UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

 

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended December 31, 2008

 

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

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

1555 Peachtree Street, NE, Suite 1800, Atlanta, GA

30309

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (404) 892-0896

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Name of Exchange on Which Registered

Common Shares, $0.20 par value per share

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

 

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 x  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o  No x

 

At June 30, 2008, the aggregate market value of the voting stock held by non-affiliates was $7.9 billion, based on the closing price of the registrant’s Common Shares, par value U.S. $0.20 per share, on the New York Stock Exchange. At January 31, 2009, the number of Common Shares outstanding was 378,417,557.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant will incorporate by reference information required in response to Part III, Items 10-14 in its definitive Proxy Statement for its annual meeting of shareholders, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2008.

 

 

 

 


TABLE OF CONTENTS

 

We include cross references to captions elsewhere in this Annual Report on Form 10-K, which we refer to as this “Report,” where you can find related additional information. The following table of contents tells you where to find these captions.

 

 

 

Page

Special Cautionary Note Regarding Forward-Looking Statements

3

PART I

 

Item 1.

Business

4

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

18

Item 2.

Properties

18

Item 3.

Legal Proceedings

19

Item 4.

Submission of Matters to a Vote of Security Holders

19

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

Item 6.

Selected Financial Data

23

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

52

Item 8.

Financial Statements and Supplementary Data

57

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

108

Item 9A.

Controls and Procedures

108

Item 9B.

Other Information

109

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

109

Item 11.

Executive Compensation

111

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

111

Item 13.

Certain Relationships and Related Transactions, and Director Independence

111

Item 14.

Principal Accountant Fees and Services

111

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

112

 

 

2

 

 


SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Report, the documents incorporated by reference herein, other public filings and oral and written statements by us and our management, may include statements that constitute “forward-looking statements” within the meaning of the United States securities laws. These statements are based on the beliefs and assumptions of our management and on information available to us at the time such statements are made. Forward-looking statements include information concerning possible or assumed future results of our operations, expenses, earnings, liquidity, cash flows and capital expenditures, industry or market conditions, assets under management, acquisition activities and the effect of completed acquisitions, debt levels and our ability to obtain additional financing or make payments on our debt, 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.

 

The following important factors, and other factors described elsewhere in this Report or incorporated by reference into this Report or contained in our other filings with the U.S. Securities and Exchange Commission (“SEC”), among others, could cause our results to differ materially from any results described in any forward-looking statements:

 

 

variations in demand for our investment products or services, including termination or non-renewal of our investment advisory agreements;

 

 

significant changes in net asset flows into or out of the accounts we manage or declines in market value of the assets in, or redemptions or other withdrawals from, those accounts;

 

 

enactment of adverse state, federal or foreign legislation or changes in government policy or regulation (including accounting standards) affecting our operations, our capital requirements or the way in which our profits are taxed;

 

 

significant fluctuations in the performance of debt and equity markets worldwide;

 

 

exchange rate fluctuations, especially as against the U.S. dollar;

 

 

the effect of economic conditions and interest rates in the U.S. or globally;

 

 

our ability to compete in the investment management business;

 

 

the effect of consolidation in the investment management business;

 

 

limitations or restrictions on access to distribution channels for our products;

 

 

our ability to attract and retain key personnel, including investment management professionals;

 

 

the investment performance of our investment products;

 

 

our ability to acquire and integrate other companies into our operations successfully and the extent to which we can realize anticipated cost savings and synergies from such acquisitions;

 

 

changes in regulatory capital requirements;

 

 

our substantial debt and the limitations imposed by our credit facility;

 

 

the effect of failures or delays in support systems or customer service functions, and other interruptions of our operations;

 

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the occurrence of breaches and errors in the conduct of our business, including any failure to properly safeguard confidential and sensitive information;

 

 

the execution risk inherent in our current company-wide transformational initiatives;

 

 

the effect of political or social instability in the countries in which we invest or do business;

 

 

the effect of terrorist attacks in the countries in which we invest or do business and the escalation of hostilities that could result therefrom;

 

 

war and other hostilities in or involving countries in which we invest or do business; and

 

 

adverse results in litigation, including private civil litigation related to mutual fund fees and any similar potential regulatory or other proceedings.

 

Other factors and assumptions not identified above were also involved in the derivation of these forward-looking statements, and the failure of such other assumptions to be realized may also cause actual results to differ materially from those projected. For more discussion of the risks affecting us, please refer to Part I, Item 1A, “Risk Factors.”

 

You should consider the areas of risk described above in connection with any forward-looking statements that may be made by us and our businesses generally. We expressly disclaim any obligation to update any of the information in this or any other public report if any forward-looking statement later turns out to be inaccurate, whether as a result of new information, future events or otherwise. For all forward-looking statements, we claim the “safe harbor” provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

 

PART I

 

In this Annual Report on Form 10-K, unless otherwise specified, the terms “we,” “our,” “us,” “company,” “Invesco,” and “Invesco Ltd.” refer to Invesco Ltd., a company incorporated in Bermuda, and its subsidiaries.

 

Item 1.  Business

 

Introduction

 

Invesco is a leading independent global investment management company, dedicated to helping people worldwide build their financial security. By delivering the combined power of our distinctive worldwide investment management capabilities, Invesco provides a comprehensive array of enduring solutions for retail, institutional and high-net-worth clients around the world. Operating in 20 countries, Invesco had $357.2 billion in assets under management (AUM) as of December 31, 2008.

 

The key drivers of success for Invesco are long-term investment performance and client service delivered across a diverse spectrum of investment management capabilities, distribution channels, geographic areas and market exposures. By achieving success in these areas, we seek to generate positive net flows, increased AUM and associated revenues. We are affected significantly by market movements, which are beyond our control; however, we endeavor to mitigate the impact of market movement by offering broad investment capability, client and geographical diversification. We measure relative investment performance by comparing our investment capabilities to competing products, industry benchmarks and client investment objectives. Generally, distributors, investment advisors and consultants heavily weigh longer-term performance (e.g., three-year and five-year performance) in selecting the investment capabilities they recommend to their customers, although shorter-term performance may also be an important consideration. Third-party ratings can also have an influence on client investment decisions. Quality of client service is monitored in a variety of ways, including periodic client satisfaction surveys, analysis of response times and redemption rates, competitive benchmarking of services and feedback from investment consultants.

 

Invesco Ltd. is organized under the laws of Bermuda, and our common shares are listed and traded on the New York Stock Exchange under the symbol “IVZ.” We maintain a Web site at www.invesco.com. (Information contained on our Web site shall not be deemed to be part of, or to be incorporated into, this document).

 

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Strategy

 

The company is focusing on four key strategic objectives that are designed to strengthen our business and help ensure our long-term success:

 

 

Achieve strong investment performance over the long term for our clients;

 

 

Deliver the combined power of our distinctive investment management capabilities anywhere in the world to meet our clients’ needs;

 

 

Unlock the power of our global operating platform by simplifying our processes and procedures and integrating the support structures of our business globally; and

 

 

Continue to build a high-performance organization by fostering greater transparency, accountability and execution at all levels.

 

Prior to 2006, Invesco operated as a collection of diverse business units. Beginning in August 2005, Invesco began to leverage the individual strengths of these business units in ways that would help us operate more effectively as a unified global organization. Under the leadership of chief executive officer (CEO) Mr. Martin L. Flanagan, the company developed and is implementing a comprehensive operating plan designed to achieve our strategic objectives. Early in 2006, Invesco evolved the leadership structure of the organization to ensure alignment with our strategic direction. We believe these changes have strengthened Invesco’s ability to operate more efficiently and effectively as an integrated, global organization.

 

Since we take a unified approach to our business, we are presenting our financial statements and other disclosures under the single operating segment “asset management.”

 

Recent Developments

 

On May 24, 2007, with approval from our shareholders, we changed our name from AMVESCAP PLC to INVESCO PLC to better reflect our position as an integrated global company. We chose Invesco from among our many powerful brands since Invesco is recognized in every market in which we operate and because being an investment management company is embedded in the name; however we continue to utilize and leverage our unique investment capabilities and geographic brand presence around the world. On November 5, 2007, we introduced a new brand identity for Invesco. This move was part of our long-range brand strategy to further unify our company and build on the strength of our existing brands, which helps us more effectively promote our global investment management expertise.

 

On December 4, 2007, we moved our primary listing to the New York Stock Exchange and redomiciled the company from the United Kingdom to Bermuda in a transaction previously approved by shareholders. To accomplish this, our predecessor company INVESCO PLC effected a court-approved U.K. Scheme of Arrangement under which our shareholders received common shares in Invesco Ltd., our new Bermuda parent company, in exchange for their ordinary shares in INVESCO PLC. Holders of our American Depositary Shares (ADSs) and our Canadian exchangeable shares also received common shares in the new Bermuda parent company. Following the redomicile, Invesco Ltd. effected a one-for-two reverse stock split, such that all of our shareholders now hold common shares, par value $0.20 per share, in Invesco Ltd. Per share amounts have been adjusted throughout this Annual Report on Form 10-K to give effect to the reverse stock split. See Part II, Item 8, “Financial Statements and Supplementary Data — Note 1, Accounting Policies” for additional information.

 

On December 31, 2007, Invesco was added to the Dow Jones Wilshire 5000 Composite Index, the Dow Jones Wilshire 4500 Completion Index, the Dow Jones Wilshire U.S. Large-Cap Index, and the Dow Jones Wilshire U.S. Large-Cap Growth Index. Invesco Ltd. continues to stay in the Dow Jones Wilshire Global Indexes, including the Dow Jones Wilshire Global Total Market Index and the Dow Jones Wilshire Global Large-Cap Index. On December 4, 2007, Invesco was also added to the Russell 3000, Russell 1000, Russell 1000 Value, Russell 1000 Growth, Russell Midcap, Russell Midcap Value, and Russell Midcap Growth Indexes. Additionally, we continue to be a member of the Russell Global Large Cap Index. After the close of trading on August 20, 2008, common shares of Invesco were added to the Standard & Poor’s 500 Index, widely regarded as the best single gauge of the U.S. equities market. The index includes 500 leading companies in leading industries of the U.S. economy.

 

5

 

 


Throughout 2007, we remained committed to executing our comprehensive operating plan. During this period, and consistent with our plan, we actively pursued multiple growth opportunities. However, during the summer of 2007, we began to more tightly manage the business, in response to looming market pressures and volatility, which threatened to adversely impact the global economy. Continuous improvement activities, core to Invesco’s operating strategy, gave us the flexibility to continue to invest in our core markets and in the long-term success of our business, despite these market pressures.

 

In 2008, Invesco imposed an even higher degree of discipline to our business, given the turmoil in the global markets. In anticipation of a challenging year, we directed the majority of our efforts and allocated key resources to largely those activities that we believed could best improve our competitive position over time. These activities included enhancing our pay for performance approach to compensation, upgrading and renewing Invesco’s talent pool, and investing in our ETF, private equity, real estate and Chinese operations. To provide the resources and capacity to fund these efforts, we undertook a number of cost saving initiatives, including streamlining operations to work more effectively as an integrated global organization and more effectively managing our discretionary spending.

 

Operating margin and net operating margin decreased to 22.6% and 31.6% in 2008, respectively, from 25.6% and 36.0% in 2007, respectively, due primarily to declines in AUM. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Schedule of Non-GAAP Information” for a reconciliation of operating income to net operating income (and by calculation, a reconciliation of operating margin to net operating margin) and important additional disclosures.

 

Certain Demographic and Industry Trends

 

Demographic and economic trends around the world continue to transform the investment management industry and our business:

 

 

Economic uncertainty and global market declines in 2008 resulted in a diminished pool of global of assets under management across the industry.

 

 

Population growth continues to create a growing number of investors who need professional support to reach their financial goals.

 

 

Global retirement needs are creating a larger middle class of investors, resulting in increasing demand for an array of investment solutions that span investment capabilities around the globe. The greater reliance on self-funded retirement will result in not only a higher level of investable assets, but a greater need to be advised on how to invest effectively for the future. We believe we are well-positioned to attract these retirement assets through our products developed to meet retirement needs, including lifecycle and target maturity funds.

 

 

We have seen increasing demand from clients for alpha and beta to be separated as investment strategies in the investment management industry. (“Alpha” is defined as excess return attributable to a manager, and “beta” refers to the return of an underlying benchmark.) This trend reflects how clients are differentiating between low-cost beta solutions such as passive, index and ETF products and higher-priced alpha strategies such as those offered by many alternative products.

 

 

Investors are increasingly seeking to invest outside their domestic markets. They seek firms that operate globally and have investment expertise in markets around the world. Invesco, with 13 distinct investment teams worldwide, has the global capabilities to benefit from this trend.

 

Our plans for taking the business forward acknowledge these demographic and economic trends, as we work to further strengthen our competitive position. Our multi-year strategy is designed to leverage our global presence, our distinctive worldwide investment management capabilities and our talented people to further grow our business and ensure our long-term success.

 

Investment Management Capabilities

 

Invesco is a leading independent global investment manager with operations in 20 countries. As of December 31, 2008, Invesco managed $357.2 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.

 

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Supported by a global operating platform, Invesco delivers a broad array of investment products and services to retail, institutional and high-net-worth investors on a global basis. We have a significant presence in the institutional and retail segments of the investment management industry in North America, Europe and Asia-Pacific, with clients in more than 100 countries.

 

We are committed to delivering the combined power of our distinctive worldwide investment management capabilities globally. We believe that our discipline-specific teams provide us with a competitive advantage. In addition, we offer multiple investment objectives within the various asset classes and products that we manage. Our asset classes include money market, fixed income, balanced, equity and alternatives. Approximately 36% of our AUM as of December 31, 2008, was invested in equities (December 31, 2007: 49.6% in equities), with the balance invested in fixed income and other securities. We believe that having our investment professionals working in and investing from many of the world’s financial markets is one of our core strengths.

 

The following table sets forth the investment objectives by which we manage, sorted by asset class:

 

Objectives by Asset Class

 

Money Market

Fixed Income

Balanced

Equity

Alternatives

Prime

Convertibles

Core

Small Cap Core

Financial Structures

Government/Treasury

Core/Core Plus

Global

Small Cap Growth

Absolute Return

Tax-Free

Emerging Markets

Asset Allocation

Small Cap Value

U.S. REITS

Cash Plus

Enhanced Cash

 

Medium Cap Core

Global REITS

 

Government Bonds

 

Medium Cap Growth

U.S. Direct Real Estate

 

High-Yield Bonds

 

Medium Cap Value

European Direct Real Estate

 

High-Yield Loans

 

Large Cap Core

Asian Direct Real Estate

 

Index

 

Large Cap Growth

Private Capital Direct Investments

 

Intermediate

 

Large Cap Value

Private Capital Fund of Funds

 

International/Global

 

Enhanced Index

Multiple Asset Strategies

 

Municipal Bonds

 

Sector Funds

Asset Allocation

 

Short Bonds

 

International

Portable Alpha

 

Stable Value

 

Global

 

 

 

 

Regional/Single Country

 

 

The following table sets forth the categories of products sold through our three principal distribution channels:

 

Investment Vehicles by Distribution Channel

 

Retail

Institutional

Private Wealth Management

Mutual Funds

Institutional Separate Accounts

Separate Accounts

ICVCs*

Collective Trust Funds

Managed Accounts

Investment Trusts

Managed Accounts

Mutual Funds

Individual Savings Accounts

Exchange-Traded Funds

Exchange-Traded Funds

Exchange-Traded Funds

Private Capital Funds

Private Capital Funds

 

Variable Insurance Funds

 

                

____________

 

*

Investment companies with variable capital

 

 

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One of Invesco’s greatest competitive strengths is the diversification in our AUM by client domicile, distribution channel and asset class. Our distribution channels are comprised of approximately 42% retail, 54% institutional, and 4% Private Wealth Management clients. 35% of client assets under management are outside the U.S., and we service clients in more than 100 countries. The following tables present a breakdown of AUM by client domicile, distribution channel and asset class as of December 31, 2008:

 

AUM Diversification ($ in billions)



 

See Part II, Item 8, “Financial Statements and Supplementary Data — Note 13, Geographic Information,” for a geographic breakdown of our consolidated operating revenues for the years ended December 31, 2008, 2007 and 2006.

 

 

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Distribution Channels

 

Retail

 

Invesco is a significant provider of retail investment solutions to clients through our distribution channels: Invesco AIM in the U.S., Invesco Trimark in Canada, Invesco Perpetual in the U.K., Invesco in Europe and Asia, and Invesco PowerShares (for our ETF products). Collectively, the retail product management teams manage assets of $149.4 billion as of December 31, 2008. We offer retail products within all of the major asset classes (money market, fixed income, balanced, equity and alternatives). Our retail products are primarily distributed through third-party financial intermediaries, including traditional broker-dealers, fund “supermarkets,” retirement platforms, financial advisors, insurance companies and trust companies.

 

The U.S., Canadian and U.K. retail operations rank among the largest, by AUM, in their respective markets: as of December 31, 2008, Invesco Aim was the 14th largest non-proprietary mutual fund complex in the U.S., Invesco Trimark was the 8th largest retail fund manager in Canada, and Invesco Perpetual was the largest retail fund provider in the U.K. In addition, Invesco Great Wall, our joint venture in China was one of the largest long-term Sino-foreign managers in China, with AUM of approximately $6.0 billion as of December 31, 2008. Invesco PowerShares adds a leading set of ETF products (with $9.2 billion in AUM and 138 exchanged-traded funds as of December 31, 2008) to the extensive choices available to our retail investors. We now provide our retail clients with one of the industry’s most robust and comprehensive product lines.

 

Institutional

 

We provide investment solutions to institutional investors globally, with a major presence in the U.S., U.K., Continental Europe and Asia-Pacific regions through Invesco and Invesco Aim ($194.4 billion in AUM as of December 31, 2008). We offer a broad suite of domestic and global products, including traditional equities, structured equities, fixed income, real estate, private equity (expanded through our 2006 acquisition of WL Ross & Co.), financial structures, and absolute return strategies. Regional sales forces distribute our products and provide services to clients and intermediaries around the world. We have a diversified client base that includes major public entities, corporate, union, non-profit, endowments, foundations, and financial institutions. Clients of Invesco Aim’s institutional money market funds included 21 of the 25 largest U.S. banks, 11 of the Fortune 25 U.S. corporations, and 10 of the top 50 Fortune Global Corporations as of December 31, 2008.

 

Private Wealth Management

 

Through Atlantic Trust, Invesco provides high-net-worth individuals and their families with a broad range of personalized and sophisticated wealth management services, including financial counseling, estate planning, asset allocation, investment management (including sale of third-party managed investment products), private equity, trust, custody and family office services. Atlantic Trust also provides asset management services to foundations and endowments. Atlantic Trust obtains new clients through referrals from existing clients, recommendations from other professionals serving the high-net-worth market, such as attorneys and accountants, and from financial intermediaries, such as brokers. Atlantic Trust has offices in 11 U.S. cities and manages $13.4 billion as of December 31, 2008.

 

Employees

 

As of December 31, 2008, we had 5,325 employees, the majority of whom were located in North America. As of December 31, 2007 and 2006, we had 5,475 and 5,574 employees, respectively. None of our employees is covered under collective bargaining agreements.

 

Competition

 

The investment management business is highly competitive, with points of differentiation including investment performance, the range of products offered, brand recognition, business reputation, financial strength, the depth and continuity of relationships, quality of service and the level of fees charged for services. We compete with a large number of investment management firms, commercial banks, investment banks, broker dealers, hedge funds, insurance companies and other financial institutions. We believe that the diversity of our investment styles, product types and channels of distribution enable us to compete effectively in the investment management business. We also believe being an independent investment manager is a competitive advantage, as our business model avoids conflicts that are inherent within institutions that both distribute investment products and manage investment products.

 

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Management Contracts

 

We derive substantially all of our revenues from investment management contracts with clients. Fees vary with the type of assets being managed, with higher fees earned on actively managed equity and balanced accounts, along with real estate and alternative asset products, and lower fees earned on fixed income, money market and stable value accounts. Investment management contracts are generally terminable upon thirty or fewer days’ notice. Typically, mutual fund and unit trust investors may withdraw their funds at any time without prior notice. Institutional and private wealth management clients may elect to terminate their relationship with us or reduce the aggregate amount of assets under management upon very short-notice periods.

 

Government Regulation

 

As with all investment management companies, our operations and investment products are highly regulated. Laws and regulations applied at the national, state or provincial and local level generally grant government agencies and industry self-regulatory authorities broad administrative discretion over the activities of our business, including the power to limit or restrict business activities. Possible sanctions for violations of law 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 in general or particular investment products could be amended or interpreted in a manner that is adverse to us.

 

We conduct substantial business operations in the U.S. Various of our subsidiaries and/or products and services offered by such subsidiaries are regulated by the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the National Futures Association, the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency (OCC). Federal statutes that regulate the products and services we offer in the U.S. include the Securities Act of 1933, the Securities Exchange Act of 1934 (Exchange Act), the Investment Advisers Act of 1940 (Investment Advisers Act), the Investment Company Act of 1940 (Investment Company Act), and the Employee Retirement Income Security Act of 1974. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including recordkeeping requirements, operational requirements, marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act imposes similar obligations on registered investment companies, as well as detailed operational requirements on investment advisers. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from fines and censure to termination of an investment adviser’s registration. Investment advisers also are subject to certain state securities laws and regulations. In addition, in recent years, the SEC adopted various rules, the effect of which has been to further regulate the investment management industry and has imposed on Invesco additional compliance obligations and costs for fulfilling such obligations.

 

Various of our subsidiaries are regulated in the United Kingdom by the Financial Services Authority (FSA). Our operations elsewhere in the world are regulated by similar regulatory organizations. Other regulators who potentially exert a significant impact on our businesses around the world include the Ministry of Finance and the Financial Services Agency in Japan, the Austrian Financial Market Authority (FMA), the Bundesamt für Finanzdienstleistungsaufsicht (BaFin) in Germany, the Canadian securities administrators (including the Ontario Securities Commission), the Financial Regulator in Ireland, the Autorité des Marchs Financiers in France, the China Securities Regulatory Commission in the Peoples Republic of China, the Financial Supervisory Commission of the Ministry of Finance and the Investment Commission of the Ministry of Economic Affairs of the Peoples Republic of China, the Securities and Futures Commission of Hong Kong, the Commission Bancaire, Financière et des Assurances (CBFA) in Belgium, the Australian Securities & Investments Commission, the Commissione Nazionale per le Società e la Borsa (CONSOB) in Italy, the Swiss Federal Banking Commission, La Comisión Nacional del Mercado de Valores (CNMV) in Spain, the Monetary Authority of Singapore, the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg, the Jersey Financial Services Commission and the Dubai Financial Services Authority.

 

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. After redomicile and after consultation with the U.K. FSA, it has been determined that, for the purposes of prudential supervision, Invesco Ltd. is not subject to regulatory consolidated capital requirements under current European Union (EU) Directives. A sub-group, however, including all of our regulated EU subsidiaries, is subject to these consolidated capital requirements, and capital is maintained within this sub-group to satisfy these regulations. At December 31, 2008, the European sub-group had cash and cash equivalent balances of $427.9 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

 

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restructuring and the regulatory undertakings that we have given, certain of these EU subsidiaries may be required to limit their distributions. We cannot guarantee that further corporate restructuring will not be required to comply with applicable legislation. See Part 1, Item 1A, “Risk Factors.”

 

Various regulators, legislators, other government officials and other public policy commentators have proposed or are considering proposals for regulatory reform in response to the ongoing crisis in the financial markets. Certain proposals are far reaching and if enacted could have a material impact on Invesco’s business. Potential developments include expanded prudential regulation over investment management firms, new or increased capital requirements and related regulation (including new capital requirements and related regulation pertaining to money market funds), other additional rules and regulations and disclosure requirements, and other changes impacting the identity or the organizational structure of regulators with supervisory authority over Invesco. Certain proposals would require national legislation or international treaties. Invesco cannot at this time predict the impact of potential regulatory changes on its business. It is possible such changes could impose material 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.

 

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.

 

Available Information

 

We file current and periodic reports, proxy statements and other information with the SEC, copies of which can be obtained from the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.

 

The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, at www.sec.gov. We make available free of charge on our Web site, www.invesco.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

 

Item 1A.  Risk Factors

 

Recent volatility and disruption in world capital and credit markets, as well as adverse changes in the global economy, have negatively affected Invesco’s revenues and may continue to do so.

 

The capital and credit markets have been experiencing substantial volatility and disruption for over a year. In recent months, the volatility and disruption have reached extreme levels. These market events have materially impacted our results of operations, and may continue to do so, and could materially impact our financial condition and liquidity. In this regard:

 

 

The overall decline in global market conditions around the world has resulted, and may continue to result, in significant decreases in our assets under management and revenues.

 

 

In addition to the impact on the market value of client portfolios, the illiquidity and volatility of both the global fixed income and equity markets could negatively affect our ability to manage client inflows and outflows from pooled investment vehicles or to timely meet client redemption requests.

 

 

Our money market funds have always maintained a $1.00 net asset value (NAV); however, we cannot guarantee that we can continue to achieve such results. Market conditions could lead to severe liquidity issues in money market products, which could affect their NAVs. If the NAV of one of our money market funds were to decline below $1.00 per share, such funds would likely experience significant redemptions in assets under management, loss of shareholder confidence and reputational harm.

 

 

Even if legislative or regulatory initiatives or other efforts successfully stabilize and add liquidity to the financial markets, we may need to modify our strategies, businesses or operations, and we may incur increased capital requirements and constraints or additional costs in order to satisfy new regulatory requirements or to compete in a changed business environment.

 

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In the event of extreme circumstances, including economic, political, or business crises, such as a widespread systemic failure in the global financial system or additional failures of firms that have significant obligations as counterparties on financial instruments, we may suffer further significant declines in assets under management and severe liquidity or valuation issues in the short-term sponsored investment products in which client and company assets are invested, all of which would adversely affect our operating results, financial condition, liquidity, credit ratings, ability to access capital markets, and retention and ability to attract key employees. Additionally, these factors could impact our ability to realize the carrying value of our goodwill.

 

We may not adjust our expenses quickly enough to match rapid deterioration in global financial markets.

 

In response to significant reductions in our assets under management related to recent adverse changes in world financial markets, we have undertaken a variety of efforts to achieve cost savings and reduce our overall operating expenses. If we are unable to effect appropriate expense reductions in a timely manner in response to declines in our revenues, or if we are otherwise unable to adapt to rapid changes in the global marketplace, our profitability, financial condition and results of operations would be adversely affected.

 

Our revenues would be adversely affected by any reduction in assets under our management as a result of either a decline in market value of such assets or net outflows, which would reduce the investment management fees we earn.

 

We derive substantially all of our revenues from investment management contracts with clients. Under these contracts, the investment management fees paid to us are typically based on the market value of assets under management. Assets under management may decline for various reasons. For any period in which revenues decline, our income and operating margin may decline by a greater proportion because certain expenses remain relatively fixed. Factors that could decrease assets under management (and therefore revenues) include the following:

 

Declines in the market value of the assets in the funds and accounts managed. These could be caused by price declines in the securities markets generally or by price declines in the market segments in which those assets are concentrated. Approximately 36% of our total assets under management were invested in equity securities and approximately 64% were invested in fixed income and other securities at December 31, 2008. Through the date of the filing of the Annual Report on Form 10-K with the SEC, markets continue to be volatile. Our AUM as of January 31, 2009, was $354.1 billion. We cannot predict whether the continued volatility in the markets will result in substantial or sustained declines in the securities markets generally or result in price declines in market segments in which our assets under management are concentrated. Any of the foregoing could negatively impact our revenues, income and operating margin.

 

Redemptions and other withdrawals from, or shifting among, the funds and accounts managed. These could be caused by investors (in response to adverse market conditions or pursuit of other investment opportunities) reducing their investments in funds and accounts in general or in the market segments on which Invesco focuses; investors taking profits from their investments; poor investment performance of the funds and accounts managed by Invesco; and portfolio risk characteristics, which could cause investors to move assets to other investment managers. Poor performance relative to other investment management firms tends to result in decreased sales, increased redemptions of fund shares, and the loss of private institutional or individual accounts, with corresponding decreases in our revenues. Failure of our funds and accounts to perform well could, therefore, have a material adverse effect on us. Furthermore, the fees we earn vary with the types of assets being managed, with higher fees earned on actively managed equity and balanced accounts, along with real estate and alternative asset products, and lower fees earned on fixed income and stable return accounts. Therefore, our revenues may decline if clients shift their investments to lower fee accounts.

 

Declines in the value of seed capital and partnership investments. The company has investments in sponsored investment products that invest in a variety of asset classes, including, but not limited to equities, fixed income products, private equity, and real estate. Investments in these products are generally made to establish a track record, meet purchase size requirements for trading blocks, or demonstrate economic alignment with other investors in our funds. Adverse market conditions may result in the need to write down the value of these seed investments. As of December 31, 2008, the company had $118.7 million in seed capital and partnership investments.

 

 

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Our investment advisory agreements are subject to termination or non-renewal, and our fund and other investors may withdraw their assets at any time.

 

Substantially all of our revenues are derived from investment advisory agreements. Investment advisory agreements are generally terminable upon 30 or fewer days’ notice. Agreements with U.S. mutual funds may be terminated with notice, or terminated in the event of an “assignment” (as defined in the Investment Company Act), and must be renewed annually by the disinterested members of each fund’s board of directors or trustees, as required by law. In addition, the board of trustees or directors of certain other funds accounts of Invesco or our subsidiaries generally may terminate these investment advisory agreements upon written notice for any reason. Mutual fund and unit trust investors may generally withdraw their funds at any time without prior notice. Institutional clients may elect to terminate their relationships with us or reduce the aggregate amount of assets under our management, and individual clients may elect to close their accounts, redeem their shares in our funds, or shift their funds to other types of accounts with different fee structures. Any termination of or failure to renew a significant number of these agreements, or any other loss of a significant number of our clients or assets under management, would adversely affect our revenues and profitability.

 

Our revenues and profitability from money market and other fixed income assets may be harmed by interest rate, liquidity and credit volatility.

 

In a rising-rate environment, certain institutional investors using money market products and other short-term duration fixed income products for cash management purposes may shift these investments to direct investments in comparable instruments in order to realize higher yields than those available in money market and other fund products holding lower yielding instruments. These redemptions would reduce managed assets, thereby reducing our revenues. In addition, rising interest rates will tend to reduce the market value of bonds held in various investment portfolios and other products. Thus, increases in interest rates could have an adverse effect on our revenues from money market portfolios and from other fixed income products. If securities within a money market portfolio default, or investor redemptions force the portfolio to realize losses, there could be negative pressure on its net asset value. Although money market investments are not guaranteed instruments, the company might decide, under such a scenario, that it is in its best interest to provide support in the form of a support agreement, capital infusion, or other methods to help stabilize a declining net asset value. Some of these methods could have an adverse impact on our profitability. Additionally, we have $17.5 million of equity at risk invested in our collateralized loan obligation products, the valuation of which could change with changes in interest and default rates. We have no significant or direct exposure to SIVs or subprime commercial paper.

 

We operate in an industry that is highly regulated in the U.S. and numerous foreign countries, and any adverse changes in the 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. 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. After redomicile and after consultation with the U.K. Financial Services Authority (FSA), it has been determined that, for the purposes of prudential supervision, Invesco Ltd. is not subject to regulatory consolidated capital requirements under current European Union (EU) Directives. A sub-group, however, including all of our regulated EU subsidiaries, is subject to these consolidated capital requirements, and capital is maintained within this sub-group to satisfy these regulations. At December 31, 2008, the European sub-group had cash and cash equivalent balances of $427.9 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 distributions. We cannot guarantee that further corporate restructuring will not be required to comply with applicable legislation.

 

The regulatory environment in which we operate frequently changes and has seen significant increased regulation in recent years. We may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations. To the extent that existing regulations are amended or future regulations are adopted that reduce the sale, or increase the redemptions, of our products and services, or that negatively affect the investment performance of our products, our aggregate assets under management and our revenues could be adversely affected. In addition, regulatory changes could impose additional costs, which could negatively impact our profitability.

 

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Various regulators, legislators, other government officials and other public policy commentators have proposed or are considering proposals for regulatory reform in response to the ongoing crisis in the financial markets. Certain proposals are far reaching and if enacted could have a material impact on Invesco’s business. Potential developments include expanded prudential regulation over investment management firms, new or increased capital requirements and related regulation (including new capital requirements and related regulation pertaining to money market funds), other additional rules and regulations and disclosure requirements, and other changes impacting the identity or the organizational structure of regulators with supervisory authority over Invesco. Certain proposals would require national legislation or international treaties. Invesco cannot at this time predict the impact of potential regulatory changes on its business. It is possible such changes could impose material 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.

 

Civil litigation and governmental enforcement actions and investigations could adversely affect our assets under management and future financial results, and increase our costs of doing business.

 

Invesco and certain related entities have in recent years been subject to various legal proceedings arising from normal business operations and/or matters that have been the subject of previous regulatory actions. See Part I, Item 3, “Legal Proceedings,” for additional information.

 

Our investment management professionals and other key employees are a vital part of our ability to attract and retain clients, and the loss of a significant portion of those professionals could result in a reduction of our revenues and profitability.

 

Retaining highly skilled technical and management personnel is important to our ability to attract and retain clients and retail shareholder accounts. The market for investment management professionals is competitive and has grown more so in recent periods as the investment management industry has experienced growth. The market for investment managers is also increasingly characterized by the movement of investment managers among different firms. Our policy has been to provide our investment management professionals with compensation and benefits that we believe are competitive with other leading investment management firms. However, we may not be successful in retaining our key personnel, and the loss of significant investment management personnel could reduce the attractiveness of our products to potential and current clients and could, therefore, adversely affect our revenues and profitability.

 

If our reputation is harmed, we could suffer losses in our business, revenues and net income.

 

Our business depends on earning and maintaining the trust and confidence of clients, regulators and other market participants, and the resulting good reputation is critical to our business. Our reputation is vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries, material errors in public reports, employee dishonesty or other misconduct and rumors, among other things, can substantially damage our reputation, even if they are baseless or satisfactorily addressed. Further, our business requires us to continuously manage actual and potential conflicts of interest, including situations where our services to a particular client conflict, or are perceived to conflict, with the interests of another client. We have procedures and controls that are designed to address and manage conflicts of interest, but this task is complex and difficult, and our reputation could be damaged, and the willingness of clients to enter into transactions in which such a conflict might arise may be affected, if we fail – or appear to fail – to deal appropriately with conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation or regulatory enforcement actions. Any damage to our reputation could impede our ability to attract and retain clients and key personnel, and lead to a reduction in the amount of our assets under management, any of which could have a material adverse effect on our revenues and net income.

 

Failure to comply with client contractual requirements and/or guidelines could result in damage awards against us and loss of revenues due to client terminations.

 

Many of the asset management agreements under which we manage assets or provide products or services specify guidelines or contractual requirements that Invesco is required to observe in the provision of its services. A failure to comply with these guidelines or contractual requirements could result in damage to our reputation or in our clients seeking to recover losses, withdrawing their assets or terminating their contracts, any of which could cause our revenues and net income to decline. We maintain various compliance procedures and other controls to prevent, detect and correct such errors. When an error is detected, we typically will make a payment into the applicable client account to correct it. Significant errors could impact our results of operations.

 

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Competitive pressures may force us to reduce the fees we charge to clients, increase commissions paid to our financial intermediaries or provide more support to those intermediaries, all of which could reduce our profitability.

 

The investment management business is highly competitive, and we compete based on a variety of factors, including investment performance, the range of products offered, brand recognition, business reputation, financial strength, stability and continuity of client and intermediary relationships, quality of service, level of fees charged for services and the level of compensation paid and distribution support offered to financial intermediaries. We continue to face market pressures regarding fee levels in certain products.

 

We face strong competition in every market in which we operate. Our competitors include a large number of investment management firms, commercial banks, investment banks, broker-dealers, hedge funds, insurance companies and other financial institutions. Some of these institutions have greater capital and other resources, and offer more comprehensive lines of products and services, than we do. Our competitors seek to expand their market share in many of the products and services we offer. If these competitors are successful, our revenues and profitability could be adversely affected. In addition, there are relatively few barriers to entry by new investment management firms, and the successful efforts of new entrants into our various distribution channels around the world have also resulted in increased competition.

 

We may engage in strategic transactions that could create risks.

 

As part of our business strategy, we regularly review, and from time to time have discussions with respect to potential strategic transactions, including potential acquisitions, dispositions, consolidations, joint ventures or similar transactions, some of which may be material. There can be no assurance that we will find suitable candidates for strategic transactions at acceptable prices, have sufficient capital resources to accomplish such transactions, or be successful in entering into agreements for desired transactions.

 

Acquisitions, including completed acquisitions, also pose the risk that any business we acquire may lose customers or employees or could underperform relative to expectations. We could also experience financial or other setbacks if transactions encounter unanticipated problems, including problems related to execution or integration. Following the completion of an acquisition, we may have to rely on the seller to provide administrative and other support, including financial reporting and internal controls, to the acquired business for a period of time. There can be no assurance that the seller will do so in a manner that is acceptable to us.

 

Our ability to access the capital markets in a timely manner should we seek to do so depends on a number of factors.

 

Our access to the capital markets, including for purposes of financing potential acquisitions, depends significantly on our credit ratings. We have received credit ratings of A3 and BBB+ from Moody’s and Standard & Poor’s credit rating agencies, respectively, as of the date of this Annual Report on Form 10-K. Both Standard & Poor’s and Moody’s have a “stable” outlook for the rating as of the date of this Annual Report on Form 10-K. We believe that rating agency concerns include but are not limited to: our ability to sustain net positive asset flows across customer channels, product type and geographies, our substantial indebtedness, and our ability to maintain consistent positive investment performance. Additionally, the rating agencies could decide to downgrade the entire asset management industry, based on their perspective of future growth and solvency. Material deterioration of these factors, and others defined by each rating agency, could result in downgrades to our credit ratings, thereby limiting our ability to generate additional financing or receive mandates. Management believes that solid investment grade ratings are an important factor in winning and maintaining institutional business and strives to manage the company to maintain such ratings.

 

A reduction in our long- or short-term credit ratings could increase our borrowing costs and limit our access to the capital markets. The current levels of unprecedented volatility in global finance markets may also affect our ability to access the capital markets should we seek to do so. If we are unable to access capital markets in a timely manner, our business could be adversely affected.

 

Our substantial indebtedness could adversely affect our financial position.

 

We have a significant amount of indebtedness. As of December 31, 2008, we had outstanding total long-term debt of $1,159.2 million and shareholders’ equity of $5,689.5 million. The significant amount of indebtedness we carry could limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or other purposes, increase our vulnerability to adverse economic and industry conditions, limit our flexibility in planning for, or reacting to, changes in our business or industry, and place us at a disadvantage in relation to our competitors. Any or all of the above factors could materially adversely affect our financial position.

 

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Our credit facility imposes restrictions on our ability to conduct business and, if amounts borrowed under it were subject to accelerated repayment, we might not have sufficient assets to repay such amounts in full.

   Our credit facility requires us to maintain specified financial ratios, including maximum debt-to-earnings and minimum interest coverage ratios. This credit facility also contains customary affirmative operating covenants and negative covenants that, among other things, restrict certain of our subsidiaries’ ability to incur debt and restrict our ability to transfer assets, merge, make loans and other investments and create liens. The breach of any covenant (either due to our actions or due to a significant and prolonged market-driven decline in our operating results) would result in a default under the credit facility. In the event of any such default, lenders that are party to the credit facility could refuse to make further extensions of credit to us and require all amounts borrowed under the credit facility, together with accrued interest and other fees, to be immediately due and payable. If any indebtedness under the credit facility were subject to accelerated repayment, we might not have sufficient liquid assets to repay such indebtedness in full.

 

Changes in the distribution channels on which we depend could reduce our revenues and hinder our growth.

 

We sell a portion of our investment products through a variety of financial intermediaries, including major wire houses, regional broker-dealers, banks and financial planners in North America, and independent brokers and financial advisors, banks and financial organizations in Europe and Asia. Increasing competition for these distribution channels could cause our distribution costs to rise, which would lower our net revenues. As a result of recent market turmoil, there has been both consolidation of banks and broker-dealers as well as fragmentation of broker-dealers into smaller or independent firms. If these changes increase concentration among our distributors, our distribution costs could rise, which would lower our net revenues. Additionally, certain of the intermediaries upon whom we rely to distribute our investment products also sell their own competing proprietary funds and investment products, which could limit the distribution of our products. In addition, some investors rely on third-party financial planners, registered investment advisers, and other consultants or financial professionals to advise them on the choice of investment adviser and investment portfolio. These professionals and consultants could favor a competing investment portfolio as better meeting their particular client’s needs. There is no assurance that our investment products will be among their recommended choices in the future. Additionally, if one of our major distributors were to cease operations, it could have a significant adverse effect on our revenues and profitability. Moreover, any failure to maintain strong business relationships with these distribution sources would impair our ability to sell our products, which could have a negative effect on our revenues and profitability.

 

We could be subject to losses if we fail to properly safeguard confidential and sensitive information.

 

We maintain and transmit confidential information about our clients as well as proprietary information relating to our business operations as part of our regular operations. Our systems could be attacked by unauthorized users or corrupted by computer viruses or other malicious software code, or authorized persons could inadvertently or intentionally release confidential or proprietary information.

 

Such disclosure could, among other things, damage our reputation, allow competitors to access our proprietary business information, result in liability for failure to safeguard our clients’ data, result in the termination of contracts by our existing customers, subject us to regulatory action, or require material capital and operating expenditures to investigate and remediate the breach.

 

Our business is vulnerable to deficiencies and failures in support systems and customer service functions that could lead to breaches and errors, resulting in loss of customers or claims against us or our subsidiaries.

 

The ability to consistently and reliably obtain accurate securities pricing information, process client portfolio and fund shareholder transactions and provide reports and other customer service to fund shareholders and investors in other accounts managed by us is essential to our continuing success. Any delays or inaccuracies in obtaining pricing information, processing such transactions or such reports, other breaches and errors, and any inadequacies in other customer service, could result in reimbursement obligations or other liabilities, or alienate customers and potentially give rise to claims against us. Our customer service capability, as well as our ability to obtain prompt and accurate securities pricing information and to process transactions and reports, is highly dependent on communications and information systems and on third-party vendors. These systems could suffer deficiencies, failures or interruptions due to various natural or man-made causes, and our back-up procedures and capabilities may not be adequate to avoid extended interruptions in operations. Certain of these processes involve a degree of manual input, and thus similar problems could occur from time to time due to human error.

 

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If we are unable to successfully recover from a disaster or other business continuity problem, we could suffer material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.

 

If we were to experience a local or regional disaster or other business continuity problem, such as a pandemic or other natural or man-made disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities and the proper functioning of our computer, telecommunication and other related systems and operations. In such an event, our operational size, the multiple locations from which we operate, and our existing back-up systems would provide us with an important advantage. Nevertheless, we could still experience near-term operational challenges with regard to particular areas of our operations, such as key executive officers or technology personnel. Further, as we strive to achieve cost savings by shifting certain business processes to lower-cost geographic locations such as India, the potential for particular types of natural or man-made disasters, political, economic or infrastructure instabilities, or other country- or region-specific business continuity risks increases. Although we seek to regularly assess and improve our existing business continuity plans, a major disaster, or one that affected certain important operating areas, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm or legal liability.

 

Since many of our subsidiary operations are located outside of the United States and have functional currencies other than the U.S. dollar, changes in the exchange rates to the U.S. dollar affect our reported financial results from one period to the next.

 

The largest component of our net assets, revenues and expenses, as well as our assets under management, is presently derived from the United States. However, we have a large number of subsidiaries outside of the United States whose functional currencies are not the U.S. dollar. As a result, fluctuations in the exchange rates to the U.S. dollar affect our reported financial results from one period to the next. We do not actively manage our exposure to such effects. Consequently, significant strengthening of the U.S. dollar relative to the U.K. Pound Sterling, Euro, or Canadian dollar, among other currencies, could have a material negative impact on our reported financial results.

 

The carrying value of goodwill and other intangible assets on our balance sheet could become impaired, which would adversely affect our results of operations.

 

We have goodwill on our balance sheet that is subject to an annual impairment review. Goodwill totaled $5,966.8 million at December 31, 2008 (2007: $6,848.0 million). We may not realize the value of such goodwill. We perform impairment reviews of the book values of goodwill on an annual basis or more frequently if impairment indicators are present. A variety of factors could cause such book values to become impaired. Should valuations be deemed to be impaired, a write-down of the related assets would occur, adversely affecting our results of operations for the period.

 

Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders.

 

Our shareholders may have more difficulty protecting their interests than shareholders of a corporation incorporated in a jurisdiction of the United States. As a Bermuda company, we are governed by the Companies Act 1981 of Bermuda (“Companies Act”). The Companies Act differs in some material respects from laws generally applicable to United States corporations and shareholders, including provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, shareholder lawsuits and indemnification of directors.

 

Under Bermuda law, the duties of directors and officers of a company are generally owed to the company only. Shareholders of Bermuda companies do not generally have rights to take action against directors or officers of the company, and may only do so in limited circumstances. Directors and officers may owe duties to a company’s creditors in cases of impending insolvency. Directors and officers of a Bermuda company must, in exercising their powers and performing their duties, act honestly and in good faith with a view to the best interests of the company and must exercise the care and skill that a reasonably prudent person would exercise in comparable circumstances. Directors have a duty not to put themselves in a position in which their duties to the company and their personal interests may conflict and also are under a duty to disclose any personal interest in any material contract or proposed material contract with the company or any of its subsidiaries. If a director or officer of a Bermuda company is found to have breached his duties to that company, he may be held personally liable to the company in respect of that breach of duty.

 

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Our Bye-Laws provide for indemnification of our directors and officers in respect of any loss arising or liability attaching to them in respect of any negligence, default, breach of duty or breach of trust of which a director or officer may be guilty in relation to us other than in respect of his own fraud or dishonesty, which is the maximum extent of indemnification permitted under the Companies Act. Under our Bye-Laws, each of our shareholders agrees to waive any claim or right of action, both individually and on our behalf, other than those involving fraud or dishonesty, against us or any of our officers, directors or employees. The waiver applies to any action taken by a director, officer or employee, or the failure of such person to take any action, in the performance of his duties, except with respect to any matter involving any fraud or dishonesty on the part of the director, officer or employee. This waiver limits the right of shareholders to assert claims against our directors, officers and employees unless the act or failure to act involves fraud or dishonesty.

 

Legislative and other measures that may be taken by U.S. and/or other governmental authorities could materially increase our tax burden or otherwise adversely affect our financial conditions, results of operations or cash flows.

 

Under current laws, as the company is domiciled and tax resident in Bermuda, taxation in other jurisdictions is dependent upon the types and the extent of the activities of the company undertaken in those jurisdictions. There is a risk that changes in either the types of activities undertaken by the company or changes in tax rules relating to tax residency could subject the company and its shareholders to additional taxation.

 

We continue to assess the impact of various U.S. federal and state legislative proposals, and modifications to existing tax treaties between the United States and foreign countries, that could result in a material increase in our U.S. federal and state taxes. Proposals have been introduced in the U.S. Congress that, if ultimately enacted, could either limit treaty benefits on certain payments made by our U.S. subsidiaries to non-U.S. affiliates, treat the company as a U.S. corporation and thereby subject the earnings from non-U.S. subsidiaries of the company to U.S. taxation, or both. We cannot predict the outcome of any specific legislative proposals. However, if such proposals were to be enacted, or if modifications were to be made to certain existing tax treaties, the consequences could have a materially adverse impact on the company, including increasing our tax burden, increasing costs of our tax compliance or otherwise adversely affecting our financial condition, results of operations or cash flows.

 

Examinations and audits by tax authorities could result in additional tax payments for prior periods.

 

The company and its subsidiaries’ income tax returns periodically are examined by various tax authorities. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional income taxes will be due. We adjust these liabilities in light of changing facts and circumstances. Due to the complexity of some of these uncertainties, however, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.

 

We have anti-takeover provisions in our Bye-Laws that may discourage a change of control.

 

Our Bye-Laws contain provisions that could make it more difficult for a third-party to acquire us or to obtain majority representation on our board of directors without the consent of our board. As a result, shareholders may be limited in their ability to obtain a premium for their shares under such circumstances.

 

Item 1B.  Unresolved Staff Comments

 

N/A

 

Item 2.  Properties

 

Our registered office is located in Hamilton, Bermuda, and our principal executive offices are in leased office space at 1555 Peachtree Street N.E., Suite 1800, Atlanta, Georgia, 30309, U.S.A. We own office facilities at Perpetual Park, Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom, and at 301 W. Roosevelt, Wheaton, Illinois, 60187, and we lease our additional principal offices located at 30 Finsbury Square, London, EC2A 1AG, United Kingdom; 11 Greenway Plaza, Houston, Texas 77046; 1166 Avenue of the Americas, New York, New York 10036; and in Canada at 5140 Yonge Street, Toronto, Ontario M2N 6X7. We lease office space in 17 other countries.

 

18

 

 


Item 3.  Legal Proceedings

 

Following the industry-wide regulatory investigations, 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 during the three months ended December 31, 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.

 

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.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

None.

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Invesco Ltd. is organized under the laws of Bermuda, and our common shares are listed and traded on the New York Stock Exchange under the symbol “IVZ.” At January 31, 2009, there were approximately 7,584 holders of record of our common shares.

 

Prior to December 4, 2007, we had outstanding ordinary shares that were listed on the Official List of The U.K. Listing Authority and were traded on the London Stock Exchange. We also had American Depositary Shares (ADSs) listed for trading on the NYSE, also under the symbol “IVZ.” Each ADS represented the right to receive two ordinary shares. We also had exchangeable shares, which were issued by one of our subsidiaries and were listed for trading on the Toronto Stock Exchange. Each exchangeable share represented the right to receive one ordinary share.

 

On December 4, 2007, we redomiciled the company from the United Kingdom to Bermuda in a transaction previously approved by shareholders. To accomplish this, our predecessor company, INVESCO PLC, effected a court-approved U.K. scheme of arrangement under which our shareholders received common shares in Invesco Ltd., the new Bermuda parent company, in exchange for their ordinary shares in INVESCO PLC. Holders of our ADSs and our exchangeable shares also received common shares in the new Bermuda parent company in exchange for their holdings. Following the redomicile, Invesco Ltd. effected a one-for-two reverse stock split, such that all of our shareholders now hold only common shares, par value $0.20 per share, in Invesco Ltd.

 

19

 

 


The following table sets forth, for the periods indicated, the high and low reported share prices on the New York Stock Exchange, based on data reported by Bloomberg.

 

 

 

Invesco Ltd.

Common Shares (or equivalent*)

 

 

 

High

 

Low

Dividends

Declared

2008

 

 

 

Fourth Quarter

$21.07

$8.84

$0.10

Third Quarter

$27.00

$20.56

$0.10

Second Quarter

$28.80

$22.31

$0.10

First Quarter

$30.66

$21.43

$0.10

2007

 

 

 

Fourth Quarter

$32.25

$24.90

Third Quarter

$27.66

$21.09

$0.164

Second Quarter

$26.52

$22.03

First Quarter

$26.05

$20.35

$0.208

 

____________

 

*

All figures prior to December 4, 2007, represent high and low share prices of our ADSs. One ADS represented two ordinary shares of INVESCO PLC. Following the redomicile, Invesco Ltd. effected a one-for-two reverse stock split, such that all of our shareholders now hold only common shares, par value $0.20 per share, in Invesco Ltd.

 

 

The following graph illustrates the cumulative total shareholder return of our common shares (ordinary shares prior to December 4, 2007) over the five-year period ending December 31, 2008, and compares it to the cumulative total return on the Standard and Poor’s (S&P) 500 Index and to a group of peer asset management companies. This table is not intended to forecast future performance of our common shares.

 


 

20

 

 


The chart below illustrates the cumulative total shareholder return of our common shares (ordinary shares prior to December 4, 2007) since the company began executing its multi-year strategic plan, which was designed to enhance long-term investment performance, improve and simplify the operating platform, sharpen the focus on clients and strengthen the business for long-term success.


 

Note:

Asset Manager Index includes Affiliated Managers Group, Alliance Bernstein, BlackRock, Eaton Vance, Federated Investors, Franklin Resources, Gamco Investors, Invesco Ltd., Janus, Legg Mason, Schroders, T. Rowe Price, and Waddell & Reed.

 

Important Information Regarding Dividend Payments

 

On October 27, 2008, the company declared a third quarter cash dividend of $0.10 per Invesco Ltd. common share, which was paid on December 17, 2008, to shareholders of record as of November 26, 2008. On January 29, 2009, the company declared a fourth quarter 2008 cash dividend of $0.10 per Invesco Ltd. common share, which will be paid on March 11, 2009, to shareholders of record as of February 25, 2009.

 

In 2008, Invesco began declaring and paying dividends on a quarterly basis in arrears. The 2008 total dividend of $0.40 per share represented a 4.2% increase over the 2007 total dividend of $0.384 per share. The declaration, payment and amount of any future dividends will be determined by our board of directors and will depend upon, among other factors, our earnings, financial condition and capital requirements at the time such declaration and payment are considered. The board has a policy of managing dividends in a prudent fashion, with due consideration given to profit levels, overall debt levels and historical dividend payouts. See also Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources - Dividends,” for additional details regarding dividends.

 

21

 

 


Repurchases of Equity Securities

 

The following table shows share repurchase activity for cash during the three months ended December 31, 2008:

 

Month

Total Number of Shares

Purchased(1)

 

Average Price Paid Per Share ($)

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(2) (millions)

October 1-31, 2008

1,360

November 1-30, 2008

1,360

December 1-31, 2008

11,638

$10.48

1,360

 

____________

 

(1)

An aggregate of 11,638 shares were repurchased in private transactions from a current officer of the company at the respective NYSE closing prices for the common shares on the preceding day. This purchase was made in connection with the payment of taxes due to the vesting of a share award. Additionally, an aggregate of 0.3 million shares were withheld on vesting events during the three months ended December 31, 2008, to meet employees’ tax obligations. The value of these shares withheld was $4.6 million.

 

(2)

On April 23, 2008, our board of directors authorized a share repurchase program of up to $1.5 billion with no stated expiration date. A public announcement of the authorization was made on April 24, 2008. Of the total amount authorized, $1,360 million remained as of December 31, 2008. The company did not make any purchases pursuant to this plan during the three months ended December 31, 2008.

 

 

22

 

 


Item 6.  Selected Financial Data

 

The following tables present selected consolidated financial information for the company as of and for each of the five fiscal years in the period ended December 31, 2008. The consolidated financial information has been prepared in accordance with U.S. generally accepted accounting principles.

 

 

As of and For The Years Ended December 31,

$ in millions, except per share and other data

2008

2007

2006

2005

2004

Operating Data:

 

 

 

 

 

Operating revenues

3,307.6

3,878.9

3,246.7

2,872.6

2,757.5

Net revenues*

2,489.4

2,888.4

2,428.0

2,166.6

2,124.5

Operating income

747.8

994.3

759.2

407.9

11.7

Net operating income*

787.5

1,039.8

762.1

407.9

11.7

Operating margin

22.6%

25.6%

23.4%

14.2%

0.42%

Net operating margin*

31.6%

36.0%

31.4%

18.8%

0.55%

Net income/(loss)

481.7

673.6

482.7

219.8

(85.9)

Per Share Data:

 

 

 

 

 

Earnings/(loss) per share:

 

 

 

 

 

-basic

1.25

1.69

1.22

0.55

(0.21)

-diluted

1.21

1.64

1.19

0.54

(0.21)

Dividends declared per share

0.520

0.372

0.357

0.330

0.323

Balance Sheet Data:

 

 

 

 

 

Total assets

9,756.9

12,925.2

12,228.5

10,702.7

10,580.3

Total long-term debt

1,159.2

1,276.4

1,279.0

1,220.0

1,381.7

Shareholders’ equity

5,689.5

6,590.6

6,164.0

5,529.8

5,519.6

Other Data:

 

 

 

 

 

AUM (in billions)

$357.2

$500.1

$462.6

$386.3

$382.1

Headcount

5,325

5,475

5,574

5,798

6,693

 

____________

 

*

Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of revenues, net of third-party distribution expenses, from joint venture investments. Net operating margin is equal to net operating income divided by net revenues. Net operating income is operating income plus our proportional share of the net operating income from joint venture investments. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Schedule of Non-GAAP Information” for reconciliations of operating revenues to net revenues and from operating income to net operating income.

 

23

 

 


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Overview

 

The following executive overview summarizes the significant trends affecting our results of operations and financial condition for the periods presented. This overview and the remainder of this management’s discussion and analysis supplements, and should be read in conjunction with, the Consolidated Financial Statements of Invesco Ltd. and its subsidiaries (collectively, the “company” or “Invesco”) and the notes thereto contained elsewhere in this Annual Report on Form 10-K.

 

Global equity markets declined in the three months and year ended December 31, 2008, and continued to fall during the month of January 2009, as illustrated in the table below:

 

 

Index

Three Months Ended December 31, 2008

Year Ended
December 31, 2008

Month Ended
January 31, 2009

Dow Jones Industrial Average

(18.38)%

(31.93)%

(8.65)%

S&P 500

(21.84)%

(37.00)%

(8.43)%

NASDAQ Composite Index

(24.37)%

(39.98)%

(6.35)%

S&P/TSX Composite (Canada)

(22.71)%

(33.01)%

(2.96)%

FTSE 100

(8.56)%

(27.99)%

(6.34)%

FTSE World Europe

(22.00)%

(43.17)%

(3.88)%

China SE Shanghai Composite

(20.60)%

(64.89)%

9.33%

Nikkei 225

(21.24)%

(41.14)%

(9.76)%

Lehman Brothers U.S. Aggregate Bond Index

4.58%

5.24%

(0.88)%

 

2008 was an extremely challenging period in the financial markets. The financial crisis began in 2007 with the subprime mortgage collapse that continued into 2008. Financial institutions that held mortgage-backed securities on their balance sheets took a series of write-downs that led to lower market liquidity and the collapse or consolidation of several major financial firms. Heightened risk perceptions ultimately led to systematic deleveraging across the global markets as investors moved out of risky assets.

 

Events in these periods were dominated by challenges in the credit markets. Many financial institutions had difficulty securing short-term funding as liquidity rapidly contracted. With banks unable to obtain funding and reluctant to lend, interbank rates rose both absolutely and relative to central bank policy rates. Government bonds benefited from a flight to quality, particularly short-dated issues. This also led to a strengthening of the U.S. dollar from July until November as U.S. investors unwound carry trades and repatriated funds, and non-U.S. investors increasingly purchased U.S. government issues. Further, credit spreads widened sharply, particularly for financials, and economic growth around the world slowed under the impact of the credit squeeze. Global manufacturing orders slumped as business and consumer confidence waned. Emerging markets saw weakening demand for both exported goods and commodities. Asian markets also experienced lower export demand with concerns about inflation becoming secondary to economic growth.

 

Several major global market indices declined by historic amounts: the Dow Jones Industrial Average saw its worst year since 1931, the S&P 500 had its worst year since 1937, Japan’s Nikkei Average saw its biggest decline ever, and the FTSE 100’s decline ranks as its worst year since it was created in 1985.

 

In response to the market disruptions, governments and central banks have acted to help revive credit markets and restore stability in the financial system. These actions include direct and indirect support of financial institutions, the imposition of short-selling restrictions, easing of monetary policy, and the guaranteeing of certain financial instruments. The U.S. Federal Reserve cut the federal-funds rate target seven times during 2008, from 4.25% at the beginning of the year to setting a target rate of 0% to 0.25% in December, a historic low. Despite these actions, the equity and credit markets continue to operate under considerable pressure.

 

A significant portion of our business and managed AUM are based outside of the U.S. The strengthening of the U.S. dollar against other currencies, primarily the Pound Sterling and the Canadian dollar, will impact our reported revenues and expenses from period to period. Additionally, our revenues are directly influenced by the level and composition of our AUM. Therefore, movements in global capital market levels, net new business inflows (or outflows) and changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period. The returns from most global capital markets declined in the three months and year ended December 31, 2008, which contributed to declines in AUM of $52.4 billion and $142.9 billion during the respective periods.

 

24

 

 


 

Assuming a continuation of year-end 2008 market and foreign exchange levels, Invesco expects to decrease 2009 total operating expenses by $450 million, or 17.6%, to $2,110 million from $2,560 million in 2008. This reduction is comprised of three components: (1) 48% of the reduction is expected to be realized from decreases in third-party distribution, service and advisory expenses, which naturally decline with AUM levels; (2) 35% of the reduction is expected to be realized from decreases in employee compensation expenses; and (3) 17% of the reduction is expected to be realized from declines in other expenses, including general and administrative, marketing and property, office and technology expenses. As part of the $450 million expense reduction, we expect $140 million in savings to be generated from our continued movement towards global operating platforms, further use of our low-cost enterprise centers, managing discretionary spending, continued leverage of our centers of expertise on a global basis, and managing our staff expenses. We will also continue to reinvest in our business in 2009, targeting $35 million of incremental cost (which is included in the $450 million total reduction) in 2009 versus 2008, including investments in our private equity business, exchange-traded funds, common technology platforms, and building out our institutional sales and client service group. We expect to incur transition expenses of approximately $15 million (also included in the $450 million) in order to achieve the planned savings. 

 

Summary operating information for 2008 and 2007 is presented in the table below.

 

 

Year ended December 31,

 

2008

2007

Operating revenues

$3,307.6m

$3,878.9m

Net revenues(1)

$2,489.4m

$2,888.4m

Operating margin

       22.6%

       25.6%

Net operating margin(2)

       31.6%

      36.0%

Net income

   $481.7m

  $673.6m

Diluted EPS

       $1.21

     $1.64

Average assets under management (in billions)

    $440.6

    $489.1

 

____________

 

(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. See “Schedule of Non-GAAP Information” for the reconciliation of operating revenues to net revenues.

 

(2)

Net operating margin is net operating income divided by net revenues. See “Schedule of Non-GAAP Information” for the reconciliation of operating income to net operating income.

 

 

25

 

 


Investment Capabilities Performance Overview

 

 

 

Benchmark Comparison

Peer Group Comparison

 

 

% of AUM Ahead of

Benchmark

% of AUM In Top Half of

Peer Group

 

 

1yr

3yr

5yr

1yr

3yr

5yr

Equities

U.S. Core

95%

92%

94%

94%

90%

88%

 

U.S. Growth

32%

64%

64%

47%

48%

44%

 

U.S. Value

19%

4%

3%

14%

3%

3%

 

Sector

27%

12%

79%

41%

36%

56%

 

U.K.

99%

94%

99%

97%

94%

100%

 

Canadian

88%

63%

25%

78%

56%

23%

 

Asian

53%

82%

87%

55%

74%

69%

 

Continental European

62%

92%

95%

72%

88%

74%

 

Global

53%

56%

84%

63%

37%

20%

 

Global Ex U.S. and Emerging

  Markets

 

92%

 

96%

 

97%

 

92%

 

98%

 

71%

 

 

 

 

 

 

 

 

Balanced

Balanced

67%

51%

53%

71%

35%

51%

 

 

 

 

 

 

 

 

Fixed Income

Money Market

59%

58%

58%

97%

95%

95%

 

U.S. Fixed Income

42%

25%

23%

55%

55%

61%

 

Global Fixed Income

62%

65%

69%

60%

58%

60%

 

Note:

For most products the rankings are as of 12/31/08. Exceptions include institutional products (9/30/08) and Australian retail (11/30/08). Includes assets with a minimum 1-year composite track record and populated benchmark return (for % assets ahead of benchmark) or peer group (for % assets in top half of peer group). AUM measured in the one-, three-, and five-year peer group rankings represents 66%, 65%, and 58% of total Invesco AUM, respectively, and AUM measured versus benchmark on a one-, three-, and five-year basis represents 82%, 78%, and 74% of total Invesco AUM, respectively, as of 12/31/08. Excludes Invesco PowerShares, stable value, alternatives, W.L. Ross & Co., Invesco Private Capital, 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.

 

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, is generally strong with some pockets of outstanding performance and some areas where we have been challenged. Within our equity asset class, U.S. Core, U.K., Asian, European, and Global ex-U.S. and Emerging Markets have had strong relative performance versus competitors and versus benchmark over one-, three- and five-year periods. Investment performance in our U.S. Value equities has lagged while our Canadian equity one- and three-year year performance has sharply improved. Within our fixed income and balanced asset classes, the global fixed income products have had at least 58% of AUM ahead of benchmark and peers over one-, three-, and five-year periods; the balanced products were largely ahead of peers and benchmarks; and the U.S. fixed income products had at least 55% of AUM ahead of peers. Our money market capability had at least 95% of AUM ahead of peers on a one-, three-, and five-year basis while performance versus benchmark was tempered as some of the larger products underperformed their respective benchmarks by anywhere from 1 to 24 basis points.

 

26

 

 


Assets Under Management

 

AUM at December 31, 2008, were $357.2 billion, compared to $500.1 billion at December 31, 2007. The decline in AUM during the year was due to $102.8 billion in reduced market values, $26.6 billion impact of less favorable foreign exchange rates, and total net outflows of $13.5 billion (long-term net flows plus net flows in institutional money market funds). Average AUM for 2008 were $440.6 billion, compared to $489.1 billion in 2007. Our retail total net outflows for 2008 were $10.6 billion, compared to total net inflows of $5.7 billion in 2007. Institutional net outflows were $3.1 billion in 2008, compared to total net inflows of $1.2 billion in 2007 (including Stable Value net outflows of $16.2 billion in 2007 attributable to the departure of employees to a competitor). Our Private Wealth Management (PWM) channel had total net inflows of $0.2 billion in 2008 compared to total net outflows of $0.2 billion in 2007.

 

Changes in AUM were as follows:

 

$ in billions

2008

2007

2006

January 1,

$500.1

$462.6

$386.3

Long-term inflows

72.7

119.9

85.8

Long-term outflows

(94.6)

(123.3)

(87.2)

Long-term net flows

(21.9)

(3.4)

(1.4)

Net flows in money market funds

8.4

10.1

12.8

Market gains and losses/reinvestment

(102.8)

20.0

46.5

Acquisitions/disposals

8.9

Foreign currency translation

(26.6)

10.8

9.5

December 31,

 $357.2

$500.1

$462.6

Average long-term AUM

 $360.8

$424.2

$366.3

Average institutional money market AUM

 79.8

64.9

57.9

Average AUM

 $440.6

$489.1

$424.2

Net revenue yield on AUM (annualized)(1)

    56.5bps

    59.1bps

    56.9bps

Net revenue yield on AUM before performance fees (annualized)(1)

    54.8bps

    57.7bps

    55.0bps

 

____________

 

(1)

Net revenue yield on AUM is equal to net revenue divided by average AUM. Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of net revenues from joint venture investments. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues and important additional disclosures.

 

 

27

 

 


Our AUM by channel, by asset class, and by client domicile were as follows:

 

AUM by Channel

 

$ in billions

Total

Retail

Institutional

PWM

January 1, 2006(a) AUM

$386.3

$195.2

$174.9

$16.2

Long-term inflows

85.8

58.4

23.2

4.2

Long-term outflows

(87.2)

(57.9)

(24.4)

(4.9)

Long-term net flows

(1.4)

0.5

(1.2)

(0.7)

Net flows in money market funds

12.8

(0.3)

13.1

Market gains and losses/reinvestment

46.5

31.4

13.9

1.2

Acquisitions/disposals

8.9

6.3

2.6

Foreign currency translation

9.5

5.9

3.6

December 31, 2006(a) AUM

$462.6

$239.0

$206.9

$16.7

Long-term inflows

119.9

86.6

28.2

5.1

Long-term outflows

(123.3)

(80.6)

(37.4)

(5.3)

Long-term net flows

(3.4)

6.0

(9.2)

(0.2)

Net flows in money market funds

10.1

(0.3)

10.4

Market gains and losses/reinvestment

20.0

11.3

7.8

0.9

Foreign currency translation

10.8

8.5

2.3

December 31, 2007(a) AUM

$500.1

$264.5

$218.2

$17.4

Long-term inflows

72.7

48.1

19.7

4.9

Long-term outflows

(94.6)

(58.7)

(31.2)

(4.7)

Long-term net flows

(21.9)

(10.6)

(11.5)

0.2

Net flows in money market funds

8.4

8.4

Market gains and losses/reinvestment

(102.8)

(79.2)

(19.4)

(4.2)

Foreign currency translation

(26.6)

(25.3)

(1.3)

December 31, 2008 AUM

$357.2

$149.4

$194.4

$13.4

 

____________

 

(a)

The beginning balances were adjusted to reflect certain asset reclassifications.

 

28

 

 


AUM by Asset Class

 

$ in billions

 

Total

 

Equity

Fixed

Income

 

Balanced

Money

Market

 

Alternatives(b)

January 1, 2006(a) AUM

$386.3

$173.7

$71.1

$42.7

$53.1

$45.7

Long-term inflows

85.8

42.5

28.6

7.4

1.9

5.4

Long-term outflows

(87.2)

(46.6)

(23.5)

(9.6)

(3.1)

(4.4)

Long-term net flows

(1.4)

(4.1)

5.1

(2.2)

(1.2)

1.0

Net flows in money market funds

12.8

12.8

 —

Market gains and losses/reinvestment

46.5

32.6

5.3

5.7

0.5

2.4

Acquisitions

8.9

6.3

2.6

Foreign currency translation

9.5

6.7

1.6

0.4

0.1

0.7

December 31, 2006(a) AUM

$462.6

$215.2

$83.1

$46.6

$65.3

$52.4

Long-term inflows

119.9

74.6

14.7

10.1

1.5

19.0

Long-term outflows

(123.3)

(64.2)

(35.1)

(9.6)

(2.1)

(12.3)

Long-term net flows

(3.4)

10.4

(20.4)

0.5

(0.6)

6.7

Net flows in money market funds

10.1

(0.6)

0.2

(1.3)

10.6

1.2

Market gains and losses/reinvestment

20.0

14.1

3.7

0.2

2.0

Foreign currency translation

10.8

6.5

1.3

2.8

0.1

0.1

December 31, 2007(a) AUM

$500.1

$245.6

$67.9

$48.8

$75.4

$62.4

Long-term inflows

72.7

38.2

13.8

9.0

3.7

8.0

Long-term outflows

(94.6)

(52.8)

(17.4)

(10.3)

(3.7)

(10.4)

Long-term net flows

(21.9)

(14.6)

(3.6)

(1.3)

(2.4)

Net flows in money market funds

8.4

8.4

Market gains and losses/reinvestment

(102.8)

(84.5)

(1.3)

(10.2)

0.7

(7.5)

Foreign currency translation

(26.6)

(18.0)

(2.4)

(4.5)

(0.3)

(1.4)

December 31, 2008 AUM

$357.2

$128.5

$60.6

$32.8

$84.2

$51.1

 

____________

 

(a)

The beginning balances were adjusted to reflect certain asset reclassifications.

 

(b)

The alternative asset class includes financial structures, absolute return, real estate, private equity, asset allocation, portable alpha and multiple asset strategies.

 

 

29

 

 


AUM by Client Domicile

 

 

$ in billions

 

Total

 

U.S.

 

Canada

 

U.K.

Continental Europe

 

Asia

January 1, 2006(a) AUM

$386.3

$250.6

$38.8

$52.9

$25.4

$18.6

Long-term inflows

85.8

30.0

4.5

14.5

23.6

13.2

Long-term outflows

(87.2)

(42.2)

(7.7)

(10.2)

(18.0)

(9.1)

Long-term net flows

(1.4)

(12.2)

(3.2)

4.3

5.6

4.1

Net flows in money market funds

12.8

11.5

0.4

0.2

0.7

Market gains and losses/reinvestment

46.5

21.9

6.9

9.9

4.1

3.7

Acquisitions

8.9

8.9

Foreign currency translation

9.5

(0.3)

0.4

6.5

2.7

0.2

December 31, 2006(a) AUM

$462.6

$280.4

$43.3

$73.8

$38.5

$26.6

Long-term inflows

119.9

48.2

6.7

22.0

21.4

21.6

Long-term outflows

(123.3)

(64.7)

(6.8)

(10.0)

(25.6)

(16.2)

Long-term net flows

(3.4)

(16.5)

(0.1)

12.0

(4.2)

5.4

Net flows in money market funds

10.1

11.0

0.2

(0.5)

(0.6)

Market gains and losses/reinvestment

20.0

14.9

(4.1)

2.7

1.8

4.7

Foreign currency translation

10.8

7.6

0.4

2.0

0.8

December 31, 2007(a) AUM

$500.1

$289.8

$46.7

$89.1

$37.6

$36.9

Long-term inflows

72.7

36.2

2.9

17.2

10.0

6.4

Long-term outflows

(94.6)

(46.4)

(9.7)

(9.9)

(16.8)

(11.8)

Long-term net flows

(21.9)

(10.2)

(6.8)

7.3

(6.8)

(5.4)

Net flows in money market funds

8.4

4.5

0.2

1.2

2.5

Market gains and losses/reinvestment

(102.8)

(51.5)

(8.5)

(21.5)

(8.1)

(13.2)

Foreign currency translation

(26.6)

(7.3)

(18.4)

(1.6)

0.7

December 31, 2008 AUM

$357.2

$232.6

$24.1

$56.7

$22.3

$21.5

 

____________

 

(a)

The beginning balances were adjusted to reflect certain asset reclassifications.

 

Results of Operations

 

Results of Operations for the Year Ended December 31, 2008, Compared with the Year Ended December 31, 2007

 

Operating Revenues and Net Revenues

 

Operating revenues decreased by 14.7% in 2008 to $3,307.6 million (2007: $3,878.9 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. Net revenues decreased by 13.8% in 2008 to $2,489.4 million (2007: $2,888.4 million). See “Schedule of Non-GAAP Information” for additional important disclosures regarding the use of net revenues. The main categories of revenues, and the dollar and percentage change between the periods, are as follows:

 

$ in millions

2008

2007

$ Change

% Change

Investment management fees

2,617.8

3,080.1

(462.3)

(15.0)

Performance fees

75.1

70.3

4.8

6.8

Service and distribution fees

512.5

593.1

(80.6)

(13.6)

Other

102.2

135.4

(33.2)

(24.5)

Total operating revenues

3,307.6

3,878.9

(571.3)

(14.7)

Third-party distribution, service and advisory expenses

(875.5)

(1,051.1)

175.6

(16.7)

Proportional share of revenues, net of third-party distribution expenses, from joint venture investments

57.3

60.6

(3.3)

(5.4)

Net revenues

2,489.4

2,888.4

(399.0)

(13.8)

 

30

 

 


Investment Management Fees

 

Investment management fees are derived from providing professional services to manage client accounts and include fees received 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 decreased 15.0% in 2008 to $2,617.8 million (2007: $3,080.1 million) due to decreases in average AUM during the year and the mix of AUM between various asset classes. Average AUM for the year ended December 31, 2008, were $440.6 billion (2007: $489.1 billion), a decrease of 9.9%. Average long-term AUM, which generally earn higher fee rates than institutional money market AUM, for the year ended December 31, 2008, were $360.8 billion, a decrease of 14.9% from $424.2 billion for the year ended December 31, 2007, while average institutional money market AUM increased 23.0% to $79.8 billion at December 31, 2008, from $64.9 billion for the year ended December 31, 2007. In addition, our equity AUM as a percentage of total AUM fell from 49% at December 31, 2007, to 36% at December 31, 2008. This decline in equities within our asset mix is consistent with the decline in global equity markets.

 

Performance Fees

 

Performance fee revenues are generated on certain management contracts when performance hurdles are achieved. They are recorded in operating revenues as of the performance measurement date, when the contractual performance criteria have been met. The performance measurement date is defined in each contract in which incentive and performance fee revenue agreements are in effect. 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 and no later than the first date of performance measurement after the expiration 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 absolute performance.

 

In 2008, these fees increased 6.8% to $75.1 million (2007: $70.3 million). The performance fees generated in 2008 arose primarily in the Invesco Quantitative Strategies and Real Estate groups, as well as in the U.K.; whereas the performance fees generated in 2007 included amounts generated primarily in the U.K. and Asia.

 

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 2008, service and distribution fees decreased 13.6% to $512.5 million (2007: $593.1 million) primarily due to decreased retail AUM, offset by increases in institutional money market revenues resulting from the 23.0% increase in average institutional money market AUM during the year.

 

Other Revenues

 

Other revenues include fees derived primarily from transaction commissions earned upon the sale of new investments into certain of our retail funds and fees earned upon the completion of transactions in our real estate and private equity assets 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. The

 

31

 

 


measurement date in which these transaction fees are recorded is the date on which the transaction is legally closed. Other revenues also include the revenues of consolidated investment products.

 

In 2008, other revenues decreased 24.5% to $102.2 million (2007: $135.4 million) driven by decreases in sales volumes of funds subject to front-end commissions, offset by higher transaction fees within our private equity business.

 

Third-Party Distribution, Service and Advisory Expenses

 

Third-party distribution, service and advisory expenses include renewal commissions paid to independent financial advisors for as long as the clients’ assets 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 decreased 16.7% in 2008 to $875.5 million (2007: $1,051.1 million), consistent with the declines in investment management and service and distribution fee revenues.

 

Proportional share of revenues, net of third-party distribution expenses, from joint venture investments

 

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, as identified in Item 8, “Financial Statements and Supplementary Data — Note 4, Investments,” is our 49.0% investment in Invesco Great Wall Fund Management Company Limited (the “Invesco Great Wall” joint venture). In September 2008, the company entered into a 50% joint venture with Huaneng Capital Services, a subsidiary of China Huaneng Group (the largest power producer in China), to form Huaneng Invesco WLR Investment Consulting Company Ltd. This joint venture will assess private equity investment opportunities in power generation in China.

 

The 5.4% decrease in our proportional share of revenues, net of third-party distribution expenses, to $57.3 million in 2008 (2007: $60.6 million), is driven by the declines in average AUM in the Invesco Great Wall joint venture. Our share of the Invesco Great Wall joint venture’s AUM at December 31, 2008, was $3.0 billion, a 58% decline in AUM from $7.1 billion at December 31, 2007, reflecting the increased volatility of equity markets in this region during the year.

 

Operating Expenses

 

During 2008, operating expenses decreased 11.3% to $2,559.8 million (2007: $2,884.6 million), reflecting declines in all cost categories from 2007 expense levels.

 

The main categories of operating expenses are as follows:

 

$ in millions

2008

2007

$ Change

% Change

Employee compensation

1,055.8

1,137.6

 (81.8)

 (7.2)

Third-party distribution, service and advisory

875.5

1,051.1

  (175.6)

 (16.7)

Marketing

148.2

157.6

 (9.4)

 (6.0)

Property, office and technology

214.3

242.5

 (28.2)

 (11.6)

General and administrative

   266.0

     295.8

    (29.8)

       (10.1)

Total operating expenses

2,559.8

 2,884.6

  (324.8)

 (11.3)

 

 

32

 

 


The table below sets forth these expense categories as a percentage of total operating expenses and operating revenues, which we believe provides useful information as to the relative significance of each type of expense.

 

$ in millions

2008

% of Total

Operating

Expenses

% of Operating

Revenues

2007

% of Total

Operating

Expenses

% of

Operating

Revenues

Employee compensation

1,055.8

41.2%

31.9%

1,137.6

39.4%

29.3%

Third-party distribution, service and advisory

875.5

34.2%

26.5%

1,051.1

36.4%

 27.1%

Marketing

148.2

5.8%

4.5%

157.6

5.5%

4.1%

Property, office and technology

214.3

8.4%

6.5%

242.5

8.4%

 6.3%

General and administrative

266.0

10.4%

8.0%

295.8

10.3%

7.6%

Total operating expenses

2,559.8

100.0%

77.4%

2,884.6

100.0%

74.4%

 

 

Employee Compensation

 

Employee compensation includes salary, cash bonuses and share-based payment plans designed to attract and retain the highest caliber employees.

 

Employee compensation decreased $81.8 million, or 7.2%, in 2008 from 2007 due predominantly to overall decreases in sales commissions and variable compensation. Offsetting these declines were increases in base salary expenses resulting from annual merit increases, which were effective March 1, 2008. Additionally, in the three months ended December 31, 2008, the company experienced increases in bonus expense tied to improved investment performance and performance fee revenues. These increases in bonus expense during the three months ended December 31, 2008, which incorporated recognition of a full year impact tied to investment performance improvements, were equally offset in the three months ended December 31, 2008, by the reversal of $18.8 million ($12.6 million, net of tax, or $0.5 per share) of cumulative share-based compensation charges related to performance-based share awards granted in 2007. The reversal was made because the company does not expect that the required performance targets for the vesting of these awards will be achieved. Of the charges reversed, $10.8 million was originally recorded in 2007, with the remainder originally recorded in the first nine months of 2008.

 

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 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 decreased 6.0% in 2008 to $148.2 million (2007: $157.6 million) due to decreased marketing support payments related to decreased sales and AUM in the U.S., consistent with overall market declines during the period.

 

Property, Office and Technology

 

Property, office and technology expenses include rent and utilities for our various leased facilities, depreciation of company-owned property and capitalized computer equipment costs, minor non-capitalized computer equipment and software purchases and related maintenance payments, and costs related to externally provided operations, technology, and other back office management services.

 

Property, office and technology costs decreased 11.6% to $214.3 million in 2008 from $242.5 million in 2007, due primarily to reduced depreciation charges reflecting longer useful lives for certain global technology initiatives. During the three months ended December 31, 2008, charges of $5.1 million were recorded related to vacating leased property; however these charges were offset during the year by downward adjustments in rent costs for sublet office property of $8.2 million. Rent expense during the year ended December 31, 2007, included a $7.4 million charge related to vacating leased property.

 

33


 

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 decreased by $29.8 million (10.1%) to $266.0 million in 2008 from $295.8 million in 2007. During the three months ended December 31, 2007, we recorded $12.8 million of expense related to the relisting of the company on the New York Stock Exchange and a $9.8 million charge related to the proposed final settlement of market-timing private litigation that commenced in 2003.

 

Operating Income, Net Operating Income, Operating Margin and Net Operating Margin

 

Operating income decreased 24.8% to $747.8 million in 2008 from $994.3 million in 2007, driven by the declines in operating revenues from reduced AUM. Operating margin (operating income divided by operating revenues) was 22.6% in 2008, down from 25.6% in 2007. Net operating income (operating income plus our proportional share of the operating income from joint venture arrangements) decreased 24.3% to $787.5 million in 2008 from $1,039.8 million in 2007. Net operating margin is equal to net 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. Net operating margin was 31.6% in 2008, down from 36.0% in 2007. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues, a reconciliation of operating income to net operating income and additional important disclosures regarding net revenues, net operating income and net operating margins.

 

Other Income and Expenses

 

Interest income decreased 23.3% to $37.2 million in 2008 from $48.5 million in 2007 due to the combination of lower interest rates and lower average cash and cash equivalents balances in 2008. The decrease in yields was consistent with the market movement from 2007 to 2008. Interest expense increased 7.9% to $76.9 million in 2008 from $71.3 million in 2007 due to increases in the average debt balance in 2008, which were only partially offset by lower debt costs in 2008.

 

Other gains and losses, net were a net loss of $39.9 million in 2008, compared to a net gain of $9.9 million in 2007. The 2008 net loss included $22.7 million in other-than-temporary impairment charges related to the valuations of investments in certain of our CLO products (2007: $5.4 million) and $8.5 million in other-than-temporary impairment charges related to other seed money in affiliated funds (2007: $0 million). The impairment of the CLO products arose principally from increases in discount rates and extended cash flow projections used in the valuation models, and the impairment of the seed money arose principally due to extended declines in market values of the underlying funds. $14.2 million of the combined impairment charges arose during the three months ended December 31, 2008.

 

Included in other gains and losses, net are net gains on disposals of investments of $4.3 million in 2008 (2007: $24.0 million), primarily driven by a gain of $7.4 realized upon the maturity of a CLO product in which the company had invested. Also included in other losses are net foreign exchange losses, primarily associated with long-term intercompany financing. In the year ended December 31, 2008, we incurred $13.0 million in net foreign exchange losses (2007: $10.3 million), largely the result of the weakening of the Pound Sterling to the Euro and U.S. dollar in the three months ended December 31, 2008. See Item 8, “Financial Statements and Supplementary Data — Note 14, Other Gains and Losses, Net,” for additional details related to other gains and losses.

 

Included in other income and expenses are net realized and unrealized gains of consolidated investment products. In 2008, the net losses of consolidated investment products were $58.0 million, compared to net gains of $214.3 million in 2007, reflecting the changes in market values of the investments held by consolidated investment products and the deconsolidation of certain variable interest entities for which we determined that we were no longer the primary beneficiary. Invesco invests in a small equity portion of these products, and as a result the majority of these gains and losses are offset by minority interests.

 

34

 

 


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 28.0%, the Canadian statutory tax rate is 33.5% and the U.S. Federal statutory tax rate is 35.0%.

 

The U.K.’s tax rate decreased from 30% to 28.0% effective April 1, 2008. On December 14, 2007, legislation was enacted to reduce the Canadian income tax rate over five years. Beginning January 1, 2008, the Canadian rate was reduced to 33.5%, with further reductions to 33.0% in 2009, 32.0% in 2010, 30.5% in 2011, and finally 29.0% in 2012.

 

Our effective tax rate excluding minority interest for 2008 was 32.9%, as compared to 34.6% in 2007. The decrease related primarily to a net reduction in our FIN 48 reserves, lower state taxes, and reduced taxes on subsidiary dividends in excess of an increase in the net valuation allowance for subsidiary operating losses and certain investment write-downs that did not give rise to tax benefits. Our effective tax rate, after minority interests, increased to 52.9% for the three months ended December 31, 2008, largely as a result of the investment write-downs. 2007 included a reduction in our Canadian and U.K. deferred tax assets to reflect the tax rate changes discussed above and transaction costs associated with our change in listing and domicile that were not deductible for tax purposes.

 

The inclusion of income from minority interests increased our effective tax rate to 35.9% in 2008 and reduced it to 28.7% in 2007.

 

Results of Operations for the Year Ended December 31, 2007, Compared with the Year Ended December 31, 2006

 

Operating Revenues and Net Revenues

 

Operating revenues increased by 19.5% in 2007 to $3,878.9 million (2006: $3,246.7 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. Net revenues increased by 19.0% in 2007 to $2,888.4 million (2006: $2,428.0 million). See “Schedule of Non-GAAP Information” for additional important disclosures regarding the use of net revenues. The main categories of revenues, and the dollar and percentage change between the periods, are as follows:

 

$ in millions

2007

2006

$ Change

% Change

Investment management fees

3,080.1

2,508.2

571.9

22.8

Performance fees

70.3

82.1

(11.8)

(14.4)

Service and distribution fees

593.1

534.9

58.2

10.9

Other

135.4

121.5

13.9

11.4

Total operating revenues

3,878.9

3,246.7

632.2

19.5

Third-party distribution, service and advisory expenses

(1,051.1)

(826.8)

(224.3)

(27.1)

Proportional share of revenues, net of third-party distribution expenses, from joint venture investments

60.6

8.1

52.5

648.1

Net revenues

2,888.4

2,428.0

460.4

19.0

 

Investment Management Fees

 

Investment management fees increased 22.8% in 2007 to $3,080.1 million (2006: $2,508.2 million) due to increases in AUM during the year. AUM at December 31, 2007, were $500.1 billion (2006: $462.6 billion).

 

Performance Fees

 

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 absolute performance. In 2007, these fees decreased 14.4% to $70.3 million (2006: $82.1 million). The performance fees generated in 2006 were the result of outstanding investment performance across a number of our investment disciplines.

 

35

 

 


Service and Distribution Fees

 

In 2007, service and distribution fees increased 10.9% to $593.1 million (2006: $534.9 million) due to increased sales and AUM.

 

Other Revenues

 

In 2007, other revenues increased 11.4% to $135.4 million (2006: $121.5 million) driven by increases in sales volumes of funds subject to front-end commissions, offset by declines in real estate transaction fees from 2006. Increases in other revenues were also offset by decreases in the revenues of consolidated investment products, which were primarily the result of the deconsolidation of certain variable interest entities following the company’s determination that it was no longer the primary beneficiary of those entities in 2007. See Item 8, “Financial Statements and Supplementary Data — Note 17, Consolidated Investment Products.”

 

Third-Party Distribution, Service and Advisory Expenses

 

Third-party distribution, service and advisory expenses increased 27.1% in 2007 to $1,051.1 million (2006: $826.8 million), driven by increased renewal commissions generated by increased AUM. Additionally, the trend towards platform and fund supermarket sales in the U.K. has further contributed to the increase in these expenses.

 

Proportional share of revenues, net of third-party distribution expenses, from joint venture investments

 

The 648.1% increase in our proportional share of revenues, net of third-party distribution expenses, to $60.6 million in 2007 (2006: $8.1 million), is driven by the significant growth in AUM in our 49% joint venture investment in Invesco Great Wall Fund Management Company Limited.

 

Operating Expenses

 

During 2007, operating expenses increased 16.0% to $2,884.6 million (2006: $2,487.5 million), driven by increases in employee compensation, third-party distribution, service and advisory expenses and general and administrative expenses.

 

The main categories of operating expenses are as follows:

 

$ in millions

2007

2006

$ Change

% Change

Employee compensation

1,137.6

1,070.5

67.1

6.3

Third-party distribution, service and advisory

1,051.1

826.8

224.3

27.1

Marketing

157.6

138.8

18.8

13.5

Property, office and technology

242.5

230.7

11.8

5.1

General and administrative

295.8

207.6

88.2

42.5

Restructuring charge

13.1

(13.1)

(100.0)

Total operating expenses

2,884.6

2,487.5

397.1

16.0

 

The table below sets forth these expense categories as a percentage of total operating expenses and operating revenues, which we believe provides useful information as to the relative significance of each type of expenses.

 

$ in millions

2007

% of Total

Operating

Expenses

% of

Operating

Revenues

 

 

2006

% of Total

Operating

Expenses

% of

Operating

Revenues

Employee compensation

1,137.6

39.4%

29.3%

 

1,070.5

43.0%

33.0%

Third-party distribution, service and advisory

1,051.1

36.4%

27.1%

 

826.8

33.2%

25.5%

Marketing

157.6

5.5%

4.1%

 

138.8

5.6%

4.3%

Property, office and technology

242.5

8.4%

6.3%

 

230.7

9.3%

7.1%

General and administrative

295.8

10.3%

7.6%

 

207.6

8.3%

6.4%

Restructuring charge

 

13.1

0.6%

0.4%

Total operating expenses

2,884.6

100.0%

74.4%

 

2,487.5

100.0%

76.7%

 

36


Employee Compensation

 

Employee compensation increased $67.1 million, or 6.3%, in 2007 from 2006 due predominantly to increases in base salaries, sales incentive bonuses and staff bonuses for performance against corporate objectives, and $25.0 million in amortization related to a component of the cost of the October 2006 acquisition of WL Ross & Co., which was accounted for as prepaid compensation (see Item 8, “Financial Statements and Supplementary Data — Note 2, Acquisitions”).

 

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 13.5% in 2007 to $157.6 million (2006: $138.8 million) due to increased marketing support payments related to increased sales and AUM in the U.S.

 

Property, Office and Technology

 

Property, office and technology costs increased 5.1% to $242.5 million in 2007 from $230.7 million in 2006, due primarily to a $7.4 million lease charge related to vacating leased property.

 

General and Administrative

 

General and administrative expenses increased by $88.2 million (42.5%) to $295.8 million in 2007 from $207.6 million in 2006. This increase included growth in legal and other costs related to a $24.0 million insurance recovery in 2006 and to fund launch costs for a broad array of new ETF products through PowerShares. In addition, during the three months ended December 31, 2007, we recorded $12.8 million of expense related to the relisting of the company on the New York Stock Exchange and a $9.8 million charge related to the proposed final settlement of market-timing private litigation that commenced in 2003.

 

Restructuring Charge

 

We did not incur any restructuring costs in 2007. In 2006, we recorded $13.1 million in remaining charges related to the operational restructuring efforts that began in 2005.

 

Operating Income, Net Operating Income, Operating Margin and Net Operating Margin

 

Operating income increased 31.0% to $994.3 million in 2007 from $759.2 million in 2006, driven by the growth in operating revenues. Operating margin (operating income divided by operating revenues) was 25.6% in 2007, up from 23.4% in 2006. Net operating income (operating income plus our proportional share of the operating income from joint venture arrangements) increased 36.4% to $1,039.8 million in 2007 from $762.1 million in 2006. Net operating margin is equal to net 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. Net operating margin was 36.0% in 2007, up from 31.4% in 2006. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues, a reconciliation of operating income to net operating income and additional important disclosures regarding net revenues, net operating income and net operating margins.

 

Other Income and Expenses

 

Interest income increased 80.3% to $48.5 million in 2007 from $26.9 million in 2006 largely as a result of growth in our interest-earning cash balances during the year. Interest expense decreased 7.6% to $71.3 million in 2007 from $77.2 million in 2006 due to lower credit facility balances and a lower coupon interest rate on the new senior notes issued in April 2007.

 

37

 

 


Other gains and losses, net decreased 63.1% to $9.9 million in 2007 from $26.8 million in 2006. Included in other gains and losses, net are gains on disposals of investments, which increased to $32.2 million in 2007 from $18.1 million in 2006, primarily driven by gains realized upon the redemption of seed money investments, offset by a loss of $8.2 million incurred upon the liquidation of a fund investment. Also included in other gains and losses, net are net foreign exchange gains and losses. In 2007, we incurred $10.3 million in net foreign exchange losses; whereas in 2006 we benefited from $8.5 million in net foreign exchange gains. Additionally, we incurred $5.4 million in write-downs and losses on certain CLO investments during 2007 (2006: $1.7 million). See Item 8, “Financial Statements and Supplementary Data — Note 14, Other Gains and Losses, Net,” for additional details related to other gains and losses.

 

Included in other income and expenses are net other realized and unrealized gains of consolidated investment products. These net gains decreased 27.2% to $214.3 million in 2007 from $294.3 million in 2006, primarily due to the deconsolidation of certain variable interest entities for which we determined that we were no longer the primary beneficiary.

 

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 U.K. statutory tax rate was 30.0%, the Canadian statutory tax rate was 36.0% and the U.S. Federal statutory tax rate was 35.0% for both 2007 and 2006.

 

The U.K.’s tax rate decreased from 30% to 28.0% effective April 1, 2008. On December 14, 2007, legislation was enacted to reduce the Canadian income tax rate over five years. Beginning January 1, 2008, the Canadian tax rate will be reduced to 33.5%, with further reductions to 33.0% in 2009, 32.0% in 2010, 30.5% in 2011, and finally 29.0% in 2012.

 

Our effective tax rate excluding minority interest for 2007 was 34.6%, as compared to 34.5% in 2006. In 2007 a larger percentage of our profits originated from the U.K. than in 2006, which further decreased our effective tax rate. Similar to 2006, this reduction was offset by state taxes, additional taxes on subsidiary dividends, and an increase in the net valuation allowance for subsidiary operating losses. In 2007, we also reduced our Canadian and U.K. deferred tax assets to reflect the tax rate changes discussed above and we incurred transaction costs associated with our change in listing and domicile that were not deductible for tax purposes.

 

The inclusion of income from minority interests reduced our effective tax rate to 28.7% in 2007 and 24.6% in 2006.

 

Schedule of Non-GAAP Information

 

Net revenues, net operating income and net operating margin are non-GAAP financial measures. The most comparable U.S. GAAP measures are operating revenues, operating income and operating margin. Management believes that the deduction of third-party distribution, service and advisory expenses from operating revenues in the computation of net revenues and the related computation of net operating margin provides useful information to investors because the distribution, service and advisory fee amounts represent costs that are passed through to external parties, which essentially are a share of the related revenues. Management also 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 net operating income and net operating margin also provide useful information to investors, as management considers it appropriate to evaluate the contribution of its joint venture investment to the operations of the business. Net revenues, net operating income and net operating margin 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.

 

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The following is a reconciliation of operating revenues, operating income and operating margin on a U.S. GAAP basis to net revenues, net operating income and net operating margin.

 

 

Years Ended December 31,

$ in millions

2008

2007

2006

Operating revenues, GAAP basis

3,307.6

3,878.9

3,246.7

Third-party distribution, service and advisory expenses

(875.5)

(1,051.1)

(826.8)

Proportional share of revenues, net of third-party distribution expenses, from joint venture investments

57.3

60.6

8.1

Net revenues

2,489.4

2,888.4

2,428.0

Operating income, GAAP basis

747.8

994.3

759.2

Proportional share of operating income from joint venture investments

39.7

45.5

2.9

Net operating income

787.5

1,039.8

762.1

Operating margin*

22.6%

25.6%

23.4%

Net operating margin**

31.6%

36.0%

31.4%

 

____________

 

Operating margin is equal to operating income divided by operating revenues.

 

**

Net operating margin is equal to net operating income divided by net revenues.

 

Balance Sheet Discussion

 

The following table presents a comparative analysis of significant balance sheet line items:

 

$ in millions

2008

2007

$ Change

% Change

Cash and cash equivalents

585.2

915.8

(330.6)

(36.1)

Unsettled fund receivables

303.7

605.5

(301.8)

(49.8)

Current investments

123.6

151.4

(27.8)

(18.4)

Assets held for policyholders

840.2

1,898.0

(1,057.8)

(55.7)

Non-current investments

121.3

114.1

7.2

6.3

Investments of consolidated investment products

843.8

1,239.6

(395.8)

(31.9)

Goodwill

5,966.8

6,848.0

(881.2)

(12.9)

Policyholder payables

840.2

1,898.0

(1,057.8)

(55.7)

Current maturities of long-term debt

297.2

297.2

100.0

Long-term debt

862.0

1,276.4

(414.4)

(32.5)

Minority interests in equity of consolidated affiliates

906.7

1,121.2

(214.5)

(19.1)

Shareholders’ equity

5,689.5

6,590.6

(901.1)

(13.7)

 

Cash and Cash Equivalents

 

Cash and cash equivalents decreased from December 31, 2007, to December 31, 2008, primarily because cash provided by our operating activities was exceeded by cash used for financing and investment activities; including the purchase of our shares in the market under our share repurchase program and payments to reduce the drawn balance on our credit facility. Details regarding changes in cash balances are provided within our Consolidated Statements of Cash Flows.

 

Invesco has local capital requirements in several jurisdictions, as well as regional requirements for entities that are part of the European sub-group. These requirements mandate the retention of liquid resources in those jurisdictions, which we meet in part by holding cash and cash equivalents. This retained cash can be used for general business purposes in the European sub-group or in the countries where it is located. Due to the capital restrictions, the ability to transfer cash between certain jurisdictions may be limited. In addition, transfers of cash between international jurisdictions may have adverse tax consequences that may substantially limit such activity. At December 31, 2008, the European sub-group had cash and cash equivalent balances of $427.9 million, much of which is used to satisfy these regulatory requirements. We are in compliance with all regulatory minimum net capital requirements.

 

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Unsettled Fund Receivables

 

Unsettled fund receivables decreased from $605.5 million at December 31, 2007, to $303.7 million at December 31, 2008, due to lower transaction activities. Unsettled fund receivables are created by the normal settlement periods on transactions initiated by certain clients of our U.K. and offshore funds. We are legally required to establish a receivable and a substantially offsetting payable at trade date with both the investor and the fund for normal purchases and sales.

 

Investments (Non-current and current)

 

As of December 31, 2008, we had $244.9 million in investments, of which $121.3 million were non-current investments and $123.6 million were current investments. Included in current investments are $69.1 million of seed money in affiliated funds and $35.5 million of investments related to assets held for deferred compensation plans. Included in non-current investments are $95.3 million in equity method investments in our Chinese joint venture and in certain of the company’s private equity, real estate and other investment products. Additionally, non-current investments include $17.5 million of investments in collateralized loan obligation structures managed by Invesco. Our investments in collateralized loan obligation structures are generally in the form of a relatively small portion of the unrated, junior, subordinated position. As such these positions would share in the first losses to be incurred if the structures were to experience significant increases in default rates of underlying investments above historical levels.

 

Assets Held for Policyholders and Policyholder Payables

 

One of our subsidiaries, Invesco Pensions 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 decreasing balance in these accounts was the result of the transfer of a portion of our U.K. pension administration operations to another provider, foreign exchange movements and the decline in the market values of these assets and liabilities.

 

Investments of consolidated investment products

 

Financial Accounting Standards Board Interpretation (FIN) No. 46(R), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” requires that the primary beneficiary of variable interest entities (VIEs) consolidate the VIEs. A VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. 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 also VIEs. The primary beneficiary is the party to the VIE who absorbs a majority of the losses or absorbs the majority of the rewards generated by the VIE. Emerging Issues Task Force (EITF) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” requires that the general partner in a partnership that is not a VIE consolidate 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. Investments of consolidated investment products include the investments of both consolidated VIEs, and partnerships that have been consolidated under EITF 04-5. Investment products are also consolidated under FASB Statement No. 94, “Consolidation of All Majority-Owned Subsidiaries,” if appropriate.

 

As of December 31, 2008, investments of consolidated investment products totaled $843.8 million (2007: $1,239.6 million). These investments are offset primarily in minority interests on the Consolidated Balance Sheets, as the company’s equity investment in these structures is very small. The decrease from 2007 reflects the impact of declining market values and the deconsolidation of certain previously consolidated VIEs resulting from the company’s determination that it was no longer the primary beneficiary of these entities.

 

Goodwill

 

Goodwill decreased from $6,848.0 million at December 31, 2007, to $5,966.8 million at December 31, 2008, primarily due to the impact of foreign currency translation for certain subsidiaries whose functional currency differs from that of the parent. The weakening of the U.S. dollar during 2008, mainly against the Canadian dollar and Pound Sterling, resulted in a $926.3 million decrease in goodwill, upon consolidation, with a corresponding decrease to equity. Additional goodwill was recorded in 2008 related to the earn-out on the WL Ross acquisition ($43.8 million). The company’s annual goodwill impairment review is performed as of October 1 of each year. As a result of that analysis, the company determined that no impairment existed at that date.

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Due to the declines in global markets experienced during the three months ended December 31, 2008, the company conducted an interim goodwill impairment test at October 31, 2008, and determined that no impairment existed at that date. Interim impairment conclusions, including a reassessment of key assumptions, were reviewed again at December 31, 2008, and the company concluded that no significant changes had occurred.

 

Current Portion of Long-term Debt

 

This balance increased from December 31, 2007, as a result of the reclassification out of long-term and into current of $297.2 million 4.5% senior notes that mature on December 15, 2009.

 

Long-term Debt

 

The decrease in this balance was due to the repayment of borrowings under the credit facility.

 

Minority interests in equity of consolidated entities

 

Minority interests in equity of consolidated entities decreased from $1,121.2 million at December 31, 2007, to $906.7 million at December 31, 2008, primarily due to the impact of declining market values and the deconsolidation of VIEs for which the company determined that it was no longer the primary beneficiary of the arrangements as a result of reconsideration events. The minority interests in equity of consolidated entities are generally offset by the investments of consolidated investment products, as the company’s equity investments in these investment products are very small.

 

Total Equity

 

Shareholders’ equity decreased from $6,590.6 million at December 31, 2007, to $5,689.5 million at December 31, 2008, a decrease of $901.1 million. The decrease included foreign currency translation losses of $1,034.2 million with respect to subsidiaries whose functional currency differs from that of the parent together with $318.0 million of share repurchases, offset by net income of $481.7 million, and share issuances on employee option exercises of $75.7 million. Dividends totaling $207.1 million were recorded during 2008.

 

Liquidity and Capital Resources

 

The existing capital structure of the company, together with the cash flows from operations and borrowings under the credit facility, should provide the company with sufficient resources to meet present and future cash needs. We believe that our cash flows from operations and credit facilities, together with our ability to obtain alternative sources of financing, will enable us to meet operating, debt and other obligations as they come due and anticipated future capital requirements. Future obligations include the maturity of the remaining $297.2 million 4.5% senior notes due December 15, 2009, and the expiration of the $900 million credit facility on March 31, 2010. 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.

 

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 require the retention of liquid resources in those jurisdictions, which we meet in part by holding cash and cash equivalents. This retained cash can be used for general business purposes in the European sub-group or in the countries where it is located. Due to the capital restrictions, the ability to transfer cash between certain jurisdictions may be limited. In addition, transfers of cash between international jurisdictions may have adverse tax consequences that may substantially limit such activity. At December 31, 2008, the European sub-group had cash and cash equivalent balances of $427.9 million, much of which is used to satisfy these regulatory requirements. We are in compliance with all regulatory minimum net capital requirements.

 

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.

 

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Cash flows of consolidated investment products (discussed in Item 8, “Financial Statements and Supplementary Data — Note 17, Consolidated Investment Products”) are reflected in Invesco’s cash provided by operating activities, used in investing activities and used in 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.

 

Cash flows for the years ended December 31, 2008, 2007 and 2006 are summarized as follows:

 

$ in millions

 

 

 

Cash flow from:

2008

2007

2006

Operating activities

495.7

913.7

455.9

Investing activities

(68.6)

(46.4)

(258.7)

Financing activities

(666.4)

(740.8)

(163.1)

(Decrease)/increase in cash and cash equivalents

(239.3)

126.5

34.1

Cash and cash equivalents, beginning of year

915.8

778.9

709.5

Foreign exchange

(91.3)

10.4

35.3

Cash and cash equivalents, end of year

585.2

915.8

778.9

 

 

Operating Activities

 

Cash provided by operating activities is generated by the receipt of investment management and other fees generated from AUM, offset by operating expenses.

 

Cash provided by operating activities in 2008 was $495.7 million, a decrease of $418.0 million or 45.7% over 2007. Changes in operating assets and liabilities contributed $241.6 million of the decrease, and lower net income contributed a further $191.9 million of the decrease in cash flows generated from operating activities.

 

Cash provided by operating activities in 2007 was $913.7 million, an increase of $457.8 million or 100.4% over 2006. Changes in operating assets and liabilities contributed $307.2 million of the increase, and higher net income contributed $190.9 million of the increase in cash flows generated from operating activities.

 

Investing Activities

 

In our institutional operations, we periodically invest in our collateralized loan obligation structures, through a relatively small portion of the unrated, junior subordinated position, and in our private equity funds, as is customary in the industry. Other investors into these structures have no recourse against the company for any losses sustained in the structures. Many of our private equity products are structured as limited partnerships. Our investment may take the form of the general partner or as a limited partner. We received $26.4 million (2007: $10.1 million; 2006: $13.6 million) in return of capital from such investments. We also make seed investments in affiliated funds to assist in the launch of new funds. During 2008, we invested $70.6 million in new funds and recaptured $33.5 million from redemptions of prior investments.

 

During the fiscal years ended December 31, 2008, 2007 and 2006, our capital expenditures were $84.1 million, $36.7 million and $37.9 million, respectively. The increase over 2007 is primarily due to leasehold improvements related to new headquarters space. Other 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 fiscal years ended December 31, 2008, 2007 and 2006, our capital divestitures were not significant relative to our total fixed assets.

 

Net cash outflows of $174.3 million in 2008 and $56.0 million in 2007 related primarily to acquisition earn-out payments related to the 2006 acquisitions of PowerShares and WL Ross & Co.

 

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Financing Activities

 

Net cash used in financing activities reduced from $740.8 million in 2007 to $666.4 million in 2008, primarily due to lower levels of purchases of treasury shares. Cash used for treasury share purchases in 2008 totaled $313.4 million compared to $716.0 million in 2007.

 

Net cash used in financing activities increased from $163.1 million in 2006 to $740.8 million in 2007 as the increase in net inflows from share issuances were offset by the increase in dividends paid and purchase of treasury shares. A summary of shares purchased by month for the fourth quarter of 2008 is presented in Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

 

Dividends

 

In 2008, Invesco began declaring and paying dividends on a quarterly basis in arrears. The 2008 quarterly dividend was $0.10 per Invesco Ltd. common share. On October 27, 2008, the company declared the third quarter cash dividend, which was paid on December 17, 2008, to shareholders of record as of November 26, 2008. On January 30, 2009, the company declared the fourth quarter cash dividend, which will be paid on March 11, 2009, to shareholders of record as of February 25, 2009. The 2008 total dividend of $0.40 per share represented a 4.2% increase over the 2007 total dividend of $0.384 per share.

 

The declaration, payment and amount of any future dividends will be declared by our board of directors and will depend upon, among other factors, our earnings, financial condition and capital requirements at the time such declaration and payment are considered. The board has a policy of managing dividends in a prudent fashion, with due consideration given to profit levels, overall debt levels, and historical dividend payouts.

 

The following table sets forth the historical amounts for interim, final and total dividends per American Depositary Share in respect of each year indicated:

 

 

U.S. Cents per American

Depositary Share

Years Ended December 31,

Interim

Final

Total

2007

16.40

22.00

38.40

 

 

 

 

 

Q1

Q2

Q3

Q4

Total

2008

10.0

10.0

10.0

10.0

40.0

 

Share Repurchase Plan

 

In March 2008, the company completed the $500.0 million share repurchase program that was authorized by the board of directors in June 2007. On April 23, 2008, the board of directors authorized a new share repurchase program of up to $1.5 billion with no stated expiration date. During the year ended December 31, 2008, 12.3 million shares of Invesco Ltd. were purchased in the market at a cost of $313.4 million, including 0.7 million of shares purchased directly from current executives for $20.0 million. These shares were recorded as treasury shares on the Consolidated Balance Sheets. The company did not make any purchases in the three months ended December 31, 2008, under the $1.5 billion authorization, but did purchase 11,638 shares at a cost of $121,965 from a current officer of the company. Additionally, an aggregate of 0.3 million shares were withheld on vesting events during the year ended December 31, 2008, to meet employees’ tax obligations. The value of these shares withheld was $4.6 million.

 

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Debt

 

Our total indebtedness at December 31, 2008, is $1,159.2 million (December 31, 2007: $1,276.4 million) and is comprised of the following:

 

$ in millions

 

 

Unsecured Senior Notes:

2008

2007

4.5% — due December 15, 2009

297.2

300.0

5.625% — due April 17, 2012

300.0

300.0

5.375% — due February 27, 2013

350.0

350.0

5.375% — due December 15, 2014

200.0

200.0

Floating rate credit facility expiring March 31, 2010

12.0

126.4

Total long-term debt

1,159.2

1,276.4

Less: current maturities of long-term debt

297.2

Long-term debt

862.0

1,276.4

 

For the three months and year ended December 31, 2008, the company’s weighted average cost of debt was 4.93% and 4.87%, respectively (three months and year ended December 31, 2007: 5.24% and 5.22%, respectively.) Long-term debt decreased from $1,276.4 million at December 31, 2007, to $1,159.2 million at December 31, 2008, due primarily to repayment of borrowings under our floating rate credit facility as well as repurchases of long-term debt. On November 24, 2008, the company received board authorization to begin repurchasing up to $120 million of the $300 million 4.5% senior notes due December 15, 2009, in open market and privately negotiated transactions. As of December 31, 2008, the company has repurchased $2.8 million at 93.28% of par value. Due to the infrequency with which these bonds trade, it is unlikely that the firm will be able to retire significant amounts of this debt in the open market.

 

In the past, debt issuance proceeds have been used by the company to form part of the consideration paid for acquisitions and also for the integration of the acquired businesses over time. On January 16, 2007, $300.0 million of our 5.9% senior notes matured and was paid using a draw on our credit facility. On April 17, 2007, the company issued $300.0 million five-year 5.625% senior notes. The net proceeds from the offering were used to repay amounts outstanding under our credit facility and for general corporate purposes. Interest is paid semi-annually on the senior notes. The senior notes are unsecured.

 

On March 31, 2005, we entered into a five-year unsecured $900.0 million credit facility with a group of lenders that was amended and restated in December 2007 in conjunction with the redomicile and relisting of the company. The company draws and repays its credit facility balances and utilizes the credit facility for working capital and other cash needs. The financial covenants under our credit agreement include a leverage ratio of not greater than 3.25:1.00 (debt/EBITDA, as defined in the credit facility) and an interest coverage ratio of not less than 4.00:1.00 (EBITDA as defined in the credit facility/interest payable for the four consecutive fiscal quarters). The breach of any covenant would result in a default under the credit facility, which could lead to lenders requiring all balances under the credit facility, together with accrued interest and other fees, to be immediately due and payable. This credit facility also contains customary affirmative operating covenants and negative covenants that, among other things, restrict certain of our subsidiaries’ ability to incur debt, transfer assets, merge, make loans and other investments and create liens. As of December 31, 2008, we were in compliance with our debt covenants. The coverage ratios, as defined in our credit facility, were as follows during 2008, 2007 and 2006:

 

 

2008

 

Q1

Q2

Q3

Q4

Leverage Ratio

1.25

1.11

1.17

1.28

Interest Coverage Ratio

16.99

16.53

15.19

12.20

 

 

2007

 

Q1

Q2

Q3

Q4

Leverage Ratio

1.18

0.97

0.91

1.04

Interest Coverage Ratio

12.96

13.54

14.30

17.81

 

 

2006

 

Q1

Q2

Q3

Q4

 

Leverage Ratio

1.62

1.60

1.46

1.24

 

Interest Coverage Ratio

9.22

10.69

11.67

12.93

 

 

 

44


We have received credit ratings of A3 and BBB+ from Moody’s and Standard & Poor’s credit rating agencies, respectively, as of the date of this Annual Report on Form 10-K. Both Standard & Poor’s and Moody’s have a “stable” outlook for the rating as of the date of this Annual Report on Form 10-K. According to Moody’s, obligations rated ‘A’ are considered upper medium grade and are subject to low credit risk. Invesco’s rating of A3 is at the low end of the A range (A1, A2, A3), but three notches above the lowest investment grade rating of Baa3. Standard and Poor’s rating of BBB+ is at the upper end of the BBB rating, with BBB- representing Standard and Poor’s lowest investment grade rating. According to Standard and Poor’s, BBB obligations exhibit adequate protection parameters; however adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. We believe that rating agency concerns include but are not limited to: our ability to sustain net positive asset flows across customer channels, product type and geographies, our substantial indebtedness, and our ability to maintain consistent positive investment performance. Additionally, the rating agencies could decide to downgrade the entire asset management industry, based on their perspective of future growth and solvency. Material deterioration of these factors, and others defined by each rating agency, could result in downgrades to our credit ratings, thereby limiting our ability to generate additional financing. Because our credit facility borrowing rates are not tied to credit ratings, and interest rates on our outstanding senior notes are fixed, there is no direct correlation between changes in ratings and interest expense of the company. However, management believes that solid investment grade ratings are an important factor in winning and maintaining institutional business and strives to manage the company to maintain such ratings. Disclosure of these ratings is not a recommendation to buy, sell or hold our debt. These credit ratings may be subject to revision or withdrawal at anytime by Moody’s or Standard & Poor’s. Each rating should be evaluated independently.

 

Credit and Liquidity Risk

 

Capital management involves the management of the company’s liquidity and cash flows. The company manages its capital by reviewing annual and projected cash flow forecasts and by monitoring credit, liquidity and market risks, such as interest rate and foreign currency risks (as discussed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”), through measurement and analysis. The company is primarily exposed to credit risk through its cash and cash equivalent deposits, which are held by external firms. The company invests its cash balances in its own institutional money market products, as well as with external high credit-quality financial institutions; however, we have chosen to limit the number of firms with which we invest. These arrangements create exposure to concentrations of credit risk.

 

Credit Risk

 

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The company is subject to credit risk in the following areas of its business:

 

 

All cash and cash equivalent balances are subject to credit risk, as they represent deposits made by the company with external banks and other institutions. As of December 31, 2008, our maximum exposure to credit risk related to our cash and cash equivalent balances is $585.2 million. Cash and cash equivalents invested in affiliated money market funds (related parties) totaled $172.3 million at December 31, 2008.

 

 

Certain trust subsidiaries of the company accept deposits and place deposits with other institutions on behalf of our customers. As of December 31, 2008, our maximum exposure to credit risk related to these transactions is $0.9 million.

 

The company does not utilize credit derivatives or similar instruments to mitigate the maximum exposure to credit risk. The company does not expect any counterparties to its financial instruments to fail to meet their obligations.

 

Liquidity Risk

 

Liquidity risk is the risk that the company will encounter difficulty in meeting obligations associated with its financial liabilities. The company is exposed to liquidity risk through its $1,159.2 million in total long-term debt. The company actively manages liquidity risk by preparing cash flow forecasts for future periods, reviewing them regularly with senior management, maintaining a committed credit facility, scheduling significant gaps between major debt maturities and engaging external financing sources in regular dialog.

 

Effects of Inflation

 

Inflation can impact our organization primarily in two ways. First, inflationary pressures can result in increases in our cost structure, especially to the extent that large expense components such as compensation are impacted. To the degree that these expense

 

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increases are not recoverable or cannot be counterbalanced through pricing increases due to the competitive environment, our profitability could be negatively impacted. Secondly, the value of the assets that we manage may be negatively impacted when inflationary expectations result in a rising interest rate environment. Declines in the values of these AUM could lead to reduced revenues as management fees are generally calculated based upon the size of AUM.

 

Off Balance Sheet Commitments

 

The company transacts 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. Certain of these investments are considered to be variable interest entities of which the company is the primary beneficiary and certain of these investments are limited partnerships for which the company is the general partner and is deemed to have control (with the absence of substantive kick-out, liquidation or participation rights of the other limited partners) and are consolidated into the company’s financial statements under EITF 04-5 (see Item 8, “Financial Statements and Supplementary Data — Note 17, Consolidated Investment Products” and “Note 1, Accounting Policies” for additional information on consolidated and unconsolidated investment products).

 

Many of the company’s investment products are structured as limited partnerships. Our investment may take the form of the general partner or as a limited partner, and the entities are structured such that each partner makes capital commitments that are to be drawn down over the life of the partnership as investment opportunities are identified. At December 31, 2008, our undrawn capital commitments were $36.5 million (2007: $60.2 million).

 

    The volatility and valuation dislocations that occurred during 2007 and 2008 in certain sectors of the fixed income market have generated some 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 accredited investors. In December 2008, the agreements were amended to extend the term through June 30, 2009. As of December 31, 2008, the committed support under these agreements was $43.0 million with an internal approval mechanism to increase the maximum possible support to $64.5 million at the option of the company. The fair value of these agreements at December 31, 2008, was estimated to be $5.5 million, which was recorded as a guarantee obligation. No payments have been made under either agreement nor has Invesco realized any losses from the support agreements. These trusts were not consolidated because the company was not deemed to be the primary beneficiary under FIN 46R.

 

Contractual Obligations

 

We have various financial obligations that require future cash payments. The following table outlines the timing of payment requirements related to our commitments as of December 31, 2008:

 

$ in millions

Total(4)(5)

Within

1 Year

1-3

Years

3-5

Years

More Than

5 Years

Total debt

1,159.2

297.2

312.0

550.0

Estimated interest payments on total debt(1)

221.7

59.9

  92.9

68.9

Finance leases

0.3

0.2

0.1

Operating leases(2)

478.9

56.6

96.6

86.2

239.5

Defined benefit pension and postretirement medical obligations(3)

318.0

7.4

16.8

19.4

274.4

Total

2,178.1

421.3

518.4

724.5

513.9

 

____________

 

(1)

Total debt includes $1,159.2 million of fixed rate debt. Fixed interest payments are therefore reflected in the table above in the periods they are due. The credit facility, $900.0 million at December 31, 2008, provides for borrowings of various maturities. Interest is payable based upon LIBOR, Prime, Federal Funds or other bank-provided rates in existence at the time of each borrowing. Estimated credit facility interest payments in the table above are based upon an assumption that the credit facility balance of $12.0 million and the interest rate that existed at December 31, 2008, will remain until credit facility maturity on March 31, 2010.

 

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(2)

Operating leases reflect obligations for leased building space and sponsorship and naming rights agreements. See Part II, Item 8, “Financial Statements and Supplementary Data — Note 19, Operating Leases” for sublease information.

 

(3)

The defined benefit obligation of $318.0 million is comprised of $271.2 million related to pension plans and $46.8 million related to a postretirement medical plan. The fair value of plan assets at December 31, 2008, was $224.6 million for the retirement plan and $6.3 million for the medical plan. See Part II, Item 8, “Financial Statements and Supplementary Data — Note 20, Retirement Benefit Plans” for detailed benefit pension and postretirement plan information.

 

(4)

Other contingent payments at December 31, 2008, include $500.0 million related to the PowerShares acquisition and $165.0 million related to the WL Ross & Co. acquisition, which are excluded until such time as they are probable and reasonably estimable.

 

(5)

Due to the uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefits at December 31, 2008, the company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $55.9 million of gross unrecognized tax benefits have been excluded from the contractual obligations table above. See Part II, Item 8, “Financial Statements and Supplementary Data, Note 15 — Taxation” for a discussion on income taxes.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are disclosed in Part II, Item 8, “Financial Statements and Supplementary Data — Note 1, Accounting Policies” to our Consolidated Financial Statements. The accounting policies and estimates that we believe are the most critical to an understanding of our results of operations and financial condition are those that require complex management judgment regarding matters that are highly uncertain at the time policies were applied and estimates were made. These accounting policies and estimates are discussed below. Different estimates reasonably could have been used in the current period that would have had a material effect on these financial statements, and changes in these estimates are likely to occur from period-to-period in the future.

 

Share-Based Compensation. We have issued equity-settled share-based awards to certain employees, which are measured at fair value at the date of grant. These awards consist of restricted share awards (RSAs), restricted share units (RSUs) and share option awards. 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 a defined vesting period of continued employee service upon the company’s attainment of certain performance criteria, generally the attainment of cumulative EPS 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 RSAs or 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.

 

The fair value of these awards is determined at the grant date and is expensed on a straight-line basis over the vesting period, based on the company’s estimate of shares that will eventually vest. The forfeiture rate applied to most grants is 5% per annum, based upon our historical experience with respect to employee turnover. Fair value for RSAs and RSUs representing equity interests identical to those associated with shares traded in the open market are determined using the market price at the time of grant. Fair value is measured by use of the Black Scholes valuation model for certain RSUs that do not include dividend rights and a stochastic model (a lattice-based model) for share option awards. The expected life of share-based payment awards used in these models is adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioral considerations.

 

Changes in the assumptions used in the stochastic valuation model for share option awards, as well as changes in the company’s estimates of vesting (including the company’s evaluation of performance conditions associated with certain share-based payment awards and assumptions used in determining award lapse rates) could have a material impact on the share-based payment charge recorded in each year. During the three months ended December 31, 2008, the company reversed cumulative costs previously recognized related to performance-based share awards granted in 2007 based upon the expectation that the required performance targets for the vesting of these awards will not be attained and the awards will not vest. There have been no grants of share options since 2005.

 

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RSUs that do not include dividend rights or cash payments in lieu of dividends are valued using the Black Scholes model. There were no such awards granted in 2008 or 2007. The assumptions used in the Black Scholes model for these awards granted in 2006 are as follows:

 

 

2006

Weighted average share price*

1,034p

Expected term

5.3 years

Expected dividend yield

1.84%

 

__________

 

*

Share prices are in Pounds Sterling, the currency of the awards.

 

The table below is a summary, as of December 31, 2008, of equity-settled share-based compensation awards outstanding under the company’s share-based compensation programs. Details relating to each program are included in Part II, Item 8, “Financial Statements and Supplementary Data — Note 18, Share-Based Compensation.”

 

 

Awards Outstanding

Vesting During The Years Ended December 31,

 

Total

2009

2010

2011

2012

2013

2014

Millions of shares

 

 

 

 

 

Time-vested

13.7

5.1

2.8

5.1

0.3

0.2

0.2

Performance-vested

4.3

2.2

1.1

1.0

Share Awards*

18.0

7.3

3.9

6.1