statement. Goodwill and other fair value adjustments
arising on acquisition of a foreign entity are treated as assets and liabilities of the foreign
entity and are translated at rates of exchange prevailing at the balance sheet date.
The company does not utilize derivative financial instruments to provide a hedge against
interest rate or foreign exchange exposures except in the management of its offshore fund
operations, where foreign currency forward and swap contracts are purchased daily to hedge against
foreign exchange rate movements during the four-day client money settlement period. Certain
consolidated investment products may also utilize such instruments. See Note 20, “Consolidated
Investment Products,” for additional information.
Reclassifications
The presentation of certain prior period reported amounts has been reclassified to be
consistent with the current presentation. Such reclassifications had no impact on net income or
equity attributable to common shareholders.
Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements
In December 2007, the FASB issued two items of additional guidance now encompassed in ASC
Topic 805, “Business Combinations,” and ASC Topic 810, “Consolidation.” Under the guidance now
encompassed in ASC Topic 805, the acquirer must recognize, with certain exceptions, 100% of the
fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions
of less than 100% controlling interest when the acquisition constitutes a change in control of the
acquired entity. Additionally, when an acquirer obtains partial ownership in an acquiree, an
acquirer recognizes and consolidates assets acquired, liabilities assumed and any noncontrolling
interests at 100% of their fair values at that date regardless of the percentage ownership in the
acquiree. As goodwill is calculated as a residual, all goodwill of the acquired business, not just
the acquirer’s share, is recognized under this “full-goodwill” approach. Contingent consideration
obligations that are elements of consideration transferred are recognized as of the acquisition
date as part of the fair value transferred in exchange for the acquired business.
Acquisition-related costs incurred in connection with a business combination shall be expensed.
Under the guidance now encompassed in ASC Topic 810, “Consolidation,” the FASB established new
accounting and reporting standards for noncontrolling interests (formerly known as “minority
interests”) in a subsidiary and for the deconsolidation of a subsidiary. Both items of additional
guidance became effective for the company on January 1, 2009. The guidance now encompassed in ASC
Topic 805 was applied prospectively, while the guidance now encompassed in ASC Topic 810 required
retroactive adoption of the presentation and disclosure requirements for existing noncontrolling
interests but prospective adoption of all of its other requirements. The adoption of the additional
guidance now encompassed in ASC Topic 805 amended the definition of a business, which led to a
change in the company’s basis, but not the company’s conclusion, of determining that it has one
reporting unit for goodwill impairment purposes. The company acquired Morgan
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Stanley’s retail asset management business, including Van Kampen Investments on June 1, 2010.
See Note 2, “Business Combination and Integration” for additional details.
In February 2008, the FASB issued additional guidance now encompassed in ASC Topic 820, “Fair
Value Measurements and Disclosures” (ASC Topic 820). The guidance delayed the effective date of ASC
Topic 820 for nonfinancial assets and nonfinancial liabilities except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis (that is, at least
annually). For items within its scope, the guidance delayed the effective date of ASC Topic 820 to
January 1, 2009. As of January 1, 2008, the company applied the fair value measurement and
disclosure provisions of ASC Topic 820 to its financial assets and financial liabilities that are
recognized or disclosed at fair value in the financial statements. As of January 1, 2009, the
company applied the fair value measurement and disclosure provisions of ASC Topic 820 to
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in
the financial statements on a non-recurring basis. Those items include: (1) nonfinancial assets and
nonfinancial liabilities initially measured at fair value in a business combination or other new
basis event, but not measured at fair value in subsequent periods; (2) nonfinancial long-lived
assets measured at fair value for an impairment assessment under ASC Topic 360, “Property, Plant
and Equipment;” (3) nonfinancial liabilities for exit or disposal activities initially measured at
fair value under ASC Topic 420, “Exit or Disposal Cost Obligations;” and (4) nonfinancial assets
and nonfinancial liabilities measured at fair value in the second step of a goodwill impairment
test. The adoption of this additional guidance did not have a material impact on the company’s
financial statements.
In April 2008, the FASB issued additional guidance, which is now encompassed in ASC Topic 350,
“Intangibles — Goodwill and Other” (ASC Topic 350). The guidance amended the factors that should
be considered in developing renewal or extension assumptions used to determine the useful life over
which to amortize the cost of a recognized intangible asset under ASC Topic 350 and required an
entity to consider its own assumptions about renewal or extension of the term of the arrangement,
consistent with its expected use of the asset. It was intended to improve the consistency between
the useful life of an intangible asset determined under ASC Topic 350 and the period of expected
cash flows used to measure the fair value of the asset under ASC Topic 805 and other U.S. GAAP. The
guidance for determining the useful life of a recognized intangible asset was applied prospectively
to intangible assets acquired after the effective date of January 1, 2009. This additional guidance
did not have a material impact on the company’s financial statements.
During June 2008, the FASB issued additional guidance now encompassed in ASC Topic 260,
“Earnings Per Share” (ASC Topic 260), which addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and need to be included in the
earnings allocation in computing earnings per share (EPS) under the two-class method described in
ASC Topic 260. The new guidance provides that only those unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents are participating securities
that should be included in the calculation of basic EPS under the two-class method. The FASB
concluded that the holder of a share-based award receives a noncontingent transfer of value each
time the entity declares a dividend, and therefore the share-based award meets the definition of a
participating security. The guidance was effective for financial statements issued for fiscal years
beginning after December 15, 2008, with all prior period EPS data being adjusted retrospectively.
The adoption of the guidance on January 1, 2009, required the company to include unvested
restricted stock units (RSUs) that contain nonforfeitable dividend equivalents as outstanding
common shares for purposes of calculating basic EPS. The adoption of this additional guidance did
not have a material impact on the company’s calculation of diluted EPS for periods prior to January
1, 2009.
In December 2008, the FASB issued additional guidance now encompassed in ASC Topic 860,
“Transfers and Servicing,” which became effective for the company on March 31, 2009. The guidance
requires additional disclosures by public entities with a) continuing involvement in transfers of
financial assets to a special purpose entity or b) a variable interest in a variable interest
entity. The adoption of this additional guidance did not have a material impact on the company’s
financial statements. See Note 20, “Consolidated Investment Products,” for additional disclosures.
In January 2009, the FASB issued additional guidance now encompassed in ASC Topic 325, which
became effective for the company on March 31, 2009. The guidance revised the impairment approach
provided by ASC Topic 325 for beneficial interests to make it consistent with the requirements of
ASC Topic 320 for determining whether an impairment of other debt and equity securities is
other-than-temporary. This guidance also eliminates the requirement to rely exclusively on market
participant assumptions about future cash flows and permitted the use of reasonable management
judgment of the probability that the holder will be unable to collect all amounts due. Instead,
this guidance requires that an other-than-temporary impairment be recognized when it is probable
that there has been an adverse change in the holder’s estimated cash flows. This additional
guidance did not have a material impact on the company’s financial statements.
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On April 9, 2009, the FASB issued three items of additional guidance intended to enhance
disclosures regarding fair value measurements and to clarify guidance on impairments of securities:
a) Additional guidance now encompassed in ASC Topic 820 provides guidelines for making fair
value measurements more consistent with existing principles for fair value measurement. This
guidance addresses the measurement of fair value of financial assets when there is no active market
or where the price inputs being used could be indicative of distressed sales. It also reaffirms the
definition of fair value already reflected in ASC Topic 820, which is the price that would be paid
to sell an asset in an orderly transaction (as opposed to a distressed or forced transaction) at
the measurement date under current market conditions. This guidance also reaffirms the need to use
judgment to ascertain if a formerly active market has become inactive and in determining fair
values when markets have become inactive. This additional guidance became effective for the company
for the period ended June 30, 2009. Its application did not have a material impact on the
Consolidated Financial Statements. See Note 3, “Fair Value of Assets and Liabilities,” and Note 20,
“Consolidated Investment Products,” for additional details.
b) Additional guidance now encompassed in ASC Topic 825 enhanced consistency in financial
reporting by increasing the frequency of fair value disclosures. It was issued to improve the fair
value disclosures for any financial instruments that are not currently reflected on the balance
sheets of companies at fair value. Prior to its issuance, fair values of these assets and
liabilities were only disclosed on an annual basis. This additional guidance requires these
disclosures on a quarterly basis, providing qualitative and quantitative information about fair
value estimates for all financial instruments not measured on the balance sheet at fair value. It
became effective for the company for the period ended June 30, 2009, which required the company to
make annual disclosures in its interim financial statements, which are included in Note 3, “Fair
Value of Assets and Liabilities,” Note 4, “Investments,” and Note 9, “Debt.”
c) Additional guidance now encompassed in ASC Topic 320-10-65 provided additional clarity and
consistency in accounting for and presentation of impairment losses on securities. It was intended
to improve the consistency in the timing of impairment recognition and provide greater clarity to
investors about the credit and noncredit components of impaired debt securities that are not
expected to be sold, and it requires increased and more timely disclosures sought by investors
regarding expected cash flows, credit losses, and an aging of securities with unrealized losses.
The company adopted this additional guidance on April 1, 2009. Upon adoption, the company recorded
a cumulative effect adjustment of $1.5 million to the April 1, 2009, opening balance of retained
earnings with a corresponding adjustment to accumulated other comprehensive income.
In May 2009, the FASB issued additional guidance now encompassed in ASC Topic 855, “Subsequent
Events,” which established general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. Specifically, the guidance provides clarity around the period after the balance sheet date
during which management of a reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, the circumstances under which
an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosure that an entity should make about events or transactions
that occurred after the balance sheet date. The additional guidance was effective for interim and
annual financial reporting periods ending after June 15, 2009, and was applied prospectively. On
February 24, 2010 the FASB issued Accounting Standards Update 2010-09, “Amendments to Certain
Recognition and Disclosure Requirements” (ASU 2010-09). ASU 2010-09 amended the guidance on
subsequent events to remove the requirement for Securities and Exchange Commission filers to
disclose the date through which an entity has evaluated subsequent events.
In June 2009, the FASB issued additional guidance now encompassed in ASC Topic 860, which
addressed the effects of eliminating the qualifying special-purpose entity concept, and generally
subjects those entities to the consolidation guidance applied to other VIEs now encompassed in ASC
Topic 810. Specifically, the guidance introduced the concept of a participating interest, which
will limit the circumstances where the transfer of a portion of a financial asset will qualify as a
sale, assuming all other derecogntion criteria are met, and clarifies and amends the derecogntion
criteria for determining whether a transfer qualifies for sale accounting. This additional guidance
was applied prospectively to new transfers of financial assets occurring on or after January 1,
2010. It did not have a material impact on the company’s Consolidated Financial Statements.
In June 2009, the FASB issued additional guidance now encompassed in ASC Topic 810 which
amended certain provisions for determining whether an entity is a VIE; it requires a qualitative
rather than a quantitative analysis to determine whether the company is the primary beneficiary of
a VIE; it amended the consideration of related party relationships in the determination of the
primary beneficiary of a VIE by providing an exception regarding de facto agency relationships in
certain circumstances; it requires continuous assessments of whether the company is a VIE’s primary
beneficiary; and it requires enhanced disclosures about the company’s involvement with VIEs, which
are generally consistent with those disclosures required by the guidance issued in December 2008
discussed above. In February 2010 the FASB issued ASU 2010-10, a deferral of the effective date of
this additional guidance for a reporting entity’s interests in certain investment funds which have
attributes of investment companies, for which the reporting entity does not have an obligation to
fund losses, and which are not structured as securitization entities. In addition, the deferral
applies to a
reporting entity’s interest in money market fund-type products. The company has determined
that all of its managed funds with the exception of certain collateralized loan obligation products
(CLOs) qualify for the deferral.
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The adoption of the additional guidance now encompassed in ASC Topic 810, which was effective
January 1, 2010, had a significant impact on the presentation of the company’s financial
statements, as its provisions required the company to consolidate certain CLOs that were not
previously consolidated. The cumulative effect adjustment upon adoption at January 1, 2010 resulted
in an appropriation of retained earnings and a reclassification of other comprehensive income into
retained earnings of $274.3 million and $5.2 million, respectively. The company’s Consolidated
Statement of Income for the year ended December 31, 2010 reflects the elimination of $35.4 million
in management fees earned from these CLOs, and the addition of $240.9 million in interest income,
$118.6 million in interest expense, and $2.6 million in net other gains. Prior to the adoption of
this guidance, the company accounted for its investments in these CLOs as available-for-sale
investments, with changes in the value of the company’s interests being recorded through other
comprehensive income.
Upon consolidation of the CLOs, the company’s and the CLOs’ accounting policies were
effectively aligned, resulting in the reclassification of the company’s gain for the year ended
December 31, 2010 of $6.4 million (representing the increase in the market value of the company’s
holding in the consolidated CLOs) from other comprehensive income into other gains/losses. The
company’s gain on its investment in the CLOs (before consolidation) eliminates with the company’s
share of the offsetting loss on the CLOs’ debt. The $77.1 million net income impact during the year
ended December 31, 2010 of consolidation of these CLOs is therefore completely attributed to other
investors in these CLOs, as the company’s share has been eliminated through consolidation. The
Consolidated Balance Sheet at December 31, 2010 reflects the consolidation of $6.9 billion in
assets held and $5.9 billion in debt issued by these CLOs, despite the fact that the assets cannot
be used by the company, nor is the company obligated for the debt. Retained earnings appropriated
for investors of consolidated investment products of $495.5 million is presented as part of the
company’s total equity and reflects the excess of the consolidated CLOs’ assets over their
liabilities, attributable to noncontrolling third-party investors in consolidated CLOs at December
31, 2010. In addition, the company’s Consolidated Cash Flow Statement for the year ended December
31, 2010 reflects the cash flows of these CLOs. In accordance with the standard, prior periods have
not been restated to reflect the consolidation of these CLOs.
Upon adoption of this additional guidance now encompassed in ASC Topic 810, the assets and
liabilities of the consolidated CLOs were measured at fair value, as the determination of the
carrying amounts was not practicable. The company has elected the fair value option under ASC Topic
825-10-25 to measure the assets and liabilities of all consolidated CLOs at fair value subsequent
to the date of initial adoption of this additional guidance, as the company has determined that
measurement of the notes issued by consolidated CLOs at fair value better correlates with the value
of the assets held by consolidated CLOs, which are held to provide the cash flows for the note
obligations. See Note 20, “Consolidated Investment Products,” for a consolidating balance sheet at
December 31, 2010.
In July 2009, the FASB issued additional guidance which replaced the existing hierarchy of
U.S. Generally Accepted Accounting Principles with the FASB ASC as the single source of
authoritative U.S. accounting and reporting standards applicable for all nongovernmental entities,
with the exception of guidance issued by the U.S. Securities and Exchange Commission and its staff.
This additional guidance is now encompassed in ASC Topic 105, “Generally Accepted Accounting
Principles,” and was effective July 1, 2009. The company has replaced references to FASB accounting
standards with ASC references, where applicable and relevant, in this Report.
In August 2009, the FASB issued Accounting Standards Update 2009-05, “Fair Value Measurements
and Disclosures (Topic 820) — Measuring Liabilities at Fair Value” (ASU 2009-05). ASU 2009-05
amends Topic 820 by providing additional guidance (including illustrative examples) clarifying the
measurement of liabilities at fair value. When a quoted price in an active market for the identical
liability is not available, the amendments in ASU 2009-05 require that the fair value of a
liability be measured using one or more of the listed valuation techniques that should maximize the
use of relevant observable inputs and minimize the use of unobservable inputs. In addition, the
amendments in ASU 2009-05 clarify that when estimating the fair value of a liability, an entity is
not required to include a separate input or adjustment to the other inputs relating to the
existence of a restriction that prevents the transfer of the liability. The amendments also clarify
how the price of a traded debt security (i.e., an asset value) should be considered in estimating
the fair value of the issuer’s liability. The amendments in ASU 2009-05 became effective for the
company on October 1, 2009. The company has made the required disclosures in Note 9, “Debt.”
In September 2009, the FASB issued Accounting Standards Update 2009-12, “Investments in
Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)” (ASU 2009-12). ASU
2009-12 amends ASC Topic 820 to provide further guidance on how to measure the fair value of
investments in alternative investments, such as hedge, private equity, real estate, venture
capital, offshore and fund of funds. ASU 2009-12 permits, as a practical expedient, the measurement
of fair value of an investment on the basis of the
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net asset value per share of the investment (or its equivalent) if the net asset value of the
investment (or its equivalent) is calculated in a manner consistent with ASC Topic 946, “Financial
Services — Investment Companies,” including measurement of all or substantially all of the fund’s
underlying investments at fair value in accordance with ASC Topic 820. ASU 2009-12 is effective for
interim and annual periods ending after December 15, 2009. The adoption of ASU 2009-12 did not have
a material impact on the Consolidated Financial Statements.
In January 2010, the FASB issued Accounting Standards Update 2010-06, “Improving Disclosures
about Fair Value Measurements” (ASU 2010-06). ASU 2010-06 amends Topic 820 to require a number of
additional disclosures regarding fair value measurements. Specifically, ASU 2010-06 requires
entities to disclose: (1) the amount of significant transfers between Level 1 and Level 2 of the
fair value hierarchy and the reasons for these transfers; (2) the reasons for any transfers in or
out of Level 3; and (3) information in the reconciliation of recurring Level 3 measurements about
purchases, sales, issuances and settlements on a gross basis. ASU 2010-06 also clarifies existing
fair value disclosures about the appropriate level of disaggregation and about inputs and valuation
techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2
or Level 3. The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair
value measurements, which are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The company has made the required disclosures in Note
20, “Consolidated Investment Products.” The company does not expect the additional disclosure
requirements with respect to rollforward activity to have a significant impact on its disclosure.
2. BUSINESS COMBINATION AND INTEGRATION
On June 1, 2010, Invesco acquired from Morgan Stanley its retail asset management business,
including Van Kampen Investments (the “acquired business” or the “acquisition”), in exchange for an
aggregate of 30.9 million shares of common stock and participating preferred stock on an as
converted basis and $770.0 million in cash. The 30.9 million shares issued to Morgan Stanley
included 11.7 million common shares and 19.2 million participating preferred shares as converted to
common shares. Each participating preferred share issued to Morgan Stanley was convertible into
1,000 common shares upon transfer by Morgan Stanley to an unrelated third party. During July 2010,
a cash payment of $2.5 million was made reflecting agreed working capital levels in the acquired
business. The share issuance portion of the acquisition consideration represents a noncash
financing activity related to the statement of cash flows. In November 2010, Morgan Stanley sold
its 30.9 million shares, as converted, to unrelated third parties, resulting in the conversion of
the participating preferred shares outstanding into common shares outstanding.
The acquired business brought in assets under management across the equity, fixed income and
alternative asset classes (including mutual funds, variable insurance funds, separate accounts and
UITs).
The transaction was accounted for under the acquisition method of accounting. Accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed based upon their
estimated fair values at the date of the transaction. Substantially all of the $372.8 million
excess of the purchase price over the fair value of assets acquired and liabilities and
noncontrolling interests assumed was recorded as nondeductible goodwill. The goodwill balance
resulted primarily from an opening balance sheet net deferred tax liability of $295.2 million which
reflects a carryover tax basis in certain assets that were acquired.
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The following table summarizes the initial estimates of amounts of identified assets
acquired and liabilities assumed at the acquisition date and at December 31, 2010, as well as the
consideration transferred to acquire Morgan Stanley’s retail asset management business, including
Van Kampen Investments.
| Initial Fair Value | Revised Fair | |||||||||||
| $ in millions | Estimate* | Adjustments* | Value Estimate | |||||||||
|
ASSETS
|
||||||||||||
|
Cash and cash equivalents
|
57.8 | — | 57.8 | |||||||||
|
Cash of consolidated investment products
|
4.4 | 12.1 | 16.5 | |||||||||
|
Investments
|
71.4 | — | 71.4 | |||||||||
|
Investments of consolidated investment products
|
762.3 | — | 762.3 | |||||||||
|
Receivables
|
81.1 | (0.9 | ) | 80.2 | ||||||||
|
Receivables of consolidated investment products
|
11.6 | — | 11.6 | |||||||||
|
Property and equipment
|
3.2 | 0.1 | 3.3 | |||||||||
|
Institutional relationships intangible
|
18.0 | — | 18.0 | |||||||||
|
Sub-Advised relationships intangible
|
54.0 | — | 54.0 | |||||||||
|
Fund management contracts intangible
|
1,047.0 | — | 1,047.0 | |||||||||
|
Distribution relationships intangible
|
40.0 | — | 40.0 | |||||||||
|
Distribution agreements intangible
|
17.0 | — | 17.0 | |||||||||
|
Trademarks / Trade Names intangible
|
13.0 | — | 13.0 | |||||||||
|
Goodwill
|
362.7 | 10.1 | 372.8 | |||||||||
|
Other assets
|
18.8 | 15.0 | 33.8 | |||||||||
|
Total assets
|
2,562.3 | 36.4 | 2,598.7 | |||||||||
|
LIABILITIES AND APPROPRIATED EQUITY
|
||||||||||||
|
Accruals and accounts payables
|
(135.6 | ) | (21.9 | ) | (157.5 | ) | ||||||
|
Other current liabilities of consolidated
investment products
|
(16.3 | ) | (8.4 | ) | (24.7 | ) | ||||||
|
Deferred taxation, net
|
(307.8 | ) | 12.6 | (295.2 | ) | |||||||
|
Long-term debt of consolidated investment products
|
(630.2 | ) | — | (630.2 | ) | |||||||
|
Retained earnings appropriated for investors of
consolidated investment products
|
(130.7 | ) | (18.7 | ) | (149.4 | ) | ||||||
|
Total liabilities and appropriated equity
|
(1,220.6 | ) | (36.4 | ) | (1,257.0 | ) | ||||||
|
Total identifiable net assets
|
1,341.7 | — | 1,341.7 | |||||||||
|
|
||||||||||||
|
Summary of consideration:
|
||||||||||||
|
Cash paid
|
770.0 | — | 770.0 | |||||||||
|
Payable to seller
|
2.5 | — | 2.5 | |||||||||
|
Capital stock at fair value
|
569.2 | — | 569.2 | |||||||||
|
Total cash and stock consideration
|
1,341.7 | — | 1,341.7 | |||||||||
| * | As the company receives additional information related to the transaction, certain initially recorded estimates may change. Adjustments identified through December 31, 2010 relate primarily to the addition of cash and derivative assets and liabilities of acquired consolidated collateralized loan obligation products and the recognition of an acquired contingent liability for deferred structuring fees of $20.8 million (and related deferred tax asset $8.3 million), discounted from a maximum contractual amount of $46.4 million using a credit-adjusted risk free rate of 6.19%. The company does not expect additional material changes to the value of assets acquired or liabilities assumed in conjunction with the transaction. |
The initial opening balance sheet includes an accrual of $4.7 million related to probable
legal contingencies existing at the date of the acquisition and an indemnification asset due from
Morgan Stanley for the same amount. Any adjustments made to the contingent liability will result in
equal and offsetting adjustments to the receivable from Morgan Stanley. The 30.9 million aggregate
common shares and participating preferred shares as converted to common shares issued to Morgan
Stanley had a total fair value of $567.8 million based on the company’s opening market price of
$18.38 per share on June 1, 2010, the acquisition date. The vested portion of replacement employee
share-based awards had a fair value of $1.4 million.
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Immediately following the acquisition date, the company commenced the integration of the
acquired business with its pre-existing operations. The integration of the acquired business was
largely complete as of the date of the company’s Form 10-Q for the three and six months ended June
30, 2010; as such, accurate segregated expense information for (and therefore earnings generated
by) the acquired business for periods subsequent to June 30, 2010 is no longer available. Prior to
any significant product mergers, revenues associated with the acquired business can be separately
identified, and as a result, the impact can be estimated. Operating revenues of the acquired
business from the closing date of June 1 through December 31, 2010 were approximately $468 million,
which represents the incremental impact of the acquired business and does not represent the
stand-alone results of the acquired business.
The following unaudited proforma summary presents consolidated information of the company as
if the acquisition had occurred on January 1, 2009. Transaction and integration expenses have been
removed from the proforma information as they are deemed to be costs directly attributable to the
acquired business. These pro forma results are not indicative of the actual results of operations
that would have been achieved nor are they indicative of future results of operations.
| For the year ended December 31, | ||||||||
| $ in millions | 2010 | 2009 | ||||||
|
Operating Revenues
|
3,805.4 | 3,264.9 | ||||||
|
Net income
|
607.8 | 353.5 | ||||||
During the year ended December 31, 2010, the company incurred $150.0 million of transaction
and integration costs ($103.1 million net of taxation). Transaction and integration costs include
acquisition-related charges incurred during the period to effect a business combination and do not
represent ongoing costs of the fully integrated combined organization. They include legal,
regulatory, advisory, valuation, integration-related employee incentive awards and other
professional or consulting fees, general and administrative costs, including travel costs related
to the transaction and the costs of temporary staff involved in executing the transaction, and
post-closing costs of integrating the acquired business into the company’s existing operations
including incremental costs associated with achieving synergy savings. Additionally, transaction
and integration expenses include legal costs related to the defense of auction rate preferred
securities complaints raised in the pre-acquisition period with respect to various closed-end funds
included in the acquisition obtained as part of the acquired business. See Note 19, “Commitments
and Contingencies” for additional information. The following table presents acquisition-related and
integration-related charges incurred during the period.
| For the year ended | ||||
| $ in millions | December 31, 2010 | |||
|
Acquisition-related charges
|
5.7 | |||
|
Integration-related charges:
|
||||
|
Staff costs
|
39.1 | |||
|
Technology, contractor and related costs
|
53.4 | |||
|
Professional services
|
51.8 | |||
|
|
||||
|
Total integration-related charges
|
144.3 | |||
|
|
||||
|
Total transaction and integration charges
(1)
|
150.0 | |||
|
|
||||
| (1) | The company incurred $4.3 million of acquisition-related costs and $6.5 million of integration-related costs during 2009, which are not reflected in this table. |
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3. FAIR VALUE OF ASSETS AND LIABILITIES
The carrying value and fair value of financial instruments is presented in the below summary
table. The fair value of financial instruments held by consolidated investment products is
presented in Note 20, “Consolidated Investment Products.”
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||
| Footnote | Carrying | Carrying | ||||||||||||||||||
| $ in millions | Reference | Value | Fair Value | Value | Fair Value | |||||||||||||||
|
Cash and cash equivalents
|
740.5 | 740.5 | 762.0 | 762.0 | ||||||||||||||||
|
Available for sale investments
|
4 | 100.0 | 100.0 | 92.7 | 92.7 | |||||||||||||||
|
Assets held for policyholders
|
1,295.4 | 1,295.4 | 1,283.0 | 1,283.0 | ||||||||||||||||
|
Trading investments
|
4 | 180.6 | 180.6 | 84.6 | 84.6 | |||||||||||||||
|
Foreign time deposits*
|
4 | 28.2 | 28.2 | 22.5 | 22.5 | |||||||||||||||
|
Support agreements*
|
19, 20 | (2.0 | ) | (2.0 | ) | (2.5 | ) | (2.5 | ) | |||||||||||
|
Policyholder payables
|
(1,295.4 | ) | (1,295.4 | ) | (1,283.0 | ) | (1,283.0 | ) | ||||||||||||
|
Financial instruments sold, not yet purchased
|
(0.7 | ) | (0.7 | ) | — | — | ||||||||||||||
|
Derivative liabilities
|
(0.1 | ) | (0.1 | ) | — | — | ||||||||||||||
|
Note Payable
|
(18.9 | ) | (18.9 | ) | — | — | ||||||||||||||
|
Long-term debt*
|
9 | (1,315.7 | ) | (1,339.3 | ) | (745.7 | ) | (765.5 | ) | |||||||||||
| * | These financial instruments are not measured at fair value on a recurring basis. See the indicated footnotes for additional information about the carrying and fair values of these financial instruments. Foreign time deposits are measured at cost plus accrued interest, which approximates fair value. |
A three-level valuation hierarchy exists for disclosure of fair value measurements based upon
the transparency of inputs to the valuation of an asset or liability as of the measurement date.
The three levels are defined as follows:
| • | Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| • | Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
| • | Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
An asset or liability’s categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement.
There are three types of valuation approaches: a market approach, which uses observable prices
and other relevant information that is generated by market transactions involving identical or
comparable assets or liabilities; an income approach, which uses valuation techniques to convert
future amounts to a single, discounted present value amount; and a cost approach, which is based on
the amount that currently would be required to replace the service capacity of an asset.
The following is a description of the valuation methodologies used for assets and liabilities
measured at fair value on a recurring basis, as well as the general classification of such assets
and liabilities pursuant to the valuation hierarchy.
Cash equivalents
Cash equivalents include cash investments in money market funds and time deposits. Cash and
cash equivalents invested in affiliated money market funds totaled $289.6 million at December 31,
2010 (December 31, 2009: $465.1 million). Cash investments in money market funds are valued under
the market approach through the use of quoted market prices in an active market, which is the net
asset value of the underlying funds, and are classified within level 1 of the valuation hierarchy.
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Table of Contents
Available-for-sale investments
Available-for-sale investments include amounts seeded into affiliated investment products, and
investments in affiliated CLOs. Seed money is valued under the market approach through the use of
quoted market prices available in an active market and is classified within level 1 of the
valuation hierarchy; there is no modeling or additional information needed to arrive at the fair
values of these investments. Seed money investments are investments held in Invesco managed funds
with the purpose of providing capital to the funds during their development periods. CLOs are
valued using an income approach through the use of certain observable and unobservable inputs. Due
to current liquidity constraints within the market for CLO products that require the use of
unobservable inputs, these investments are classified as level 3 within the valuation hierarchy.
Assets held for policyholders
Assets held for policyholders represent investments held by one of the company’s subsidiaries,
which is an insurance entity that was established to facilitate retirement savings plans in the
U.K. The assets held for policyholders are accounted for at fair value pursuant to ASC Topic 944,
“Financial Services — Insurance,” and are comprised primarily of affiliated unitized funds. The
assets are measured at fair value under the market approach based on the quoted prices of the
underlying funds in an active market and are classified within level 1 of the valuation hierarchy.
The policyholder payables are indexed to the value of the assets held for policyholders.
Trading investments
Trading investments include investments held to hedge economically against costs the company
incurs in connection with certain deferred compensation plans in which the company participates, as
well as trading and investing activities in equity and debt securities entered into in its capacity
as sponsor of UITs.
| • | Investments related to deferred compensation plans |
| Investments related to deferred compensation plans are primarily invested in affiliated funds that are held to hedge economically current and non-current deferred compensation liabilities. Investments related to deferred compensation plans are valued under the market approach through the use of quoted prices in an active market and are classified within level 1 of the valuation hierarchy. |
| • | UIT-related equity and debt securities |
| At December 31, 2010, UIT-related equity and debt securities consisted of investments in corporate stock, UITs, and U.S. state and political subdivision securities. Each is discussed more fully below. |
| o | Corporate stock |
| The company temporarily holds investments in corporate stock for purposes of creating a UIT. Corporate stocks are valued under the market approach through use of quoted prices on an exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized in Level 1 of the fair value hierarchy; otherwise, they are categorized in Level 2. |
| o | UITs |
| The company may hold units of its sponsored UITs at period-end for sale in the primary market or secondary market. Equity UITs are valued under the market approach through use of quoted prices on an exchange. Fixed income UITs are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as Level 1, 2, or 3. |
| o | U.S. state and political subdivision securities |
| U.S. state and political subdivision (collectively ‘municipal’) securities are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as Level 1, 2, or 3. |
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Table of Contents
UIT-related financial instruments sold, not yet purchased, and derivative liabilities
The company uses U.S. Treasury futures, which are types of derivative financial instruments,
to hedge economically fixed income UIT inventory and securities in order to mitigate market
risk. Open futures contracts are marked to market daily through earnings, which is
recorded in the company’s consolidated statement of income in other revenue, along with the
mark-to-market on the underlying trading securities held. Fair values of derivative contracts in an
asset position are included in other assets in the company’s consolidated balance sheet. Fair
values of derivative contracts in a liability position are included in other liabilities in the
company’s consolidated balance sheet. These derivative contracts are valued under the
market approach through use of quoted prices in an active market and are classified within Level 1
of the valuation hierarchy. At December 31, 2010 there were 76 futures contracts with a notional
value of $9.3 million. Additionally, to hedge economically the market risk associated with equity
and debt securities and UITs temporarily held as trading investments, the company will hold short
corporate stock, exchange-traded fund, or U.S. treasury security positions. These transactions are
recorded as financial instruments sold, not yet purchased and are included in other liabilities in
the company’s consolidated balance sheet. To the extent these securities are actively traded,
valuation adjustments are not applied and they are categorized in Level 1 of the fair value
hierarchy; otherwise, they are categorized in Level 2.
Note payable
The note payable represents a payable linked to the aggregate amount of distributions
proportional to Invesco’s acquired ownership interest in two consolidated real estate funds. As the
underlying investments in the funds are carried at fair value (and are disclosed as Level 3 assets
in the fair value hierarchy table included in Note 20, “Consolidated Investment Products”),
management elected the fair value option for the note payable in order to offset the fair value
movements recognized from the funds and has recorded the note payable as a Level 3 liability. The
fair value of the note payable represents its remaining principal balance adjusted for changes in
equity of the funds that is attributable to the company’s ownership interest in the funds.
105
Table of Contents
The following table presents, for each of the hierarchy levels described above, the carrying
value of the company’s assets and liabilities, including major security type for equity and debt
securities, which are measured at fair value on the face of the statement of financial position as
of December 31, 2010.
| As of December 31, 2010 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Fair Value | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
| $ in millions | Measurements | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Current assets:
|
||||||||||||||||
|
Cash equivalents:
|
||||||||||||||||
|
Money market funds
|
316.4 | 316.4 | — | — | ||||||||||||
|
Investments:*
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Seed money
|
99.5 | 99.5 | — | — | ||||||||||||
|
Trading investments:
|
||||||||||||||||
|
Investments related to deferred
compensation plans
|
165.5 | 165.5 | — | — | ||||||||||||
|
UIT-related equity and debt securities:
|
||||||||||||||||
|
Corporate stock
|
1.2 | 1.2 | — | — | ||||||||||||
|
UITs
|
4.0 | 4.0 | — | — | ||||||||||||
|
U.S. state and political
subdivisions securities
|
9.9 | — | 9.9 | — | ||||||||||||
|
Assets held for policyholders
|
1,295.4 | 1,295.4 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total current assets
|
1,891.9 | 1,882.0 | 9.9 | — | ||||||||||||
|
|
||||||||||||||||
|
Non-current assets:
|
||||||||||||||||
|
Investments — available-for-sale*:
|
||||||||||||||||
|
CLOs**
|
0.5 | — | — | 0.5 | ||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
1,892.4 | 1,882.0 | 9.9 | 0.5 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Current liabilities:
|
||||||||||||||||
|
Policyholder payables
|
(1,295.4 | ) | (1,295.4 | ) | — | — | ||||||||||
|
UIT-related financial instruments sold,
not yet purchased:
|
||||||||||||||||
|
Corporate equities
|
(0.7 | ) | (0.7 | ) | — | — | ||||||||||
|
U.S. Treasury securities
|
— | — | — | — | ||||||||||||
|
UIT-related derivative liabilities
|
(0.1 | ) | (0.1 | ) | — | — | ||||||||||
|
Non-current liabilities:
|
||||||||||||||||
|
Note payable
|
(18.9 | ) | — | — | (18.9 | ) | ||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
(1,315.1 | ) | (1,296.2 | ) | — | (18.9 | ) | |||||||||
|
|
||||||||||||||||
| * | Current foreign time deposits of $28.2 million and other current investments of $0.5 million are excluded from this table. Other non-current equity and cost method investments of $156.9 million and $7.0 million, respectively, are also excluded from this table. These investments are not measured at fair value, in accordance with applicable accounting standards. | |
| ** | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of CLOs for which the company has an underlying investment of $23.3 million at December 31, 2010 (before consolidation). In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. |
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Table of Contents
The following table presents, for each of the hierarchy levels described above, the carrying
value of the company’s assets and liabilities that are measured at fair value as of December 31,
2009:
| As of December 31, 2009 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Fair Value | Identical Assets | Observable Inputs | Unobservable Inputs | |||||||||||||
| $ in millions | Measurements | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Current assets:
|
||||||||||||||||
|
Cash equivalents:
|
||||||||||||||||
|
Money market funds
|
498.6 | 498.6 | — | — | ||||||||||||
|
Investments:*
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Seed money
|
74.8 | 74.8 | — | — | ||||||||||||
|
Trading investments:
|
||||||||||||||||
|
Investments related to
deferred compensation plans
|
84.6 | 84.6 | — | — | ||||||||||||
|
Assets held for policyholders
|
1,283.0 | 1,283.0 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total current assets
|
1,941.0 | 1,941.0 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Non-current assets:
|
||||||||||||||||
|
Investments — available-for-sale:
|
||||||||||||||||
|
CLOs
|
17.9 | — | — | 17.9 | ||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
1,958.9 | 1,941.0 | — | 17.9 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Current liabilities:
|
||||||||||||||||
|
Policyholder payables
|
(1,283.0 | ) | (1,283.0 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
(1,283.0 | ) | (1,283.0 | ) | — | — | ||||||||||
|
|
||||||||||||||||
| * | Current foreign time deposits of $22.5 million and other current investments of $0.5 million are excluded from this table. Other non-current equity method and other investments of $134.7 million and $4.8 million, respectively, are also excluded from this table. These investments are not measured at fair value, in accordance with applicable accounting standards. |
The following table shows a reconciliation of the beginning and ending fair value measurements
for level 3 assets during the year ending December 31, 2010, which are comprised solely of CLOs,
and are valued using significant unobservable inputs:
| Year Ended | Year Ended | |||||||
| $ in millions | December 31, 2010 | December 31, 2009 | ||||||
|
Beginning balance
|
17.9 | 17.5 | ||||||
|
Adoption of guidance now encompassed in ASC Topic 810*
|
(17.4 | ) | — | |||||
|
|
||||||||
|
Beginning balance, as adjusted
|
0.5 | 17.5 | ||||||
|
Net unrealized gains and losses included in accumulated other
comprehensive income/(loss)**
|
0.1 | 6.4 | ||||||
|
Purchases and issuances
|
— | — | ||||||
|
Other-than-temporary impairment included in other gains and losses, net
|
— | (5.2 | ) | |||||
|
Return of capital
|
(0.1 | ) | (0.8 | ) | ||||
|
|
||||||||
|
Ending balance
|
0.5 | 17.9 | ||||||
|
|
||||||||
| * | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of CLOs for which the company has an underlying investment of $23.3 million at December 31, 2010 (before consolidation). The adjustment of $17.4 million in the table above reflects the elimination of the company’s equity interest upon adoption. In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. | |
| ** | Of these net unrealized gains and losses included in accumulated other comprehensive income/(loss), $0.1 million for the year ended December 31, 2010 is attributed to the change in unrealized gains and losses related to assets still held at December 31, 2010. |
107
Table of Contents
4. INVESTMENTS
The disclosures below include details of the company’s investments. Investments held by
consolidated investment products are detailed in Note 20, “Consolidated Investment Products.”
Current Investments
| As of | ||||||||
| December 31, | December 31, | |||||||
| $ in millions | 2010 | 2009 | ||||||
|
Available-for-sale investments:
|
||||||||
|
Seed money
|
99.5 | 74.8 | ||||||
|
Trading investments:
|
||||||||
|
Investments related to deferred compensation plans
|
165.5 | 84.6 | ||||||
|
UIT-related equity and debt securities
|
15.1 | — | ||||||
|
Foreign time deposits
|
28.2 | 22.5 | ||||||
|
Other
|
0.5 | 0.5 | ||||||
|
|
||||||||
|
Total current investments
|
308.8 | 182.4 | ||||||
|
|
||||||||
Non-current Investments
| As of | ||||||||
| December 31, | December 31, | |||||||
| $ in millions | 2010 | 2009 | ||||||
|
Available-for-sale investments:
|
||||||||
|
CLOs
|
0.5 | 17.9 | ||||||
|
Equity method investments
|
156.9 | 134.7 | ||||||
|
Other
|
7.0 | 4.8 | ||||||
|
|
||||||||
|
Total non-current investments
|
164.4 | 157.4 | ||||||
|
|
||||||||
The portion of trading gains and losses for the year ended December 31, 2010, that relates to
trading securities still held at December 31, 2010, was a $8.6 million net gain (December 31, 2009:
a $18.6 million net gain).
Realized gains and losses recognized in the income statement during the year from investments
classified as available-for-sale are as follows:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Proceeds | Gross | Gross | Proceeds | Gross | Gross | Proceeds | Gross | Gross | ||||||||||||||||||||||||||||
| from | Realized | Realized | from | Realized | Realized | from | Realized | Realized | ||||||||||||||||||||||||||||
| $ in millions | Sales | Gains | Losses | Sales | Gains | Losses | Sales | Gains | Losses | |||||||||||||||||||||||||||
|
Current
available-for-sale
investments
|
64.5 | 9.9 | (1.3 | ) | 47.5 | 4.5 | (1.6 | ) | 73.9 | 1.6 | (1.7 | ) | ||||||||||||||||||||||||
|
Non-current
available-for-sale
investments
|
0.2 | — | — | 2.2 | 1.4 | — | 10.6 | 7.4 | — | |||||||||||||||||||||||||||
Upon the sale of available-for-sale securities, net realized gains of $8.6 million, $4.3
million and $7.3 million were transferred from accumulated other comprehensive income into the
Consolidated Statements of Income during 2010, 2009, and 2008, respectively. The specific
identification method is used to determine the realized gain or loss on securities sold or
otherwise disposed.
108
Table of Contents
Gross unrealized holding gains and losses recognized in other accumulated comprehensive income
from available-for-sale investments are presented in the table below:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||
| Holding | Holding | Fair | Holding | Holding | Fair | |||||||||||||||||||||||||||
| $ in millions | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
|
Current:
|
||||||||||||||||||||||||||||||||
|
Seed money
|
89.6 | 10.6 | (0.7 | ) | 99.5 | 74.7 | 5.9 | (5.8 | ) | 74.8 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Current available-for-sale investments
|
89.6 | 10.6 | (0.7 | ) | 99.5 | 74.7 | 5.9 | (5.8 | ) | 74.8 | ||||||||||||||||||||||
|
Non-current:
|
||||||||||||||||||||||||||||||||
|
CLOs*
|
0.3 | 0.2 | — | 0.5 | 12.6 | 5.3 | — | 17.9 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Non-current available-for-sale
investments:
|
0.3 | 0.2 | — | 0.5 | 12.6 | 5.3 | — | 17.9 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
89.9 | 10.8 | (0.7 | ) | 100.0 | 87.3 | 11.2 | (5.8 | ) | 92.7 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| * | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of CLOs for which the company has an underlying investment of $23.3 million at December 31, 2010 (before consolidation). In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. |
Available-for-sale debt securities as of December 31, 2010, by maturity, are set out below:
| Available-for-Sale | ||||
| $ in millions | (Fair Value) | |||
|
Less than one year
|
— | |||
|
One to five years
|
— | |||
|
Five to ten years
|
0.5 | |||
|
Greater than ten years
|
— | |||
|
|
||||
|
Total available-for-sale
|
0.5 | |||
|
|
||||
The following table provides the breakdown of available-for-sale investments with unrealized
losses at December 31, 2010:
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| $ in millions | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
|
Seed money (40 funds)
|
0.4 | — | 5.7 | (0.7 | ) | 6.1 | (0.7 | ) | ||||||||||||||||
The following table provides the breakdown of available-for-sale investments with unrealized
losses at December 31, 2009:
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| $ in millions | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
|
Seed money (44 funds)
|
5.7 | (0.3 | ) | 25.1 | (5.5 | ) | 30.8 | (5.8 | ) | |||||||||||||||
The company recorded other-than-temporary impairment charges (OTTI) on seed money investments
of $6.7 million in 2010 (2009: $3.0 million). The gross unrealized losses of seed money investments
were primarily caused by declines in the market value of the underlying funds and foreign exchange
movements. After conducting a review of the financial condition and near-term prospects of the
underlying securities in the seeded funds as well as the severity and duration of the impairment,
the company does not consider its remaining gross unrealized losses on these securities to be
other-than-temporarily impaired. The securities are expected to recover their value over time and
the company has the intent and ability to hold the securities until this recovery occurs.
109
Table of Contents
As discussed in Note 1, “Accounting Policies,” the company adopted guidance now encompassed in
ASC Topic 320, on April 1, 2009. Upon adoption, the company recorded a cumulative effect adjustment
of $1.5 million to the April 1, 2009, opening balance of retained earnings with a corresponding
adjustment to accumulated other comprehensive income, representing the non-credit component of
previously-recognized OTTI. During the year ended December 31, 2010, there were no charges to other
comprehensive income from other-than-temporary impairment related to non-credit related factors. A
rollforward of the cumulative credit-related other-than-temporary impairment charges recognized in
earnings for which some portion of the impairment was recorded in other comprehensive income is as
follows
:
| Year ended December | Nine months ended | |||||||
| In millions | 31, 2010 | December 31, 2009* | ||||||
|
Beginning balance
|
18.8 | 17.1 | ||||||
|
Adoption of guidance now encompassed in ASC Topic 810**
|
(18.0 | ) | — | |||||
|
|
||||||||
|
Beginning balance, as adjusted
|
0.8 | 17.1 | ||||||
|
Additional credit losses recognized during the period
related to securities for which:
|
||||||||
|
No OTTI has been previously recognized
|
— | — | ||||||
|
OTTI has been previously recognized
|
— | 1.7 | ||||||
|
|
||||||||
|
Ending balance
|
0.8 | 18.8 | ||||||
|
|
||||||||
| * | The guidance now encompassed in ASC Topic 320 was effective on April 1, 2009. Credit-related OTTI recorded in other gains and losses, net, on the Consolidated Statement of Income during the year ended December 31, 2009 was $5.2 million. | |
| ** | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of CLOs for which the company has an underlying investment of $23.3 million at December 31, 2010 (before consolidation). Of the $18.8 million cumulative credit-related OTTI balance at January 1, 2010, $18.0 million relates to CLOs that were consolidated into the company’s Consolidated Balance Sheet, resulting in the elimination of our equity interest. |
The company owns 100% of the voting control of its subsidiary entities, directly or
indirectly, with the exception of the following entities, which are consolidated with resulting
noncontrolling interests:
| Country of | ||||||||
| Name of Company | Incorporation | % Voting Interest Owned | ||||||
|
India Asset Recovery Management Limited
|
India | 80.1 | % | |||||
Following are the company’s investments in joint ventures and affiliates, which are accounted
for using the equity method and are recorded as non-current investments on the Consolidated Balance
Sheets:
| Country of | ||||||||
| Name of Company | Incorporation | % Voting Interest Owned | ||||||
|
Invesco Great Wall Fund Management Company Limited
|
China | 49.0 | % | |||||
|
Huaneng Invesco WLR Investment Consulting Company Limited
|
China | 50.0 | % | |||||
|
Pocztylion — ARKA
|
Poland | 29.3 | % | |||||
Undistributed earnings from equity method investees have not been a material restriction on
the company’s ability to pay dividends to shareholders. Equity method investments also include the
company’s investments in various of its sponsored private equity, real estate and other investment
entities. The company’s investment is generally less than 5% of the capital of these entities.
These entities include variable interest entities for which the company has determined that it is
not the primary beneficiary and other investment products structured as partnerships for which the
company is the general partner and the other limited partners possess either substantive kick-out,
liquidation or participation rights. See Note 20, “Consolidated Investment Products,” for
additional information.
110
Table of Contents
5. PROPERTY AND EQUIPMENT
Changes in property and equipment balances are as follows:
| Technology and Other | Land and | Work In | Leasehold | |||||||||||||||||||||
| $ in millions | Equipment | Software | Buildings* | Process | Improvements | Total | ||||||||||||||||||
|
Cost:
|
||||||||||||||||||||||||
|
January 1, 2010
|
282.5 | 231.3 | 72.5 | 11.5 | 141.3 | 739.1 | ||||||||||||||||||
|
Foreign exchange
|
1.7 | (1.1 | ) | (1.4 | ) | (0.1 | ) | 1.3 | 0.4 | |||||||||||||||
|
Additions**
|
10.0 | 7.4 | 1.0 | 78.2 | 3.5 | 100.1 | ||||||||||||||||||
|
Transfers
|
28.3 | 28.6 | — | (70.0 | ) | 13.1 | — | |||||||||||||||||
|
Disposals
|
(4.1 | ) | (0.1 | ) | — | — | — | (4.2 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2010
|
318.4 | 266.1 | 72.1 | 19.6 | 159.2 | 835.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Accumulated depreciation:
|
||||||||||||||||||||||||
|
January 1, 2010
|
(245.5 | ) | (165.3 | ) | (7.5 | ) | — | (100.1 | ) | (518.4 | ) | |||||||||||||
|
Foreign exchange
|
(2.1 | ) | 0.8 | 0.3 | — | (1.4 | ) | (2.4 | ) | |||||||||||||||
|
Depreciation expense
|
(18.2 | ) | (19.6 | ) | (1.2 | ) | — | (7.4 | ) | (46.4 | ) | |||||||||||||
|
Disposals
|
4.1 | 0.1 | — | — | — | 4.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2010
|
(261.7 | ) | (184.0 | ) | (8.4 | ) | — | (108.9 | ) | (563.0 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net book value:
|
||||||||||||||||||||||||
|
December 31, 2010
|
56.7 | 82.1 | 63.7 | 19.6 | 50.3 | 272.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Cost:
|
||||||||||||||||||||||||
|
January 1, 2009
|
270.2 | 191.9 | 65.0 | 11.6 | 132.6 | 671.3 | ||||||||||||||||||
|
Foreign exchange
|
7.9 | 4.9 | 6.6 | — | 5.0 | 24.4 | ||||||||||||||||||
|
Additions
|
8.1 | 5.2 | 0.9 | 35.0 | 3.8 | 53.0 | ||||||||||||||||||
|
Transfers
|
3.3 | 29.5 | — | (35.1 | ) | 2.3 | — | |||||||||||||||||
|
Disposals
|
(7.0 | ) | (0.2 | ) | — | — | (2.4 | ) | (9.6 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009
|
282.5 | 231.3 | 72.5 | 11.5 | 141.3 | 739.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Accumulated depreciation:
|
||||||||||||||||||||||||
|
January 1, 2009
|
(233.2 | ) | (146.3 | ) | (5.9 | ) | — | (80.6 | ) | (466.0 | ) | |||||||||||||
|
Foreign exchange
|
(7.7 | ) | (4.0 | ) | (0.7 | ) | — | (4.3 | ) | (16.7 | ) | |||||||||||||
|
Depreciation expense
|
(11.6 | ) | (15.0 | ) | (0.9 | ) | — | (17.5 | ) | (45.0 | ) | |||||||||||||
|
Disposals
|
7.0 | — | — | — | 2.3 | 9.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2009
|
(245.5 | ) | (165.3 | ) | (7.5 | ) | — | (100.1 | ) | (518.4 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net book value:
|
||||||||||||||||||||||||
|
December 31, 2009
|
37.0 | 66.0 | 65.0 | 11.5 | 41.2 | 220.7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| * | Included within land and buildings are $33.2 million at December 31, 2010 (2009: $33.7 million) in non-depreciable land assets. | |
| ** | Included within additions is $5.4 million at December 31, 2010 related to the acquired businesses. |
111
Table of Contents
6. INTANGIBLE ASSETS
The following table presents the major classes of the company’s intangible assets at December
31, 2010 and 2009:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Gross Book | Accumulated | Net Book | Amortization | |||||||||||||
| $ in millions | Value | Amortization | Value | Period (years) | ||||||||||||
|
December 31, 2010
|
||||||||||||||||
|
Management contracts — indefinite-lived
|
1,161.7 | N/A | 1,161.7 | N/A | ||||||||||||
|
Management contracts — finite-lived
|
199.7 | (87.0 | ) | 112.7 | 9.0 | |||||||||||
|
Customer relationships
|
40.0 | (1.9 | ) | 38.1 | 12.0 | |||||||||||
|
Distribution agreements
|
17.0 | (2.5 | ) | 14.5 | 4.0 | |||||||||||
|
Trademarks / Trade names
|
13.0 | (3.8 | ) | 9.2 | 2.0 | |||||||||||
|
Other
|
3.6 | (2.6 | ) | 1.0 | 6.1 | |||||||||||
|
|
||||||||||||||||
|
Total
|
1,435.0 | (97.8 | ) | 1,337.2 | 8.8 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
Management contracts — indefinite-lived
|
110.6 | N/A | 110.6 | N/A | ||||||||||||
|
Management contracts — finite-lived
|
103.4 | (75.8 | ) | 27.6 | 9.3 | |||||||||||
|
Other
|
2.8 | (1.9 | ) | 0.9 | 5.0 | |||||||||||
|
|
||||||||||||||||
|
Total
|
216.8 | (77.7 | ) | 139.1 | 9.0 | |||||||||||
|
|
||||||||||||||||
The acquisitions of Morgan Stanley’s retail asset management business, including Van Kampen
Investments on June 1, 2010, Concord Capital on August 16, 2010, and AIG Asia Real Estate on
December 31, 2010, collectively added $173.1 million of finite-lived intangible assets at their
respective acquisition dates.
Where evidence exists that the underlying management contracts have a high likelihood of
continued renewal at little or no cost to the company, the intangible asset is assigned an
indefinite life. The acquisition of Morgan Stanley’s retail asset management business, including
Van Kampen Investments, added $1,047.0 million of indefinite-lived intangible assets to the
company’s Consolidated Balance Sheet at June 1, 2010, also as discussed in Note 2, “Business
Combination and Integration,” above. Indefinite-lived intangible assets primarily relate to
management contracts and related rights to manage the assets acquired during the June 1, 2010
acquisition. The 2010, 2009 and 2008 annual impairment reviews of indefinite-lived intangible
assets determined that no impairment existed at the respective review dates.
Amortization expense was $30.3 million during the year ended December 31, 2010 (2009: $12.6
million) and is included within General and Administrative expenses in the Consolidated Statements
of Income. Estimated amortization expense for each of the five succeeding fiscal years based upon
the company’s intangible assets at December 31, 2010 is as follows:
Years Ended December 31,
| $ in millions | ||||
|
2011
|
34.6 | |||
|
2012
|
27.1 | |||
|
2013
|
23.8 | |||
|
2014
|
18.3 | |||
|
2015
|
16.0 |
7. GOODWILL
The table below details changes in the goodwill balance:
| Gross Book | Accumulated | Net Book | ||||||||||
| $ in millions | Value | Impairment | Value | |||||||||
|
January 1, 2010
|
6,484.2 | (16.6 | ) | 6,467.6 | ||||||||
|
Business combinations
|
440.0 | — | 440.0 | |||||||||
|
Foreign exchange
|
72.6 | — | 72.6 | |||||||||
|
|
||||||||||||
|
December 31, 2010
|
6,996.8 | (16.6 | ) | 6,980.2 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
January 1, 2009
|
5,983.4 | (16.6 | ) | 5,966.8 | ||||||||
|
Business combinations
|
34.2 | — | 34.2 | |||||||||
|
Foreign exchange
|
466.6 | — | 466.6 | |||||||||
|
|
||||||||||||
|
December 31, 2009
|
6,484.2 | (16.6 | ) | 6,467.6 | ||||||||
|
|
||||||||||||
112
Table of Contents
The acquisitions of Morgan Stanley’s retail asset management business, including Van
Kampen Investments, Concord Capital, and AIG Asia Real Estate collectively added $399.6 million to
the company’s Consolidated Balance Sheet at their respective acquisition dates. The 2010 earn-out
calculations related to the 2006 acquisition of W.L. Ross & Co. resulted in an addition to goodwill
of $40.4 million (2009 earn-out goodwill addition: $34.2 million). See Note 19, “Commitments and
Contingencies,” for additional information.
The 2010, 2009 and 2008 annual impairment reviews determined that no impairment existed at the
respective review dates. Separately, due to deteriorating market conditions, interim impairment
tests were performed at October 31, 2008, and March 31, 2009. These interim tests also concluded
that no impairment had occurred. As each test concluded that the fair value was above the carrying
value, there was no need to proceed to step two of the goodwill impairment test, which would have
required separately valuing each class of asset and liability. Following the March 31, 2009 interim
test, general market conditions improved and the company did not identify the need for further
interim tests during 2009, as no indicators of impairment existed. No interim impairment tests were
deemed necessary during 2010.
8. OTHER CURRENT LIABILITIES
The table below details the components of other current liabilities:
| $ in millions | 2010 | 2009 | ||||||
|
Accruals and other liabilities
|
182.5 | 110.4 | ||||||
|
Compensation and benefits
|
36.4 | 45.1 | ||||||
|
Accrued bonus and deferred compensation
|
365.3 | 239.2 | ||||||
|
Accounts payable
|
302.5 | 148.1 | ||||||
|
Other
|
19.0 | 17.1 | ||||||
|
|
||||||||
|
Other current liabilities
|
905.7 | 559.9 | ||||||
|
|
||||||||
9. DEBT
The disclosures below include details of the company’s debt. Debt of consolidated investment
products is detailed in Note 20, “Consolidated Investment Products.”
| December 31, 2010 | December 31, 2009 | |||||||||||||||
| Carrying | Carrying | |||||||||||||||
| $ in millions | Value | Fair Value | Value | Fair Value | ||||||||||||
|
Unsecured Senior Notes*:
|
||||||||||||||||
|
5.625% — due April 17, 2012
|
215.1 | 223.7 | 215.1 | 227.0 | ||||||||||||
|
5.375% — due February 27, 2013
|
333.5 | 335.2 | 333.5 | 343.4 | ||||||||||||
|
5.375% — due December 15, 2014
|
197.1 | 210.4 | 197.1 | 195.1 | ||||||||||||
|
Floating rate credit facility terminated May 24, 2010
|
— | — | — | — | ||||||||||||
|
Floating rate credit facility expiring May 23, 2013
|
570.0 | 570.0 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total debt
|
1,315.7 | 1,339.3 | 745.7 | 765.5 | ||||||||||||
|
Less: current maturities of total debt
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Long-term debt
|
1,315.7 | 1,339.3 | 745.7 | 765.5 | ||||||||||||
|
|
||||||||||||||||
| * | The company’s Senior Note indentures contain certain restrictions on mergers or consolidations. Beyond these items, there are no other restrictive covenants in the indentures. |
The fair market value of the company’s Senior Notes was determined by market quotes provided by
Bloomberg. In the absence of an active market, the company relies upon the average price quoted by
brokers for determining the fair market value of the debt. The level of trading, both in number of
trades and amount of Senior Notes traded, has increased to a level that the company believes market
quotes to be a reasonable representation of the current fair market value of the Senior Notes. Due
to the short-term nature of the credit facility and the variable interest rate, the fair value of
the outstanding balance approximates its carrying value.
113
Table of Contents
Analysis of Borrowings by Maturity:
| $ in millions | December 31, 2010 | |||
|
2011
|
— | |||
|
2012
|
215.1 | |||
|
2013
|
903.5 | |||
|
2014
|
197.1 | |||
|
Thereafter
|
— | |||
|
|
||||
|
Total debt
|
1,315.7 | |||
|
|
||||
On May 24, 2010, the company terminated its existing $500.0 million credit facility and
entered into a new $1,250.0 million credit facility. Amounts borrowed under the credit facility are
repayable at maturity on May 23, 2013.
At December 31, 2010, the outstanding balance on the credit facility was $570.0 million and
the weighted average interest rate on the credit facility was 1.371%. Borrowings under the credit
facility will bear interest at (i) LIBOR for specified interest periods or (ii) a floating base
rate (based upon the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus
0.50% and (c) LIBOR for an interest period of one month plus 1.00%), plus, in either case, an
applicable margin determined with reference to the company’s credit ratings and specified credit
default spreads. Based on credit ratings as of December 31, 2010 of the company and such credit
default spreads, the applicable margin for LIBOR-based loans was 1.075% and for base rate loans was
0.075%. In addition, the company is required to pay the lenders a facility fee on the aggregate
commitments of the lenders (whether or not used) at a rate per annum which is based on the
company’s credit ratings. Based on credit ratings as of December 31, 2010, the annual facility fee
was equal to 0.30%.
The credit agreement governing the credit facility contains customary restrictive covenants on
the company and its subsidiaries. Restrictive covenants in the credit agreement include, but are
not limited to: prohibitions on creating, incurring or assuming any liens; entering into certain
restrictive merger arrangements; selling, leasing, transferring or otherwise disposing of assets;
making a material change in the nature of the business; making material amendments to organic
documents; making a significant accounting policy change in certain situations; entering into
transactions with affiliates; incurring certain indebtedness through the non-guarantor
subsidiaries. Many of these restrictions are subject to certain minimum thresholds and exceptions.
Financial covenants under the credit agreement include: (i) the quarterly maintenance of a
debt/EBITDA ratio, as defined in the credit agreement, of not greater than 3.25:1.00 through
December 31, 2011, and not greater than 3.00:1.00 thereafter, (ii) a coverage ratio (EBITDA, as
defined in the credit agreement/interest payable for the four consecutive fiscal quarters ended
before the date of determination) of not less than 4.00:1.00.
The credit agreement governing the credit facility also contains customary provisions
regarding events of default which could result in an acceleration or increase in amounts due,
including (subject to certain materiality thresholds and grace periods) payment default, failure to
comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency
proceedings, change of control, certain judgments, ERISA matters, cross-default to other debt
agreements, governmental action prohibiting or restricting the company or its subsidiaries in a
manner that has a material adverse effect and failure of certain guaranty obligations.
The lenders (and their respective affiliates) may have provided, and may in the future
provide, investment banking, cash management, underwriting, lending, commercial banking, leasing,
foreign exchange, trust or other advisory services to the company and its subsidiaries and
affiliates. These parties may have received, and may in the future receive, customary compensation
for these services.
The company maintains approximately $35.5 million in letters of credit from a variety of
banks. The letters of credit are generally one-year automatically-renewable facilities and are
maintained for various commercial reasons. Approximately $19.5 million of the letters of credit
support office lease obligations, and $12.2 million supports the Canada Revenue Authority
assessments discussed in Note 19, “Commitments and Contingencies.”
114
Table of Contents
10. SHARE CAPITAL
Movements in the number of common shares and common share equivalents issued are represented
in the table below:
| Year Ended | Year Ended | Year Ended | ||||||||||
| In millions | December 31, 2010 | December 31, 2009 | December 31, 2008 | |||||||||
|
Common shares issued — beginning balance
|
459.5 | 426.6 | 424.7 | |||||||||
|
Issue of new shares
|
30.9 | 32.9 | 1.9 | |||||||||
|
|
||||||||||||
|
Common shares issued — ending balance
|
490.4 | 459.5 | 426.6 | |||||||||
|
Less: Treasury shares for which dividend and voting rights do not apply
|
(30.3 | ) | (28.1 | ) | (40.7 | ) | ||||||
|
|
||||||||||||
|
Common shares outstanding
|
460.1 | 431.4 | 385.9 | |||||||||
|
|
||||||||||||
Common Shares of Invesco Ltd.
On June 1, 2010, Invesco acquired Morgan Stanley’s retail asset management business, including
Van Kampen Investments. In connection with this transaction, Invesco issued to Morgan Stanley
19,212 shares of Series A convertible participating preferred stock (“participating preferred
shares”). Each participating preferred share was convertible into 1,000 common shares upon transfer
of the shares by Morgan Stanley to an unrelated third party. Each participating preferred share
participated in dividends on a basis equal to common shares. The participating preferred shares
were non-voting except as otherwise provided by applicable law and benefit from a liquidation
preference of $0.01 per share. In November 2010, Morgan Stanley sold its 30.9 million shares, as
converted, to unrelated third parties, resulting in the conversion of the participating preferred
shares outstanding into common shares outstanding.
On May 26, 2009, the company issued 32.9 million shares in a public offering that produced
gross proceeds of $460.5 million ($441.8 million net of related expenses).
Treasury Shares
During the year ended December 31, 2010, the company repurchased 9.4 million shares in the
market at a cost of $192.2 million (2009: no shares were repurchased). Separately, an aggregate of
1.9 million shares were withheld on vesting events during the year ended December 31, 2010 to meet
employees’ withholding tax obligations (2009: 1.6 million shares). The carrying value of these
shares withheld was $47.9 million (2009: $22.9 million). Approximately $1.2 billion remained
authorized under the company’s share repurchase plan at December 31, 2010 (2009: $1.4 billion).
Treasury shares include shares held related to certain employee share-based payment programs.
These shares include shares previously held in the Invesco Employee Share Option Trust and the
Invesco Global Stock Plan Trust. The Invesco Global Stock Plan Trust was terminated in December
2008, and at December 31, 2009, the Invesco Employee Share Option Trust held no company shares. The
shares formerly held by both the Invesco Global Stock Plan Trust and the Invesco Employee Share
Option Trust are now held by the company, the transfers having no accounting implications for the
company. These shares are accounted for under the treasury stock method.
There were no waived dividends for the trustees of the Employee Share Option Trust in 2010
(2009: $3.9 million; 2008: $5.0 million). As the Global Stock Plan Trust was terminated in December
2008, there were no waived dividends for this Trust in 2010 and 2009 (2008: $4.5 million).
Movements in Treasury Shares comprise:
| Year Ended | Year Ended | Year Ended | ||||||||||
| In millions | December 31, 2010 | December 31, 2009 | December 31, 2008 | |||||||||
|
Beginning balance
|
40.2 | 50.7 | 45.6 | |||||||||
|
Acquisition of common shares
|
11.3 | 1.6 | 12.6 | |||||||||
|
Distribution of common shares
|
(7.0 | ) | (7.5 | ) | (4.4 | ) | ||||||
|
Common shares distributed to meet option exercises
|
(1.8 | ) | (4.6 | ) | (3.1 | ) | ||||||
|
|
||||||||||||
|
Ending balance
|
42.7 | 40.2 | 50.7 | |||||||||
|
|
||||||||||||
115
Table of Contents
Total treasury shares at December 31, 2010 were 42.7 million (2009: 40.2 million), including
12.4 million unvested restricted stock awards (2009: 12.1 million) for which dividend and voting
rights apply. The market price of common shares at the end of 2010 was $24.06. The total market
value of the company’s 42.7 million treasury shares was $1,027.4 million on December 31, 2010.
11. OTHER COMPREHENSIVE INCOME/(LOSS)
The components of accumulated other comprehensive income/(loss) at December 31 were as
follows:
| $ in millions | 2010 | 2009 | 2008 | |||||||||
|
Net unrealized gains/(losses) on available-for-sale investments
|
10.1 | 5.4 | (7.7 | ) | ||||||||
|
Tax on unrealized gains/(losses) on available-for-sale investments
|
(2.4 | ) | (1.6 | ) | 0.1 | |||||||
|
Accumulated other comprehensive income/(loss) of equity method investments
|
2.9 | — | — | |||||||||
|
Cumulative foreign currency translation adjustments
|
524.6 | 442.0 | (46.3 | ) | ||||||||
|
Tax on cumulative foreign currency translation adjustments
|
2.0 | 2.0 | 1.3 | |||||||||
|
Employee benefit plan liability adjustments
|
(55.8 | ) | (74.5 | ) | (59.4 | ) | ||||||
|
Tax on employee benefit plan liability adjustments
|
14.1 | 20.3 | 16.2 | |||||||||
|
|
||||||||||||
|
Total accumulated other comprehensive income/(loss)
|
495.5 | 393.6 | (95.8 | ) | ||||||||
|
|
||||||||||||
Total other comprehensive income/(loss) details are presented below.
| $ in millions | 2010 | 2009 | 2008 | |||||||||
|
Net income, including gains and losses attributable to noncontrolling interests
|
636.8 | 209.3 | 421.0 | |||||||||
|
Adoption of guidance now encompassed in ASC Topic 320
|
— | (1.5 | ) | — | ||||||||
|
Unrealized holding gains and losses on available-for-sale investments*
|
11.5 | 10.6 | (33.3 | ) | ||||||||
|
Tax on unrealized holding gains and losses on available-for-sale investments
|
(2.7 | ) | (2.8 | ) | 3.2 | |||||||
|
Comprehensive income of equity method investments
|
2.9 | — | — | |||||||||
|
Reclassification adjustments for net (gains) and losses on available-for-sale
investments included in net income
|
(1.6 | ) | 4.0 | 24.0 | ||||||||
|
Tax on reclassification adjustments for gains (losses) on available-for-sale
investments included in net income
|
1.9 | 1.1 | (0.9 | ) | ||||||||
|
Foreign currency translation adjustments**
|
77.3 | 488.3 | (1,034.2 | ) | ||||||||
|
Tax on foreign currency translation adjustments
|
— | 0.7 | (5.0 | ) | ||||||||
|
Adjustments to employee benefit plan liability
|
18.7 | (15.1 | ) | (0.3 | ) | |||||||
|
Tax on adjustments to employee benefit plan liability
|
(6.2 | ) | 4.1 | (1.4 | ) | |||||||
|
|
||||||||||||
|
Total other comprehensive income/(loss)
|
738.6 | 698.7 | (626.9 | ) | ||||||||
|
|
||||||||||||
| * | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of certain CLOs. Upon adoption, accumulated other comprehensive income was reduced by $5.2 million, as accumulated net unrealized gains at January 1, 2010 relating to the company’s investments in certain CLOs were reclassified into retained earnings upon their consolidation. | |
| ** | Included in this amount are net losses of $5.3 million for the year ended December 31, 2010 related to foreign currency translation adjustments attributable to consolidated investment products. Such amounts form part of the company’s total comprehensive income but are reclassified from accumulated other comprehensive income into retained earnings appropriated for investors in consolidated investment products. |
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12. SHARE-BASED COMPENSATION
The company issues equity-settled share-based awards to certain employees, which are measured
at fair value at the date of grant, in accordance with ASC Topic 718, “Compensation — Stock
Compensation.” The fair value determined at the grant date is expensed, based on the company’s
estimate of shares that will eventually vest, on a straight-line or accelerated basis over the
vesting period. The initial forfeiture rate applied to most grants is 5% per year, based upon the
company’s historical experience with respect to employee turnover. Fair value for share awards
representing equity interests identical to those associated with shares traded in the open market
is determined using the market price at the grant date. Fair value is measured by use of the Black
Scholes valuation model for certain share awards that do not include dividend rights, and fair
value was measured by use of a stochastic model (a lattice-based model) for share option awards.
The company recognized total expenses of $117.8 million, $90.8 million and $97.7 million
related to equity-settled share-based payment transactions in 2010, 2009 and 2008, respectively.
The total income tax benefit recognized in the Consolidated Statements of Income for share-based
compensation arrangements was $35.0 million for 2010 (2009: $28.6 million; 2008: $32.1 million).
Cash received from exercise of share options granted under share-based compensation
arrangements was $19.6 million in 2010 (2009: $80.0 million; 2008: $79.8 million). The total tax
benefit realized from share options exercises was $4.1 million in 2010 (2009: $5.2 million; 2008:
$11.2 million).
Share Awards
Share awards are broadly classified into two categories: time-vested and performance-vested.
Share awards are measured at fair value at the date of grant and are expensed, based on the
company’s estimate of shares that will eventually vest, on a straight-line or accelerated basis
over the vesting period.
Time-vested awards vest ratably over or cliff-vest at the end of a period of continued
employee service. Performance-vested awards cliff-vest at the end of or vest ratably over a defined
vesting period of continued employee service upon the company’s attainment of certain performance
criteria, generally the attainment of cumulative earnings per share growth targets at the end of
the vesting period reflecting a compound annual growth rate of between 10.0% and 15.0% per annum
during a three-year period. Time-vested and performance-vested share awards are granted in the form
of restricted share awards (RSAs) or restricted share units (RSUs). Dividends accrue directly to
the employee holder of RSAs, and cash payments in lieu of dividends are made to employee holders of
certain RSUs. There is therefore no discount to the fair value of these share awards at their grant
date. Movements on share awards priced in Pounds Sterling prior to the company’s primary share
listing moving to the New York Stock Exchange from the London Stock Exchange, which occurred on
December 4, 2007, in connection with the redomicile of the company from the U.K. to Bermuda, are
detailed below:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||||||||||
| Time- | Performance- | Grant Date Fair | Time- | Performance- | Time- | Performance- | ||||||||||||||||||||||
| Millions of shares, except fair values | Vested | Vested | Value (£ Sterling) | Vested | Vested | Vested | Vested | |||||||||||||||||||||
|
Unvested at the beginning of year
|
5.4 | 2.0 | 11.24 | 10.2 | 6.0 | 15.2 | 6.2 | |||||||||||||||||||||
|
Forfeited during the year
|
(0.1 | ) | (1.4 | ) | 12.07 | (0.3 | ) | (0.3 | ) | (0.7 | ) | (0.1 | ) | |||||||||||||||
|
Modification of share-based payment
awards*
|
— | — | — | — | (1.4 | ) | — | — | ||||||||||||||||||||
|
Vested and distributed during the year
|
(2.0 | ) | (0.5 | ) | 10.01 | (4.5 | ) | (2.3 | ) | (4.3 | ) | (0.1 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Unvested at the end of the year
|
3.3 | 0.1 | 11.80 | 5.4 | 2.0 | 10.2 | 6.0 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
| * | During the year ended December 31, 2009, the company modified the terms of 1.4 million equity-settled share-based payment awards such that the awards are now deferred cash awards. As a result of this modification, $13.0 million was reclassified out of additional paid in capital and into other current and non-current liabilities on the Consolidated Balance Sheet during the year. There was no impact to the Consolidated Statement of Income or earnings per share as a result of this modification. |
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Subsequent to the company’s primary share listing moving to the New York Stock Exchange,
shares are now priced in U.S. dollars. Movements on share awards priced in U.S. dollars are
detailed below:
| Year ended December 31, 2010 | Year ended December 31, 2009 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Time- | Grant Date | Time- | Grant Date | |||||||||||||
|
Millions of shares, except fair values
|
Vested | Fair Value ($) | Vested | Fair Value ($) | ||||||||||||
|
Unvested at the beginning of period
|
11.6 | 15.24 | 3.5 | 26.64 | ||||||||||||
|
Granted during the period
|
10.6 | 19.11 | 8.9 | 11.51 | ||||||||||||
|
Forfeited during the period
|
(0.3 | ) | 19.36 | (0.1 | ) | 17.27 | ||||||||||
|
Vested and distributed during the period
|
(4.5 | ) | 16.04 | (0.7 | ) | 24.98 | ||||||||||
|
|
||||||||||||||||
|
Unvested at the end of the period
|
17.4 | 17.25 | 11.6 | 15.24 | ||||||||||||
|
|
||||||||||||||||
All share awards outstanding at December 31, 2010, had a weighted average remaining
contractual life of 1.54 years. The total fair value of shares that vested during 2010 was $125.3
million (2009: $130.2 million; 2008: $138.3 million). The weighted average fair value at the date
of grant of the historical Pound Sterling vested and distributed share awards was £10.01 (2009:
£7.87; 2008: £7.52). The weighted average fair value at the date of grant of the U.S. dollar vested
and distributed share awards was $16.04.
At December 31, 2010, there was $221.2 million of total unrecognized compensation cost related
to non-vested share awards; that cost is expected to be recognized over a weighted average period
of 3.4 years.
Share Options
The company has not granted share option awards since 2005. All share options awards,
therefore, were granted prior to the December 4, 2007, redomicile from the United Kingdom to
Bermuda and relisting from the London Stock Exchange (where the predecessor company’s ordinary
shares traded in Pounds Sterling) to the New York Stock Exchange (where the company’s common shares
now trade in U.S. Dollars). The company maintains its two historical share option plans which have
outstanding share options: The 2000 Share Option Plan and the No. 3 Executive Share Option Scheme.
All remaining outstanding share option awards were fully vested and were expensed by the company
over the applicable vesting periods (the latest of which ended prior to December 31, 2008). At the
time of their grants, the exercise prices of the share options were denominated in the company’s
trading currency, which was the Pound Sterling. The company did not change the accounting for share
options at the redomicile/relisting date, because the share options were not modified at that date.
The exercise price remains in Pounds Sterling and was not changed to U.S. Dollars. Therefore, upon
exercise of the share options, the Pound Sterling exercise price will be converted into U.S.
Dollars using the spot foreign exchange rate in effect on the exercise date. Upon the exercise of
share options, the company either issues new shares or can utilize shares held in treasury (see
Note 10, “Share Capital”) to satisfy the exercise.
The share option plans provided for a grant price equal to the quoted market price of the
company’s shares on the date of grant. If the options remain unexercised after a period of 10 years
from the date of grant, the options expire. Furthermore, options are forfeited if the employee
leaves the company before the options vest. All options outstanding at December 31, 2010 were
exercisable and had a range of exercise prices from £6.39 to £28.80, and weighted average remaining
contractual life of 2.20 years. The total intrinsic value of options exercised during the years
ended December 31, 2010, 2009, and 2008, was $18.5 million, $20.7 million, and $41.4 million,
respectively. At December 31, 2010, the aggregate intrinsic value of options outstanding and
options exercisable was $63.3 million. The market price of the company’s common stock at December
31, 2010 was $24.06 (December 31, 2009: $23.49).
Changes in outstanding share option awards are as follows:
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise Price | Exercise Price | Exercise Price | ||||||||||||||||||||||
| Millions of shares, except prices | Options | (£ Sterling) | Options | (£ Sterling) | Options | (£ Sterling) | ||||||||||||||||||
|
Outstanding at the beginning of year
|
16.4 | 14.99 | 23.1 | 14.06 | 29.7 | 12.97 | ||||||||||||||||||
|
Forfeited during the year
|
(3.9 | ) | 21.90 | (2.1 | ) | 15.15 | (1.6 | ) | 14.19 | |||||||||||||||
|
Exercised during the year
|
(1.8 | ) | 6.70 | (4.6 | ) | 10.20 | (5.0 | ) | 7.50 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Outstanding at the end of the year
|
10.7 | 13.85 | 16.4 | 14.99 | 23.1 | 14.06 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Exercisable at the end of the year
|
10.7 | 13.85 | 16.4 | 14.99 | 23.0 | 14.16 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
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Table of Contents
13. RETIREMENT BENEFIT PLANS
Defined Contribution Plans
The company operates defined contribution retirement benefit plans for all qualifying
employees. The assets of the plans are held separately from those of the company in funds under the
control of trustees. When employees leave the plans prior to vesting fully in the contributions,
the contributions payable by the company are reduced by the amount of forfeited contributions.
The total amounts charged to the Consolidated Statements of Income for the year ended December
31, 2010, of $47.0 million (2009: $43.6 million, 2008: $44.3 million) represent contributions paid or
payable to these plans by the company at rates specified in the rules of the plans. As of December
31, 2010, accrued contributions of $18.9 million (2009: $17.1 million) for the current year will be
paid to the plans.
The Patient Protection and Affordable Care Act that was signed into law in the U.S. on March
23, 2010 and its related modifications as part of the Health Care and Education Reconciliation Act
of 2010 did not have a material impact on the company’s financial statements during the year ended
December 31, 2010. The company is evaluating whether these new regulations may require any
longer-term changes in our benefit plans.
Defined Benefit Plans
The company maintains legacy defined benefit pension plans for qualifying employees of its
subsidiaries in the U.K., Ireland, Germany, Taiwan and the U.S. All defined benefit plans are
closed to new participants, and the U.S. plan benefits have been frozen. Further, during the year
ended December 31, 2009, the company terminated one of its U.S. defined benefit retirement plans.
The company also maintains a postretirement medical plan in the U.S., which was closed to new
participants in 2005. In 2006, the plan was amended to eliminate benefits for all participants who
will not meet retirement eligibility by 2008. The assets of all defined benefit schemes are held in
separate trustee-administered funds. Under the plans, the employees are generally entitled to
retirement benefits based on final salary at retirement.
The most recent actuarial valuations of plan assets and the present value of the defined
benefit obligation were valued as of December 31, 2010. The benefit obligation, related current
service cost and prior service cost were measured using the projected unit credit method.
Benefit Obligations and Funded Status
The amounts included in the Consolidated Balance Sheets arising from the company’s obligations
and plan assets in respect of its defined benefit retirement plans is as follows:
| Retirement Plans | Medical Plan | |||||||||||||||
| $ in millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Benefit obligation
|
(336.1 | ) | (330.2 | ) | (52.4 | ) | (48.5 | ) | ||||||||
|
Fair value of plan assets
|
286.0 | 262.9 | 8.1 | 7.3 | ||||||||||||
|
|
||||||||||||||||
|
Funded status
|
(50.1 | ) | (67.3 | ) | (44.3 | ) | (41.2 | ) | ||||||||
|
|
||||||||||||||||
|
Amounts recognized in the Consolidated Balance Sheets:
|
||||||||||||||||
|
Non-current assets
|
1.0 | 0.2 | — | — | ||||||||||||
|
Current liabilities
|
(0.9 | ) | (0.8 | ) | (2.5 | ) | (2.3 | ) | ||||||||
|
Non-current liabilities
|
(50.2 | ) | (66.7 | ) | (41.8 | ) | (38.9 | ) | ||||||||
|
|
||||||||||||||||
|
Funded status
|
(50.1 | ) | (67.3 | ) | (44.3 | ) | (41.2 | ) | ||||||||
|
|
||||||||||||||||
119
Table of Contents
Changes in the benefit obligations were as follows:
| Retirement Plans | Medical Plan | |||||||||||||||
| $ in millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
January 1
|
330.2 | 271.2 | 48.5 | 46.8 | ||||||||||||
|
Service cost
|
4.1 | 3.9 | 0.6 | 0.2 | ||||||||||||
|
Interest cost
|
18.2 | 16.6 | 2.7 | 2.8 | ||||||||||||
|
Contributions from plan participants
|
— | — | 0.5 | 0.6 | ||||||||||||
|
Actuarial (gains)/losses
|
4.6 | 45.8 | 2.4 | 0.3 | ||||||||||||
|
Exchange difference
|
(11.8 | ) | 27.7 | — | — | |||||||||||
|
Benefits paid
|
(9.2 | ) | (7.3 | ) | (2.3 | ) | (2.2 | ) | ||||||||
|
Termination benefits paid*
|
— | (27.7 | ) | — | — | |||||||||||
|
|
||||||||||||||||
|
December 31
|
336.1 | 330.2 | 52.4 | 48.5 | ||||||||||||
|
|
||||||||||||||||
| * | During the year ended December 31, 2009, the company terminated one of its defined benefit retirement plans in the U.S. Termination benefits of $27.7 million were paid to plan participants. |
Key assumptions used in plan valuations are detailed below. Appropriate local mortality tables
are also used. The postretirement benefit obligations reflect the anticipated annual receipt of the
28% subsidy on retiree prescription drug claims between $310 and $6,300 for 2010 (and adjusted
annually in the future) as a result of the Medicare Prescription Drug Improvement and Modernization
Act of 2003. The weighted average assumptions used to determine defined benefit obligations at
December 31, 2010, and 2009 are:
| Retirement Plans | Medical Plan | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Discount rate
|
5.65 | % | 5.68 | % | 5.20 | % | 5.80 | % | ||||||||
|
Expected rate of salary increases
|
3.60 | % | 3.62 | % | 3.00 | % | 4.50 | % | ||||||||
|
Future pension/medical cost trend rate increases
|
3.49 | % | 3.50 | % | 5.00%-7.75 | % | 5.00%-8.00 | % | ||||||||
Changes in the fair value of plan assets in the current period were as follows:
| Retirement Plans | Medical Plan | |||||||||||||||
| $ in millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
January 1
|
262.9 | 224.6 | 7.3 | 6.3 | ||||||||||||
|
Actual return on plan assets
|
33.2 | 42.3 | 0.8 | 1.1 | ||||||||||||
|
Exchange difference
|
(5.9 | ) | 22.6 | — | — | |||||||||||
|
Contributions from the company
|
6.3 | 8.0 | — | — | ||||||||||||
|
Contributions from plan participants
|
— | — | 0.2 | 0.3 | ||||||||||||
|
Benefits paid
|
(9.2 | ) | (7.3 | ) | (0.2 | ) | (0.4 | ) | ||||||||
|
Settlement and other
|
(1.3 | ) | (27.3 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
December 31
|
286.0 | 262.9 | 8.1 | 7.3 | ||||||||||||
|
|
||||||||||||||||
The components of the amount recognized in accumulated other comprehensive income at December
31, 2010, and 2009 are as follows:
| Retirement Plans | Medical Plan | |||||||||||||||
| $ in millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Prior service cost/(credit)
|
— | 0.4 | (13.9 | ) | (15.9 | ) | ||||||||||
|
Transition obligation
|
— | (0.2 | ) | — | — | |||||||||||
|
Net actuarial loss/(gain)
|
56.6 | 76.3 | 13.1 | 13.9 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
56.6 | 76.5 | (0.8 | ) | (2.0 | ) | ||||||||||
|
|
||||||||||||||||
120
Table of Contents
The amounts in accumulated other comprehensive income expected to be amortized into net
periodic benefit cost during the year ending December 31, 2011 are as follows:
| $ in millions | Retirement Plans | Medical Plan | ||||||
|
Prior service cost/(credit)
|
— | (2.0 | ) | |||||
|
Net actuarial loss/(gain)
|
2.0 | 2.8 | ||||||
|
|
||||||||
|
Total
|
2.0 | 0.8 | ||||||
|
|
||||||||
The total accumulated benefit obligation, the accumulated benefit obligation and fair value of
plan assets for plans with accumulated benefit obligations in excess of plan assets and the
projected benefit obligation and fair value of plan assets for pension plans with projected benefit
obligations in excess of plan assets are as follows:
| Retirement Plans | ||||||||
| $ in millions | 2010 | 2009 | ||||||
|
Plans with accumulated benefit obligation in excess of plan assets:
|
||||||||
|
Accumulated benefit obligation
|
321.9 | 319.0 | ||||||
|
|
||||||||
|
Fair value of plan assets
|
274.2 | 251.2 | ||||||
|
|
||||||||
|
Plans with projected benefit obligation in excess of plan assets:
|
||||||||
|
Projected benefit obligation
|
321.9 | 319.0 | ||||||
|
|
||||||||
|
Fair value of plan assets
|
274.2 | 251.2 | ||||||
|
|
||||||||
Net Periodic Benefit Cost
The components of net periodic benefit cost in respect of these defined benefit plans are as
follows:
| Retirement Plans | Medical Plan | |||||||||||||||||||||||
| $ in millions | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
|
Service cost
|
(4.1 | ) | (3.9 | ) | (6.2 | ) | (0.6 | ) | (0.2 | ) | (0.4 | ) | ||||||||||||
|
Interest cost
|
(18.2 | ) | (16.6 | ) | (20.8 | ) | (2.7 | ) | (2.7 | ) | (2.5 | ) | ||||||||||||
|
Expected return on plan assets
|
14.9 | 14.4 | 22.1 | 0.4 | 0.4 | 0.4 | ||||||||||||||||||
|
Amortization of prior service cost/(credit)
|
(3.0 | ) | (0.1 | ) | — | 2.0 | 2.0 | 2.0 | ||||||||||||||||
|
Amortization of net actuarial gain/(loss)
|
— | (2.7 | ) | (1.4 | ) | (2.7 | ) | (3.6 | ) | (4.3 | ) | |||||||||||||
|
Settlement
|
0.6 | (4.0 | ) | — | — | — | — | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net periodic benefit cost
|
(9.8 | ) | (12.9 | ) | (6.3 | ) | (3.6 | ) | (4.1 | ) | (4.8 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
The weighted average assumptions used to determine net periodic benefit cost for the years
ended December 31, 2010, 2009 and 2008 are:
| Retirement Plans | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Discount rate
|
5.68 | % | 5.84 | % | 5.73 | % | ||||||
|
Expected return on plan assets
|
6.20 | % | 6.15 | % | 6.93 | % | ||||||
|
Expected rate of salary increases
|
3.62 | % | 3.09 | % | 5.82 | % | ||||||
|
Future pension rate increases
|
3.50 | % | 2.88 | % | 3.28 | % | ||||||
| Medical Plan | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Discount rate
|
5.80 | % | 6.10 | % | 5.75 | % | ||||||
|
Expected return on plan assets
|
7.00 | % | 7.00 | % | 7.00 | % | ||||||
|
Expected rate of salary increases
|
4.50 | % | 4.50 | % | 4.50 | % | ||||||
|
Future medical cost trend rate increases
|
5.00%-8.00 | % | 5.00%-8.00 | % | 5.50%-9.00 | % | ||||||
In developing the expected rate of return, the company considers long-term compound annualized
returns based on historical and current market data. Using this reference information, the company
develops forward-looking return expectations for each asset category and an expected long-term rate
of return for a targeted portfolio. Discount rate assumptions were based upon AA-rated corporate
bonds of suitable terms and currencies.
121
Table of Contents
The assumed health care cost rates are as follows:
| Medical Plan | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Health care cost trend rate assumed for next year
|
7.75 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate to which cost trend rate gradually declines
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
Year the rate reaches level it is assumed to remain thereafter
|
2017 | 2015 | 2014 | |||||||||
A one percent change in the assumed rate of increase in healthcare costs would have the
following effects:
| $ in millions | Increase | Decrease | ||||||
|
Effect on aggregate service and interest costs
|
0.5 | (0.4 | ) | |||||
|
Effect on defined benefit obligation
|
6.6 | (5.6 | ) | |||||
Plan Assets
The analysis of the plan assets as of December 31, 2010 was as follows:
| Retirement | % Fair Value of | % Fair Value | ||||||||||||||
| $ in millions | Plans | Plan Assets | Medical Plan | of Plan Assets | ||||||||||||
|
Cash and cash equivalents
|
6.5 | 2.3 | % | 0.3 | 3.7 | % | ||||||||||
|
Fund investments
|
117.4 | 41.0 | % | 7.6 | 93.8 | % | ||||||||||
|
Equity securities
|
111.2 | 38.9 | % | 0.2 | 2.5 | % | ||||||||||
|
Government debt securities
|
34.9 | 12.2 | % | — | — | % | ||||||||||
|
Other assets
|
1.8 | 0.6 | % | — | — | % | ||||||||||
|
Guaranteed investments contracts
|
14.2 | 5.0 | % | — | — | % | ||||||||||
|
|
||||||||||||||||
|
Total
|
286.0 | 100.0 | % | 8.1 | 100.0 | % | ||||||||||
|
|
||||||||||||||||
The analysis of the plan assets as of December 31, 2009 was as follows:
| $ in millions | Retirement Plans | Medical Plan | ||||||
|
Cash and cash equivalents
|
6.4 | 0.2 | ||||||
|
Fund investments
|
122.8 | 7.1 | ||||||
|
Equity securities
|
89.4 | — | ||||||
|
Government debt securities
|
29.7 | — | ||||||
|
Other assets
|
0.7 | — | ||||||
|
Guaranteed investments contracts
|
13.9 | — | ||||||
|
|
||||||||
|
Total
|
262.9 | 7.3 | ||||||
|
|
||||||||
Plan assets are not held in company stock. The investment policies and strategies for plan
assets held by defined benefit plans include:
| • | Funding — to have sufficient assets available to pay members benefits; |
| • | Security — to maintain the minimum Funding Requirement; |
| • | Stability — to have due regard to the employer’s ability in meeting contribution payments given their size and incidence. |
122
Table of Contents
The following table presents the carrying value of the plan assets, including major security
type for equity and debt securities, which are measured at fair value as of December 31, 2010:
| As of December 31, 2010 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant Other | Significant | ||||||||||||||
| Fair Value | for Identical | Observable | Unobservable | |||||||||||||
| $ in millions | Measurements | Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | ||||||||||||
|
Cash and cash equivalents
|
0.3 | 0.3 | — | — | ||||||||||||
|
Fund investments
|
125.0 | 125.0 | — | — | ||||||||||||
|
Equity securities
|
111.4 | 111.4 | — | — | ||||||||||||
|
Government debt securities
|
34.9 | 12.6 | 22.3 | — | ||||||||||||
|
Other assets
|
1.8 | 1.8 | — | — | ||||||||||||
|
Guaranteed investments contracts
|
14.2 | — | — | 14.2 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
287.6 | 251.1 | 22.3 | 14.2 | ||||||||||||
|
|
||||||||||||||||
The following table presents the carrying value of the plan assets, including major security
type for equity and debt securities, which are measured at fair value as of December 31, 2009:
| As of December 31, 2009 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets | Significant Other | Significant | ||||||||||||||
| Fair Value | for Identical | Observable | Unobservable | |||||||||||||
| $ in millions | Measurements | Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | ||||||||||||
|
Cash and cash equivalents
|
0.2 | 0.2 | — | — | ||||||||||||
|
Fund investments
|
129.9 | 129.9 | — | — | ||||||||||||
|
Equity securities
|
89.4 | 89.4 | — | — | ||||||||||||
|
Government debt securities
|
29.7 | — | 29.7 | — | ||||||||||||
|
Other assets
|
0.7 | 0.7 | — | — | ||||||||||||
|
Guaranteed investments contracts
|
13.9 | — | — | 13.9 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
263.8 | 220.2 | 29.7 | 13.9 | ||||||||||||
|
|
||||||||||||||||
The following is a description of the valuation methodologies used for each major category of
plan assets measured at fair value. Information about the valuation hierarchy levels used to
measure fair value is detailed in Note 3, “Fair Value of Assets and Liabilities.”
Cash and cash equivalents
Cash equivalents include cash investments in money market funds and time deposits. Cash
investments in money market funds are valued under the market approach through the use of quoted
market prices in an active market, which is the net asset value of the underlying funds, and are
classified within level 1 of the valuation hierarchy. Cash investments in time deposits of $6.5
million held at December 31, 2010 (December 31, 2009: $6.4 million) are not included in the table
above, as they are not measured at fair value on a recurring basis. Time deposits are valued at
cost plus accrued interest, which approximates fair value.
Fund investments
These plan assets are primarily invested in affiliated funds and are classified within level 1
of the valuation hierarchy. They are valued at the net asset value of shares held by the plan at
year end.
Equity securities, corporate debt securities and other investments
These plan assets are classified within level 1 of the valuation hierarchy and are valued at
the closing price reported on the active market on which the individual securities are traded.
Government debt securities
These plan assets are classified within Level 2 of the valuation hierarchy as they include
index-linked bonds. Prices for these bonds are calculated using the relevant index ratio.
123
Table of Contents
Guaranteed investment contracts
These plan assets are classified within level 3 of the valuation hierarchy and are valued
through use of unobservable inputs by discounting the related cash flows based on current yields of
similar instruments with comparable durations considering the credit-worthiness of the issuer.
The following table shows a reconciliation of the beginning and ending fair value measurement
for level 3 assets, which is comprised solely of the guaranteed investment contracts, using
significant unobservable inputs:
| Year Ended | Year Ended | |||||||
| $ in millions | December 31, 2010 | December 31, 2009 | ||||||
|
Balance, beginning of year
|
13.9 | 12.6 | ||||||
|
Unrealized gains/(losses) relating to the instrument still held at the reporting date
|
2.7 | 2.2 | ||||||
|
Purchases, sales, issuances and settlements (net)
|
(2.4 | ) | (0.9 | ) | ||||
|
|
||||||||
|
Balance, end of year
|
14.2 | 13.9 | ||||||
|
|
||||||||
Cash Flows
The estimated amounts of contributions expected to be paid to the plans during 2011 is $6.1
million for retirement plans, with no expected contribution to the medical plan.
There are no future annual benefits of plan participants covered by insurance contracts issued
by the employer or related parties.
The benefits expected to be paid in each of the next five fiscal years and in the five fiscal
years thereafter are as follows:
| $ in millions | Retirement Plans | Medical Plan | ||||||
|
Expected benefit payments:
|
||||||||
|
2011
|
6.5 | 2.5 | ||||||
|
2012
|
7.0 | 2.6 | ||||||
|
2013
|
7.6 | 2.8 | ||||||
|
2014
|
8.1 | 3.0 | ||||||
|
2015
|
8.8 | 3.1 | ||||||
|
Thereafter in the succeeding five years
|
56.6 | 16.1 | ||||||
14. OPERATING LEASES
The company leases office space in the majority of its locations of business under
non-cancelable operating leases. Sponsorship and naming rights commitments relate to Invesco Field
at Mile High, a sports stadium in Denver, Colorado. These leases and commitments expire on varying
dates through 2021. Certain leases provide for renewal options and contain escalation clauses
providing for increased rent based upon maintenance, utility and tax increases.
As of December 31, 2010, the company’s total future commitments by year under non-cancelable
operating leases are as follows:
| Sponsorship | ||||||||||||||||
| and Naming | ||||||||||||||||
| $ in millions | Total | Buildings | Rights | Other | ||||||||||||
|
2011
|
67.7 | 59.9 | 6.0 | 1.8 | ||||||||||||
|
2012
|
65.7 | 58.0 | 6.0 | 1.7 | ||||||||||||
|
2013
|
63.2 | 55.5 | 6.0 | 1.7 | ||||||||||||
|
2014
|
62.8 | 55.2 | 6.0 | 1.6 | ||||||||||||
|
2015
|
62.7 | 56.7 | 6.0 | — | ||||||||||||
|
Thereafter
|
349.5 | 316.0 | 33.5 | — | ||||||||||||
|
|
||||||||||||||||
|
Gross lease commitments
|
671.6 | 601.3 | 63.5 | 6.8 | ||||||||||||
|
|
||||||||||||||||
|
Less: future minimum payments expected to be received under non-cancelable subleases
|
94.4 | 94.4 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Net lease commitments
|
577.2 | 506.9 | 63.5 | 6.8 | ||||||||||||
|
|
||||||||||||||||
124
Table of Contents
As discussed in Note 1, “Accounting Policies — Security Deposit Assets and Receivables and
Security Deposit Payables,” the company is party to master lease agreements with various property
owners and is party to sublease agreements with tenants in its capacity as asset manager of
property portfolios. The company’s future commitments to the property owners is equal to and offset
by the future minimum payments expected to be received from the tenants; therefore, these amounts
are not included in the table above.
The company recognized $60.1 million, $57.5 million, and $53.7 million in operating lease
expenses in the Consolidated Statements of Income in 2010, 2009 and 2008, respectively. Lease
termination charges of $12.0 million were incurred in 2009, however these costs were offset in 2008
by downward adjustments in rent costs for sub-let office properties of $8.2 million. These expenses
are net of $11.4 million, $12.8 million and $6.3 million of sublease income in 2010, 2009 and 2008,
respectively.
15. OTHER GAINS AND LOSSES, NET
The components of other gains and losses, net, are:
| $ in millions | 2010 | 2009 | 2008 | |||||||||
|
Other gains:
|
||||||||||||
|
Gain on sale of investments
|
9.9 | 5.9 | 10.7 | |||||||||
|
Unrealized gain on trading investments, net
|
14.2 | — | — | |||||||||
|
Net foreign exchange gains
|
— | 8.4 | — | |||||||||
|
Net gain generated upon debt tender offer
|
— | 3.3 | — | |||||||||
|
|
||||||||||||
|
Total other gains
|
24.1 | 17.6 | 10.7 | |||||||||
|
|
||||||||||||
|
Other losses:
|
||||||||||||
|
Other-than-temporary impairment of available-for-sale investments
|
(7.0 | ) | (8.2 | ) | (31.2 | ) | ||||||
|
Net foreign exchange losses
|
(0.2 | ) | — | (13.0 | ) | |||||||
|
Other realized losses
|
(1.3 | ) | (1.6 | ) | (6.4 | ) | ||||||
|
|
||||||||||||
|
Total other losses
|
(8.5 | ) | (9.8 | ) | (50.6 | ) | ||||||
|
|
||||||||||||
|
Other gains and losses, net
|
15.6 | 7.8 | (39.9 | ) | ||||||||
|
|
||||||||||||
16. TAXATION
The company and its subsidiaries file annual income tax returns in the United States (“U.S.”)
federal jurisdiction, various U.S. state and local jurisdictions, and in numerous foreign
jurisdictions. A number of years may elapse before an uncertain tax position, for which the company
has unrecognized tax benefits, is finally resolved. To the extent that the company has favorable
tax settlements, or determines that accrued amounts are no longer needed due to a lapse in the
applicable statute of limitations or other reasons, such liabilities, as well as the related
interest and penalty, would be reversed as a reduction of income tax expense (net of federal tax
effects, if applicable) in the period such determination is made.
The company’s (provision)\benefit for income taxes is summarized as follows:
| $ in millions | 2010 | 2009 | 2008 | |||||||||
|
Current:
|
||||||||||||
|
Federal
|
(44.6 | ) | (6.7 | ) | (41.4 | ) | ||||||
|
State
|
(9.9 | ) | (1.4 | ) | (6.9 | ) | ||||||
|
Foreign
|
(122.8 | ) | (130.3 | ) | (156.0 | ) | ||||||
|
|
||||||||||||
|
|
(177.3 | ) | (138.4 | ) | (204.3 | ) | ||||||
|
|
||||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(10.2 | ) | (9.2 | ) | (31.9 | ) | ||||||
|
State
|
2.0 | (0.6 | ) | 0.1 | ||||||||
|
Foreign
|
(11.5 | ) | — | 0.1 | ||||||||
|
|
||||||||||||
|
|
(19.7 | ) | (9.8 | ) | (31.7 | ) | ||||||
|
|
||||||||||||
|
Total income tax (provision)/benefit
|
(197.0 | ) | (148.2 | ) | (236.0 | ) | ||||||
|
|
||||||||||||
125
Table of Contents
The net deferred tax recognized in our balance sheet at December 31 includes the following:
| $ in millions | 2010 | 2009 | ||||||
|
Deferred Tax Assets:
|
||||||||
|
Deferred compensation arrangements
|
113.1 | 89.6 | ||||||
|
Expenses for vacating leased property
|
1.7 | 18.8 | ||||||
|
Tax loss carryforwards
|
84.7 | 74.3 | ||||||
|
Postretirement medical, pension and other benefits
|
28.2 | 29.6 | ||||||
|
Investment basis differences
|
17.4 | 23.0 | ||||||
|
Other
|
27.0 | 19.5 | ||||||
|
|
||||||||
|
Total Deferred Tax Assets
|
272.1 | 254.8 | ||||||
|
Valuation Allowance
|
(84.3 | ) | (73.2 | ) | ||||
|
|
||||||||
|
Deferred Tax Assets, net of valuation allowance
|
187.8 | 181.6 | ||||||
|
|
||||||||
|
Deferred Tax Liabilities:
|
||||||||
|
Deferred sales commissions
|
(12.5 | ) | (12.3 | ) | ||||
|
Goodwill and Intangibles
|
(361.1 | ) | (30.7 | ) | ||||
|
Undistributed earnings of subsidiaries
|
(3.1 | ) | (2.3 | ) | ||||
|
Revaluation reserve
|
(5.1 | ) | (5.2 | ) | ||||
|
Other
|
(4.6 | ) | (7.6 | ) | ||||
|
|
||||||||
|
Total Deferred Tax Liabilities
|
(386.4 | ) | (58.1 | ) | ||||
|
|
||||||||
|
Net Deferred Tax Assets/(Liabilities)
|
(198.6 | ) | 123.5 | |||||
|
|
||||||||
A reconciliation between the statutory rate and the effective tax rate on income from
operations for the years ended December 31, 2010, 2009 and 2008 is as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Statutory Rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Foreign jurisdiction statutory income tax rates
|
(9.7 | )% | (7.4 | )% | (4.7 | )% | ||||||
|
State taxes, net of federal tax effect
|
1.2 | % | 1.4 | % | 0.5 | % | ||||||
|
Change in valuation allowance for unrecognized tax losses
|
2.3 | % | 4.2 | % | 2.0 | % | ||||||
|
Other
|
0.9 | % | (1.7 | %) | 0.1 | % | ||||||
|
|
||||||||||||
|
Effective tax rate (excluding noncontrolling interests)
|
29.7 | % | 31.5 | % | 32.9 | % | ||||||
|
Gains/(losses) attributable to noncontrolling interests
|
(6.1 | )% | 10.0 | % | 3.0 | % | ||||||
|
|
||||||||||||
|
Effective tax rate per Consolidated Statements of Income
|
23.6 | % | 41.5 | % | 35.9 | % | ||||||
|
|
||||||||||||
The company’s subsidiaries operate in several taxing jurisdictions around the world, each with
its own statutory income tax rate. As a result, the blended average statutory tax rate will vary
from year to year depending on the mix of the profits and losses of the company’s subsidiaries. The
majority of our profits are earned in the U.S., Canada and the U.K. The current U.K. statutory tax
rate is 28%, the Canadian statutory tax rate is 31% and the U.S. Federal statutory tax rate is 35%.
On December 14, 2007, legislation was enacted to reduce the Canadian income tax rate over five
years, which changed the rate to 33.5% in 2008 and 33.0% in 2009. The legislation was revised in
December 2009, further reducing the rate to 31.0% in 2010, 28.25% in 2011, 26.25% in 2012, 25.5% in
2013, and 25% thereafter. On July 27, 2010, legislation was introduced to reduce the UK income tax
rate to 27% on April 1, 2011. Further reductions to the main rate are proposed to reduce the rate
by 1% per year to 24% by April 1, 2014. These reductions are expected to be introduced in future
Finance Bills for each annual reduction. The reduction in our Canadian and UK deferred tax assets
and liabilities as a result of these rate changes decreased our 2010 effective tax rate by 0.1% and
is included in “Other” above.
At December 31, 2010, the company had tax loss carryforwards accumulated in certain taxing
jurisdictions in the aggregate of $261.1 million (2009: $222.5 million), approximately $17.3
million of which will expire between 2011 and 2015, $29.3 million which will expire after 2015,
with the remaining $214.5 million having an indefinite life. A full valuation allowance has been
recorded against the deferred tax assets related to these losses based on a history of losses in
these taxing jurisdictions which make it unlikely that the deferred tax assets will be realized. We
anticipate that future dividends paid to the UK from non-UK subsidiaries will meet one of the new
classes of exemption and thus will not be subject to further UK tax.
126
Table of Contents
As a multinational corporation, the company operates in various locations around the world and
we generate substantially all of our earnings from our subsidiaries. Under ASC 740-30 deferred tax
liabilities are recognized for taxes that would be payable on the unremitted earnings of the
company’s subsidiaries, consolidated investment products, and joint ventures, except where it is
our intention to continue to indefinitely reinvest the undistributed earnings. Our Canadian and
U.S. subsidiaries continue to be directly owned by Invesco Holding Company Limited (formerly
INVESCO PLC, our predecessor company), which is directly owned by Invesco Ltd. Our Canadian
unremitted earnings, for which we are indefinitely reinvested, are estimated to be $1,131 million
at December 31, 2010, compared with $1,016 million at December 31, 2009. If distributed as a
dividend, Canadian withholding tax of 5.0% would be due. Dividends from our investment in the U.S.
should not give rise to additional tax as we are not subject to withholding tax between the U.S.
and U.K. Deferred tax liabilities in the amount of $3.1 million (2009: $2.3 million) for additional
tax have been recognized for unremitted earnings of certain subsidiaries that have regularly
remitted earnings and are expected to continue to remit earnings in the foreseeable future. The UK
dividend exemption should apply to the remainder of our UK subsidiary investments. There is no
additional tax on dividends from the U.K. to Bermuda.
The company and its subsidiaries file annual income tax returns in the U.S. federal
jurisdiction, various U.S. state and local jurisdictions, and in numerous foreign jurisdictions. A
number of years may elapse before an uncertain tax position, for which the company has unrecognized
tax benefits, is finally resolved. To the extent that the company has favorable tax settlements, or
determines that accrued amounts are no longer needed due to a lapse in the applicable statute of
limitations or other change in circumstances, such liabilities, as well as the related interest and
penalty, would be reversed as a reduction of income tax expense (net of federal tax effects, if
applicable) in the period such determination is made. At January 1, 2010, the company had
approximately $39.0 million of gross unrecognized income tax benefits (UTBs). Of this total, $20.4
million (net of tax benefits in other jurisdictions and the federal benefit of state taxes)
represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the
effective tax rate in future periods. A reconciliation of the change in the UTB balance from
January 1, 2008, to December 31, 2010, is as follows:
| Gross Unrecognized | ||||
| $ in millions | Income Tax Benefits | |||
|
Balance at January 1, 2008
|
69.0 | |||
|
Additions for tax positions related to the current year
|
5.1 | |||
|
Additions for tax positions related to prior years
|
(0.2 | ) | ||
|
Other reductions for tax positions related to prior years
|
(6.1 | ) | ||
|
Reductions for statute closings
|
(11.9 | ) | ||
|
|
||||
|
Balance at December 31, 2008
|
55.9 | |||
|
|
||||
|
Additions for tax positions related to the current year
|
0.3 | |||
|
Additions for tax positions related to prior years
|
4.1 | |||
|
Other reductions for tax positions related to prior years
|
(6.0 | ) | ||
|
Reductions for statute closings
|
(15.3 | ) | ||
|
|
||||
|
Balance at December 31, 2009
|
39.0 | |||
|
|
||||
|
Additions for tax positions related to the current year
|
— | |||
|
Additions for tax positions related to prior years
|
1.8 | |||
|
Other reductions for tax positions related to prior years
|
(0.5 | ) | ||
|
Reductions for statute closings
|
(13.2 | ) | ||
|
|
||||
|
Balance at December 31, 2010
|
27.1 | |||
|
|
||||
The company recognizes accrued interest and penalties, as appropriate, related to unrecognized
tax benefits as a component of the income tax provision. At December 31, 2010, the total amount of
gross unrecognized tax benefits was $27.1 million. Of this total, $20.1 million (net of tax
benefits in other jurisdictions and the federal benefit of state taxes) represents the amount of
unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in
future periods. The Consolidated Balance Sheet includes accrued interest and penalties of $5.6
million at December 31, 2010, reflecting $7.7 million of tax benefit realized in 2010. As a result
of the expiration of statutes of limitations for various jurisdictions and anticipated legislative
changes, it is reasonably possible that the company’s gross unrecognized tax benefits balance may
change within the next twelve months by a range of zero to $15.0 million. The company and its
subsidiaries are periodically examined by various taxing authorities. With few exceptions, the
company is no longer subject to income tax examinations by the primary tax authorities for years
prior to 2003. Management monitors changes in tax statutes and regulations and the issuance of
judicial decisions to determine the potential impact to uncertain income tax positions. As of
December 31, 2010, management had identified no other potential subsequent events that could have a
significant impact on the unrecognized tax benefits balance.
127
Table of Contents
17. EARNINGS PER SHARE
The calculation of earnings per share is as follows:
| Net Income | ||||||||||||
| Attributable to | Weighted Average | Per Share | ||||||||||
| $ in millions, except per share data | Common Shareholders | Number of Shares* | Amount* | |||||||||
|
2010
|
||||||||||||
|
Basic earnings per share
|
$ | 465.7 | 460.4 | $ | 1.01 | |||||||
|
Dilutive effect of share-based awards
|
— | 2.8 | — | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 465.7 | 463.2 | $ | 1.01 | |||||||
|
|
||||||||||||
|
2009
|
||||||||||||
|
Basic earnings per share
|
$ | 322.5 | 417.2 | $ | 0.77 | |||||||
|
Dilutive effect of share-based awards
|
— | 6.4 | — | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 322.5 | 423.6 | $ | 0.76 | |||||||
|
|
||||||||||||
|
2008
|
||||||||||||
|
Basic earnings per share
|
$ | 481.7 | 388.7 | $ | 1.24 | |||||||
|
Dilutive effect of share-based awards
|
— | 10.4 | — | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 481.7 | 399.1 | $ | 1.21 | |||||||
|
|
||||||||||||
| * | The basic weighted average number of shares for the year ended December 31, 2008 was restated upon the adoption of guidance now encompassed in ASC Topic 260 as discussed in Note 1. The adoption of this guidance resulted in a change to the reported basic earnings per share amount of $0.01, and did not impact diluted earnings per share for the year ended December 31, 2008. |
See Note 12, “Share-Based Compensation,” for a summary of share awards outstanding under the
company’s share-based payment programs. These programs could result in the issuance of common
shares that would affect the measurement of basic and diluted earnings per share.
Options to purchase 5.7 million common shares at a weighted average exercise price of £19.47
were outstanding during the year ended December 31, 2010 (2009: 9.6 million share options at a
weighted average exercise price of £20.30; 2008: 13.3 million share options at a weighted average
exercise price of £18.88), but were not included in the computation of diluted earnings per share
because the option’s exercise price was greater than the average market price of the common shares
and therefore their inclusion would have been anti-dilutive.
There were no time-vested share awards that were excluded from the computation of diluted
earnings per share during the years ended December 31, 2010, 2009, and 2008 due to their inclusion
being anti-dilutive. There were no contingently issuable shares excluded from the diluted earnings
per share computation during year ended December 31, 2010 (2009: 1.4 million contingently issuable
shares; 2008: none), because the necessary performance conditions for the shares to be issuable had
not yet been satisfied at the end of the respective period.
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Table of Contents
18. GEOGRAPHIC INFORMATION
The company operates under one business segment, investment management. Geographical
information is presented below. There are no revenues or long-lived assets attributed to the
company’s country of domicile, Bermuda.
| Continental | ||||||||||||||||||||||||
| $ in millions | U.S. | U.K./Ireland | Canada | Europe | Asia | Total | ||||||||||||||||||
|
2010
|
||||||||||||||||||||||||
|
Operating revenues
|
1,680.8 | 1,305.8 | 370.7 | 44.3 | 86.1 | 3,487.7 | ||||||||||||||||||
|
Inter-company
|
9.8 | (131.3 | ) | (10.1 | ) | 56.3 | 75.3 | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
1,690.6 | 1,174.5 | 360.6 | 100.6 | 161.4 | 3,487.7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-lived assets
|
169.3 | 79.6 | 7.6 | 2.8 | 13.1 | 272.4 | ||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
Operating revenues
|
1,131.6 | 1,037.9 | 353.1 | 42.8 | 61.9 | 2,627.3 | ||||||||||||||||||
|
Inter-company
|
11.0 | (103.7 | ) | (8.8 | ) | 43.4 | 58.1 | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
1,142.6 | 934.2 | 344.3 | 86.2 | 120.0 | 2,627.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-lived assets
|
127.2 | 75.0 | 7.7 | 3.1 | 7.7 | 220.7 | ||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
Operating revenues
|
1,427.8 | 1,231.7 | 516.6 | 58.9 | 72.6 | 3,307.6 | ||||||||||||||||||
|
Inter-company
|
24.4 | (143.4 | ) | (16.1 | ) | 59.5 | 75.6 | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
1,452.2 | 1,088.3 | 500.5 | 118.4 | 148.2 | 3,307.6 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-lived assets
|
125.9 | 61.9 | 8.1 | 0.9 | 8.5 | 205.3 | ||||||||||||||||||
Operating revenues reflect the geographical regions from which services are provided.
19. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies may arise in the ordinary course of business.
The company has transactions with various private equity, real estate and other investment
entities sponsored by the company for the investment of client assets in the normal course of
business. Many of the company’s investment products are structured as limited partnerships. The
company’s investment may take the form of the general partner or a limited partner, and the
entities are structured such that each partner makes capital commitments that are to be drawn down
over the life of the partnership as investment opportunities are identified. At December 31, 2010,
the company’s undrawn capital commitments were $136.4 million (2009: $77.6 million).
The volatility and valuation dislocations that occurred from 2007 to the date of this Report
in certain sectors of the fixed income market have generated pricing issues in many areas of the
market. As a result of these valuation dislocations, during the fourth quarter of 2007, Invesco
elected to enter into contingent support agreements for two of its investment trusts to enable them
to sustain a stable pricing structure. These two trusts are unregistered trusts that invest in
fixed income securities and are available only to strictly limited types of investors. In December
2010, the agreements were amended to extend the term through June 30, 2011; further extensions are
likely. As of December 31, 2010, the total committed support under these agreements was $36.0
million with an internal approval mechanism to increase the maximum possible support to $66.0
million at the option of the company. The estimated value of these agreements at December 31, 2010,
was $2.0 million (December 31, 2009: $2.5 million), which was recorded in other current liabilities
on the Consolidated Balance Sheet. The estimated value of these agreements is lower than the
maximum support amount, reflecting management’s estimation that the likelihood of funding under the
support agreements is low. Significant investor redemptions out of the trusts before the scheduled
maturity of the underlying securities or significant credit default issues of the securities held
within the trusts’ portfolios could change the company’s estimation of likelihood of funding. No
payment has been made under either agreement nor has Invesco realized any loss from the support
agreements through the date of this Report. These trusts were not consolidated because the company
was not deemed to be the primary beneficiary.
A subsidiary of the company has received assessments from the Canada Revenue Agency (CRA) for
goods and services tax (GST) related to various taxation periods from April 1999 to December 2006
related to GST on sales charges collected from investors upon the redemption of certain mutual
funds. The company objected to the assessments and sought remedial action in the Ontario Superior
Court of Justice. In November 2009, the company was successful in such remedial action and, as a
result, anticipated successfully contesting the assessments. In November and December 2010, the
Appeals Division of the CRA ruled in the company’s favor with
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respect to assessments for certain of these taxation periods; these assessments were reversed
by the CRA. At December 31, 2010, the remaining assessments totaled $12.3 million. Management
believes that the CRA’s claims are unfounded and that these assessments are unlikely to stand, and
accordingly no provision has been recorded in the Consolidated Financial Statements; however, until
resolution of the remaining assessments, the company secured a letter of credit in favor of the CRA
for the same amount.
Acquisition Contingencies
Contingent consideration related to acquisitions made prior to January 1, 2009 (the effective
date of guidance now encompassed in ASC Topic 805 — see Note 1, “Accounting Policies”), includes
the following:
| • | Earn-outs relating to the Invesco PowerShares acquisition. A contingent payment of up to $500.0 million could be due in October 2011, five years after the date of acquisition, based on compound annual growth in management fees (as defined and adjusted pursuant to the acquisition agreement) from an assumed base of $17.5 million at closing. The Year 5 management fees will be reduced by $50.0 million, for purposes of the calculation, since the second contingent payment was earned. For a compound annual growth rate (CAGR) in Year 5 below 15%, no additional payment will be made. For a CAGR in Year 5 between 15% and 75%, $5.0 million for each CAGR point above 15%, for a maximum payment of $300.0 million for a 75% CAGR. For a CAGR in Year 5 between 75% and 100%, $300.0 million, plus an additional $8.0 million for each CAGR point above 75%, for a maximum total payment of $500.0 million for a 100% CAGR. |
| • | Earn-outs relating to the W.L. Ross & Co. acquisition. Contingent payments of up to $55.0 million are due each year for the five years following the October 2006 date of acquisition based on the size and number of future fund launches in which W.L. Ross & Co. is integrally involved. On December 9, 2010, a $26.3 million acquisition earn-out was paid to the former owners of W.L. Ross & Co., consisting of $25.8 million calculated at the April 3, 2010, earn-out measurement date and $0.5 million calculated at the October 3, 2010, earn-out measurement date. Additionally, in the fourth quarter of 2010, the purchase agreement was amended resulting in certain changes to the timing of the final earn-out payment. As a result of these changes, an additional earn-out calculation was performed at December 31, 2010, and $14.1 million of the final earn-out was accrued at that date. As a result of these transactions, goodwill was increased by $40.4 million. The maximum remaining contingent payments of $40.9 million would require 2011 fund launches to total $3.5 billion. |
Legal Contingencies
In July 2010, various closed-end funds formerly advised by Van Kampen Investments or Morgan
Stanley Investment Management included in the acquired business had complaints filed against them
in New York State Court commencing derivative lawsuits purportedly brought on behalf of the common
shareholders of those funds. The funds are nominal defendants in these derivative lawsuits and the
defendants also include Van Kampen Investments (acquired by Invesco on June 1, 2010), Morgan
Stanley Investment Management and certain officers and trustees of the funds who are or were
employees of those firms. Invesco has certain obligations under the applicable acquisition
agreement regarding the defense costs and any damages associated with this litigation. The
plaintiffs allege breaches of fiduciary duties owed by the non-fund defendants to the funds’ common
shareholders related to the funds’ redemption in prior periods of Auction Rate Preferred Securities
(“ARPS”) theretofore issued by the funds. The complaints are similar to other complaints recently
filed against investment advisers, officers and trustees of closed-end funds in other fund
complexes which issued and redeemed ARPS. The complaints allege that the advisers, distributors and
certain officers and trustees of those funds breached their fiduciary duty by redeeming ARPS at
their liquidation value when there was no obligation to do so and when the value of ARPS in the
secondary marketplace were significantly below their liquidation value. The complaints also allege
that the ARPS redemptions were principally motivated by the fund sponsors’ interests to preserve
distribution relationships with brokers and other financial intermediaries who held ARPS after
having repurchased them from their own clients. Certain other funds included in the acquired
business have received demand letters expressing similar allegations. Such demand letters could be
precursors to additional similar lawsuits being commenced against those other funds. The Boards of
Trustees of the funds are evaluating the complaints and demand letters and have established special
committees of independent trustees to conduct an inquiry regarding the allegations. Invesco
believes the cases should be dismissed following completion of such review period, although there
can be no assurance of that result. Invesco intends to defend vigorously any cases which may
survive beyond initial motions to dismiss.
The investment management industry also is subject to extensive levels of ongoing regulatory
oversight and examination. In the United States and other jurisdictions in which the company
operates, governmental authorities regularly make inquiries, hold investigations and administer
market conduct examinations with respect to compliance with applicable laws and regulations.
Additional lawsuits or regulatory enforcement actions arising out of these inquiries may in the
future be filed against the company and related entities and individuals in the U.S. and other
jurisdictions in which the company and its affiliates operate. Any material loss of
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investor and/or client confidence as a result of such inquiries and/or litigation could result
in a significant decline in assets under management, which would have an adverse effect on the
company’s future financial results and its ability to grow its business.
In the normal course of its business, the company is subject to various litigation matters.
Although there can be no assurances, at this time management believes, based on information
currently available to it, that it is not probable that the ultimate outcome of any of these
actions will have a material adverse effect on the consolidated financial condition or results of
operations of the company.
20. CONSOLIDATED INVESTMENT PRODUCTS
The company’s risk with respect to each investment in consolidated investment products is
limited to its equity ownership and any uncollected management fees. Therefore, the gains or losses
of consolidated investment products have not had a significant impact on the company’s results of
operations, liquidity or capital resources. The company has no right to the benefits from, nor does
it bear the risks associated with, these investments, beyond the company’s minimal direct
investments in, and management fees generated from, the investment products. If the company were to
liquidate, these investments would not be available to the general creditors of the company, and as
a result, the company does not consider investments held by consolidated investment products to be
company assets. Additionally, the collateral assets of consolidated CLOs are held solely to satisfy
the obligations of the CLOs, and the investors in the consolidated CLOs have no recourse to the
general credit of the company for the notes issued by the CLOs.
CLOs
A significant portion of consolidated investment products are CLOs. CLOs are investment
vehicles created for the sole purpose of issuing collateralized loan instruments that offer
investors the opportunity for returns that vary with the risk level of their investment. The notes
issued by the CLOs are backed by diversified collateral asset portfolios consisting primarily of
loans or structured debt. For managing the collateral for the CLO entities, the company earns
investment management fees, including in some cases subordinated management fees, as well as
contingent incentive fees. The company has invested in certain of the entities, generally taking a
portion of the unrated, junior subordinated position. The company’s investments in CLOs are
generally subordinated to other interests in the entities and entitle the company and other
subordinated tranche investors to receive the residual cash flows, if any, from the entities. The
company’s subordinated interest can take the form of (1) subordinated notes, (2) income notes or
(3) preference/preferred shares. The company has determined that, although the junior tranches have
certain characteristics of equity, they should be accounted for and disclosed as debt on the
company’s Consolidated Balance Sheet, as the subordinated and income notes have a stated maturity
indicating a date for which they are mandatorily redeemable. The preference shares are also
classified as debt, as redemption is required only upon liquidation or termination of the CLO and
not of the company.
Prior to the adoption of guidance now encompassed in ASC Topic 810 (discussed in Note 1,
“Accounting Policies”), the company’s ownership interests, which were classified as
available-for-sale investments on the company’s Consolidated Balance Sheets, combined with its
other interests (management and incentive fees), were quantitatively assessed to determine if the
company is the primary beneficiary of these entities. The company determined, for periods prior to
the adoption of this guidance, that it did not absorb the majority of the expected gains or losses
from the CLOs and therefore was not their primary beneficiary.
Upon adoption of additional guidance now encompassed in ASC Topic 810, the company determined
that it was the primary beneficiary of certain CLOs, as it has the power to direct the activities
of the CLOs that most significantly impact the CLOs’ economic performance, and the obligation to
absorb losses/right to receive benefits from the CLOs that could potentially be significant to the
CLOs. The primary beneficiary assessment includes an analysis of the rights of the company in its
capacity as investment manager. In certain CLOs, the company’s role as investment manager provides
that the company contractually has the power, as defined in ASC Topic 810, to direct the activities
of the CLOs that most significantly impact the CLOs’ economic performance, such as managing the
collateral portfolio and its credit risk. In other CLOs, the company determined that it does not
have this power in its role as investment manager due to certain restrictions that limit its
ability to manage the collateral portfolio and its credit risk. Additionally, the primary
beneficiary assessment includes an analysis of the company’s rights to receive benefits and
obligations to absorb losses associated with its first loss position and management/incentive fees.
As part of this analysis, the company uses a quantitative model to corroborate its qualitative
assessments. The quantitative model includes an analysis of the expected performance of the CLOs
and a comparison of the company’s absorption of this performance relative to the other investors in
the CLOs. The company has determined that it could receive significant benefits and/or absorb
significant losses from certain CLOs in which it holds a first loss position and has the right to
significant fees. It was determined that the company’s benefits and losses from certain other CLOs
could not be significant, particularly in situations where the company does not hold a first loss
position and where the fee interests are based upon a fixed percentage of collateral asset value.
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Private equity, real estate and fund-of-funds (partnerships)
For investment products that are structured as partnerships and are determined to be VIEs,
including private equity funds, real estate funds and fund-of-funds products, the company evaluates
the structure of the partnership to determine if it is the primary beneficiary of the investment
product. This evaluation includes assessing the rights of the limited partners to transfer their
economic interests in the investment product. If the limited partners lack rights to manage their
economic interests, they are considered to be de facto agents of the company, resulting in the
company determining that it is the primary beneficiary of the investment product. The company
generally takes less than a 1% investment in these entities as the general partner. Non-VIE general
partnership investments are deemed to be controlled by the company and are consolidated under a
voting interest entity (VOE) model, unless the limited partners have the substantive ability to
remove the general partner without cause based upon a simple majority vote or can otherwise
dissolve the partnership, or unless the limited partners have substantive participating rights over
decision-making. Interests in unconsolidated private equity funds, real estate funds and
fund-of-funds products are classified as equity method investments in the company’s Consolidated
Balance Sheets.
On July 8, 2009, the U.S. Treasury announced the launch of the Public-Private Investment
Program (PPIP), which was designed to support market functioning and facilitate price discovery in
the asset-based securities markets, to allow banks and other financial institutions to re-deploy
capital, and to extend new credit to households and businesses. Under this program, the U.S.
Treasury will invest up to $30.0 billion of equity and debt into funds established with private
sector investment managers and private investors for the purpose of purchasing legacy securities.
The U.S. Treasury has partnered with eight investment management firms, including Invesco, in the
PPIP. The company determined that certain feeder funds within the Invesco-sponsored PPIP
partnership structure are VIEs; however, the company is not their primary beneficiary, as it does
not absorb the majority of the expected gains or losses from these funds. Additionally, the company
does not have any capital invested or committed into these funds. Other funds within the PPIP
structure are VOEs; however, the company as general partner is not deemed to control these entities
due to the presence of substantive kick-out or liquidation rights.
Other investment products
As discussed in Note 19, “Commitments and Contingencies,” the company has entered into
contingent support agreements for two of its investment trusts to enable them to sustain a stable
pricing structure, creating variable interests in these VIEs. The company earns management fees
from the trusts and has a small investment in one of these trusts. The company was not deemed to be
the primary beneficiary of these trusts after considering any explicit and implicit variable
interests in relation to the total expected gains and losses of the trusts.
In June 2009, the company invested in the initial public offering of Invesco Mortgage Capital
Inc. (NYSE: IVR), a real estate investment trust which is managed by the company. The company
purchased 75,000 common shares of IVR at $20.00 per share and 1,425,000 limited partner units at
$20.00 per unit through private placements for a total of $30.0 million. The company determined
that IVR is a VIE and that its investment represents a variable interest. The company’s ownership
interests, which are classified as equity method investments on the company’s Consolidated Balance
Sheets, combined with its other interests (management fees), were quantitatively assessed to
determine if the company is the primary beneficiary of IVR. The company determined that it did not
absorb the majority of the expected gains or losses from IVR and therefore is not its primary
beneficiary.
At December 31, 2010, the company’s maximum risk of loss in significant VIEs in which the
company is not the primary beneficiary is presented in the table below.
| Company’s Maximum | ||||||||||||
| $ in millions | Footnote Reference | Carrying Value | Risk of Loss | |||||||||
|
CLO investments
|
3 | 0.5 | 0.5 | |||||||||
|
Partnership and trust investments
|
— | 18.4 | 18.4 | |||||||||
|
Investments in Invesco Mortgage Capital Inc.
|
— | 32.9 | 32.9 | |||||||||
|
Support agreements*
|
19 | (2.0 | ) | 36.0 | ||||||||
|
|
||||||||||||
|
Total
|
87.8 | |||||||||||
|
|
||||||||||||
| * | As of December 31, 2010, the committed support under these agreements was $36.0 million with an internal approval mechanism to increase the maximum possible support to $66.0 million at the option of the company. |
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During the year ended December 31, 2010, entities were consolidated due to the adoption of
guidance now encompassed in ASC Topic 810 and business combinations. As a result of the acquisition
of Morgan Stanley’s retail asset management business, CLOs with total assets of $805.4 million were
consolidated as of June 1, 2010 and increased appropriated retained earnings by $149.4 million at
that date. As a result of the acquisition of AIG Asia Real Estate, certain real estate funds with
total assets of $385.9 million were consolidated at December 31, 2010 and increased noncontrolling
interests by $363.6 million. The table below illustrates the summary balance sheet amounts related
to these entities consolidated during the year. Balances are reflective of the amounts at the
respective consolidation dates and are before consolidation into the company.
Balance Sheet
| $ in millions | CLOs - VIEs | VOEs | ||||||
|
Year ended December 31, 2010
|
||||||||
|
Current assets
|
281.6 | 96.0 | ||||||
|
Non-current assets
|
6,188.1 | 289.9 | ||||||
|
Total assets
|
6,469.7 | 385.9 | ||||||
|
Current liabilities
|
162.6 | 1.6 | ||||||
|
Non-current liabilities
|
5,883.4 | — | ||||||
|
Total liabilities
|
6,046.0 | 1.6 | ||||||
|
Total equity
|
423.7 | 384.3 | ||||||
|
Total liabilities and equity
|
6,469.7 | 385.9 | ||||||
During the year ended December 31, 2009, the company deconsolidated $53.3 million of
investments held by consolidated investment products and related noncontrolling interests in
consolidated entities as a result of determining that the company is no longer the primary
beneficiary. The amounts deconsolidated from the Consolidated Balance Sheet are illustrated in the
table below. There was no net impact to the Consolidated Statement of Income for the year ended
December 31, 2009, from the deconsolidation of these investment products.
Balance Sheet
| $ in millions | Other VIEs | |||
|
Year ended December 31, 2009
|
||||
|
Current assets
|
— | |||
|
Non-current assets
|
53.3 | |||
|
|
||||
|
Total assets
|
53.3 | |||
|
|
||||
|
Current liabilities
|
— | |||
|
Non-current liabilities
|
— | |||
|
|
||||
|
Total liabilities
|
— | |||
|
|
||||
|
Equity attributable to common shareholders
|
— | |||
|
Equity attributable to noncontrolling interests in consolidated entities
|
53.3 | |||
|
|
||||
|
Total liabilities and equity
|
53.3 | |||
|
|
||||
The following tables reflect the impact of consolidation of investment products into the
Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009, and the Consolidated
Statements of Income for the years ended December 31, 2010, 2009 and 2008.
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Condensed Consolidating Balance Sheets
| Before | CLOs– | Other | ||||||||||||||||||||||
| $ in millions | Consolidation (1) | VIEs (2) | VIEs | VOEs | Adjustments (3) | Total | ||||||||||||||||||
|
As of December 31, 2010
|
||||||||||||||||||||||||
|
Current assets
|
3,480.0 | 679.3 | 3.7 | 133.8 | (22.3 | ) | 4,274.5 | |||||||||||||||||
|
Non-current assets
|
9,025.1 | 6,204.6 | 59.6 | 941.3 | (61.0 | ) | 16,169.6 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
12,505.1 | 6,883.9 | 63.3 | 1075.1 | (83.3 | ) | 20,444.1 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Current liabilities
|
2,777.9 | 500.2 | 0.9 | 7.8 | (22.3 | ) | 3,264.5 | |||||||||||||||||
|
Long-term debt of
consolidated investment
products
|
— | 5,888.2 | — | — | (22.8 | ) | 5,865.4 | |||||||||||||||||
|
Other non-current liabilities
|
1,953.3 | — | — | — | — | 1,953.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities
|
4,731.2 | 6,388.4 | 0.9 | 7.8 | (45.1 | ) | 11,083.2 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Retained earnings
appropriated for investors
in consolidated investment
products
|
— | 495.5 | — | — | — | 495.5 | ||||||||||||||||||
|
Other equity attributable to
common shareholders
|
7,769.1 | — | 0.1 | 38.1 | (38.2 | ) | 7,769.1 | |||||||||||||||||
|
Equity attributable to
noncontrolling interests in
consolidated entities
|
4.8 | — | 62.3 | 1,029.2 | — | 1,096.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and equity
|
12,505.1 | 6,883.9 | 63.3 | 1,075.1 | (83.3 | ) | 20,444.1 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Before | Other | |||||||||||||||||||
| $ in millions | Consolidation (1) | VIEs | VOEs | Adjustments (3) | Total | |||||||||||||||
|
As of December 31, 2009
|
||||||||||||||||||||
|
Current assets
|
3,089.8 | 4.2 | 27.0 | — | 3,121.0 | |||||||||||||||
|
Non-current assets
|
7,111.8 | 67.9 | 617.1 | (8.2 | ) | 7,788.6 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
10,201.6 | 72.1 | 644.1 | (8.2 | ) | 10,909.6 | ||||||||||||||
|
|
||||||||||||||||||||
|
Current liabilities
|
2,293.6 | 0.7 | 4.1 | — | 2,298.4 | |||||||||||||||
|
Non-current liabilities
|
990.4 | — | — | — | 990.4 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities
|
3,284.0 | 0.7 | 4.1 | — | 3,288.8 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total equity attributable to common shareholders
|
6,912.9 | 0.2 | 8.0 | (8.2 | ) | 6,912.9 | ||||||||||||||
|
Equity attributable to noncontrolling interests
in consolidated entities
|
4.7 | 71.2 | 632.0 | — | 707.9 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities and equity
|
10,201.6 | 72.1 | 644.1 | (8.2 | ) | 10,909.6 | ||||||||||||||
|
|
||||||||||||||||||||
| (1) | The Before Consolidation column includes Invesco’s equity interest in the investment products subsequently consolidated, accounted for as equity method and available-for-sale investments. | |
| (2) | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of certain CLOs. In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. Prior to January 1, 2010, the company was not deemed to be the primary beneficiary of these CLOs. | |
| (3) | Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of the company’s equity at risk recorded as investments by the company (before consolidation) against either equity (private equity and real estate partnership funds) or subordinated debt (CLOs) of the funds. |
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Condensed Consolidating Statements of Income
| Before | CLOs– | Other | ||||||||||||||||||||||
| $ in millions | Consolidation (1) | VIEs (2) | VIEs | VOEs | Adjustments (1)(3) | Total | ||||||||||||||||||
|
Year ended December 31, 2010
|
||||||||||||||||||||||||
|
Total operating revenues
|
3,532.7 | — | — | 0.3 | (45.3 | ) | 3,487.7 | |||||||||||||||||
|
Total operating expenses
|
2,887.8 | 41.4 | 1.6 | 12.3 | (45.3 | ) | 2,897.8 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income
|
644.9 | (41.4 | ) | (1.6 | ) | (12.0 | ) | — | 589.9 | |||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
40.8 | — | — | — | (0.6 | ) | 40.2 | |||||||||||||||||
|
Interest and dividend income
|
10.4 | 246.0 | — | — | (5.1 | ) | 251.3 | |||||||||||||||||
|
Other investment income/(losses)
|
15.6 | (3.8 | ) | 6.9 | 104.5 | 6.4 | 129.6 | |||||||||||||||||
|
Interest expense
|
(58.6 | ) | (123.7 | ) | — | — | 5.1 | (177.2 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
653.1 | 77.1 | 5.3 | 92.5 | 5.8 | 833.8 | ||||||||||||||||||
|
Income tax provision
|
(197.0 | ) | — | — | — | — | (197.0 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
456.1 | 77.1 | 5.3 | 92.5 | 5.8 | 636.8 | ||||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.2 | ) | (77.1 | ) | (5.3 | ) | (88.4 | ) | (0.1 | ) | (171.1 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
455.9 | — | — | 4.1 | 5.7 | 465.7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| Before | ||||||||||||||||||||
| $ in millions | Consolidation (1) | VIEs | VOEs | Adjustments (3) | Total | |||||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||||||
|
Total operating revenues
|
2,633.3 | 0.3 | 1.6 | (7.9 | ) | 2,627.3 | ||||||||||||||
|
Total operating expenses
|
2,139.5 | 1.8 | 9.6 | (7.9 | ) | 2,143.0 | ||||||||||||||
|
|
||||||||||||||||||||
|
Operating income
|
493.8 | (1.5 | ) | (8.0 | ) | — | 484.3 | |||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
24.5 | — | — | 2.5 | 27.0 | |||||||||||||||
|
Interest and dividend income
|
9.8 | — | — | — | 9.8 | |||||||||||||||
|
Other investment income/(losses)
|
7.8 | (11.6 | ) | (95.3 | ) | — | (99.1 | ) | ||||||||||||
|
Interest expense
|
(64.5 | ) | — | — | — | (64.5 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
471.4 | (13.1 | ) | (103.3 | ) | 2.5 | 357.5 | |||||||||||||
|
Income tax provision
|
(148.2 | ) | — | — | — | (148.2 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Net income/(loss), including gains and losses
attributable to noncontrolling interests
|
323.2 | (13.1 | ) | (103.3 | ) | 2.5 | 209.3 | |||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.7 | ) | 13.1 | 100.8 | — | 113.2 | ||||||||||||||
|
|
||||||||||||||||||||
|
Net income attributable to common shareholders
|
322.5 | — | (2.5 | ) | 2.5 | 322.5 | ||||||||||||||
|
|
||||||||||||||||||||
| See accompanying notes to these tables on the following page. | ||
135
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| Before | ||||||||||||||||||||
| $ in millions | Consolidation (1) | VIEs | VOEs | Adjustments (3) | Total | |||||||||||||||
|
Year ended December 31, 2008
|
||||||||||||||||||||
|
Total operating revenues
|
3,308.4 | 0.3 | 5.2 | (6.3 | ) | 3,307.6 | ||||||||||||||
|
Total operating expenses
|
2,555.3 | 1.5 | 9.3 | (6.3 | ) | 2,559.8 | ||||||||||||||
|
|
||||||||||||||||||||
|
Operating income
|
753.1 | (1.2 | ) | (4.1 | ) | — | 747.8 | |||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
45.9 | — | — | 0.9 | 46.8 | |||||||||||||||
|
Interest and dividend income
|
37.2 | — | — | — | 37.2 | |||||||||||||||
|
Other investment income/(losses)
|
(39.9 | ) | 15.5 | (73.5 | ) | — | (97.9 | ) | ||||||||||||
|
Interest expense
|
(76.9 | ) | — | — | — | (76.9 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
719.4 | 14.3 | (77.6 | ) | 0.9 | 657.0 | ||||||||||||||
|
Income tax provision
|
(236.0 | ) | — | — | — | (236.0 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
483.4 | 14.3 | (77.6 | ) | 0.9 | 421.0 | ||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(1.7 | ) | (14.3 | ) | 76.7 | — | 60.7 | |||||||||||||
|
|
||||||||||||||||||||
|
Net income attributable to common shareholders
|
481.7 | — | (0.9 | ) | 0.9 | 481.7 | ||||||||||||||
|
|
||||||||||||||||||||
| (1) | The Before Consolidation column includes Invesco’s equity interest in the investment products accounted for as equity method (private equity and real estate partnership funds) and available-for-sale investments (CLOs). Upon consolidation of the CLOs, the company’s and the CLOs’ accounting policies were effectively aligned, resulting in the reclassification of the company’s gain for the year ended December 31, 2010 of $6.4 million (representing the increase in the market value of the company’s holding in the consolidated CLOs) from other comprehensive income into other gains/losses. The company’s gain on its investment in the CLOs (before consolidation) eliminates with the company’s share of the offsetting loss on the CLOs’ debt. The net income arising from consolidation of CLOs is therefore completely attributed to other investors in these CLOs, as the company’s share has been eliminated through consolidation. | |
| (2) | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of certain CLOs. In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. Prior to January 1, 2010, the company was not deemed to be the primary beneficiary of these CLOs. | |
| (3) | Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company. |
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The carrying value of investments held, derivative contracts, and notes issued by consolidated
investment products is also their fair value. The following table presents the fair value hierarchy
levels of investments held, derivative contracts, and notes issued by consolidated investment
products, which are measured at fair value as of December 31, 2010:
| As of December 31, 2010 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant Other | Significant | ||||||||||||||
| Fair Value | Identical Assets | Observable Inputs | Unobservable | |||||||||||||
| $ in millions | Measurements | (Level 1) | (Level 2) | Inputs (Level 3) | ||||||||||||
|
Assets:
|
||||||||||||||||
|
CLO collateral assets:
|
||||||||||||||||
|
Bank loans
|
5,910.6 | — | 5,910.6 | — | ||||||||||||
|
Bonds
|
261.1 | 261.1 | — | — | ||||||||||||
|
Equity securities
|
32.9 | 32.9 | — | — | ||||||||||||
|
CLO-related derivative assets
|
20.2 | — | 20.2 | — | ||||||||||||
|
Private equity fund assets:
|
||||||||||||||||
|
Equity securities
|
114.4 | 17.6 | — | 96.8 | ||||||||||||
|
Investments in other private equity funds
|
586.1 | — | — | 586.1 | ||||||||||||
|
Debt securities issued by the U.S. Treasury
|
11.0 | 11.0 | — | — | ||||||||||||
|
Real estate investments
|
289.9 | — | — | 289.9 | ||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
7,226.2 | 332.6 | 5,930.8 | 972.8 | ||||||||||||
|
|
||||||||||||||||
|
Liabilities:
|
||||||||||||||||
|
CLO notes
|
(5,865.4 | ) | — | — | (5,865.4 | ) | ||||||||||
|
CLO-related derivative liabilities
|
(6.6 | ) | — | (6.6 | ) | — | ||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
(5,872.0 | ) | — | (6.6 | ) | (5,865.4 | ) | |||||||||
|
|
||||||||||||||||
The following table presents the fair value hierarchy levels of the carrying value of
investments held by consolidated investment products, which are measured at fair value as of
December 31, 2009:
| As of December 31, 2009 | ||||||||||||||||
| Quoted Prices in | Significant | |||||||||||||||
| Active Markets | Other | Significant | ||||||||||||||
| Fair Value | for Identical | Observable | Unobservable | |||||||||||||
| $ in millions | Measurements | Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | ||||||||||||
|
Private equity fund assets:
|
||||||||||||||||
|
Equity securities
|
117.2 | 7.0 | — | 110.2 | ||||||||||||
|
Investments in other private equity funds
|
556.9 | — | — | 556.9 | ||||||||||||
|
Debt securities issued by U.S. Treasury
|
10.9 | 10.9 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
685.0 | 17.9 | — | 667.1 | ||||||||||||
|
|
||||||||||||||||
The following table shows a reconciliation of the beginning and ending fair value measurements
for level 3 assets using significant unobservable inputs:
| For the year ended December 31, | ||||||||
| $ in millions | 2010 | 2009 | ||||||
|
Beginning balance
|
667.1 | 761.0 | ||||||
|
Purchases, sales, issuances and settlements, net
|
(81.2 | ) | 13.8 | |||||
|
Acquisition of businesses
|
289.9 | — | ||||||
|
Gains and losses included in the Consolidated
Statements of Income*
|
97.0 | (107.7 | ) | |||||
|
|
||||||||
|
Ending balance
|
972.8 | 667.1 | ||||||
|
|
||||||||
| * | Included in gains and losses of consolidated investment products in the Consolidated Statement of Income for the year ended December 31, 2010 are $46.5 million in net unrealized gains attributable to investments still held at December 31, 2010 by consolidated investment products (year ended December 31, 2009: $110.2 million net unrealized losses attributable to investments still held at December 31, 2009). |
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The following table shows a reconciliation of the beginning and ending fair value measurements
for level 3 liabilities using significant unobservable inputs:
| Year Ended | ||||
| $ in millions | December 31, 2010* | |||
|
Beginning balance
|
(5,234.9 | ) | ||
|
Purchases, sales, issuances and settlements/prepayments, net
|
209.1 | |||
|
Acquisition of businesses
|
(630.2 | ) | ||
|
Gains/(losses) included in the Consolidated Statement of Income
|
(414.3 | ) | ||
|
Foreign exchange
|
204.9 | |||
|
|
||||
|
Ending balance
|
(5,865.4 | ) | ||
|
|
||||
| * | The company adopted guidance now encompassed in ASC Topic 810 on January 1, 2010, resulting in the consolidation of certain CLOs. In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. Prior to January 1, 2010, the company was not deemed to be the primary beneficiary of these CLOs. |
Fair value of consolidated CLOs
The collateral assets held by consolidated CLOs are primarily invested in senior secured bank
loans, bonds, and equity securities. Bank loan investments, which comprise the majority of
consolidated CLO portfolio collateral, are senior secured corporate loans from a variety of
industries, including but not limited to the aerospace and defense, broadcasting, technology,
utilities, household products, healthcare, oil and gas, and finance industries. Bank loan
investments mature at various dates between 2011 and 2021, pay interest at Libor or Euribor plus a
spread of up to 10.25%, and typically range in credit rating categories from BBB down to unrated.
At December 31, 2010, the unpaid principal balance exceeded the fair value of the senior secured
bank loans and bonds by approximately $261 million. Less than 2% of the collateral assets are in
default as of December 31, 2010. CLO investments are valued based on price quotations provided by
an independent third-party pricing source. For bank loan investments, in the event that the
third-party pricing source is unable to price an investment, other relevant factors, data and
information are considered, including: i) information relating to the market for the investment,
including price quotations for and trading in the investment and interest in similar investments
and the market environment and investor attitudes towards the investment and interests in similar
investments; ii) the characteristics of and fundamental analytical data relating to the investment,
including, for senior secured corporate loans, the cost, size, current interest rate, period until
next interest rate reset, maturity and base lending rate, the terms and conditions of the senior
secured corporate loan and any related agreements, and the position of the senior secured corporate
loan in the borrower’s debt structure; iii) the nature, adequacy and value of the senior secured
corporate loan’s collateral, including the CLO’s rights, remedies and interests with respect to the
collateral; iv) for senior secured corporate loans, the creditworthiness of the borrower, based on
an evaluation of its financial condition, financial statements and information about the business,
cash flows, capital structure and future prospects; v) the reputation and financial condition of
the agent and any intermediate participants in the senior secured corporate loan; and vi) general
economic and market conditions affecting the fair value of the senior secured corporate loan.
Notes issued by consolidated CLOs mature at various dates between 2014 and 2024 and have a
weighted average maturity of 9.8 years. The notes are issued in various tranches with different
risk profiles. The interest rates are generally variable rates based on Libor or Euribor plus a
pre-defined spread, which varies from 0.21% for the more senior tranches to 7.50% for the more
subordinated tranches. At December 31, 2010, the outstanding balance on the notes issued by
consolidated CLOs exceeds their fair value by approximately $1.2 billion. The investors in this
debt are not affiliated with the company and have no recourse to the general credit of the company
for this debt
.
Notes issued by CLOs are recorded at fair value using an income approach, driven by
cash flows expected to be received from the portfolio collateral assets. Fair value is determined
using current information, notably market yields and projected cash flows of collateral assets
based on forecasted default and recovery rates that a market participant would use in determining
the current fair value of the notes, taking into account the overall credit quality of the issuers
and the company’s past experience in managing similar securities. Market yields, default rates and
recovery rates used in the company’s estimate of fair value vary based on the nature of the
investments in the underlying collateral pools. In periods of rising market yields, default rates
and lower debt recovery rates, the fair value, and therefore the carrying value, of the notes may
be adversely affected. The current liquidity constraints within the market for CLO products require
the use of certain unobservable inputs for CLO valuation. Once the undiscounted cash flows of the
collateral assets have been determined, the company applies appropriate discount rates that a
market participant would use, to determine the discounted cash flow valuation of the notes.
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The significant inputs used in the valuation of the notes issued by consolidated CLOs include
a cumulative average default rate between 2% and 4% and discount rates derived by utilizing the
applicable forward rate curves and appropriate spreads.
Certain consolidated CLOs with Euro-denominated debt have entered into swap agreements with
various counterparties to hedge economically interest rate and foreign exchange risk related to CLO
collateral assets with non-Euro interest rates and currencies. These swap agreements are not
designated as qualifying as hedging instruments. The fair value of derivative contracts in an asset
position is included in the company’s Consolidated Balance Sheet in other current assets, and the
fair value of derivative contracts in a liability position is included in the company’s
Consolidated Balance Sheet in other current liabilities. These derivative contracts are valued
under an income approach using forecasted interest rates and are classified within Level 2 of the
valuation hierarchy. Changes in fair value of $7.9 million are reflected in gains/(losses) of
consolidated investment products, net on the company’s Consolidated Statement of Income for the
year ended December 31, 2010. At December 31, 2010, there were 105 open swap agreements with a
notional value of $168.4 million. Swap maturities are tied to the maturity of the underlying
collateral assets.
Fair value of consolidated private equity funds
Consolidated private equity funds are generally structured as partnerships. Generally, the
investment strategy of underlying holdings in these partnerships is to seek capital appreciation
through direct investments in public or private companies with compelling business models or ideas
or through investments in partnership investments that also invest in similar private or public
companies. Various strategies may be used. Companies targeted could be distressed organizations,
targets of leveraged buyouts or fledgling companies in need of venture capital. Investees of these
consolidated investment products may not redeem their investment until the partnership liquidates.
Generally, the partnerships have a life that range from seven to twelve years unless dissolved
earlier. The general partner may extend the partnership term up to a specified period of time as
stated in the Partnership Agreement. Some partnerships allow the limited partners to cause an
earlier termination upon the occurrence of certain events as specified in the Partnership
Agreement.
For private equity partnerships, fair value is determined by reviewing each investment for the
sale of additional securities of an issuer to sophisticated investors or for investee financial
conditions and fundamentals. Publicly traded portfolio investments are carried at market value as
determined by their most recent quoted sale, or if there is no recent sale, at their most recent
bid price. For these investments held by consolidated investment products, level 1 classification
indicates that fair values have been determined using unadjusted quoted prices in active markets
for identical assets that the partnership has the ability to access. Level 2 classification may
indicate that fair values have been determined using quoted prices in active markets but give
effect to certain lock-up restrictions surrounding the holding period of the underlying
investments.
The fair value of level 3 investments held by consolidated investment products are derived
from inputs that are unobservable and which reflect the limited partnerships’ own determinations
about the assumptions that market participants would use in pricing the investments, including
assumptions about risk. These inputs are developed based on the partnership’s own data, which is
adjusted if information indicates that market participants would use different assumptions. The
partnerships which invest directly into private equity portfolio companies (direct private equity
funds) take into account various market conditions, subsequent rounds of financing, liquidity,
financial condition, purchase multiples paid in other comparable third-party transactions, the
price of securities of other companies comparable to the portfolio company, and operating results
and other financial data of the portfolio company, as applicable.
The partnerships which invest into other private equity funds (funds of funds) take into
account information received from those underlying funds, including their reported net asset values
and evidence as to their fair value approach, including consistency of their fair value
application. These investments do not trade in active markets and represent illiquid long-term
investments that generally require future capital commitments. While the partnerships’ reported
share of the underlying net asset values of the underlying funds is usually the most significant
input in arriving at fair value and is generally representative of fair value, other information
may also be used to value such investments at a premium or discount to the net asset values as
reported by the funds, including allocations of priority returns within the funds as well as any
specific conditions and events affecting the funds.
Unforeseen events might occur that would subsequently change the fair values of these
investments, but such changes would be inconsequential to the company due to its minimal
investments in these products (and the large offsetting noncontrolling interests resulting from
their consolidation). Any gains or losses resulting from valuation changes in these investments are
substantially offset by resulting changes in gains and losses attributable to noncontrolling
interests in consolidated entities and therefore do not have a material effect on the financial
condition, operating results (including earnings per share), liquidity or capital resources of the
company’s common shareholders.
139
Table of Contents
Fair value of consolidated real estate funds
Consolidated real estate funds are structured as limited liability companies. These limited
liability companies invest in other real estate funds, and these investments are carried at fair
value and presented as investments in consolidated investment products. The net asset value of the
underlying funds, which primarily consists of the real estate investment value and mortgage loans,
is adjusted to fair value. Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Real estate fund assets are classified within the fair value hierarchy based on
the lowest level of input that is significant to the fair value measurement. Due to the illiquid
nature of investments made in real estate companies, all of the real estate fund assets are
classified as Level 3. The real estate funds use one or more valuation techniques (e.g., the market
approach, the income approach, or the cost approach) for which sufficient and reliable data is
available to value investments classified within Level 3. The income approach generally consists of
the net present value of estimated future cash flows, adjusted as appropriate for liquidity,
credit, market and/or other risk factors.
The inputs used by the real estate funds in estimating the value of Level 3 investments
include the original transaction price, recent transactions in the same or similar instruments, as
well as completed or pending third-party transactions in the underlying investment or comparable
investments. Level 3 investments may also be adjusted to reflect illiquidity and/or
non-transferability. Other inputs used include discount rates, cap rates and income and expense
assumptions. The fair value measurement of Level 3 investments does not include transaction costs
and acquisition fees that may have been capitalized as part of the investment’s cost basis. Due to
the lack of observable inputs, the assumptions used may significantly impact the resulting fair
value and therefore the real estate funds’ results of operations.
21. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Invesco Holding Company Limited, the Issuer and a subsidiary of Invesco Ltd. (the Parent),
issued 5.625% $300.0 million senior notes due 2012, 5.375% $350.0 million senior notes due 2013 and
5.375% $200.0 million senior notes due 2014. These senior notes, are fully and unconditionally
guaranteed as to payment of principal, interest and any other amounts due thereon by the Parent,
together with the following wholly owned subsidiaries: Invesco Aim Management Group, Inc., Invesco
Aim Advisers, Inc., Invesco North American Holdings, Inc., and Invesco Institutional (N.A.), Inc.
(the Guarantors). On June 9, 2009, in connection with the credit facility agreement discussed in
Note 9, “Debt,” IVZ, Inc. also became a guarantor of the senior notes. On December 31, 2009,
Invesco Aim Advisors, Inc. merged with Invesco Institutional (N.A.), Inc., which was renamed
Invesco Advisors, Inc. The company’s remaining consolidated subsidiaries do not guarantee this
debt. The guarantees of each of the Guarantors are joint and several. Presented below are Condensed
Consolidating Balance Sheets as of December 31, 2010, and December 31, 2009, Condensed
Consolidating Statements of Income for the year ended December 31, 2010, 2009, and 2008, and
Condensed Consolidating Statements of Cash Flows for the year ended December 31, 2010, 2009, and
2008.
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Table of Contents
Condensed Consolidating Balance Sheets
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
December 31, 2010
|
||||||||||||||||||||||||
|
Assets held for policyholders
|
— | 1,295.4 | — | — | — | 1,295.4 | ||||||||||||||||||
|
Other current assets
|
175.7 | 2,766.7 | 3.0 | 33.7 | — | 2,979.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total current assets
|
175.7 | 4,062.1 | 3.0 | 33.7 | — | 4,274.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Goodwill
|
2,322.9 | 4,216.5 | 440.8 | — | — | 6,980.2 | ||||||||||||||||||
|
Investments in subsidiaries
|
1,333.8 | 5.5 | 4,766.1 | 8,400.6 | (14,506.0 | ) | — | |||||||||||||||||
|
Other non-current assets
|
557.0 | 8,625.0 | 4.5 | 2.9 | — | 9,189.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
4,389.4 | 16,909.1 | 5,214.4 | 8,437.2 | (14,506.0 | ) | 20,444.1 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Policyholder payables
|
— | 1,295.4 | — | — | — | 1,295.4 | ||||||||||||||||||
|
Other current liabilities
|
112.5 | 1,850.4 | 5.5 | 0.7 | — | 1,969.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total current liabilities
|
112.5 | 3,145.8 | 5.5 | 0.7 | — | 3,264.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Intercompany balances
|
1,299.8 | (1,449.6 | ) | (22.1 | ) | 171.9 | — | — | ||||||||||||||||
|
Non-current liabilities
|
597.0 | 6,476.0 | 745.7 | — | — | 7,818.7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities
|
2,009.3 | 8,172.2 | 729.1 | 172.6 | — | 11,083.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity attributable to common shareholders
|
2,380.1 | 7,640.6 | 4,485.3 | 8,264.6 | (14,506.0 | ) | 8,264.6 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Equity attributable to noncontrolling interests
in consolidated entities
|
— | 1,096.3 | — | — | — | 1,096.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity
|
2,380.1 | 8,736.9 | 4,485.3 | 8,264.6 | (14,506.0 | ) | 9,360.9 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and equity
|
4,389.4 | 16,909.1 | 5,214.4 | 8,437.2 | (14,506.0 | ) | 20,444.1 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
December 31, 2009
|
||||||||||||||||||||||||
|
Assets held for policyholders
|
— | 1,283.0 | — | — | — | 1,283.0 | ||||||||||||||||||
|
Other current assets
|
211.5 | 1,591.7 | 3.1 | 31.7 | — | 1,838.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total current assets
|
211.5 | 2,874.7 | 3.1 | 31.7 | — | 3,121.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Goodwill
|
2,302.8 | 3,709.4 | 455.4 | — | — | 6,467.6 | ||||||||||||||||||
|
Investments in subsidiaries
|
714.9 | 5.7 | 4,697.7 | 6,859.3 | (12,277.6 | ) | — | |||||||||||||||||
|
Other non-current assets
|
147.5 | 1,165.2 | 4.9 | 3.4 | — | 1,321.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
3,376.7 | 7,755.0 | 5,161.1 | 6,894.4 | (12,277.6 | ) | 10,909.6 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Policyholder payables
|
— | 1,283.0 | — | — | — | 1,283.0 | ||||||||||||||||||
|
Other current liabilities
|
35.7 | 972.2 | 7.1 | 0.4 | — | 1,015.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total current liabilities
|
35.7 | 2,255.2 | 7.1 | 0.4 | — | 2,298.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Intercompany balances
|
956.8 | (1,660.0 | ) | 722.1 | (18.9 | ) | — | — | ||||||||||||||||
|
Non-current liabilities
|
31.5 | 213.1 | 745.8 | — | — | 990.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities
|
1,024.0 | 808.3 | 1,475.0 | (18.5 | ) | — | 3,288.8 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity attributable to common shareholders
|
2,352.7 | 6,238.8 | 3,686.1 | 6,912.9 | (12,277.6 | ) | 6,912.9 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Equity attributable to noncontrolling interests
in consolidated entities
|
— | 707.9 | — | — | — | 707.9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity
|
2,352.7 | 6,946.7 | 3,686.1 | 6,912.9 | (12,277.6 | ) | 7,620.8 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and equity
|
3,376.7 | 7,755.0 | 5,161.1 | 6,894.4 | (12,277.6 | ) | 10,909.6 | |||||||||||||||||
|
|
||||||||||||||||||||||||
141
Table of Contents
Condensed Consolidating Statements of Income
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
Year ended December 31, 2010
|
||||||||||||||||||||||||
|
Total operating revenues
|
1,031.6 | 2,456.1 | — | — | — | 3,487.7 | ||||||||||||||||||
|
Total operating expenses
|
742.4 | 2,140.2 | — | 15.2 | — | 2,897.8 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income/(loss)
|
289.2 | 315.9 | — | (15.2 | ) | — | 589.9 | |||||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
5.7 | 33.4 | 266.5 | 477.3 | (742.7 | ) | 40.2 | |||||||||||||||||
|
Other income/(expense)
|
(109.8 | ) | 347.8 | (41.9 | ) | 7.6 | — | 203.7 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
185.1 | 697.1 | 224.6 | 469.7 | (742.7 | ) | 833.8 | |||||||||||||||||
|
Income tax provision
|
(66.1 | ) | (129.2 | ) | 2.3 | (4.0 | ) | — | (197.0 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
119.0 | 567.9 | 226.9 | 465.7 | (742.7 | ) | 636.8 | |||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
— | (171.1 | ) | — | — | — | (171.1 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
119.0 | 396.8 | 226.9 | 465.7 | (742.7 | ) | 465.7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||||||||||
|
Total operating revenues
|
549.7 | 2,077.6 | — | — | — | 2,627.3 | ||||||||||||||||||
|
Total operating expenses
|
432.1 | 1,701.3 | (3.3 | ) | 12.9 | — | 2,143.0 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income/(loss)
|
117.6 | 376.3 | 3.3 | (12.9 | ) | — | 484.3 | |||||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
17.1 | 53.3 | 148.3 | 326.3 | (518.0 | ) | 27.0 | |||||||||||||||||
|
Other income/(expense)
|
(52.2 | ) | (82.3 | ) | (28.4 | ) | 9.1 | — | (153.8 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
82.5 | 347.3 | 123.2 | 322.5 | (518.0 | ) | 357.5 | |||||||||||||||||
|
Income tax provision
|
(0.2 | ) | (136.5 | ) | (11.5 | ) | — | — | (148.2 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
82.3 | 210.8 | 111.7 | 322.5 | (518.0 | ) | 209.3 | |||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
— | 113.2 | — | — | — | 113.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
82.3 | 324.0 | 111.7 | 322.5 | (518.0 | ) | 322.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
Year ended December 31, 2008
|
||||||||||||||||||||||||
|
Total operating revenues
|
683.6 | 2,624.0 | — | — | — | 3,307.6 | ||||||||||||||||||
|
Total operating expenses
|
512.5 | 2,020.7 | 9.5 | 17.1 | — | 2,559.8 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income/(loss)
|
171.1 | 603.3 | (9.5 | ) | (17.1 | ) | — | 747.8 | ||||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
73.9 | 135.9 | 256.7 | 505.8 | (925.5 | ) | 46.8 | |||||||||||||||||
|
Other income expense
|
(6.5 | ) | (48.4 | ) | (75.7 | ) | (7.0 | ) | — | (137.6 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
238.5 | 690.8 | 171.5 | 481.7 | (925.5 | ) | 657.0 | |||||||||||||||||
|
Income tax provision
|
(73.2 | ) | (172.3 | ) | 9.5 | — | — | (236.0 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
165.3 | 518.5 | 181.0 | 481.7 | (925.5 | ) | 421.0 | |||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
— | 60.7 | — | — | — | 60.7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
165.3 | 579.2 | 181.0 | 481.7 | (925.5 | ) | 481.7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
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Table of Contents
Condensed Consolidating Statements of Cash Flows
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
Year ended December 31, 2010
|
||||||||||||||||||||||||
|
Net cash provided by/(used in) operating activities
|
84.4 | 219.8 | 58.4 | 161.1 | (144.5 | ) | 379.2 | |||||||||||||||||
|
Net cash (used in)/provided by investing activities
|
(742.4 | ) | 665.2 | (57.5 | ) | 209.7 | (412.8 | ) | (337.8 | ) | ||||||||||||||
|
Net cash (used in)/provided by financing activities
|
570.0 | (822.7 | ) | — | (370.5 | ) | 557.3 | (65.9 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
(Decrease)/increase in cash and cash equivalents
|
(88.0 | ) | 62.3 | 0.9 | 0.3 | — | (24.5 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
Year ended December 31, 2009
|
||||||||||||||||||||||||
|
Net cash provided by/(used in) operating activities
|
162.4 | (182.0 | ) | 1.0 | 218.5 | 162.8 | 362.7 | |||||||||||||||||
|
Net cash (used in)/provided by investing activities
|
(26.1 | ) | (139.3 | ) | 105.0 | (538.0 | ) | 496.0 | (102.4 | ) | ||||||||||||||
|
Net cash (used in)/provided by financing activities
|
(458.3 | ) | 803.7 | (107.5 | ) | 320.2 | (658.8 | ) | (100.7 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
(Decrease)/increase in cash and cash equivalents
|
(322.0 | ) | 482.4 | (1.5 | ) | 0.7 | — | 159.6 | ||||||||||||||||
|
|
||||||||||||||||||||||||
| $ in millions | Guarantors |
Non-
Guarantors |
Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
Year ended December 31, 2008
|
||||||||||||||||||||||||
|
Net cash provided by operating activities
|
130.3 | 409.8 | 77.1 | 524.0 | (645.5 | ) | 495.7 | |||||||||||||||||
|
Net cash (used in)/provided by investing activities
|
(130.5 | ) | 106.4 | 102.8 | (44.5 | ) | (102.8 | ) | (68.6 | ) | ||||||||||||||
|
Net cash used in financing activities
|
— | (747.4 | ) | (182.0 | ) | (485.3 | ) | 748.3 | (666.4 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Decrease in cash and cash equivalents
|
(0.2 | ) | (231.2 | ) | (2.1 | ) | (5.8 | ) | — | (239.3 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
22. SUBSEQUENT EVENTS
On January 27, 2011, the company declared a fourth quarter 2010 dividend of $0.11 per share,
payable on March 9, 2011, to shareholders of record at the close of business on February 23, 2011.
Subsequent to year end, the Company received additional rulings from the Appeals Division of
the CRA covering the assessments disclosed in Note 19, “Commitments and Contingencies” for the 2003
to 2006 taxation years. These reassessments were also reversed. At February 14, 2011, the remaining
outstanding assessments totaled $5.6 million, including interest and penalties. Management
continues to believe that the CRA’s assessments are unlikely to stand; accordingly, no provision
has been recorded.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
N/A
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our chief executive officer and chief financial officer,
has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010.
There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our
chief executive officer and chief financial officer concluded that the company’s disclosure
controls and procedures were effective to provide reasonable assurance that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the applicable rules and
forms, and that it is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions regarding required
disclosure.
143
Table of Contents
Management’s report on internal control over financial reporting is located in Item 8,
“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Our independent
auditors, Ernst & Young LLP, have issued an audit report on the effectiveness of our internal
control over financial reporting. This report appears in Item 8, “Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K.
Item 9B.
Other Information
None.
144
Table of Contents
Item 10.
Directors, Executive Officers and Corporate Governance
Invesco has filed the certification of its Chief Financial Officer with the New York Stock
Exchange (“NYSE”) as required pursuant to Section 303A.12 of the NYSE Listed Company Manual. In
addition, Invesco has filed the Sarbanes-Oxley Act Section 302 certifications of its Chief
Executive Officer and Chief Financial Officer with the Securities and Exchange Commission, which
certifications are attached hereto as Exhibit 31.1 and Exhibit 31.2, respectively.
The information required by this Item will be included in the definitive Proxy Statement for
the company’s annual meeting of shareholders, which will be filed with the SEC no later than 120
days after the close of the fiscal year ended December 31, 2010, and is incorporated by reference
in this Report.
The following is a list of individuals serving as executive officers of the company as of the
date hereof. All company executive officers are elected annually and serve at the discretion of the
company’s Board of Directors or Chief Executive Officer.
Note: Country listed denotes citizenship.
Martin L. Flanagan
, CFA, CPA (50) President and Chief Executive Officer of Invesco Ltd.
(U.S.A.)
Martin L. Flanagan is president and chief executive officer of Invesco, a position he has held
since August 2005. He is also a member of the Board of Directors of Invesco and a trustee of the
Invesco Funds. Mr. Flanagan joined Invesco from Franklin Resources, Inc., where he was president
and co-chief executive officer from January 2004 to July 2005. Previously he had been Franklin’s
co-president from May 2003 to January 2004, chief operating officer and chief financial officer
from November 1999 to May 2003, and senior vice president and chief financial officer from 1993
until November 1999. Mr. Flanagan served as director, executive vice president and chief operating
officer of Templeton, Galbraith & Hansberger, Ltd. before its acquisition by Franklin in 1992.
Before joining Templeton in 1983, he worked with Arthur Andersen & Co. Mr. Flanagan received a B.A.
and BBA from Southern Methodist University (SMU). He is a CFA charter holder and a certified public
accountant. He is vice chairman of the Investment Company Institute. He also serves as a member of
the executive board at the SMU Cox School of Business and a member of the Board of Councilors of
the Carter Center in Atlanta.
G. Mark Armour
(57) Senior Managing Director and Head of Institutional (Australia)
Mark Armour has served as senior managing director and head of Invesco’s Institutional
business since January 2007. Previously, Mr. Armour served as head of sales and service for the
institutional business. He was chief executive officer of Invesco Australia from September 2002 to
July 2006. Prior to joining Invesco, Mr. Armour held significant leadership roles in the funds
management business in both Australia and Hong Kong. He previously served as chief investment
officer for ANZ Investments and spent almost 20 years with the National Mutual/AXA Australia Group,
where he was chief executive, Funds Management, from 1998 to 2000. Mr. Armour received a bachelor
of economics from La Trobe University in Melbourne, Australia.
Kevin M. Carome
(54) Senior Managing Director and General Counsel (U.S.A.)
Kevin Carome has served as general counsel of our company since January 2006. Previously, he
was senior vice president and general counsel of Invesco’s U.S. Retail Business (f/k/a Invesco Aim)
from 2003 to 2005. Prior to joining Invesco, Mr. Carome worked with Liberty Financial Companies,
Inc. (LFC) in Boston where he was senior vice president and general counsel from August 2000
through December 2001. He joined LFC in 1993 as associate general counsel and, from 1998 through
2000, was general counsel of certain of its investment management subsidiaries. Mr. Carome began
his career as an associate at Ropes & Gray in Boston. He received a B.S. in political science and a
J.D. from Boston College.
Andrew T. S. Lo
(49) Senior Managing Director and Head of Invesco Asia Pacific (China)
Andrew Lo has served as head of Invesco Asia Pacific since February 2001. He joined our
company as managing director for Invesco Asia in 1994. Mr. Lo began his career as a credit analyst
at Chase Manhattan Bank in 1984. He became vice president of the investment management group at
Citicorp in 1988 and was managing director of Capital House Asia from 1990 to 1994. Mr. Lo was
chairman of the Hong Kong Investment Funds Association from 1996 to 1997 and a member of the
Council to the Stock Exchange of Hong Kong and the Advisory Committee to the Securities and Futures
Commission in Hong Kong from 1997 to 2001. He received a B.S. and an MBA from Babson College in the
U.S.
145
Table of Contents
Colin D. Meadows
(40) Senior Managing Director and Chief Administrative Officer (U.S.A.)
Colin Meadows has served as chief administrative officer of Invesco since May 2006 with
responsibility for IT, operations, human resources, corporate communications and corporate
development/M&A. Mr. Meadows came to Invesco from GE Consumer Finance where he was senior vice
president of business development and mergers and acquisitions. Prior to that role, he served as
senior vice president of strategic planning and technology at Wells Fargo Bank. From 1996-2003, Mr.
Meadows was an associate principal with McKinsey & Company, focusing on the financial services and
venture capital industries, with an emphasis in the banking and asset management sectors. Mr.
Meadows received a B.A. in economics and English literature from Andrews University and a J.D. from
Harvard Law School.
James I. Robertson
(53) Senior Managing Director and Head of U.K. and Continental Europe;
Director (U.K.)
James Robertson has served as a member of the Board of Directors of our company since April
2004. He is currently head of Invesco Perpetual with additional responsibility for Continental
Europe. He was head of Operations and Technology from 2006 to September 2008. He was chief
financial officer from April 2004 to October 2005. Mr. Robertson joined our company as director of
finance and corporate development for Invesco’s Global division in 1993 and repeated this role for
the Pacific division in 1995. Mr. Robertson became managing director of global strategic planning
in 1996 and served as chief executive officer of AMVESCAP Group Services, Inc. from 2001 to 2005.
He holds an M.A. from Cambridge University and is a Chartered Accountant.
Loren M. Starr
(49) Senior Managing Director and Chief Financial Officer (U.S.A.)
Loren Starr has served as senior managing director and chief financial officer of our company
since October 2005. His current responsibilities include finance, accounting, investor relations
and corporate services. Previously, he served from 2001 to 2005 as senior vice president and chief
financial officer of Janus Capital Group Inc., after working as head of corporate finance from 1998
to 2001 at Putnam Investments. Prior to these positions, Mr. Starr held senior corporate finance
roles with Lehman Brothers and Morgan Stanley & Co. He received a B.A. in chemistry and B.S. in
industrial engineering, from Columbia University, as well as an MBA, also from Columbia, and M.S.
in operations research from Carnegie Mellon University. Mr. Starr is a certified treasury
professional. He is a past chairman of the Association for Financial Professionals.
Philip A. Taylor
(56) Senior Managing Director and Head of North American Retail (Canada)
Philip Taylor became head of Invesco’s North American Retail business in April 2006. He had
previously served as head of Invesco Trimark since January 2002. He joined Invesco Trimark in 1999
as senior vice president of operations and client services and later became executive vice
president and chief operating officer. Mr. Taylor was president of Canadian retail broker Investors
Group Securities from 1994 to 1997 and managing partner of Meridian Securities, an execution and
clearing broker, from 1989 to 1994. He held various management positions with Royal Trust, now part
of Royal Bank of Canada, from 1982 to 1989. Mr. Taylor began his career in consumer brand
management in the U.S. and Canada with Richardson-Vicks, now part of Procter & Gamble. He received
a Bachelor of Commerce degree from Carleton University and an MBA from the Schulich School of
Business at York University. Mr. Taylor is a member of the Dean’s Advisory council of the Schulich
School of Business. He has been chair of the Toronto Symphony Orchestra and is currently on the
board of the Royal Conservatory of Music.
Item 11.
Executive Compensation
The information required by this Item will be included in the definitive Proxy Statement for
the company’s annual meeting of shareholders, which will be filed with the SEC no later than 120
days after the close of the fiscal year ended December 31, 2010, and is incorporated by reference
in this Report.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item will be included in the definitive Proxy Statement for
the company’s annual meeting of shareholders, which will be filed with the SEC no later than 120
days after the close of the fiscal year ended December 31, 2010, and is incorporated by reference
in this Report.
146
Table of Contents
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the definitive Proxy Statement for
the company’s annual meeting of shareholders, which will be filed with the SEC no later than 120
days after the close of the fiscal year ended December 31, 2010, and is incorporated by reference
in this Report.
Item 14.
Principal Accountant Fees and Services
The information required by this Item will be included in the definitive Proxy Statement for
the company’s annual meeting of shareholders, which will be filed with the SEC no later than 120
days after the close of the fiscal year ended December 31, 2010, and is incorporated by reference
in this Report.
147
Table of Contents
Item 15.
Exhibits and Financial Statement Schedule
(a)(1) The financial statements filed as part of this Report are listed in Part II, Item 8,
“Financial Statements and Supplementary Data.”
(a)(2) No financial statement schedules are required to be filed as part of this Report
because all such schedules have been omitted. Such omission has been made on the basis that
information is provided in the financial statements or related footnotes in Part II, Item 8,
“Financial Statements and Supplementary Data,” or is not required to be filed as the information is
not applicable.
(a)(3) The exhibits listed on the Exhibit Index are included with this Report.
Exhibit Index
(Note: References herein to “AMVESCAP,” “AMVESCAP PLC” or “INVESCO PLC” are to the predecessor registrant to Invesco Ltd.)
| 3.1 | Memorandum of Association of Invesco Ltd., incorporating amendments up to and including December 4, 2007, incorporated by reference to exhibit 3.1 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007 | ||
| 3.2 | Amended and Restated Bye-Laws of Invesco Ltd., incorporating amendments up to and including December 4, 2007, incorporated by reference to exhibit 3.2 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007 | ||
| 4.1 | Specimen Certificate for Common Shares of Invesco Ltd., incorporated by reference to exhibit 4.1 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007 | ||
| 4.2 | Indenture, dated as of February 27, 2003, for AMVESCAP’s 5.375% Senior Notes Due 2013, among AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., INVESCO North American Holdings, Inc. and SunTrust Bank, incorporated by reference to exhibit 2.12 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003 | ||
| 4.3 | Indenture, dated as of December 14, 2004, for AMVESCAP’s 5.375% Senior Notes due 2014, among AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., INVESCO North American Holdings, Inc. and SunTrust Bank, incorporated by reference to exhibit 2.11 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Securities and Exchange Commission on June 29, 2005 | ||
| 4.4 | Indenture, dated as of April 11, 2007, for AMVESCAP’s 5.625% Senior Notes Due 2012, among AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., INVESCO North American Holdings, Inc. and The Bank of New York Trust Company, N.A., incorporated by reference to exhibit 99.1 to AMVESCAP’s Report on Form 6-K, filed with the Securities and Exchange Commission on April 18, 2007 | ||
| 4.5 | Supplemental Indenture No. 2, dated as of November 27, 2007, among INVESCO PLC, a public limited company organized under the laws of England and Wales, and formerly known as AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., and INVESCO North American Holdings, Inc., Invesco Ltd., a Bermuda corporation, and The Bank of New York Trust Company, N.A., incorporated by reference to exhibit 4.2 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 30, 2007 |
148
Table of Contents
| 4.6 | Supplemental Indenture, dated as of November 27, 2007, among INVESCO PLC, a public limited company organized under the laws of England and Wales, and formerly known as AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., and INVESCO North American Holdings, Inc., Invesco Ltd., a Bermuda corporation, and U.S. Bank National Association, as Successor Trustee to SunTrust Bank, incorporated by reference to exhibit 4.3 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 30, 2007 | ||
| 4.7 | Supplemental Indenture, dated as of November 27, 2007, among INVESCO PLC, a public limited company organized under the laws of England and Wales, and formerly known as AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., and INVESCO North American Holdings, Inc., Invesco Ltd., a Bermuda corporation, and U.S. Bank National Association, as Successor Trustee to SunTrust Bank, incorporated by reference to exhibit 4.4 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 30, 2007 | ||
| 4.8 | Supplemental Indenture No. 3, dated as of June 9, 2009, for the 5.625% Senior Notes due 2012, among Invesco Holding Company Limited (f/k/a AMVESCAP PLC), IVZ, Inc., and The Bank of New York Mellon Trust Company, N.A., incorporated by reference to exhibit 4.8 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on February 26, 2010 | ||
| 4.9 | Supplemental Indenture No. 2, dated as of June 9, 2009, for the 5.375% Senior Notes due 2013, among Invesco Holding Company Limited (f/k/a AMVESCAP PLC), IVZ, Inc., and U.S. Bank National Association, as successor trustee to SunTrust Bank., incorporated by reference to exhibit 4.9 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on February 26, 2010 | ||
| 4.10 | Supplemental Indenture No. 2, dated as of June 9, 2009, for the 5.375% Senior Notes due 2014, among Invesco Holding Company Limited (f/k/a AMVESCAP PLC), IVZ, Inc., and U.S. Bank National Association, as successor trustee to SunTrust Bank, incorporated by reference to exhibit 4.10 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on February 26, 2010 | ||
| 4.11 | Guarantee, dated February 27, 2003, with respect to AMVESCAP’s 5.375% Senior Notes Due 2013, made by A I M Management Group Inc., A I M Advisors, Inc., INVESCO Institutional (N.A.), Inc. and INVESCO North American Holdings, Inc., incorporated by reference to exhibit 4.20 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003 | ||
| 10.1 | Credit Agreement, dated as of June 9, 2009, among IVZ, Inc., Invesco Ltd., the banks, financial institutions and other institutional lenders from time to time a party thereto and Bank of America, N.A., as administrative agent, incorporated by reference to exhibit 10.1 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on February 26, 2010 | ||
| 10.2 | Credit Agreement, dated as of May 24, 2010, among Invesco Holding Company Limited, IVZ, Inc., Invesco Ltd., the banks, financial institutions and other institutional lenders from time to time a party thereto and Bank of America, N.A., as administrative agent, incorporated by reference to exhibit 10.1 to Invesco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed with the Securities and Exchange Commission on August 2, 2010 | ||
| 10.3 | Third Amended and Restated Purchase and Sale Agreement, dated as of August 18, 2003, among Citibank, N.A., Citicorp North America, Inc., A I M Management Group Inc., A I M Distributors, Inc., A I M Advisors, Inc. and Invesco Funds Group, Inc., incorporated by reference to exhibit 10.2 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 | ||
| 10.4 | Amendment No. 4 to Facility Documents, dated as of August 24, 2001 among A I M Management Group Inc., A I M Advisors, Inc., A I M Distributors, Inc., Citibank, N.A., Bankers Trust Company and Citicorp North America, Inc., incorporated by reference to exhibit 4.4 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2001, filed with the Securities and Exchange Commission on April 4, 2002 | ||
| 10.5 | Amendment No. 5 to Facility Documents, dated as of August 18, 2003, among Invesco Funds Group, Inc., A I M Management Group Inc., A I M Advisors, Inc., A I M Distributors, Inc., Citibank, N.A., Citicorp North America, Inc. and Deutsche Bank Trust Company Americas, incorporated by reference to exhibit 10.4 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 |
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| 10.6 | Global Stock Plan, as amended and restated as of as of April 1, 2009, incorporated by reference to exhibit 10.1 to Invesco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the Securities and Exchange Commission on May 8, 2009 | ||
| 10.7 | Invesco Ltd. 2008 Global Equity Incentive Plan, as amended and restated effective January 1, 2009, incorporated by reference to exhibit 10.6 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009 | ||
| 10.8 | Amendment No. 1 to the Invesco Ltd. 2008 Global Equity Incentive Plan, as amended and restated effective February 1, 2009, incorporated by reference to exhibit 10.1 to Invesco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed with the Securities and Exchange Commission on November 2, 2010 | ||
| 10.9 | Form of Restricted Stock Award Agreement — Time Vesting under the Invesco Ltd. 2008 Global Equity Incentive Plan, incorporated by reference to exhibit 10.2 to Invesco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed with the Securities and Exchange Commission on November 7, 2008 | ||
| 10.10 | Form of Restricted Stock Unit Award Agreement — Time Vesting under the Invesco Ltd. 2008 Global Equity Incentive Plan, incorporated by reference to exhibit 10.3 to Invesco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed with the Securities and Exchange Commission on November 7, 2008 | ||
| 10.11 | Form of Award Agreement for Non-Executive Directors under the Invesco Ltd. 2008 Global Equity Incentive Plan | ||
| 10.12 | Invesco Ltd. 2010 Global Equity Incentive Plan (ST), effective May 18, 2010 | ||
| 10.13 | Amendment No. 1, effective July 30, 2010, to the Invesco Ltd. 2010 Global Equity Incentive Plan (ST), incorporated by reference to exhibit 10.2 to Invesco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed with the Securities and Exchange Commission on November 2, 2010 | ||
| 10.14 | Invesco Ltd. Executive Incentive Bonus Plan, as amended and restated effective January 1, 2009, incorporated by reference to exhibit 10.7 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009 | ||
| 10.15 | Invesco Ltd. Amended and Restated 2005 Non-Qualified Deferred Compensation Plan, effective as of January 1, 2009, incorporated by reference to exhibit 10.8 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009 | ||
| 10.16 | No. 3 Executive Share Option Scheme, as revised as of August 2006, incorporated by reference to exhibit 10.6 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 | ||
| 10.17 | 2000 Share Option Plan, as revised as of January 26, 2005, incorporated by reference to exhibit 10.7 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 | ||
| 10.18 | Invesco ESOP, as amended and restated, generally effective as of February 1, 2005, incorporated by reference to exhibit 10.8 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 | ||
| 10.19 | 2003 Share Option Plan (Canada), dated June 2003, incorporated by reference to exhibit 10.10 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 | ||
| 10.20 | Deferred Fees Share Plan, as amended and restated effective December 10, 2008, incorporated by reference to exhibit 10.13 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 27, 2009 | ||
| 10.21 | Rules of the AMVESCAP International Sharesave Plan, dated May 8, 1997, incorporated by reference to exhibit 10.12 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 | ||
| 10.22 | Global Partner Agreement, dated November 10, 2005, between AMVESCAP PLC and Loren M. Starr, incorporated by reference to exhibit 10.14 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 |
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| 10.23 | Global Partner Agreement, dated January 1, 2001, between AIM Funds Management Inc. and Philip A. Taylor, incorporated by reference to exhibit 10.15 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 | ||
| 10.24 | Global Partners Employment Contract, dated April 1, 2000, between INVESCO Pacific Holdings Limited and Andrew Lo, incorporated by reference to exhibit 10.17 to Invesco’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 29, 2008 | ||
| 10.25 | Global Partner Agreement, dated January 3, 2001, between James I. Robertson and AMVESCAP Group Services, Inc., incorporated by reference to exhibit 4.16 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Securities and Exchange Commission on June 29, 2005 | ||
| 10.26 | Description of Material Employment Terms for G. Mark Armour, incorporated by reference to exhibit 10.2 to Invesco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, filed with the Securities and Exchange Commission on August 2, 2010 | ||
| 10.27 | Transaction Agreement, dated as of October 19, 2009, between Morgan Stanley and Invesco Ltd., incorporated by reference to exhibit 10.1 to Invesco’s Quarterly Report on Form 10-Q for the quarter ended September 20, 2009, filed with the Securities and Exchange Commission on October 30, 2009 | ||
| 10.28 | Amendment, dated as of May 28, 2010, to Transaction Agreement, dated as of October 19, 2009, between Morgan Stanley and Invesco Ltd., incorporated by reference to exhibit 10.2 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 2, 2010 | ||
| 21 | List of Subsidiaries | ||
| 23.1 | Consent of Ernst & Young LLP, dated February 25, 2011 | ||
| 31.1 | Certification of Martin L. Flanagan pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31.2 | Certification of Loren M. Starr pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32.1 | Certification of Martin L. Flanagan pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 32.2 | Certification of Loren M. Starr pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| Invesco Ltd. | ||||||
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By: |
/s/ MARTIN L. FLANAGAN
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Name: | Martin L. Flanagan | ||||
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Title: | President and Chief Executive Officer | ||||
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Date: | February 25, 2011 | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated and on
the dates indicated.
| Name | Title | Date | ||
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/s/ MARTIN L. FLANAGAN
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Chief Executive Officer (Principal Executive Officer) and President; Director | February 25, 2011 | ||
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/s/ LOREN M. STARR
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Senior Managing Director and Chief Financial Officer (Principal Financial Officer) | February 25, 2011 | ||
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/s/ DAVID A. HARTLEY
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Group Controller and Chief Accounting Officer (Principal Accounting Officer) | February 25, 2011 | ||
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/s/ REX D. ADAMS
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Chairman and Director | February 25, 2011 | ||
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/s/ SIR JOHN BANHAM
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Director | February 25, 2011 | ||
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/s/ JOSEPH R. CANION
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Director | February 25, 2011 | ||
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/s/ BEN F. JOHNSON, III
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Director | February 25, 2011 | ||
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/s/ DENIS KESSLER
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Director | February 25, 2011 | ||
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/s/ EDWARD P. LAWRENCE
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Director | February 25, 2011 | ||
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/s/ J. THOMAS PRESBY
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Director | February 25, 2011 | ||
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/s/ JAMES I. ROBERTSON
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Director | February 25, 2011 | ||
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/s/ PHOEBE A. WOOD
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Director | February 25, 2011 |
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Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedule