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-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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, N.E., 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 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 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
(Do not check if a smaller reporting company) |
Smaller reporting company o |
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
As of September 30, 2010, the most recent practicable date, 462,055,518 of the company’s
common shares and common share equivalents (on an as-converted basis) par value $0.20 per share,
were outstanding. Common share equivalents include 19,212 participating preferred shares, each of
which is convertible into 1,000 common shares upon transfer of the shares to an unrelated third
party.
TABLE OF CONTENTS
We include cross references to captions elsewhere in this Quarterly Report on Form 10-Q, 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 — Financial Information
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| EX-10.1 | ||||||||
| EX-10.2 | ||||||||
| 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 | ||||||||
2
Table of Contents
Item 1.
Financial Statements
Invesco Ltd
.
(Unaudited)
| As of | ||||||||
| $ in millions, except share data | September 30, 2010 | December 31, 2009 | ||||||
|
ASSETS
|
||||||||
|
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
664.1 | 762.0 | ||||||
|
Cash and cash equivalents of consolidated investment products
|
317.5 | 28.0 | ||||||
|
Unsettled fund receivables
|
1,118.1 | 383.1 | ||||||
|
Accounts receivable
|
414.1 | 289.3 | ||||||
|
Accounts receivable of consolidated investment products
|
69.0 | — | ||||||
|
Investments
|
377.1 | 182.4 | ||||||
|
Prepaid assets
|
70.2 | 57.6 | ||||||
|
Other current assets
|
105.1 | 77.9 | ||||||
|
Deferred tax asset, net
|
76.3 | 57.7 | ||||||
|
Assets held for policyholders
|
1,249.7 | 1,283.0 | ||||||
|
|
||||||||
|
Total current assets
|
4,461.2 | 3,121.0 | ||||||
|
Non-current assets:
|
||||||||
|
Investments
|
145.3 | 157.4 | ||||||
|
Investments of consolidated investment products
|
6,809.9 | 685.0 | ||||||
|
Prepaid assets
|
0.6 | 16.2 | ||||||
|
Other non-current assets
|
17.9 | 13.0 | ||||||
|
Deferred sales commissions
|
41.6 | 23.8 | ||||||
|
Deferred tax asset, net
|
— | 65.8 | ||||||
|
Property and equipment, net
|
244.9 | 220.7 | ||||||
|
Intangible assets, net
|
1,344.2 | 139.1 | ||||||
|
Goodwill
|
6,876.1 | 6,467.6 | ||||||
|
|
||||||||
|
Total non-current assets
|
15,480.5 | 7,788.6 | ||||||
|
|
||||||||
|
Total assets
|
19,941.7 | 10,909.6 | ||||||
|
|
||||||||
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|
||||||||
|
LIABILITIES AND EQUITY
|
||||||||
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|
||||||||
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Current liabilities:
|
||||||||
|
Unsettled fund payables
|
1,137.7 | 367.9 | ||||||
|
Income taxes payable
|
74.5 | 82.8 | ||||||
|
Other current liabilities
|
791.0 | 559.9 | ||||||
|
Other current liabilities of consolidated investment products
|
298.3 | 4.8 | ||||||
|
Policyholder payables
|
1,249.7 | 1,283.0 | ||||||
|
|
||||||||
|
Total current liabilities
|
3,551.2 | 2,298.4 | ||||||
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Non-current liabilities:
|
||||||||
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Long-term debt
|
1,394.2 | 745.7 | ||||||
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Long-term debt of consolidated investment products
|
5,643.8 | — | ||||||
|
Deferred tax liabilities, net
|
275.9 | — | ||||||
|
Other non-current liabilities
|
230.4 | 244.7 | ||||||
|
|
||||||||
|
Total non-current liabilities
|
7,544.3 | 990.4 | ||||||
|
|
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Total liabilities
|
11,095.5 | 3,288.8 | ||||||
|
|
||||||||
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Commitments and contingencies (See Note 15)
|
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|
Equity:
|
||||||||
|
Equity attributable to common shareholders:
|
||||||||
|
Common shares ($0.20 par value;
1,050.0 million authorized; 471.2 million shares issued as of September 30, 2010
and December 31, 2009)
|
94.2 | 91.9 | ||||||
|
Participating preferred shares ($0.20 par value; 20,000 authorized as of
September 30, 2010; 19,212 shares issued as of September 30, 2010)
|
— | — | ||||||
|
Additional paid-in-capital
|
6,272.0 | 5,688.4 | ||||||
|
Treasury shares
|
(961.0 | ) | (892.4 | ) | ||||
|
Retained earnings
|
1,780.8 | 1,631.4 | ||||||
|
Retained earnings appropriated for investors in consolidated investment products
|
546.9 | — | ||||||
|
Accumulated other comprehensive income/(loss), net of tax
|
417.2 | 393.6 | ||||||
|
|
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Total equity attributable to common shareholders
|
8,150.1 | 6,912.9 | ||||||
|
Equity attributable to noncontrolling interests in consolidated entities
|
696.1 | 707.9 | ||||||
|
|
||||||||
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Total equity
|
8,846.2 | 7,620.8 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
19,941.7 | 10,909.6 | ||||||
|
|
||||||||
See accompanying notes.
3
Table of Contents
Invesco Ltd
.
(Unaudited)
| Three months Ended | Nine months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| $ in millions, except per share data | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Operating revenues:
|
||||||||||||||||
|
Investment management fees
|
725.8 | 570.3 | 1,947.2 | 1,508.4 | ||||||||||||
|
Service and distribution fees
|
191.6 | 111.8 | 443.5 | 301.2 | ||||||||||||
|
Performance fees
|
2.5 | 4.3 | 7.4 | 23.2 | ||||||||||||
|
Other
|
33.2 | 19.4 | 61.1 | 46.7 | ||||||||||||
|
|
||||||||||||||||
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Total operating revenues
|
953.1 | 705.8 | 2,459.2 | 1,879.5 | ||||||||||||
|
|
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|
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Operating expenses:
|
||||||||||||||||
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Employee compensation
|
304.1 | 238.9 | 802.2 | 703.7 | ||||||||||||
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Third-party distribution, service and advisory
|
266.5 | 183.5 | 682.8 | 498.0 | ||||||||||||
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Marketing
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44.8 | 27.7 | 108.3 | 78.5 | ||||||||||||
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Property, office and technology
|
63.5 | 63.0 | 172.8 | 157.5 | ||||||||||||
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General and administrative
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64.5 | 40.1 | 178.6 | 117.0 | ||||||||||||
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Transaction and integration
|
26.8 | 1.0 | 123.3 | 1.0 | ||||||||||||
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Total operating expenses
|
770.2 | 554.2 | 2,068.0 | 1,555.7 | ||||||||||||
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Operating income
|
182.9 | 151.6 | 391.2 | 323.8 | ||||||||||||
|
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|
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Other income/(expense):
|
||||||||||||||||
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Equity in earnings of unconsolidated affiliates
|
10.7 | 7.9 | 26.9 | 17.9 | ||||||||||||
|
Interest and dividend income
|
3.4 | 1.7 | 6.8 | 7.7 | ||||||||||||
|
Interest income of consolidated investment products
|
70.3 | — | 175.9 | — | ||||||||||||
|
Gains/(losses) of consolidated investment products, net
|
(148.3 | ) | 2.1 | 142.0 | (132.8 | ) | ||||||||||
|
Interest expense
|
(16.1 | ) | (16.9 | ) | (42.6 | ) | (49.3 | ) | ||||||||
|
Interest expense of consolidated investment products
|
(35.6 | ) | — | (82.0 | ) | — | ||||||||||
|
Other gains and losses, net
|
14.6 | 2.0 | 3.2 | 7.8 | ||||||||||||
|
|
||||||||||||||||
|
Income before income taxes, including gains and losses
attributable to noncontrolling interests
|
81.9 | 148.4 | 621.4 | 175.1 | ||||||||||||
|
Income tax provision
|
(54.5 | ) | (43.7 | ) | (141.3 | ) | (100.0 | ) | ||||||||
|
|
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Net income/(loss), including gains and losses
attributable to noncontrolling interests
|
27.4 | 104.7 | 480.1 | 75.1 | ||||||||||||
|
(Gains)/losses attributable to noncontrolling interests
in consolidated entities, net
|
127.3 | 0.5 | (189.6 | ) | 136.5 | |||||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
154.7 | 105.2 | 290.5 | 211.6 | ||||||||||||
|
|
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|
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Earnings per share:
|
||||||||||||||||
|
— basic
|
$ | 0.32 | $ | 0.24 | $ | 0.64 | $ | 0.51 | ||||||||
|
— diluted
|
$ | 0.32 | $ | 0.24 | $ | 0.63 | $ | 0.51 | ||||||||
|
Dividends declared per share
|
$ | 0.1100 | $ | 0.1025 | $ | 0.3225 | $ | 0.3050 | ||||||||
See accompanying notes.
4
Table of Contents
Invesco Ltd
.
(Unaudited)
| Nine months ended Sept 30, | ||||||||
| $ in millions | 2010 | 2009 | ||||||
|
Operating activities:
|
||||||||
|
Net income, including gains attributable to noncontrolling interests of $189.6
million during the nine months ended September 30, 2010 (losses of $136.5 million
during the nine months ended September 30, 2009)
|
480.1 | 75.1 | ||||||
|
Adjustments to reconcile net income to net cash used in operating activities:
|
||||||||
|
Amortization and depreciation
|
65.4 | 52.7 | ||||||
|
Share-based compensation expense
|
87.0 | 68.1 | ||||||
|
Gain on disposal of property equipment software, net
|
— | (1.2 | ) | |||||
|
Purchase of trading investments
|
(4,073.9 | ) | (41.9 | ) | ||||
|
Proceeds from sale of trading investments
|
3,976.1 | 13.1 | ||||||
|
Other gains and losses, net
|
(3.2 | ) | (7.8 | ) | ||||
|
(Gains)/losses of consolidated investment products, net
|
(142.0 | ) | 132.8 | |||||
|
Tax benefit from share-based compensation
|
53.2 | 39.0 | ||||||
|
Excess tax benefits from share-based compensation
|
(14.2 | ) | (0.1 | ) | ||||
|
Equity in earnings of unconsolidated affiliates
|
(26.9 | ) | (17.9 | ) | ||||
|
Dividends from unconsolidated affiliates
|
22.9 | 27.4 | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
(Increase)/decrease in cash held by consolidated investment products
|
(95.2 | ) | 34.7 | |||||
|
(Increase)/decrease in receivables
|
(796.0 | ) | (481.8 | ) | ||||
|
Increase/(decrease) in payables
|
842.2 | 269.2 | ||||||
|
|
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Net cash provided by operating activities
|
375.5 | 161.4 | ||||||
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Investing activities:
|
||||||||
|
Purchase of property and equipment
|
(57.4 | ) | (23.3 | ) | ||||
|
Disposal of property and equipment
|
— | 6.4 | ||||||
|
Purchase of available-for-sale investments
|
(31.4 | ) | (11.6 | ) | ||||
|
Proceeds from sale of available-for-sale investments
|
33.1 | 16.6 | ||||||
|
Purchase of investments by consolidated investment products
|
(1,792.2 | ) | (37.7 | ) | ||||
|
Proceeds from sale of investments by consolidated investment products
|
1,867.5 | 28.0 | ||||||
|
Returns of capital in investments of consolidated investment products
|
61.1 | 11.3 | ||||||
|
Purchase of other investments
|
(50.8 | ) | (59.0 | ) | ||||
|
Proceeds from sale of other investments
|
28.2 | 20.4 | ||||||
|
Returns of capital and distributions from equity method investments
|
22.6 | 9.1 | ||||||
|
Acquisition of businesses (cash paid $787.0 million, less cash acquired $61.9 million)
|
(725.1 | ) | — | |||||
|
|
||||||||
|
Net cash used in investing activities
|
(644.4 | ) | (39.8 | ) | ||||
|
|
||||||||
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|
||||||||
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Financing activities:
|
||||||||
|
Issuance of new shares
|
— | 441.8 | ||||||
|
Proceeds from exercises of share options
|
10.8 | 40.5 | ||||||
|
Purchases of treasury shares
|
(127.7 | ) | — | |||||
|
Dividends paid
|
(146.3 | ) | (124.2 | ) | ||||
|
Excess tax benefits from share-based compensation
|
14.2 | 0.1 | ||||||
|
Capital invested into consolidated investment products
|
8.5 | 5.5 | ||||||
|
Capital distributed by consolidated investment products
|
(73.2 | ) | (35.0 | ) | ||||
|
Repayments of debt of consolidated investment products
|
(165.3 | ) | — | |||||
|
Net borrowings/(repayments) under credit facility
|
648.5 | (12.0 | ) | |||||
|
Repayments of senior notes
|
— | (103.0 | ) | |||||
|
Acquisition of remaining noncontrolling interest in subsidiary
|
— | (10.3 | ) | |||||
|
|
||||||||
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Net cash provided by financing activities
|
169.5 | 203.4 | ||||||
|
|
||||||||
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(Decrease)/increase in cash and cash equivalents
|
(99.4 | ) | 325.0 | |||||
|
Foreign exchange movement on cash and cash equivalents
|
1.5 | 13.6 | ||||||
|
Cash and cash equivalents, beginning of period
|
762.0 | 585.2 | ||||||
|
|
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Cash and cash equivalents, end of period
|
664.1 | 923.8 | ||||||
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Supplemental Cash Flow Information:
|
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Interest paid
|
(34.9 | ) | (41.9 | ) | ||||
|
Interest received
|
5.2 | 8.1 | ||||||
|
Taxes paid
|
(119.4 | ) | (57.9 | ) | ||||
See accompanying notes.
5
Table of Contents
Invesco Ltd
.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
| Equity Attributable to Common Shareholders | ||||||||||||||||||||||||||||||||||||
| Retained Earnings | ||||||||||||||||||||||||||||||||||||
| Appropriated for | Total Equity | Noncontrolling | ||||||||||||||||||||||||||||||||||
| Additional | Investors in | Accumulated Other | Attributable to | Interests in | ||||||||||||||||||||||||||||||||
| Paid-in- | Treasury | Retained | Consolidated | Comprehensive | Common | Consolidated | Total | |||||||||||||||||||||||||||||
| $ in millions | Common Shares | Capital | Shares | Earnings | Investment 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 FASB Statement No. 167
|
— | — | — | 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
|
— | — | — | 290.5 | — | — | 290.5 | 189.6 | 480.1 | |||||||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||||||
|
Currency translation differences
on investments in overseas
subsidiaries
|
— | — | — | — | — | 12.8 | 12.8 | (16.2 | ) | (3.4 | ) | |||||||||||||||||||||||||
|
Change in accumulated OCI
related to employee benefit
plans
|
— | — | — | — | — | 4.3 | 4.3 | — | 4.3 | |||||||||||||||||||||||||||
|
Change in net unrealized gains
on available-for-sale
investments
|
— | — | — | — | — | 14.6 | 14.6 | — | 14.6 | |||||||||||||||||||||||||||
|
Tax impacts of changes in
accumulated other comprehensive
income balances
|
— | — | — | — | — | (2.9 | ) | (2.9 | ) | — | (2.9 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
319.3 | 173.4 | 492.7 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net income reclassified to
appropriated retained earnings
|
— | — | — | — | 139.4 | — | 139.4 | (139.4 | ) | — | ||||||||||||||||||||||||||
|
Currency translation differences on
investments in overseas
subsidiaries reclassified to
appropriated retained earnings
|
— | — | — | — | (16.2 | ) | — | (16.2 | ) | 16.2 | — | |||||||||||||||||||||||||
|
Change in noncontrolling interests
in consolidated entities, net
|
— | — | — | — | — | — | — | (62.0 | ) | (62.0 | ) | |||||||||||||||||||||||||
|
Business Combination
|
2.3 | 566.9 | — | — | 149.4 | — | 718.6 | — | 718.6 | |||||||||||||||||||||||||||
|
Dividends
|
— | — | — | (146.3 | ) | — | — | (146.3 | ) | — | (146.3 | ) | ||||||||||||||||||||||||
|
Employee share plans:
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Share-based compensation
|
— | 87.0 | — | — | — | — | 87.0 | — | 87.0 | |||||||||||||||||||||||||||
|
Vested shares
|
— | (65.9 | ) | 65.9 | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Exercise of options
|
— | (18.6 | ) | 29.4 | — | — | — | 10.8 | — | 10.8 | ||||||||||||||||||||||||||
|
Tax impact of share-based payment
|
— | 14.2 | — | — | — | — | 14.2 | — | 14.2 | |||||||||||||||||||||||||||
|
Purchase of shares
|
— | — | (163.9 | ) | — | — | — | (163.9 | ) | — | (163.9 | ) | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
September 30, 2010
|
94.2 | 6,272.0 | (961.0 | ) | 1,780.8 | 546.9 | 417.2 | 8,150.1 | 696.1 | 8,846.2 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| Equity Attributable to Common Shareholders | ||||||||||||||||||||||||||||||||
| Total Equity | Noncontrolling | |||||||||||||||||||||||||||||||
| Additional | Attributable to | Interests in | ||||||||||||||||||||||||||||||
| Common | Paid-in- | Treasury | Retained | Accumulated Other | Common | Consolidated | Total | |||||||||||||||||||||||||
| $ in millions | Shares | Capital | Shares | Earnings | Comprehensive 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
|
— | — | — | 211.6 | — | 211.6 | (136.5 | ) | 75.1 | |||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||
|
Currency translation differences on
investments in overseas subsidiaries
|
— | — | — | — | 422.4 | 422.4 | — | 422.4 | ||||||||||||||||||||||||
|
Change in minimum pension liability
|
— | — | — | — | (1.9 | ) | (1.9 | ) | — | (1.9 | ) | |||||||||||||||||||||
|
Change in net unrealized gains on
available-for-sale investments
|
— | — | — | — | 13.0 | 13.0 | — | 13.0 | ||||||||||||||||||||||||
|
Adoption of FSP FAS 115-2
|
— | — | — | — | (1.5 | ) | (1.5 | ) | — | (1.5 | ) | |||||||||||||||||||||
|
Tax impacts of changes in accumulated
other comprehensive income balances
|
— | — | — | — | 0.2 | 0.2 | — | 0.2 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
643.8 | (136.5 | ) | 507.3 | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Adoption of FSP FAS 115-2
|
— | — | — | 1.5 | — | 1.5 | — | 1.5 | ||||||||||||||||||||||||
|
Change in noncontrolling interests in
consolidated entities, net
|
— | — | — | — | — | — | (71.2 | ) | (71.2 | ) | ||||||||||||||||||||||
|
Issuance of new shares
|
6.6 | 435.2 | — | — | — | 441.8 | — | 441.8 | ||||||||||||||||||||||||
|
Dividends
|
— | — | — | (124.2 | ) | — | (124.2 | ) | — | (124.2 | ) | |||||||||||||||||||||
|
Employee share plans:
|
||||||||||||||||||||||||||||||||
|
Share-based compensation
|
— | 68.1 | — | — | — | 68.1 | — | 68.1 | ||||||||||||||||||||||||
|
Vested shares
|
— | (90.5 | ) | 90.5 | — | — | — | — | — | |||||||||||||||||||||||
|
Exercise of options
|
— | (38.6 | ) | 79.1 | — | — | 40.5 | — | 40.5 | |||||||||||||||||||||||
|
Tax impact of share-based payment
|
— | 0.1 | — | — | — | 0.1 | — | 0.1 | ||||||||||||||||||||||||
|
Modification of share-based payment awards
|
— | (13.0 | ) | — | — | — | (13.0 | ) | — | (13.0 | ) | |||||||||||||||||||||
|
Purchase of shares
|
— | — | (12.6 | ) | — | — | (12.6 | ) | — | (12.6 | ) | |||||||||||||||||||||
|
Acquisition of remaining noncontrolling
interest in subsidiary
|
— | (8.9 | ) | — | — | — | (8.9 | ) | (1.4 | ) | (10.3 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
September 30, 2009
|
91.9 | 5,705.0 | (971.9 | ) | 1,565.2 | 336.4 | 6,726.6 | 697.6 | 7,424.2 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
See accompanying notes.
6
Table of Contents
Invesco Ltd.
Notes to the Condensed 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’s sole business is investment management.
Basis of Accounting and Consolidation
The accompanying Condensed Consolidated Balance Sheets, Statements of Income, Statements of
Cash Flows, and Statement of Changes in Equity (together, the Condensed Consolidated Financial
Statements) have not been audited and should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the
year ended December 31, 2009. In the opinion of management, the Condensed 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 Condensed 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 Condensed
Consolidated Financial Statements.
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.
Investors in the CLOs have no recourse against the company for any losses sustained in the CLO
structure.
7
Table of Contents
All of the investments held and notes issued by consolidated investment products are presented
at fair value in the company’s Condensed Consolidated Balance Sheet at September 30, 2010, and
interest income and expense of consolidated CLOs are presented as other income/(expense) in the
company’s Condensed Consolidated Income Statement for the nine months ended September 30, 2010. The
surplus of consolidated CLO assets over consolidated CLO liabilities is reflected in the company’s
Condensed 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 Condensed Consolidated Statement of Income and in the retained
earnings appropriated for investors in consolidated investment products in the Condensed
Consolidated Balance Sheet, as they are considered noncontrolling interests of the company. See
Note 12, “Consolidated Investment Products,” for additional details.
The company also consolidates certain private equity 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 the Accounting
Standards Codification (ASC) Topic 946, “Financial Services — Investment Companies.” The company
has retained the specialized industry accounting principles of these investment products in its
Condensed Consolidated Financial Statements. See Note 12, “Consolidated Investment Products,” for
additional details.
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 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 Condensed Consolidated Balance Sheets. The
proportionate share of income or loss is included in equity in earnings of unconsolidated
affiliates in the Condensed 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.
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.
8
Table of Contents
Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations
(FASB Statement No. 141(R)),” and Statement No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (FASB Statement No. 160).” Under FASB Statement
No. 141(R), which is now encompassed in ASC Topic 805, “Business Combinations,” 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. FASB Statement No. 160, which is now encompassed in
ASC Topic 810, “Consolidation,” establishes new accounting and reporting standards for
noncontrolling interests (formerly known as “minority interests”) in a subsidiary and for the
deconsolidation of a subsidiary. FASB Statement No. 141(R) and FASB Statement No. 160 became
effective for the company on January 1, 2009. FASB Statement No. 141(R) was applied prospectively,
while FASB Statement No. 160 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 FASB Statement No. 141(R) 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. See Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations, Critical Accounting Policies and
Estimates — Goodwill” for additional information. The company completed the acquisition of Morgan
Stanley’s retail asset management business, including Van Kampen Investments (the “acquired
business” or the “acquisition”) on June 1, 2010. See Note 4, “Business Combinations and
Integration” for additional details.
In February 2008, the FASB issued Staff Position No. FAS 157-2, “Effective Date of FASB
Statement No. 157 (FSP FAS 157-2).” FSP FAS 157-2, which is now encompassed in ASC Topic 820, “Fair
Value Measurements and Disclosures” (ASC Topic 820), amended FASB Statement No. 157 to delay the
effective date 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, FSP FAS 157-2 delayed the effective date of FASB
Statement No. 157 to January 1, 2009. As of January 1, 2008, the company applied the fair value
measurement and disclosure provisions of FASB Statement No. 157 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
FASB Statement No. 157 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 FASB
Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets;” (now
encompassed in ASC Topic 360, “Property, Plant and Equipment”); (3) nonfinancial liabilities for
exit or disposal activities initially measured at fair value under FASB Statement No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities;” (now encompassed in 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 FSP FAS
157-2 did not have a material impact on the company’s financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life
of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3, which is now encompassed in ASC Topic 350,
“Intangibles — Goodwill and Other” (ASC Topic 350), 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 FASB Statement No. 142, “Goodwill and
Other Intangible Assets,” also now encompassed in ASC Topic 350. FSP FAS 142-3 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. FSP FAS 142-3 was intended to improve the
consistency between the useful life of an intangible asset determined under FASB Statement No. 142
and the period of expected cash flows used to measure the fair value of the asset under FASB
Statement No. 141(R) (now encompassed in ASC Topic 805) and other U.S. GAAP. The guidance provided
by FSP FAS 142-3 for determining the useful life of a recognized intangible asset was to be applied
prospectively to intangible assets acquired after the effective date, which is January 1, 2009. FSP
FAS 142-3 did not have a material impact on the company’s financial statements.
During June 2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF
03-6-1). FSP EITF 03-6-1, which is now encompassed in ASC Topic
9
Table of Contents
260, “Earnings Per Share” (ASC Topic 260), addressed 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 FASB Statement No. 128, “Earnings Per Share,” also now encompassed in ASC Topic
260. The guidance in the FSP EITF 03-6-1 provided 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. FSP EITF 03-6-1 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 FSP EITF 03-6-1 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 FSP EITF 03-6-1
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 FASB Staff Position No. FAS 140-4 and FIN 46(R)-8,
“Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities (FSP
FAS 140-4 and FIN 46(R)-8),” which became effective for the company on March 31, 2009. FSP FAS
140-4 and FIN 46(R)-8, which is now encompassed in ASC Topic 860, “Transfers and Servicing,”
required 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 FSP FAS 140-4 and FIN 46(R)-8 did not have a material impact on the
company’s financial statements. See Note 12, “Consolidated Investment Products,” for additional
disclosures.
In January 2009, the FASB issued Staff Position No. EITF 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1),” which became effective for the
company on March 31, 2009. FSP EITF 99-20-1, which is now encompassed in ASC Topic 325, revised the
impairment guidance provided by EITF 99-20 for beneficial interests to make it consistent with the
requirements of FASB Statement No. 115 (now encompassed in ASC Topic 320) for determining whether
an impairment of other debt and equity securities is other-than-temporary. FSP EITF 99-20-1
eliminated 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, FSP 99-20-1 required 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. FSP EITF 99-20-1 did not have a material impact on the
company’s financial statements.
On April 9, 2009, the FASB issued three Staff Positions (FSPs) intended to provide additional
application guidance and enhance disclosures regarding fair value measurements and impairments of
securities. FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly
(FSP FAS 157-4),” now encompassed in ASC Topic 820, provided guidelines for making fair value
measurements more consistent with the principles presented in FASB Statement No. 157. FSP FAS 107-1
and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1),” now
encompassed in ASC Topic 825, enhanced consistency in financial reporting by increasing the
frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments (FSP FAS 115-2),” now encompassed in ASC Topic 320-10-65, provided
additional guidance designed to create greater clarity and consistency in accounting for and
presenting impairment losses on securities.
FSP FAS 157-4 addressed 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. FSP FAS
157-4 reaffirmed the definition of fair value already reflected in FASB Statement No. 157, 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. FSP FAS 157-4 also
reaffirmed 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. FSP FAS 157-4 became effective
for the company for the period ended June 30, 2009. The application of FSP FAS 157-4 did not have a
material impact on the Consolidated Financial Statements. See Note 2, “Fair Value of Assets and
Liabilities,” and Note 12, “Consolidated Investment Products,” for additional details.
FSP FAS 107-1 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 issuing
FSP FAS 107-1, fair values of these assets and liabilities were only disclosed on an annual basis.
FSP FAS 107-1 required 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. FSP FAS 107-1 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 2, “Fair Value of Assets and Liabilities,” Note 3,
“Investments,” and Note 7, “Debt.”
10
Table of Contents
FSP FAS 115-2 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. FSP FAS 115-2 required 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 FSP FAS 115-2 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 Statement No. 165, “Subsequent Events” (FASB Statement No. 165).
FASB Statement No. 165, which is now encompassed in ASC Topic 855, “Subsequent Events,” 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, FASB
Statement No. 165 provided 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. FASB Statement No. 165 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 Statement No. 166, “Accounting for Transfers of Financial Assets
— an amendment of FASB Statement No. 140,” (FASB Statement No. 166), which addresses the effects
of eliminating the qualifying special-purpose entity concept from FASB Statement No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(FASB Statement No. 140), and will generally subject those entities to the consolidation guidance
applied to other VIEs as provided by FASB Statement No. 167, “Amendments to FASB Interpretation No.
46(R)” (FASB Statement No. 167). FASB Statement No. 166 is now encompassed in ASC Topic 860. FASB
Statement No. 167 is now encompassed in ASC Topic 810. Specifically, FASB Statement No. 166
introduces 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. FASB Statement No. 166 will be applied prospectively to new
transfers of financial assets occurring on or after January 1, 2010. The adoption of FASB Statement
No. 166 did not have a material impact on the company’s Consolidated Financial Statements.
In June 2009, the FASB issued Statement No. 167, which amends certain provisions of FIN 46(R).
Specifically, FASB Statement No. 167 amends 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 amends FIN 46(R)’s 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 FSP FAS 140-4 and FIN 46(R)-8 discussed above. In February 2010 the FASB
issued ASU 2010-10, a deferral of the effective date of FASB Statement No. 167 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.
FASB Statement No. 167, 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 of FASB Statement No. 167 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 nine
months ended September 30, 2010 reflects the elimination of $26.4 million in management fees earned
from these CLOs, and the addition of $175.9 million in interest income, $82.0 million in interest
expense, and $78.9 million in net other gains. The $141.9 million net income impact during the
nine months ended September 30, 2010 of consolidation of these CLOs is largely offset by
gains/(losses) attributable to investors in noncontrolling interests of $139.4 million. Prior to
the adoption of FASB Statement No. 167, 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. After the adoption of FASB Statement No. 167, the change in
value of the company’s investments in these CLOs is reflected in the company’s
11
Table of Contents
net income. For the nine months ended September 30, 2010, the net impact to the company of its
investments in these CLOs was $2.5 million. The Condensed Consolidated Balance Sheet at September
30, 2010 reflects the consolidation of $6.5 billion in assets held and $5.7 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 $546.9 million is presented as part of the company’s total equity, reflecting the
excess of the consolidated CLOs’ assets over their liabilities, attributable to noncontrolling
third-party investors in their consolidated CLOs at September 30, 2010. In addition, the company’s
Condensed Consolidated Cash Flow Statement for the nine months ended September 30, 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 FASB Statement No. 167, 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
FASB Statement No. 167, 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 12, “Consolidated
Investment Products,” for a consolidating balance sheet at September 30, 2010.
In July 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement
No. 162,” (FASB Statement No. 168). FASB Statement No. 168 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. FASB
Statement No. 168 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 7, “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 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
12, “Consolidated Investment Products.”
12
Table of Contents
2. 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 12, “Consolidated Investment Products.”
| September 30, 2010 | December 31, 2009 | |||||||||||||||||||
| Footnote | Carrying | Carrying | ||||||||||||||||||
| $ in millions | Reference | Value | Fair Value | Value | Fair Value | |||||||||||||||
|
Cash and cash equivalents
|
664.1 | 664.1 | 762.0 | 762.0 | ||||||||||||||||
|
Available for sale investments
|
3 | 127.0 | 127.0 | 92.7 | 92.7 | |||||||||||||||
|
Assets held for policyholders
|
1,249.7 | 1,249.7 | 1,283.0 | 1,283.0 | ||||||||||||||||
|
Trading investments
|
3 | 224.7 | 224.7 | 84.6 | 84.6 | |||||||||||||||
|
Support agreements
|
12,15 | (4.0 | ) | (4.0 | ) | (2.5 | ) | (2.5 | ) | |||||||||||
|
Policyholder payables
|
(1,249.7 | ) | (1,249.7 | ) | (1,283.0 | ) | (1,283.0 | ) | ||||||||||||
|
Financial instruments sold, not yet purchased
|
(8.2 | ) | (8.2 | ) | — | — | ||||||||||||||
|
Derivative liabilities
|
(0.2 | ) | (0.2 | ) | — | — | ||||||||||||||
|
Long-term debt
|
7 | (1,394.2 | ) | (1,446.9 | ) | (745.7 | ) | (765.5 | ) | |||||||||||
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, as well as the general classification of such assets and liabilities
pursuant to the valuation hierarchy.
Cash equivalents
Cash equivalents carried at fair value include cash investments in money market funds. 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.
Available-for-sale investments
Available-for-sale investments include amounts seeded into affiliated investment products and
investments in affiliated unconsolidated 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. 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. 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.
13
Table of Contents
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 liabilities 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 unit investment trusts (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 September 30, 2010, UIT-related equity and debt securities consisted of investments in corporate stock, UITs, U.S. state and political subdivisions. 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 transactions, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturity as the underlying bond. If the spread data does not reference the issuer, then data that references a comparable issuer 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 ‘municipals’) securities are valued using recently executed transactions, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturity as the underlying bond. If the spread data does not reference the issuer, then data that references a comparable issuer 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. |
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 statement of position.
Fair values of derivative contracts in a liability position are included in other liabilities in
the company’s consolidated statement of position. 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. 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
14
Table of Contents
sold, not yet purchased. 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.
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 September 30, 2010.
| As of September 30, 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
|
232.0 | 232.0 | — | — | ||||||||||||
|
Investments:*
|
||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
Seed money
|
126.5 | 126.5 | — | — | ||||||||||||
|
Trading investments:
|
||||||||||||||||
|
Investments related to deferred
compensation plans
|
159.4 | 159.4 | — | — | ||||||||||||
|
UIT-related equity and debt securities:
|
||||||||||||||||
|
Corporate stock
|
1.0 | 1.0 | — | — | ||||||||||||
|
UITs
|
4.5 | 4.5 | — | — | ||||||||||||
|
U.S. state and political
subdivisions securities
|
59.8 | — | 59.8 | — | ||||||||||||
|
Assets held for policyholders
|
1,249.7 | 1,249.7 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total current assets
|
1,832.9 | 1,773.1 | 59.8 | — | ||||||||||||
|
|
||||||||||||||||
|
Non-current assets:
|
||||||||||||||||
|
Investments — available-for-sale*:
|
||||||||||||||||
|
CLOs**
|
0.5 | — | — | 0.5 | ||||||||||||
|
|
||||||||||||||||
|
Total assets at fair value
|
1,833.4 | 1,773.1 | 59.8 | 0.5 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Current liabilities:
|
||||||||||||||||
|
UIT-related financial instruments sold, not
yet purchased:
|
||||||||||||||||
|
Corporate equities
|
(0.4 | ) | (0.4 | ) | — | — | ||||||||||
|
U.S. Treasury securities
|
(7.8 | ) | (7.8 | ) | — | — | ||||||||||
|
UIT-related derivative liabilities
|
(0.2 | ) | (0.2 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Total liabilities at fair value
|
(8.4 | ) | (8.4 | ) | — | — | ||||||||||
|
|
||||||||||||||||
| * | Current foreign time deposits of $25.4 million and other current investments of $0.5 million are excluded from this table. Other non-current equity and cost method investments of $140.1 million and $4.7 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 FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, resulting in the consolidation of CLOs for which the company has an underlying investment of $19.6 million at September 30, 2010 (before consolidation). In accordance with the standard, prior periods have not been restated to reflect the consolidation of these CLOs. |
15
Table of Contents
The following table presents, for each of the hierarchy levels described above, the carrying
value of the company’s assets 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 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 three and nine month periods ending September 30, 2010, which are
comprised solely of CLOs, and are valued using significant unobservable inputs:
| Three months Ended | Nine months Ended | |||||||
| $ in millions | September 30, 2010 | September 30, 2010 | ||||||
|
Beginning balance
|
0.6 | 17.9 | ||||||
|
Adoption of FASB Statement No. 167*
|
— | (17.4 | ) | |||||
|
|
||||||||
|
Beginning balance, as adjusted
|
0.6 | 0.5 | ||||||
|
Net unrealized gains and losses included in accumulated other
comprehensive income/(loss)**
|
(0.1 | ) | — | |||||
|
Purchases and issuances
|
— | — | ||||||
|
Other-than-temporary impairment included in other gains and losses, net
|
— | — | ||||||
|
Return of capital
|
— | — | ||||||
|
|
||||||||
|
Ending balance
|
0.5 | 0.5 | ||||||
|
|
||||||||
| * | The company adopted FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, resulting in the consolidation of CLOs for which the company has an underlying investment of $19.6 million at September 30, 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 three months ended September 30, 2010 is attributed to the change in unrealized gains and losses related to assets still held at September 30, 2010. |
16
Table of Contents
The following table shows a reconciliation of the beginning and ending fair value measurements
for level 3 assets during the three and nine month periods ending September 30, 2009, which were
comprised solely of CLOs (prior to the adoption of FASB Statement No. 167), and were valued using
significant unobservable inputs:
| Three months Ended | Nine months Ended | |||||||
| $ in millions | September 30, 2009 | September 30, 2009 | ||||||
|
Beginning balance
|
13.4 | 17.5 | ||||||
|
Net unrealized gains and losses included in accumulated other
comprehensive income/(loss)*
|
3.6 | 4.5 | ||||||
|
Purchases and issuances
|
— | — | ||||||
|
Other-than-temporary impairment included in other gains and losses, net
|
(0.8 | ) | (5.2 | ) | ||||
|
Return of capital
|
— | (0.6 | ) | |||||
|
|
||||||||
|
Ending balance
|
16.2 | 16.2 | ||||||
|
|
||||||||
| * | Of these net unrealized gains and losses included in accumulated other comprehensive income/(loss), $3.6 million for the three months ended September 30, 2009, and $4.5 million for the nine months ended September 30, 2009, are attributed to the change in unrealized gains and losses related to assets still held at September 30, 2009. |
3. INVESTMENTS
The disclosures below include details of the company’s investments. Investments held by
consolidated investment products are detailed in Note 12, “Consolidated Investment Products.”
Current Investments
| As of | ||||||||
| September 30, | December 31, | |||||||
| $ in millions | 2010 | 2009 | ||||||
|
Available-for-sale investments:
|
||||||||
|
Seed money
|
126.5 | 74.8 | ||||||
|
Trading investments:
|
||||||||
|
Investments related to deferred compensation plans
|
159.4 | 84.6 | ||||||
|
UIT-related equity and debt securities
|
65.3 | — | ||||||
|
Foreign time deposits
|
25.4 | 22.5 | ||||||
|
Other
|
0.5 | 0.5 | ||||||
|
|
||||||||
|
Total current investments
|
377.1 | 182.4 | ||||||
|
|
||||||||
Non-current Investments
| As of | ||||||||
| September 30, | December 31, | |||||||
| $ in millions | 2010 | 2009 | ||||||
|
Available-for-sale investments:
|
||||||||
|
CLOs
|
0.5 | 17.9 | ||||||
|
Equity method investments
|
140.1 | 134.7 | ||||||
|
Other
|
4.7 | 4.8 | ||||||
|
|
||||||||
|
Total non-current investments
|
145.3 | 157.4 | ||||||
|
|
||||||||
The portion of trading gains and losses for the nine months ended September 30, 2010 that
relates to trading securities still held at September 30, 2010 was a $6.1 million net gain.
17
Table of Contents
Realized gains and losses recognized in the income statement during the year from investments
classified as available-for-sale are as follows:
| For the Three months Ended | For the Nine months Ended | |||||||||||||||||||||||
| September 30, 2010 | September 30, 2010 | |||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||
| Proceeds | Realized | Realized | Proceeds | Realized | Realized | |||||||||||||||||||
| $ in millions | from Sales | Gains | Losses | from Sales | Gains | Losses | ||||||||||||||||||
|
Current available-for-sale investments
|
22.5 | 2.9 | — | 33.0 | 3.6 | (0.5 | ) | |||||||||||||||||
|
Non-current available-for-sale investments
|
— | — | — | 0.1 | — | — | ||||||||||||||||||
Upon the sale of available-for-sale securities, net realized gains of $2.9 million and $3.1
million were transferred from accumulated other comprehensive income into the Condensed
Consolidated Statements of Income during three and the nine months ended September 30, 2010,
respectively. The specific identification method is used to determine the realized gain or loss on
securities sold or otherwise disposed.
Gross unrealized holding gains and losses recognized in other accumulated comprehensive income
from available-for-sale investments are presented in the table below:
| September 30, 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
|
116.2 | 11.1 | (0.8 | ) | 126.5 | 74.7 | 5.9 | (5.8 | ) | 74.8 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Current available-for-sale investments
|
116.2 | 11.1 | (0.8 | ) | 126.5 | 74.7 | 5.9 | (5.8 | ) | 74.8 | ||||||||||||||||||||||
|
Non-current:
|
||||||||||||||||||||||||||||||||
|
CLOs*
|
0.4 | 0.1 | — | 0.5 | 12.6 | 5.3 | — | 17.9 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Non-current available-for-sale investments:
|
0.4 | 0.1 | — | 0.5 | 12.6 | 5.3 | — | 17.9 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
116.6 | 11.2 | (0.8 | ) | 127.0 | 87.3 | 11.2 | (5.8 | ) | 92.7 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| * | The company adopted FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, resulting in the consolidation of CLOs for which the company has an underlying investment of $19.6 million at September 30, 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 September 30, 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 September 30, 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 (45 funds)
|
4.6 | (0.4 | ) | 5.8 | (0.4 | ) | 10.4 | (0.8 | ) | |||||||||||||||
18
Table of Contents
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 has reviewed investment securities for other-than-temporary impairment in
accordance with its accounting policy and has recognized other-than-temporary impairment charges of
$0.3 million and $6.5 million on seed money investments during the three and nine months ended
September 30, 2010, respectively.
The gross unrealized losses of seed money investments at September 30, 2010 were primarily
caused by declines in the market value of the underlying securities in the seeded 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 any material portion of its 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.
As discussed in Note 1, “Accounting Policies,” the company adopted FSP FAS 115-2, 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 other-than-temporary impairment (OTTI). During the nine months
ended September 30, 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
:
| Three months ended | Nine months ended | |||||||
| In millions | September 30, 2010 | September 30, 2010 | ||||||
|
Beginning balance
|
0.8 | 18.8 | ||||||
|
Adoption of FASB Statement No. 167*
|
— | (18.0 | ) | |||||
|
|
||||||||
|
Beginning balance, as adjusted
|
0.8 | 0.8 | ||||||
|
Additional credit losses recognized during the period related to securities for which:
|
||||||||
|
No OTTI has been previously recognized
|
— | — | ||||||
|
OTTI has been previously recognized
|
— | — | ||||||
|
|
||||||||
|
Ending balance
|
0.8 | 0.8 | ||||||
|
|
||||||||
| * | The company adopted FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, resulting in the consolidation of CLOs for which the company has an underlying investment of $19.6 million at September 30, 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 Condensed Consolidated Balance Sheet, resulting in the elimination of our equity interest. |
4. BUSINESS COMBINATIONS 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. 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.
The acquired business brings in assets under management across the equity, fixed income and
alternative asset classes (including mutual funds, variable insurance funds, separate accounts and
unit investment trusts).
19
Table of Contents
Each participating preferred shares issued to Morgan Stanley is convertible into 1,000 common
shares upon transfer by Morgan Stanley to an unrelated third party. The 30.9 million shares issued
to Morgan Stanley include 11.7 million common shares and 19.2 million participating preferred
shares as converted to common shares.
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 $364.2 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 $307.8 million which
reflects a carryover tax basis in certain assets that were acquired.
The following table summarizes the initial estimates of amounts of identified assets acquired
and liabilities assumed at the acquisition date and at September 30, 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 | (0.4 | ) | 80.7 | ||||||||
|
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 | 1.5 | 364.2 | |||||||||
|
Other assets
|
18.8 | 15.0 | 33.8 | |||||||||
|
Total assets
|
2,562.3 | 28.3 | 2,590.6 | |||||||||
|
LIABILITIES AND APPROPRIATED EQUITY
|
||||||||||||
|
Accruals and accounts payables
|
(135.6 | ) | (1.2 | ) | (136.8 | ) | ||||||
|
Other current liabilities of consolidated investment products
|
(16.3 | ) | (8.4 | ) | (24.7 | ) | ||||||
|
Deferred taxation, net
|
(307.8 | ) | — | (307.8 | ) | |||||||
|
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 | ) | (28.3 | ) | (1,248.9 | ) | ||||||
|
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 September 30, 2010 relate primarily to the addition of cash and derivative assets and liabilities of acquired consolidated collateralized loan obligation products. The company does not expect additional material changes to the value of assets acquired or liabilities assumed in conjunction with the transaction. |
20
Table of Contents
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. 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.
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 September 30, 2010 were approximately $272
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 business combination had occurred on January 1, 2009, the earliest period presented herein.
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 three months ended September 30, | ||||||||
| $ in millions | 2010 | 2009 | ||||||
|
Operating Revenues
|
953.1 | 884.8 | ||||||
|
Net income
|
172.5 | 122.0 | ||||||
| For the nine months ended September 30, | ||||||||
| $ in millions | 2010 | 2009 | ||||||
|
Operating Revenues
|
2,776.9 | 2,338.4 | ||||||
|
Net income
|
427.1 | 219.6 | ||||||
On August 16, 2010, Invesco acquired Concord Capital (“Concord”), an Australian equities
manager, in exchange for $14.5 million cash consideration paid and an initially estimated $32.4
million in contingent consideration payable over 5 years. Cash and cash equivalents acquired was
$4.1 million, and the purchase consideration has initially been attributed primarily to management
contract intangibles of $24.2 million and goodwill of $20.2 million.
During the three and nine months ended September 30, 2010, the company incurred $26.8 million,
and $123.3 million, respectively, of transaction and integration costs ($17.8 million and $97.6
million net of taxation, respectively). Transaction and integration costs include
acquisition-related charges incurred during the period to effect a business combination, including
legal, regulatory, advisory, valuation, 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. The following table presents acquisition-related and integration-related
charges incurred during the period.
| For the three months ended | For the nine months ended | |||||||
| $ in millions | September 30, 2010 | September 30, 2010 | ||||||
|
Acquisition-related charges
|
0.3 | 5.7 | ||||||
|
Integration-related charges
|
26.5 | 117.6 | ||||||
|
|
||||||||
|
Total transaction and integration charges
(1)
|
26.8 | 123.3 | ||||||
|
|
||||||||
| (1) | The company incurred $4.3 million of acquisition-related costs and $6.5 million of integration-related costs during 2009, which is not reflected in this table. |
Integration charges include costs associated with activities that do not represent ongoing
costs of the fully integrated combined organization, such as severance and employee-related
charges, costs associated with proxy solicitation to fund shareholders and other
integration-related charges.
21
Table of Contents
5. INTANGIBLE ASSETS
The following table presents the major classes of the company’s finite-lived intangible assets
at September 30, 2010 and December 31, 2009:
| Weighted Average | ||||||||||||||||
| Amortization | Gross Book | Accumulated | Net Book | |||||||||||||
| $ in millions | Period (years) | Value | Amortization | Value | ||||||||||||
| September 30, 2010 | ||||||||||||||||
|
Management contracts
|
9.1 | 189.4 | (77.9 | ) | 111.5 | |||||||||||
|
Customer relationships
|
12.0 | 40.0 | (1.1 | ) | 38.9 | |||||||||||
|
Distribution agreements
|
4.0 | 17.0 | (1.4 | ) | 15.6 | |||||||||||
|
Trademarks / Trade Names
|
2.0 | 13.0 | (2.2 | ) | 10.8 | |||||||||||
|
Other
|
6.1 | 3.6 | (2.6 | ) | 1.0 | |||||||||||
|
|
||||||||||||||||
|
Total
|
8.9 | 263.0 | (85.2 | ) | 177.8 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
Management contracts
|
9.3 | 103.4 | (75.8 | ) | 27.6 | |||||||||||
|
Other
|
5.0 | 2.8 | (1.9 | ) | 0.9 | |||||||||||
|
|
||||||||||||||||
|
Total
|
9.0 | 106.2 | (77.7 | ) | 28.5 | |||||||||||
|
|
||||||||||||||||
The acquisitions of Morgan Stanley’s retail asset management business, including Van Kampen
Investments, and of Concord Capital, added $142.0 million and $24.2 million of finite-lived
intangible assets, respectively, as discussed in Note 4, “Business Combinations and Integration.”
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 Condensed Consolidated Balance Sheet at June 1, 2010, also as discussed in Note 4,
“Business Combination and Integration,” above. Indefinite-lived intangible assets, which total
$1,166.3 million at September 30, 2010 (December 31, 2009: $110.6 million) primarily relate to
management contracts and related asset management rights acquired during the June 1, 2010
acquisition.
22
Table of Contents
Amortization expense was $9.4 million and $17.7 million, respectively, during the three and
nine months ended September 30, 2010 (three and nine months ended September 30, 2009: $3.2 million
and $9.4 million, respectively) and is included within General and Administrative expenses in the
Condensed Consolidated Statements of Income. Estimated amortization expense for each of the five
succeeding fiscal years based upon the company’s intangible assets at September 30, 2010 is as
follows:
| Years Ended September 30, | ||||
| $ in millions | ||||
|
2011
|
34.8 | |||
|
2012
|
27.9 | |||
|
2013
|
22.9 | |||
|
2014
|
19.1 | |||
|
2015
|
14.9 |
6. GOODWILL
The table below details changes in the goodwill balance:
| Gross Book | Accumulated | Net Book | ||||||||||
| $ in millions | Value | Impairment | Value | |||||||||
|
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 | ||||||||
|
|
||||||||||||
|
Business combinations
|
410.2 | — | 410.2 | |||||||||
|
Foreign exchange
|
(1.7 | ) | — | (1.7 | ) | |||||||
|
|
||||||||||||
|
September 30, 2010
|
6,892.7 | (16.6 | ) | 6,876.1 | ||||||||
|
|
||||||||||||
The acquisition of Morgan Stanley’s retail asset management business, including Van Kampen
Investments, added $364.2 million of goodwill, and the acquisition of Concord Capital added $20.2
million of goodwill to the company’s Condensed Consolidated Balance Sheet at their respective
acquisition dates, as discussed in Note 4, “Business Combination and Integration.” The April 3,
2010 earn-out calculation related to the 2006 acquisition of W.L. Ross & Co. resulted in an
addition to goodwill and a non-interest bearing note payable to the sellers of $25.8 million,
payable in conjunction with the amount resulting from the October 3, 2010 measurement date
calculation (2009 earn-out goodwill addition: $34.2 million). See Note 15, “Commitments and
Contingencies,” for additional information.
7. DEBT
The disclosures below include details of the company’s debt. Debt of consolidated investment
products is detailed in Note 12, “Consolidated Investment Products.”
| September 30, 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 | 226.3 | 215.1 | 227.0 | ||||||||||||
|
5.375% — due February 27, 2013
|
333.5 | 357.3 | 333.5 | 343.4 | ||||||||||||
|
5.375% — due December 15, 2014
|
197.1 | 214.8 | 197.1 | 195.1 | ||||||||||||
|
Floating rate credit facility terminated May 24, 2010
|
— | — | — | — | ||||||||||||
|
Floating rate credit facility expiring May 23, 2013
|
648.5 | 648.5 | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total debt
|
1,394.2 | 1,446.9 | 745.7 | 765.5 | ||||||||||||
|
Less: current maturities of total debt
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Long-term debt
|
1,394.2 | 1,446.9 | 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. |
23
Table of Contents
The fair market value of the company’s total debt 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 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 Notes.
Analysis of Borrowings by Maturity:
| $ in millions | September 30, 2010 | |||
|
2011
|
— | |||
|
2012
|
215.1 | |||
|
2013
|
982.0 | |||
|
2014
|
197.1 | |||
|
Thereafter
|
— | |||
|
|
||||
|
Total debt
|
1,394.2 | |||
|
|
||||
On May 24, 2010, the company terminated its existing $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.
At September 30, 2010, the outstanding balance on the credit facility was $648.5 million and
the weighted average interest rate on the credit facility was 1.79%. 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 September 30, 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 September 30, 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.
24
Table of Contents
8. SHARE CAPITAL
Movements in the number of common shares and common share equivalents issued are represented
in the table below:
| Nine months Ended | Nine months Ended | |||||||
| In millions | September 30, 2010 | September 30, 2009 | ||||||
|
Common shares issued — beginning balance
|
459.5 | 426.6 | ||||||
|
Issue of new shares
|
11.7 | 32.9 | ||||||
|
|
||||||||
|
Common shares issued — ending balance
|
471.2 | 459.5 | ||||||
|
Less: Treasury shares for which dividend and voting rights do not apply
|
(28.4 | ) | (30.7 | ) | ||||
|
|
||||||||
|
Common shares outstanding
|
442.8 | 428.8 | ||||||
|
Participating preferred shares, on an as converted basis
|
19.2 | — | ||||||
|
|
||||||||
|
Common shares and common share equivalents outstanding
|
462.0 | 428.8 | ||||||
|
|
||||||||
Total treasury shares at September 30, 2010 were 41.2 million (September 30, 2009: 43.3
million), including 12.8 million unvested restricted stock awards (September 30, 2009: 12.6
million) for which dividend and voting rights apply.
During the three and nine months ended September 30, 2010, the company repurchased 6.4 million
shares in the market at a cost of $127.7 million (three and nine months ended September 30, 2009:
no shares were repurchased). Separately, an aggregate of 1.4 million shares were withheld on
vesting events during the nine months ended September 30, 2010 to meet employees’ withholding tax
obligations (nine months ended September 30, 2009: 1.1 million shares). The carrying value of these
shares withheld was $36.5 million (nine months ended September 30, 2009: $12.6 million).
Approximately $1.2 billion remained authorized under the company’s share repurchase plan at
September 30, 2010.
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 is convertible into 1,000 common shares upon transfer
of the shares by Morgan Stanley to an unrelated third party. Each participating preferred share
participates in dividends on a basis equal to common shares. The participating preferred shares are
non-voting except as otherwise provided by applicable law and benefit from a liquidation preference
of $0.01 per share.
9. OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, which includes our proportionate
share of equity method investees’ accumulated other comprehensive income, were as follows:
| September 30, | December 31, | |||||||
| $ in millions | 2010 | 2009 | ||||||
|
Net unrealized gains/(losses) on available-for-sale investments
|
14.8 | 5.4 | ||||||
|
Tax on unrealized losses/(gains) on available-for-sale investments
|
(2.7 | ) | (1.6 | ) | ||||
|
Cumulative foreign currency translation adjustments
|
454.8 | 442.0 | ||||||
|
Tax on cumulative foreign currency translation adjustments
|
2.0 | 2.0 | ||||||
|
Employee benefit plan liability adjustments
|
(70.2 | ) | (74.5 | ) | ||||
|
Tax on employee benefit plan liability adjustments
|
18.5 | 20.3 | ||||||
|
|
||||||||
|
Total accumulated other comprehensive income
|
417.2 | 393.6 | ||||||
|
|
||||||||
25
Table of Contents
Total other comprehensive income details are presented below:
| Three months Ended | Nine months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| $ in millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Net income/(loss), including gains and losses attributable to
noncontrolling interests
|
27.4 | 104.7 | 480.1 | 75.1 | ||||||||||||
|
Adoption of FSP FAS 115-2
|
— | — | — | (1.5 | ) | |||||||||||
|
Unrealized holding gains and losses on available-for-sale investments*
|
6.5 | 11.4 | 6.6 | 9.1 | ||||||||||||
|
Tax on net unrealized holding gains and losses on available-for-sale
investments
|
(1.3 | ) | (0.6 | ) | (1.0 | ) | (1.8 | ) | ||||||||
|
Reclassification adjustments for net gains and losses on
available-for-sale investments included in net income
|
2.1 | (1.5 | ) | 8.0 | 3.9 | |||||||||||
|
Tax on reclassification adjustments for net gains and losses on
available-for-sale investments included in net income
|
0.1 | 0.4 | (0.1 | ) | 0.8 | |||||||||||
|
Foreign currency translation adjustments**
|
145.6 | 102.9 | (3.4 | ) | 422.4 | |||||||||||
|
Tax on foreign currency translation adjustments
|
— | (0.2 | ) | — | 0.6 | |||||||||||
|
Adjustments to employee benefit plan liability
|
(2.7 | ) | 1.6 | 4.3 | (1.9 | ) | ||||||||||
|
Tax on adjustments to pension liability
|
— | (1.4 | ) | (1.8 | ) | 0.6 | ||||||||||
|
|
||||||||||||||||
|
Total comprehensive income/(loss)
|
177.7 | 217.3 | 492.7 | 507.3 | ||||||||||||
|
|
||||||||||||||||
| * | The company adopted FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” 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 $53.3 million and $16.2 million for the three and nine months ended September 30, 2010, respectively, 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. |
10. TAXATION
At September 30, 2010, the total amount of gross unrecognized tax benefits was $26.2 million
as compared to the December 31, 2009, total amount of $39.0 million. During the three months ended
September 30, 2010, a net tax benefit of $10.1 million was recognized as a result of the expiration
of the statute of limitations for certain tax positions related to the 2006 tax year.
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.
11. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income attributable to common
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 periods.
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 participating preferred shares. Each participating preferred share is convertible into 1,000
common shares upon transfer of the shares by Morgan Stanley to an unrelated third party. Each
participating preferred share participates in dividends on a basis equal to common shares. Due to
the similarities in terms between the company’s participating preferred shares and common shares,
and the fact that the number of participating preferred shares
26
Table of Contents
outstanding of 19,212 and the dividends payable on participating preferred shares of $2.1
million would not change the amount of basic or diluted EPS, the company has excluded these amounts
from the calculation below and considers the participating preferred shares to be common share
equivalents. The company has included the outstanding participating preferred shares, as converted
to common shares, and dividends payable on participating preferred shares in the calculation of
average basic and diluted shares outstanding for the three and nine months ended September 30,
2010.
The calculation of earnings per share is as follows:
| Net Income | ||||||||||||
| Attributable to | ||||||||||||
| Common | Weighted Average | Per Share | ||||||||||
| In millions, except per share data | Shareholders | Number of Shares | Amount | |||||||||
|
For the three months ended September 30, 2010
|
||||||||||||
|
Basic earnings per share
|
$ | 154.7 | 476.6 | $ | 0.32 | |||||||
|
Dilutive effect of share-based awards
|
— | 2.5 | — | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 154.7 | 479.1 | $ | 0.32 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
For the three months ended September 30, 2009
|
||||||||||||
|
Basic earnings per share
|
$ | 105.2 | 431.6 | $ | 0.24 | |||||||
|
Dilutive effect of share-based awards
|
— | 6.1 | — | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 105.2 | 437.7 | $ | 0.24 | |||||||
|
|
||||||||||||
| Net Income | ||||||||||||
| Attributable to | ||||||||||||
| Common | Weighted Average | Per Share | ||||||||||
| In millions, except per share data | Shareholders | Number of Shares | Amount | |||||||||
|
For the nine months ended September 30, 2010
|
||||||||||||
|
Basic earnings per share
|
$ | 290.5 | 457.0 | $ | 0.64 | |||||||
|
Dilutive effect of share-based awards
|
— | 2.9 | — | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 290.5 | 459.9 | $ | 0.63 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
For the nine months ended September 30, 2009
|
||||||||||||
|
Basic earnings per share
|
$ | 211.6 | 411.5 | $ | 0.51 | |||||||
|
Dilutive effect of share-based awards
|
— | 6.3 | — | |||||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 211.6 | 417.8 | $ | 0.51 | |||||||
|
|
||||||||||||
See Note 13, “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 8.6 million shares at a weighted average exercise price of 2033 pence were
outstanding for the nine months ended September 30, 2010 (nine months ended September 30, 2009:
12.4 million share options at a weighted average exercise price of 1,890 pence), but were not
included in the computation of diluted earnings per share because the options’ exercise price were
greater than the average market price of the shares and therefore their inclusion would have been
anti-dilutive.
There were no contingently issuable shares excluded from the diluted earnings per share
computation for the nine months ended September 30, 2010 (nine months ended September 30, 2009: 1.6
million contingently issuable shares), because the necessary performance conditions for the shares
to be issuable had not yet been satisfied at the end of the respective period. There were no
contingently issuable shares that were excluded from the computation of diluted earnings per share
during the nine months ended September 30, 2010 and 2009, due to their inclusion being
anti-dilutive.
12. CONSOLIDATED INVESTMENT PRODUCTS
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 and generally has a small investment in certain of these products to
demonstrate “skin in the game” to other potential
27
Table of Contents
unaffiliated investors in these products. Certain of these investments are considered to be
variable interest entities (VIEs). If the company is the primary beneficiary of the VIEs, then the
investment products are consolidated into the company’s financial statements. Other partnership
entities are consolidated under a voting interest entity (VOE) model where the company is the
general partner and is presumed to have control, in the absence of simple majority kick-out rights
to remove the general partner, simple majority liquidation rights to dissolve the partnership, or
any substantive participating rights of the other limited partners.
The company’s risk with respect to each investment 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.
CLOs
For CLO entities, as discussed in Note 1, “Accounting Policies,” and Note 2, “Fair Value of
Assets and Liabilities,” the company generally invests in a portion of the unrated, junior
subordinated positions. 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 underlying investments in
the CLOs of $19.6 million (before consolidation) at September 30, 2010 (December 31, 2009: $17.9
million) represent its maximum risk of loss.
Prior to the adoption of FASB Statement No. 167, now encompassed in ASC Topic 810,
“Consolidation” (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 FASB Statement No. 167, that it did not absorb the
majority of the expected gains or losses from the CLOs and therefore was not their primary
beneficiary.
Effective January 1, 2010, upon the adoption of FASB Statement No. 167, 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 FASB Statement No. 167, 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
obligation 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.
The company generally invests in only a portion of the unrated, junior subordinated positions.
This 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 Condensed 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.
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
28
Table of Contents
available to the general creditors of the company. Additionally, the investors in the CLOs
have no recourse to the general credit of the company for the notes issued by the CLOs.
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 objective rights to
transfer 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.
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 15, “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. The maximum committed
amount under the support agreements, which represents the company’s maximum risk of loss, is
equivalent to the amount of support that the trusts required as of September 30, 2010 to maintain
the net asset value of the trusts at $1.00 per share. The estimated fair value of the guarantees
related to these agreements at September 30, 2010 was $4.0 million (December 31, 2009: $2.5
million), which was recorded as a guarantee obligation in other current liabilities in the
Consolidated Balance Sheet. The estimated fair value of these agreements is lower than the maximum
support amount reflecting management’s estimation that the likelihood of funding under the support
agreement is low, as 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 would be required to trigger funding by the company.
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.
29
Table of Contents
At September 30, 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
|
2 | 0.5 | 0.5 | |||||||||
|
Partnership and trust investments
|
— | 18.2 | 18.2 | |||||||||
|
Investments in Invesco Mortgage Capital Inc.
|
— | 31.8 | 31.8 | |||||||||
|
Support agreements*
|
12 | (4.0 | ) | 36.0 | ||||||||
|
|
||||||||||||
|
Total
|
86.5 | |||||||||||
|
|
||||||||||||
| * | As of September 30, 2010, the committed support under these agreements was $36 million with an internal approval mechanism to increase the maximum possible support to $66 million at the option of the company. |
During the nine months ended September 30, 2010, entities with the following balance sheets
were consolidated:
Balance Sheet
| VIEs | ||||
| $ in millions | consolidated | |||
|
During the nine months ended September 30, 2010*
|
||||
|
Current assets
|
281.6 | |||
|
Non-current assets
|
6,188.1 | |||
|
|
||||
|
Total assets
|
6,469.7 | |||
|
|
||||
|
Current liabilities
|
162.6 | |||
|
Non-current liabilities
|
5,883.4 | |||
|
|
||||
|
Total liabilities
|
6,046.0 | |||
|
|
||||
|
Total equity
|
423.7 | |||
|
|
||||
|
Total liabilities and equity
|
6,469.7 | |||
|
|
||||
| * | The amounts consolidated in this table reflect the initial consolidation of CLOs at the adoption of FASB Statement No. 167 on January 1, 2010 as well as the initial consolidation of certain CLOs acquired in the June 1, 2010 acquisition. |
During the nine months ended September 30, 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 Condensed Consolidated Balance Sheet are
illustrated in the table below. There was no net impact to the Condensed Consolidated Statement of
Income for the nine months ended September 30, 2009, from the deconsolidation of these investment
products.
Balance Sheet
| Amounts | ||||
| deconsolidated | ||||
| $ in millions | under FIN 46(R) | |||
|
During the nine months ended September 30, 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 | |||
|
|
||||
30
Table of Contents
The following tables reflect the impact of consolidation of investment products into the
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009, and the
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2010
and 2009.
Condensed Consolidating Balance Sheets
| Before | Other | |||||||||||||||||||||||
| $ in millions | Consolidation* | CLOs - VIEs ** | VIEs | VOEs | Eliminations | Total | ||||||||||||||||||
|
As of September 30, 2010
|
||||||||||||||||||||||||
|
Current assets
|
4,055.7 | 389.5 | 1.6 | 23.3 | (8.9 | ) | 4,461.2 | |||||||||||||||||
|
Non-current assets
|
8,703.3 | 6,125.4 | 60.0 | 624.5 | (32.7 | ) | 15,480.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
12,759.0 | 6,514.9 | 61.6 | 647.8 | (41.6 | ) | 19,941.7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Current liabilities
|
3,252.8 | 302.1 | 1.0 | 4.2 | (8.9 | ) | 3,551.2 | |||||||||||||||||
|
Long-term debt of
consolidated investment
products
|
— | 5,663.4 | — | — | (19.6 | ) | 5,643.8 | |||||||||||||||||
|
Other non-current liabilities
|
1,900.5 | — | — | — | — | 1,900.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities
|
5,153.3 | 5,965.5 | 1.0 | 4.2 | (28.5 | ) | 11,095.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Retained earnings
appropriated for investors
in consolidated investment
products
|
— | 549.4 | — | — | (2.5 | ) | 546.9 | |||||||||||||||||
|
Other equity attributable to
common shareholders
|
7,600.7 | — | 0.1 | 13.0 | (10.6 | ) | 7,603.2 | |||||||||||||||||
|
Equity attributable to
noncontrolling interests in
consolidated entities
|
5.0 | — | 60.5 | 630.6 | — | 696.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and equity
|
12,759.0 | 6,514.9 | 61.6 | 647.8 | (41.6 | ) | 19,941.7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Before | Other | |||||||||||||||||||
| $ in millions | Consolidation* | VIEs | VOEs | Eliminations | 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 | ||||||||||||||
|
|
||||||||||||||||||||
| * | 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. | |
| ** | The company adopted FASB Statement No. 167 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. |
31
Table of Contents
Condensed Consolidating Statements of Income
| Before | Other | |||||||||||||||||||||||
| $ in millions | Consolidation* | CLOs - VIEs ** | VIEs | VOEs | Eliminations | Total | ||||||||||||||||||
|
Three months ended September 30, 2010
|
||||||||||||||||||||||||
|
Total operating revenues
|
963.5 | — | — | 0.1 | (10.5 | ) | 953.1 | |||||||||||||||||
|
Total operating expenses
|
768.4 | 9.8 | 0.4 | 2.1 | (10.5 | ) | 770.2 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income
|
195.1 | (9.8 | ) | (0.4 | ) | (2.0 | ) | — | 182.9 | |||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
10.7 | — | — | — | — | 10.7 | ||||||||||||||||||
|
Interest and dividend income
|
3.4 | 71.8 | — | — | (1.5 | ) | 73.7 | |||||||||||||||||
|
Other investment income/(losses)
|
14.6 | (164.3 | ) | 0.4 | 15.6 | — | (133.7 | ) | ||||||||||||||||
|
Interest expense
|
(16.2 | ) | (37.0 | ) | — | — | 1.5 | (51.7 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
207.6 | (139.3 | ) | — | 13.6 | — | 81.9 | |||||||||||||||||
|
Income tax provision
|
(54.5 | ) | — | — | — | — | (54.5 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
153.1 | (139.3 | ) | — | 13.6 | — | 27.4 | |||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.2 | ) | 138.0 | — | (10.4 | ) | (0.1 | ) | 127.3 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
152.9 | (1.3 | ) | — | 3.2 | (0.1 | ) | 154.7 | ||||||||||||||||
|
|
||||||||||||||||||||||||
| Before | ||||||||||||||||||||
| $ in millions | Consolidation* | VIEs | VOEs | Eliminations | Total | |||||||||||||||
|
Three months ended September 30, 2009
|
||||||||||||||||||||
|
Total operating revenues
|
708.1 | — | (0.4 | ) | (1.9 | ) | 705.8 | |||||||||||||
|
Total operating expenses
|
553.3 | 0.3 | 2.5 | (1.9 | ) | 554.2 | ||||||||||||||
|
|
||||||||||||||||||||
|
Operating income
|
154.8 | (0.3 | ) | (2.9 | ) | — | 151.6 | |||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
7.6 | — | — | 0.3 | 7.9 | |||||||||||||||
|
Interest and dividend income
|
1.7 | — | — | — | 1.7 | |||||||||||||||
|
Other investment income/(losses)
|
2.0 | 0.5 | 1.6 | — | 4.1 | |||||||||||||||
|
Interest expense
|
(16.9 | ) | — | — | — | (16.9 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
149.2 | 0.2 | (1.3 | ) | 0.3 | 148.4 | ||||||||||||||
|
Income tax provision
|
(43.7 | ) | — | — | — | (43.7 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Net income/(loss), including gains and losses
attributable to noncontrolling interests
|
105.5 | 0.2 | (1.3 | ) | 0.3 | 104.7 | ||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.3 | ) | (0.2 | ) | 1.0 | — | 0.5 | |||||||||||||
|
|
||||||||||||||||||||
|
Net income attributable to common shareholders
|
105.2 | — | (0.3 | ) | 0.3 | 105.2 | ||||||||||||||
|
|
||||||||||||||||||||
| * | The Before Consolidation column includes Invesco’s equity interest in the investment products, accounted for as equity method and available-for-sale investments. | |
| ** | The company adopted FASB Statement No. 167 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. |
32
Table of Contents
| Before | Other | |||||||||||||||||||||||
| $ in millions | Consolidation* | CLOs - VIEs ** | VIEs | VOEs | Eliminations | Total | ||||||||||||||||||
|
Nine months ended September 30, 2010
|
||||||||||||||||||||||||
|
Total operating revenues
|
2,492.3 | — | — | 0.3 | (33.4 | ) | 2,459.2 | |||||||||||||||||
|
Total operating expenses
|
2,060.3 | 31.0 | 1.4 | 8.7 | (33.4 | ) | 2,068.0 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income
|
432.0 | (31.0 | ) | (1.4 | ) | (8.4 | ) | — | 391.2 | |||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
27.3 | — | — | — | (0.4 | ) | 26.9 | |||||||||||||||||
|
Interest and dividend income
|
6.8 | 179.2 | — | — | (3.3 | ) | 182.7 | |||||||||||||||||
|
Other investment income/(losses)
|
3.2 | 78.9 | 4.9 | 58.2 | — | 145.2 | ||||||||||||||||||
|
Interest expense
|
(42.7 | ) | (85.2 | ) | — | — | 3.3 | (124.6 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
426.6 | 141.9 | 3.5 | 49.8 | (0.4 | ) | 621.4 | |||||||||||||||||
|
Income tax provision
|
(141.3 | ) | — | — | — | — | (141.3 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
285.3 | 141.9 | 3.5 | 49.8 | (0.4 | ) | 480.1 | |||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.4 | ) | (139.4 | ) | (3.5 | ) | (46.2 | ) | (0.1 | ) | (189.6 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
284.9 | 2.5 | — | 3.6 | (0.5 | ) | 290.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Before | ||||||||||||||||||||
| $ in millions | Consolidation* | VIEs | VOEs | Eliminations | Total | |||||||||||||||
|
Nine months ended September 30, 2009
|
||||||||||||||||||||
|
Total operating revenues
|
1,883.6 | 0.3 | 1.5 | (5.9 | ) | 1,879.5 | ||||||||||||||
|
Total operating expenses
|
1,553.0 | 1.3 | 7.3 | (5.9 | ) | 1,555.7 | ||||||||||||||
|
|
||||||||||||||||||||
|
Operating income
|
330.6 | (1.0 | ) | (5.8 | ) | — | 323.8 | |||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
15.4 | — | — | 2.5 | 17.9 | |||||||||||||||
|
Interest and dividend income
|
7.7 | — | — | — | 7.7 | |||||||||||||||
|
Other investment income/(losses)
|
7.8 | (16.0 | ) | (116.8 | ) | — | (125.0 | ) | ||||||||||||
|
Interest expense
|
(49.3 | ) | — | — | — | (49.3 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
312.2 | (17.0 | ) | (122.6 | ) | 2.5 | 175.1 | |||||||||||||
|
Income tax provision
|
(100.0 | ) | — | — | — | (100.0 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Net income/(loss), including gains and losses
attributable to noncontrolling interests
|
212.2 | (17.0 | ) | (122.6 | ) | 2.5 | 75.1 | |||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.6 | ) | 17.0 | 120.1 | — | 136.5 | ||||||||||||||
|
|
||||||||||||||||||||
|
Net income attributable to common shareholders
|
211.6 | — | (2.5 | ) | 2.5 | 211.6 | ||||||||||||||
|
|
||||||||||||||||||||
| * | The Before Consolidation column includes Invesco’s equity interest in the investment products, accounted for as equity method and available-for-sale investments. | |
| ** | The company adopted FASB Statement No. 167 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. |
33
Table of Contents
The carrying value of investments held and notes issued by consolidated investment products is
also their fair value. The following table presents the fair value hierarchy levels of investments
held and notes issued by consolidated investment products, which are measured at fair value as of
September 30, 2010:
| As of September 30, 2010 | ||||||||||||||||
| 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) | ||||||||||||
|
Assets:
|
||||||||||||||||
|
CLO collateral assets:
|
||||||||||||||||
|
Bank loans
|
5,837.0 | — | 5,837.0 | — | ||||||||||||
|
Bonds
|
253.1 | 253.1 | — | — | ||||||||||||
|
Equity securities
|
35.3 | 35.3 | — | — | ||||||||||||
|
CLO-related derivative assets
|
18.9 | — | 18.9 | — | ||||||||||||
|
Private equity fund assets:
|
||||||||||||||||
|
Equity securities
|
121.8 | 8.9 | — | 112.9 | ||||||||||||
|
Investments in other private equity funds
|
555.7 | — | — | 555.7 | ||||||||||||
|
Debt securities issued by the U.S. Treasury
|
7.0 | 7.0 | — | — | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
CLO notes
|
(5,643.8 | ) | — | — | (5,643.8 | ) | ||||||||||
|
CLO-related derivative liabilities
|
(8.8 | ) | — | (8.8 | ) | — | ||||||||||
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 | — | — | ||||||||||||
The following table shows a reconciliation of the beginning and ending fair value measurements
for level 3 assets using significant unobservable inputs:
| Three months Ended | Three months Ended | Nine months Ended | Nine months Ended | |||||||||||||
| $ in millions | September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | ||||||||||||
|
Beginning balance
|
662.7 | 632.4 | 667.1 | 761.0 | ||||||||||||
|
Purchases, sales,
issuances and
settlements, net
|
(8.4 | ) | 6.1 | (55.7 | ) | 12.3 | ||||||||||
|
Gains and losses
included in the
Condensed
Consolidated
Statements of Income*
|
14.3 | 1.4 | 57.2 | (133.4 | ) | |||||||||||
|
|
||||||||||||||||
|
Ending balance
|
668.6 | 639.9 | 668.6 | 639.9 | ||||||||||||
|
|
||||||||||||||||
| * | Included in gains and losses of consolidated investment products in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2010 are $2.1 million and $44.3 million, respectively, in net unrealized gains attributable to investments still held at September 30, 2010 by consolidated investment products (three and nine months ended September 30, 2009: $1.1 million and $126.4 million, respectively, attributable to investments still held at September 30, 2009). |
34
Table of Contents
The following table shows a reconciliation of the beginning and ending fair value measurements
for level 3 liabilities using significant unobservable inputs:
| Three months Ended | Nine months Ended | |||||||
| $ in millions | September 30, 2010* | September 30, 2010* | ||||||
|
Beginning balance
|
(5,404.4 | ) | (5,234.9 | ) | ||||
|
Purchases, sales, issuances and settlements/prepayments, net
|
64.0 | 166.4 | ||||||
|
Acquisition of business
|
— | (630.2 | ) | |||||
|
Gains/(losses) included in the Condensed Consolidated Statements of Income
|
(265.6 | ) | (209.7 | ) | ||||
|
Foreign exchange
|
(37.8 | ) | 264.6 | |||||
|
|
||||||||
|
Ending balance
|
(5,643.8 | ) | (5,643.8 | ) | ||||
|
|
||||||||
| * | The company adopted FASB Statement No. 167 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 2010 and 2018, pay interest at Libor or Euribor plus a
spread of between 0.25% and 15%, and typically range in credit rating categories from BBB down to
unrated. At September 30, 2010, the unpaid principal balance exceeded the fair value of the senior
secured bank loans and bonds by approximately $572 million. Less than 3% of the collateral assets
are in default as of September 30, 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.
In a typical CLO structure, notes are issued in tranches and are categorized into varying
degrees of subordination. Each tranche has a different level of credit protection or risk exposure
than another. There is generally a senior (“A”) class of securities and one or more junior
subordinated (“B,” “C,” etc.) classes that function as protective layers for the “A” class. The
senior classes have first claim on the cash that the CLO receives, and the more junior classes
receive repayment only after the more senior classes have repaid. Because of the cascading effect
between classes, this arrangement is often referred to as a cash flow waterfall. In the event that
the underlying collateral asset pool becomes insufficient to make payments on the notes, the loss
is absorbed first by the subordinated tranches, and the upper-level tranches remain unaffected
until the losses exceed the entire amount of the subordinated tranches. The senior securities are
typically AAA-rated, signifying a lower risk, while the lower-credit quality subordinated classes
receive a lower credit rating, signifying a higher risk. The most junior class (often called the
equity class) is the most exposed to payment risk. In some cases the equity class receives no
coupon (either fixed or floating), but only the residual cash flow (if any) after all the other
classes have been paid.
Notes issued by consolidated CLOs mature at various dates between 2014 and 2024 and have
a weighted average maturity of 10.2 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 September 30, 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
35
Table of Contents
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.
The significant inputs used in the valuation of the notes issued by consolidated CLOs include
a cumulative average default rate between 3% 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 Condensed Consolidated Balance Sheet in other current assets,
and the fair value of derivative contracts in a liability position is included in the company’s
Condensed 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 $5.1 million and $5.3 million are reflected in
gains/losses of investments in consolidated investment products on the company’s Condensed
Consolidated Statements of Income for the three and nine months ended September 30, 2010. At
September 30, 2010, there were 108 open swap agreements with a notional value of $174.0 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
36
Table of Contents
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.
13. 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 $87.0 million in the nine months ended September 30,
2010 (September 30, 2009: $68.1 million) related to equity-settled share-based payment
transactions. The total income tax benefit recognized in the Consolidated Statements of Income for
share-based compensation arrangements was $28.4 million for the nine months ended September 30,
2010 (September 30, 2009: $21.9 million).
Cash received from the exercise of share options granted under share-based compensation
arrangements was $10.8 million in the nine months ended September 30, 2010 (September 30, 2009:
$40.5 million). The total tax benefit realized from share based payment awards was $53.2 million in
the nine months ended September 30, 2010 (September 30, 2009: $39.0 million).
Share Awards
Share awards are broadly classified into two categories: time-vested and performance-vested
share awards. 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 move of the company’s
primary share listing 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:
37
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| Nine months ended September 30, 2010 | Nine months ended September 30, 2009 | |||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||
| Average | Average | |||||||||||||||||||||||
| Grant Date | Grant Date | |||||||||||||||||||||||
| Time- | Performance- | Fair Value | Time- | Performance- | Fair Value | |||||||||||||||||||
| Vested | Vested | (£ Sterling) | Vested | Vested | (£ Sterling) | |||||||||||||||||||
|
Millions of shares, except fair values
|
||||||||||||||||||||||||
|
Unvested at the beginning of period
|
5.4 | 2.0 | 11.24 | 10.2 | 6.0 | 9.62 | ||||||||||||||||||
|
Forfeited during the period
|
(0.1 | ) | (1.4 | ) | 12.07 | (0.3 | ) | (0.1 | ) | 8.90 | ||||||||||||||
|
Modification of share-based payment
awards*
|
— | — | — | — | (1.4 | ) | 9.37 | |||||||||||||||||
|
Vested and distributed during the period
|
(1.2 | ) | (0.5 | ) | 9.14 | (1.9 | ) | (2.2 | ) | 8.31 | ||||||||||||||
|
Unvested at the end of the period
|
4.1 | 0.1 | 11.82 | 8.0 | 2.3 | 10.22 | ||||||||||||||||||
| * | During the nine months ended September 30, 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, $13.0 million was reclassified out of additional paid in capital and into other current and non-current liabilities on the Condensed Consolidated Balance Sheet during the period. There was no impact to the Condensed Consolidated Statement of Income or earnings per share as a result of this modification. |
Subsequent to the move of the company’s primary share listing to the New York Stock Exchange,
shares are now priced in U.S. dollars. Movements on share awards priced in U.S. dollars are
detailed below:
| Nine months ended September 30, 2010 | Nine months ended September 30, 2009 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Time- | Grant Date | Time- | Grant Date | |||||||||||||
| Vested | Fair Value ($) | Vested | Fair Value ($) | |||||||||||||
|
Millions of shares, except fair values
|
||||||||||||||||
|
Unvested at the beginning of period
|
11.6 | 15.24 | 3.5 | 26.67 | ||||||||||||
|
Granted during the period
|
10.6 | 19.13 | 8.9 | 11.49 | ||||||||||||
|
Forfeited during the period
|
(0.2 | ) | 18.81 | (0.1 | ) | 22.94 | ||||||||||
|
Vested and distributed during the period
|
(3.1 | ) | 14.40 | (0.6 | ) | 26.25 | ||||||||||
|
|
||||||||||||||||
|
Unvested at the end of the period
|
18.9 | 17.52 | 11.7 | 15.24 | ||||||||||||
|
|
||||||||||||||||
Share awards outstanding at September 30, 2010 had a weighted average remaining contractual
life of 1.71 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.
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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. The options outstanding at September 30, 2010 had a
range of exercise prices from 50 pence to 3,360 pence, and a weighted average remaining contractual
life of 2.07 years (for options exercisable at September 30, 2010, the weighted average remaining
contractual life is 2.07 years). The total intrinsic value of options exercised during the nine
months ended September 30, 2010 and 2009, was $10.8 million and $13.2 million, respectively. At
September 30, 2010, the aggregate intrinsic value of options outstanding and options exercisable
was $54.2 million and $54.2 million, respectively. The market price of the company’s common stock
at September 30, 2010 was $21.23.
Changes in outstanding share option awards are as follows:
| Nine months ended September 30, 2010 | Nine months ended September 30, 2009 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Options | Exercise Price | Options | Exercise Price | |||||||||||||
| (millions of shares) | (£ Sterling) | (millions of shares) | (£ Sterling) | |||||||||||||
|
Outstanding at the beginning of the period
|
16.4 | 14.99 | 23.1 | 14.06 | ||||||||||||
|
Forfeited during the period
|
(1.0 | ) | 21.81 | (0.8 | ) | 17.41 | ||||||||||
|
Exercised during the period
|
(1.0 | ) | 6.44 | (2.5 | ) | 9.02 | ||||||||||
|
|
||||||||||||||||
|
Outstanding at the end of the period
|
14.4 | 15.19 | 19.8 | 14.56 | ||||||||||||
|
|
||||||||||||||||
|
Exercisable at the end of the period
|
14.4 | 15.19 | 19.5 | 14.74 | ||||||||||||
|
|
||||||||||||||||
14. 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 Condensed Consolidated Statements of Income for the nine
months ended September 30, 2010 and 2009, of $35.9 million and $32.5 million, respectively,
represent contributions paid or payable to these plans by the company at rates specified in the
rules of the plans. As of September 30, 2010, accrued contributions of $14.2 million (December 31,
2009: $17.1 million) for the current year will be paid to the plans when due.
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. 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 components of net periodic benefit cost in respect of these defined benefit plans are as
follows:
| Three months Ended September 30, | Nine months Ended September 30, | |||||||||||||||||||||||||||||||
| Retirement Plans | Medical Plan | Retirement Plans | Medical Plan | |||||||||||||||||||||||||||||
| $ in millions | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Service cost
|
0.9 | 1.6 | 0.1 | 0.1 | 2.9 | 8.3 | 0.2 | 0.3 | ||||||||||||||||||||||||
|
Interest cost
|
3.9 | 4.8 | 0.7 | 0.6 | 11.7 | 14.6 | 2.0 | 1.9 | ||||||||||||||||||||||||
|
Expected return on plan assets
|
(3.4 | ) | (5.3 | ) | (0.1 | ) | (0.1 | ) | (10.3 | ) | (15.8 | ) | (0.3 | ) | (0.3 | ) | ||||||||||||||||
|
Amortization of prior service cost
|
— | — | (0.5 | ) | (0.5 | ) | — | — | (1.5 | ) | (1.5 | ) | ||||||||||||||||||||
|
Amortization of net actuarial (loss)/gain
|
0.7 | 0.3 | 0.9 | 1.1 | 2.0 | 0.8 | 2.7 | 3.2 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net periodic benefit cost
|
2.1 | 1.4 | 1.1 | 1.2 | 6.3 | 7.9 | 3.1 | 3.6 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
The estimated amounts of contributions expected to be paid to the plans during 2010 is $7.9
million for retirement plans, with no expected contribution to the medical plan.
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Table of Contents
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 nine months
ended September 30, 2010. The company is evaluating whether these new regulations may require any
longer-term changes in our benefit plans.
15. 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 September 30, 2010,
the company’s undrawn capital commitments were $82.0 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 June
2010, the agreements were amended to extend the term through December 31, 2010. As of September 30,
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 fair value of the guarantees related to these agreements at September 30,
2010 was $4.0 million (December 31, 2009: $2.5 million), which was recorded in other current
liabilities on the Condensed Consolidated Balance Sheet. 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 in the amount of $21.8 million related to GST on sales charges collected from
investors upon the redemption of certain mutual funds. The company has 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, anticipates successfully contesting the
assessments. As a result of such actions, the CRA is currently considering its next steps and has
not responded to the company in this regard. Management believes that the CRA’s claims are
unfounded and that this assessment is unlikely to stand, and accordingly no provision has been
recorded in the Consolidated Financial Statements.
Acquisition Contingencies
Contingent consideration related to acquisitions made prior to January 1, 2009 (the effective
date of FASB Statement No. 141(R) – 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 WL Ross 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. The maximum remaining contingent payments of $110.0 million would require annual fund launches to total $4.0 billion. The April 3, 2010 earn-out calculation resulted in an addition to goodwill and a non-interest bearing note payable to the sellers of $25.8 million, payable in conjunction with the amount resulting from the October 3, 2010 measurement date calculation. |
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Table of Contents
Legal Contingencies
Following the industry-wide regulatory investigations in 2003 and 2004, multiple lawsuits
based on market timing allegations were filed against various parties affiliated with Invesco.
These lawsuits were consolidated in the United States District Court for the District of Maryland,
together with market timing lawsuits brought against affiliates of other mutual fund companies, and
on September 29, 2004, three amended complaints were filed against company-affiliated parties: (1)
a putative shareholder class action complaint brought on behalf of shareholders of AIM funds
formerly advised by Invesco Funds Group, Inc.; (2) a derivative complaint purportedly brought on
behalf of certain AIM funds and the shareholders of such funds; and (3) an ERISA complaint
purportedly brought on behalf of participants in the company’s 401(k) plan. The company and
plaintiffs have reached settlements in principle of these lawsuits. The proposed settlements, which
are subject to court approval, call for a payment by the company of $9.8 million, recorded in
general and administrative expenses in the Consolidated Statement of Income in 2007, in exchange
for dismissal with prejudice of all pending claims. In addition, under the terms of the proposed
settlements, the company may incur certain costs in connection with providing notice of the
proposed settlements to affected shareholders. Based on information currently available, it is not
believed that any such incremental notice costs will have any material effect on the consolidated
financial position or results of operations of the company.
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 the ARPS 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 distributors’ 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 asset 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.
16. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Prior to the December 4, 2007, redomicile of the company from the United Kingdom to Bermuda
and the relisting of the company from the London Stock Exchange to the New York Stock Exchange,
INVESCO PLC (now known as Invesco Holding Company Limited), the Issuer, issued 4.5% $300.0 million
senior notes due 2009, 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 Invesco Ltd. (the Parent), together with the following wholly owned subsidiaries: Invesco
Management Group, Inc., Invesco Aim Advisers, Inc., Invesco North
41
Table of Contents
American Holdings, Inc., and Invesco Institutional (N.A.), Inc. (the Guarantors). On June 9,
2009, 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 September 30, 2010 and December 31, 2009, Condensed Consolidating Statements
of Income for the three and nine months ended September 30, 2010 and 2009, and Condensed
Consolidating Statements of Cash Flows for the nine months ended September 30, 2010 and 2009.
Condensed Consolidating Balance Sheets
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
As of September 30, 2010
|
||||||||||||||||||||||||
|
Assets held for policyholders
|
— | 1,249.7 | — | — | — | 1,249.7 | ||||||||||||||||||
|
Other current assets
|
188.7 | 2,990.4 | — | 32.4 | — | 3,211.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total current assets
|
188.7 | 4,240.1 | — | 32.4 | — | 4,461.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Goodwill
|
2,356.3 | 4,076.2 | 443.6 | — | — | 6,876.1 | ||||||||||||||||||
|
Investments in subsidiaries
|
1,253.2 | 5.7 | 4,629.4 | 8,279.2 | (14,167.5 | ) | — | |||||||||||||||||
|
Other non-current assets
|
492.2 | 8,104.6 | 4.1 | 3.5 | — | 8,604.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total assets
|
4,290.4 | 16,426.6 | 5,077.1 | 8,315.1 | (14,167.5 | ) | 19,941.7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Policyholder payables
|
— | 1,249.7 | — | — | — | 1,249.7 | ||||||||||||||||||
|
Other current liabilities
|
81.5 | 2,215.3 | 4.0 | 0.7 | — | 2,301.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total current liabilities
|
81.5 | 3,465.0 | 4.0 | 0.7 | — | 3,551.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Intercompany balances
|
1,257.1 | (1,395.9 | ) | (25.5 | ) | 164.3 | — | — | ||||||||||||||||
|
Non-current liabilities
|
675.3 | 6,123.3 | 745.7 | — | — | 7,544.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities
|
2,013.9 | 8,192.4 | 724.2 | 165.0 | — | 11,095.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity attributable to common shareholders
|
2,276.5 | 7,538.1 | 4,352.9 | 8,150.1 | (14,167.5 | ) | 8,150.1 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Equity attributable to noncontrolling interests
in consolidated entities
|
— | 696.1 | — | — | — | 696.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total equity
|
2,276.5 | 8,234.2 | 4,352.9 | 8,150.1 | (14,167.5 | ) | 8,846.2 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total liabilities and equity
|
4,290.4 | 16,426.6 | 5,077.1 | 8,315.1 | (14,167.5 | ) | 19,941.7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
As of 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 | |||||||||||||||||
|
|
||||||||||||||||||||||||
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Table of Contents
Condensed Consolidating Statements of Income
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
For the three months ended September 30, 2010
|
||||||||||||||||||||||||
|
Total operating revenues
|
300.1 | 653.0 | — | — | — | 953.1 | ||||||||||||||||||
|
Total operating expenses
|
207.9 | 559.5 | (0.7 | ) | 3.5 | — | 770.2 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income/(loss)
|
92.2 | 93.5 | 0.7 | (3.5 | ) | — | 182.9 | |||||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
0.4 | 10.0 | 94.6 | 150.4 | (244.7 | ) | 10.7 | |||||||||||||||||
|
Other income/(expense)
|
(32.7 | ) | (76.5 | ) | (12.3 | ) | 9.8 | — | (111.7 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes, including gains and
losses attributable to noncontrolling interests
|
59.9 | 27.0 | 83.0 | 156.7 | (244.7 | ) | 81.9 | |||||||||||||||||
|
Income tax provision
|
(13.2 | ) | (42.1 | ) | 2.8 | (2.0 | ) | — | (54.5 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
46.7 | (15.1 | ) | 85.8 | 154.7 | (244.7 | ) | 27.4 | ||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
— | 127.3 | — | — | — | 127.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
46.7 | 112.2 | 85.8 | 154.7 | (244.7 | ) | 154.7 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
For the three months ended September 30, 2009
|
||||||||||||||||||||||||
|
Total operating revenues
|
148.9 | 556.9 | — | — | — | 705.8 | ||||||||||||||||||
|
Total operating expenses
|
110.0 | 440.5 | 0.3 | 3.4 | — | 554.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income/(losses)
|
38.9 | 116.4 | (0.3 | ) | (3.4 | ) | — | 151.6 | ||||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
0.3 | 6.9 | 32.8 | 99.8 | (131.9 | ) | 7.9 | |||||||||||||||||
|
Other income/(expense)
|
(28.8 | ) | 20.4 | (11.5 | ) | 8.8 | — | (11.1 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes and noncontrolling interest
|
10.4 | 143.7 | 21.0 | 105.2 | (131.9 | ) | 148.4 | |||||||||||||||||
|
Income tax provision
|
11.7 | (62.3 | ) | 6.9 | — | — | (43.7 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including losses attributable to
noncontrolling interests
|
22.1 | 81.4 | 27.9 | 105.2 | (131.9 | ) | 104.7 | |||||||||||||||||
|
(Gains)/Losses attributable to the noncontrolling
interests in consolidated entities, net of tax
|
— | 0.5 | — | — | — | 0.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
22.1 | 81.9 | 27.9 | 105.2 | (131.9 | ) | 105.2 | |||||||||||||||||
|
|
||||||||||||||||||||||||
43
Table of Contents
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
For the nine months ended September 30, 2010
|
||||||||||||||||||||||||
|
Total operating revenues
|
711.4 | 1,747.8 | — | — | — | 2,459.2 | ||||||||||||||||||
|
Total operating expenses
|
531.6 | 1,526.8 | 0.1 | 9.5 | — | 2,068.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income/(loss)
|
179.8 | 221.0 | (0.1 | ) | (9.5 | ) | — | 391.2 | ||||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
3.3 | 22.9 | 166.6 | 294.4 | (460.3 | ) | 26.9 | |||||||||||||||||
|
Other income/(expense)
|
(77.4 | ) | 315.7 | (42.6 | ) | 7.6 | — | 203.3 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income/(loss) before income taxes, including
gains and losses attributable to noncontrolling
interests
|
105.7 | 559.6 | 123.9 | 292.5 | (460.3 | ) | 621.4 | |||||||||||||||||
|
Income tax provision
|
(37.1 | ) | (107.0 | ) | 4.8 | (2.0 | ) | — | (141.3 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
68.6 | 452.6 | 128.7 | 290.5 | (460.3 | ) | 480.1 | |||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
— | (189.6 | ) | — | — | — | (189.6 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
68.6 | 263.0 | 128.7 | 290.5 | (460.3 | ) | 290.5 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
For the nine months ended September 30, 2009
|
||||||||||||||||||||||||
|
Total operating revenues
|
394.2 | 1,485.3 | — | — | — | 1,879.5 | ||||||||||||||||||
|
Total operating expenses
|
304.5 | 1,240.3 | 1.0 | 9.9 | — | 1,555.7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Operating income/(loss)
|
89.7 | 245.0 | (1.0 | ) | (9.9 | ) | — | 323.8 | ||||||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
15.0 | 47.0 | 83.9 | 214.9 | (342.9 | ) | 17.9 | |||||||||||||||||
|
Other income/(expense)
|
(30.4 | ) | (128.7 | ) | (14.1 | ) | 6.6 | — | (166.6 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income taxes, including gains and
losses attributable to noncontrolling interests
|
74.3 | 163.3 | 68.8 | 211.6 | (342.9 | ) | 175.1 | |||||||||||||||||
|
Income tax provision
|
(6.7 | ) | (81.1 | ) | (12.2 | ) | — | — | (100.0 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
67.6 | 82.2 | 56.6 | 211.6 | (342.9 | ) | 75.1 | |||||||||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net of tax
|
— | 136.5 | — | — | — | 136.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income attributable to common shareholders
|
67.6 | 218.7 | 56.6 | 211.6 | (342.9 | ) | 211.6 | |||||||||||||||||
|
|
||||||||||||||||||||||||
| Condensed Consolidating Statements of Cash Flows | ||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
For the nine months ended September 30, 2010
|
||||||||||||||||||||||||
|
Net cash (used in)/provided by operating activities
|
(48.3 | ) | 356.0 | 61.0 | 56.9 | (50.1 | ) | 375.5 | ||||||||||||||||
|
Net cash (used in)/provided by investing activities
|
(690.9 | ) | 307.1 | (57.5 | ) | 207.7 | (410.8 | ) | (644.4 | ) | ||||||||||||||
|
Net cash (used in)/provided by financing activities
|
648.5 | (676.7 | ) | — | (263.2 | ) | 460.9 | 169.5 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
(Decrease)/increase in cash and cash equivalents
|
(90.7 | ) | (13.6 | ) | 3.5 | 1.4 | — | (99.4 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
|
For the nine months ended September 30, 2009
|
||||||||||||||||||||||||
|
Net cash (used in)/provided by operating activities
|
21.3 | 202.9 | 119.2 | 80.5 | (262.5 | ) | 161.4 | |||||||||||||||||
|
Net cash (used in)/provided by investing activities
|
(12.4 | ) | 1.1 | — | (28.5 | ) | — | (39.8 | ) | |||||||||||||||
|
Net cash (used in)/provided by financing activities
|
— | 112.4 | (119.4 | ) | (52.1 | ) | 262.5 | 203.4 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
(Decrease)/increase in cash and cash equivalents
|
8.9 | 316.4 | (0.2 | ) | (0.1 | ) | — | 325.0 | ||||||||||||||||
|
|
||||||||||||||||||||||||
44
Table of Contents
17. SUBSEQUENT EVENTS
On
October 21, 2010, the court approved the private litigation settlements as discussed in
Note 15, “Commitments and Contingencies,” resulting in no revisions to accruals previously
recorded. The settlements may be appealed prior to November 25, 2010. Barring an appeal, the
settlements would then become final.
On October 25, 2010, the company declared a third quarter 2010 dividend of 11 cents per share,
payable on December 8, 2010 to common and participating preferred shareholders of record at the
close of business on November 19, 2010.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Condensed Consolidated Financial Statements and
related Notes thereto, which appear elsewhere in this Report. Except for the historical financial
information, this Report may include statements that constitute “forward-looking statements” under
the United States securities laws. 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, 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. 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
and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent
Forms 10-Q, filed with the Securities and Exchange Commission.
References
In this Report, 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.
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
Condensed Consolidated Financial Statements of Invesco Ltd. and its subsidiaries and the notes
thereto contained elsewhere in this Report.
Invesco is a leading independent global investment manager with offices in 20 countries. As of
September 30, 2010, we managed $604.5 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, with clients
in more than 150 countries.
Despite continued economic and political uncertainty during the third quarter, most global
financial markets experienced positive returns. In the U.S., equity markets increased quarter over
quarter driven by strong performance in the month of September. In the three months ended September
30, 2010, the return on the S&P 500 was +10.7%. Equity markets outside of the U.S. were strong as
well. The FTSE 100 index increased 12.9% and the MSCI Emerging Market index was up 17.2%. Japanese
equities, as measured by the Nikkei 225 index were down slightly during the third quarter (0.14%)
as investors worried that a stronger Japanese Yen would
45
Table of Contents
hinder the profits of Japanese multinationals. The table below summarizes the third quarter
and nine months ended September 30 returns of several major market indices for 2010 and 2009:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| Index | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
S&P 500
|
10.7 | % | 15.0 | % | 2.3 | % | 18.7 | % | ||||||||
|
FTSE 100
|
12.9 | % | 20.8 | % | 2.5 | % | 16.9 | % | ||||||||
|
Nikkei 225
|
(0.14 | )% | 1.8 | % | (11.2 | )% | 14.4 | % | ||||||||
|
MSCI Emerging Market Index
|
17.2 | % | 20.1 | % | 8.7 | % | 61.2 | % | ||||||||
Although not as strong as equity market returns, credit markets also experienced positive
returns during the third quarter. Investment grade corporate bonds returned 4.9% and U.S. Treasury
securities returned 2.7% during the third quarter.
A significant portion of our business and assets under management (AUM) is based outside of
the U.S. The strengthening or weakening of the U.S. dollar against other currencies, primarily the
Pound Sterling, Canadian dollar, and Euro, 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 three and nine months ended September 30, 2010, which resulted in market gains in
our AUM of $34.4 billion and $19.8 billion during the respective periods; additionally the change
in foreign exchange rates increased AUM by $8.2 billion and $0.2 billion during the respective
periods. AUM at September 30, 2010 were $604.5 billion.
Summary operating information is presented in the table below:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| U.S. GAAP Financial Measures Summary | ||||||||||||||||
|
Operating revenues
|
$ | 953.1 | m | $ | 705.8 | m | $ | 2,459.2 | m | $ | 1,879.5 | m | ||||
|
Operating margin
|
19.2 | % | 21.5 | % | 15.9 | % | 17.2 | % | ||||||||
|
Net income attributable to common shareholders
|
$ | 154.7 | m | $ | 105.2 | m | $ | 290.5 | m | $ | 211.6 | m | ||||
|
Diluted EPS
|
$ | 0.32 | $ | 0.24 | $ | 0.63 | $ | 0.51 | ||||||||
|
Average assets under management (in billions)
|
$ | 583.3 | $ | 437.1 | $ | 504.5 | $ | 403.3 | ||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Non-GAAP Financial Measures Summary | ||||||||||||||||
|
Net revenues
(1)
|
$ | 707.1 | m | $ | 537.1 | m | $ | 1,840.5 | m | $ | 1,418.8 | m | ||||
|
Adjusted operating margin
(2)
|
34.8 | % | 32.1 | % | 33.6 | % | 26.6 | % | ||||||||
|
Adjusted net income
(3)
|
$ | 185.0 | m | $ | 117.7 | m | $ | 430.4 | m | $ | 247.4 | m | ||||
|
Adjusted EPS
(3)
|
$ | 0.39 | $ | 0.27 | $ | 0.94 | $ | 0.59 | ||||||||
|
Average assets under management (in billions)
|
$ | 583.3 | $ | 437.1 | $ | 504.5 | $ | 403.3 | ||||||||
| (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, and the operating income impact of the consolidation of investment products. 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. 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. |
46
Table of Contents
On June 1, 2010, the company completed the acquisition of 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. The acquisition added assets under management across
equity, fixed income and alternatives (including mutual funds, variable insurance funds, separate
accounts and unit investment trusts). 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. asset managers by assets under management (AUM), diversity of investment teams and client profile; | ||
| • | Deepened Invesco’s relationships with clients and strengthen its overall distribution capabilities; and | ||
| • | Further strengthened its position in the Japanese investment management market. |
Management believes that expected synergies resulting from the transaction have been achieved,
and notes that if certain U.S. fund mergers are approved by the fund boards, further product
rationalization will occur. Such fund mergers are expected to occur six to nine months from
September 30, 2010 and are expected to result in approximately $10 million in additional cost
savings in the second year following the acquisition.
47
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. Performance in our equities capabilities, as measured by the percentage
of AUM ahead of benchmark and ahead of peer median, has generally been strong with some pockets of
outstanding performance and some areas where we have been challenged. Within our equity asset
class, U.S. Value, Continental European, and Global ex-U.S. and Emerging Markets continue to have
generally strong relative performance versus competitors and versus benchmark over three- and
five-year periods. Within our U.S. Core equity range, conservative portfolio positioning has led to
near-term underperformance. Our Canadian equities has seen a strong turnaround as 65% and 81% of
assets are in the top half of the peer group on a one- and three-year period, respectively.
Previous near-term underperformance in U.K. equities has reversed with 94%, 92%, and 95% of assets
ahead of peers on a one-, three-, and five-year period, respectively, and 92%, 91%, and 92% of
assets ahead of benchmark on a one-, three-, and five-year basis, respectively. Within our fixed
income asset class, the global fixed income products have had at least 79% of AUM ahead of
benchmark and peers over one-, three-, and five-year periods. Our money market capability had at
least 93% of AUM ahead of peers on a one-, three-, and five-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
|
24 | % | 79 | % | 95 | % | 17 | % | 78 | % | 76 | % | |||||||||||||
|
U.S. Growth
|
52 | % | 45 | % | 57 | % | 52 | % | 46 | % | 52 | % | ||||||||||||||
|
U.S. Value
|
57 | % | 95 | % | 95 | % | 61 | % | 94 | % | 93 | % | ||||||||||||||
|
Sector
|
53 | % | 73 | % | 71 | % | 16 | % | 57 | % | 56 | % | ||||||||||||||
|
U.K.
|
94 | % | 92 | % | 95 | % | 92 | % | 91 | % | 92 | % | ||||||||||||||
|
Canadian
|
44 | % | 64 | % | 3 | % | 65 | % | 81 | % | 25 | % | ||||||||||||||
|
Asian
|
68 | % | 74 | % | 94 | % | 57 | % | 69 | % | 75 | % | ||||||||||||||
|
Continental European
|
98 | % | 81 | % | 94 | % | 79 | % | 80 | % | 77 | % | ||||||||||||||
|
Global
|
79 | % | 57 | % | 79 | % | 43 | % | 39 | % | 54 | % | ||||||||||||||
|
Global Ex U.S. and Emerging Markets
|
87 | % | 84 | % | 94 | % | 61 | % | 93 | % | 62 | % | ||||||||||||||
|
|
||||||||||||||||||||||||||
| Balanced |
Balanced
|
38 | % | 76 | % | 76 | % | 29 | % | 65 | % | 71 | % | |||||||||||||
|
|
||||||||||||||||||||||||||
| Fixed Income |
Money Market
|
38 | % | 77 | % | 74 | % | 96 | % | 93 | % | 94 | % | |||||||||||||
|
U.S. Fixed Income
|
86 | % | 41 | % | 66 | % | 76 | % | 65 | % | 62 | % | ||||||||||||||
|
Global Fixed Income
|
93 | % | 79 | % | 86 | % | 90 | % | 91 | % | 90 | % | ||||||||||||||
| Note: | AUM measured in the one-, three-, and five-year peer group rankings represents 61%, 60%, and 58% of total Invesco AUM, respectively, and AUM measured versus benchmark on a one-, three-, and five-year basis represents 73%, 71%, and 66% of total Invesco AUM, respectively, as of 9/30/10. 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 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. |
48
Table of Contents
Results of Operations for the three months ended September 30, 2010 compared with the three
months ended September 30, 2009
Assets Under Management
The company’s rolling presentation of AUM from period to period 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. Long-term outflows and the underlying reasons for the movements
in this line item include redemptions resulting from closed client accounts/funds, partial
redemptions in continuing client accounts/funds, and reductions in funding commitments into private
equity funds.
There are numerous drivers of AUM inflows and outflows, from individual investor decisions to
change their investment preferences to fiduciaries making broad asset allocation decisions on
behalf of advised clients to reallocate 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 short-term cash 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 QQQ ETF, DB PowerShares 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:
| Post- | ||||||||
| Previously | Reporting | |||||||
| $ in billions | Disclosed | Alignment | ||||||
|
Ending AUM:
|
||||||||
|
January 1, 2009
|
357.2 | 377.1 | ||||||
|
March 31, 2009
|
348.2 | 369.0 | ||||||
|
June 30, 2009
|
388.7 | 414.4 | ||||||
|
September 30, 2009
|
416.9 | 446.9 | ||||||
|
December 31, 2009
|
423.1 | 459.5 | ||||||
|
March 31, 2010
|
419.6 | 457.7 | ||||||
|
Average AUM:
|
||||||||
|
Three months ended September 30, 2009
|
406.9 | 437.1 | ||||||
|
Nine months ended September 30, 2009
|
378.2 | 403.3 | ||||||
|
Net revenue yield on AUM:
|
||||||||
|
Three months ended September 30, 2009
|
52.6 | bps | 49.2 | bps | ||||
|
Nine months ended September 30, 2009
|
49.9 | bps | 46.9 | bps | ||||
|
Net revenue yield on AUM before performance fees:
|
||||||||
|
Three months ended September 30, 2009
|
52.1 | bps | 48.8 | bps | ||||
|
Nine months ended September 30, 2009
|
49.1 | bps | 46.1 | bps | ||||
|
Gross revenue yield on AUM:
|
||||||||
|
Three months ended September 30, 2009
|
70.1 | bps | 65.2 | bps | ||||
|
Nine months ended September 30, 2009
|
66.9 | bps | 62.7 | bps | ||||
|
Gross revenue yield on AUM before performance fees:
|
||||||||
|
Three months ended September 30, 2009
|
69.6 | bps | 64.8 | bps | ||||
|
Nine months ended September 30, 2009
|
66.1 | bps | 61.9 | bps | ||||
49
Table of Contents
Additionally, as a result of the June 1, 2010 acquisition of Morgan Stanley’s retail asset
management business, including Van Kampen Investments (the “acquired business” or 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 September 30, 2010 were $604.5 billion (June 30, 2010: $557.7 billion; September 30,
2009: $446.9 billion). The acquisition added $114.6 billion in AUM at June 1, 2010. Additionally,
during the three months ended September 30, 2010, the acquisition of Australian equities manager,
Concord Capital, added $3.1 billion of AUM offset by a $1.4 billion disposition arising from the
sale of Echo Point Investment Management (which was part of the acquired business). During the
three months ended September 30, 2010, net inflows increased AUM by $4.9 billion, while positive
market movements increased AUM by $34.4 billion. We experienced net outflows in institutional money
market funds of $2.4 billion, and increases in AUM of $8.2 billion due to changes in foreign
exchange rates during the three months ended September 30, 2010. During the three months ended
September 30, 2009, net inflows increased AUM by $4.0 billion, and positive market movements
increased AUM by $30.3 billion. We experienced net outflows in institutional money market funds of
$2.6 billion, and increases in AUM of $0.8 billion due to changes in foreign exchange rates during
the three months ended September 30, 2009. Average AUM during the three months ended September 30,
2010 included the impact of the acquired business and were $583.3 billion, compared to $437.1
billion for the three months ended September 30, 2009.
Net inflows during the three months ended September 30, 2010 included net long-term inflows of
ETF, UIT and passive AUM of $3.6 billion and other net long-term inflows of $1.3 billion. Net flows
were driven by net inflows into our Institutional and Retail distribution channels of $3.9 billion
and $0.9 billion, respectively, primarily in the fixed income asset class, while our high net worth
distribution channel experienced net inflows of $0.1 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 three months
ended September 30, 2010, $25.2 billion of this increase was due to the change in value of our
equity asset class across all of our business components. Our fixed income, balanced, and
alternatives asset classes were also positively impacted by the change in market valuations during
the period. During the three months ended September 30, 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 10.7% and 12.9%,
respectively, during the three months ended September 30, 2010. The increase in equity valuations
impacted our retail distribution channel the most significantly. Of the $30.3 billion increase in
AUM resulting from market increases during the three months ended September 30, 2009, $22.6 billion
of this increase was due to the change in value of our equity asset class, in line with increases
in the S&P 500 and the FTSE 100 indices of 15.0% and 20.8%, respectively, during that period.
Foreign exchange rate movements in our AUM result from the effect of changes in foreign
exchange rates from period to period as non-U.S.-Dollar denominated AUM is translated into U.S.
Dollars, the reporting currency of the company. The impact of the change in foreign exchange rates
in the three months ended September 30, 2010 was driven primarily by the strengthening of the Pound
Sterling relative to the U.S. Dollar, which was reflected in the translation of our Pound
Sterling-based AUM into U.S. Dollars, the strengthening of the Canadian Dollar relative to the U.S.
Dollar, which was reflected in the translation of our Canadian Dollar-based AUM into U.S. Dollars,
and to the strengthening of the Euro relative to the U.S. Dollar, which was reflected in the
translation of our Euro-based AUM into U.S. Dollars. The impact of the change in foreign exchange
rates in the three months ended September 30, 2009 was driven by the strengthening of the Canadian
Dollar and Euro to the U.S. Dollar, offset by the weakening of the Pound Sterling to the U.S.
Dollar.
The table below illustrates the spot foreign exchange rates for translation into the U.S.
Dollar, the reporting currency of the company, at September 30, 2010 and 2009, as compared with the
rates that existed at June 30, 2010 and 2009:
| September 30, 2010 | June 30, 2010 | September 30, 2009 | June 30, 2009 | |||||||||||||
|
Pound Sterling ($ per £)
|
1.57 | 1.50 | 1.60 | 1.65 | ||||||||||||
|
Canadian Dollar (CAD per $)
|
1.03 | 1.06 | 1.07 | 1.16 | ||||||||||||
|
Euro ($ per Euro)
|
1.36 | 1.23 | 1.46 | 1.40 | ||||||||||||
50
Table of Contents
Net revenue yield decreased slightly to 48.5 basis points in the three months ended September
30, 2010 from the three months ended September 30, 2009, level of 49.2 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
September 30, 2010 equity AUM were $294.4 billion, representing 48.7% of our total AUM at that
date; whereas at September 30, 2009 equity AUM were $181.2 billion, representing 40.5% 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 September 30, 2010 ETF, UIT and Passive
AUM were $89.9 billion, representing 14.9% of total AUM at that date; whereas at September 30, 2009
ETF, UIT and Passive AUM were $45.9 billion, representing 10.3% of our total AUM at that date.
Gross revenue yield on AUM increased 0.5 basis points to 65.7 basis points in the three months
ended September 30, 2010 from the three months ended September 30, 2009 level of 65.2 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 | |||||||||||||||||||||||
| ETF, UIT & | ETF, UIT & | ETF, UIT | ETF, UIT & | |||||||||||||||||||||
| Total AUM | Passive | Passive | Total AUM | & Passive | Passive | |||||||||||||||||||
| $ in billions | 2010 | 2010 | 2010 | 2009 | 2009 | 2009 | ||||||||||||||||||
|
June 30
|
557.7 | 478.5 | 79.2 | 414.4 | 375.4 | 39.0 | ||||||||||||||||||
|
Long-term inflows
|
36.8 | 21.6 | 15.2 | 27.6 | 17.8 | 9.8 | ||||||||||||||||||
|
Long-term outflows
|
(31.9 | ) | (20.3 | ) | (11.6 | ) | (23.6 | ) | (16.1 | ) | (7.5 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
4.9 | 1.3 | 3.6 | 4.0 | 1.7 | 2.3 | ||||||||||||||||||
|
Net flows in institutional money market
funds
|
(2.4 | ) | (2.4 | ) | — | (2.6 | ) | (2.6 | ) | — | ||||||||||||||
|
Market gains and losses/reinvestment
|
34.4 | 28.4 | 6.0 | 30.3 | 25.8 | 4.5 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
1.7 | 1.7 | — | — | — | — | ||||||||||||||||||
|
Foreign currency translation
|
8.2 | 7.1 | 1.1 | 0.8 | 0.7 | 0.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30
|
604.5 | 514.6 | 89.9 | 446.9 | 401.0 | 45.9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average long-term AUM
|
516.4 | 436.9 | 79.5 | 347.3 | 305.8 | 41.5 | ||||||||||||||||||
|
Average institutional money market AUM
|
66.9 | 66.9 | — | 89.8 | 89.8 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average AUM
|
583.3 | 503.8 | 79.5 | 437.1 | 395.6 | 41.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Gross revenue yield on AUM
(1)
|
65.7 | bps | 74.8 | bps | 8.8 | bps | 65.2 | bps | 70.6 | bps | 13.9 | bps | ||||||||||||
|
Gross revenue yield on AUM before
performance fees
(1)
|
65.6 | bps | 74.6 | bps | 8.8 | bps | 64.8 | bps | 70.2 | bps | 13.9 | bps | ||||||||||||
|
Net revenue yield on AUM
(2)
|
48.5 | bps | 54.8 | bps | 8.8 | bps | 49.2 | bps | 52.9 | bps | 13.9 | bps | ||||||||||||
|
Net revenue yield on AUM before
performance fees
(2)
|
48.3 | bps | 54.6 | bps | 8.8 | bps | 48.8 | bps | 52.4 | bps | 13.9 | 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 the third quarter for our JVs in China was $3.4 billion (second quarter 2010: $3.5 billion; third quarter 2009: $3.9 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 Condensed 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. |
51
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 | ||||||||||||
|
June 30, 2010 AUM
|
557.7 | 325.6 | 216.7 | 15.4 | ||||||||||||
|
Long-term inflows
|
36.8 | 29.0 | 7.2 | 0.6 | ||||||||||||
|
Long-term outflows
|
(31.9 | ) | (28.1 | ) | (3.3 | ) | (0.5 | ) | ||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
4.9 | 0.9 | 3.9 | 0.1 | ||||||||||||
|
Net flows in institutional money market funds
|
(2.4 | ) | — | (2.4 | ) | — | ||||||||||
|
Market gains and losses/reinvestment
|
34.4 | 29.2 | 4.5 | 0.7 | ||||||||||||
|
Acquisitions/dispositions, net
|
1.7 | (1.0 | ) | 2.7 | — | |||||||||||
|
Foreign currency translation
|
8.2 | 4.9 | 3.3 | — | ||||||||||||
|
|
||||||||||||||||
|
September 30, 2010 AUM
|
604.5 | 359.6 | 228.7 | 16.2 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
June 30, 2009 AUM
(2)
|
414.4 | 192.1 | 208.5 | 13.8 | ||||||||||||
|
Long-term inflows
|
27.6 | 22.6 | 3.8 | 1.2 | ||||||||||||
|
Long-term outflows
|
(23.6 | ) | (16.9 | ) | (5.6 | ) | (1.1 | ) | ||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
4.0 | 5.7 | (1.8 | ) | 0.1 | |||||||||||
|
Net flows in institutional money market funds
|
(2.6 | ) | — | (2.6 | ) | — | ||||||||||
|
Market gains and losses/reinvestment
|
30.3 | 26.2 | 3.0 | 1.1 | ||||||||||||
|
Foreign currency translation
|
0.8 | 0.1 | 0.7 | — | ||||||||||||
|
|
||||||||||||||||
|
September 30, 2009 AUM
|
446.9 | 224.1 | 207.8 | 15.0 | ||||||||||||
|
|
||||||||||||||||
ETF, UIT & Passive AUM by Channel
(1)
| Private | ||||||||||||||||
| Wealth | ||||||||||||||||
| $ in billions | Total | Retail | Institutional | Management | ||||||||||||
|
June 30, 2010 AUM
|
79.2 | 57.3 | 21.9 | — | ||||||||||||
|
Long-term inflows
|
15.2 | 15.2 | — | — | ||||||||||||
|
Long-term outflows
|
(11.6 | ) | (11.6 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
3.6 | 3.6 | — | — | ||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | ||||||||||||
|
Market gains and losses/reinvestment
|
6.0 | 5.7 | 0.3 | — | ||||||||||||
|
Acquisitions/dispositions, net
|
— | — | — | — | ||||||||||||
|
Foreign currency translation
|
1.1 | — | 1.1 | — | ||||||||||||
|
|
||||||||||||||||
|
September 30, 2010 AUM
|
89.9 | 66.6 | 23.3 | — | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
June 30, 2009 AUM
(2)
|
39.0 | 35.3 | 3.7 | — | ||||||||||||
|
Long-term inflows
|
9.8 | 9.6 | 0.2 | — | ||||||||||||
|
Long-term outflows
|
(7.5 | ) | (7.5 | ) | — | — | ||||||||||
|
|
||||||||||||||||
|
Long-term net flows
|
2.3 | 2.1 | 0.2 | — | ||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | ||||||||||||
|
Market gains and losses/reinvestment
|
4.5 | 4.0 | 0.5 | — | ||||||||||||
|
Foreign currency translation
|
0.1 | 0.1 | — | — | ||||||||||||
|
|
||||||||||||||||
|
September 30, 2009 AUM
|
45.9 | 41.5 | 4.4 | — | ||||||||||||
|
|
||||||||||||||||
See accompanying notes to these AUM tables on the following page.
52
Table of Contents
Total AUM by Asset Class
(3)
| Fixed | Money | |||||||||||||||||||||||
| $ in billions | Total | Equity | Income | Balanced | Market | Alternatives (4) | ||||||||||||||||||
|
June 30, 2010 AUM
|
557.7 | 263.2 | 119.3 | 38.2 | 72.5 | 64.5 | ||||||||||||||||||
|
Long-term inflows
|
36.8 | 22.1 | 9.8 | 1.8 | 0.2 | 2.9 | ||||||||||||||||||
|
Long-term outflows
|
(31.9 | ) | (23.3 | ) | (3.7 | ) | (1.6 | ) | (0.5 | ) | (2.8 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
4.9 | (1.2 | ) | 6.1 | 0.2 | (0.3 | ) | 0.1 | ||||||||||||||||
|
Net flows in institutional money market funds
|
(2.4 | ) | — | — | — | (2.4 | ) | — | ||||||||||||||||
|
Market gains and losses/reinvestment
|
34.4 | 25.2 | 4.3 | 2.0 | 0.1 | 2.8 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
1.7 | 1.7 | — | — | — | — | ||||||||||||||||||
|
Foreign currency translation
|
8.2 | 5.5 | 1.1 | 0.9 | — | 0.7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
604.5 | 294.4 | 130.8 | 41.3 | 69.9 | (5) | 68.1 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
June 30, 2009 AUM
(2)
|
414.4 | 155.6 | 68.5 | 35.0 | 94.3 | 61.0 | ||||||||||||||||||
|
Long-term inflows
|
27.6 | 16.8 | 5.2 | 2.1 | 0.3 | 3.2 | ||||||||||||||||||
|
Long-term outflows
|
(23.6 | ) | (13.9 | ) | (3.0 | ) | (1.9 | ) | (0.6 | ) | (4.2 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
4.0 | 2.9 | 2.2 | 0.2 | (0.3 | ) | (1.0 | ) | ||||||||||||||||
|
Net flows in institutional money market funds
|
(2.6 | ) | — | — | — | (2.6 | ) | — | ||||||||||||||||
|
Market gains and losses/reinvestment
|
30.3 | 22.6 | 3.4 | 3.0 | — | 1.3 | ||||||||||||||||||
|
Foreign currency translation
|
0.8 | 0.1 | — | 0.5 | 0.1 | 0.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
446.9 | 181.2 | 74.1 | 38.7 | 91.5 | 61.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
ETF, UIT and Passive AUM by Asset Class
(3)
| Fixed | Money | |||||||||||||||||||||||
| $ in billions | Total | Equity | Income | Balanced | Market | Alternatives (4) | ||||||||||||||||||
|
June 30, 2010 AUM
|
79.2 | 48.9 | 15.3 | — | — | 15.0 | ||||||||||||||||||
|
Long-term inflows
|
15.2 | 12.7 | 1.8 | — | — | 0.7 | ||||||||||||||||||
|
Long-term outflows
|
(11.6 | ) | (9.8 | ) | (0.3 | ) | — | — | (1.5 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
3.6 | 2.9 | 1.5 | — | — | (0.8 | ) | |||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
6.0 | 4.8 | 0.4 | — | — | 0.8 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
— | — | — | — | — | — | ||||||||||||||||||
|
Foreign currency translation
|
1.1 | 0.9 | — | — | — | 0.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
89.9 | 57.5 | 17.2 | — | — | 15.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
June 30, 2009 AUM
(2)
|
39.0 | 24.6 | 1.9 | — | — | 12.5 | ||||||||||||||||||
|
Long-term inflows
|
9.8 | 7.1 | 1.0 | — | — | 1.7 | ||||||||||||||||||
|
Long-term outflows
|
(7.5 | ) | (6.1 | ) | — | — | — | (1.4 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
2.3 | 1.0 | 1.0 | — | — | 0.3 | ||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
4.5 | 3.8 | 0.6 | — | — | 0.1 | ||||||||||||||||||
|
Foreign currency translation
|
0.1 | — | — | — | — | 0.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
45.9 | 29.4 | 3.5 | — | — | 13.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
See accompanying notes to these AUM tables on the following page.
53
Table of Contents
Total AUM by Client Domicile
(6)
| Continental | ||||||||||||||||||||||||
| $ in billions | Total | U.S. | Canada | U.K. | Europe | Asia | ||||||||||||||||||
|
June 30, 2010 AUM
|
557.7 | 377.1 | 26.0 | 79.6 | 29.6 | 45.4 | ||||||||||||||||||
|
Long-term inflows
|
36.8 | 26.5 | 0.4 | 3.7 | 3.6 | 2.6 | ||||||||||||||||||
|
Long-term outflows
|
(31.9 | ) | (22.6 | ) | (1.6 | ) | (2.8 | ) | (2.9 | ) | (2.0 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
4.9 | 3.9 | (1.2 | ) | 0.9 | 0.7 | 0.6 | |||||||||||||||||
|
Net flows in institutional money market funds
|
(2.4 | ) | (1.9 | ) | — | (0.5 | ) | (0.1 | ) | 0.1 | ||||||||||||||
|
Market gains and losses/reinvestment
|
34.4 | 21.8 | 1.6 | 5.8 | 2.2 | 3.0 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
1.7 | (0.9 | ) | (0.5 | ) | — | — | 3.1 | ||||||||||||||||
|
Foreign currency translation
|
8.2 | — | 0.8 | 4.0 | 1.2 | 2.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
604.5 | 400.0 | 26.7 | 89.8 | 33.6 | 54.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
June 30, 2009 AUM
(2)
|
414.4 | 269.4 | 25.2 | 68.7 | 26.6 | 24.5 | ||||||||||||||||||
|
Long-term inflows
|
27.6 | 17.0 | 0.3 | 5.6 | 2.6 | 2.1 | ||||||||||||||||||
|
Long-term outflows
|
(23.6 | ) | (15.0 | ) | (1.2 | ) | (2.4 | ) | (3.1 | ) | (1.9 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
4.0 | 2.0 | (0.9 | ) | 3.2 | (0.5 | ) | 0.2 | ||||||||||||||||
|
Net flows in institutional money market funds
|
(2.6 | ) | (1.1 | ) | (0.1 | ) | (0.2 | ) | (0.1 | ) | (1.1 | ) | ||||||||||||
|
Market gains and losses/reinvestment
|
30.3 | 14.0 | 2.3 | 9.3 | 2.4 | 2.3 | ||||||||||||||||||
|
Foreign currency translation
|
0.8 | — | 2.0 | (2.1 | ) | 0.3 | 0.6 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
446.9 | 284.3 | 28.5 | 78.9 | 28.7 | 26.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
ETF, UIT and Passive AUM by Client Domicile
(6)
| Continental | ||||||||||||||||||||||||
| $ in billions | Total | U.S. | Canada | U.K. | Europe | Asia | ||||||||||||||||||
|
June 30, 2010 AUM
|
79.2 | 61.7 | — | — | 0.9 | 16.6 | ||||||||||||||||||
|
Long-term inflows
|
15.2 | 15.2 | — | — | — | — | ||||||||||||||||||
|
Long-term outflows
|
(11.6 | ) | (11.5 | ) | — | — | (0.1 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
3.6 | 3.7 | — | — | (0.1 | ) | — | |||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
6.0 | 5.3 | — | — | 0.2 | 0.5 | ||||||||||||||||||
|
Acquisitions/dispositions, net
|
— | — | — | — | — | — | ||||||||||||||||||
|
Foreign currency translation
|
1.1 | — | — | — | — | 1.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
89.9 | 70.7 | — | — | 1.0 | 18.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
June 30, 2009 AUM
(2)
|
39.0 | 36.8 | — | — | 0.8 | 1.4 | ||||||||||||||||||
|
Long-term inflows
|
9.8 | 9.7 | — | — | 0.1 | — | ||||||||||||||||||
|
Long-term outflows
|
(7.5 | ) | (7.4 | ) | — | — | (0.1 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
2.3 | 2.3 | — | — | — | — | ||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
4.5 | 4.2 | — | — | 0.1 | 0.2 | ||||||||||||||||||
|
Foreign currency translation
|
0.1 | 0.1 | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
45.9 | 43.4 | — | — | 0.9 | 1.6 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| (1) | Channel refers to the distribution channel from which the AUM originated. Institutional AUM originated from individual corporate clients, endowments, foundations, government authorities, universities, or charities. Retail AUM arose from client investments into funds available to the public with shares or units. 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) | The alternatives asset class includes financial structures, absolute return, real estate, private equity, asset allocation, portable alpha and multiple asset strategies. | |
| (5) | Ending Money Market AUM includes $65.8 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. |
54
Table of Contents
Results of Operations
Adoption of FASB Statement No. 167
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 I,
Item 1, Financial Statements – Note 12, “Consolidated Investment Products,” for additional details.
FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” 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 of FASB Statement No. 167
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 three months ended September 30, 2010
reflects the elimination of $8.8 million in management fees earned from these CLOs, and the
addition of $70.3 million in interest income, $35.6 million in interest expense, and $148.3 million
in net other losses. The $139.3 million net income impact during the three months ended September
30, 2010 of consolidation of these CLOs is largely offset by gains/(losses) attributable to
investors in noncontrolling interests of $138.0 million. Prior to the adoption of FASB Statement
No. 167, 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. After the adoption of FASB Statement No. 167, the change in value of the company’s
investments in these CLOs is reflected in the company’s net income. For the three months ended
September 30, 2010, the net impact to the company of its investments in these CLOs was a net loss
of $1.3 million. The Condensed Consolidated Balance Sheet at September 30, 2010 reflects the
consolidation of $6.5 billion in assets held and $5.7 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 $546.9 million
is presented as part of the company’s total equity, reflecting the excess of the consolidated CLOs’
assets over their liabilities, attributable to noncontrolling third-party investors in their
consolidated CLOs at September 30, 2010 and includes $149.4 million related to consolidated CLOs
acquired as part of the acquisition. 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
September 30, 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.
55
Table of Contents
Condensed Consolidating Statements of Income
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation* | Products** | Eliminations | Total | ||||||||||||
|
Three months ended September 30, 2010
|
||||||||||||||||
|
Total operating revenues
|
963.5 | 0.1 | (10.5 | ) | 953.1 | |||||||||||
|
Total operating expenses
|
768.4 | 12.3 | (10.5 | ) | 770.2 | |||||||||||
|
|
||||||||||||||||
|
Operating income
|
195.1 | (12.2 | ) | — | 182.9 | |||||||||||
|
Equity in earnings of unconsolidated affiliates
|
10.7 | — | — | 10.7 | ||||||||||||
|
Interest and dividend income
|
3.4 | 71.8 | (1.5 | ) | 73.7 | |||||||||||
|
Other investment income/(losses)
|
14.6 | (148.3 | ) | — | (133.7 | ) | ||||||||||
|
Interest expense
|
(16.2 | ) | (37.0 | ) | 1.5 | (51.7 | ) | |||||||||
|
|
||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
207.6 | (125.7 | ) | — | 81.9 | |||||||||||
|
Income tax provision
|
(54.5 | ) | — | — | (54.5 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
153.1 | (125.7 | ) | — | 27.4 | |||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.2 | ) | 127.6 | (0.1 | ) | 127.3 | ||||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
152.9 | 1.9 | (0.1 | ) | 154.7 | |||||||||||
|
|
||||||||||||||||
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation* | Products | Eliminations | Total | ||||||||||||
|
Three months ended September 30, 2009
|
||||||||||||||||
|
Total operating revenues
|
708.1 | (0.4 | ) | (1.9 | ) | 705.8 | ||||||||||
|
Total operating expenses
|
553.3 | 2.8 | (1.9 | ) | 554.2 | |||||||||||
|
|
||||||||||||||||
|
Operating income
|
154.8 | (3.2 | ) | — | 151.6 | |||||||||||
|
Equity in earnings of unconsolidated affiliates
|
7.6 | — | 0.3 | 7.9 | ||||||||||||
|
Interest and dividend income
|
1.7 | — | — | 1.7 | ||||||||||||
|
Other investment income/(losses)
|
2.0 | 2.1 | — | 4.1 | ||||||||||||
|
Interest expense
|
(16.9 | ) | — | — | (16.9 | ) | ||||||||||
|
|
||||||||||||||||
|
Income before income taxes, including gains
and losses attributable to noncontrolling
interests
|
149.2 | (1.1 | ) | 0.3 | 148.4 | |||||||||||
|
Income tax provision
|
(43.7 | ) | — | — | (43.7 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income, including gains and losses
attributable to noncontrolling interests
|
105.5 | (1.1 | ) | 0.3 | 104.7 | |||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.3 | ) | 0.8 | — | 0.5 | |||||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
105.2 | (0.3 | ) | 0.3 | 105.2 | |||||||||||
|
|
||||||||||||||||
| * | 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. | |
| ** | The company adopted FASB Statement No. 167 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. |
56
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:
| Three months ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Investment management fees
|
725.8 | 570.3 | 155.5 | 27.3 | % | |||||||||||
|
Service and distribution fees
|
191.6 | 111.8 | 79.8 | 71.4 | % | |||||||||||
|
Performance fees
|
2.5 | 4.3 | (1.8 | ) | (41.9 | )% | ||||||||||
|
Other
|
33.2 | 19.4 | 13.8 | 71.1 | % | |||||||||||
|
|
||||||||||||||||
|
Total operating revenues
|
953.1 | 705.8 | 247.3 | 35.0 | % | |||||||||||
|
Third-party distribution, service and advisory expenses
|
(266.5 | ) | (183.5 | ) | 83.0 | 45.2 | % | |||||||||
|
Proportional share of revenues, net of third-party
distribution expenses, from joint venture investments
|
10.1 | 12.5 | (2.4 | ) | (19.2 | )% | ||||||||||
|
Management fees earned from consolidated investment products
|
10.5 | 1.9 | 8.6 | N/A | ||||||||||||
|
Other revenues recorded by consolidated investment products
|
(0.1 | ) | 0.4 | (0.5 | ) | N/A | ||||||||||
|
|
||||||||||||||||
|
Net revenues
|
707.1 | 537.1 | 170.0 | 31.7 | % | |||||||||||
|
|
||||||||||||||||
Operating revenues increased by $247.3 million (35.0%) in the three months ended September 30,
2010 to $953.1 million (three months ended September 30, 2009: $705.8 million). Net revenues
increased by $170.0 million (31.7%) in the three months ended September 30, 2010 to $707.1 million
(three months ended September 30, 2009: $537.1 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 resulted in a $7.3 million
decrease in operating revenues during the three months ended September 30, 2010 compared to the
three months ended September 30, 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.
The operating results for the three months ended September 30, 2010 include the operating
results of the acquired business for the entire period. 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 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 for the three
months ended September 30, 2010 were approximately $205 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 in relation to the level of client assets managed.
Investment management fees increased by $155.5 million (27.3%) in the three months ended
September 30, 2010, to $725.8 million (three months ended September 30, 2009: $570.3 million) due
to the acquisition, increases in average AUM, primarily retail AUM, and changes in the mix of AUM
between asset classes, offset by the impact of foreign exchange rate movement. The acquisition
contributed to an estimated increase in investment management fees of $110 million during the
period. Average long-term AUM, which generally earn higher fee rates than money market AUM, for the
three months ended September 30, 2010 increased 48.7% to $516.4 billion from $347.3 billion for the
three months ended September 30, 2009, while average institutional money market AUM decreased 25.5%
to $66.9 billion for the three months ended September 30, 2010, from $89.8 billion for the three
months ended
57
Table of Contents
September 30, 2009. The increase in average long-term AUM includes the impact of the acquired
business. See the company’s disclosures regarding the changes in AUM during the three months ended
September 30, 2010 in the “Assets Under Management” section of the “Results of Operations for the
three months ended September 30, 2010 compared with the three months ended September 30, 2009,”
above for additional information regarding the movements in AUM. Foreign exchange rate movements
led to a decrease in investment management fees of $5.0 million during the three months ended
September 30, 2010, compared to the three months ended September 30, 2009.
Additionally, the change in investment management fee revenues reflects the adoption of FASB
Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, which
resulted in the consolidation of certain CLOs with total assets of $6.5 billion at September 30,
2010. As part of the consolidation, management fees earned from consolidated CLOs and other
products of $10.5 million were eliminated from the company’s operating revenues for the three
months ended September 30, 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 CLOs. 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 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.
In the three months ended September 30, 2010, service and distribution fees increased by $79.8
million (71.4%) to $191.6 million, (three months ended September 30, 2009: $111.8 million)
primarily due to increases in average AUM during the period. Additionally, the acquisition
contributed an estimated $75 million of the increase in service and distribution fees during the
three months ended September 30, 2010.
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 $604.5
billion in AUM at September 30, 2010, only approximately $33.3 billion, or 5.5%, 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 three months ended September 30, 2010 performance fees decreased by $1.8 million
(41.9%) to $2.5 million (three months ended September 30, 2009: $4.3 million). The performance fees
generated in the three months ended September 30, 2010 arose primarily due to products managed in
the U.K. and by our bank loan group. The performance fees generated in the three months ended
September 30, 2009 arose primarily due to products managed in the U.K. and in our real estate
group.
58
Table of Contents
Other revenues
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 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 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.
Following the acquisition, the company is the sponsor of unit investment trust products
(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 three months ended September 30, 2010, other revenues increased by $13.8 million
(71.1%) to $33.2 million (three months ended September 30, 2009: $19.4 million). Other revenues
included $17.8 million in UIT revenues during the period, a result of the acquired business, which
were offset by a $1.9 million decline in transaction commissions, and lower real estate acquisition
and disposition fees of $4.3 million.
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 $83.0 million (45.2%) in
the three months ended September 30, 2010 to $266.5 million (three months ended September 30, 2009:
$183.5 million), consistent with the increases in investment management and service and
distribution fee revenues. The increase in third-party distribution, service and advisory expenses
includes an estimated $61 million as a result of the acquired business.
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).
Our proportional share of revenues, net of third-party distribution expenses decreased by $2.4
million (19.2%) to $10.1 million in the three months ended September 30, 2010 (September 30, 2009:
$12.5 million), driven by decreases in average AUM during the period of the Invesco Great Wall
joint venture. Our share of the Invesco Great Wall joint venture’s average AUM in the three months
ended September 30, 2010 was $3.4 billion (September 30, 2009: $3.9 billion). Decreases in average
AUM during the period were consistent with declines in the Asian markets during the three months
ended September 30, 2010.
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
59
Table of Contents
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.
Management fees earned from consolidated investment products increased by $8.6 million
(452.6%) to $10.5 million in the three months ended September 30, 2010 (September 30, 2009:
$1.9 million). The increase reflects the adoption of FASB Statement No. 167, now encompassed in ASC
Topic 810, “Consolidation,” on January 1, 2010, which primarily resulted in the consolidation of
certain CLOs with total assets of $6.5 billion at September 30, 2010. CLO management fees of $8.8
million were eliminated from the company’s operating revenues for the three months ended September
30, 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. The change
in operating revenues of consolidated investment products is discussed above.
Operating Expenses
The main categories of operating expenses, and the dollar and percentage changes between
periods, are as follows:
| Three months ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Employee compensation
|
304.1 | 238.9 | 65.2 | 27.3 | % | |||||||||||
|
Third-party distribution, service and advisory
|
266.5 | 183.5 | 83.0 | 45.2 | % | |||||||||||
|
Marketing
|
44.8 | 27.7 | 17.1 | 61.7 | % | |||||||||||
|
Property, office and technology
|
63.5 | 63.0 | 0.5 | 0.8 | % | |||||||||||
|
General and administrative
|
64.5 | 40.1 | 24.4 | 60.8 | % | |||||||||||
|
Transaction and integration
|
26.8 | 1.0 | 25.8 | N/A | ||||||||||||
|
|
||||||||||||||||
|
Total operating expenses
|
770.2 | 554.2 | 216.0 | 39.0 | % | |||||||||||
|
|
||||||||||||||||
The table below sets forth these cost 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 | |||||||||||||||||||||
| Three months ended: | Sept 30, | Operating | Operating | Sept 30, | Operating | Operating | ||||||||||||||||||
| $ in millions | 2010 | Expenses | Revenues | 2009 | Expenses | Revenues | ||||||||||||||||||
|
Employee compensation
|
304.1 | 39.5 | % | 31.9 | % | 238.9 | 43.1 | % | 33.8 | % | ||||||||||||||
|
Third-party distribution, service and advisory
|
266.5 | 34.6 | % | 28.0 | % | 183.5 | 33.1 | % | 26.0 | % | ||||||||||||||
|
Marketing
|
44.8 | 5.8 | % | 4.7 | % | 27.7 | 5.0 | % | 3.9 | % | ||||||||||||||
|
Property, office and technology
|
63.5 | 8.2 | % | 6.7 | % | 63.0 | 11.4 | % | 8.9 | % | ||||||||||||||
|
General and administrative
|
64.5 | 8.4 | % | 6.8 | % | 40.1 | 7.2 | % | 5.7 | % | ||||||||||||||
|
Transaction and integration
|
26.8 | 3.5 | % | 2.8 | % | 1.0 | 0.2 | % | 0.1 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total operating expenses
|
770.2 | 100.0 | % | 80.8 | % | 554.2 | 100.0 | % | 78.5 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
During the three months ended September 30, 2010, operating expenses increased by $216.0
million (39.0%) to $770.2 million (three months ended September 30, 2009: $554.2 million). 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 resulted in a $5.7 million decrease in operating expenses during the three
months ended September 30, 2010 compared to the three months ended September 30, 2009.
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The operating results for the three months ended September 30, 2010 include the operating
results of the acquired business for the entire period. 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 the acquired business for
periods subsequent to June 30, 2010 is no longer available.
Employee Compensation
Employee compensation includes salary, cash bonuses and share-based payment plans designed to
attract and retain the highest caliber employees. Employee staff benefits plan costs and payroll
taxes are also included in employee compensation.
Employee compensation increased $65.2 million (27.3%) to $304.1 million in the three months
ended September 30, 2010 (three months ended September 30, 2009: $238.9 million). Base salaries and
variable compensation increased $44.8 million during the three months ended September 30, 2010 from
the three months ended September 30, 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, for
the three months ended September 30, 2010. Also included in compensation expenses during the three
months ended September 30, 2010 are share-based costs of $30.3 million compared to $24.2 million
during the three months ended September 30, 2009, an increase of $6.2 million, 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. Additionally, employee
compensation costs for the three months ended September 30, 2010 and 2009 included $5.0 million of
prepaid compensation amortization expenses related to the 2006 acquisition of W.L. Ross & Co. This
expense amortization will continue through 2010, and the acquisition-related asset will be fully
amortized by the third quarter of 2011.
Headcount at September 30, 2010 was 5,532 (September 30, 2009: 4,908). The acquisition added
580 employees at June 1, 2010.
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 $17.1 million (61.7%) in the three months ended September 30,
2010 to $44.8 million (three months ended September 30, 2009: $27.7 million), driven by the impact
of the acquired business. The increase during the three months ended September 30, 2010 includes a
market-driven increase in marketing support payments of $13.5 million as compared to the three
months ended September 30, 2009. Additionally, travel and client event expenses both increased $1.5
million during the three months ended September 30, 2010 from the three months ended September 30,
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 expenses increased by $0.5 million (0.8%) to $63.5 million in
the three months ended September 30, 2010 (three months ended September 30, 2009: $63.0 million).
The three months ended September 30, 2009 included a $12.0 million expense related to vacating
leased property. The impact of not incurring this charge in the three months ended September 30,
2010 was offset by additional costs resulting from the acquisition and higher depreciation on
purchased technology.
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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.
General and administrative expenses increased by $24.4 million (60.8%) to $64.5 million in the
three months ended September 30, 2010 (three months ended September 30, 2009: $40.1 million).
Audit, legal and information services expenses increased $8.8 million during the three months ended
September 30, 2010 from the three months ended September 30, 2009 due in part to the acquired
business. Travel expenses increased $2.3 million during the three months ended September 30, 2010
from the three months ended September 30, 2009 driven by higher levels of business activity. During
the three months ended September 30, 2010 intangible amortization expense increased $6.3 million
resulting from additional amortization of the various finite-lived intangible assets that arose
from the acquisition. Estimated amortization expense for all of the company’s intangible assets,
for each of the five succeeding years based upon the company’s intangible assets at September 30,
2010 is included in Part I, Item 1, Financial Statements, Note 5, “Intangible Assets.”
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, 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.
Transaction and integration charges were $26.8 million in the three months ended September 30,
2010 (three months ended September 30, 2009: $1.0) and relate to the acquired business. The
acquisition was announced in October 2009 and closed on June 1, 2010. Transaction and
integration expenses during the three months ended September 30, 2010 include $7.5 million
of employee compensation costs, $6.3 million of technology contractor and related costs and $13.0
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 by $31.3 million (20.6%) to $182.9 million in the three months
ended September 30, 2010 (September 30, 2009: $151.6 million), as the increase in operating
revenues was greater than the increase in operating expenses during the period. Operating margin
(operating income divided by operating revenues), however, declined from 21.5% in the three months
ended September 30, 2009 to 19.2% in the three months ended September 30, 2010. The decline in
operating margin resulted from a greater relative increase in operating expenses (39.0%) than in
operating revenues (35.0%) during the period. Adjusted operating income (operating income plus our
proportional share of the operating income from joint venture arrangements, transaction and
integration charges, amortization of acquisition-related prepaid compensation and other
intangibles, and the operating income impact of the consolidation of investment products), however,
increased by $73.6 million (42.7%) to $245.8 million in the three months ended September 30, 2010
from $172.2 million in the three months ended September 30, 2009. Adjusted operating margin is
equal to adjusted operating income divided by net revenues. Net revenues are equal to operating
revenues less third-party distribution, service and advisory expenses, plus our proportional share
of the net revenues from our joint venture arrangements, plus management fees earned from, less
other revenue recorded by, consolidated investment products. Adjusted operating margin increased to
34.8% in the three months ended September 30, 2010 from 32.1% in the three months ended September
30, 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.
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Other Income and Expenses
The main categories of other income and expenses, and the dollar and percentage changes
between periods are as follows:
| Three months ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
10.7 | 7.9 | 2.8 | 35.4 | % | |||||||||||
|
Interest and dividend income
|
3.4 | 1.7 | 1.7 | 100.0 | % | |||||||||||
|
Interest income of consolidated investment products
|
70.3 | — | 70.3 | N/A | ||||||||||||
|
Gains/(losses) of consolidated investment products, net
|
(148.3 | ) | 2.1 | (150.4 | ) | N/A | ||||||||||
|
Interest expense
|
(16.1 | ) | (16.9 | ) | 0.8 | 4.7 | % | |||||||||
|
Interest expense of consolidated investment products
|
(35.6 | ) | — | (35.6 | ) | N/A | ||||||||||
|
Other gains and losses, net
|
14.6 | 2.0 | 12.6 | N/A | ||||||||||||
|
|
||||||||||||||||
|
Total other income and expenses
|
(101.0 | ) | (3.2 | ) | (97.8 | ) | N/A | |||||||||
|
|
||||||||||||||||
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates increased by $2.8 million (35.4%) to $10.7
million in the three months ended September 30, 2010 (three months ended September 30, 2009: $7.9
million). Included in equity in earnings from affiliates is our share of the income from our joint
ventures in China, which declined $2.7 million to $5.8 million in the three months ended September
30, 2010 from $8.5 million earned during the three months ended September 30, 2009. Declines in
equity in earnings from our joint ventures are due to declines in average AUM in those entities
during the period. This decline was offset by our share of the market-driven valuation changes in
the underlying holdings of certain partnership investments, including our investment in Invesco
Mortgage Capital, Inc. Equity in earnings from our partnership investments
increased by $5.7 million from the comparative period.
Interest and dividend income and interest expense
Interest and dividend income increased by $1.7 million (100.0%) to $3.4 million in the three
months ended September 30, 2010 (three months ended September 30, 2009: $1.7 million). The three
months ended September 30, 2010 includes dividend income of $1.3 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 three months ended September 30, 2010 offset lower
average cash and cash equivalent balances. Interest expense decreased by $0.8 million (4.7%) to
$16.1 million in the three months ended September 30, 2010 (three months ended September 30, 2009:
$16.9 million). Higher average debt balances were more than offset by lower average cost of debt
during the three months ended September 30, 2010 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 operating expense requirements, including the
payment of the management and performance fees to the company as investment manager. See Part I,
Item 1, Financial Statements – Note 12, “Consolidated Investment Products,” for additional details.
In the three months ended September 30, 2010, interest income and interest expense of
consolidated investment products were $70.3 million and $35.6 million, respectively. The balances
reflect the adoption of FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,”
on January 1, 2010, which resulted in the consolidation of certain CLOs with total assets and total
debt of $6.5 billion and $5.7 billion, respectively, at September 30, 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 three months ended September 30, 2010,
other gains and losses of consolidated investment products were a net loss of $148.3 million, as
compared to a
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net gain of $2.1 million in the three months ended September 30, 2009. The net loss in the
period primarily reflects the adoption of FASB Statement No. 167, now encompassed in ASC Topic 810,
“Consolidation,” on January 1, 2010, which resulted in the consolidation of certain CLOs with total
assets and total debt of $6.5 billion and $5.7 billion, respectively, at September 30, 2010.
Collateral assets and notes issued by consolidated CLOs are held at fair value, and the unrealized
and realized gains and losses of the collateral assets and notes are reflected in this line item.
In accordance with the standard, prior periods have not been restated to reflect the consolidation
of these CLOs. As these gains and losses are largely attributable to non-affiliated third party
investors in consolidated investment products, it is not practicable for the company to analyze the
components of the net gains and losses.
As illustrated in the Condensed Consolidating Statements of Income for the three months ended
September 30, 2010 and 2009 at the beginning of this Results of Operations section, the
consolidation of investment products during the three months ended September 30, 2010 resulted in a
decrease to net income of $125.7 million before attribution to noncontrolling interests. Invesco
invests in only a portion of these products, and as a result this net loss is offset by
noncontrolling interests of $127.5 million, resulting in a net increase in net income of the
company of $1.8 million. Consolidated investment products had no net income impact to the
company for the three months ended September 30, 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 Condensed
Consolidated Statements of Income generally offset the gains and losses, interest income and
interest expense of consolidated investment products.
Other gains and losses, net
Other gains and losses, net were a net gain of $14.6 million in the three months ended
September 30, 2010 as compared to a net gain of $2.0 million in the three months ended September
30, 2009. Included in other gains and losses is a net gain of $10.8 million as a result of the
appreciation of assets held for our deferred compensation plans (three months ended September 30,
2009: none), together with $2.8 million of seed investment gains (three months ended September 30,
2009: $2.3 million gain). These gains are offset by $0.3 million of other-than-temporary impairment
charges related to seed money investments (three months ended September 30, 2009: $0.8 million of
other-than-temporary impairment charges related to the company’s investments in collateralized loan
obligations). In the three months ended September 30, 2010, we benefitted from $1.6 million in net
foreign exchange gains (three months ended September 30, 2009: $0.5 million in net foreign exchange
gains).
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%.
Our effective tax rate, excluding noncontrolling interests in consolidated entities, for the
three months ended September 30, 2010 was 26.1%, down from 29.3% for the three months ended
September 30, 2009. The rate decrease was primarily due to the mix of pre-tax income, a decrease in
the net valuation allowance for subsidiary operating losses, and lower states taxes. The rate
decrease was partially offset by the impact of non-deductible transaction and integration costs
related to the acquired business and a smaller benefit from the release of $10.1 million of
provisions for uncertain tax positions during the three months ended September 30, 2010 (September
30, 2009: release of $11.9 million). The three months ended September 30, 2009 also included the
release of an unremitted earnings deferred tax liability as a result of a change in U.K. tax law
during that quarter.
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Results of Operations for the Nine months ended September 30, 2010 compared with the Nine
months ended September 30, 2009
Assets Under Management
AUM at September 30, 2010 were $604.5 billion (September 30, 2009: $446.9 billion). The
acquired business added $114.6 billion in AUM at June 1, 2010. Additionally, during the three
months ended September 30, 2010, the acquisition of Australian equities manager, Concord Capital,
added $3.1 billion of AUM offset by a $1.4 billion disposition arising from the sale of Echo Point
Investment Management (which was part of the acquired business). During the nine months ended
September 30, 2010, net inflows increased AUM by $22.5 billion, while market gains increased AUM by
$19.8 billion. We experienced net outflows in institutional money market funds of $13.8 billion,
and increases in AUM of $0.2 billion due to changes in foreign exchange rates during the nine
months ended September 30, 2010. During the nine months ended September 30, 2009, net inflows
increased AUM by $10.1 billion, and positive market movements increased AUM by $42.0 billion. We
experienced net inflows in institutional money market funds of $7.7 billion, and increases in AUM
of $10.0 billion due to changes in foreign exchange rates during the nine months ended September
30, 2009. Average AUM during the nine months ended September 30, 2010 include the impact of the
acquired business and were $504.5 billion, compared to $403.3 billion for the nine months ended
September 30, 2009.
Net inflows were driven by net inflows into our Institutional distribution channel of $22.2
billion, which included a $15.8 billion passive mandate in Japan, a post-close direct consequence
of the acquisition. Our retail distribution channel experienced net outflows of $0.7 billion during
the nine months ended September 30, 2010, primarily in the equity and alternatives asset classes,
while our high net worth distribution channel experienced net inflows of $1.0 billion.
Of the total increase in AUM resulting from market gains during the nine months ended
September 30, 2010, $10.3 billion of this increase was due to the change in value of our equity
asset class. During the nine months ended September 30, 2010 our equity AUM increased in line with
the increases in 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 3.9% and 5.7%,
respectively, during the nine months ended September 30, 2010. The increase in equity valuations
impacted our retail distribution channel the most significantly. Of the total increase in AUM
resulting from market increases during the nine months ended September 30, 2009, $32.3 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 18.7% and 16.9%, respectively, during the period.
Foreign exchange rate movements led to a $0.2 billion increase in AUM during the nine months
ended September 30, 2010 compared to a $10.0 billion increase in the comparative 2009 period. The
impact of the change in foreign exchange rates in the nine months ended September 30, 2010 was
driven primarily by the weakening of the Pound Sterling relative to the U.S. Dollar, which was
reflected in the translation of our Pound Sterling-based AUM into U.S. Dollars, the weakening of
the Euro relative to the U.S. Dollar, which was reflected in the translation of our Euro-based AUM
into U.S. Dollars, and the strengthening of the Canadian Dollar relative to the U.S. Dollar, which
was reflected in the translation of our Canadian Dollar-based AUM into U.S. Dollars. The impact of
the change in foreign exchange rates in the nine months ended September 30, 2009 was driven by the
strengthening of the Pound Sterling, Canadian Dollar, and Euro to the U.S. Dollar.
The table below illustrates the spot foreign exchange rates for translation into the U.S.
Dollar, the reporting currency of the company, at September 30, 2010 and 2009, as compared with the
rates that existed at December 31, 2009 and 2008:
| September 30, 2010 | December 31, 2009 | September 30, 2009 | December 31, 2008 | |||||||||||||
|
Pound Sterling ($ per £)
|
1.57 | 1.61 | 1.60 | 1.45 | ||||||||||||
|
Canadian Dollar (CAD per $)
|
1.03 | 1.05 | 1.07 | 1.23 | ||||||||||||
|
Euro ($ per Euro)
|
1.36 | 1.43 | 1.46 | 1.39 | ||||||||||||
Net revenue yield increased 1.7 basis points to 48.6 basis points in the nine months ended
September 30, 2010 from the nine months ended September 30, 2009, level of 46.9 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 earns a higher net revenue rate than money
market AUM. At September 30, 2010, equity AUM were $294.4 billion, representing 48.7% of our total
AUM at that date; whereas at September 30, 2009, equity AUM were $181.2 billion, representing 40.5%
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 September 30, 2010,
ETF, UIT and Passive AUM were
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$89.9 billion, representing 14.9% of total AUM at that date; whereas at September 30, 2009,
ETF, UIT and Passive AUM were $45.9 billion, representing 10.3% of our total AUM at that date.
Gross revenue yield on AUM increased 2.8 basis points to 65.5 basis points in the nine months
ended September 30, 2010 from the nine months ended September 30, 2009, level of 62.7 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 | |||||||||||||||||||||||
| ETF, UIT & | ETF, UIT & | ETF, UIT | ETF, UIT & | |||||||||||||||||||||
| Total AUM | Passive | Passive | Total AUM | & Passive | Passive | |||||||||||||||||||
| $ in billions | 2010 | 2010 | 2010 | 2009 | 2009 | 2009 | ||||||||||||||||||
|
December 31
|
459.5 | 406.5 | 53.0 | 377.1 | 346.6 | 30.5 | ||||||||||||||||||
|
Long-term inflows
|
114.3 | 60.0 | 54.3 | 75.7 | 47.5 | 28.2 | ||||||||||||||||||
|
Long-term outflows
|
(91.8 | ) | (56.4 | ) | (35.4 | ) | (65.6 | ) | (43.6 | ) | (22.0 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
22.5 | 3.6 | 18.9 | 10.1 | 3.9 | 6.2 | ||||||||||||||||||
|
Net flows in institutional money market
funds
|
(13.8 | ) | (13.8 | ) | — | 7.7 | 7.7 | — | ||||||||||||||||
|
Market gains and losses/reinvestment
|
19.8 | 16.5 | 3.3 | 42.0 | 33.1 | 8.9 | ||||||||||||||||||
|
Acquisition/disposition, net
|
116.3 | 102.6 | 13.7 | — | — | — | ||||||||||||||||||
|
Foreign currency translation
|
0.2 | (0.8 | ) | 1.0 | 10.0 | 9.7 | 0.3 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30
|
604.5 | 514.6 | 89.9 | 446.9 | 401.0 | 45.9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average long-term AUM
|
434.5 | 371.5 | 63.0 | 314.5 | 279.9 | 34.6 | ||||||||||||||||||
|
Average institutional money market AUM
|
70.0 | 70.0 | — | 88.8 | 88.8 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Average AUM
|
504.5 | 441.5 | 63.0 | 403.3 | 368.7 | 34.6 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Gross revenue yield on AUM
(1)
|
65.5 | bps | 73.3 | bps | 11.2 | bps | 62.7 | bps | 67.4 | bps | 12.7 | bps | ||||||||||||
|
Gross revenue yield on AUM before
performance fees
(1)
|
65.3 | bps | 73.0 | bps | 11.2 | bps | 61.9 | bps | 66.6 | bps | 12.7 | bps | ||||||||||||
|
Net revenue yield on AUM
(2)
|
48.6 | bps | 54.0 | bps | 11.2 | bps | 46.9 | bps | 50.1 | bps | 12.7 | bps | ||||||||||||
|
Net revenue yield on AUM before
performance fees
(2)
|
48.4 | bps | 53.8 | bps | 11.2 | bps | 46.1 | bps | 49.3 | bps | 12.7 | 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 the nine months ended September 30, 2010 for our JVs in China was $3.6 billion (nine months ended September 30, 2009 $3.6 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 Condensed 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. |
66
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 | ||||||||||||||||||||
|
December 31, 2009 AUM
(2)
|
459.5 | 239.8 | 204.5 | 15.2 | ||||||||||||||||||||
|
Long-term inflows
|
114.3 | 76.5 | 35.3 | 2.5 | ||||||||||||||||||||
|
Long-term outflows
|
(91.8 | ) | (77.2 | ) | (13.1 | ) | (1.5 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
22.5 | (0.7 | ) | 22.2 | 1.0 | |||||||||||||||||||
|
Net flows in institutional money market funds
|
(13.8 | ) | — | (13.8 | ) | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
19.8 | 17.8 | 2.0 | — | ||||||||||||||||||||
|
Acquisition/disposition, net
|
116.3 | 104.0 | 12.3 | — | ||||||||||||||||||||
|
Foreign currency translation
|
0.2 | (1.3 | ) | 1.5 | — | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
604.5 | 359.6 | 228.7 | 16.2 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
(2)
|
377.1 | 166.4 | 197.3 | 13.4 | ||||||||||||||||||||
|
Long-term inflows
|
75.7 | 60.2 | 11.3 | 4.2 | ||||||||||||||||||||
|
Long-term outflows
|
(65.6 | ) | (47.7 | ) | (13.9 | ) | (4.0 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
10.1 | 12.5 | (2.6 | ) | 0.2 | |||||||||||||||||||
|
Net flows in institutional money market funds
|
7.7 | — | 7.7 | — | ||||||||||||||||||||
|
Market gains and losses/reinvestment
|
42.0 | 36.9 | 3.7 | 1.4 | ||||||||||||||||||||
|
Foreign currency translation
|
10.0 | 8.3 | 1.7 | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
446.9 | 224.1 | 207.8 | 15.0 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
| ETF, UIT & Passive AUM by Channel (1) | ||||||||||||||||||||||||
| Private | ||||||||||||||||||||||||
| Wealth | ||||||||||||||||||||||||
| $ in billions | Total | Retail | Institutional | Management | ||||||||||||||||||||
|
December 31, 2009 AUM
|
53.0 | 48.0 | 5.0 | — | ||||||||||||||||||||
|
Long-term inflows
|
54.3 | 38.3 | 16.0 | — | ||||||||||||||||||||
|
Long-term outflows
|
(35.4 | ) | (35.4 | ) | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
18.9 | 2.9 | 16.0 | — | ||||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | ||||||||||||||||||||
|
Market gains and losses/reinvestment
|
3.3 | 2.0 | 1.3 | — | ||||||||||||||||||||
|
Acquisition/disposition, net
|
13.7 | 13.7 | — | — | ||||||||||||||||||||
|
Foreign currency translation
|
1.0 | — | 1.0 | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
89.9 | 66.6 | 23.3 | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
|
30.5 | 27.1 | 3.4 | — | ||||||||||||||||||||
|
Long-term inflows
|
28.2 | 28.0 | 0.2 | — | ||||||||||||||||||||
|
Long-term outflows
|
(22.0 | ) | (22.0 | ) | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
6.2 | 6.0 | 0.2 | — | ||||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | ||||||||||||||||||||
|
Market gains and losses/reinvestment
|
8.9 | 8.3 | 0.6 | — | ||||||||||||||||||||
|
Foreign currency translation
|
0.3 | 0.1 | 0.2 | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
45.9 | 41.5 | 4.4 | — | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
See accompanying notes to these AUM tables on the following page.
67
Table of Contents
Total AUM by Asset Class
(3)
| Fixed | Money | |||||||||||||||||||||||
| $ in billions | Total | Equity | Income | Balanced | Market | Alternatives (4) | ||||||||||||||||||
|
December 31, 2009 AUM
(2)
|
459.5 | 192.6 | 76.2 | 39.9 | 83.5 | 67.3 | ||||||||||||||||||
|
Long-term inflows
|
114.3 | 75.5 | 22.1 | 5.7 | 1.1 | 9.9 | ||||||||||||||||||
|
Long-term outflows
|
(91.8 | ) | (59.9 | ) | (12.9 | ) | (5.5 | ) | (1.5 | ) | (12.0 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
22.5 | 15.6 | 9.2 | 0.2 | (0.4 | ) | (2.1 | ) | ||||||||||||||||
|
Net flows in institutional money market funds
|
(13.8 | ) | — | — | — | (13.8 | ) | — | ||||||||||||||||
|
Market gains and losses/reinvestment
|
19.8 | 10.3 | 7.6 | 1.1 | 0.1 | 0.7 | ||||||||||||||||||
|
Acquisition/disposition, net
|
116.3 | 75.4 | 37.8 | 0.3 | 0.6 | 2.2 | ||||||||||||||||||
|
Foreign currency translation
|
0.2 | 0.5 | — | (0.2 | ) | (0.1 | ) | — | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
604.5 | 294.4 | 130.8 | 41.3 | 69.9 | (5) | 68.1 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
(2)
|
377.1 | 140.6 | 61.5 | 31.7 | 84.2 | 59.1 | ||||||||||||||||||
|
Long-term inflows
|
75.7 | 41.2 | 14.6 | 6.5 | 1.9 | 11.5 | ||||||||||||||||||
|
Long-term outflows
|
(65.6 | ) | (38.8 | ) | (9.0 | ) | (6.3 | ) | (2.5 | ) | (9.0 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
10.1 | 2.4 | 5.6 | 0.2 | (0.6 | ) | 2.5 | |||||||||||||||||
|
Net flows in institutional money market funds
|
7.7 | — | — | — | 7.7 | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
42.0 | 32.3 | 5.7 | 5.1 | (0.1 | ) | (1.0 | ) | ||||||||||||||||
|
Foreign currency translation
|
10.0 | 5.9 | 1.3 | 1.7 | 0.3 | 0.8 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
446.9 | 181.2 | 74.1 | 38.7 | 91.5 | 61.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| ETF, UIT & Passive AUM by Asset Class (3) | ||||||||||||||||||||||||
| Fixed | Money | |||||||||||||||||||||||
| $ in billions | Total | Equity | Income | Balanced | Market | Alternatives (4) | ||||||||||||||||||
|
December 31, 2009 AUM
|
53.0 | 31.1 | 4.0 | — | — | 17.9 | ||||||||||||||||||
|
Long-term inflows
|
54.3 | 47.2 | 3.1 | — | — | 4.0 | ||||||||||||||||||
|
Long-term outflows
|
(35.4 | ) | (27.8 | ) | (0.8 | ) | — | — | (6.8 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
18.9 | 19.4 | 2.3 | — | — | (2.8 | ) | |||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
3.3 | 1.6 | 1.7 | — | — | — | ||||||||||||||||||
|
Acquisition/disposition, net
|
13.7 | 4.5 | 9.2 | — | — | — | ||||||||||||||||||
|
Foreign currency translation
|
1.0 | 0.9 | — | — | — | 0.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
89.9 | 57.5 | 17.2 | — | — | 15.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
|
30.5 | 21.6 | 0.9 | — | — | 8.0 | ||||||||||||||||||
|
Long-term inflows
|
28.2 | 19.1 | 2.0 | — | — | 7.1 | ||||||||||||||||||
|
Long-term outflows
|
(22.0 | ) | (18.7 | ) | — | — | — | (3.3 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
6.2 | 0.4 | 2.0 | — | — | 3.8 | ||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
8.9 | 7.4 | 0.6 | — | — | 0.9 | ||||||||||||||||||
|
Foreign currency translation
|
0.3 | — | — | — | — | 0.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
45.9 | 29.4 | 3.5 | — | — | 13.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
See accompanying notes to these AUM tables on the following page.
68
Table of Contents
Total AUM by Client Domicile
(6)
| Continental | ||||||||||||||||||||||||
| $ in billions | Total | U.S. | Canada | U.K. | Europe | Asia | ||||||||||||||||||
|
December 31, 2009 AUM
(2)
|
459.5 | 294.1 | 29.0 | 84.9 | 24.4 | 27.1 | ||||||||||||||||||
|
Long-term inflows
|
114.3 | 66.5 | 1.6 | 12.9 | 10.7 | 22.6 | ||||||||||||||||||
|
Long-term outflows
|
(91.8 | ) | (62.6 | ) | (5.1 | ) | (10.8 | ) | (8.2 | ) | (5.1 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
22.5 | 3.9 | (3.5 | ) | 2.1 | 2.5 | 17.5 | |||||||||||||||||
|
Net flows in institutional money market funds
|
(13.8 | ) | (15.1 | ) | — | (1.4 | ) | 3.6 | (0.9 | ) | ||||||||||||||
|
Market gains and losses/reinvestment
|
19.8 | 14.3 | 0.7 | 4.2 | 0.8 | (0.2 | ) | |||||||||||||||||
|
Acquisition/disposition, net
|
116.3 | 102.8 | 0.1 | 1.8 | 2.9 | 8.7 | ||||||||||||||||||
|
Foreign currency translation
|
0.2 | — | 0.4 | (1.8 | ) | (0.6 | ) | 2.2 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
604.5 | 400.0 | 26.7 | 89.8 | 33.6 | 54.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
(2)
|
377.1 | 252.7 | 23.8 | 57.1 | 22.3 | 21.2 | ||||||||||||||||||
|
Long-term inflows
|
75.7 | 48.9 | 1.5 | 13.5 | 6.5 | 5.3 | ||||||||||||||||||
|
Long-term outflows
|
(65.6 | ) | (43.9 | ) | (3.7 | ) | (5.5 | ) | (7.1 | ) | (5.4 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
10.1 | 5.0 | (2.2 | ) | 8.0 | (0.6 | ) | (0.1 | ) | |||||||||||||||
|
Net flows in institutional money market funds
|
7.7 | 5.2 | (0.1 | ) | — | 3.2 | (0.6 | ) | ||||||||||||||||
|
Market gains and losses/reinvestment
|
42.0 | 21.4 | 3.5 | 8.8 | 3.0 | 5.3 | ||||||||||||||||||
|
Foreign currency translation
|
10.0 | — | 3.5 | 5.0 | 0.8 | 0.7 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
446.9 | 284.3 | 28.5 | 78.9 | 28.7 | 26.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
ETF, UIT & Passive AUM by Client Domicile
(6)
| Continental | ||||||||||||||||||||||||
| $ in billions | Total | U.S. | Canada | U.K. | Europe | Asia | ||||||||||||||||||
|
December 31, 2009 AUM
|
53.0 | 50.4 | — | — | 1.0 | 1.6 | ||||||||||||||||||
|
Long-term inflows
|
54.3 | 38.4 | — | — | 0.1 | 15.8 | ||||||||||||||||||
|
Long-term outflows
|
(35.4 | ) | (35.2 | ) | — | — | (0.2 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
18.9 | 3.2 | — | — | (0.1 | ) | 15.8 | |||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
3.3 | 3.4 | — | — | 0.1 | (0.2 | ) | |||||||||||||||||
|
Acquisition/disposition, net
|
13.7 | 13.7 | — | — | — | — | ||||||||||||||||||
|
Foreign currency translation
|
1.0 | — | — | — | — | 1.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2010 AUM
|
89.9 | 70.7 | — | — | 1.0 | 18.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
December 31, 2008 AUM
|
30.5 | 29.0 | — | — | 0.5 | 1.0 | ||||||||||||||||||
|
Long-term inflows
|
28.2 | 27.9 | — | — | 0.3 | — | ||||||||||||||||||
|
Long-term outflows
|
(22.0 | ) | (21.9 | ) | — | — | (0.1 | ) | — | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Long-term net flows
|
6.2 | 6.0 | — | — | 0.2 | — | ||||||||||||||||||
|
Net flows in institutional money market funds
|
— | — | — | — | — | — | ||||||||||||||||||
|
Market gains and losses/reinvestment
|
8.9 | 8.3 | — | — | 0.2 | 0.4 | ||||||||||||||||||
|
Foreign currency translation
|
0.3 | 0.1 | — | — | — | 0.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
September 30, 2009 AUM
|
45.9 | 43.4 | — | — | 0.9 | 1.6 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| (1) | Channel refers to the distribution channel from which the AUM originated. Institutional AUM originated from individual corporate clients, endowments, foundations, government authorities, universities, or charities. Retail AUM arose from client investments into funds available to the public with shares or units. 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) | The alternatives asset class includes financial structures, absolute return, real estate, private equity, asset allocation, portable alpha and multiple asset strategies. | |
| (5) | Ending Money Market AUM includes $65.8 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. |
69
Table of Contents
Results of Operations
Adoption of FASB Statement No. 167
The company’s Consolidated Statement of Income for the nine months ended September 30, 2010
reflect the elimination of $26.4 million in management fees earned from CLOs, and the addition of
$175.9 million in interest income, $82.0 million in interest expense, and $78.9 million in net
other gains. The $141.9 million net income impact during the nine months ended September 30, 2010
of consolidation of these CLOs is largely offset by gains attributable to investors in
noncontrolling interests of $139.4 million. Prior to the adoption of FASB Statement No. 167, 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. After
the adoption of FASB Statement No. 167, the change in value of the company’s investments in these
CLOs is reflected in the company’s net income. For the nine months ended September 30, 2010, the
net impact to the company of its investments in these CLOs was a $2.5 million net gain.
Condensed Consolidating Statements of Income
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation* | Products** | Eliminations | Total | ||||||||||||
|
Nine months ended September 30, 2010
|
||||||||||||||||
|
Total operating revenues
|
2,492.3 | 0.3 | (33.4 | ) | 2,459.2 | |||||||||||
|
Total operating expenses
|
2,060.3 | 41.1 | (33.4 | ) | 2,068.0 | |||||||||||
|
|
||||||||||||||||
|
Operating income
|
432.0 | (40.8 | ) | — | 391.2 | |||||||||||
|
Equity in earnings of unconsolidated affiliates
|
27.3 | — | (0.4 | ) | 26.9 | |||||||||||
|
Interest and dividend income
|
6.8 | 179.2 | (3.3 | ) | 182.7 | |||||||||||
|
Other investment income/(losses)
|
3.2 | 142.0 | — | 145.2 | ||||||||||||
|
Interest expense
|
(42.7 | ) | (85.2 | ) | 3.3 | (124.6 | ) | |||||||||
|
|
||||||||||||||||
|
Income before income taxes, including gains and losses attributable to
noncontrolling interests
|
426.6 | 195.2 | (0.4 | ) | 621.4 | |||||||||||
|
Income tax provision
|
(141.3 | ) | — | — | (141.3 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income, including gains and losses attributable to noncontrolling interests
|
285.3 | 195.2 | (0.4 | ) | 480.1 | |||||||||||
|
(Gains)/losses attributable to noncontrolling interests in consolidated
entities, net
|
(0.4 | ) | (189.1 | ) | (0.1 | ) | (189.6 | ) | ||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
284.9 | 6.1 | (0.5 | ) | 290.5 | |||||||||||
|
|
||||||||||||||||
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation* | Products | Eliminations | Total | ||||||||||||
|
Nine months ended September 30, 2009
|
||||||||||||||||
|
Total operating revenues
|
1,883.6 | 1.8 | (5.9 | ) | 1,879.5 | |||||||||||
|
Total operating expenses
|
1,553.0 | 8.6 | (5.9 | ) | 1,555.7 | |||||||||||
|
|
||||||||||||||||
|
Operating income
|
330.6 | (6.8 | ) | — | 323.8 | |||||||||||
|
Equity in earnings of unconsolidated affiliates
|
15.4 | — | 2.5 | 17.9 | ||||||||||||
|
Interest and dividend income
|
7.7 | — | — | 7.7 | ||||||||||||
|
Other investment income/(losses)
|
7.8 | (132.8 | ) | — | (125.0 | ) | ||||||||||
|
Interest expense
|
(49.3 | ) | — | — | (49.3 | ) | ||||||||||
|
|
||||||||||||||||
|
Income/(loss) before income taxes, including
gains and losses attributable to
noncontrolling interests
|
312.2 | (139.6 | ) | 2.5 | 175.1 | |||||||||||
|
Income tax provision
|
(100.0 | ) | — | — | (100.0 | ) | ||||||||||
|
|
||||||||||||||||
|
Net income/(loss), including gains and losses
attributable to noncontrolling interests
|
212.2 | (139.6 | ) | 2.5 | 75.1 | |||||||||||
|
(Gains)/losses attributable to noncontrolling
interests in consolidated entities, net
|
(0.6 | ) | 137.1 | — | 136.5 | |||||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders
|
211.6 | (2.5 | ) | 2.5 | 211.6 | |||||||||||
|
|
||||||||||||||||
| * | 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. | |
| ** | The company adopted FASB Statement No. 167 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. |
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Operating Revenues and Net Revenues
The main categories of revenues, and the dollar and percentage change between the periods,
were as follows:
| Nine months ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Investment management fees
|
1,947.2 | 1,508.4 | 438.8 | 29.1 | % | |||||||||||
|
Service and distribution fees
|
443.5 | 301.2 | 142.3 | 47.2 | % | |||||||||||
|
Performance fees
|
7.4 | 23.2 | (15.8 | ) | (68.1 | )% | ||||||||||
|
Other
|
61.1 | 46.7 | 14.4 | 30.8 | % | |||||||||||
|
|
||||||||||||||||
|
Total operating revenues
|
2,459.2 | 1,879.5 | 579.7 | 30.8 | % | |||||||||||
|
Third-party distribution, service and advisory expenses
|
(682.8 | ) | (498.0 | ) | 184.8 | 37.1 | % | |||||||||
|
Proportional share of revenues, net of third-party
distribution expenses, from joint venture investments
|
31.0 | 33.2 | (2.2 | ) | (6.6 | )% | ||||||||||
|
Management fees earned from consolidated investment products
|
33.4 | 5.9 | 27.5 | 466.1 | % | |||||||||||
|
Other revenues recorded by consolidated investment products
|
(0.3 | ) | (1.8 | ) | (1.5 | ) | (83.3 | )% | ||||||||
|
|
||||||||||||||||
|
Net revenues
|
1,840.5 | 1,418.8 | 421.7 | 29.7 | % | |||||||||||
|
|
||||||||||||||||
Operating revenues increased by $579.7 million (30.8%) in the nine months ended September 30,
2010 to $2,459.2 million (nine months ended September 30, 2009: $1,879.5 million). Net revenues
increased by $421.7 million (29.7%) in the nine months ended September 30, 2010 to $1,840.5 million
(nine months ended September 30, 2009: $1,418.8 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 resulted in $22.4 million
(3.9%) of the increase in operating revenues during the nine months ended September 30, 2010
compared to the nine months ended September 30, 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.
The operating results for the nine months ended September 30, 2010 include the operating
results of the acquired business from the closing date of June 1, 2010. 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 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 June 1
through September 30, 2010 were approximately $272 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 increased by $438.8 million (29.1%) in the nine months ended
September 30, 2010 to $1,947.2 million (nine months ended September 30, 2009: $1,508.4 million) due
to the acquisition, increases in average AUM, changes in the mix of AUM between asset classes and
foreign exchange rate movement. The acquisition contributed to an estimated increase in investment
management fees of $146 million during the period. Average long-term AUM, which generally earn
higher fee rates than money market AUM, for the nine months ended September 30, 2010 were $434.5
billion (nine months ended September 30, 2009: $314.5 billion), while average institutional money
market AUM decreased 21.2% to $70.0 billion for the nine months ended September 30, 2010, from
$88.8 billion for the nine months ended September 30, 2009. The increase in average long-term AUM
includes the impact of the acquired business. See the company’s disclosures regarding the changes
in AUM during the nine months ended September 30, 2010 in the “Assets Under Management” section of
the “Results of Operations for the nine months ended September 30, 2010 compared with the nine
months ended September 30, 2009,” above for additional information regarding the movements in AUM.
Foreign exchange rate movements led to an increase in investment management fees of $22.1 million
during the nine months ended September 30, 2010.
Additionally, the change in investment management fee revenues reflects the adoption of FASB
Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, which
resulted in the consolidation of certain CLOs with total assets of $6.5 billion at September 30,
2010. As part of the consolidation, management fees earned from consolidated CLOs and other
products of $33.4 million were eliminated from the company’s operating revenues for the nine months
ended September 30, 2010. In accordance with the standard, prior periods have not been restated to
reflect the consolidation of CLOs. The company uses a non-
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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
consolidated investment products. See “Schedule of Non-GAAP Information” for the reconciliation of
operating revenues to net revenues.
Service and distribution fees
In the nine months ended September 30, 2010, service and distribution fees increased by $142.3
million (47.2%) to $443.5 million (nine months ended September 30, 2009: $301.2 million) due to
increases in average AUM during the period. Additionally, the acquisition contributed an estimated
$101 million of the increase in service and distribution fees during the nine months ended
September 30, 2010.
Performance fees
In the nine months ended September 30, 2010, performance fees decreased by $15.8 million
(68.1%) to $7.4 million (nine months ended September 30, 2009: $23.2 million). The performance fees
generated in the nine months ended September 30, 2010 arose primarily due to products managed in
the U.K., in our real estate group, and in Asia Pacific. The performance fees generated during the
nine months ended September 30, 2009 arose primarily in the U.K. and in the U.S. quantitative
equities group.
Other revenues
In the nine months ended September 30, 2010, other revenues increased by $14.4 million (30.8%)
to $61.1 million (nine months ended September 30, 2009: $46.7 million). Other revenues included
$23.0 million in UIT revenues during the period, which was offset primarily by lower transaction
commissions of $5.3 million.
Third-party distribution, service and advisory expenses
Third-party distribution, service and advisory expenses increased by $184.8 million (37.1%) in
the nine months ended September 30, 2010 to $682.8 million (nine months September 30, 2009: $498.0
million), consistent with the increases in investment management and service and distribution fee
revenues. The increase in third-party distribution, service and advisory expenses includes an
estimated $80 million as a result of the acquired business.
Proportional share of revenues, net of third-party distribution expenses, from joint venture
investments
Our proportional share of revenues, net of third-party distribution expenses decreased by $2.2
million (6.6%) to $31.0 million in the nine months ended September 30, 2010 (nine months ended
September 30, 2009: $33.2 million), driven by increases in expenses during the period in the
Invesco Great Wall joint venture. Our share of the Invesco Great Wall joint venture’s average AUM
in the nine months ended September 30, 2010 was $3.6 billion (September 30, 2009: $3.6 billion).
Management fees earned from consolidated investment products
Management fees earned from consolidated investment products increased by $27.5 million
(466.1%) to $33.4 million in the nine months ended September 30, 2010 (nine months ended September
30, 2009: $5.9 million). The increase is primarily due to the adoption of FASB Statement No. 167,
now encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010, which resulted in the
consolidation of certain CLOs with total assets of $6.5 billion at September 30, 2010. CLO
management fees of $26.4 million were eliminated from the company’s operating revenues for the nine
months ended September 30, 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
See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net
revenues. The change in operating revenues of consolidated investment products is discussed above.
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Operating Expenses
The main categories of operating expenses, and the dollar and percentage changes between
periods, are as follows:
| Nine months ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Employee compensation
|
802.2 | 703.7 | 98.5 | 14.0 | % | |||||||||||
|
Third-party distribution, service and advisory
|
682.8 | 498.0 | 184.8 | 37.1 | % | |||||||||||
|
Marketing
|
108.3 | 78.5 | 29.8 | 38.0 | % | |||||||||||
|
Property, office and technology
|
172.8 | 157.5 | 15.3 | 9.7 | % | |||||||||||
|
General and administrative
|
178.6 | 117.0 | 61.6 | 52.6 | % | |||||||||||
|
Transaction and integration
|
123.3 | 1.0 | 122.3 | N/A | ||||||||||||
|
|
||||||||||||||||
|
Total operating expenses
|
2,068.0 | 1,555.7 | 512.3 | 32.9 | % | |||||||||||
|
|
||||||||||||||||
The table below sets forth these cost 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:
Nine months ended:
| % of Total | % of | % of Total | % of | |||||||||||||||||||||
| Sept 30, | Operating | Operating | Sept 30, | Operating | Operating | |||||||||||||||||||
| $ in millions | 2010 | Expenses | Revenues | 2009 | Expenses | Revenues | ||||||||||||||||||
|
Employee compensation
|
802.2 | 38.8 | % | 32.6 | % | 703.7 | 45.2 | % | 37.4 | % | ||||||||||||||
|
Third-party distribution, service and advisory
|
682.8 | 33.0 | % | 27.8 | % | 498.0 | 32.0 | % | 26.5 | % | ||||||||||||||
|
Marketing
|
108.3 | 5.2 | % | 4.4 | % | 78.5 | 5.1 | % | 4.2 | % | ||||||||||||||
|
Property, office and technology
|
172.8 | 8.4 | % | 7.0 | % | 157.5 | 10.1 | % | 8.4 | % | ||||||||||||||
|
General and administrative
|
178.6 | 8.6 | % | 7.3 | % | 117.0 | 7.5 | % | 6.2 | % | ||||||||||||||
|
Transaction and integration
|
123.3 | 6.0 | % | 5.0 | % | 1.0 | 0.1 | % | 0.1 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Total operating expenses
|
2,068.0 | 100.0 | % | 84.1 | % | 1,555.7 | 100.0 | % | 82.8 | % | ||||||||||||||
|
|
||||||||||||||||||||||||
During the nine months ended September 30, 2010, operating expenses increased by $512.3
million (32.9%) to $2,068.0 million (nine months ended September 30, 2009: $1,555.7 million). 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 resulted in $18.3 million (3.6%) of the increase in operating expenses
during the nine months ended September 30, 2010 compared to the nine months ended September 30,
2009.
The operating results for the nine months ended September 30, 2010 include the operating
results of the acquired business from the closing date of June 1, 2010. 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 the acquired
business for periods subsequent to June 30, 2010 is no longer available.
Employee Compensation
Employee compensation increased $98.5 million (14.0%) to $802.2 million in the nine months
ended September 30, 2010 (nine months ended September 30, 2009: $703.7 million). Base salaries and
variable compensation increased $69.1 million during the nine months ended September 30, 2010 from
the nine months ended September 30, 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 for the nine months ended September 30, 2010. Severance
costs decreased by $12.3 million during the nine months ended September 30, 2010 from the prior
comparative period. Also included in compensation expenses during the nine months ended September
30, 2010 are share-based costs of $83.8 million, compared to $68.1 million during the nine months
ended September 30, 2009, an increase of $15.2 million, 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 $6.8 million during the nine months ended September 30, 2010 from
the nine months ended September 30, 2009. Additionally, employee compensation costs for the nine
months ended September 30, 2010 and 2009 included $15.0 million of prepaid compensation
amortization expenses related to the 2006 acquisition of W.L. Ross & Co. This expense amortization
will continue through 2010, and the acquisition-related asset will be fully amortized by the third
quarter of 2011.
Headcount at September 30, 2010 was 5,532 (September 30, 2009: 4,908). The acquisition added
580 employees at June 1, 2010.
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Table of Contents
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 increased by $29.8 million (38.0%) in the nine months ended September 30,
2010 to $108.3 million (nine months ended September 30, 2009: $78.5 million) driven by the impact
of the acquired business. The increase during the nine months ended September 30, 2010 includes a
market-driven increase in marketing support payments of $24.4 million as compared to the nine
months ended September 30, 2009. Additionally, travel and sales literature/research expenses
increased $3.3 million and $1.7 million, respectively, during the nine months ended September 30,
2010 from the nine months ended September 30, 2009, offset by a decrease in advertising expenses of
$1.6 million during the nine months ended September 30, 2010 from the nine months ended September
30, 2009.
Property, Office and Technology
Property, office and technology expenses increased by $15.3 million (9.7%) to $172.8 million
in the nine months ended September 30, 2010 (nine months ended September 30, 2009: $157.5 million).
The nine months ended September 30, 2009 included a $12.0 million expense related to vacating
leased property. The impact of not incurring this charge in the nine months ended September 30,
2010 was offset by higher depreciation on purchased technology and additional costs resulting from
the acquisition.
General and Administrative
General and administrative expenses increased by $61.6 million (52.6%) to $178.6 million in
the nine months ended September 30, 2010 (nine months ended September 30, 2009: $117.0 million),
including the impact of the acquired business. Included in general and administrative expenses for
the nine months ended September 30, 2010 is $8.9 million ($6.0 million net of tax) representing
fund reimbursement costs from the correction of historical foreign exchange allocations. Travel
expenses increased $7.9 million during the nine months ended September 30, 2010 from the nine
months ended September 30, 2009, driven by higher levels of business activity. Information services
expenses increased $6.5 million during the nine months ended September 30, 2010 from the nine
months ended September 30, 2009, due to increases in costs associated with certain quantitative
securities analysis services. Additionally, irrecoverable tax expense increased $3.2 million during
the nine months ended September 30, 2010 from the nine months ended September 30, 2009, due in part
to an increase in VAT tax rates from 15% to 17.5%. Foreign exchange rate movements led to an
increase of $1.4 million in general and administrative expenses during the nine months ended
September 30, 2010 from the nine months ended September 30, 2009.
During the nine months ended September 30, 2010, intangible amortization expense increased
$8.3 million resulting from additional amortization of the various finite-lived intangible assets
that arose from the acquisition. Estimated amortization expense for all of the company’s intangible
assets, for each of the five succeeding years based upon the company’s intangible assets at
September 30, 2010 is included in Part I, Item 1, Financial Statements, Note 5, “Intangible
Assets.”
General and administrative expenses in the nine months ended September 30, 2009 included an
insurance recovery of $9.5 million related to legal costs associated with the market-timing
regulatory settlement.
Transaction and integration
Transaction and integration charges were $123.3 million in the nine months ended September 30,
2010 (nine months ended September 30, 2009: $1.0) and relate to the acquired business. Transaction
and integration expenses include $26.7 million of employee compensation costs, including $20.0
million of severance costs; $20.9 million for the proxy solicitation of fund investors to approve a
change in fund advisor, $27.6 million for transition of the Van Kampen funds to Invesco’s platform
and governance structure, $6.7 million related to office space including charges
associated with vacating office space in Houston as we consolidated operations, $4.5 million of
sales and marketing costs as we printed re-branded fund prospectuses, $25.8 million of professional
services, principally legal, consultancy and insurance, and $11.0 million in technology contractor
and travel costs.
Operating Income, Adjusted Operating Income, Operating Margin and Adjusted Operating Margin
Operating income increased by $67.4 million (20.8%) to $391.2 million in the nine months ended
September 30, 2010 (nine months ended September 30, 2009: $323.8 million), and operating margin
(operating income divided by operating revenues) increased to 19.2% in the nine months ended
September 30, 2010 from 15.9% in the nine months ended September 30, 2009. Adjusted operating
income (operating income plus our proportional share of the operating income from joint venture
arrangements, transaction and
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integration charges, amortization of acquisition-related prepaid compensation and other
intangibles, and the operating income impact of the consolidation of investment products) increased
by $239.8 million (63.5%) to $617.5 million in the nine months ended September 30, 2010 from
$377.7 million in the nine months ended September 30, 2009. Adjusted operating margin is equal to
adjusted operating income divided by net revenues. Net revenues are equal to operating revenues
less third-party distribution, service and advisory expenses, plus our proportional share of the
net revenues from our joint venture arrangements, plus management fees earned from, less other
revenue recorded by, consolidated investment products. Adjusted operating margin increased to 34.7%
in the nine months ended September 30, 2010 from 33.6% in the nine months ended September 30, 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:
| Nine months ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Equity in earnings of unconsolidated affiliates
|
26.9 | 17.9 | 9.0 | 50.3 | % | |||||||||||
|
Interest and dividend income
|
6.8 | 7.7 | (0.9 | ) | (11.7 | )% | ||||||||||
|
Interest income of consolidated investment products
|
175.9 | — | 175.9 | N/A | ||||||||||||
|
Gains/(losses) of consolidated investment products, net
|
142.0 | (132.8 | ) | 274.8 | N/A | |||||||||||
|
Interest expense
|
(42.6 | ) | (49.3 | ) | 6.7 | 13.6 | % | |||||||||
|
Interest expense of consolidated investment products
|
(82.0 | ) | — | (82.0 | ) | N/A | ||||||||||
|
Other gains and losses, net
|
3.2 | 7.8 | (4.6 | ) | (59.0 | )% | ||||||||||
|
|
||||||||||||||||
|
Total other income and expenses
|
230.2 | (148.7 | ) | 378.9 | N/A | |||||||||||
|
|
||||||||||||||||
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates increased by $9.0 million (50.3%) to $26.9
million in the nine months ended September 30, 2010 (nine months ended September 30, 2009: $17.9
million). Included in equity in earnings from affiliates is our share of the income from our joint
ventures in China, which declined $4.8 million to $17.7 million in the nine months ended September
30, 2010 from $22.5 million earned during the nine months ended September 30, 2009. Declines in
equity in earnings of unconsolidated affiliates were driven primarily by our share of increased
operating expenses in our Chinese joint ventures in the nine months ended September 30, 2010
compared to the nine months ended September 30, 2009. This decline was offset by our share of the
market-driven valuation changes in the underlying holdings of certain partnership investments,
including our investment in Invesco Mortgage Capital, Inc. Equity in
earnings from our partnership investments increased by $13.9 million from
the comparative period.
Interest and dividend income and interest expense
Interest and dividend income decreased by $0.9 million (11.7%) to $6.8 million in the nine months
ended September 30, 2010 (nine months ended September 30, 2009: $7.7 million), as a result of lower
yields and average cash and cash equivalent balances during the period. The decrease in yields was
consistent with market direction during the period. The nine months ended September 30, 2010
includes dividend income of $1.3 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. Interest expense
decreased by $6.7 million (13.6%) to $42.6 million in the nine months ended September 30, 2010
(nine months ended September 30, 2009: $49.3 million), resulting from a combination of lower
average debt balances and lower average cost of debt during the nine months ended September 30,
2010 versus the comparative period.
Interest income and interest expense of consolidated investment products
In the nine months ended September 30, 2010 interest income and interest expense of
consolidated investment products were $175.9 million and $82.0 million, respectively. The increases
reflect the adoption of FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,”
on January 1, 2010, which resulted in the consolidation of certain CLOs with total assets and total
debt of $6.5 billion and $5.7 billion, respectively, at September 30, 2010. In accordance with the
standard, prior periods have not been restated to reflect the consolidation.
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Table of Contents
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 nine months ended September 30, 2010
other gains and losses of consolidated investment products were a net gain of $142.0 million, as
compared to a net loss of $132.8 million in the nine months ended September 30, 2009. The increase
primarily reflects the adoption of FASB Statement No. 167, now encompassed in ASC Topic 810,
“Consolidation,” on January 1, 2010, which resulted in the consolidation of certain CLOs with total
assets and total debt of $6.5 billion and $5.7 billion, respectively, at September 30, 2010.
Collateral assets and notes issued by consolidated CLOs are held at fair value, and the unrealized
and realized gains and losses of the collateral assets and notes are reflected in this line item.
In accordance with the standard, prior periods have not been restated to reflect the consolidation
of these CLOs.
As illustrated in the Condensed Consolidating Statements of Income for the nine months ended
September 30, 2010 and 2009 at the beginning of this Results of Operations section, the
consolidation of investment products during the nine months ended September 30, 2010 resulted in a
net income impact of $194.8 million before attribution to noncontrolling interests. Invesco invests
in a portion of these products and as a result, this net income is offset by noncontrolling
interests of $189.2 million, resulting in a net income impact to the company of $5.6 million.
Consolidated investment products had no net income impact to the company for the nine months ended
September 30, 2009.
Other gains and losses, net
Other gains and losses, net were a net gain of $3.2 million in the nine months ended September
30, 2010 as compared to a net gain of $7.8 million in the nine months ended September 30, 2009.
Included in other gains and losses is a net gain of $7.4 million as a result of the appreciation
of assets held for our deferred compensation plans (nine months ended September 30, 2009: none)
together with $3.1 million of seed investment net gains (nine months ended September 30, 2009: $2.3
million net gains). In the nine months ended September 30, 2010 we incurred $0.5 million in net
foreign exchange losses (nine months ended September 30, 2009: $8.3 million in net foreign exchange
gains). Included in other losses are $6.5 million of other-than-temporary impairment charges
related to the company’s seed money investments (nine months ended September 30, 2009: $7.9 million
of other-than-temporary impairment charges related to the company’s investments in collateralized
loan obligations and seed money investments).
Income Tax Expense
Our effective tax rate, excluding noncontrolling interests in consolidated entities, for the
nine months ended September 30, 2010 was 32.7%, up from 32.1% for the nine months ended September
30, 2009. The effective tax rate for the nine months ended September 30, 2010 included the impact
of non-deductible transaction and integration costs related to the acquired business and the
release of 10.1 million of provisions for uncertain tax positions during the nine months ended
September 30, 2010 (nine months ended September 30, 2009: release of $11.9 million). The nine
months ended September 30, 2009 also included the release of an unremitted earnings deferred tax
liability as a result of a change in U.K. tax law during 2009. The rate increase was partially
offset by a decrease in the net valuation allowance for subsidiary operating losses and lower
states taxes during the nine months ended September 30, 2010.
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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 Financial Accounting Standards Board (FASB) Statement No. 167, “Amendments to FASB
Interpretation No. 46(R)” (FASB Statement No. 167), now encompassed in the Accounting Standards
Codification Topic 810 (discussed in Part I, Item I, “Financial Statements – 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
three and nine months ended September 30, 2009, has 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):
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| $ in millions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
|
Operating revenues, U.S. GAAP basis
|
953.1 | 705.8 | 2,459.2 | 1,879.5 | ||||||||||||
|
Third-party distribution, service and advisory expenses
(1)
|
(266.5 | ) | (183.5 | ) | (682.8 | ) | (498.0 | ) | ||||||||
|
Proportional share of net revenues from joint venture
arrangements
(2)
|
10.1 | 12.5 | 31.0 | 33.2 | ||||||||||||
|
Management fees earned from consolidated investment products eliminated
upon consolidation
(3)
|
10.5 | 1.9 | 33.4 | 5.9 | ||||||||||||
|
Other revenues recorded by consolidated investment products
(3)
|
(0.1 | ) | 0.4 | (0.3 | ) | (1.8 | ) | |||||||||
|
|
||||||||||||||||
|
Net revenues
|
707.1 | 537.1 | 1,840.5 | 1,418.8 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Operating income, U.S. GAAP basis
|
182.9 | 151.6 | 391.2 | 323.8 | ||||||||||||
|
Proportional share of operating income from joint venture
investments
(2)
|
5.6 | 8.2 | 16.9 | 21.7 | ||||||||||||
|
Transaction and integration charges
(4)
|
26.8 | 1.0 | 123.3 | 1.0 | ||||||||||||
|
Amortization of acquisition-related prepaid compensation
(4)
|
5.0 | 5.0 | 15.0 | 15.0 | ||||||||||||
|
Amortization of other intangibles
(4)
|
9.4 | 3.2 | 17.7 | 9.4 | ||||||||||||
|
Compensation expense related to market valuation changes in deferred
compensation plans
|
4.0 | — | 3.8 | — | ||||||||||||
|
Consolidation of investment products
(3)
|
12.1 | 3.2 | 40.7 | 6.8 | ||||||||||||
|
Other reconciling items
(6)
|
— | — | 8.9 | — | ||||||||||||
|
|
||||||||||||||||
|
Adjusted operating income
|
245.8 | 172.2 | 617.5 | 377.7 | ||||||||||||
|
|
||||||||||||||||
|
Operating margin*
|
19.2 | % | 21.5 | % | 15.9 | % | 17.2 | % | ||||||||
|
Adjusted operating margin**
|
34.8 | % | 32.1 | % | 33.6 | % | 26.6 | % | ||||||||
|
|
||||||||||||||||
|
Net income attributable to common shareholders, U.S. GAAP basis
|
154.7 | 105.2 | 290.5 | 211.6 | ||||||||||||
|
Transaction and integration charges, net of tax
(4)
|
17.8 | 0.8 | 97.6 | 0.8 | ||||||||||||
|
Amortization of acquisition-related prepaid compensation
(4)
|
5.0 | 5.0 | 15.0 | 15.0 | ||||||||||||
|
Amortization of other intangibles, net of tax
(4)
|
8.4 | 3.1 | 16.0 | 9.2 | ||||||||||||
|
Deferred compensation plan market valuation changes and dividend income
less compensation expense, net of tax
|
(5.7 | ) | — | (3.5 | ) | — | ||||||||||
|
Deferred income taxes on intangible assets
(4)
|
6.6 | 3.6 | 14.4 | 10.8 | ||||||||||||
|
Consolidation of investment products
(3)
|
(1.8 | ) | — | (5.6 | ) | — | ||||||||||
|
Other reconciling items
(6)
|
— | — | 6.0 | — | ||||||||||||
|
|
||||||||||||||||
|
Adjusted net income
|
185.0 | 117.7 | 430.4 | 247.4 | ||||||||||||
|
|
||||||||||||||||
|
Average shares outstanding — diluted
|
479.1 | 437.7 | 459.9 | 417.8 | ||||||||||||
|
Diluted EPS
|
$ | 0.32 | $ | 0.24 | $ | 0.63 | $ | 0.51 | ||||||||
|
Adjusted EPS***
|
$ | 0.39 | $ | 0.27 | $ | 0.94 | $ | 0.59 | ||||||||
| * | Operating margin is equal to operating income divided by operating revenues. | |
| ** | Adjusted operating margin is equal to net 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. |
| (1) | Third-party distribution, service and advisory expenses | |
| Third-party distribution, service and advisory expenses include renewal commissions, management fee rebates and distribution costs (12b-1) 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 |
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| 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. 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 Invesco’s own investment units. 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 was one of the largest Sino-foreign managers of equity products in China, with AUM of approximately $6.8 billion as of September 30, 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 U.S. FASB issued Statement No. 167, now encompassed in ASC Topic 810, “Consolidation,” which was effective January 1, 2010. It has had a significant impact on the presentation of the company’s financial statements. The provisions of FASB Statement No. 167 required us to consolidate into our financial statements certain CLOs with approximately $6.5 billion in assets and $5.7 billion in debt at September 30, 2010. The company’s Consolidated Statements of Income reflect the elimination of management and performance fees earned from these CLOs and other consolidated investment products of $10.5 million and $33.4 million during the three and nine months ended September 30, 2010, respectively, and the addition of $70.3 million and $175.9 million in interest income, $35.6 million and $81.9 million in interest expense, and $148.3 million and $142.0 million in net other gains for the respective periods. The $125.7 million and $194.8 million net income impact during the three and nine months ended September 30, 2010, respectively, of consolidation is largely offset by noncontrolling interests of $127.5 million and $189.2 million, respectively. See Part I, Item 1, Financial Statements, Note 12, “Consolidated Investment |
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| Products” for a detailed analysis of the impact to the company’s Condensed 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 Condensed 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. | ||
| Transaction and integration charges were $26.8 million and $123.3 million for the three and nine months ended September 30, 2010 (three and nine months ended September 30, 2009: $1.0 million), and relate to acquisition. The tax benefit on this amount, calculated at the applicable tax rate for the tax deductible portion of the charges, is $9.0 million and $25.7 million for the three and nine months ended September 30, 2010 (three and nine months ended September 30, 2009: $0.2 million) giving a net adjustment of $17.8 million and $97.6 million for the three and nine months ended September 30, 2010 (three and nine months ended September 30, 2009: $0.8 million). These charges reflect the legal, regulatory, advisory, valuation 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. | ||
| 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. These reconciling items are intangible amortization of $9.4 million and $17.7 million for the three and nine months ended September 30, 2010, respectively (three and nine months ended September 30, 2009: $3.2 million and $9.4 million, respectively), and the amortization of prepaid compensation of $5.0 million and $15.0 million for the three and nine months ended September 30, 2010, respectively (three and nine months ended September 30, 2009: $5.0 million and $15.0 million, respectively), related to the October 2006 acquisition of W.L. Ross & Co. The tax benefit of $1.0 million and $1.7 million for the three and nine months ended September 30, 2010, respectively (three and nine months ended September 30, 2009: $0.1 million and $0.2 million, respectively) 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 represent tax benefits that are not included in the Condensed 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 Condensed Consolidated Statements of Income or through settlement of tax obligations. Adjustments for deferred income taxes on goodwill and indefinite-lived intangibles that are amortized for tax |
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| purposes were $6.6 million and $14.4 million for the three and nine months ended September 30, 2010, respectively (three and nine months ended September 30, 2009: $3.6 million and $10.8 million, respectively). | ||
| (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 new 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 that, over the life of the award, will ultimately be offset by gains and losses recorded below operating income on the Consolidated Statements of Income. | ||
| 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 Condensed 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. | ||
| The market appreciation of the compensation liability was $4.0 million and $3.8 million for the three and nine months ended September 30, 2010, respectively, with investment gains and dividend income of $10.8 million and $1.3 million, respectively, for the three months ended September 30, 2010 and investment gains and dividend income of $7.4 million and $1.3 million, respectively, for the nine months ended September 30, 2010 on the assets held to hedge economically the compensation liability. This additional compensation expense, investment gains, and dividend income are adjusted in arriving at the non-GAAP information and, net of applicable taxation of $2.4 million and $1.4 million for the three and nine months ended September 30, 2010, respectively, result in a net income adjustment of $5.7 million and $3.5 million for the three and nine months ended September 30, 2010, respectively. No adjustments are being made for the 2009 comparative non-GAAP measures presented above due to the relative insignificance of the amounts in that period. | ||
| (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 nine months ended September 30, 2010 (three and nine months ended September 30, 2009: none), 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. 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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Balance Sheet Discussion
Condensed Consolidating Balance Sheets are presented below and reflect the consolidation of
investment products, including adoption of FASB Statement No. 167, now encompassed in ASC Topic
810, “Consolidation,” at January 1, 2010. The majority of the company’s consolidated investment
products were CLOs as of September 30, 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* | Products** | Eliminations | Total | ||||||||||||
|
As of September 30, 2010
|
||||||||||||||||
|
Current assets
|
4,055.7 | 414.4 | (8.9 | ) | 4,461.2 | |||||||||||
|
Non-current assets
|
8,703.3 | 6,809.9 | (32.7 | ) | 15,480.5 | |||||||||||
|
|
||||||||||||||||
|
Total assets
|
12,759.0 | 7,224.3 | (41.6 | ) | 19,941.7 | |||||||||||
|
|
||||||||||||||||
|
Current liabilities
|
3,252.8 | 307.3 | (8.9 | ) | 3,551.2 | |||||||||||
|
Long-term debt of consolidated investment products
|
— | 5,663.4 | (19.6 | ) | 5,643.8 | |||||||||||
|
Other non-current liabilities
|
1,900.5 | — | — | 1,900.5 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities
|
5,153.3 | 5,970.7 | (28.5 | ) | 11,095.5 | |||||||||||
|
|
||||||||||||||||
|
Retained earnings attributable to investors in
consolidated investment products
|
— | 549.4 | (2.5 | ) | 546.9 | |||||||||||
|
Other equity attributable to common shareholders
|
7,600.7 | 13.1 | (10.6 | ) | 7,603.2 | |||||||||||
|
Equity attributable to noncontrolling interests
in consolidated entities
|
5.0 | 691.1 | — | 696.1 | ||||||||||||
|
|
||||||||||||||||
|
Total liabilities and equity
|
12,759.0 | 7,224.3 | (41.6 | ) | 19,941.7 | |||||||||||
|
|
||||||||||||||||
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation* | Products | Eliminations | 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 | |||||||||||
|
|
||||||||||||||||
| * | 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. | |
| ** | The company adopted FASB Statement No. 167, 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. |
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The following table presents a comparative analysis of significant detailed balance sheet line
items:
| September 30, | December 31, | |||||||||||||||
| $ in millions | 2010 | 2009 | $ Change | % Change | ||||||||||||
|
Cash and cash equivalents
|
664.1 | 762.0 | (97.9 | ) | (12.8 | )% | ||||||||||
|
Unsettled fund receivables
|
1,118.1 | 383.1 | 735.0 | 191.9 | % | |||||||||||
|
Current investments
|
377.1 | 182.4 | 194.7 | 106.7 | % | |||||||||||
|
Assets held for policyholders
|
1,249.7 | 1,283.0 | (33.3 | ) | (2.6 | )% | ||||||||||
|
Non-current investments
|
145.3 | 157.4 | (12.1 | ) | (7.7 | )% | ||||||||||
|
Investments of consolidated investment products
|
6,809.9 | 685.0 | 6,124.9 | 894.1 | % | |||||||||||
|
Goodwill
|
6,876.1 | 6,467.6 | 408.5 | 6.3 | % | |||||||||||
|
Policyholder payables
|
(1,249.7 | ) | (1,283.0 | ) | (33.3 | ) | (2.6 | )% | ||||||||
|
Long-term debt
|
(1,394.2 | ) | (745.7 | ) | 648.5 | 87.0 | % | |||||||||
|
Long-term debt of consolidated investment products
|
(5,643.8 | ) | — | 5,643.8 | 100.0 | % | ||||||||||
|
Retained earnings appropriated for investors in consolidated investment
products
|
(546.9 | ) | — | 546.9 | 100.0 | % | ||||||||||
|
Equity attributable to common shareholders
|
(8,150.1 | ) | (6,912.9 | ) | 1,237.2 | 17.9 | % | |||||||||
|
Equity attributable to noncontrolling interests in consolidated entities
|
(696.1 | ) | (707.9 | ) | (11.8 | ) | (1.7 | )% | ||||||||
Cash and Cash Equivalents
Cash and cash equivalents decreased by $97.9 million from $762.0 million at December 31, 2009
to $664.1 million at September 30, 2010, as we utilized cash balances to partly fund business
acquisitions and purchase treasury shares. During the nine month period the company paid $725.1
million net cash on business acquisitions and borrowed $648.5 million from the credit facility, the
balance funded from existing cash balances. Treasury share purchases during the period utilized
$127.7 million of cash. These cash outflows were partly offset by cash inflows generated from
operating activities. Please see the “Cash Flows” in the following section within this
Management’s Discussion and Analysis.
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 September 30, 2010, the European sub-group had cash and cash equivalent balances of
$459.3 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 unit investment trust broker dealer entity, which was part of the acquired business. At
September 30, 2010 these cash deposits totaled $13.8 million.
Unsettled Fund Receivables
Unsettled fund receivables increased by $735.0 million from $383.1 million at December 31,
2009 to $1,118.1 million at September 30, 2010, due to $96.4 million of unsettled balances
associated with the unit investment trust (UIT) products that formed part of the acquired business
together with higher transaction activity between funds and investors in late September 2010 when
compared to late December 2009 in our U.K and 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 ($1,137.7
million) at trade date with both the investor and the fund or to the brokers, dealers, and clearing
organizations, for normal purchases and sales, reflects the legal relationship between the
underlying investor and the company.
Investments (current and non-current)
As of September 30, 2010 we had $522.4 million in investments, of which $377.1 million were
current investments and $145.3 million were non-current investments. Included in current
investments are $126.5 million of seed money investments in affiliated funds used to seed funds as
we launch new products, and $159.4 million of investments related to assets held for deferred
compensation plans, which are also held primarily in affiliated funds. Seed investments increased
by $51.7 million during the nine
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months to September 30, 2010, primarily due to the $53.9 million of seed investments included
in the acquired business. Investments held to hedge deferred compensation awards increased by $74.7
million during the nine month period as we purchased additional investments in affiliated funds to
hedge economically new employee plan awards. Included in non-current investments are $140.1 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
$5.4 million in equity method investments includes an increase of $11.0 million in partnership
investments due to capital calls and valuation improvements exceeding distributions and capital
returns during the period. The value of the joint venture investments has reduced by $5.6 million
during the period as a result of annual dividends paid to the company offset by current year
earnings.
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 $1,249.7 million at
September 30, 2010 was the result of foreign exchange movements, the increase in the market values
of these assets, and net flows into the funds.
Investments of consolidated investment products
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 and may have a small investment in certain of these products to demonstrate
“skin in the game” to other potential unaffiliated investors in these products. Certain of these
investments are considered to be variable interest entities (VIEs). If the company is the primary
beneficiary of the VIEs, then the investment products are consolidated into the company’s financial
statements. Other partnership entities are consolidated under a voting interest entity (VOE) model
where the company is the general partner and is presumed to have control, in the absence of simple
majority kick-out rights to remove the general partner, simple majority liquidation rights to
dissolve the partnership, or any substantive participating rights of the other limited partners.
See Part I, Item 1, Financial Statements – Note 12, “Consolidated Investment Products,” for
additional details.
Effective January 1, 2010, upon the adoption of FASB Statement No. 167, now encompassed in ASC
Topic 810, “Consolidation,” the company determined that it was the primary beneficiary of certain
CLO VIEs, 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/rights to receive benefits from
the CLOs that could potentially be significant to the CLOs. Generally, private equity and fund of
funds 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 also VIEs. The
primary beneficiary of non-CLO investment products is the party to the VIE who absorbs a majority
of the losses or absorbs the majority of the rewards generated by the VIE. Additionally, under the
voting interest entity (VOE) consolidation model, the general partner in a partnership that is not
a VIE consolidates the partnership because the general partner is deemed to control the partnership
where the other limited partner do not have substantive kick-out, liquidation or participation
rights. The company has no right to the benefits from, nor does it bear the risks associated with,
investments held by consolidated investment products, 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 assets held by consolidated investment
products would not be available to the general creditors of the company. Investments of
consolidated investment products include the investments of both consolidated VIEs and VOEs.
As of September 30, 2010, investments of consolidated investment products totaled
$6,809.9 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 Condensed Consolidated Balance Sheets, as the company’s equity investment in these structures
is very small. The increase from December 31, 2009, primarily reflects adoption of FASB Statement
No. 167 on January 1, 2010. In accordance with the standard, prior periods have not been restated.
As a result of the acquisition, the company consolidated additional CLOs with investments of $762.3
million at September 30, 2010.
Goodwill
Goodwill increased by $408.5 million from $6,467.6 million at December 31, 2009, to $6,876.1
million at September 30, 2010, as we recorded $364.2 million of goodwill associated with the
acquired business, $20.2 million associated with the acquisition of an
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Australian equity manager, and $25.8 million related to the earn-out on the 2006 acquisition
of W.L Ross & Co. The additions were offset by a reduction of $1.7 million due to the impact of
foreign currency translation for certain subsidiaries whose functional currency differs from that
of the parent.
The non-current portion of our total long-term debt was $1,394.2 million at September, 30,
2010 (December 31, 2009: $745.7 million). On May 24, 2010, the company terminated its existing
$500.0 million credit facility and entered into a new $1,250 million credit facility. At September
30, 2010, $648.5 million was drawn on this credit facility and was used to fund part of the
consideration for the acquired business, which closed on June 1, 2010. Amounts borrowed under the
new credit facility are repayable at maturity on May 23, 2013.
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 debt
tranches 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 $5,643.8 million at September 30, 2010,
primarily reflecting the adoption of FASB Statement No. 167, now encompassed in ASC Topic 810,
“Consolidation,” 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 September 30, 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
Condensed Consolidated Balance Sheet.
Retained earnings appropriated for investors in consolidated investment products was $546.9
million at September 30, 2010, reflecting the adoption of FASB Statement No. 167, now encompassed
in ASC Topic 810, “Consolidation,” on January 1, 2010, which resulted in the consolidation of
certain CLOs with $6.5 billion of assets held and $5.7 billion in debt issued at September 30,
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
retained earnings appropriated for investors in consolidated investment products of $149.4 million
at September 30, 2010.
Equity attributable to noncontrolling interests in consolidated entities
Equity attributable to noncontrolling interests in consolidated entities decreased by $11.8
million from $707.9 million at December 31, 2009, to $696.1 million at September 30, 2010. Net
gains attributable to noncontrolling interests in consolidated entities of $0.4 million were offset
by $12.2 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 $8,150.1 million at September 30, 2010, an increase of $1,237.2 million. Increases to
equity included $718.6 million as a result of the business combination, net income attributable to
common shareholders of $290.5 million, share issuances upon employee option exercises of $10.8
million, and a share based payment credit to capital of $87.0 million. The increase also includes
$274.3 million of retained earnings appropriated for investors in consolidated investment products
recorded at January 1, 2010 arising from the adoption of FASB Statement No. 167, now encompassed in
ASC Topic 810, “Consolidation”, together with a $139.4 million movement in this balance during the
period from net income attributable to investors in consolidated investment products during the
period. The increases to equity were partially offset by $146.3 million in dividend payments, $3.4
million of changes in foreign currency rates, and
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$163.9 million in treasury shares acquired through market purchases ($127.7 million) and from
staff to meet withholding tax obligations on share award vestings ($36.2 million).
Liquidity and Capital Resources
The adoption of FASB Statement No. 167, now encompassed in ASC Topic 810, “Consolidations,” on
January 1, 2010, which resulted in the consolidation of $6.5 billion and $5.7 billion of total
assets and long-term debt of certain CLO products as of September 30, 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 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 I, Item 1,
Financial Statements – Note 12, “Consolidated Investment Products,” for additional details.
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. |
In addition, 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 asset 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 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 quarter we repurchased 6.4 million common shares in open market transactions utilizing $127.7
million in cash. We believe that the cash flow generated from operations of the combined firm, the
remaining $601.5 million in credit facility capacity, and our ability to access the capital
markets, will provide sufficient liquidity to meet future capital resource needs.
Our ability 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
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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 September 30,
2010, the European sub-group had cash and cash equivalent balances of $459.3 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 unit investment trust broker dealer entity, which was included in the acquired business.
At September 30, 2010 these cash deposits totaled $13.8 million.
Cash Flows
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 1, Financial Statements —
Note 12, “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.
Condensed Consolidating Statements of Cash Flows
| Consolidated | ||||||||||||||||
| Before | Investment | |||||||||||||||
| $ in millions | Consolidation | Products * | Eliminations | Total | ||||||||||||
|
For the nine months ended September 30, 2010
|
||||||||||||||||
|
Net income
|
285.3 | 195.2 | (0.4 | ) | 480.1 | |||||||||||
|
Net purchases of trading investments
|
(97.8 | ) | — | — | (97.8 | ) | ||||||||||
|
Other adjustments to reconcile net income to net cash
provided by operating activities
|
183.8 | (142.0 | ) | 0.4 | 42.2 | |||||||||||
|
Changes in cash held by consolidated investment products
|
— | (95.2 | ) | — | (95.2 | ) | ||||||||||
|
Other changes in operating assets and liabilities
|
(89.4 | ) | 135.6 | — | 46.2 | |||||||||||
|
|
||||||||||||||||
|
Net cash provided by operating activities
|
281.9 | 93.6 | — | 375.5 | ||||||||||||
|
|
||||||||||||||||
|
Net proceeds of investments by consolidated investment
products
|
— | 136.4 | — | 136.4 | ||||||||||||
|
Purchases of available for sale and other investments
|
(83.7 | ) | — | 1.5 | (82.2 | ) | ||||||||||
|
Proceeds from sales and returns of capital of available
for sale and other investments
|
85.4 | — | (1.5 | ) | 83.9 | |||||||||||
|
Other investing activities
|
(782.5 | ) | — | — | (782.5 | ) | ||||||||||
|
|
||||||||||||||||
|
Net cash (used in)/provided by investing activities
|
(780.8 | ) | 136.4 | — | (644.4 | ) | ||||||||||
|
|
||||||||||||||||
|
Net capital distributed by consolidated investment products
|
— | (230.0 | ) | — | (230.0 | ) | ||||||||||
|
Other financing activities
|
399.5 | — | — | 399.5 | ||||||||||||
|
|
||||||||||||||||
|
Net cash provided by/(used in) financing activities
|
399.5 | (230.0 | ) | — | 169.5 | |||||||||||
|
|
||||||||||||||||
|
Decrease in cash and cash equivalents
|
(99.4 | ) | — | — | (99.4 | ) | ||||||||||
|
Foreign exchange movement on cash and cash equivalents
|
1.5 | — | — | 1.5 | ||||||||||||
|
Cash and cash equivalents, beginning of period
|
762.0 | — | — | 762.0 | ||||||||||||
|
|
||||||||||||||||
|
Cash and cash equivalents, end of period
|
664.1 | — | — | 664.1 | ||||||||||||
|
|
||||||||||||||||
| * | The company adopted FASB Statement No. 167 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. |
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| Consolidated | ||||||||||||
| Before | Investment | |||||||||||
| $ in millions | Consolidation | Products | Total | |||||||||
|
For the nine months ended September 30, 2009
|
||||||||||||
|
Net income
|
212.2 | (137.1 | ) | 75.1 | ||||||||
|
Net purchases of trading investments
|
(28.8 | ) | — | (28.8 | ) | |||||||
|
Other adjustments to reconcile net income to net cash provided
by operating activities
|
162.7 | 130.3 | 293.0 | |||||||||
|
Changes in cash held by consolidated investment products
|
— | 34.7 | 34.7 | |||||||||
|
Other changes in operating assets and liabilities
|
(212.6 | ) | — | (212.6 | ) | |||||||
|
|
||||||||||||
|
Net cash (used in)/provided by operating activities
|
133.5 | 27.9 | 161.4 | |||||||||
|
|
||||||||||||
|
Net proceeds of investments by consolidated investment products
|
— | 1.6 | 1.6 | |||||||||
|
Other investing activities
|
(41.4 | ) | — | (41.4 | ) | |||||||
|
|
||||||||||||
|
Net cash (used in)/provided by investing activities
|
(41.4 | ) | 1.6 | (39.8 | ) | |||||||
|
|
||||||||||||
|
Net capital distributed by consolidated investment products
|
— | (29.5 | ) | (29.5 | ) | |||||||
|
Other financing activities
|
232.9 | — | 232.9 | |||||||||
|
|
||||||||||||
|
Net cash provided by/(used in) financing activities
|
232.9 | (29.5 | ) | 203.4 | ||||||||
|
|
||||||||||||
|
Decrease in cash and cash equivalents
|
325.0 | — | 325.0 | |||||||||
|
Foreign exchange movement on cash and cash equivalents
|
13.6 | — | 13.6 | |||||||||
|
Cash and cash equivalents, beginning of period
|
585.2 | — | 585.2 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents, end of period
|
923.8 | — | 923.8 | |||||||||
|
|
||||||||||||
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.
During the nine months ended September 30, 2010, cash generated by operating activities
increased $214.1 million to $375.5 million from $161.4 million during the nine months ended
September 30, 2009. As shown on the table above, consolidated investment products contributed $93.6
million of the cash generated during the nine months ended September 30, 2010 compared to $27.9
million in the nine months ended September 30, 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 $281.9 million in the nine
months ended September 30, 2010 compared to $133.5 million in the nine months ended September 30,
2009.
The generation of $281.9 million of cash from operations during the nine months ended
September 30, 2010 included:
| • | net purchases of trading investments of $97.8 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 $379.7 million, representing net income as adjusted for non-cash items and the changes in operating assets and liabilities. This nine month period included the use of $240.3 million of cash to pay the annual staff bonuses, related payroll taxes, payroll taxes on then annual share award vesting, and annual pension contributions, all of which result in increased operating cash utilization in the first nine months of the calendar year. |
The $133.5 million of cash generated from operations during the nine months ended September
30, 2009 included: cash generated from the other operating activities of $162.3 million,
representing net income as adjusted for non-cash items and the changes in operating assets and
liabilities, and net purchases of trading investments of $28.8 million principally for staff
deferred compensation plan awards. This nine month period included the use of $317.8 million of
cash to pay the annual staff bonuses, related payroll taxes, payroll taxes on the annual share
based awards vesting, and annual pension contributions, all of which result in increased cash
utilization in the first nine months of the calendar year.
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After excluding the net purchase of trading investments, cash generated from other operating
activities in the nine months ended September 30, 2010 improved by $217.3 million from $162.3
million in the nine months ended September 30, 2009 to $379.6 million in the nine months ended
September 30, 2010. This reflects the increased net income as realized into cash together with the
lower annual staff related operating cash outflows, as bonus and other staff compensation related
payments in early 2010 were lower than in early 2009 principally due to reduced profitability in
the respective years to which the bonuses related.
Investing Activities
Net cash used in investing activities totaled $644.4 million for the nine months ended
September 30, 2010 (nine months ended September 30, 2009: net cash used of $39.8 million). As shown
in the table above, consolidated investment products, including investment purchases, sales and
returns of capital, contributed $136.4 million (2009: $1.6 million contributed). After allowing for
these consolidated investment product cash flows, net cash used in investing activities was $780.8
million (nine months ended September 30, 2009: net cash used of $41.4 million). The closing of the
business 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. During the three months ended
September 30, 2010, additional net acquisition payments were $12.9 million. There were no
acquisition related payments in the nine months ended September 30, 2009.
In addition, during the nine months ended September 30, 2010 the company purchased
available-for-sale investments and other investments of $83.7 million (nine months ended September
30, 2009: $70.6 million) and had capital expenditures of $57.4 million (nine months ended September
30, 2009: $23.3 million). These cash outflows were partly offset from collected proceeds of $85.4
million from sales and returns of capital of investments in the nine months ended September 30,
2010 (nine months ended September 30, 2009: $46.1 million).
The increase in capital expenditure cash outflows in the nine months ended September 30, 2010
when compared to the nine months ended September 30, 2009 was 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 these costs 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 nine months ended
September 30, 2010 and 2009, our capital divestitures were not significant relative to our total
fixed assets.
There were no payments made in the nine months ended September 30, 2010 related to acquisition
earn-out arrangements.
Financing Activities
Net cash provided by financing activities totaled $169.5 million for the nine months ended
September 30, 2010 (nine months ended September 30, 2009: $203.4 million). As shown in the table
above, the financing activities of the consolidated investment products used cash of $230.0 million
(nine months ended September 30, 2009: $29.5 million). Excluding the impact of consolidated
investment products, financing activities provided cash of $399.5 million in the nine months ended
September 30, 2010 (nine months ended September 30, 2009: $232.9 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 September 30, 2010 was $648.5 million.
Other financing cash flows during the nine months ended September 30, 2010 included $146.3
million of dividend payments for the dividends declared in January, April and July 2010 (nine
months ended September 30, 2009: dividends paid of $124.2 million), the purchase of treasury shares
through market transactions totaling $127.7 million (nine months ended September 30, 2009: none),
cash inflows from the exercise of options of $10.8 million (nine months ended September 30, 2009:
$40.5 million), and excess tax benefits cash inflows from share-based compensation of $14.2 million
(nine months ended September 30, 2009: $0.1 million).
Net cash provided by financing activities for the nine months ended September 30, 2009 also
included equity issuance proceeds of $441.8 million, payments to purchase outstanding debt of
$103.0 million resulting from a tender offer, repayments of our credit facility of $12.0 million
and a payment of $10.3 million to purchase of the remaining 24.9% of Invesco Real Estate GmbH not
already held by the company, the controlling interest having been acquired in December 2003.
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Dividends
Invesco declares and pays dividends on a quarterly basis. On July 27, 2010, the company
declared a second quarter 2010 cash dividend of 11 cents per share, which was paid on September 9,
2010 to common and preferred shareholders of record at the close of business on August 23, 2010. On
October 25, 2010, the company declared a third quarter 2010 cash dividend of 11 cents per share,
which is payable on December 8, 2010 to common and preferred shareholders of record at the close of
business on November 19, 2010.
Share Repurchase Plan
During the three and nine months ended September 30, 2010, the company repurchased 6.4 million
shares in the market at a cost of $127.7 million (three and nine months ended September 30, 2009:
no shares were repurchased). An aggregate of 1.4 million shares were withheld on vesting events
during the nine months ended September 30, 2010 to meet employees’ withholding tax obligations
(nine months ended September 30, 2009: 1.1 million shares). The value of these shares withheld was
$36.5 million (nine months ended September 30, 2009: $12.6 million). At September 30, 2010
approximately $1.2 billion remained authorized for repurchase under the company’s share repurchase
plan.
Debt
Our total indebtedness at September 30, 2010 was $1,394.2 million (December 31, 2009 is $745.7
million) and was comprised of the following:
| September 30, | 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
|
648.5 | — | ||||||
|
|
||||||||
|
Total debt
|
1,394.2 | 745.7 | ||||||
|
Less: current maturities of total debt
|
— | — | ||||||
|
|
||||||||
|
Long-term debt
|
1,394.2 | 745.7 | ||||||
|
|
||||||||
For the nine months ended September 30, 2010 the company’s weighted average cost of debt was
4.51% (nine months ended September 30, 2009: 5.18%).
Financial covenants under the credit facility 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 September 30, 2010 we were in
compliance with our debt covenants. At September 30, 2010 our leverage ratio was 1.52:1.00
(December 31, 2009: 1.11:1.00), and our interest coverage ratio was 16.43:1.00 (December 31, 2009:
11.01:1.00).
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The September 30, 2010 coverage ratio calculations are as follows:
| $ millions | Total | Q3 2010 | Q2 2010 | Q1 2010 | Q4 2009 | |||||||||||||||
|
Net income attributable to common shareholders
|
401.4 | 154.7 | 40.8 | 95.0 | 110.9 | |||||||||||||||
|
Net income attributable to Consolidated Investment Products
|
(5.6 | ) | (1.8 | ) | (2.2 | ) | (1.6 | ) | — | |||||||||||
|
Tax expense
|
189.5 | 54.5 | 36.7 | 50.1 | 48.2 | |||||||||||||||
|
Amortization/depreciation
|
90.3 | 26.3 | 20.8 | 18.3 | 24.9 | |||||||||||||||
|
Interest expense
|
57.8 | 16.1 | 14.1 | 12.4 | 15.2 | |||||||||||||||
|
Share-based compensation expense
|
109.6 | 31.5 | 31.3 | 24.2 | 22.6 | |||||||||||||||
|
Unrealized gains and losses from investments, net*
|
0.8 | (8.8 | ) | 7.7 | 1.6 | 0.3 | ||||||||||||||
|
Acquired business proforma EBITDA impact**
|
105.6 | — | 35.7 | 41.2 | 28.7 | |||||||||||||||
|
|
||||||||||||||||||||
|
EBITDA***
|
949.4 | 272.5 | 184.9 | 241.2 | 250.8 | |||||||||||||||
|
|
||||||||||||||||||||
|
Adjusted debt***
|
$ | 1,446.7 | ||||||||||||||||||
|
|
||||||||||||||||||||
|
Leverage ratio (Debt/EBITDA – maximum 3.25:1.00)
|
1.52 | |||||||||||||||||||
|
|
||||||||||||||||||||
|
Interest coverage (EBITDA/Interest Expense – minimum 4.00:1.00)
|
16.43 | |||||||||||||||||||
|
|
||||||||||||||||||||
| * | 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 EBITDA 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 $1,394.2 million plus $52.4 million in letters of credit and $0.1 million in capital leases. |
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 September 30, 2010,
the company’s undrawn capital commitments were $82.0 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 June
2010, the agreements were amended to extend the term through December 31, 2010. As of September 30,
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 fair value of the guarantees related to these agreements at September 30,
2010 was $4.0 million (December 31, 2009: $2.5 million), which was recorded in other current
liabilities on the Condensed Consolidated Balance Sheet. 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 future obligations under various contracts relating to debt and interest payments,
financing and operating leases, long-term defined benefit pension and post-retirement medical
plans, and acquisition contracts. During the nine months ended September 30, 2010 significant
changes to these obligations from those reported in our Annual Report on Form 10-K for the year
ended December 31, 2009, include the termination of the floating rate credit agreement on May 24,
2010 and the entrance into a new $1,250.0 million credit facility expiring May 23, 2013, discussed
in Part I, Item 1, “Financial Statements – Note 7, Debt.”
Critical Accounting Policies and Estimates
Our significant accounting policies are disclosed in our most recent Form 10-K for the year
ended December 31, 2009. 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. Different estimates 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. Our accounting policies
and estimates regarding investments and consolidated investment products are discussed below, as
there have been changes to these policies after the adoption of FASB Statement No. 167, now
encompassed in ASC Topic 810, “Consolidation,” on January 1, 2010.
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.
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 Worldwide 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.
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.
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The company cannot predict the occurrence of future events that might adversely affect the
reported value of goodwill that totaled $6,876.1 million and $6,467.6 million at September 30, 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. 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 2009 and 2008 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.
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 asset 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 to be
performed. The second step could have resulted in an impairment loss for goodwill.
Intangible Assets.
Management contract and related management rights 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
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 are
renewed annually 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.
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 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 determined using an income approach where 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.
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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 $522.4 million total investments at September 30, 2010, those most susceptible
to impairment include $126.5 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 such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a component of the business that may affect the future earnings potential; | |
| • | 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; | |
| • | 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 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.
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Assessing if an entity is a VIE or 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 voting interest entities (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 Condensed 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
Condensed Consolidated Statements of Income.
As of September 30, 2010 the company consolidated VIEs that held investments of $6,185.4
million (December 31, 2009: $67.9 million) and VOE partnership investments of $624.5 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.
Recent Accounting Standards
See Part I, Item 1, “Financial Statements — Note 1, Accounting Policies — Accounting
Pronouncements Recently Adopted and Pending Accounting Pronouncements.”
Item 3.
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.
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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 exposure to certain
deferred compensation plans. The company’s exposure to market risk arises from its investments. A
20% increase or decrease in the fair value of investments exposed to market risk is not material to
the operating results of the company.
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
September 30, 2010 the interest rates on 53.5% of the company’s borrowings were fixed for an
average period of 2.65 years. Borrowings under the credit facility, which represent 46.5% of the
company’s borrowings, have floating interest rates. A 1% change in the level of interest rates on
current debt levels would change annualized interest expense by $6.5 million but would not have a
material impact on the ability of the company to continue to service its indebtedness.
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 $0.9 million for
the nine months ended September 30, 2010 and $8.2 million in gains in the comparable prior year
period, and are included in general and administrative and other gains and losses, net on the
Condensed Consolidated Statements of Income. We continue to monitor our exposure to foreign
exchange revaluation.
Item 4.
Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and
procedures that are designed to ensure that information the company is required to disclose in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls and procedures include controls and procedures designed to ensure that
the company’s management, including its principal executive and principal financial officers, as
appropriate, to allow timely decisions regarding required disclosure.
We have evaluated, with the participation of our chief executive officer and chief financial
officer, the effectiveness of our disclosure controls and procedures as of September 30, 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 our evaluation, our
chief executive officer and chief financial officer concluded that our 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.
We have evaluated any change in our internal control over financial reporting that occurred
during the nine months ended September 30, 2010 and have concluded that there was no change that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
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Item 1.
Legal Proceedings
Following the industry-wide regulatory investigations in 2003 and 2004, multiple lawsuits
based on market timing allegations were filed against various parties affiliated with Invesco.
These lawsuits were consolidated in the United States District Court for the District of Maryland,
together with market timing lawsuits brought against affiliates of other mutual fund companies, and
on September 29, 2004, three amended complaints were filed against company-affiliated parties: (1)
a putative shareholder class action complaint brought on behalf of shareholders of AIM funds
formerly advised by Invesco Funds Group, Inc.; (2) a derivative complaint purportedly brought on
behalf of certain AIM funds and the shareholders of such funds; and (3) an ERISA complaint
purportedly brought on behalf of participants in the company’s 401(k) plan. The company and
plaintiffs have agreed to settle these lawsuits. The settlements call for a payment by the company
of $9.8 million, recorded in general and administrative expenses in the Consolidated Statement of
Income in 2007, in exchange for dismissal with prejudice of all pending claims. In addition, under
the terms of the settlements, the company may incur certain costs in connection with providing
notice of the proposed settlements to affected shareholders. Based on information currently
available, it is not believed that any such incremental notice costs will have any material effect
on the consolidated financial position or results of operations of the company. The court approved
the settlements on October 21, 2010. The settlements may be appealed prior to November 25, 2010.
Barring an appeal, the settlements would then become final.
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 the ARPS 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 distributors’ 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 asset 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.
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Item 1A.
Risk Factors
The company has had no significant changes in its risk factors from those previously disclosed
in its Annual Report on Form 10-K for the year ended December 31, 2009, other than the risk factor
noted below.
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 September 30, 2010, the European sub-group had cash and cash equivalent balances of
$459.3 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.
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.
Potential developments under enacted and proposed legal and regulatory changes, and related
matters, include:
| • | Expanded prudential regulation over investment management firms. |
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| • | 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 continues to develop the Alternative Investment Fund Manager Directive which, among other elements, could 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. | ||
| • | 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. | ||
| • | 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. | ||
| • | 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 revenues might be adversely affected.
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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Equity Securities
The following table sets forth information regarding purchases of our common shares by us and
any affiliated purchases during the three months ended September 30, 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) | ||||||||||||
|
July 1-31, 2010
|
21,120 | 17.16 | — | $ | 1,360,608,682 | |||||||||||
|
August 1-31, 2010
|
330,617 | 18.00 | 310,700 | $ | 1,355,017,294 | |||||||||||
|
September 1-30, 2010
|
6,135,496 | 19.91 | 6,132,621 | $ | 1,232,927,298 | |||||||||||
|
|
||||||||||||||||
|
Total
|
6,487,233 | 6,443,321 | ||||||||||||||
|
|
||||||||||||||||
| (1) | An aggregate of 43,912 restricted share awards 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. |
Item 3.
Defaults upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
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Item 6.
Exhibits
Exhibit Index
| 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
|
|||
|
|
||||
| 10.1 |
Amendment No. 1 to the 2008 Global Equity Incentive Plan, as amended and restated effective February 1, 2009
|
|||
|
|
||||
| 10.2 |
Amendment No. 1 to the 2010 Global Equity Incentive Plan (ST), effective May 18, 2010
|
|||
|
|
||||
| 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 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.
|
||||
| November 2, 2010 | By: | /s/ MARTIN L. FLANAGAN | ||
| Martin L. Flanagan | ||||
| President and Chief Executive Officer | ||||
| November 2, 2010 | By: | /s/ LOREN M. STARR | ||
| Loren M. Starr | ||||
| Senior Managing Director and Chief Financial Officer | ||||
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Item 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission Of Matters To A Vote Of Security HoldersItem 6. Exhibits