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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
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.) |
|
| 1360 Peachtree Street, NE, 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 o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
(The registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 contained
financial statements prepared in accordance with International Financial Reporting Standards.)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.) Yes o No þ
At June 30, 2007, the aggregate market value of the voting stock held by non-affiliates was $8.4
billion, based on the closing price of (i) the registrant’s Ordinary Shares, par value U.S. $0.10
per share, on the London Stock Exchange and (ii) the registrant’s American Depositary Shares (each
representing two (2) Ordinary Shares) on the New York Stock Exchange.
Following the registrant’s December 4, 2007 redomicile and reverse stock split transactions, as of
January 31, 2008, the most recent practicable date, 424,767,233 million of the company’s common
shares, par value U.S. $0.20 per share, were outstanding. The primary market for the common shares
is the New York Stock Exchange.
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, 2007.
TABLE OF CONTENTS
We include cross references to captions elsewhere in this Annual Report on Form 10-K, which we
refer to as this “Report,” where you can find related additional information. The following table
of contents tells you where to find these captions.
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SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We believe it is important to communicate our future expectations to our shareholders and to the
public. 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, 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,”
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 or incorporated by reference
in this Report or 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:
| n | variations in demand for our investment products or services, including termination or non-renewal of our investment advisory agreements; | ||
| n | significant changes in net cash 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; | ||
| n | significant fluctuations in the performance of debt and equity markets worldwide; | ||
| n | exchange rate fluctuations, especially as against the U.S. dollar; | ||
| n | the effect of economic conditions and interest rates in the U.S. or globally; | ||
| n | our ability to compete in the investment management business; | ||
| n | the effect of consolidation in the investment management business; | ||
| n | limitations or restrictions on access to distribution channels for our products; | ||
| n | our ability to attract and retain key personnel, including investment management professionals; | ||
| n | the investment performance of our investment products; | ||
| n | 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; | ||
| n | changes in regulatory capital requirements; | ||
| n | our substantial debt and the limitations imposed by our credit facility; | ||
| n | the effect of failures or delays in support systems or customer service functions, and other interruptions of our operations; | ||
| n | the occurrence of breaches and errors in the conduct of our business, including any failure to properly safeguard confidential and sensitive information; | ||
| n | the execution risk inherent in our current company-wide transformational initiatives; | ||
| n | the effect of political or social instability in the countries in which we invest or do business; | ||
| n | the effect of terrorist attacks in the countries in which we invest or do business and the escalation of hostilities that could result therefrom; | ||
| n | enactment of adverse state, federal or foreign legislation or changes in government policy or regulation (including accounting standards) affecting our operations or the way in which our profits are taxed; | ||
| n | war and other hostilities in or involving countries in which we invest or do business; and | ||
| n | adverse results in litigation, including private civil litigation related to mutual fund fees and any similar potential regulatory or other proceedings. |
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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 1, 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.
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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, including AIM, Atlantic Trust, Invesco, Perpetual,
PowerShares, Trimark and WL Ross, 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 $500.1 billion in assets under management (AUM) as of December 31, 2007.
The key drivers of success for Invesco are long-term investment performance and client service
delivered across a diverse spectrum of 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 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).
Strategy
The company is focusing on four key strategic drivers that we believe will contribute to our
long-term success:
| • | Achieve strong investment performance over the long term by having clearly articulated investment disciplines and providing truly enduring solutions to 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. During 2006 and 2007,
Invesco increasingly leveraged the individual strengths of these business units by working 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. We believe these changes have strengthened the
business. Invesco’s primary senior management team consists of the CEO and eight direct reports,
each of whom has responsibility for a core aspect of our global business. 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.”
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Recent Developments
In September 2006, we acquired PowerShares, a leading provider of exchange-traded funds (ETFs). As
of December 31, 2007, PowerShares managed approximately $14.5 billion in assets and offered
investors more than 100 domestic and international ETFs. In October 2006, we acquired WL Ross &
Co., one of the industry’s leading financial restructuring groups, expanding the range of
high-quality alternative investment offerings for our clients. Led by Wilbur Ross and his team, WL
Ross & Co. assumed responsibility for the direct private equity operations of Invesco, with $6.8
billion in combined assets under management as of year end 2007. Our 2007 operating results
include a full year of operations of both PowerShares and WL Ross & Co.
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. On November 5, 2007, we
introduced a new brand identity for Invesco. This move was part of our long-range brand strategy
that will further unify our company and build on the strength of our existing brands to help us
promote our global investment management expertise.
Throughout the year, we remained committed to executing on our comprehensive operating plan. At
the same time, we were intensely focused on investing for growth. Our focus on continuous
improvement gave us the flexibility to invest in our core markets and in the long-term success of
our business. During 2007, we undertook a number of initiatives that provided the resources for
reinvesting in our business, including:
| • | Transformation of our Operations and Technology group and our North American retail operations; and | ||
| • | Rationalization of our enterprise support, institutional sales and service and transfer agent operations. |
These initiatives provided resources that were reinvested in the business to support our expansion
in key markets, launch new products, enhance our infrastructure and retain and motivate our
high-performing employees. See Part II, Item 8, “Financial Statements and Supplementary Data -
Note 13, Restructuring Charge” for additional details.
Operating margin and net operating margin increased to 25.6% and 36.0% in 2007, respectively, from
23.4% and 31.4% in 2006, respectively. 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 for important additional disclosures.
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 I, Item 4, “Submission of Matters to a
Vote of Security Holders” and Part II, Item 8, “Financial Statements and Supplementary Data — Note
1, Accounting Policies” for additional information.
Certain Demographic and Industry Trends
During 2007, we saw demographic and economic trends around the world continue to transform the
investment management industry and our business:
| • | Population and economic growth are creating a larger universe of investable assets and a growing number of investors who need professional support to reach their financial goals. | |
| • | Global economic prosperity and changes in retirement needs are creating a larger middle class of investors, resulting in the growth of mutual funds 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. The effect of the recent changes to U.S. pension laws could potentially further increase the size of the defined contribution market. 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. |
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| • | 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 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 15 distinct investment centers worldwide, has the global capabilities to benefit from this trend. |
Our plans for taking the business forward acknowledge these demographic and economic trends, as
well as 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
grow our business and ensure our long-term success.
During the last half of 2007 and continuing into early 2008 through the date of this Report, the
fixed income markets experienced unprecedented disruptions impacting the liquidity and valuation of
certain securities, including a variety of asset-backed securities and other securities with
complex structures, particularly those exposed to sub-prime mortgage securities. These market
events, in turn, caused the investment management industry to experience a marked decline in
investor demand for certain credit-sensitive U.S. fixed income products, in particular certain
collateralized debt obligations (CDO) vehicles that directly or indirectly held these types of
securities. In addition, certain other products, including certain short duration fixed income
funds, experienced liquidity and valuation difficulties with respect to investments in these types
of securities. These events had a negative impact on several financial institutions, as well as
many asset managers; some of these firms decided to provide financial support to these products in
order to offset or prevent losses, as securities were sold at, or portfolio values adjusted to
reflect, distressed prices. Although Invesco does have limited levels of exposure to these types of
securities within its CDOs and certain un-registered short duration funds, among other products it
manages, this exposure has not created any material financial loss or a need to fund any payment
under support agreements as of the date of this Report. In addition, as of the date of this
Report, none of Invesco’s registered money market funds have experienced any significant liquidity
or valuation disruptions as a result of these market factors.
Investment Management Capabilities
Invesco is a leading independent global investment manager with offices in 20 countries. As of
December 31, 2007, Invesco managed $500.1 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, including AIM, Atlantic Trust, Invesco, Perpetual,
PowerShares, Trimark and WL Ross, Invesco provides a comprehensive array of enduring solutions for
our clients. Invesco shares are traded publicly on the New York Stock Exchange under the symbol
“IVZ.”
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 49.6% of our AUM as of December 31, 2007, was
invested 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.
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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 | Private Capital Direct Investments | ||||||
| Index | Large Cap Growth | Private Capital Fund of Funds | ||||||
| Intermediate | Large Cap Value | Multiple Asset Strategies | ||||||
| International/Global | Enhanced Index | Asset Allocation | ||||||
| Municipal Bonds | Sector Funds | |||||||
| Short Bonds | International | |||||||
| 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 | ||
| * | Investment companies with variable capital |
The following tables present a breakdown of AUM by client domicile, distribution channel and asset
class as of December 31, 2007:
AUM Diversification ($ in billions)
See Part II, Item 8, “Financial Statements and Supplementary Data — Note 14, “Geographic
Information,” for a geographic breakdown of our consolidated operating revenues for the years ended December
31, 2007, 2006 and 2005.
Distribution Channels
Retail
Invesco is a significant provider of retail investment solutions to clients through our
distribution channels: AIM in the U.S., Trimark in Canada, Invesco Perpetual in the U.K., Invesco
in Europe and Asia, and PowerShares (for our ETF products). Collectively, the retail product
management teams manage $259.5 billion as of December 31, 2007. 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.
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The U.S., Canadian and U.K. retail operations rank among the largest, by AUM, in their respective
regions: as of year end 2007, AIM was the 11th largest non-proprietary mutual fund
complex in the U.S., Trimark was the 5th 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 the second-largest Sino-foreign manager in China, with AUM of
approximately $14.6 billion as of December 31, 2007. PowerShares adds a leading set of ETF products
(with $14.5 billion in AUM and 105 exchanged-traded funds as of December 31, 2007) to the
extensive choices available to our retail investors. In 2007, PowerShares successfully launched ETF
products in Europe. 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., Canada, U.K., Continental Europe and Asia-Pacific regions through Invesco and AIM ($223.1
billion in AUM as of December 31, 2007). 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. Global and 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 AIM’s institutional money market funds included 22 of the 25 largest U.S. banks, nine of
the largest 25 global banks, 10 of the Fortune 25 U.S. corporations, and seven of the top 25
Fortune Global Corporations all as of December 31, 2007.
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 in the U.S.
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
$17.5 billion as of December 31, 2007.
Employees
As of December 31, 2007, we had 5,475 employees, the majority of whom were located in North
America. As of December 31, 2006 and 2005, we had 5,574 and 5,798 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.
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 return 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.
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Government Regulation
As with all investment management companies, our operations and investment products 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 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 Reporting 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 Company Act of 1940, (the Investment Company Act), the Investment Advisers Act of 1940
and the Employee Retirement Income Security Act of 1974. The Investment Advisers Act of 1940, as
amended (the Investment Advisers Act), imposes numerous obligations on registered investment
advisers, including record-keeping 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, 2007, the
European sub-group had cash and cash equivalent balances of $758.1 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. See
Part 1, Item 1A, “Risk Factors.”
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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
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 from time to time 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 49.6% of our total
assets under management were invested in equity securities and approximately 50.4% were
invested in fixed income and other securities at December 31, 2007. Through the date of the
filing of the Annual Report on Form 10-K with the SEC, markets continue to be volatile, and
our AUM as of January 31, 2008 had fallen 4.9% from year-end levels. 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, and real estate. Investments in these products are generally made to
establish a track record. Adverse market conditions may result in the need to write down
the value of these seed investments. As of December 31, 2007 the
company had $113.6 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
rate 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 $39.0 million of equity at risk invested in our
collateralized loan and debt 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 sub-prime 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, 2007, the
European sub-group had cash and cash equivalent balances of $758.1 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.
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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.
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 a significant portion, either in quality or quantity,
of our investment management personnel could reduce the attractiveness of our products to potential
and current clients and could, therefore, adversely affect our revenues and profitability. During
2007, several members of our Stable Value team departed for a competitor, which resulted in net
outflows of AUM of $16.2 billion.
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, employee misconduct and rumors, among other
things, can substantially damage our reputation, even if they are baseless or satisfactorily
addressed. 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.
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, financing strength, strength 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. The recent trend toward consolidation within the investment management industry has
served to increase the strength of a number of our competitors. These
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strengthened 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 substantial indebtedness could adversely affect our financial position.
We have a significant amount of indebtedness. As of December 31, 2007, we had outstanding total
long-term debt of $1,276.4 million (which excludes $116.6 million of debt held by consolidated
investment products) and shareholders’ equity of $6,590.6 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.
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.
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.
Our credit facility imposes restrictions on our ability to conduct business and, if amounts
borrowed under it were to be accelerated, 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 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 to be accelerated, 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.
Additionally, certain of the intermediaries upon whom we rely to
distribute our investment products also sell
their own competing
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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 failures in support systems and customer service functions that could
lead to loss of customers, breaches and errors, or claims against us or our subsidiaries.
The ability to consistently and reliably obtain 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 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.
Other similar problems could occur from time to time due to human error.
If we are unable to successfully recover from a disaster or other business continuity problem, we
could suffer material financial loss, loss of human capital, regulatory actions, reputational harm
or legal liability.
If we were to experience a local or regional disaster or other business continuity problem, such as
a pandemic or other natural or man-made disaster, our continued success will depend, in part, on
the availability of our personnel, our office facilities and the proper functioning of our
computer, telecommunication and other related systems and operations. In such an event, our
operational size, the multiple locations from which we operate, and our existing back-up systems
would provide us with an important advantage. Nevertheless, we could still experience near-term
operational challenges with regard to particular areas of our operations, such as key executive
officers or technology personnel. Further, as we expand our operations in particular areas, 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
may 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.
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As a result, fluctuations in the
exchange rates to the U.S. dollar may affect our reported financial results from one period to the
next. We do not actively manage our exposure to such effects. Consequently, changes in exchange
rates to the U.S. dollar could have a material negative impact on our reported financial results.
The carrying value of goodwill 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 $6,848.0 million at December 31, 2007 (2006: $6,360.7 million). We may not realize the
value of such goodwill. We perform impairment reviews of the book values of goodwill on an annual
basis. 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 asset 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.
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, other than those involving fraud, against us or any of our officers or directors.
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. Additionally, under existing U.S. tax rules
earnings from non-U.S. subsidiaries of the company are not subject to U.S. 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. More recently, several
proposals have been introduced in the U.S. Congress that, if ultimately enacted, could limit treaty
benefits on certain payments made by our U.S. subsidiaries to non-U.S. affiliates. 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.
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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.
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 1360 Peachtree Street N.E., 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; 4350
South Monaco Street, Denver, Colorado 80237; and in Canada at 5140 Yonge Street, Toronto, Ontario
M2N 6X7. We have entered into a lease for a new principal office location at 1555 Peachtree Street,
NE, Atlanta, Georgia 30309, which we expect to occupy by the latter half of 2008. We lease office
space in 17 other countries.
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. On September 15, 2006, the court dismissed the ERISA lawsuit with
prejudice. The plaintiff has appealed that dismissal to the United States Court of Appeals for the
Fourth Circuit. Oral argument was held on December 5, 2007. The company and plaintiffs have
reached a settlement in principle of the shareholder class action and derivative lawsuits. The
proposed settlement, which is subject to court approval, calls for a payment by the company of $9.8
million, recorded in general and administrative costs in the 2007 Consolidated Statement of Income,
in exchange for dismissal with prejudice of all pending claims. In addition, under the terms of
the proposed settlement the company may incur certain costs in connection with providing notice of
the proposed settlement 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 company and/or company-affiliated parties have also been named as defendants in a lawsuit
alleging that one or more of the company’s funds inadequately employed fair value pricing, and
thereby made such funds more susceptible to market timing. The lawsuit is a purported class action
seeking unspecified monetary damages. It is now pending in the State court in Madison County,
Illinois after a series of removals to the United States District Court for the Southern District
of Illinois and remands back to the State Court. The Auditor of the State of West Virginia, in his
capacity as securities commissioner, has initiated administrative proceedings against many mutual
fund companies, including AIM, seeking disgorgement and other monetary relief based on allegations
similar to those underlying the market timing lawsuits. The action against AIM was initiated on
August 30, 2005. AIM’s time to respond to the Auditor’s proceeding has not yet elapsed. Although
there can be no assurances, based on information currently available, the company does not believe
it is probable that the ultimate outcome of any of these actions will have a material adverse
effect on the company’s consolidated financial position or results of operations.
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
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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
On July 18, 2007, our predecessor, INVESCO PLC, announced that it had lost its foreign private
issuer status in the United States, chiefly as a result of U.S. share ownership exceeding fifty
percent of issued share capital. As a result of this, INVESCO PLC immediately became subject to the
full requirements of two primary securities regulators, the SEC in the United States and the FSA in
the United Kingdom, and two different accounting standards, U.S. Generally Accepted Accounting
Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). Different
regulatory and accounting standards placed INVESCO PLC in an untenable position that may have
produced supervisory conflicts that may have impeded full compliance with the requirements of
either primary regulatory scheme. In response, INVESCO PLC proposed to its shareholders that the
company change its primary listing from the London Stock Exchange to the New York Stock Exchange
and redomicile from the U.K. to Bermuda by order of a scheme of arrangement.
On November 14, 2007, two meetings of INVESCO PLC shareholders were held — a court meeting and an
extraordinary general meeting. The court meeting was convened so that the appropriate U.K. court
would have the authority to sanction the scheme of arrangement if approved by INVESCO PLC
shareholders. The extraordinary general meeting was held to authorize the implementation of the
following inter-related proposals (Proposals):
| • | to move Invesco’s primary listing from the London Stock Exchange to the New York Stock Exchange; | |
| • | to reorganize pursuant to a court approved scheme of arrangement under the laws of England and Wales so that INVESCO PLC would become a wholly-owned subsidiary of Invesco Ltd. and the former holders of INVESCO PLC shares would become shareholders of Invesco Ltd.; | |
| • | to implement a reverse stock split, also known as a share capital consolidation, on a one-for-two basis immediately after the scheme of arrangement becoming effective; and | |
| • | to transfer Invesco’s regulated business in the European Union from INVESCO PLC to Invesco Ltd. promptly after the scheme of arrangement becoming effective. The transfer was accomplished by INVESCO PLC issuing bonus shares, cancelling such bonus shares (see resolutions 2 and 3 of the Extraordinary General Meeting below) and utilizing the distributable reserves created by such issuance and cancellation to transfer Invesco’s regulated business from INVESCO plc to Invesco Ltd. |
The shareholders of INVESCO PLC approved the scheme of arrangement at the court meeting and the
Proposals at the extraordinary general meeting. The results of voting at each of the court meeting
and the extraordinary meeting are set forth below.
Court Meeting
At the Court Meeting, (i) a majority in number of Invesco PLC shareholders who voted (either in
person or by proxy), and (ii) over 75 percent in value of all Invesco PLC shares held by such
shareholders, voted in favor of the resolution to approve the Scheme of Arrangement. The final
result was as follows:
| Number of Votes | % of Votes Cast | |||||||
In Favor
|
137,239,891 | 97.15 | ||||||
Against
|
4,020,247 | 2.85 | ||||||
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Extraordinary General Meeting
At the Extraordinary General Meeting, the special resolutions proposed in relation to the Scheme
were also passed by the requisite majorities. The final result was as follows:
| Number of Votes | % of Votes Cast | |||||||||
Resolution 1. To
approve the Scheme of
Arrangement |
In Favor | 140,253,078 | 97.05 | |||||||
| Against | 4,262,972 | 2.95 | ||||||||
| Abstaining | 1,910,835 | — | ||||||||
Resolution 2. To
approve the issue of bonus
shares to Invesco Ltd. |
In Favor | 141,286,241 | 97.40 | |||||||
| Against | 3,776,776 | 2.60 | ||||||||
| Abstaining | 1,363,870 | — | ||||||||
Resolution 3. To
approve the reduction
of capital relating to the New Shares |
In Favor | 141,346,030 | 97.44 | |||||||
| Against | 3,719,193 | 2.56 | ||||||||
| Abstaining | 1,361,663 | — | ||||||||
The scheme of arrangement became effective on December 4, 2007. As a result, INVESCO PLC became a
wholly-owned subsidiary of Invesco Ltd. and the shareholders of INVESCO PLC received common shares
of Invesco Ltd. in exchange for their ordinary shares of INVESCO PLC.
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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.”
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.
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 as reported by Bloomberg. 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.
| Invesco Ltd. | ||||||||||||||||
| Common Shares (or equivalent) | ||||||||||||||||
| Dividends | ||||||||||||||||
| High | Low | Declared | ||||||||||||||
Fourth Quarter |
2007 | $ | 32.25 | $ | 24.90 | — | ||||||||||
Third Quarter |
2007 | $ | 27.66 | $ | 21.09 | $ | 0.164 | |||||||||
Second Quarter |
2007 | $ | 26.52 | $ | 22.03 | — | ||||||||||
First Quarter |
2007 | $ | 26.05 | $ | 20.35 | $ | 0.208 | |||||||||
Fourth Quarter |
2006 | $ | 25.04 | $ | 21.10 | — | ||||||||||
Third Quarter |
2006 | $ | 22.09 | $ | 16.67 | $ | 0.154 | |||||||||
Second Quarter |
2006 | $ | 23.12 | $ | 16.62 | — | ||||||||||
First Quarter |
2006 | $ | 20.53 | $ | 15.46 | $ | 0.203 | |||||||||
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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, 2007 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.
The chart below illustrates the cumulative total shareholder return of our common shares (ordinary
shares prior to December 4, 2007) over the period since the company began its comprehensive
operating plan designed to strengthen the business, build renewed momentum and identify the most
promising opportunities for future growth.
Note: The 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, Waddell & Reed, and W.P. Stewart & Co.
Important Information Regarding Dividend Payments
An interim dividend of $0.164 per INVESCO PLC ADS was declared on August 2, 2007 and paid on
October 25, 2007. On February 1, 2008, the board of directors declared a final (semi-annual)
dividend for 2007 of $0.22 per common share. The dividend will be paid on April 7, 2008 to holders
of record on March 19, 2008.
If dividends are paid in the future, they will be declared and paid on a quarterly basis. The
declaration, payment and amount of any future dividends will be declared by our board of directors
and will depend upon, among other factors, our earnings, financial condition and capital
requirements at the time such declaration and payment are considered. The board has a policy of
managing dividends in a prudent fashion, with due consideration given to profit levels, overall
debt levels, and historical dividend payouts. See also Part II, Item 7. “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources -
Dividends,” for additional details regarding dividends.
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Holders
At January 31, 2008, we had 424.8 million common shares issued and outstanding, and there were
approximately 8,094 holders of record of our common shares.
Repurchases of Equity Securities
The following table shows share repurchase activity during the three months ended December 31,
2007:
| (d) | ||||||||||||||||
| Maximum Number | ||||||||||||||||
| (c) | (or Approximate | |||||||||||||||
| (a) | Total Number of | Dollar Value) of | ||||||||||||||
| Total Number | (b) | Shares Purchased | Shares that May | |||||||||||||
| of Shares | Average Price | as Part of Publicly | Yet Be Purchased | |||||||||||||
| Purchased | Paid Per Share | Announced Plans | Under the Plans | |||||||||||||
| Month(1) | (millions)(2)(3) | ($) | or Programs (millions)(4) | or Programs (millions) (4) | ||||||||||||
October 1 — 31, 2007
|
1.5 | 28.88 | 1.5 | 351.7 | ||||||||||||
November 1 — 30, 2007
|
10.4 | 26.03 | 4.0 | 246.7 | ||||||||||||
December 1 — 31, 2007
|
5.5 | 27.18 | 3.2 | 154.5 | ||||||||||||
| (1) | Purchases from October 1, 2007 through December 3, 2007 were made by INVESCO PLC and were comprised of ordinary shares trading on the London Stock Exchange. Purchases made after December 3, 2007 were comprised of Invesco Ltd. common shares trading on the New York Stock Exchange. Historical share prices were converted into U.S. dollars using the foreign exchange rate in effect on the date that the shares were purchased. | |
| (2) | From time to time, the trustees of the Invesco Global Stock Plan (GSP) and the Invesco Employee Share Option Trust purchased ordinary shares in the open market. These trusts were established to satisfy our obligations to issue ordinary shares under the GSP, our share option and other share-based schemes. During the fourth quarter 2007, the company contributed $216.6 million to these trusts, which in turn purchased 16.9 million ordinary shares (equivalent to 8.4 million common shares). All transactions during the quarter were executed before the redomicile and relisting of the company discussed above. At the 2008 annual meeting of shareholders, the company will be proposing for shareholder approval two new equity compensation plans. Provided that such plans are approved, the company does not intend to fund further purchases by these trusts. | |
| (3) | An aggregate of 0.3 million shares were repurchased in private transactions from current executive officers at the respective NYSE closing prices for the common shares on the preceding day. | |
| (4) | On June 13, 2007, our board of directors authorized a share repurchase program of up to $500.0 million of the company’s shares through June 30, 2008. A public announcement of the authorization was made on June 14, 2007. Of the total amount authorized, $154.5 million remained as of December 31, 2007. During the fourth quarter, purchases related to this program totaled $240.3 million, representing 8.7 million shares. |
20
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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, 2007. 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, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (Dollars in millions, except per share and other data) | ||||||||||||||||||||
Operating Data: |
||||||||||||||||||||
Operating revenues |
3,878.9 | 3,246.7 | 2,872.6 | 2,757.5 | 2,342.0 | |||||||||||||||
Net revenues * |
2,888.4 | 2,428.0 | 2,166.6 | 2,124.5 | 1,901.1 | |||||||||||||||
Operating income |
994.3 | 759.2 | 407.9 | 11.7 | 428.7 | |||||||||||||||
Net operating income * |
1,039.8 | 762.1 | 407.9 | 11.7 | 428.7 | |||||||||||||||
Operating margin |
25.6 | % | 23.4 | % | 14.2 | % | 0.42 | % | 18.3 | % | ||||||||||
Net operating margin * |
36.0 | % | 31.4 | % | 18.8 | % | 0.55 | % | 22.6 | % | ||||||||||
Net income/(loss) |
673.6 | 482.7 | 219.8 | (85.9 | ) | 248.6 | ||||||||||||||
Per Share Data: |
||||||||||||||||||||
Earnings/(loss) per share: |
||||||||||||||||||||
-basic |
1.69 | 1.22 | 0.55 | (0.21 | ) | 0.62 | ||||||||||||||
-diluted |
1.64 | 1.19 | 0.54 | (0.21 | ) | 0.61 | ||||||||||||||
Dividends per share |
0.372 | 0.357 | 0.330 | 0.323 | 0.375 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Total assets |
12,925.2 | 12,228.5 | 10,702.7 | 10,580.3 | 10,307.9 | |||||||||||||||
Long-term debt |
1,276.4 | 979.0 | 1,220.0 | 1,381.7 | 1,290.3 | |||||||||||||||
Shareholders’ equity |
6,590.6 | 6,164.0 | 5,529.8 | 5,519.6 | 5,717.3 | |||||||||||||||
Other Data: |
||||||||||||||||||||
AUM (in billions) |
$ | 500.1 | $ | 462.6 | $ | 386.3 | $ | 382.1 | $ | 370.6 | ||||||||||
Headcount |
5,475 | 5,574 | 5,798 | 6,693 | 6,747 | |||||||||||||||
| * | Net revenues are operating revenues less third-party distribution, service and advisory costs, plus our proportional share of revenues, net of third-party distribution costs, 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. |
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.
During the year ended December 31, 2007, we had net income of $673.6 million, compared to $482.7
million during 2006. The 39.5% increase in net income was driven by the following factors:
| • | An increase in operating revenues of $632.2 million (19.5%) driven mainly by growth in average assets under management (“AUM”) of $64.9 billion (15.3%), while at the same time limiting the increase in operating expenses to $397.1 million (16.0%). | ||
| • | Growth in equity in earnings of unconsolidated affiliates of $43.8 million, from $4.3 million in 2006 to $48.1 million in 2007. |
The factors above that contributed to the growth in operating income during the year ended December
31, 2007 were offset, in part, by the following:
| • | An increase of $67.1 million (6.3%) in employee compensation expense due predominantly to increases in base salaries, sales incentive bonuses and staff bonuses driven by performance against corporate objectives and $25.0 million in amortization of a |
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| component of the cost of the October 2006 acquisition of WL Ross & Co, which was accounted for as prepaid compensation (see Part II, Item 8, “Financial Statements and Supplementary Data — Note 2, Acquisitions and Dispositions” for additional details). | |||
| • | An increase in general and administrative expenses of $88.2 million (42.5%). The increase included growth in legal costs related to a $24.0 million insurance recovery in 2006 and to fund launches, a $12.8 million charge 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. | ||
| • | An increase in income tax expense of $102.7 million (40.3%), which was consistent with the increase in income before taxes. |
Invesco ended 2007 with a record year-end AUM of $500.1 billion, an 8.1% increase over 2006
resulting from a combination of market gains, positive flows into money market funds and foreign
currency translation partially offset by net outflows of $3.4 billion. Larger AUM increased operating revenues
to $3,878.9 million, a 19.5% increase over the previous year. Operating expenses increased 16.0% to
$2,884.6 million. The growth in operating revenues exceeded the increase in operating expenses,
producing record operating income of $994.3 million in 2007, an increase of 31.0% over operating
income of $759.2 million in 2006, and a significant expansion of operating margin and net operating
margin to 25.6% and 36.0% in 2007, respectively, from 23.4% and 31.4% in 2006, respectively.
Diluted earnings per share improved 37.8%, from $1.19 in 2006 to $1.64 in 2007. See “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.
Achieving strong investment performance continues to be a strategic focus for Invesco. Within our
retail products, the U.K. has continued to have strong relative performance versus its competitors
throughout 2007. The U.S., Continental Europe and Asia were ahead of peers over most relevant time
periods, while the relative performance in Canada tended to lag peers due to certain portfolios
being underweight in the resources sector while being relatively overweight in consumer
discretionary businesses. The strong Canadian dollar was an additional impediment for funds with
higher-than-average investment in foreign securities. Many of our institutional products were ahead
of benchmark over most relevant time periods with our fixed income and money market products once
again delivering consistent outstanding relative performance.
Industry Discussion
Global equity markets generally increased for the full year of 2007. However, both equity and
credit markets suffered sharp corrections at times during the fourth quarter, mainly due to
sub-prime related write-downs from the large investment banks and tighter liquidity in short-term
money markets. In North America during 2007, the Dow Jones Industrial Average, the S&P 500, the
Nasdaq Composite Index, and the S&P/TSX Composite (Canada) were up 8.9%, 5.5%, 10.7%. and 9.8%,
respectively; in Europe the FTSE 100 was up 7.8% and the FTSE World Europe was up 3.3%; and in Asia
the China SE Shanghai Composite was up 97.9% while the Nikkei 225 was down 10.2%. The Lehman
Brothers U.S. Aggregate Bond Index returned 7.0% for the year, bolstered by two interest rate cuts
by the Federal Reserve in the fourth quarter, and despite credit concerns that increased across the
broader economy. The markets continue to be volatile in early 2008. Our AUM at the end of 2007 were
$500.1 billion (2006: $462.6 billion). At January 31, 2008, AUM decreased by $24.5 billion (4.9%)
to $475.6 billion due primarily to this market volatility.
Assets Under Management
Average AUM for 2007 were $489.1 billion, compared to $424.2 billion in 2006. Net outflows for the
year ended December 31, 2007, were $3.4 billion, with inflows of $119.9 billion and outflows of
$123.3 billion. The primary driver of net outflows for 2007 were net outflows from the Stable Value
product of $16.2 billion. These outflows occurred following the departure of several members of our
Stable Value team to a competitor in April 2007. Our retail net inflows for 2007 were $6.0 billion,
compared to net inflows of $0.5 billion in 2006. Institutional net outflows were $9.2 billion in
2007 (including the Stable Value net outflows of $16.2 billion) versus net outflows of $1.2 billion
in 2006. Our Private Wealth Management (PWM) channel had net outflows of $0.2 billion in 2007
compared to net outflows of $0.7 billion in 2006.
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Changes in AUM were as follows:
| $ in billions | 2007 | 2006 | 2005 | |||||||||||||
January 1, |
$ | 462.6 | $ | 386.3 | $ | 382.1 | ||||||||||
Inflows |
119.9 | 85.8 | 66.3 | |||||||||||||
Outflows |
(123.3 | ) | (87.2 | ) | (82.5 | ) | ||||||||||
Net flows |
(3.4 | ) | (1.4 | ) | (16.2 | ) | ||||||||||
Net flows in money market funds and other |
10.1 | 12.8 | 0.5 | |||||||||||||
Market gains/reinvestment |
20.0 | 46.5 | 24.4 | |||||||||||||
Acquisitions/disposals |
— | 8.9 | — | |||||||||||||
Foreign currency |
10.8 | 9.5 | (4.5 | ) | ||||||||||||
December 31, |
$ | 500.1 | $ | 462.6 | $ | 386.3 | ||||||||||
Average long-term AUM |
$ | 424.2 | $ | 366.3 | $ | 331.7 | ||||||||||
Average institutional money market AUM |
64.9 | 57.9 | 45.9 | |||||||||||||
Average AUM |
$ | 489.1 | $ | 424.2 | $ | 377.6 | ||||||||||
Net revenue yield on AUM (annualized) (1) |
59.1 | bps | 56.9 | bps | 57.4 | bps | ||||||||||
Net revenue yield on AUM before performance fees (annualized) (1) |
57.7 | bps | 55.0 | bps | 56.5 | bps | ||||||||||
| (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 costs, 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. |
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 may materially affect our revenues from period to period.
The returns from global capital markets declined in 2007. The total returns (in local currency
terms) of the FTSE 100, the S&P 500 and the Dow Jones Industrial Average (DJIA) all declined in
2007 from 2006: FTSE 100 — from 14.8% to 7.8%, S&P 500 — from 15.8% to 5.5% and the DJIA — from
19.0% to 8.9%, respectively. The total returns of the NASDAQ increased slightly from 10.4% to
10.7%. 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, 2005 |
$ | 382.1 | $ | 186.0 | $ | 180.9 | $ | 15.2 | ||||||||
Inflows |
66.3 | 41.2 | 21.3 | 3.8 | ||||||||||||
Outflows |
(82.5 | ) | (53.3 | ) | (25.8 | ) | (3.4 | ) | ||||||||
Net flows |
(16.2 | ) | (12.1 | ) | (4.5 | ) | 0.4 | |||||||||
Net flows in money market funds and other |
0.5 | 1.9 | (1.6 | ) | 0.2 | |||||||||||
Market gains/reinvestment |
24.4 | 16.0 | 7.9 | 0.5 | ||||||||||||
Foreign currency |
(4.5 | ) | (1.6 | ) | (2.9 | ) | — | |||||||||
December 31, 2005 |
$ | 386.3 | $ | 190.2 | $ | 179.8 | $ | 16.3 | ||||||||
Inflows |
85.8 | 58.4 | 23.2 | 4.2 | ||||||||||||
Outflows |
(87.2 | ) | (57.9 | ) | (24.4 | ) | (4.9 | ) | ||||||||
Net flows |
(1.4 | ) | 0.5 | (1.2 | ) | (0.7 | ) | |||||||||
Net flows in money market funds and other |
12.8 | (0.3 | ) | 13.1 | — | |||||||||||
Market gains/reinvestment |
46.5 | 31.4 | 13.9 | 1.2 | ||||||||||||
Acquisitions/disposals |
8.9 | 6.3 | 2.6 | — | ||||||||||||
Foreign currency |
9.5 | 5.9 | 3.6 | — | ||||||||||||
December 31, 2006 |
$ | 462.6 | $ | 234.0 | $ | 211.8 | $ | 16.8 | ||||||||
Inflows |
119.9 | 86.6 | 28.2 | 5.1 | ||||||||||||
Outflows |
(123.3 | ) | (80.6 | ) | (37.4 | ) | (5.3 | ) | ||||||||
Net flows |
(3.4 | ) | 6.0 | (9.2 | ) | (0.2 | ) | |||||||||
Net flows in money market funds and other |
10.1 | (0.3 | ) | 10.4 | — | |||||||||||
Market gains/reinvestment |
20.0 | 11.3 | 7.8 | 0.9 | ||||||||||||
Foreign currency |
10.8 | 8.5 | 2.3 | — | ||||||||||||
December 31, 2007 |
$ | 500.1 | $ | 259.5 | $ | 223.1 | $ | 17.5 | ||||||||
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AUM by Asset Class
| Fixed | Money | Stable | ||||||||||||||||||||||||||
| $ in billions | Total | Equity (b) | Income | Balanced | Market | Value | Alternatives (c) | |||||||||||||||||||||
January 1, 2005 (a) |
$ | 382.1 | $ | 177.0 | $ | 27.5 | $ | 37.2 | $ | 51.8 | $ | 42.1 | $ | 46.5 | ||||||||||||||
Inflows |
66.3 | 30.0 | 14.5 | 7.8 | 3.3 | 4.2 | 6.5 | |||||||||||||||||||||
Outflows |
(82.5 | ) | (45.6 | ) | (10.4 | ) | (12.5 | ) | (3.5 | ) | (3.0 | ) | (7.5 | ) | ||||||||||||||
Net flows |
(16.2 | ) | (15.6 | ) | 4.1 | (4.7 | ) | (0.2 | ) | 1.2 | (1.0 | ) | ||||||||||||||||
Net flows in money market funds |
0.5 | — | — | — | 0.5 | — | — | |||||||||||||||||||||
Market gains/reinvestment |
24.4 | 17.9 | 1.2 | 1.7 | — | 2.4 | 1.2 | |||||||||||||||||||||
Foreign currency translation |
(4.5 | ) | (3.3 | ) | (0.8 | ) | 0.1 | — | — | (0.5 | ) | |||||||||||||||||
December 31, 2005 (a) |
$ | 386.3 | $ | 176.0 | $ | 32.0 | $ | 34.3 | $ | 52.1 | $ | 45.7 | $ | 46.2 | ||||||||||||||
Inflows |
85.8 | 42.5 | 24.3 | 7.4 | 1.9 | 4.3 | 5.4 | |||||||||||||||||||||
Outflows |
(87.2 | ) | (46.6 | ) | (17.9 | ) | (9.6 | ) | (3.1 | ) | (5.6 | ) | (4.4 | ) | ||||||||||||||
Net flows |
(1.4 | ) | (4.1 | ) | 6.4 | (2.2 | ) | (1.2 | ) | (1.3 | ) | 1.0 | ||||||||||||||||
Net flows in money market funds |
12.8 | — | — | — | 12.8 | — | — | |||||||||||||||||||||
Market gains/reinvestment |
46.5 | 32.6 | 2.8 | 5.7 | 0.5 | 2.5 | 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) |
$ | 462.6 | $ | 217.5 | $ | 42.8 | $ | 38.2 | $ | 64.3 | $ | 46.9 | $ | 52.9 | ||||||||||||||
Inflows |
119.9 | 74.6 | 10.7 | 10.1 | 1.5 | 4.0 | 19.0 | |||||||||||||||||||||
Outflows |
(123.3 | ) | (64.2 | ) | (14.9 | ) | (9.6 | ) | (2.1 | ) | (20.2 | ) | (12.3 | ) | ||||||||||||||
Net flows |
(3.4 | ) | 10.4 | (4.2 | ) | 0.5 | (0.6 | ) | (16.2 | ) | 6.7 | |||||||||||||||||
Net flows in money market funds |
10.1 | (0.6 | ) | 0.3 | (1.3 | ) | 10.6 | (0.1 | ) | 1.2 | ||||||||||||||||||
Market gains/reinvestment |
20.0 | 14.1 | 2.1 | 0.2 | — | 1.6 | 2.0 | |||||||||||||||||||||
Foreign currency translation |
10.8 | 6.5 | 1.2 | 2.8 | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||
December 31, 2007 |
$ | 500.1 | $ | 247.9 | $ | 42.2 | $ | 40.4 | $ | 74.4 | $ | 32.3 | $ | 62.9 | ||||||||||||||
| (a) | The beginning balances were adjusted to reflect certain asset reclassifications. | |
| (b) | Includes PowerShares’s ETF AUM ($14.5 billion at December 31, 2007), which are primarily invested in equity securities. | |
| (c) | Assets have been restated beginning December 31, 2006 to reflect an amended definition of the alternative asset class. The alternative asset class includes real estate, private equity and absolute return strategies. |
AUM by Client Domicile
| $ in billions | Total | U.S. | Canada | U.K. | Europe | Asia | ||||||||||||||||||
January 1, 2006 (a) |
$ | 386.3 | $ | 250.6 | $ | 38.8 | $ | 53.8 | $ | 25.0 | $ | 18.1 | ||||||||||||
Inflows |
85.8 | 30.0 | 4.5 | 14.5 | 23.6 | 13.2 | ||||||||||||||||||
Outflows |
(87.2 | ) | (42.2 | ) | (7.7 | ) | (10.2 | ) | (18.0 | ) | (9.1 | ) | ||||||||||||
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/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 |
$ | 462.6 | $ | 280.4 | $ | 43.3 | $ | 74.7 | $ | 38.1 | $ | 26.1 | ||||||||||||
Inflows |
119.9 | 48.2 | 6.7 | 22.0 | 21.4 | 21.6 | ||||||||||||||||||
Outflows |
(123.3 | ) | (64.7 | ) | (6.8 | ) | (10.0 | ) | (25.6 | ) | (16.2 | ) | ||||||||||||
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/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 |
$ | 500.1 | $ | 289.8 | $ | 46.7 | $ | 90.0 | $ | 37.2 | $ | 36.4 | ||||||||||||
| (a) | The beginning balances were adjusted to reflect certain asset reclassifications. The company began documenting and presenting AUM by client domicile in 2006. |
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Investment Performance
| Retail Results | % of AUM in Top Half of Peer Group | |||||||||||||||||||||||
| One-year | Three-year | Five-year | ||||||||||||||||||||||
| Dec-07 | Dec-06 | Dec-07 | Dec-06 | Dec-07 | Dec-06 | |||||||||||||||||||
U.S. (Lipper) |
45 | % | 62 | % | 64 | % | 74 | % | 67 | % | 67 | % | ||||||||||||
U.S. (Morningstar) |
49 | % | 60 | % | 65 | % | 51 | % | 50 | % | 77 | % | ||||||||||||
Canada |
4 | % | 80 | % | 15 | % | 54 | % | 14 | % | 81 | % | ||||||||||||
U.K. |
75 | % | 89 | % | 80 | % | 98 | % | 92 | % | 87 | % | ||||||||||||
Cont. Europe & Asia |
72 | % | 47 | % | 57 | % | 90 | % | 85 | % | 57 | % | ||||||||||||
| Institutional Results | % of AUM Ahead of Benchmark | |||||||||||||||||||||||
| One-year | Three-year | Five-year | ||||||||||||||||||||||
Equity |
12 | % | 53 | % | 56 | % | 59 | % | 56 | % | 100 | % | ||||||||||||
Fixed Income |
65 | % | 92 | % | 89 | % | 96 | % | 91 | % | 99 | % | ||||||||||||
Money Market |
98 | % | 97 | % | 98 | % | 97 | % | 98 | % | 97 | % | ||||||||||||
Alternative |
42 | % | 92 | % | 97 | % | 100 | % | 93 | % | 100 | % | ||||||||||||
| Note: | As of December 31, 2007. Certain funds and products were excluded from the analysis because of limited benchmark or peer group data. Had these been available, results may be 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. |
Within U.S. retail, over 64% of assets were in the top half of their respective peer groups on both
a three- and five-year Lipper basis while 45% of assets were in the top half on a one-year basis.
Morningstar peer groups result in 49%, 65%, and 50% of AUM being in the top half on a one-, three-
and five-year basis, respectively. During 2007, we evaluated, rationalized and merged five funds in
the U.S. retail product line and introduced six new target date allocation funds as part of our
efforts to ensure we are delivering the best possible investment solutions to our clients.
In our Canadian retail operations, certain portfolios lagged peers in 2007 due to being underweight
in the resources sectors while overweight in consumer discretionary businesses. The strong Canadian
dollar was an additional headwind for funds with higher-than-average investment in foreign
securities.
The U.K. retail operations have produced particularly strong results across all measured time
frames. In Continental Europe and Asia, 72%, 57% and 85% of AUM are performing in the top half of
their peer groups on a one-, three- and five-year basis, respectively.
In our institutional operations, over 98% of our money market assets were in the top-half of their
respective peer groups over one-, three-and five-year periods. At least 89% of alternatives and
fixed income AUM were ahead of benchmark over three and five year periods. The institutional equity
products experienced some relative weakness over a one year period but had 56% of AUM ahead of
benchmark over a three- and five-year period. Although measuring our investment performance against
benchmarks is an important criterion, our institutional operations are also evaluated against peer
groups and consultant perception.
Results of Operations
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 costs, 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:
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| $ | % | |||||||||||||||
| $ 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 costs |
(1,051.1 | ) | (826.8 | ) | (224.3 | ) | (27.1 | )% | ||||||||
Proportional share of
revenues, net of third-party
distribution costs, 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 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), investment trusts and institutional advisory contracts. Investment
management fees for products offered in the retail distribution channel are generally calculated as
a percentage of the daily average asset balances and therefore vary as the levels of AUM change
resulting from inflows, outflows and market movements. Investment management fees for products
offered in the institutional and private wealth management distribution channels are calculated in
accordance with the underlying investment management contracts and also vary in relation to the
level of client assets managed.
Investment management fees increased 22.8% in 2007 to $3,080.1 million (2006: $2,508.2 million) due
to increases in assets under management during the year. AUM at December 31, 2007 were $500.1
billion (2006: $462.6 billion).
Performance Fees
Performance fee revenues are only generated on certain management contracts when certain
performance hurdles are achieved. They are recorded in operating revenues as of the performance
measurement date, or on the date of achievement of the performance hurdle, when the outcome can be
estimated reliably. The performance measurement date is defined in each contract in which incentive
and performance fee revenue agreements are in effect.
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.
Service and Distribution Fees
Service fees are generated through fees charged to cover several types of expenses, including fund
accounting fees, SEC filings and other maintenance costs for mutual funds, unit trusts and ICVCs,
and administrative fees received from closed-ended funds. Service fees also include transfer agent
fees, which are fees charged to cover the expense of transferring shares of a mutual fund or units
of a unit trust into the investor’s name. Distribution fees include 12b-1 fees received 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. 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; instead fees for distribution
services are included within investment management fee revenues for these locations.
In 2007, service and distribution fees increased 10.9% to $593.1 million (2006: $534.9 million) due
to increased sales and assets under management.
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Other Revenues
Other revenues include fees derived primarily from transaction commissions received upon the
closing of new investments into certain of our retail funds and fees received upon the closing of
real estate investment transactions in our real estate group. Real estate transaction fees are
derived from commissions earned through the buying and selling of properties. The performance
measurement date in which revenues are recorded is the date on which the transaction is legally
closed. Other revenues also include the revenues of consolidated investment products.
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. See Item 8, “Financial Statements and
Supplementary Data — Note 18, Consolidated Investment Products.”
Third-Party Distribution, Service and Advisory Costs
Third-party distribution, service and advisory costs include renewal commissions paid to
independent financial advisors for as long as the clients’ assets are invested and are payments for
the servicing of the client accounts. Renewal commissions are calculated based upon a percentage of
the AUM value. Third-party distribution costs 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 contractual AUM-retention period. Also included
in third-party distribution, service and advisory costs are sub-transfer agency fees that are paid
to a third party for transferring shares of a mutual fund or units of a unit trust into the
investor’s name. Third-party distribution, service and advisory costs 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 costs 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 costs increased 27.1% in 2007 to $1,051.1 million
(2006: $826.8 million), driven by increased renewal commissions generated by increased assets under
management. Additionally, the trend towards platform and fund supermarket sales in the U.K. has
further contributed to the increase in these costs.
Proportional share of revenues, net of third-party distribution costs, from joint venture
investments
Management believes that the addition of our proportional share of revenues, net of third-party
distribution costs, 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
3, Investments,” is our 49.0% investment in INVESCO Great Wall Fund Management Company Limited. The
648.1% increase in our proportional share of revenues, net of third-party distribution costs, to
$60.6 million in 2007 (2006: $8.1 million), is driven by the significant growth in assets under
management in this joint venture.
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 costs
and general and administrative costs.
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 | % | |||||||||||
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The table below sets forth these cost categories as a percentage of total operating expenses,
operating revenues and net revenues, which we believe provides useful information as to the
relative significance of each type of cost.
| % of | % of | |||||||||||||||||||||||||||||||
| Total | % of | % of | Total | % of | % of | |||||||||||||||||||||||||||
| Operating | Operating | Net | Operating | Operating | Net | |||||||||||||||||||||||||||
| $ in millions | 2007 | Expenses | Revenues | Revenues* | 2006 | Expenses | Revenues | Revenues* | ||||||||||||||||||||||||
Employee compensation |
1,137.6 | 39.4 | % | 29.3 | % | 39.4 | % | 1,070.5 | 43.0 | % | 33.0 | % | 44.1 | % | ||||||||||||||||||
Third-party
distribution,
service and advisory |
1,051.1 | 36.4 | % | 27.1 | % | N/A | 826.8 | 33.2 | % | 25.5 | % | N/A | ||||||||||||||||||||
Marketing |
157.6 | 5.5 | % | 4.1 | % | 5.5 | % | 138.8 | 5.6 | % | 4.3 | % | 5.7 | % | ||||||||||||||||||
Property, office and
technology |
242.5 | 8.4 | % | 6.3 | % | 8.4 | % | 230.7 | 9.3 | % | 7.1 | % | 9.5 | % | ||||||||||||||||||
General and
administrative |
295.8 | 10.3 | % | 7.6 | % | 10.2 | % | 207.6 | 8.3 | % | 6.4 | % | 8.6 | % | ||||||||||||||||||
Restructuring charge |
— | — | — | — | 13.1 | 0.6 | % | 0.4 | % | 0.5 | % | |||||||||||||||||||||
Total operating
expenses |
2,884.6 | 100.0 | % | 74.4 | % | N/A | 2,487.5 | 100.0 | % | 76.7 | % | N/A | ||||||||||||||||||||
| * | Net revenues are operating revenues less third-party distribution, service and advisory costs, 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. |
Employee Compensation
Employee compensation continues to be the largest component of total operating expenses, accounting
for 39.4% of total operating expenses for 2007 (2006: 43.0%). Competitive compensation is critical
for the success of the company in attracting and retaining the highest caliber employees.
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 and Dispositions”).
Third-Party Distribution, Service and Advisory Costs
Third-party distribution, service and advisory costs 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. Public
relations costs, such as the marketing of the company’s products through conferences or other
sponsorships, are also included in marketing costs, as well as the cost of marketing-related
employee travel.
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. but were
relatively flat as a percentage of net revenues (5.5% of net revenues in 2007 vs. 5.7% of net
revenues in 2006).
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 computer, record-keeping and portfolio management services.
28
Table of Contents
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 for unused office space.
General and Administrative
General and administrative expenses include professional services costs, such as information
service subscriptions, consulting fees, professional insurance costs, audit, tax and legal fees,
non-marketing related employee travel expenditures, recruitment and training costs, and the
amortization of certain intangible assets.
General and administrative expenses increased by $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 fourth quarter of 2007, we recorded a $12.8
million charge 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. See Item 8,
“Financial Statements and Supplementary Data – Note 13, Restructuring Charge,” for additional
information.
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 costs, 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.
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. Also included in other gains 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 $13.6 million
in write-downs and losses on seed capital investments during 2007 (2006: $1.7 million). See Item
8, “Financial Statements and Supplementary Data — Note 15, 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.
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Table of Contents
Income Tax Provision
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 30.0%, the Canadian
statutory tax rate is 36.0% and the U.S. Federal statutory tax rate is 35.0%.
On July 19, 2007, legislation was enacted that will decrease the U.K.’s tax rate to 28.0% effective
April 1, 2008. On December 14, 2007, legislation was enacted to reduce the Canadian income tax
rate over the next 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.
Results of Operations for the Year Ended December 31, 2006 Compared with the Year Ended December
31, 2005
Operating Revenues and Net Revenues
Operating revenues increased by 13.0% in 2006 to $3,246.7 million (2005: $2,872.6 million). Net
revenues are operating revenues less third-party distribution, service and advisory costs, plus our
proportional share of revenues, net of third-party distribution costs, from joint venture
arrangements. Net revenues increased by 12.1% in 2006 to $2,428.0 million (2005: $2,166.6
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 | 2006 | 2005 | Change | Change | ||||||||||||
Investment management fees |
2,508.2 | 2,166.7 | 341.5 | 15.8 | % | |||||||||||
Performance fees |
82.1 | 33.5 | 48.6 | 145.1 | % | |||||||||||
Service and distribution fees |
534.9 | 538.2 | (3.3 | ) | (0.6 | )% | ||||||||||
Other |
121.5 | 134.2 | (12.7 | ) | (9.5 | )% | ||||||||||
Total operating revenues |
3,246.7 | 2,872.6 | 374.1 | 13.0 | % | |||||||||||
Third-party distribution,
service and advisory costs |
(826.8 | ) | (706.0 | ) | (120.8 | ) | (17.1 | )% | ||||||||
Proportional share of
revenues, net of third-party
distribution costs, from
joint venture investments |
8.1 | — | 8.1 | N/A | ||||||||||||
Net revenues |
2,428.0 | 2,166.6 | 261.4 | 12.1 | % | |||||||||||
Investment Management Fees
Investment management fees increased 15.8% in 2006 over 2005, due to market appreciation on fund
assets, investment performance and increased sales in Europe of the Dublin-based offshore fund
range and the U.K. onshore fund range.
Performance fees
Performance fees increased to $82.1 million in 2006 from $33.5 million in 2005, as several
institutional products exceeded performance hurdles. In the U.K., strong investment performance
contributed to the increase in performance fees.
30
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Service and Distribution Fees
In 2006, increases in service revenues in the U.K., in line with higher AUM, were offset by
decreases in distribution and transfer agent revenues. Distribution fees declined due to the full
year of 12b-1 rate reductions on certain U.S. retail products. The decline in transfer agent fee
revenues arose primarily in U.S. retail from a change in the sub-transfer agent methodology,
account fee rate changes, and fewer open accounts. Distribution and transfer agent fees in 2005
included revenues from AMVESCAP Retirement, which was sold in the second half of 2005, thereby
further contributing to the decline in revenues in 2006.
Other Revenues
In 2006, other revenues decreased 9.5% from 2005, primarily due to lower real estate transaction
commissions and reduced transaction commissions following the sale of our German banking license.
In 2005, other revenues included fees earned from our German banking business, such as interest
earned from balances available on demand from clients and credit institutions and commissions
earned from derivative instruments.
Third-Party Distribution, Service and Advisory Costs
Third-party distribution, service and advisory costs increased 17.1% to $826.8 million in 2006
(2005: $706.0 million) due primarily to increases in renewal commissions, partially offset by
declines in third-party distribution fees.
Proportional share of revenues, net of third-party distribution costs, from joint venture
investments
Management believes that the addition of our proportional share of revenues, net of third-party
distribution costs, 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 $8.1 million increase in our
proportional share of revenues, net of third-party distribution costs, in 2006 (2005: $nil), is
driven by the growth in assets under management in our Chinese joint venture, Invesco Great Wall
Fund Management Company Limited.
Operating Expenses
The main categories of operating expenses are as follows:
| $ | % | |||||||||||||||
| $ in millions | 2006 | 2005 | Change | Change | ||||||||||||
Employee compensation |
1,070.5 | 1,044.7 | 25.8 | 2.5 | % | |||||||||||
Third-party distribution, service and advisory |
826.8 | 706.0 | 120.8 | 17.1 | % | |||||||||||
Marketing |
138.8 | 139.5 | (0.7 | ) | (0.5 | )% | ||||||||||
Property, office and technology |
230.7 | 270.9 | (40.2 | ) | (14.8 | )% | ||||||||||
General and administrative |
207.6 | 224.4 | (16.8 | ) | (7.5 | )% | ||||||||||
Restructuring charge |
13.1 | 62.6 | (49.5 | ) | (79.1 | )% | ||||||||||
Goodwill impairment |
— | 16.6 | (16.6 | ) | (100.0 | )% | ||||||||||
Total operating expenses |
2,487.5 | 2,464.7 | 22.8 | 0.9 | % | |||||||||||
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The table below sets forth these cost categories as a percentage of total operating expenses,
operating revenues and net revenues, which we believe provides useful information as to the
relative significance of each type of cost.
| % of | % of | |||||||||||||||||||||||||||||||
| Total | % of | % of | Total | % of | % of | |||||||||||||||||||||||||||
| Operating | Operating | Net | Operating | Operating | Net | |||||||||||||||||||||||||||
| $ in millions | 2006 | Expenses | Revenues | Revenues* | 2005 | Expenses | Revenues | Revenues* | ||||||||||||||||||||||||
Employee compensation |
1,070.5 | 43.0 | % | 33.0 | % | 44.1 | % | 1,044.7 | 42.4 | % | 36.4 | % | 48.2 | % | ||||||||||||||||||
Third-party
distribution, service
and advisory |
826.8 | 33.2 | % | 25.5 | % | N/A | 706.0 | 28.6 | % | 24.6 | % | N/A | ||||||||||||||||||||
Marketing |
138.8 | 5.6 | % | 4.3 | % | 5.7 | % | 139.5 | 5.7 | % | 4.8 | % | 6.4 | % | ||||||||||||||||||
Property, office and
technology |
230.7 | 9.3 | % | 7.1 | % | 9.5 | % | 270.9 | 11.0 | % | 9.4 | % | 12.5 | % | ||||||||||||||||||
General and
administrative |
207.6 | 8.3 | % | 6.4 | % | 8.6 | % | 224.4 | 9.1 | % | 7.8 | % | 10.4 | % | ||||||||||||||||||
Restructuring charge |
13.1 | 0.6 | % | 0.4 | % | 0.5 | % | 62.6 | 2.5 | % | 2.2 | % | 2.9 | % | ||||||||||||||||||
Goodwill impairment |
— | — | — | — | 16.6 | 0.7 | % | 0.6 | % | 0.8 | % | |||||||||||||||||||||
Total operating expenses |
2,487.5 | 100.0 | % | 76.7 | % | N/A | 2,464.7 | 100.0 | % | 85.8 | % | N/A | ||||||||||||||||||||
| * | Net revenues are operating revenues less third-party distribution, service and advisory costs, 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. |
Employee Compensation
Employee compensation continues to be the largest component of total operating expenses, accounting
for 43.0% of total operating expenses for 2006: (2005: 42.4%). Employee compensation expenses
increased $25.8 million, or 2.5%. in 2006 from 2005, due primarily to $84.2 million in incremental
non-cash amortization of share-related compensation programs, including a charge of $44.7 million
($0.08 per share, net of tax) relating to the cumulative previously unrecognized cost to the
company of performance-based share options granted in 2003 that vested in February 2007. No expense
for these options was recorded in 2005 as it was not expected in 2005 that the awards would vest.
An increase of $15.5 million in staff bonuses and smaller increases in sales incentive bonuses also
contributed to the overall rise in compensation costs. The increases in share-based payment and
bonus costs were offset by decreases in base salary and pension costs in 2006, reflecting lower
headcount levels.
Third-Party Distribution, Service and Advisory Costs
Third-party distribution, service and advisory costs increased 17.1% to $826.8 million in 2006
(2005: $706.0 million) due primarily to increases in renewal commissions, partially offset by
declines in third-party distribution fees.
Marketing
Marketing expenses decreased 0.5% in 2006 from 2005 and were 5.7% of net revenues in 2006 compared
to 6.4% of net revenues in 2005.
Property, Office and Technology
Property, office and technology costs decreased 14.8% to $230.7 million in 2006 from $270.9 million
in 2005. Lower costs reflect a reduction in the amount of leased office space and lower
depreciation expense caused by a decline in overall hardware purchases.
General and Administrative
General and administrative costs decreased 7.5% in 2006 compared to 2005. In 2006 legal costs,
which included a $6.0 million settlement, were offset by a $24.0 million insurance recovery related
to market timing litigation in prior years. Professional insurance costs declined in 2006 due to
reduced premiums, and general recruitment costs declined in 2006. These declines were partially
offset by increases in external consulting costs related to various strategic initiatives.
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Restructuring Charge
In 2006 we recorded $13.1 million in remaining charges related to the operational and structural
restructuring efforts that began in 2005. In 2005, we incurred $62.6 million in restructuring
costs. See Item 8, “Financial Statements and Supplementary Data — Note 13, Restructuring Charge,”
for additional information.
Goodwill Impairment
In 2005, we recorded a $16.6 million non-cash goodwill impairment charge related to our Private
Wealth Management business. See Item 8, “Financial Statements and Supplementary Data — Note 8,
Goodwill” for additional details.
Operating Income, Net Operating Income, Operating Margin and Net Operating Margin
Operating income increased 86.1% to $759.2 million in 2006 from $407.9 million in 2005, driven by
the growth in operating revenues. Operating margin (operating income divided by operating
revenues) was 23.4% in 2006, up from 14.2% in 2005. Net operating income (operating income plus
our proportional share of the operating income from joint venture arrangements) increased 86.8% to
$762.1 million in 2006 from $407.9 million in 2005. 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 costs, plus our proportional share of the net revenues from our
joint venture arrangements. Net operating margin was 31.4% in 2006, up from 18.8% in 2005. See
“Schedule of Non-GAAP Information” below 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 61.1% to $26.9 million in 2006 from $16.7 million in 2005 as a result,
largely, of growth in our interest-earning cash balances during the year. Other gains and losses,
net increased $26.8 million in 2006 from $13.4 million in
2005, driven by the realization of gains from
our investments in collateralized debt obligations, fund seed money and foreign exchange gains.
In 2005, we recognized $32.6 million in gain upon the sale of the AMVESCAP Retirement business.
Income
Tax Provision
Our effective tax rate excluding minority interest for 2006 was 34.5%, as compared to 40.8% in
2005. In 2006 a larger percentage of our profits originated from the U.K. than in 2005, which
further decreased our effective tax rate. 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 2005, our effective tax rate excluding minority interest was higher due
primarily to the absence of lower taxed profits, Europe and Asia operating losses, nondeductible
restructuring expenses and nondeductible investment write-downs.
The inclusion of income from minority interests reduced our effective tax rate to 24.6% in 2006 and
31.4% in 2005.
Schedule of Non-GAAP Information
Net revenues, net operating income and net operating margin are non-GAAP financial measures.
Management believes that these measures are additional meaningful measures to evaluate our
operating performance. 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 costs 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 operating revenues, net of distribution costs, 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 provides useful information to investors, as management considers it appropriate to evaluate
the contribution of its growing 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 | 2007 | 2006 | 2005 | |||||||||
Operating revenues, GAAP basis |
3,878.9 | 3,246.7 | 2,872.6 | |||||||||
Third-party distribution,
service and advisory costs |
(1,051.1 | ) | (826.8 | ) | (706.0 | ) | ||||||
Proportional share of
revenues, net of third-party
distribution costs, from
joint venture investments |
60.6 | 8.1 | — | |||||||||
Net revenues |
2,888.4 | 2,428.0 | 2,166.6 | |||||||||
Operating income, GAAP basis |
994.3 | 759.2 | 407.9 | |||||||||
Proportional share of
operating income from joint
venture investments |
45.5 | 2.9 | — | |||||||||
Net operating income |
1,039.8 | 762.1 | 407.9 | |||||||||
Operating margin* |
25.6 | % | 23.4 | % | 14.2 | % | ||||||
Net operating margin** |
36.0 | % | 31.4 | % | 18.8 | % | ||||||
| * | 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 | 2007 | 2006 | Change | Change | ||||||||||||
Cash and cash equivalents |
915.8 | 778.9 | 136.9 | 17.6 | % | |||||||||||
Unsettled fund receivables |
605.5 | 561.6 | 43.9 | 7.8 | % | |||||||||||
Current investments |
177.2 | 187.8 | (10.6 | ) | (5.6 | )% | ||||||||||
Assets held for policyholders |
1,898.0 | 1,574.9 | 323.1 | 20.5 | % | |||||||||||
Non-current investments |
122.3 | 79.9 | 42.4 | 53.1 | % | |||||||||||
Investments of consolidated investment products |
1,205.6 | 1,482.0 | (276.4 | ) | (18.7 | )% | ||||||||||
Goodwill |
6,848.0 | 6,360.7 | 487.3 | 7.7 | % | |||||||||||
Policyholder payables |
1,898.0 | 1,574.9 | 323.1 | 20.5 | % | |||||||||||
Current portion of long-term debt |
— | 300.0 | (300.0 | ) | (100 | %) | ||||||||||
Long-term debt |
1,276.4 | 979.0 | 297.4 | 30.4 | % | |||||||||||
Minority interests in equity of consolidated
affiliates |
1,121.2 | 1,504.6 | (383.4 | ) | (25.5 | )% | ||||||||||
Shareholders’ equity |
6,590.6 | 6,164.0 | 426.6 | 6.9 | % | |||||||||||
Cash and Cash Equivalents
Cash and cash equivalents increased from December 31, 2006 to December 31, 2007 primarily because
cash provided by our operating activities significantly exceeded cash used for operations and the
purchase of our shares in the market under our share repurchase program. Details regarding changes
in cash balances are provided within our Consolidated Statements of Cash Flows.
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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. 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, 2007,
the European sub-group had cash and cash equivalent balances of $758.1 million, much of which is
used to satisfy these regulatory requirements. We are in compliance with all regulatory minimum
net capital requirements.
Unsettled Fund Receivables
Unsettled fund receivables increased from $561.6 million at December 31, 2006 to $605.5 million at
December 31, 2007 due to the timing of fund and investor settlements. 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, 2007, we had $299.5 million in investments, of which $122.3 million were
non-current investments and $177.2 million were current investments. Included in current
investments are $60.9 million of seed money in affiliated funds and $58.8 million of investments
related to assets held for deferred compensation plans. Included in non-current investments are
$74.7 million in equity method investments in our Chinese joint venture and in certain of the
company’s private equity, real estate and other investment. Additionally, non-current investments
include $39.0 million of investments in collateralized loan and debt obligation structures managed
by us. Our investments in collateralized debt 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-type company that was
established to facilitate retirement savings plans in the U.K. The entity holds assets that are
managed for its clients on its balance sheet with an equal and offsetting liability. The increasing
balance in these accounts was the result of success in growing this product offering.
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 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.
As of December 31, 2007, investments of consolidated investment products totaled $1,205.6 million
(2006: $1,482.0 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 2006 reflects the deconsolidation of certain previously-consolidated VIEs
resulting from the company’s determination that it was no longer was the primary beneficiary of
these entities.
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Goodwill
Goodwill increased from $6,360.7 million at December 31, 2006 to $6,848.0 million at December 31,
2007 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 2007,
mainly against that of the Canadian dollar, resulted in a $332.4 million increase in goodwill, upon
consolidation, with a corresponding increase to equity. Additional goodwill was also recorded in
2007 related to the earn-out on the Power Shares acquisition ($129.6 million), the earn-out on the
Stein Roe acquisition ($11.3 million) and other
acquisition-related adjustments ($17.0
million).
Current Portion of Long-term Debt
This balance decreased from December 31, 2006 as a result of the maturity and repayment, on January
15, 2007, of $300.0 million of 5.9% senior notes.
Long-term Debt
The
increase in this balance was due to the issuance of $300.0 million of 5.625% senior notes on
April 17, 2007.
Minority interests in equity of consolidated entities
Minority interests in equity of consolidated entities decreased from $1,504.6 million at December
31, 2006 to $1,121.2 million at December 31, 2007 primarily due to 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 investment in the investment products is very small.
Total Equity
Shareholders’ equity increased from $6,164.0 million at December 31, 2006 to $6,590.6 million at
December 31, 2007, an increase of $426.6 million. The increase included net income of $673.6
million, share issuance on employee option exercises of $137.4 million, and foreign currency
translation gains of $351.1 million with respect to subsidiaries whose functional currency differs
from that of the parent. These increases were partially offset by $352.9 million in share
repurchases under a plan initiated in June 2007 and share purchases of $330.8 million to be held by
employee trusts in association with share-based compensation arrangements.
Liquidity and Capital Resources
The existing capital structure of the company, together with the cash flow 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 flow 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.
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. 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, 2007,
the European sub-group had cash and cash equivalent balances of $758.1 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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Cash Flows
The ability to consistently generate cash from operations in excess of capital expenditures and
dividend payments is one of our company’s fundamental financial strengths. Operations continue to
be financed from current earnings and borrowings. Our principal uses of cash, other than for
operating expenses, include dividend payments, capital expenditures, acquisitions, purchase of our
shares in the open market and investments in certain new investment products.
Cash flows of consolidated investment products (discussed in Item 8, “Financial Statements and
Supplementary Data — Note 18, Consolidated Investment Products) are reflected in Invesco’s cash
provided by operating activities, provided by/(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, 2007, 2006 and 2005 are summarized as follows:
| $ in millions | 2007 | 2006 | 2005 | |||||||||
Cash flow from: |
||||||||||||
Operating activities |
913.7 | 455.9 | 306.9 | |||||||||
Investing activities |
(46.4 | ) | (258.7 | ) | 112.0 | |||||||
Financing activities |
(740.8 | ) | (163.1 | ) | (251.0 | ) | ||||||
Increase/(decrease) in cash and cash equivalents |
126.5 | 34.1 | 167.9 | |||||||||
Cash and cash equivalents, beginning of year |
778.9 | 709.5 | 546.9 | |||||||||
Foreign exchange |
10.4 | 35.3 | (5.3 | ) | ||||||||
Cash and cash equivalents, end of year* |
915.8 | 778.9 | 709.5 | |||||||||
| * | Included in cash and cash equivalents are $3.3 million of client cash (2006: $2.9 million; 2005: $227.1 million). The decrease in client cash was due primarily to one depository account sponsored by our former banking subsidiary being replaced by an unaffiliated investment fund. |
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 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.
Cash
provided by operating activities in 2006 was $455.9 million, an
increase of $149.0 million
48.6% over 2005. The increase was reduced by the decline in customer and counterparty payables, a
component of current liabilities, resulting from one depository account sponsored by our former
banking subsidiary being replaced by an unaffiliated investment fund.
Investing Activities
In our
institutional operations, we periodically invest through a relatively
small portion of the unrated,
junior subordinated position in our collateralized loan and debt obligation structures 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 $10.1 million (2006: $13.6 million; 2005: $13.4
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 2007, we invested $21.6 million in new funds and
recaptured $4.8 million from redemptions of prior investments.
During the fiscal years ended December 31, 2007, 2006 and 2005, our capital expenditures were $36.7
million, $37.9 million and $38.8 million, respectively. These 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
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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, 2007, 2006 and 2005, our capital divestitures were not
significant relative to our total fixed assets.
Net cash outflows of $56.0 million in 2007 and $200.1 million in 2006 related primarily to the
acquisitions of PowerShares and WL Ross & Co. In 2005, we received $53.6 million in cash from
business dispositions, primarily related to the sale of the retirement business.
Financing Activities
Net cash
used in financing activities increased from $163.1 million in
2006 to $740.8 million in
2007, primarily due to the purchase of shares held by employee trusts (held in treasury) totaling
$363.1 million and the purchase of treasury shares totaling $352.9 million under our share
repurchase program.
Net cash
used in financing activities decreased from $251.0 million in 2005 to $163.1 million in
2006 as the increase in net inflows from share issuances and borrowings offset the increase in
dividends paid and purchase of shares to meet the requirements of share-based compensation awards.
A summary of shares purchased by month for the fourth quarter of 2007 is
presented in Part II, Item 5, “Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities”.
Dividends
An interim dividend of $0.164 per INVESCO PLC American Depositary share was declared on August 2,
2007 and paid on October 25, 2007. On February 1, 2008, the board of directors declared a final
(semi-annual) 2007 dividend of $0.22 per Invesco Ltd. common share, payable on April 7, 2008, to
shareholders of record as of March 19, 2008. Shareholders who have a United Kingdom address and
are directly registered with our transfer agent, The Bank of New York Mellon, will receive the
dividend in Sterling.
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 | |||||||||
2003 |
16.63 | 23.31 | 39.94 | |||||||||
2004 |
9.02 | 19.00 | 28.02 | |||||||||
2005 |
14.02 | 20.33 | 34.35 | |||||||||
2006 |
15.40 | 20.80 | 36.20 | |||||||||
2007 |
16.40 | 22.00 | (1) | 38.40 | ||||||||
| (1) | The final dividend for 2007 was declared on February 1, 2008. The scheduled payment date is April 7, 2008 to shareholders of record on March 19, 2008. |
If
dividends will be paid in the future, they will be declared in U.S.
dollars on a quarterly basis. 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 of directors has a
policy of managing dividends in a prudent fashion, with due consideration given to income levels,
overall cash and debt levels, and historical dividend payouts.
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Debt
Our total indebtedness at December 31, 2007 is $1,276.4 million and is comprised of the following:
| $ in millions | ||||
Unsecured Senior Notes: |
||||
5.9% — due January 15, 2007 |
— | |||
4.5% — due December 15, 2009 |
300.0 | |||
5.625% — due April 17, 2012 |
300.0 | |||
5.375% — due February 27, 2013 |
350.0 | |||
5.375% — due December 15, 2014 |
200.0 | |||
Floating rate credit facility expiring March 31, 2010 |
126.4 | |||
Total long-term debt |
1,276.4 | |||
Less: current maturities of long-term debt |
— | |||
Long-term debt |
1,276.4 | |||
Debt 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, 2007, we were in compliance with our debt covenants. The
coverage ratios, as defined in our credit facility, were as follows during 2007, 2006 and 2005:
| 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 | ||||||||||||
| 2005 | ||||||||||||||||
| Q1 | Q2 | Q3 | Q4 | |||||||||||||
Leverage Ratio |
1.95 | 1.80 | 1.73 | 1.82 | ||||||||||||
Interest Coverage Ratio |
8.00 | 7.58 | 7.53 | 8.13 | ||||||||||||
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.
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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. 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 with 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, 2007, our maximum exposure to credit risk related to our cash and cash equivalent balances is $915.8 million. | ||
| • | Certain trust subsidiaries of the company accept deposits and place deposits with other institutions on behalf of our customers. As of December 31, 2007, our maximum exposure to credit risk related to these transactions is $3.3 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
$1,276.4 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 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 investments that we manage
may be negatively impacted when inflationary expectations result in a rising interest rate
environment. Declines in the values of these investments could lead to reduced revenues as
management fees are generally calculated based upon the size of assets under management.
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
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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 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 18, Consolidated Investment Products” and “Note 1, Accounting Policies” for additional
information on consolidated and unconsolidated investment products).
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. The private equity funds 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, 2007, our undrawn
capital commitments were $60.2 million (2006: $19.2 million).
The volatility and valuation dislocations that occurred during 2007 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. The fair value of these agreements at December 31, 2007
was estimated to be $4.5 million, which was recorded in other current liabilities on the
Consolidated Balance Sheet at that date. As of the date of this Annual Report on Form 10-K, the
maximum support that could be provided under these agreements is $33.0 million. No payments have
been made under either agreement nor has Invesco realized any losses from the support agreements
through the date of this Report. These trusts were not consolidated because the company was not
deemed to be the primary beneficiary 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, 2007:
| Within | 1-3 | 3-5 | More Than | |||||||||||||||||
| $ in millions | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
Total debt |
1,276.4 | — | 426.4 | 300.0 | 550.0 | |||||||||||||||
Estimated interest payments on total debt (1) |
290.1 | 59.9 | 106.4 | 92.9 | 30.9 | |||||||||||||||
Finance leases |
0.4 | 0.1 | 0.1 | 0.2 | — | |||||||||||||||
Operating leases (2) |
588.0 | 64.5 | 121.0 | 99.8 | 302.7 | |||||||||||||||
Defined benefit pension and post-retirement medical
obligations(3) |
428.7 | 10.9 | 21.9 | 27.2 | 368.7 | |||||||||||||||
Acquisition liabilities (4) |
129.6 | 129.6 | — | — | — | |||||||||||||||
Total |
2,713.2 | 265.0 | 675.8 | 520.1 | 1,252.3 | |||||||||||||||
| (1) | Total debt includes $1,150.0 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, 2007, 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 $126.4 million and the interest rate that existed at December 31, 2007 will remain until credit facility maturity on March 31, 2010. | |
| (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 20, Operating Leases” for sublease information. | |
| (3) | See Part II, Item 8, “Financial Statements and Supplementary Data — Note 21, Retirement Benefit Plans” for detailed benefit pension and post-retirement plans. | |
| (4) | Acquisition liabilities include deferred consideration payable in respect of the PowerShares and HVB acquisitions. Other contingent payments related to acquisitions at December 31, 2007 include $500.0 million related to the PowerShares acquisition and $220.0 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, 2007, the company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $69.0 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 16 – Taxation” for a discussion on income taxes. |
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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, contained elsewhere within this Report. 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 and
deferred share incentive awards 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 incentive
awards are granted in the form of restricted shares or deferred share awards. Dividends accrued
directly to the employee holder of restricted shares, and cash payments in lieu of dividends are
made to employee holders of certain deferred share awards. There is therefore no discount to the
fair value of these share incentive 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 restricted and deferred share awards 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 deferred share incentive awards 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. Assumptions used in association with option awards granted during 2005 are presented in the
table below (no option awards were granted in 2006 or 2007).
| 2005 | ||||
Weighted average share price * |
876p | |||
Weighted average exercise price * |
878p | |||
Expected volatility |
52.0 | % | ||
Expected term |
7.8 years | |||
Risk free rate |
4.2 | % | ||
Expected dividends |
2.2 | % | ||
| * | Share option prices are in pounds sterling, the currency of the awards. Upon exercise, the exercise price will be converted to U. S. dollars using the rate prevailing on the exercise date. |
Deferred share awards 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 2007. The assumptions
used in the Black-Scholes model for these awards granted in 2006 and 2005 are as follows:
| 2006 | 2005 | |||||||
Weighted average share price * |
1034p | 666p | ||||||
Expected term |
5.3 years | 4.0 years | ||||||
Expected dividend yield |
1.84 | % | 2.25 | % | ||||
| * | Share option prices are in pounds sterling, the currency of the awards. Upon exercise, the exercise price will be converted to U. S. dollars using the rate prevailing on the exercise date. |
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The table below is a summary, as of December 31, 2007, of equity-settled stock-based compensation
awards outstanding under the company’s non-retirement stock-based compensation programs. Details
relating to each program are included in Part II, Item 8, “Financial Statements and Supplementary Data —
Note 19, Share-Based Compensation.”
| Awards Outstanding | Vesting During the Years Ended December 31, | |||||||||||||||||||||||||||||||
| millions of shares | Total | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||||||||||
Time-vested |
15.2 | 4.2 | 6.0 | 1.6 | 2.7 | 0.3 | 0.2 | 0.2 | ||||||||||||||||||||||||
Performance-vested |
6.2 | 1.5 | 1.1 | 2.6 | 1.0 | — | — | — | ||||||||||||||||||||||||
Share Incentive Awards * |
21.4 | 5.7 | 7.1 | 4.2 | 3.7 | 0.3 | 0.2 | 0.2 | ||||||||||||||||||||||||
| * | 16.1 million share incentive awards were included in the diluted earnings per share calculation at December 31, 2007. See Item 8, “Financial Statements and Supplementary Data – Note 17, Earnings Per Share.” |
| Awards | Fully Vested at | |||||||||||||||||||
| millions of shares | Outstanding | December 31, | Vesting During the Years Ended December 31, | |||||||||||||||||
| Share Option Awards: | Total | 2007 | 2008 | 2009 | 2010 | |||||||||||||||
Time vested: |
||||||||||||||||||||
Exercise Price * |
||||||||||||||||||||
50p - 400p |
1.0 | 0.4 | 0.3 | 0.3 | — | |||||||||||||||
401p - 800p |
0.1 | 0.1 | — | — | — | |||||||||||||||
801p - 1000p |
2.3 | 2.3 | — | — | — | |||||||||||||||
1001p - 1200p |
1.4 | 1.4 | — | — | — | |||||||||||||||
1201p - 1400p |
3.8 | 3.8 | — | — | — | |||||||||||||||
1401p - 1600p |
— | — | — | — | — | |||||||||||||||
1601p - 2000p |
5.3 | 5.3 | — | — | — | |||||||||||||||
2001p - 2400p |
4.9 | 4.9 | — | — | — | |||||||||||||||
2401p -3400p |
0.4 | 0.4 | — | — | — | |||||||||||||||
Subtotal time-vested |
19.2 | 18.6 | 0.3 | 0.3 | — | |||||||||||||||
Performance-vested: |
||||||||||||||||||||
Exercise price * |
||||||||||||||||||||
601p - 800p |
7.4 | 2.1 | 5.2 | 0.1 | — | |||||||||||||||
801p - 1000p |
3.1 | 0.6 | 0.1 | 2.4 | — | |||||||||||||||
Subtotal performance-vested |
10.5 | 2.7 | 5.3 | 2.5 | — | |||||||||||||||
Total Share Option Awards ** |
29.7 | 21.3 | 5.6 | 2.8 | — | |||||||||||||||
Sharesave Plan Shares |
1.0 | 0.1 | 0.3 | — | 0.6 | |||||||||||||||
| * | Share options prices are in pounds sterling, the currency of the awards. Upon exercise, the exercise price will be converted to U. S. dollars using the rate prevailing on the exercise date. | |
| ** | 6.0 million share option awards were included in the diluted earnings per share calculation at December 31, 2007. See Part II, Item 8, “Financial Statements and Supplementary Data – Note 17, Earnings Per Share.” |
Other Compensation Arrangements. We offer certain performance-based cash awards to many of our
employees that are based upon purely discretionary determinations or, alternatively, certain
formulaic compensation arrangements. The formulaic arrangements require that we monitor on an
ongoing basis whether or not pre-established metrics are expected to be met in order to properly
record the related expense amounts. Because many of the metrics relate to matters that are highly
uncertain or susceptible to change, our estimates may not accurately reflect the ultimate outcomes
that will be achieved, and associated expense that should be recognized, with respect to these
compensation arrangements.
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Taxation. After compensation and related costs, our provision for income taxes on our earnings is
our largest annual expense. We operate in several countries and several states through our various
subsidiaries, and must allocate our income, expenses, and earnings under the various laws and
regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes
represents our total estimate of the liability that we have incurred for doing business each year
in all of our locations. Annually we file tax returns that represent our filing positions within
each jurisdiction and settle our return liabilities. Each jurisdiction has the right to audit those
returns and may take different positions with respect to income and expense allocations and taxable
earnings determinations. Because the determinations of our annual provisions are subject to
judgments and estimates, it is possible that actual results will vary from those recognized in our
financial statements. As a result, it is likely that additions to, or reductions of, income tax
expense will occur each year for prior reporting periods as actual tax returns and tax audits are
settled.
Income taxes are provided for in accordance with FASB Statement No. 109, “Accounting for Income
Taxes.” Deferred tax assets and liabilities are recorded for temporary differences between the tax
basis of assets and liabilities and the reported amounts in the Consolidated Financial Statements,
using the statutory tax rates in effect for the year in which the differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the results of operations in the period that includes the enactment date. A valuation allowance
is recorded to reduce the carrying amounts of deferred tax assets to the amount that is more likely
than not to be realized.
As a multinational corporation, the company operates in various locations outside of Bermuda and
generates substantially all of its earnings from our subsidiaries. Deferred tax liabilities are
recognized for taxes that would be payable on the unremitted earnings of the company’s
subsidiaries, consolidated investment products, and joint ventures, except where it is our
intention to continue to indefinitely reinvest the undistributed earnings. Our Canadian and U.S.
subsidiaries continue to be directly owned by Invesco Holding Company
Limited (formerly INVESCO PLC, our predecessor company), which is
directly owned by Invesco Ltd. Our Canadian unremitted earnings, for which we are indefinitely
reinvested, are estimated to be $880 million at December 31, 2007 compared with $600 million at
December 31, 2006. If distributed as a dividend, Canadian withholding tax of 5.0% would be due.
Deferred tax liabilities in the amount of $14.1million (2006: $7.0 million) for additional U.K. tax
have been recognized for unremitted earnings of certain subsidiaries that have regularly remitted
earnings and are expected to continue to remit earnings in the foreseeable future. Dividends from
our investment in the U.S. should not give rise to additional tax as there is no withholding tax
between the U.S. and U.K., the underlying U.S. tax rate is greater than the U.K. tax rate, and we
have U.K. tax credits available. There are no additional taxes on dividends from the U.K. to
Bermuda.
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Net deferred tax assets have been recognized in the U.S., U.K., and Canada based on management’s
belief that operating income and capital gains will, more likely than not, be sufficient to realize
the benefits of these assets over time. In the event that actual results differ from these
estimates, or if our historical trends of positive operating income in any of these locations
changes, we may be required to record a valuation allowance on deferred tax assets, which may have
a significant effect on our financial condition and results of operations.
Invesco adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No.
48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”,
(“FIN 48”) on January 1, 2007. This interpretation prescribes a specific recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The two-step process prescribed by FIN 48 for
evaluating a tax position involves first determining whether it is more likely than not that a tax
position will be sustained upon examination by the appropriate taxing authorities. If it is, the
second step then requires a company to measure this tax position benefit as the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As a
result of the implementation of FIN 48, Invesco increased its net tax contingencies liability by
$17.6 million. The increase in the liability and the related change in deferred taxes were
accounted for as a decrease to retained earnings at January 1, 2007. Invesco classifies any
interest and penalties on tax liabilities (or any overpayments) on the Consolidated Statements of
Income as components of income tax expense.
Goodwill. Goodwill represents the excess of the cost of an acquired entity over the net of the
amounts assigned to assets acquired and liabilities assumed and is recorded in the functional
currency of the acquired entity. Goodwill is tested for impairment at the single reporting unit
level on an annual basis, or more often if events or circumstances indicate that impairment may
exist. If the carrying amount of goodwill at the reporting unit exceeds its implied fair value,
then a charge for the excess would be recorded as an impairment loss. The principal method of
determining fair value of the reporting unit is an income approach where future cash flows are
discounted to arrive at a single present value amount. The discount rate used is derived based on
the time value of money and the risk profile of the stream of future cash flows. Recent results
and projections based on expectations regarding revenues, expenses, capital expenditures and
acquisition earn out payments produce a present value for the reporting unit. While the company
believes all assumptions utilized in our assessment are reasonable and appropriate, changes in
these estimates could produce different fair value amounts and therefore different goodwill
impairment assessments. The most sensitive of these assumptions are the estimated cash flows and
the use of our weighted average cost of capital as the discount rate to determine present value.
The company also utilizes a market approach to provide a secondary fair value of the reporting unit
by using comparable company and transaction multiples to estimate values for our single reporting
unit. Discretion and judgment is required in determining whether the transaction data available
represents information for companies of comparable nature, scope and size.
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We have determined that we have one reporting unit as defined under FASB Statement No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” Our goodwill impairment
testing conducted during 2007 and 2006 indicated that there was no impairment at the reporting unit
level. With respect to the 2007 impairment test, neither a 5.0% increase in the discount rate, nor
the impact on revenues of a 5.0% reduction in our assumed AUM would have changed the conclusion.
The company cannot predict the occurrence of future events that might adversely affect the reported
value of goodwill that totaled $6,848.0 million and $6,360.7 million at December 31, 2007 and
December 31, 2006, respectively. Such events include, but are not limited to, strategic decisions
made in response to economic and competitive conditions, the impact of the economic environment on
the company’s assets under management, or a material negative change in assets under management and
related management fees.
Investments. Most of our investments are carried at fair value on our balance sheet with the
periodic mark-to-market recorded either in accumulated other comprehensive income in the case of
available-for-sale investments or directly to earnings in the case of trading assets. Fair value is
generally determined by reference to an active trading market, using quoted close or bid prices as
of each reporting period end. When a readily ascertainable market value does not exist for an
investment (such as our collateralized loan and debt obligations, discussed below) the fair value is
calculated based on the expected cash flows of its underlying net asset base, taking into account
applicable discount rates and other factors. Since assumptions are made in determining the fair
values of investments for which active markets do not exist, the actual value that may be realized
upon the sale of these investments could differ from the current carrying values. Fair value
calculations are also required in association with our quarterly impairment testing of investments.
The accuracy of our other than temporary impairment assessments are dependent upon the extent to
which we are able to accurately determine fair values.
The company provides investment management services to a number of collateralized loan and debt
obligation entities (CLO/CDOs). These entities are investment vehicles created for the sole
purpose of issuing collateralized loan and debt instruments that offer investors the opportunity
for returns that vary with the risk level of their investment. The notes issued by the CLO/CDOs are
backed by diversified portfolios consisting primarily of loans or structured debt. The company
earns investment management fees, including subordinated management fees in some cases, for
managing the collateral for the CLO/CDO entities, as well as incentive fees that are contingent on
certain performance conditions. The company has invested in certain of the entities, generally
taking a relatively small portion of the unrated, junior subordinated position. At December 31, 2007, the
company held $39.0 million of investment in these CLO/CDOs, which represents its maximum risk of
loss. Our interests in collateralized loan or debt entities are generally subordinated to other
interests in the entity and entitles the investor to receive the residual cash flows, if any, from
the entity. As a result, the company’s investment is sensitive to changes in the credit quality of
the issuers of the collateral securities, including changes in the forecasted default rates and any
declines in anticipated recovery rates. Investors in CLO/CDOs have no recourse against the company
for any losses sustained in the CLO/CDO structure.
Management has concluded that the company is not the primary beneficiary of any of the CLO/CDO
entities and it has recorded its investments at fair value primarily using discounted cash flow
analyses. The excess of actual and anticipated future cash flows over the initial investment at the
date of purchase is recognized as interest income over the life of the investment using the
effective yield method in accordance with Emerging Issues Task Force (EITF) 99-20, “Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets.” The company reviews cash flow estimates throughout the life of each CLO/CDO
entity. Cash flow estimates are based on the underlying pool of securities and take into account
the overall credit quality of the issuers, the forecasted default rate of the securities and the
company’s past experience in managing similar securities. If the updated estimate of future cash
flows (taking into account both timing and amounts) is less than the last revised estimate, an
impairment loss is recognized based on the excess of the carrying amount of the investment over its
fair value and is recorded through the income statement if the decline in value is determined to be
other than temporary. Fair value is determined using current information, notably market yields
and projected cash flows based on forecasted default and recovery rates that a market participant
would use in determining the current fair value of the equity interest. Market yields, default
rates and recovery rates used in the company’s estimate of fair value vary based on the nature of
the investments in the underlying collateral pools. In periods of rising credit default rates and
lower debt recovery rates, the fair value, and therefore carrying value, of the company’s
investments in these CLO/CDO entities may be adversely affected. An increase or decrease in the
discount rate of 1.0% would change the valuation of the CLO/CDOs by $0.9 million (2006: $1.2
million; 2005: $1.3 million).
46
Table of Contents
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 retains the majority of the rewards generated by the VIE. Additionally,
certain investment products are structured as limited partnerships of which the company is the
general partner and is deemed to have control with the lack of substantive kick-out or
participation rights of the other limited partners. These investment products are also
consolidated into the company’s financial statements under 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.”
Assessing if an entity is a VIE or an entity falling under the consolidation requirements of EITF
04-5 involves judgment and analysis on a structure-by-structure basis. Factors included in this
assessment include the legal organization of the entity, the company’s contractual involvement with
the entity and any related party or defacto agent implications of the company’s involvement with
the entity. Determining if the company is the primary beneficiary of a VIE also requires
significant judgment, as the calculation of expected losses and residual returns involves
estimation and probability assumptions. If current financial statements are not available for
consolidated VIEs or an investment product consolidated under EITF 04-5, estimation of investment
valuation is required, which includes assessing portfolio activity since the last financial
statement date and making inquiries of the fund manager. Significant changes in these assumptions
could impact the reported value of the investments held by consolidated investment products and the
related minority interest. As of December 31, 2007, the company consolidated VIEs that held
investments of $826.5 million (2006: $1,227.8 million) and partnership investments under EITF 04-5
of $379.1 million (2006: $254.2 million) and also determined that certain previously-consolidated
VIEs should be deconsolidated since the company no longer was the primary beneficiary of these
entities. As circumstances, supporting estimates and factors change, the determination of VIE
and primary beneficiary status may change, as could the determination of the necessity of
consolidation under EITF 04-5.
Contingencies. Contingencies arise when we have a present obligation (legal or constructive) as a
result of a past event that is both probable and reasonably estimable. We must from time to time
make material estimates with respect to legal and other contingencies. The nature of our business
requires compliance with various state and federal statutes and exposes us to a variety of legal
proceedings and matters in the ordinary course of business. While the outcomes of matters such as
these are inherently uncertain and difficult to predict, we maintain reserves reflected in other
current and other non-current liabilities, as appropriate, for identified losses that are, in our
judgment, probable and reasonably estimable. Management’s judgment is based on the advice of legal
counsel, ruling on various motions by the court where a complaint against the company has been
filed, review of the outcome of similar matters, if applicable, and review of guidance from state
or federal agencies, if applicable. Deferred contingent consideration payable in relation to a
business acquisition is recorded when the outcome of the contingency is resolved and the
consideration is issued or becomes issuable.
Recent Accounting Developments
See Part
II, Item 8, “Financial Statements and Supplementary Data — Note 1, Accounting Policies – Recent
Accounting Pronouncements.”
47
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of its business, the company is primarily exposed to market risk in the form
of market risk, interest rate risk, and foreign exchange rate risk.
AUM Market Price Risk
The company’s investment management revenues are comprised of fees based on a percentage of the
value of AUM. Declines in equity or fixed income security market prices could cause revenues to
decline because of lower investment management fees by:
| • | Causing the value of AUM to decrease. |
| • | Causing the returns realized on AUM to decrease. | ||
| • | Causing clients to withdraw funds in favor of investments in markets that they perceive to offer greater opportunity and that the company does not serve. | ||
| • | Causing clients to rebalance assets away from investments that the company manages into investments that the company does not manage. | ||
| • | Causing clients to reallocated assets away from products that earn higher revenues into products that earn lower revenues. |
Underperformance of client accounts relative to competing products could exacerbate these factors.
Market Risk
The company has investments in sponsored investment products that invest in a variety of asset
classes. Investments are generally made to establish a track record or to hedge exposure to
certain deferred compensation plans. The company’s exposure to market risk arises from its
investments. The following table summarizes the fair values of the investments exposed to market
risk and provides a sensitivity analysis of the estimated fair values of those investments,
assuming a 10% increase or decrease in fair values:
48
Table of Contents
| Fair Value | Fair Value | |||||||||||
| Carrying | assuming 10% | assuming 10% | ||||||||||
| $ in millions | Value | increase | decrease | |||||||||
December 31, 2007 |
||||||||||||
Trading investments: |
||||||||||||
Investments
related to deferred compensation plans |
58.8 | 64.7 | 52.9 | |||||||||
Other |
27.8 | 30.6 | 25.0 | |||||||||
Total trading investments |
86.6 | 95.3 | 77.9 | |||||||||
Available-for-sale investments: |
||||||||||||
Seed money in affiliated funds |
60.9 | 67.0 | 54.8 | |||||||||
Other |
8.6 | 9.5 | 7.7 | |||||||||
Total
available-for-sale investments |
69.5 | 76.5 | 62.5 | |||||||||
Equity method investments |
74.7 | 82.2 | 67.2 | |||||||||
Total market risk on investments |
230.8 | 254.0 | 207.6 | |||||||||
$ in
millions |
||||||||||||
December 31, 2006 |
||||||||||||
Trading investments: |
||||||||||||
Equity |
64.8 | 71.3 | 58.3 | |||||||||
Other |
1.9 | 2.1 | 1.7 | |||||||||
Total
trading investments |
66.7 | 73.4 | 60.0 | |||||||||
Available-for-sale investments: |
||||||||||||
Seed money in affiliated funds |
97.1 | 106.8 | 87.4 | |||||||||
Other |
13.5 | 14.9 | 12.2 | |||||||||
Total
available-for-sale investments |
110.6 | 121.7 | 99.6 | |||||||||
Equity method investments |
18.4 | 20.2 | 16.6 | |||||||||
Total market risk on investments |
195.7 | 215.3 | 176.2 | |||||||||
49
Table of Contents
Interest Rate Risk
Interest rate risk relates to the risk that the fair value of future cash flows of a financial
instrument will fluctuate because of changes in market interest rates. The company is exposed to
interest rate risk primarily through its external debt and cash and cash equivalent investments. On
December 31, 2007, the interest rates on 90% of the company’s borrowings were fixed for an average
period of 4 years. The remainder of the company’s borrowings were floating. The interest rate
profile of the financial assets of the company on December 31, 2007 was:
| Fair Value | Fair Value | |||||||||||
| assuming a | assuming a | |||||||||||
| Carrying | +1% interest | -1% interest | ||||||||||
| $ in millions | Value | rate change | rate change | |||||||||
December 31, 2007 |
||||||||||||
Available-for-sale investments: |
||||||||||||
Collateralized debt obligations |
39.0 | 38.1 | 39.4 | |||||||||
Foreign time deposits |
22.7 | 22.6 | 22.8 | |||||||||
Other |
1.0 | 1.0 | 1.0 | |||||||||
Total
available-for-sale investments |
62.7 | 61.7 | 63.2 | |||||||||
U.S.
Treasury and governmental agency securities |
6.0 | 6.0 | 6.0 | |||||||||
Total investments |
68.7 | 67.7 | 69.2 | |||||||||
December 31, 2006 |
||||||||||||
Available-for-sale investments: |
||||||||||||
Collateralized debt obligations |
48.9 | 48.2 | 50.0 | |||||||||
Foreign time deposits |
11.1 | 11.0 | 11.2 | |||||||||
Other |
1.0 | 1.0 | 1.0 | |||||||||
Total
available-for-sale investments |
61.0 | 60.2 | 62.2 | |||||||||
U.S.
Treasury and governmental agency securities |
11.0 | 10.9 | 11.1 | |||||||||
Total investments |
72.0 | 71.1 | 73.3 | |||||||||
The interest rate profile of the financial liabilities of the company on December 31 was:
| Weighted | Weighted Average | |||||||||||||||||||
| Average | Period for Which | |||||||||||||||||||
| Interest | Rate is Fixed | |||||||||||||||||||
| $ in millions | Total | Floating Rate | Fixed Rate* | Rate (%) | (Years) | |||||||||||||||
2007 |
||||||||||||||||||||
Currency: |
||||||||||||||||||||
U.S. dollar |
1,276.4 | 126.4 | 1,150.0 | 5.2 | 4.4 | |||||||||||||||
Japanese yen |
0.4 | — | 0.4 | 9.3 | 3.0 | |||||||||||||||
| 1,276.8 | 126.4 | 1,150.4 | 5.2 | 4.4 | ||||||||||||||||
2006 |
||||||||||||||||||||
Currency: |
||||||||||||||||||||
U.S. dollar |
1,279.0 | 129.0 | 1,150.0 | 5.3 | 4.0 | |||||||||||||||
Japanese yen |
0.5 | — | 0.5 | 9.4 | 4.0 | |||||||||||||||
| 1,279.5 | 129.0 | 1,150.5 | 5.3 | 4.0 | ||||||||||||||||
| * | Measured at amortized cost. |
See Part II, Item 8, “Financial Statements and Supplementary Data — Note 10, Long-Term Debt” for
additional disclosures relating to the U.S. dollar floating and fixed rate obligations. A 1.0%
increase in interest rates would have increased the recorded interest expense on the floating rate
debt by $1.3 million.
The
company’s only fixed interest financial assets at
December 31, 2007 are in foreign time deposit
investments of $22.7 million (2006: $11.1 million) and in U.S. Treasury and U.S. governmental
agency securities of $6.0 million (2006: $11.0 million). The weighted average interest rate on
these investments is 2.63% (2006: 2.89%) and the average weighted time for which the rate is fixed
is 0.4 years (2006: 0.7 years).
50
Table of Contents
Foreign Exchange Rate Risk
The company has transactional currency exposures that occur when any of the company’s subsidiaries
receives or pays cash in a currency different from its functional currency. Such exposure arises
from sales or purchases by an operating unit in currencies other than the unit’s functional
currency. These exposures are not actively managed.
The company also has certain investments in foreign operations, whose net assets and related
goodwill are exposed to foreign currency translation risk. The company does not hedge these
exposures. Prior to the redenomination of the share capital of the Parent and the change in its
functional currency from sterling to U.S. dollars, the company designated its U.S. dollar senior
note balances as hedges against its net investments in its U.S.
subsidiaries. Part II, Item 8, “Financial
Statements and Supplementary Data — Note 10, Long-Term Debt” details the fair values of the U.S.
dollar senior notes (the hedging instruments) at December 31, 2007 and 2006. Gains or losses on the
retranslation of these borrowings were transferred to equity to offset any gains and losses on the
net investments in subsidiaries. During 2005, the company recorded a charge of $6.8 million within
other realized losses on the Consolidated Statement of Income related to the unhedged portion of debt.
The company is exposed to foreign exchange revaluation into the income statement on monetary assets
and liabilities that are held by subsidiaries in different functional currencies than the
subsidiaries’ functional currencies. Net foreign exchange revaluation losses were $10.3 million in
2007 (2006: gain of $8.5 million), and are included in other gains and losses, net on the
Consolidated Statements of Income. We continue to monitor our exposure to foreign
exchange revaluation.
51
Table of Contents
Supplementary Quarterly Financial Data
The following is selected unaudited consolidated data for Invesco Ltd. for the quarters ended:
| $ in millions, except per share data | Q407 | Q307 | Q207 | Q107 | Q406 | Q306 | Q206 | Q106 | ||||||||||||||||||||||||
Operating Revenues |
||||||||||||||||||||||||||||||||
Investment management fees |
$ | 816.4 | $ | 791.7 | $ | 765.7 | $ | 706.3 | $ | 688.2 | $ | 626.3 | $ | 611.9 | $ | 581.8 | ||||||||||||||||
Performance fees |
13.1 | 4.0 | 34.4 | 18.8 | 25.9 | 10.4 | 12.6 | 33.2 | ||||||||||||||||||||||||
Service and distribution fees |
150.8 | 150.7 | 148.2 | 143.4 | 135.4 | 130.8 | 133.0 | 135.7 | ||||||||||||||||||||||||
Other |
42.8 | 30.2 | 30.7 | 31.7 | 22.1 | 21.2 | 33.5 | 44.7 | ||||||||||||||||||||||||
Total Operating Revenues |
1,023.1 | 976.6 | 979.0 | 900.2 | 871.6 | 788.7 | 791.0 | 795.4 | ||||||||||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||||||||||
Employee compensation |
286.3 | 278.1 | 288.9 | 284.3 | 273.2 | 289.7 | 252.8 | 254.8 | ||||||||||||||||||||||||
Third-party distribution,
service and advisory |
284.9 | 270.8 | 263.0 | 232.4 | 223.5 | 204.2 | 200.2 | 198.9 | ||||||||||||||||||||||||
Marketing |
43.9 | 40.9 | 35.8 | 37.0 | 37.0 | 30.8 | 35.2 | 35.8 | ||||||||||||||||||||||||
Property, office and technology |
60.3 | 66.6 | 58.2 | 57.4 | 57.4 | 57.5 | 56.9 | 58.9 | ||||||||||||||||||||||||
General and administrative |
104.0 | 63.7 | 71.1 | 57.0 | 38.9 | 59.8 | 58.8 | 63.2 | ||||||||||||||||||||||||
Total Operating Expenses |
779.4 | 720.1 | 717.0 | 668.1 | 630.0 | 642.0 | 603.9 | 611.6 | ||||||||||||||||||||||||
Operating Income |
243.7 | 256.5 | 262.0 | 232.1 | 241.6 | 146.7 | 187.1 | 183.8 | ||||||||||||||||||||||||
Other income/(expense) |
||||||||||||||||||||||||||||||||
Equity in earnings of
unconsolidated affiliates |
21.0 | 14.9 | 6.4 | 5.8 | 2.3 | 0.8 | 0.9 | 0.3 | ||||||||||||||||||||||||
Interest income |
11.8 | 14.1 | 12.3 | 10.3 | 10.0 | 6.6 | 5.2 | 5.1 | ||||||||||||||||||||||||
Realized and unrealized gains of
consolidated investment
products, net |
55.8 | 58.7 | 69.8 | 30.0 | 182.8 | 41.4 | 38.9 | 31.2 | ||||||||||||||||||||||||
Interest expense |
(17.7 | ) | (16.4 | ) | (18.6 | ) | (18.6 | ) | (20.9 | ) | (19.7 | ) | (19.3 | ) | (17.3 | ) | ||||||||||||||||
Other gains and losses, net |
6.3 | (3.7 | ) | (0.2 | ) | 7.5 | 12.4 | 11.1 | 6.4 | (3.1 | ) | |||||||||||||||||||||
Income before income taxes and
minority interest |
320.9 | 324.1 | 331.7 | 267.1 | 428.2 | 186.9 | 219.2 | 200.0 | ||||||||||||||||||||||||
Income tax provision |
(91.3 | ) | (92.7 | ) | (91.4 | ) | (81.9 | ) | (83.4 | ) | (47.6 | ) | (65.4 | ) | (58.2 | ) | ||||||||||||||||
Income before minority interest |
229.6 | 231.4 | 240.3 | 185.2 | 344.8 | 139.3 | 153.8 | 141.8 | ||||||||||||||||||||||||
Minority interest income of
consolidated entities, net
of tax |
(53.7 | ) | (64.4 | ) | (64.8 | ) | (30.0 | ) | (179.6 | ) | (38.0 | ) | (37.4 | ) | (42.0 | ) | ||||||||||||||||
Net Income |
$ | 175.9 | $ | 167.0 | $ | 175.5 | $ | 155.2 | $ | 165.2 | $ | 101.3 | $ | 116.4 | $ | 99.8 | ||||||||||||||||
Earnings per share *: |
||||||||||||||||||||||||||||||||
—basic |
$ | 0.45 | $ | 0.42 | $ | 0.44 | $ | 0.39 | $ | 0.42 | $ | 0.26 | $ | 0.30 | $ | 0.25 | ||||||||||||||||
—diluted |
$ | 0.43 | $ | 0.41 | $ | 0.43 | $ | 0.38 | $ | 0.40 | $ | 0.25 | $ | 0.29 | $ | 0.25 | ||||||||||||||||
Average shares outstanding *: |
||||||||||||||||||||||||||||||||
—basic |
393.6 | 400.0 | 399.9 | 398.9 | 397.9 | 395.2 | 391.6 | 395.4 | ||||||||||||||||||||||||
—diluted |
407.6 | 410.5 | 410.6 | 410.1 | 408.2 | 404.8 | 402.0 | 405.1 | ||||||||||||||||||||||||
Dividends declared per share *: |
— | $ | 0.164 | — | $ | 0.208 | — | $ | 0.154 | — | $ | 0.203 | ||||||||||||||||||||
| * | All per share amounts have been adjusted to reflect the impact of the December 4, 2007 one-for-two reverse stock split. See Part II, Item 8, “Financial Statements and Supplementary Data — Note 1, Accounting Policies” for additional details. The sum of the quarterly earnings per share amounts may differ from the annual earnings per share amounts due to the required method of computing the weighted average number of shares in interim periods. |
52
Table of Contents
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data
| 54 | ||||
| 55 | ||||
| 56 | ||||
| 57 | ||||
| 58 | ||||
| 59 | ||||
| 61 |
53
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Invesco Ltd.
We have audited the accompanying consolidated balance sheets of Invesco Ltd. as of December 31,
2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2007. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Invesco Ltd. at December 31, 2007 and 2006, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Invesco Ltd.’s internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25,
2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 25, 2008
54
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Invesco Ltd.
We have audited Invesco Ltd.’s internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Invesco Ltd.’s management
is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the
accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Invesco Ltd. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Invesco Ltd. as of December 31, 2007 and
2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for
each of the three years in the period ended December 31,
2007, of Invesco Ltd. and our report dated
February 25, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 25, 2008
February 25, 2008
55
Table of Contents
Consolidated Balance Sheets
| $ in millions | As of December 31, | |||||||
| 2007 | 2006 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 915.8 | $ | 778.9 | ||||
Cash and cash equivalents of consolidated investment products |
36.6 | 55.4 | ||||||
Unsettled fund receivables |
605.5 | 561.6 | ||||||
Accounts receivable |
292.1 | 243.3 | ||||||
Investments |
177.2 | 187.8 | ||||||
Prepaid assets |
65.9 | 68.5 | ||||||
Other current assets |
203.3 | 238.6 | ||||||
Assets held for policyholders |
1,898.0 | 1,574.9 | ||||||
Total current assets |
4,194.4 | 3,709.0 | ||||||
Non-current assets |
||||||||
Investments |
122.3 | 79.9 | ||||||
Investments of consolidated investment products |
1,205.6 | 1,482.0 | ||||||
Prepaid assets |
55.6 | 82.2 | ||||||
Deferred sales commissions |
31.3 | 31.6 | ||||||
Deferred tax asset, net |
133.8 | 118.5 | ||||||
Property and equipment, net |
180.0 | 198.7 | ||||||
Intangible assets, net |
154.2 | 165.9 | ||||||
Goodwill |
6,848.0 | 6,360.7 | ||||||
| 8,730.8 | 8,519.5 | |||||||
Total assets |
$ | 12,925.2 | $ | 12,228.5 | ||||
Liabilities, Minority Interests and Shareholders’ Equity |
||||||||
Current liabilities |
||||||||
Current maturities of long-term debt |
$ | — | $ | 300.0 | ||||
Unsettled fund payables |
581.2 | 533.0 | ||||||
Income taxes payable |
140.6 | 99.7 | ||||||
Other current liabilities |
1,021.1 | 857.8 | ||||||
Policyholder payables |
1,898.0 | 1,574.9 | ||||||
Total current liabilities |
3,640.9 | 3,365.4 | ||||||
Non-current liabilities |
||||||||
Long-term debt |
1,276.4 | 979.0 | ||||||
Borrowings of consolidated investment products |
116.6 | 37.0 | ||||||
Other non-current liabilities |
179.5 | 178.5 | ||||||
| 1,572.5 | 1,194.5 | |||||||
Total liabilities |
5,213.4 | 4,559.9 | ||||||
Minority interests in equity of consolidated entities |
1,121.2 | 1,504.6 | ||||||
Commitments and contingencies (Note 22) |
||||||||
Shareholders’ equity |
||||||||
Common shares ($0.20 par value; 1,050.0 million authorized;
424.7 million shares issued and outstanding) |
84.9 | — | ||||||
Ordinary shares (1,050.0 million authorized; 831.9 million
shares issued and outstanding) |
— | 83.2 | ||||||
Exchangeable shares (19.8 million shares issued and outstanding) |
— | 377.4 | ||||||
Additional paid-in-capital |
5,306.3 | 4,966.1 | ||||||
Treasury shares |
(954.4 | ) | (577.9 | ) | ||||
Retained earnings |
1,201.7 | 700.7 | ||||||
Accumulated other comprehensive income, net of tax |
952.1 | 614.5 | ||||||
Total shareholders’ equity |
6,590.6 | 6,164.0 | ||||||
Total liabilities, minority interests and shareholders’ equity |
$ | 12,925.2 | $ | 12,228.5 | ||||
See accompanying notes.
56
Table of Contents
Consolidated Statements of Income
| $ in millions, except per share data | Years Ended December 31, | |||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Operating Revenues |
||||||||||||
Investment management fees |
$ | 3,080.1 | $ | 2,508.2 | $ | 2,166.7 | ||||||
Performance fees |
70.3 | 82.1 | 33.5 | |||||||||
Service and distribution fees |
593.1 | 534.9 | 538.2 | |||||||||
Other |
135.4 | 121.5 | 134.2 | |||||||||
Total Operating Revenues |
3,878.9 | 3,246.7 | 2,872.6 | |||||||||
Operating Expenses |
||||||||||||
Employee compensation |
1,137.6 | 1,070.5 | 1,044.7 | |||||||||
Third-party distribution, service and advisory |
1,051.1 | 826.8 | 706.0 | |||||||||
Marketing |
157.6 | 138.8 | 139.5 | |||||||||
Property, office and technology |
242.5 | 230.7 | 270.9 | |||||||||
General and administrative |
295.8 | 207.6 | 224.4 | |||||||||
Restructuring charge |
— | 13.1 | 62.6 | |||||||||
Goodwill impairment |
— | — | 16.6 | |||||||||
Total Operating Expenses |
2,884.6 | 2,487.5 | 2,464.7 | |||||||||
Operating Income |
994.3 | 759.2 | 407.9 | |||||||||
Other income/(expense) |
||||||||||||
Equity in earnings of unconsolidated affiliates |
48.1 | 4.3 | 0.7 | |||||||||
Interest income |
48.5 | 26.9 | 16.7 | |||||||||
Realized and unrealized gains of consolidated
investment products, net |
214.3 | 294.3 | 128.8 | |||||||||
Interest expense |
(71.3 | ) | (77.2 | ) | (85.1 | ) | ||||||
Other gains and losses, net |
9.9 | 26.8 | 13.4 | |||||||||
Income before income taxes and minority interest |
1,243.8 | 1,034.3 | 482.4 | |||||||||
Income tax provision |
(357.3 | ) | (254.6 | ) | (151.1 | ) | ||||||
Income before minority interest |
886.5 | 779.7 | 331.3 | |||||||||
Minority interest income of consolidated
entities, net of tax |
(212.9 | ) | (297.0 | ) | (111.5 | ) | ||||||
Net Income |
$ | 673.6 | $ | 482.7 | $ | 219.8 | ||||||
Earnings per share: |
||||||||||||
-basic |
$ | 1.69 | $ | 1.22 | $ | 0.55 | ||||||
-diluted |
$ | 1.64 | $ | 1.19 | $ | 0.54 | ||||||
Dividends declared per share |
$ | 0.372 | $ | 0.357 | $ | 0.330 | ||||||
See
accompanying notes.
57
Table of Contents
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||||||
| $ in millions | 2007 | 2006 | 2005 | |||||||||
Operating Activities |
||||||||||||
Net income |
$ | 673.6 | $ | 482.7 | $ | 219.8 | ||||||
Adjustments to reconcile net income to net cash provided by operating
activities: |
||||||||||||
Amortization, depreciation, and goodwill impairment |
64.1 | 67.5 | 94.5 | |||||||||
Share related compensation expense |
105.2 | 140.6 | 40.6 | |||||||||
Loss/(gain) on disposal of property, equipment, software, and business |
(1.1 | ) | 4.0 | (28.8 | ) | |||||||
Gain on disposal of investments |
(12.6 | ) | (7.3 | ) | (0.6 | ) | ||||||
Unrealized gain on trading investments, net |
(223.5 | ) | (300.0 | ) | (129.2 | ) | ||||||
Tax benefit from share-based compensation |
38.2 | 17.9 | — | |||||||||
Excess tax benefits from share-based compensation |
(23.1 | ) | (12.3 | ) | — | |||||||
Minority
interest in earnings of consolidated entities |
212.9 | 297.0 | 111.5 | |||||||||
Equity in earnings of unconsolidated affiliates |
(48.1 | ) | (4.3 | ) | (0.7 | ) | ||||||
Sale/(purchase) of trading investments |
0.4 | (50.4 | ) | 25.3 | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Change in cash held at consolidated investment products |
(4.8 | ) | 1.3 | (43.2 | ) | |||||||
(Increase)/decrease in receivables |
(59.6 | ) | (160.7 | ) | 53.4 | |||||||
Increase/(decrease) in payables |
192.1 | (20.1 | ) | (35.7 | ) | |||||||
Net cash provided by operating activities |
913.7 | 455.9 | 306.9 | |||||||||
Investing Activities |
||||||||||||
Purchase of property and equipment |
(36.7 | ) | (37.9 | ) | (38.8 | ) | ||||||
Disposal of property and equipment |
0.1 | 2.5 | 2.2 | |||||||||
Purchase of available for sale investments |
(80.3 | ) | (289.4 | ) | (316.5 | ) | ||||||
Proceeds from sale of available for sale investments |
111.8 | 254.3 | 427.0 | |||||||||
Purchase of investments by consolidated investment products |
(331.5 | ) | (372.3 | ) | (412.3 | ) | ||||||
Proceeds from sale of investments by consolidated investment products |
143.6 | 122.6 | 210.9 | |||||||||
Returns of
capital in investments of consolidated investment products |
196.0 | 257.5 | 185.3 | |||||||||
Proceeds from held to maturity investments |
5.0 | 2.0 | 0.6 | |||||||||
Acquisitions of businesses, net of cash acquired of $8.9 million in 2006 |
(56.0 | ) | (200.1 | ) | — | |||||||
Disposal of businesses, including cash of $0.6 million in 2005 |
1.6 | 2.1 | 53.6 | |||||||||
Net cash (used in)/provided by investing activities |
(46.4 | ) | (258.7 | ) | 112.0 | |||||||
Financing Activities |
||||||||||||
Proceeds from exercises of share options |
137.4 | 66.8 | 7.7 | |||||||||
Purchases of treasury shares |
(716.0 | ) | (155.9 | ) | — | |||||||
Dividends paid |
(155.0 | ) | (143.6 | ) | (134.1 | ) | ||||||
Excess tax benefits from stock-based compensation |
23.1 | 12.3 | — | |||||||||
Capital invested into consolidated investment products |
211.0 | 345.3 | 329.7 | |||||||||
Capital distributed by consolidated investment products |
(318.2 | ) | (301.2 | ) | (351.7 | ) | ||||||
Borrowings of consolidated investment products |
112.6 | 46.3 | 118.1 | |||||||||
Repayments of borrowings of consolidated investment products |
(33.1 | ) | (82.1 | ) | (60.2 | ) | ||||||
Net (repayments)/borrowings under credit facility |
(2.6 | ) | 59.0 | (81.0 | ) | |||||||
Issuance of senior notes |
300.0 | — | — | |||||||||
Repayments of senior notes |
(300.0 | ) | (10.0 | ) | (79.5 | ) | ||||||
Net cash used in financing activities |
(740.8 | ) | (163.1 | ) | (251.0 | ) | ||||||
Increase in cash and cash equivalents |
126.5 | 34.1 | 167.9 | |||||||||
Foreign exchange movement on cash and cash equivalents |
10.4 | 35.3 | (5.3 | ) | ||||||||
Cash and cash equivalents, beginning of year |
778.9 | 709.5 | 546.9 | |||||||||
Cash and cash equivalents, end of year |
$ | 915.8 | $ | 778.9 | $ | 709.5 | ||||||
Supplemental Cash Flow Information: |
||||||||||||
Interest paid |
$ | (72.0 | ) | $ | (73.4 | ) | $ | (84.4 | ) | |||
Taxes paid |
$ | (328.2 | ) | $ | (213.1 | ) | $ | (118.8 | ) | |||
See accompanying notes.
58
Table of Contents
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common | Ordinary | Paid-in- | Treasury | Retained | Comprehensive | Shareholders’ | ||||||||||||||||||||||||||
| $ in millions | Shares | Shares | Exchangeable Shares | Capital | Shares | Earnings | Income | Equity | ||||||||||||||||||||||||
January 1, 2005 |
$ | — | $ | 388.9 | $ | 593.0 | $ | 4,738.3 | $ | (456.7 | ) | $ | 339.5 | $ | (7.8 | ) | $ | 5,595.2 | ||||||||||||||
Net income |
— | — | — | — | — | 219.8 | — | 219.8 | ||||||||||||||||||||||||
Other comprehensive income
|
||||||||||||||||||||||||||||||||
Currency translation
differences on investments in overseas subsidiaries |
— | — | — | — | — | — | 360.4 | 360.4 | ||||||||||||||||||||||||
Change in minimum pension liability |
— | — | — | — | — | — | 6.8 | 6.8 | ||||||||||||||||||||||||
Change in net
unrealized gains on
available-for-sale
investments |
— | — | — | — | — | — | (4.1 | ) | (4.1 | ) | ||||||||||||||||||||||
Tax impacts of changes
in accumulated OCI
balances |
— | — | — | — | — | — | (3.6 | ) | (3.6 | ) | ||||||||||||||||||||||
Total comprehensive income |
579.3 | |||||||||||||||||||||||||||||||
Employee share plans: |
||||||||||||||||||||||||||||||||
Share-based compensation |
— | — | — | 40.6 | — | — | — | 40.6 | ||||||||||||||||||||||||
Vested stock |
— | — | — | (6.4 | ) | 6.4 | — | — | — | |||||||||||||||||||||||
Exercise of options |
— | 0.5 | — | 7.2 | — | — | — | 7.7 | ||||||||||||||||||||||||
Dividends |
— | — | — | — | — | (134.1 | ) | — | (134.1 | ) | ||||||||||||||||||||||
Business combinations |
— | 0.2 | — | 2.0 | — | — | — | 2.2 | ||||||||||||||||||||||||
Currency translation
differences from change
in presentation currency |
— | (37.5 | ) | (69.1 | ) | (434.1 | ) | 43.2 | (63.6 | ) | — | (561.1 | ) | |||||||||||||||||||
Conversion of
exchangeable shares into
ordinary shares |
— | 0.7 | (92.1 | ) | 91.4 | — | — | — | — | |||||||||||||||||||||||
Redenomination of share
capital |
— | (271.0 | ) | — | 271.0 | — | — | — | — | |||||||||||||||||||||||
December 31, 2005 |
81.8 | 431.8 | 4,710.0 | (407.1 | ) | 361.6 | 351.7 | 5,529.8 | ||||||||||||||||||||||||
Net income |
— | — | — | — | — | 482.7 | — | 482.7 | ||||||||||||||||||||||||
Other comprehensive income Currency translation differences on investments in overseas subsidiaries |
— | — | — | — | — | — | 268.3 | 268.3 | ||||||||||||||||||||||||
Change in minimum
pension liability |
— | — | — | — | — | — | 25.3 | 25.3 | ||||||||||||||||||||||||
Change in net
unrealized gains on
available-for-sale
investments |
— | — | — | — | — | — | (6.6 | ) | (6.6 | ) | ||||||||||||||||||||||
Tax impacts of changes
in accumulated OCI
balances |
— | — | — | — | — | — | (0.7 | ) | (0.7 | ) | ||||||||||||||||||||||
Total comprehensive income |
769.0 | |||||||||||||||||||||||||||||||
Initial impact of
adopting FASB 158, net of
tax |
— | — | — | — | — | — | (23.5 | ) | (23.5 | ) | ||||||||||||||||||||||
Dividends |
— | — | — | — | — | (143.6 | ) | — | (143.6 | ) | ||||||||||||||||||||||
Employee share plans: |
||||||||||||||||||||||||||||||||
Share-based
compensation |
— | — | — | 140.6 | — | — | — | 140.6 | ||||||||||||||||||||||||
Vested stock |
— | — | — | (17.4 | ) | 17.4 | — | — | — | |||||||||||||||||||||||
Exercise of options |
— | 1.1 | — | 65.7 | — | — | — | 66.8 | ||||||||||||||||||||||||
Tax impact of
share-based payment |
— | — | — | 12.3 | — | — | — | 12.3 | ||||||||||||||||||||||||
Purchase of shares |
— | — | — | — | (188.2 | ) | — | — | (188.2 | ) | ||||||||||||||||||||||
Business combinations |
— | — | — | 0.8 | — | — | — | 0.8 | ||||||||||||||||||||||||
Conversion of
exchangeable shares into
ordinary shares |
— | 0.3 | (54.4 | ) | 54.1 | — | — | — | — | |||||||||||||||||||||||
December 31, 2006 |
— | 83.2 | 377.4 | 4,966.1 | (577.9 | ) | 700.7 | 614.5 | 6,164.0 | |||||||||||||||||||||||
59
Table of Contents
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (continued)
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common | Ordinary | Paid-in- | Treasury | Retained | Comprehensive | Shareholders’ | ||||||||||||||||||||||||||
| $ in millions | Shares | Shares | Exchangeable Shares | Capital | Shares | Earnings | Income | Equity | ||||||||||||||||||||||||
December 31, 2006 |
— | 83.2 | 377.4 | 4,966.1 | (577.9 | ) | 700.7 | 614.5 | 6,164.0 | |||||||||||||||||||||||
Net income |
— | — | — | — | — | 673.6 | — | 673.6 | ||||||||||||||||||||||||
Other comprehensive income
|
||||||||||||||||||||||||||||||||
Currency translation differences on investments in overseas subsidiaries |
— | — | — | — | — | — | 351.1 | 351.1 | ||||||||||||||||||||||||
Change in accumulated |
||||||||||||||||||||||||||||||||
OCI related to employee
benefit plans |
— | — | — | — | — | — | 7.7 | 7.7 | ||||||||||||||||||||||||
Change in net
unrealized gains on
available-for-sale
investments |
— | — | — | — | — | — | (16.8 | ) | (16.8 | ) | ||||||||||||||||||||||
Tax impacts of changes
in accumulated OCI
balances |
— | — | — | — | — | — | (4.4 | ) | (4.4 | ) | ||||||||||||||||||||||
Total comprehensive income |
— | — | — | — | — | — | — | 1,011.2 | ||||||||||||||||||||||||
Adoption of FIN 48 |
— | — | — | — | — | (17.6 | ) | — | (17.6 | ) | ||||||||||||||||||||||
Dividends |
— | — | — | — | — | (155.0 | ) | — | (155.0 | ) | ||||||||||||||||||||||
Employee share plans: |
||||||||||||||||||||||||||||||||
Share-based
compensation |
— | — | — | 105.2 | — | — | — | 105.2 | ||||||||||||||||||||||||
Vested stock |
— | — | — | (53.9 | ) | 53.9 | — | — | — | |||||||||||||||||||||||
Exercise of options |
— | 1.6 | — | 135.8 | — | — | — | 137.4 | ||||||||||||||||||||||||
Tax impact of
share-based payment |
— | — | — | 23.1 | — | — | — | 23.1 | ||||||||||||||||||||||||
Purchase of shares |
— | — | — | — | (683.7 | ) | — | — | (683.7 | ) | ||||||||||||||||||||||
Cancellation of
treasury shares |
— | (1.9 | ) | — | (251.4 | ) | 253.3 | — | — | — | ||||||||||||||||||||||
Business combinations |
— | — | — | 6.0 | — | — | 6.0 | |||||||||||||||||||||||||
Conversion of
exchangeable shares into
ordinary shares |
— | 2.0 | (377.4 | ) | 375.4 | — | — | — | — | |||||||||||||||||||||||
Cancellation of ordinary
shares and issuance of
common shares |
84.9 | (84.9 | ) | — | — | — | — | — | — | |||||||||||||||||||||||
December 31, 2007 |
$ | 84.9 | $ | — | $ | — | $ | 5,306.3 | $ | (954.4 | ) | $ | 1,201.7 | $ | 952.1 | $ | 6,590.6 | |||||||||||||||
See accompanying notes.
60
Table of Contents
Notes to the Consolidated Financial Statements
1. ACCOUNTING POLICIES
Corporate Information
Invesco Ltd. (Parent) and all of its consolidated entities (collectively, the company or Invesco)
provide retail, institutional and high-net-worth clients with an array of global investment
management capabilities. The company operates globally and its sole business is asset management.
On July 18, 2007, the predecessor to Invesco Ltd., INVESCO PLC, announced that it had lost its
foreign private issuer status in the United States with the U.S. Securities and Exchange Commission
(SEC), chiefly as a result of U.S. share ownership exceeding fifty percent of issued share capital.
As a result of this, INVESCO PLC immediately became subject to the full requirements of two primary
securities regulators, the SEC in the United States and the FSA in the United Kingdom, and two
different accounting standards, Generally Accepted Accounting Principles in the United States (U.S.
GAAP) and International Financial Reporting Standards (IFRS). On December 4, 2007, INVESCO PLC
became a wholly-owned subsidiary of Invesco Ltd. and the shareholders of INVESCO PLC received
common shares of Invesco Ltd. in exchange for their ordinary shares of INVESCO PLC. This
transaction was accounted for in a manner similar to a pooling of interests. Additionally, the
company’s primary share listing moved from the London Stock Exchange to the New York Stock
Exchange, a share capital consolidation was immediately implemented (a reverse stock split) on a
one-for-two basis, and the company’s regulated business in the European Union was transferred from
INVESCO PLC to Invesco Ltd. All prior period share and earnings per share amounts have been
adjusted to reflect the reverse stock split.
Basis of Accounting and Consolidation
The financial statements have been prepared in accordance with U.S. GAAP and consolidate the
financial statements of the Parent, all of its controlled subsidiaries, any variable interest
entities (VIEs) required to be consolidated under Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 46(R), “Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51”, and any entities required to be consolidated under 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” (EITF 04-5). Under FASB Statement No. 94, “Consolidation of All
Majority-Owned Subsidiaries”, control is deemed to be present when the Parent holds a majority
voting interest or otherwise has the power to govern the financial and operating policies of the
subsidiary so as to obtain the benefits from its activities. FIN 46(R) requires that VIEs, or
entities in which the risks and rewards of ownership are not directly linked to voting interests,
for which the company is the primary beneficiary (having the majority of rewards/risks of
ownership) be consolidated. Certain of the company’s managed products are structured as
partnerships in which the company is the general partner receiving a management and/or performance
fee. If the company is deemed to have a variable interest in these entities and is determined to
be the primary beneficiary, these entities are consolidated into the company’s financial
statements. See Note 18 for further discussion. If the company is not determined to be the
primary beneficiary, the equity method of accounting is used to account for the company’s
investment in these entities. In accordance with EITF 04-5, non-VIE general partnership
investments would be deemed to be controlled by the company and would be consolidated, unless the
limited partners have the substantive ability to remove the general partner without cause based
upon a simple majority vote or can otherwise dissolve the partnership, or unless the limited
partners have substantive participating rights over decision making. Investment products that are
consolidated as variable interest entities as well as under EITF 04-5 are referred to as
consolidated investment products in the Consolidated Financial Statements.
As required by Accounting Principles Board (APB) 18, “The Equity Method of Accounting for
Investments in Common Stock,” the equity method of accounting is used to account for investments in
joint ventures and non-controlled subsidiaries in which the company’s ownership is between 20 and
50 percent. Equity investments are carried initially at cost (subsequently adjusted to recognize
the company’s share of the profit or loss of the investee after the date of acquisition) and are
included in investments on the Consolidated Balance Sheets. The proportionate share of income or
loss is included in equity in earnings of unconsolidated affiliates in the Consolidated Statements
of Income.
The reporting currency of the company changed from Sterling to U.S. Dollars effective December 31,
2005. On December 8, 2005, INVESCO PLC redenominated its share capital from Sterling to U.S. Dollars
and changed its functional currency from Sterling to U.S. Dollars. The U.S. Dollar more accurately
reflects the currency of the underlying operations and financing of INVESCO PLC. All periods are
presented in U.S. Dollars.
61
Table of Contents
The financial statements have been prepared primarily on the historical cost basis; however,
certain items are presented using other bases such as fair value, where such treatment is
appropriate. The financial statements of subsidiaries are prepared for the same reporting year as
the Parent and use consistent accounting policies, which, where applicable, have been adjusted to
U.S. GAAP from local generally accepted accounting principles or reporting regulations. All
intercompany transactions, balances, revenues and expenses are eliminated upon consolidation.
Minority interests represent the interests in certain entities consolidated by the company either
because the company has control over the entity or has determined that it is the primary
beneficiary under FIN 46(R), but of which the company does not own all of the equity.
In preparing the financial statements, management is required to make estimates and assumptions
that affect reported revenues, expenses, assets, liabilities and disclosure of contingent
liabilities. The primary estimates relate to investment valuation, goodwill impairment and taxes.
Use of available information and application of judgment are inherent in the formation of
estimates. Actual results in the future could differ from such estimates and the differences may be
material to the financial statements.
Acquisition Accounting
Upon acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured
at their fair values at the date of acquisition. In accordance with FASB Statement No. 141,
“Business Combinations”, any excess of the cost of the acquisition over the fair values of the
identifiable net assets acquired attributable to the company is recognized as goodwill. The
interest of minority shareholders is stated at the minority’s proportion of the pre-acquisition
carrying values of the acquired net assets. The results of entities acquired or sold during the
year are included from or to the date control changes.
Deferred contingent consideration payable in relation to a business acquisition is recorded when
the outcome of the contingency is resolved and the consideration is issued or becomes issuable.
Deferred contingent consideration results in recognition of additional goodwill.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash at banks and in hand and short-term deposits with a
maturity upon acquisition of three months or less. Also included in cash and cash equivalents at
December 31, 2007 is $3.3 million in cash to facilitate trust operations and customer transactions
in the company’s affiliated funds. Cash and cash equivalents invested in affiliated money market
funds (related parties) totaled $183.0 million at December 31, 2007. Cash and cash equivalents of
consolidated investment products are not available for general use by the company.
Cash balances may not be readily accessible to the Parent due to certain capital adequacy
requirements. 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 by holding cash. 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, 2007,
the European sub-group had cash and cash equivalent balances of $758.1 million, much of which is
used to satisfy these regulatory requirements. We are in compliance with all regulatory minimum
net capital requirements.
Accounts Receivable and Payable
Accounts receivable and payable are recorded at their original invoice amounts. Accounts
receivable are also recorded less any allowance for uncollectible amounts.
Investments
Investments in equity securities that have readily determinable fair values and investments in debt
securities are classified as either trading or available-for-sale in accordance with FASB Statement
No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Investments in debt
securities are classified in accordance with FASB Statement No. 115 as held-to-maturity
investments if the intent is to hold the investments until maturity. Trading securities are
securities bought and held principally for the purpose of selling them in the near term.
Securities are classified as held-to-maturity when the company has the intent and ability to hold
the securities to maturity. Available-for-sale securities are those neither classified as trading
nor as held to maturity. Trading and available-for-sale investments are measured at fair value.
Gains or losses arising from changes in the fair value of trading investments are included in
income, and gains or losses arising from changes in the fair value of available-for-sale
investments are recognized in accumulated other comprehensive income (OCI), net of tax, until the
investment is sold or otherwise disposed of, or until the investment is determined to be other than temporarily
62
Table of Contents
impaired, at which time the cumulative gain or loss previously reported in equity is
included in income. The specific identification method is used to determine the realized gain or
loss on securities sold or otherwise disposed. Held-to-maturity
investments are measured at amortized cost, taking into account any discounts or premiums. Gains or
losses on held-to-maturity investments are recognized in income when the investments are sold or
other than temporarily impaired.
Investments in joint ventures, non-controlled subsidiaries and certain investment products that are
not consolidated under FIN 46R or EITF 04-5 are investments over which the company has significant
influence but not control and are accounted for using the equity method, where the investment is
initially recorded at cost and the carrying amount is increased or decreased to recognize the
company’s share of the after-tax profit or loss of the investee after the date of acquisition.
Investments in joint ventures are investments jointly controlled by the company and external
parties. Investments in joint ventures are also accounted for using the equity method to reflect
the substance and economic reality of the company’s interest in jointly controlled entities.
Equity investments are included in investments on the Consolidated Balance Sheets in accordance
with APB 18. The proportionate share of income or loss is included in equity in earnings of
unconsolidated affiliates in the Consolidated Income Statements.
Fair value is generally determined by reference to an active trading market, using quoted closing
or bid prices as of each reporting period end. When a readily ascertainable market value does not
exist for an investment (such as the company’s collateralized
loan and debt obligations, discussed below)
the fair value is calculated based on the expected cash flows of its underlying net asset base,
taking into account applicable discount rates and other factors.
The company evaluates the carrying value of investments for impairment on a quarterly basis. In
its impairment analysis, the company takes into consideration numerous criteria, including the
duration and extent of any decline in fair value, the intent and ability of the company to hold the
security for a period of time sufficient for a recovery in value, recent events specific to the
issuer or industry and external credit ratings and recent downgrades with respect to issuers of
debt securities held. If the decline in value is determined to be other than temporary, the
carrying value of the security is written down to fair value through the income statement in
accordance with FASB Statement No. 115.
The company provides investment management services to a number of collateralized loan and debt
obligation entities (CLO/CDOs). These entities are investment vehicles created for the sole
purpose of issuing collateralized loan and debt instruments that offer investors the opportunity
for returns that vary with the risk level of their investment. The notes issued by the CLO/CDOs are
backed by diversified portfolios consisting primarily of loans or structured debt. The company
earns investment management fees, including subordinated management fees in some cases, for
managing the collateral for the CLO/CDO entities, as well as incentive fees that are contingent on
certain performance conditions. The company has invested in certain of the entities, generally
taking a relatively small portion of the unrated, junior subordinated position. At December 31, 2007, the
company held $39.0 million of investment in these CLO/CDOs, which represents its maximum risk of
loss. The company’s investments in collateralized loan or debt
entities are generally subordinated to other
interests in the entities and entitles the investors to receive the residual cash flows, if any, from
the entities. Investors in CLO/CDOs have no recourse against the company for any losses sustained in
the CLO/CDO structure.
Management has concluded that the company is not the primary beneficiary of any of the CLO/CDO
entities and it has recorded its investments at fair value using discounted cash flow analyses. The
excess of actual and anticipated future cash flows over the initial investment at the date of
purchase is recognized as interest income over the life of the investment using the effective yield
method in accordance with Emerging Issues Task Force (EITF) 99-20, “Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.”
The company reviews cash flow estimates throughout the life of each CLO/CDO entity. Cash flow
estimates are based on the underlying pool of securities and take into account the overall credit
quality of the issuers, the forecasted default rate of the securities and the company’s past
experience in managing similar securities. If the updated estimate of future cash flows (taking
into account both timing and amounts) is less than the last revised estimate, an impairment loss is
recognized based on the excess of the carrying amount of the investment over its fair value and is
recorded through the income statement, if the decline in value is determined to be other than
temporary. Fair value is determined using current information, notably market yields and projected
cash flows based on forecasted default and recovery rates that a market participant would use in
determining the current fair value of the equity interest.
Assets Held for Policyholders and Policyholder Payables
One of the company’s subsidiaries is an insurance-type entity, established to facilitate retirement
savings plans. Investments and policyholder payables held by this business meet the definition of
financial instruments and are carried in the Consolidated Balance Sheets as separate account assets
and liabilities at fair value in accordance with the American
Institute of Certified Public Accountants
Statement of Position No. 03-1, “Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts.” Changes in fair value are
recorded and offset to zero in the Consolidated Statements of Income
in other operating revenues.
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The liability to
the policyholders is linked to the value of the investments. The investments are legally
segregated and are generally not subject to claims that arise from any of the company’s other
businesses. Management fees earned from policyholder investments are accounted for as described in
the company’s revenue recognition accounting policy.
Deferred Sales Commissions
Mutual fund shares sold without a sales commission at the time of purchase are commonly referred to
as “B shares.” B shares typically have an asset-based fee (12b-1 fee) that is charged to the fund
over a period of years and a contingent deferred sales charge (CDSC). The CDSC is an asset-based
fee that is charged to investors that redeem B shares during a stated period. Commissions paid at
the date of sale to brokers and dealers for sales of mutual funds that have a CDSC are capitalized
and amortized over a period not to exceed the redemption period of the related fund (generally up
to six years).
Property, Equipment and Depreciation
Property and equipment includes owned property, leasehold improvements, computer hardware/software
and other equipment and is stated at cost less accumulated depreciation or amortization and any
previously recorded impairment in value. Expenditures for major additions and improvements are
capitalized; minor replacements, maintenance and repairs are charged to expense as incurred.
Depreciation is provided on property and equipment at rates calculated to write off the cost, less
estimated residual value, of each asset on a straight-line basis over its expected useful life:
owned buildings over 50 years, leasehold improvements over the shorter of the lease term or useful
life of the improvement; and computers and other various equipment between three and seven years.
Purchased software is capitalized where the related costs can be measured reliably, and it is
probable that the asset will generate future economic benefits, and amortized into operating
expenses on a straight-line basis over its useful life, usually three years. The company
re-evaluates the useful life determination for property and equipment each reporting period to
determine whether events and circumstances warrant a revision to the remaining useful life. On
sale or retirement, the asset cost and related accumulated depreciation are removed from the
financial statements and any related gain or loss is reflected in income.
The carrying amounts of property and equipment are reviewed for impairment under FASB Statement No.
144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, when events or changes in
circumstances indicate that the carrying values may not be recoverable. At each reporting date, an
assessment is made for any indication of impairment. If an indication of impairment exists,
recoverability is tested by comparing the carrying amount of the asset to the net undiscounted cash
flows expected to be generated from the asset. If those net undiscounted cash flows do not exceed
the carrying amount (i.e. the asset is not recoverable), the next step would be performed, which is
to determine the fair value of the asset and record an impairment charge, if any.
Intangible Assets
Management contract intangible assets identified on the acquisition of a business are capitalized
separately from goodwill if the fair value can be measured reliably on initial recognition
(transaction date) and are amortized and recorded as operating expenses on a straight-line basis
over their useful lives, usually seven to ten years, which reflects the pattern in which the
economic benefits are realized. Where evidence exists that the underlying management contracts are
renewed annually at little or no cost to the company, the management contract intangible asset is
assigned an indefinite life and reviewed for impairment on an annual basis. The company
reevaluates the useful life determination for intangible assets each reporting period to determine
whether events and circumstances warrant a revision to the remaining useful life or an indication
of impairment. Definite-lived intangibles are reviewed for impairment whenever events or changes
in circumstances indicate that their carrying amount may not be recoverable (i.e. carrying amount
exceeds the sum of the fair value of the intangible). Intangible assets not subject to
amortization are tested for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test consists of a
comparison of the fair value of an intangible asset with its carrying amount. If the carrying
amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an
amount equal to that excess. Fair value is determined using a discounted cash flow analysis.
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Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired and
is recorded in the functional currency of the acquired entity. Goodwill is recognized as an asset
and is reviewed for impairment annually on September 30 and between annual tests when events and
circumstances indicate that an impairment may have occurred. The impairment test for goodwill, as
outlined in FASB Statement No. 142, “Goodwill and Other Intangible Assets”, uses a two-step
approach, which is performed at the reporting unit level. The company has determined that it has
one reporting unit for goodwill impairment testing purposes, the consolidated Invesco Ltd. single
operating segment level, which is the level at which internal reporting is generated that reflects
the way that the company manages its operations and to which goodwill is naturally associated. If
the carrying amount of goodwill at the reporting unit exceeds its implied fair value, then a charge
for the excess would be recorded as an impairment loss. The principal method of determining fair
value of the reporting unit is an income approach where future cash flows are discounted to arrive
at a single present value amount. The discount rate used is derived based on the time value of
money and the risk profile of the stream of future cash flows. Recent results and projections
based on expectations regarding revenue, expenses, capital expenditure and acquisition earn out
payments produce a present value for the reporting unit. While the company believes all
assumptions utilized in our assessment are reasonable and appropriate, changes in these estimates
could produce different fair value amounts and therefore different goodwill impairment
assessments. The most sensitive of these assumptions are the estimated cash flows and the use of
our weighted average cost of capital as the discount rate to determine present value.
The company also utilizes a market approach to provide a secondary fair value of the reporting unit
by using comparable company and transaction multiples to estimate values for our single reporting
unit. Discretion and judgment is required in determining whether the transaction data available
represents information for companies of comparable nature, scope and size.
Debt and Financing Costs
Debt issuance costs are recognized as a deferred asset under APB 21, “Interest on Receivables and
Payables”. After initial recognition, debt issuance costs are measured at amortized cost. Finance
charges and debt issuance costs are amortized over the term of the debt using the effective
interest method. Interest charges are recognized in the Consolidated
Statement of Income in the period in which
they are incurred.
Treasury Shares
Treasury shares are valued at cost and are included as deductions from equity.
Revenue Recognition
Revenue is measured at the fair value of consideration received or receivable and represents
amounts receivable for services provided in the normal course of business, net of discounts, value
added tax and other sales-related taxes. Revenue is recognized when there is persuasive evidence of
an arrangement, delivery has occurred or services have been provided, collectibility is reasonably
assured and the revenue can be reliably measured. Revenue represents management, distribution,
transfer agent and other fees. Revenue is generally accrued over the period for which the service
is provided, or in the case of performance-based management fees, when the contractual performance
criteria have been met in accordance with Method 1 of EITF Topic No. D-96, “Accounting for
Management Fees Based on a Formula,” which indicates that performance fees shall be recorded and
recognized at the end of the performance measurement period instead of on an interim basis
throughout the measurement period. Management fee revenues are derived from providing professional
expertise to manage client accounts and include fees received from institutional advisory contracts
and retail mutual funds, unit trusts, investment companies with variable capital and investment
trusts. For the year ended December 31, 2007, management fees from affiliated fund products were
$2,481.6 million (2006: $1,996.4 million; 2005: $1,658.5 million). Management fees vary in
relation to the level of client assets managed, and in certain cases are also based on investment
performance. Distribution fees include 12b-1 fees received from certain affiliated mutual funds to
cover allowable 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. Transfer agent fees are
service fees charged to certain affiliated funds to cover the expense of transferring shares of a
mutual fund or units of a unit trust into the investor’s name. Other fees generally include trading
fees derived from generally non-recurring security or investment transactions.
Distribution, service and advisory fees that are passed through to external parties are presented
separately as expenses in accordance with EITF 99-19, “Reporting Revenue Gross as a Principal
versus Net as an Agent.”
Interest income is accrued on interest-bearing assets.
Dividend income from investments is recognized on the ex-dividend date.
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Share-Based Compensation
The company issues equity-settled stock-based awards to certain employees, which are measured at
fair value at the date of grant. The fair value determined at the grant date is expensed on a
straight-line basis over the vesting period, based on the company’s estimate of shares that will
eventually vest. Fair value is measured by use of the stochastic (a lattice model) or Black Scholes
valuation models. The expected life of stock-based compensation awards used in the lattice model is
adjusted, based on management’s best estimate, for the effects of non-transferability, exercise
restrictions and behavioral considerations.
Prior to January 1, 2006, the company accounted for its stock-based employee compensation plans
under the intrinsic value method as described in APB 25 and related interpretations. Generally, no
compensation expense was recognized for stock option grants if the exercise price was at or above
the quoted market price of the underlying stock on the date of grant.
Effective January 1, 2006, the company adopted FASB Statement No. 123(R), using the modified
prospective transition method. Under that transition method, compensation cost recognized in 2006
includes: (a) compensation cost for all stock-based compensation granted prior to, but not yet
vested, as of January 1, 2006, based on the grant-date fair value estimated in accordance with the
original provisions of FASB Statement No. 123, and (b) compensation cost for all stock-based
compensation granted subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of FASB Statement No. 123(R).
Pensions
For defined contribution plans, contributions payable related to the accounting period are charged
to the income statement. For defined benefit plans, the cost of providing benefits is separately
determined for each plan using the projected unit credit method, based on actuarial valuations
performed at each balance sheet date. A portion of actuarial gains and losses is recognized through
the income statement if the net cumulative unrecognized actuarial gain or loss at the end of the
prior period exceeds the greater of 10.0% of the present value of the defined benefit obligation
(before deducting plan assets) at that date and 10.0% of the fair value of any plan assets. Prior
service costs are recognized over the remaining service periods of active employees.
The company adopted FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an Amendment of FASB Statement Nos. 87, 88, 106 and 132(R),” on
December 31, 2006. FASB Statement No. 158 requires that the net funded status of defined benefit
plans be recognized on the balance sheet and that unrecognized net actuarial gains and losses and
prior service costs, which have previously been recorded as part of the postretirement asset or
liability, be recorded directly to other comprehensive income. Upon adoption, an increase of $34.5
million, $23.5 million net of tax, was recorded in the pension liability included within other
liabilities with a corresponding reduction in accumulated other comprehensive income. The
company’s annual measurement date is December 31.
Advertising Costs
The company expenses the cost of all advertising and promotional activities as incurred. The
company incurred advertising costs of $28.6 million for the year ended December 31, 2007 (2006:
$28.5 million; 2005: $31.7 million). These amounts are included in marketing expenses in the
Consolidated Statements of Income.
Leases
Rentals under operating leases, where the lessor retains substantially all the risks and benefits
of ownership of the asset, are charged evenly to expense over the lease term. Benefits received and
receivable as an incentive to enter an operating lease are also spread evenly over the lease term.
The Company accounts for lease termination costs in accordance with FASB Statement No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities,” which requires that (1) a
liability for costs to terminate a contract before the end of its term shall be recognized at the
time termination occurs and measured at fair value and (2) a liability for costs that will continue
to be incurred under a contract for its remaining term without economic benefit to the company be
recognized and measured at its fair value when the company ceases to use the right conveyed by the
contract, net of estimated sublease rentals that could reasonably be obtained even if the company
does not anticipate entering into any subleasing arrangements.
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Taxation
Income taxes are provided for in accordance with FASB Statement No. 109, “Accounting for Income
Taxes.” Deferred tax assets and liabilities are recorded for temporary differences between the tax
basis of assets and liabilities and the reported amounts in the Consolidated Financial Statements,
using the statutory tax rates in effect for the year in which the differences are expected to
reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the results of
operations in the period that includes the enactment date. A valuation allowance is recorded to
reduce the carrying amounts of deferred tax assets to the amount that is more likely than not to be
realized.
As a multinational corporation, the company operates in various locations outside of Bermuda and
generates substantially all of its earnings from its subsidiaries. Deferred tax liabilities are
recognized for taxes that would be payable on the unremitted earnings of the company’s
subsidiaries, consolidated investment products, and joint ventures, except where it is our
intention to continue to indefinitely reinvest the undistributed earnings. Our Canadian and U.S.
subsidiaries continue to be directly owned by Invesco Holding Company Limited (formerly INVESCO PLC, our predecessor company), which is
directly owned by Invesco, Ltd. Our Canadian unremitted earnings, for which we are indefinitely
reinvested, are estimated to be $880 million at December 31, 2007 compared with $600 million at
December 31, 2006. If distributed as a dividend, Canadian withholding tax of 5.0% would be due.
Deferred tax liabilities in the amount of $14.1 million (2006: $7.0 million) for additional U.K.
tax have been recognized for unremitted earnings of certain subsidiaries that have regularly
remitted earnings and are expected to continue to remit earnings in the foreseeable future.
Dividends from our investment in the U.S. should not give rise to additional tax as there is no
withholding tax between the U.S. and U.K., the underlying U.S. tax rate is greater than the U.K.
tax rate, and the company has U.K. tax credits available. There are no additional taxes on
dividends from the U.K. to Bermuda.
The
company adopted FASB Interpretation No. 48 L.C., “Accounting for Uncertainty in Income Taxes – An
Interpretation of FASB Statement No. 109,” on January 1, 2007. Accordingly, the company reports a
liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to
be taken in a tax return. The company recognizes interest and penalties, if any, related to
unrecognized tax benefits in income tax expense.
Earnings Per Share
Basic earnings per share is calculated by dividing net income available to shareholders by the
weighted average number of shares outstanding during the periods, excluding treasury shares.
Diluted earnings per share is computed using the treasury stock method outlined in FASB Statement
No. 128, “Earnings per Share,” which requires computing share equivalents and dividing net income
by the total weighted average number of shares and share equivalents outstanding during the period.
Comprehensive Income
Under FASB Statement No. 130, “Reporting Comprehensive Income,” the company’s other comprehensive
income/(loss) consists of changes in unrealized gains and losses on investment securities
classified as available-for-sale, reclassification adjustments for realized gains/(losses) on those
investment securities classified as available-for-sale, foreign currency translation adjustments
and pension liability adjustments. Such amounts are recorded net of applicable taxes.
Dividends to Shareholders
Dividends to shareholders are recognized on the declaration date.
Translation of Foreign Currencies
The company accounts for the impact of foreign currency under the guidance provided in FASB
Statement No. 52, “Foreign Currency Translation”. Transactions in foreign currencies (currencies
other than the functional currencies of the operation) are recorded at the rates of exchange
prevailing on the dates of the transactions. At each balance sheet date, monetary assets and
liabilities that are denominated in foreign currencies are remeasured into the functional
currencies of the company’s subsidiaries at the rates prevailing at the balance sheet date. Gains
and losses arising on revaluation are included in the income statement, with the exception of
differences on foreign currency borrowings that provide an effective designated hedge against a net
investment in a foreign entity. These differences are taken directly to accumulated other
comprehensive income in equity until the disposal of the net investment, at which time they are
recognized in the income statement. At December 31, 2007 and 2006, the company did not have any
hedges against net investments in foreign entities.
The company’s reporting currency and the functional currency of the Parent is U.S. dollars. On
consolidation, the assets and liabilities of company subsidiary operations whose functional
currencies are currencies other than the U.S. dollar (“foreign operations”) are translated at the
rates of exchange prevailing at the balance sheet date. Income statement figures are translated at
the weighted average rates for the year, which approximate actual exchange rates. Exchange
differences arising on the
translation of the net assets of foreign operations are taken directly to
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accumulated other comprehensive income in equity. Goodwill and other fair value adjustments arising
on acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
are translated at rates of exchange prevailing at the balance sheet date.
The company does not utilize derivative financial instruments to provide a hedge against interest
rate or foreign exchange exposures.
Recent Accounting Pronouncements
FASB Statement No. 157, “Fair Value Measurements” and FASB Statement No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement
No. 115” are effective for the company beginning January 1, 2008. FASB Statement No. 157
establishes a framework for measuring fair value, and FASB Statement No. 159 permits companies the
choice of measuring certain financial instruments and other items at fair value. The company
expects that the adoption of these two standards not will have a material impact on its
consolidated financial statements.
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business Combinations”,
and FASB Statement No. 160,” Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51”. Under FASB Statement No. 141(R), the acquirer must recognize, with
certain exceptions, 100% of the fair values of assets acquired, liabilities assumed, and
noncontrolling interests in acquisitions of less than 100% controlling interest when the
acquisition constitutes a change in control of the acquired entity. Additionally, when an acquirer
obtains partial ownership in an acquiree, an acquirer recognizes and consolidates assets acquired,
liabilities assumed and any noncontrolling interests at 100% of their fair values at that date
regardless of the percentage ownership in the acquiree. As goodwill is calculated as a residual,
all goodwill of the acquired business, not just the acquirer’s share, is recognized under this
“full-goodwill” approach. Contingent consideration obligations that are elements of consideration
transferred are recognized as of the acquisition date as part of the fair value transferred in
exchange for the acquired business. Acquisition-related costs incurred in connection with a
business combination shall be expensed. FASB Statement No. 160 establishes new accounting and
reporting standards for noncontrolling interests (formerly known as “minority interests”) in a
subsidiary and for the deconsolidation of a subsidiary.
FASB Statement No. 141(R) and FASB Statement No. 160 will be effective for the company beginning
January 1, 2009. FASB Statement No. 141(R) will be applied prospectively, while FASB Statement No.
160 requires retroactive adoption of the presentation and disclosure requirements for existing
minority interests but prospective adoption of all of its other requirements. The company is
currently assessing the impact of these two new standards.
2. ACQUISITIONS AND DISPOSITIONS
Acquisition of PowerShares Capital Management LLC
On September 18, 2006, the company acquired 100% of the limited liability company interests of
PowerShares Capital Management LLC (“PowerShares”). The initial consideration for the transaction
was $107.5 million, which included transaction costs of $6.3 million. The initial purchase price
did not include contingent consideration, or “earn-outs”, of up to $630.0 million, payable in two
components, as detailed below:
| • | $130.0 million payable when aggregate management fees total $50.0 million or more in any consecutive 12-month period in Year 1 to Year 4 (referred to as the second contingent payment); | ||
| • | A payment (referred to as the third contingent payment) calculated at the end of Year 5 based on compound annual growth in management fees from an assumed base of $17.5 million at closing. The Year 5 management fees are reduced by $50.0 million if the second contingent payment is earned. For a compound annual growth rate (CAGR) in Year 5 between 15% and 75%, $5.0 million for each CAGR point above 15%, for a maximum payment of $300.0 million for a 75% CAGR. For a CAGR in Year 5 between 75% and 100%, $300.0 million, plus an additional $8.0 million for each CAGR point above 75%, for a maximum total payment of $500.0 million for a 100% CAGR. |
At the company’s option, up to 35% of the contingent payments are payable in equity. The
additional purchase price will not be recognized until the contingency is resolved. Any such
payments would result in an increase to goodwill.
At the date of the acquisition, PowerShares managed assets of approximately $6.3 billion, offering
37 exchange-traded funds to investors. PowerShares offered 105 exchange-traded funds, with assets
under management of $14.5 billion as of December 31, 2007 (2006: $8.5 billion). Tax deductible
goodwill and management contract intangible assets of $107.1 million were recorded in relation to
this acquisition. The company evaluated current industry practice and estimated a value of ten
times earnings before interest, taxes, depreciation and amortization of the acquired entity to
arrive at the value of $99.7 million for management contract intangible assets.
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The management
contract intangibles were assigned an indefinite useful life and are therefore not subject to
amortization. The acquired management contracts are renewable at minimal cost to the company; it
is the company’s intention to renew these contracts indefinitely; the increased demand in the asset
management industry for exchange-traded fund products and the independence of these contracts from
other assets acquired contributed to the company’s determination of an indefinite useful life. The
excess additional purchase price of $7.4 million was allocated to goodwill.
The fair value of net assets acquired was determined as follows:
| $ in millions | ||||
Property and equipment |
2.6 | |||
Receivables |
3.4 | |||
Cash and cash equivalents |
2.1 | |||
Payables |
(7.7 | ) | ||
Net assets |
0.4 | |||
Goodwill |
7.4 | |||
Management contract intangibles |
99.7 | |||
Fair value of net assets acquired |
107.5 | |||
Satisfied by: |
||||
Cash paid to seller at closing |
101.2 | |||
Transaction costs |
6.3 | |||
Total purchase price |
107.5 | |||
The results of operations of PowerShares were included in the company’s Consolidated Statements of
Income from the date of acquisition. From September 18, 2006 through the end of 2006, PowerShares’
net income was $0.9 million.
At December 31, 2007, the second contingent earn-out payment of $129.6 million was earned and
accrued, to be paid in 2008, and reflected as an increase to goodwill. The amount was adjusted
down by $0.4 million following a recalculation of the initial consideration paid. As detailed
above, this contingent payment became payable when aggregate earn-out management fees as defined in
the agreement reached $50.0 million for the preceding twelve months.
Acquisition of WL Ross & Co. LLC
On October 3, 2006, the company acquired 100% of the limited liability company interests of WL Ross
& Co. LLC (“WL Ross”), one of the industry’s leading financial restructuring groups. WL Ross
manages assets for institutional investors in the U.S., Europe and Asia. The initial consideration
for the transaction was $134.1 million, which included $30.0 million of deferred consideration and
transaction costs of $4.1 million. Such deferred consideration was classified as a current
liability at the date of acquisition, as it represented a contractually guaranteed payment.
Additional contingent consideration, or “earn-outs”, of up to $245.0 million is payable over the
five years following the date of the acquisition depending on the achievement of annual fund launch
targets over the five years following the completion of the acquisition. The additional purchase
price will not be recognized until the contingency is resolved and the additional consideration is
issued or issuable. Any such payments would result in an increase to goodwill.
At the time of the acquisition, WL Ross managed assets of approximately $2.6 billion. At December
31, 2007, WL Ross’s assets under management were $6.8 billion (2006: $2.8 billion). Due to the
terms of an employment agreement, a prepaid compensation asset of $100.0 million, amortizable over
five years, was recognized as a result of the acquisition and is included within prepaid assets on
the balance sheet at December 31, 2006. Tax deductible goodwill, management contracts and other
intangible assets of $27.4 million have been recorded in
relation to this acquisition. Identified
intangibles are being amortized over a weighted average useful life of five years.
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The fair value of net assets acquired was determined as follows:
| $ in millions | ||||
Property and equipment |
3.0 | |||
Receivables |
4.8 | |||
Cash and cash equivalents |
6.8 | |||
Other |
0.9 | |||
Payables |
(8.8 | ) | ||
Net assets |
6.7 | |||
Goodwill |
13.7 | |||
Management contract intangibles |
13.7 | |||
Prepaid compensation |
100.0 | |||
Fair value of net assets acquired |
134.1 | |||
Satisfied by: |
||||
Cash paid to seller at closing |
100.0 | |||
Deferred consideration |
30.0 | |||
Transaction costs |
4.1 | |||
Total purchase price |
134.1 | |||
The book value of net assets acquired was approximately equal to the fair value of these assets and
liabilities. The results of operations of WL Ross are included in the company’s Consolidated
Statements of Income from the date of acquisition. From October 3, 2006 through the end of 2006, WL
Ross’s net income was $1.3 million.
During the fourth quarter of 2007, payments of $44.8 million were made related to the WL Ross
acquisition, of which $30.0 million related to deferred consideration. Goodwill was increased by
$18.9 million during 2007. Of this $18.9 million, $14.8 million related to the earn-out payment
and $4.1 million related to other goodwill adjustments.
The following unaudited pro forma results of operations for the years ended December 31, 2006 and
2005 assume that the acquisitions of PowerShares and WL Ross had taken place on January 1, 2005,
the earliest period presented herein. These unaudited pro forma results are not necessarily
indicative of the actual results of operations that would have been achieved nor are they
necessarily indicative of future results of operations.
| $ in millions (except per share amounts) | 2006 | 2005 | ||||||
Operating revenues |
3,294.4 | 2,904.7 | ||||||
Net income |
491.8 | 226.6 | ||||||
Basic earnings per share |
1.24 | 0.57 | ||||||
Diluted earnings per share |
1.21 | 0.56 | ||||||
Disposition of AMVESCAP Retirement Business
On July 15, 2005, the company completed the sale of a portion of the AMVESCAP Retirement business.
This business provided administrative, recordkeeping, brokerage, trust and custodial services for
retirement plans, individual retirement accounts, and education savings programs and accounts. The
company disposed of all rights, title and interests in this business, including all of the issued
and outstanding capital of one of its subsidiaries, AMVESCAP Services Inc. The results of this
business are included through the closing date of the transaction. The disposal is analyzed as
follows:
| $ in millions | ||||
Non-current assets |
6.2 | |||
Current assets, including cash of $0.6 million |
9.6 | |||
Current liabilities assumed |
7.7 | |||
| 23.5 | ||||
Gain on sale recognized in 2005 |
32.6 | |||
Gain on sale recognized in 2006 |
1.7 | |||
Gain on sale recognized in 2007 |
1.6 | |||
Cash consideration received (2007: $1.6 million, 2006: $1.7 million, 2005: $56.1 million) |
59.4 | |||
Other
In December 2005, the company outsourced its banking operations in Germany and on January 31, 2006,
completed the sale of its German banking license. Included in other gains and losses, net in the
2006 Consolidated Statements of Income is a gain of $0.2 million related to this transaction.
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3. INVESTMENTS
Current Investments
| $ in millions | 2007 | 2006 | ||||||
Available-for-sale investments: |
||||||||
Seed money in affiliated funds |
60.9 | 97.1 | ||||||
Foreign time deposits |
22.7 | 11.1 | ||||||
Other |
1.0 | 5.9 | ||||||
Trading investments: |
||||||||
Investments related to deferred compensation plans* |
58.8 | 64.8 | ||||||
Other |
27.8 | 1.9 | ||||||
Held-to-maturity investments: |
||||||||
U.S. Treasury and government agency securities |
6.0 | 7.0 | ||||||
Total current investments |
177.2 | 187.8 | ||||||
Non-current Investments
| $ in millions | 2007 | 2006 | ||||||
Available-for-sale investments: |
||||||||
Collateralized loan and debt obligations |
39.0 | 48.9 | ||||||
Other |
8.6 | 8.6 | ||||||
Held-to-maturity investments: |
||||||||
U.S. Treasury and government agency securities |
— | 4.0 | ||||||
Equity method investments |
74.7 | 18.4 | ||||||
Total non-current investments |
122.3 | 79.9 | ||||||
| * | Investments related to deferred compensation plans include investments in affiliated mutual fund product that are held to economically hedge current and non-current deferred compensation liabilities. |
Investments classified as available-for-sale and trading are recorded at fair value. Investments
classified as held-to-maturity are recorded at amortized cost.
The company provides investment management services to a number of collateralized loan and debt
obligation (CLO/CDO) entities that meet the definition of variable interest entities (VIEs) as
defined in FIN No. 46 (revised December 2003), “Consolidation of Variable Interest Entities.” The
company has invested in certain of the entities, generally taking a
relatively small portion of the
unrated, junior subordinated position. At December 31, 2007, the company held $39.0 million of
investment in these CLO/CDOs, which represents its maximum risk of
loss. Our investments in
collateralized loan or debt entities are generally subordinated to
other interests in the entities and
entitles the investors to receive the residual cash flows, if any,
from the entities. Investors in
CLO/CDOs have no recourse against the company for any losses sustained in the CLO/CDO structure.
Management has concluded that the company is not the primary beneficiary of any of the CLO/CDO
entities and it has recorded its investments at fair value using discounted cash flow analyses. An
increase or decrease in the discount rate of 1.0% would change the valuation of the CLO/CDOs by
$0.9 million (2006: $1.2 million). Dividend income for these investments is recorded in other
income on the Consolidated Statements of Income.
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Realized gains and losses recognized in the income statement during the year from investments
classified as available-for-sale are as follows:
| 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||
| Proceeds | Gross | Gross | Proceeds | Gross | Gross | Proceeds | Gross | Gross | ||||||||||||||||||||||||||||
| from | Realized | Realized | from | Realized | Realized | from | Realized | Realized | ||||||||||||||||||||||||||||
| $ in millions | sales | Gains | Losses | sales | Gains | Losses | sales | Gains | Losses | |||||||||||||||||||||||||||
Current
available-for-sale
investments |
102.8 | 20.6 | — | 239.4 | 9.7 | (0.4 | ) | 418.5 | 3.0 | (1.9 | ) | |||||||||||||||||||||||||
Non–current
available-for-sale
investments |
9.0 | 2.6 | (5.4 | ) | 14.9 | 8.4 | (1.3 | ) | 8.5 | 2.6 | (0.1 | ) | ||||||||||||||||||||||||
Upon the sale of available-for-sale securities, realized gains of $17.8 million, $16.4 million and
$3.6 million were transferred from accumulated other comprehensive income into the Consolidated
Statements of Income during 2007, 2006, and 2005, respectively. The portion of trading gains and
losses for the period that relates to trading securities still held at December 31, 2007 and
December 31, 2006 were $4.7 million and $4.4 million, respectively.
Gross unrealized holding gains and losses recognized in other accumulated comprehensive income from
available-for-sale investments are presented in the table below:
| 2007 | 2006 | |||||||||||||||||||||||||||||||
| Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||
| Holding | Holding | Fair | Holding | Holding | Fair | |||||||||||||||||||||||||||
| $ in millions | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
Current: |
||||||||||||||||||||||||||||||||
Seed money
in affiliated funds |
58.6 | 3.0 | (0.7 | ) | 60.9 | 88.2 | 9.4 | (0.5 | ) | 97.1 | ||||||||||||||||||||||
Foreign time deposits |
22.7 | — | — | 22.7 | 11.1 | — | — | 11.1 | ||||||||||||||||||||||||
Other |
1.0 | — | — | 1.0 | 1.1 | 4.8 | — | 5.9 | ||||||||||||||||||||||||
Current
available-for-sale
investments |
82.3 | 3.0 | (0.7 | ) | 84.6 | 100.4 | 14.2 | (0.5 | ) | 114.1 | ||||||||||||||||||||||
Non–current: |
||||||||||||||||||||||||||||||||
Collateralized debt obligations |
41.4 | 0.6 | (3.0 | ) | 39.0 | 45.9 | 4.0 | (1.0 | ) | 48.9 | ||||||||||||||||||||||
Other |
6.9 | 1.7 | — | 8.6 | 6.9 | 1.7 | — | 8.6 | ||||||||||||||||||||||||
Non–current
available-for-sale
investments: |
48.3 | 2.3 | (3.0 | ) | 47.6 | 52.8 | 5.7 | (1.0 | ) | 57.5 | ||||||||||||||||||||||
| 130.6 | 5.3 | (3.7 | ) | 132.2 | 153.2 | 19.9 | (1.5 | ) | 171.6 | |||||||||||||||||||||||
The net carrying amount, gross unrecognized gains, gross unrecognized losses and estimated fair
value of held to maturity securities is as follows:
| 2007 | 2006 | |||||||||||||||||||||||||||||||
| Net | Gross | Gross | Net | Gross | Gross | |||||||||||||||||||||||||||
| carrying | unrecognized | unrecognized | Fair | carrying | unrecognized | unrecognized | Fair | |||||||||||||||||||||||||
| $ in millions | amount | gains | losses | Value | amount | gains | losses | Value | ||||||||||||||||||||||||
Treasury and
governmental agency
securities |
6.0 | — | — | 6.0 | 11.0 | — | (0.1 | ) | 10.9 | |||||||||||||||||||||||
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Available-for-sale
and held to maturity debt securities as of December 31, 2007, by maturity, are
set out below:
| $ in millions | Available-for-sale (Fair Value) |
Held to maturity
(Net Carrying Amount) |
||||||
Less than one year |
22.7 | 6.0 | ||||||
One to five years |
27.3 | — | ||||||
Five to ten years |
11.7 | — | ||||||
Greater than ten years |
— | — | ||||||
Total available-for-sale
and held to maturity debt securities |
61.7 | 6.0 | ||||||
The following table provides the breakdown of available-for-sale investments with unrealized losses
at December 31, 2007:
| Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| $ in millions | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Seed money in affiliated funds |
8.7 | (0.5 | ) | — | (0.2 | ) | 8.7 | (0.7 | ) | |||||||||||||||
Collateralized debt obligations |
— | (2.0 | ) | 23.7 | (1.0 | ) | 23.7 | (3.0 | ) | |||||||||||||||
| 8.7 | (2.5 | ) | 23.7 | (1.2 | ) | 32.4 | (3.7 | ) | ||||||||||||||||
The following table provides the breakdown of available-for-sale investments with unrealized losses
at December 31, 2006:
| Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| $ in millions | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Seed money in affiliated funds |
33.1 | (0.5 | ) | — | — | 33.1 | (0.5 | ) | ||||||||||||||||
Collateralized debt obligations |
— | — | 7.8 | (1.0 | ) | 7.8 | (1.0 | ) | ||||||||||||||||
| 33.1 | (0.5 | ) | 7.8 | (1.0 | ) | 40.9 | (1.5 | ) | ||||||||||||||||
The company has reviewed investment securities for other-than-temporary impairment in accordance
with its accounting policy outlined in Note 1. The gross unrealized losses in collateralized debt
obligations during 2007 and 2006 were primarily caused by discount rate changes. The gross
unrealized losses in seed money during 2007 and 2006 were primarily caused by declines in the
market value of the underlying funds. The company does not consider any material portion of its
securities to be other-than-temporarily impaired because the securities are expected to recover
their value over time and the company has the intent and ability to hold the securities until this
recovery occurs.
The company owns 100% of the voting control of its subsidiary entities, directly or indirectly,
with the exception of the following entities, which are consolidated with resulting minority
interests:
| Country of | ||||||||
| Name of Company | Incorporation | % Voting Interest Owned | ||||||
INVESCO Real Estate GmbH |
Germany | 75.1 | % | |||||
INDIA Asset Recovery Management Limited |
India | 80.1 | % | |||||
Following are the company’s investments in joint ventures and affiliates, which are accounted for
using the equity method and are recorded as long-term investments on the Consolidated Balance
Sheets:
| Country of | ||||||||
| Name of Company | Incorporation | % Voting Interest Owned | ||||||
INVESCO Great Wall Fund Management Company Limited |
China | 49.0 | % | |||||
TAIYO Fund Management Co. LLC |
U.S. | 40.0 | % | |||||
Pocztylion — ARKA |
Poland | 29.3 | % | |||||
Equity method investments also include the company’s investments in various of its sponsored
private equity, real estate and other investment entities. The company’s investment is generally
less than 5% of the capital of these entities. These entities include variable interest entities
for which the company has determined that it is not the primary beneficiary and other investment
products structured as partnerships for which the company is the general partner and the other
limited partners lack either substantive kick-out or participation rights. See Note 18 for
additional information. Equity in earnings of unconsolidated affiliates for the year ended
December 31, 2007 was $48.1 million (2006:
$4.3 million; 2005: $0.7 million).
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4. OTHER CURRENT ASSETS
Components of other current assets are as follows:
| $ in millions | 2007 | 2006 | ||||||
Deferred tax assets, net |
32.5 | 25.7 | ||||||
Property held for sale |
4.7 | 11.9 | ||||||
Deferred financing costs |
6.4 | 6.3 | ||||||
Other accounts receivable |
159.7 | 194.7 | ||||||
| 203.3 | 238.6 | |||||||
During 2006, property held for sale of $15.8 million was transferred from land and buildings to
other current assets and was written down to its estimated recoverable amount, resulting in a loss
of $4.6 million.
5. ASSETS HELD FOR POLICYHOLDERS AND POLICYHOLDER PAYABLES
One of the
company’s subsidiaries, INVESCO Pensions Limited, is an
insurance-type company which was
established to facilitate retirement savings plans in the U.K. The entity holds assets on its
balance sheet that are legally segregated and are generally not subject to claims that arise from
any other Invesco business and which are managed for its clients with an offsetting liability. Both
the asset and the liability are reported at fair value. At December 31, 2007, the assets held for
policyholders and the linked policyholder payables were $1,898.0 million (2006: $1,574.9 million).
Changes in the fair values of these assets and liabilities are recorded in the income statement,
where they offset, because the value of the policyholder payables is linked to the value of the
assets held for policyholders.
6. PROPERTY AND EQUIPMENT
Changes in property and equipment balances are as follows:
| Technology and | Land and | |||||||||||||||
| $ in millions | Other Equipment | Software | Buildings * | Total | ||||||||||||
Cost: |
||||||||||||||||
January 1, 2007 |
484.0 | 228.4 | 85.7 | 798.1 | ||||||||||||
Foreign exchange |
12.6 | 3.6 | 0.6 | 16.8 | ||||||||||||
Additions |
16.3 | 18.9 | 1.5 | 36.7 | ||||||||||||
Transfer to investments |
— | — | (4.7 | ) | (4.7 | ) | ||||||||||
Re-classifications |
(1.0 | ) | — | 1.0 | — | |||||||||||
Disposals |
(46.5 | ) | (13.0 | ) | — | (59.5 | ) | |||||||||
December 31, 2007 |
465.4 | 237.9 | 84.1 | 787.4 | ||||||||||||
Accumulated depreciation: |
||||||||||||||||
January 1, 2007 |
(399.3 | ) | (194.9 | ) | (5.2 | ) | (599.4 | ) | ||||||||
Foreign exchange |
(11.0 | ) | (3.2 | ) | — | (14.2 | ) | |||||||||
Depreciation expense |
(33.0 | ) | (18.0 | ) | (1.1 | ) | (52.1 | ) | ||||||||
Re-classifications |
0.4 | — | (0.4 | ) | — | |||||||||||
Disposals |
45.5 | 12.8 | — | 58.3 | ||||||||||||
December 31, 2007 |
(397.4 | ) | (203.3 | ) | (6.7 | ) | (607.4 | ) | ||||||||
Net book value: |
||||||||||||||||
December 31, 2007 |
68.0 | 34.6 | 77.4 | 180.0 | ||||||||||||
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| Technology and | Land and | |||||||||||||||
| $ in millions | Other Equipment | Software | Buildings* | Total | ||||||||||||
Cost: |
||||||||||||||||
January 1, 2006 |
492.9 | 207.8 | 88.7 | 789.4 | ||||||||||||
Foreign exchange |
31.8 | 6.9 | 9.9 | 48.6 | ||||||||||||
Acquisitions |
3.4 | — | 2.2 | 5.6 | ||||||||||||
Additions |
21.2 | 16.0 | 2.7 | 39.9 | ||||||||||||
Transfer to investments |
— | — | (19.8 | ) | (19.8 | ) | ||||||||||
Transfer from investments |
— | — | 2.0 | 2.0 | ||||||||||||
Disposals |
(65.3 | ) | (2.3 | ) | — | (67.6 | ) | |||||||||
December 31, 2006 |
484.0 | 228.4 | 85.7 | 798.1 | ||||||||||||
Accumulated depreciation: |
||||||||||||||||
January 1, 2006 |
(394.8 | ) | (171.1 | ) | (7.4 | ) | (573.3 | ) | ||||||||
Foreign exchange |
(31.1 | ) | (5.3 | ) | (0.7 | ) | (37.1 | ) | ||||||||
Depreciation expense |
(35.7 | ) | (20.5 | ) | (1.1 | ) | (57.3 | ) | ||||||||
Transfer to investments |
— | — | 4.0 | 4.0 | ||||||||||||
Disposals |
62.3 | 2.0 | — | 64.3 | ||||||||||||
December 31, 2006 |
(399.3 | ) | (194.9 | ) | (5.2 | ) | (599.4 | ) | ||||||||
Net book value: |
||||||||||||||||
December 31, 2006 |
84.7 | 33.5 | 80.5 | 198.7 | ||||||||||||
| * | Included within land and buildings are $36.8 million at December 31, 2007 (2006: $36.6 million) in non-depreciable land assets. |
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7. INTANGIBLE ASSETS
Intangible assets are predominately investment management contracts acquired through acquisitions.
Amortization of investment management contracts is included within general and administrative costs
in the Consolidated Statements of Income. No impairments of intangible assets have been identified
in the periods presented. The weighted average amortization period of intangible assets is nine
years.
| $ in millions | 2007 | 2006 | ||||||
Cost: |
||||||||
January 1 |
205.3 | 91.4 | ||||||
Foreign exchange |
0.3 | 0.5 | ||||||
Business acquisitions |
— | 113.4 | ||||||
December 31 |
205.6 | 205.3 | ||||||
Accumulated
amortization: |
||||||||
January 1, 2007 |
(39.4 | ) | (29.3 | ) | ||||
Foreign exchange |
— | (0.1 | ) | |||||
Amortization expense |
(12.0 | ) | (10.0 | ) | ||||
December 31 |
(51.4 | ) | (39.4 | ) | ||||
Net book
value: |
||||||||
December 31 |
154.2 | 165.9 | ||||||
Management contracts include $99.7 million of amounts acquired in 2006 related to the PowerShares
acquisition that have indefinite lives and therefore are not subject to amortization.
Estimated amortization expense for each of the five succeeding fiscal years based upon the
company’s intangible assets at December 31, 2007 is as follows:
| Years ended December 31, | $ in millions | |||
2008 |
12.0 | |||
2009 |
12.0 | |||
2010 |
11.4 | |||
2011 |
7.5 | |||
2012 |
4.3 | |||
8. GOODWILL
The table below details changes in the goodwill balance:
| $ in millions | 2007 | 2006 | ||||||
January 1 |
6,360.7 | 6,069.9 | ||||||
Business acquisitions – earn-outs |
157.9 | 23.0 | ||||||
Other adjustments |
(3.0 | ) | (0.8 | ) | ||||
Foreign exchange |
332.4 | 268.6 | ||||||
December 31 |
6,848.0 | 6,360.7 | ||||||
Prior to the strategic initiative that commenced in 2005 (see Note 13), the components of the
company were separate businesses and reporting units. As a result of the 2005 goodwill impairment
review, the company recognized a non-cash goodwill impairment charge of $16.6 million ($10.4
million after tax, or $0.03 per share) related to the former Private Wealth Management reporting
unit. The key assumptions used in the discounted cash flow analysis used to determine the fair
value of the Private Wealth Management reporting unit included: a) cash flow periods of 20 years;
and b) a discount rate of 12.0%, which was based upon the company’s weighted average cost of
capital, adjusted for the risks associated with the operations. A variance in the discount rate
could have a significant impact on the amount of the goodwill impairment charge recorded.
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9. OTHER CURRENT LIABILITIES
| $ in millions | 2007 | 2006 | ||||||
Accruals and other liabilities |
322.3 | 277.2 | ||||||
Compensation and benefits |
71.5 | 88.5 | ||||||
Accrued bonus |
356.1 | 302.0 | ||||||
Accrued deferred compensation |
14.3 | 3.1 | ||||||
Accounts payable |
235.4 | 168.5 | ||||||
Other |
21.5 | 18.5 | ||||||
Other current liabilities |
1,021.1 | 857.8 | ||||||
10. LONG-TERM DEBT
| 2007 | 2006 | |||||||||||||||
| $ in millions | Book Value | Fair Value | Book Value | Fair Value | ||||||||||||
Unsecured Senior Notes: |
||||||||||||||||
5.9% — due January 15, 2007 |
— | — | 300.0 | 299.9 | ||||||||||||
4.5% — due December 15, 2009 |
300.0 | 297.9 | 300.0 | 292.2 | ||||||||||||
5.625% — due April 17, 2012 |
300.0 | 300.8 | — | — | ||||||||||||
5.375% — due February 27, 2013 |
350.0 | 341.8 | 350.0 | 346.0 | ||||||||||||
5.375% — due December 15, 2014 |
200.0 | 194.1 | 200.0 | 196.4 | ||||||||||||
Floating rate credit facility expiring
March 31, 2010 |
126.4 | 126.4 | 129.0 | 129.0 | ||||||||||||
Total long-term debt |
1,276.4 | 1,261.0 | 1,279.0 | 1,263.5 | ||||||||||||
Less: current maturities of long-term debt |
— | — | (300.0 | ) | (299.9 | ) | ||||||||||
Long-term debt |
1,276.4 | 1,261.0 | 979.0 | 963.6 | ||||||||||||
Analysis of Borrowings by Maturity:
| $ in millions | December 31, 2007 | |||
2008 |
— | |||
2009 |
300.0 | |||
2010 |
126.4 | |||
2011 |
— | |||
2012 |
300.0 | |||
Thereafter |
550.0 | |||
Total long-term debt |
1,276.4 | |||
There are no restrictive covenants in the company’s Senior Note agreements.
The
floating rate credit facility provides for borrowings of various maturities, contains
certain conditions and is unsecured. As of December 31, 2007, $773.6 million (2006: $771.0
million) remained available on the credit facility. Standard conditions for borrowing under the
facility exist, such as compliance with laws, payment of taxes and maintenance of insurance. The
company pays quarterly commitment fees and an annual administration fee for the maintenance of the
credit facility. These fees, which are not significant in amount, are recorded in interest expense
on the Consolidated Statements of Income.
Financial covenants under the credit facility include the quarterly maintenance of a debt/EBITDA
ratio, as defined in the credit facility, of not greater than 3.25:1.00 and a coverage ratio
(EBITDA, as defined in the credit facility/interest payable for the four consecutive fiscal
quarters ended before the date of determination) of not less than 4.00:1.00. Examples of
restrictive covenants in the credit facility include, but are not limited to: prohibitions on
creating, incurring or assuming any liens; making or holding external loans; entering into certain
restrictive merger arrangements; selling, leasing, transferring or otherwise disposing of assets
which generated up to 20% of the consolidated operating income of the borrower; making certain
investments; making a material change in the nature of our business; making an amendment to company
bylaws that would have a material adverse effect; making a significant accounting policy change in
certain situations; making certain limitations on subsidiary entities; becoming a general partner
to certain investments; transacting with affiliates except in the ordinary course of business; and
incurring a certain amount of indebtedness through the non-guarantor subsidiaries. The company was
in compliance with these covenants for the years ended December 31, 2007 and 2006.
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Fees, which range from 9 to 25 basis points, and borrowing margins, which range from 36 to 75 basis
points, are derived from tiers defined by debt/EBITDA ratios, as outlined in the credit facility.
Interest is payable on the credit facility based upon LIBOR, Prime, Federal Funds or other
bank-provided rates in existence at the time of each borrowing. The weighted average interest rate
on the credit facility was 5.28% at December 31, 2007 (2006: 5.74%).
Because an active market does not exist for the company’s debt in which to obtain current market
price information, fair value amounts disclosed in the table above were derived from indicative
pricing and analysis from various debt market-makers. Such analysis included comparison of the
terms of the company’s debt with other actively traded debt of similar companies.
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11. COMMON, ORDINARY, EXCHANGEABLE AND TREASURY SHARES
Movements in common, ordinary and exchangeable shares issued and outstanding are represented in the
table below:
| Common | Ordinary | Exchangeable | ||||||||||
| in millions | Shares | Shares | Shares | |||||||||
January 1, 2005 |
— | 810.7 | 28.1 | |||||||||
Exercise of options |
— | 1.4 | — | |||||||||
Business combinations |
— | 0.5 | — | |||||||||
Conversion of exchangeable shares into ordinary shares |
— | 5.5 | (5.5 | ) | ||||||||
December 31, 2005 |
— | 818.1 | 22.6 | |||||||||
Exercises of options |
— | 10.5 | — | |||||||||
Business combinations |
— | 0.5 | — | |||||||||
Conversion of exchangeable shares into ordinary shares |
— | 2.8 | (2.8 | ) | ||||||||
December 31, 2006 |
— | 831.9 | 19.8 | |||||||||
Exercise of options |
— | 15.0 | — | |||||||||
Business combinations |
— | 0.6 | — | |||||||||
Conversion of exchangeable shares into ordinary shares |
— | 19.8 | (19.8 | ) | ||||||||
Cancellation of ordinary shares held in treasury shares |
— | (19.4 | ) | — | ||||||||
Cancellation of ordinary shares and issuance of common shares |
847.9 | (847.9 | ) | — | ||||||||
One-for-two share capital consolidation |
(423.9 | ) | — | — | ||||||||
December 4, 2007 |
424.0 | — | — | |||||||||
Exercise of options |
0.7 | — | — | |||||||||
December 31, 2007 |
424.7 | — | — | |||||||||
| Common Shares of Invesco Ltd. | 2007 | |||||||
| Book | ||||||||
| in millions | Number | Value | ||||||
Authorized common shares of 20 cents each |
1,050.0 | 210.0 | ||||||
Issued and outstanding common shares of 20 cents each |
424.7 | 84.9 | ||||||
On December 4, 2007, INVESCO PLC became a wholly-owned subsidiary of Invesco Ltd. and the
shareholders of INVESCO PLC received common shares of Invesco Ltd. in exchange for their ordinary
shares of INVESCO PLC. The primary listing of shares of the company moved from the London Stock
Exchange to the New York Stock Exchange. This transaction was accounted for in a manner similar to
a pooling of interests. A share capital consolidation, also known as a reverse stock split, on a
one-for-two basis was immediately effected. Share amounts and prices have been retroactively
restated to reflect the reverse stock split, where appropriate.
As of December 31, 2007, unissued common shares were reserved for the following purposes:
| Last | ||||||||||||
| Expiration | ||||||||||||
| Shares in millions | Shares | Prices * | Date | |||||||||
Options arising from acquisitions |
0.4 | 1373p-2732p | Feb 2010 | |||||||||
Subscription agreement (options) with the Employee Share
Option Trust |
12.1 | 513p-3360p | Apr 2013 | |||||||||
Options
granted under the AMVESCAP 2000 Share Option Plan |
17.3 | 639p-2880p | Dec 2015 | |||||||||
Options granted under Sharesave plans |
1.0 | 572p-1008p | May 2010 | |||||||||
| * | Share option prices are in pounds sterling, the currency of the awards. Upon exercise, the exercise price will be converted to U.S. dollars using the rate prevailing on the exercise date. |
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| Ordinary Shares of INVESCO PLC | 2006 | |||||||
| Book | ||||||||
| in millions | Number | Value | ||||||
Authorized ordinary shares of 10 cents each |
1,050.0 | $ | 105.0 | |||||
Allotted, called up and fully paid ordinary shares of 10 cents each (2005: 10 cents each) |
831.9 | $ | 83.2 | |||||
Authorized and issued deferred sterling shares of £1 each |
0.1 | $ | 0.1 | |||||
As of December 31, 2006, unissued ordinary shares were reserved for the following purposes:
| Last | ||||||||||||
| Expiration | ||||||||||||
| Shares in millions | Shares | Prices | Date | |||||||||
Options arising from acquisitions |
0.9 | 686p-1366p | Feb 2010 | |||||||||
Conversion of exchangeable shares |
19.8 | — | Dec 2009 | |||||||||
Subscription agreement (options) with the Employee Share
Option Trust |
33.6 | 25p-1680p | Apr 2013 | |||||||||
Options
granted under the AMVESCAP 2000 Share Option Plan |
45.4 | 319.25p-1440p | Dec 2015 | |||||||||
Options granted under Sharesave plans |
1.8 | 268p-805p | May 2010 | |||||||||
Exchangeable Shares
The
exchangeable shares issued by INVESCO Inc. were exchangeable into
ordinary shares of INVESCO PLC
on a one-for-one basis at any time at the request of the holder. They had, as nearly as
practicable, the economic equivalence of the ordinary shares of INVESCO PLC, including the same
voting and dividend rights as the ordinary shares. Prior to the December 4, 2007 share capital
reorganization, all of the company’s exchangeable shares were redeemed in accordance with their
terms, and each holder of INVESCO Inc. exchangeable shares received one INVESCO PLC ordinary share.
Prior to their redemption, the exchangeable shares were included as part of shareholders’ equity in
the Consolidated Balance Sheet to present a complete view of the company’s capital structure, as
they were economically equivalent to ordinary shares.
Treasury Shares
On June 13, 2007, the company’s board of directors authorized a share repurchase program of up to
$500.0 million of the ordinary shares of INVESCO PLC. The share repurchase authorization has an
expiration of June 30, 2008 and is expected to be fully utilized by that date. Through December 4,
2007, 19.4 million ordinary shares had been repurchased at a cost of $253.3 million, which was
reflected as an increase in Treasury Shares on the Consolidated Balance Sheet. On November 30,
2007, 19.4 million Treasury Shares were cancelled. Between December 4 and 31, 2007, 3.5 million
common shares of Invesco Ltd. were purchased at a cost of $99.6 million, reflected as Treasury
Shares on the Consolidated Balance Sheet. Of the total share repurchase program amount authorized,
$154.5 million remains as of December 31, 2007. The share purchases in December 2007 included 0.3
million common shares at a cost of $7.4 million from current executive officers of the company that
have not been included in arriving at the remaining authorized amount.
Treasury shares include trust shares that represent the holdings of the common shares of Invesco
Ltd. by its employee share ownership trusts in association with certain employee share-based
payment programs. They are accounted for under the treasury stock method. The Invesco Global
Stock Plan trust purchased 13.3 million INVESCO PLC ordinary shares at a cost of $330.8 million
before December 4, 2007, which were converted to common shares of Invesco Ltd. on that date.
Between December 4 and 31, 2007, there were no purchases of common shares under the Invesco Global
Stock Plan trust. See Note 19, Share-Based Compensation.
The trustees of the Employee Share Option Trust waived dividends amounting to $3.6 million in 2007
(2006: $3.2 million). The trustees of the Global Stock Plan waived dividends amounting to $1.5
million in 2007 (2006: $1.0 million); however the company paid an equivalent amount of cash in
lieu of a dividend to certain deferred share-based award recipients per the terms of the awards.
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Movements
in Treasury Shares comprise:
| Treasury | ||||||||
| in millions | Trust Shares | Shares | ||||||
January 1, 2005 |
50.7 | — | ||||||
Distribution of ordinary shares |
(1.1 | ) | — | |||||
December 31, 2005 |
49.6 | — | ||||||
Purchases of ordinary shares |
19.2 | — | ||||||
Distribution of ordinary shares |
(2.8 | ) | — | |||||
December 31, 2006 |
66.0 | — | ||||||
Purchases of ordinary shares |
26.5 | 19.4 | ||||||
Dividend shares |
0.5 | — | ||||||
Distribution of ordinary shares |
(3.1 | ) | — | |||||
Cancellation of ordinary shares held in Treasury |
— | (19.4 | ) | |||||
One-for-two share capital consolidation |
(44.9 | ) | — | |||||
December 4, 2007 |
45.0 | — | ||||||
Purchases of common shares |
— | 3.5 | ||||||
Distribution of common shares |
(3.5 | ) | — | |||||
December 31, 2007 |
41.5 | 3.5 | ||||||
The market price of common shares at the end of 2007 was $31.38. The total market value of the
company’s combined 45.0 million trust and treasury shares was $1,412.1 million on December 31,
2007.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income at December 31 were as follows:
| $ in millions | 2007 | 2006 | 2005 | |||||||||
Net unrealized gains (losses) on available-for-sale investments |
1.6 | 18.4 | 25.0 | |||||||||
Tax on unrealized gains (losses) on available-for-sale investments |
(2.2 | ) | (2.6 | ) | (4.7 | ) | ||||||
Cumulative foreign currency translation adjustments |
987.9 | 636.8 | 368.5 | |||||||||
Tax on cumulative foreign currency translation adjustments |
6.3 | 8.0 | 3.1 | |||||||||
Pension liability adjustments |
(59.1 | ) | (66.8 | ) | (57.6 | ) | ||||||
Tax on pension liability adjustments |
17.6 | 20.7 | 17.4 | |||||||||
Total accumulated other comprehensive income |
952.1 | 614.5 | 351.7 | |||||||||
Total other comprehensive income details are presented below.
| $ in millions | 2007 | 2006 | 2005 | |||||||||
Net Income |
673.6 | 482.7 | 219.8 | |||||||||
Unrealized holding gains (losses) on available-for-sale investments |
1.0 | 9.8 | (0.5 | ) | ||||||||
Tax on unrealized holding (gains) losses on available-for-sale investments |
0.2 | (1.1 | ) | (4.7 | ) | |||||||
Reclassification adjustments for (gains) losses on available-for-sale
investments included in net income |
(17.8 | ) | (16.4 | ) | (3.6 | ) | ||||||
Tax on reclassification adjustments for gains (losses) on
available-for-sale investments included in net income |
0.2 | 3.2 | — | |||||||||
Foreign currency translation adjustments |
351.1 | 268.3 | 360.4 | |||||||||
Tax on foreign currency translation adjustments |
(1.7 | ) | 4.9 | 3.1 | ||||||||
Adjustments to pension liability |
7.7 | 25.3 | 6.8 | |||||||||
Tax on adjustments to pension liability |
(3.1 | ) | (7.7 | ) | (2.0 | ) | ||||||
Total other comprehensive income |
1,011.2 | 769.0 | 579.3 | |||||||||
13. RESTRUCTURING CHARGE
In 2005, the company commenced a strategic initiative to identify steps required to move toward
becoming a more integrated global investment manager. The company began the process of integrating
enterprise support functions, such as Human Resources, Finance and Legal and Compliance. In
addition, the company began to combine its managed account platforms
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and merge certain client
service functions across the company’s retail business. Measures were implemented that reduced
headcount, eliminated office space in certain locations, and streamlined the company’s product
line. The plan was completed in 2006. The company recorded restructuring charges of $13.1
million in 2006 ($8.3 million net of tax) and $62.6
million ($48.0 million net of tax, or $0.12 per share) in 2005 related to these initiatives in
accordance with FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities.”
The following table summarizes restructuring liabilities for the three years ended December 31,
2007:
| Total | ||||||||||||||||||||
| Staff | Fund | restructuring | ||||||||||||||||||
| $ in millions | termination | Property | rationalization | Other | liabilities | |||||||||||||||
Total charge at initial recognition |
32.0 | 20.4 | 6.9 | 3.3 | 62.6 | |||||||||||||||
Less non-cash charges |
— | (7.0 | ) | — | — | (7.0 | ) | |||||||||||||
Cash charges
recognized as expense during the year |
32.0 | 13.4 | 6.9 | 3.3 | 55.6 | |||||||||||||||
Cash paid |
(15.8 | ) | (4.6 | ) | — | (2.8 | ) | (23.2 | ) | |||||||||||
Foreign exchange |
(0.3 | ) | — | — | — | (0.3 | ) | |||||||||||||
December 31, 2005 |
15.9 | 8.8 | 6.9 | 0.5 | 32.1 | |||||||||||||||
Charge recognized as expense during the year |
13.1 | — | — | — | 13.1 | |||||||||||||||
Cash paid |
(23.0 | ) | (8.9 | ) | (4.4 | ) | (0.4 | ) | (36.7 | ) | ||||||||||
Foreign exchange |
0.6 | 0.2 | — | — | 0.8 | |||||||||||||||
December 31, 2006 |
6.6 | 0.1 | 2.5 | 0.1 | 9.3 | |||||||||||||||
Cash paid |
(6.6 | ) | (0.1 | ) | (2.5 | ) | (0.1 | ) | (9.3 | ) | ||||||||||
December 31, 2007 |
— | — | — | — | -- | |||||||||||||||
Cumulative charges incurred (gross) |
45.1 | 20.4 | 6.9 | 3.3 | 75.7 | |||||||||||||||
Staff termination, fund rationalization and other costs were accrued in current liability accounts.
Property costs were included in other liabilities and reflect calculations of the lease payments
for the remaining term in excess of the estimated sublease proceeds that could reasonably be
obtained.
14. GEOGRAPHIC INFORMATION
The company operates under one business segment, asset management. Geographical information is
presented below. The company generally records intercompany services and transfers as if the
services or transfers were provided to third parties at current market prices.
| $ in millions | U.S. | U.K./Ireland | Canada | Europe/Asia | Total | |||||||||||||||
| 2007 | ||||||||||||||||||||
Operating
revenues |
1,587.7 | 1,436.2 | 697.3 | 157.7 | 3,878.9 | |||||||||||||||
Inter-company |
61.3 | (163.5 | ) | (22.0 | ) | 124.2 | — | |||||||||||||
| 1,649.0 | 1,272.7 | 675.3 | 281.9 | 3,878.9 | ||||||||||||||||
Long-lived
assets |
80.1 | 81.1 | 8.4 | 10.4 | 180.0 | |||||||||||||||
2006 |
||||||||||||||||||||
Operating revenues |
1,456.2 | 1,033.8 | 624.1 | 132.6 | 3,246.7 | |||||||||||||||
Inter-company |
51.5 | (130.4 | ) | (14.0 | ) | 92.9 | — | |||||||||||||
| 1,507.7 | 903.4 | 610.1 | 225.5 | 3,246.7 | ||||||||||||||||
Long-lived assets |
90.8 | 85.0 | 11.3 | 11.6 | 198.7 | |||||||||||||||
2005 |
||||||||||||||||||||
Operating revenues |
1,463.4 | 704.2 | 592.1 | 112.9 | 2,872.6 | |||||||||||||||
Inter-company |
30.8 | (62.8 | ) | (10.6 | ) | 42.6 | — | |||||||||||||
| 1,494.2 | 641.4 | 581.5 | 155.5 | 2,872.6 | ||||||||||||||||
Operating revenues reflect the geographical regions from which services are provided.
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15. OTHER GAINS AND LOSSES, NET
| $ in millions | 2007 | 2006 | 2005 | |||||||||
Other gains: |
||||||||||||
Gain on sale of investments |
32.2 | 18.1 | 5.6 | |||||||||
Gain on sale of business |
1.6 | 1.9 | 32.6 | |||||||||
Net foreign exchange gains |
— | 8.5 | — | |||||||||
Total other gains |
33.8 | 28.5 | 38.2 | |||||||||
Other losses: |
||||||||||||
Other than temporary impairment of
available-for-sale investments |
(5.4 | ) | — | — | ||||||||
Loss incurred on fund liquidation |
(8.2 | ) | — | (11.3 | ) | |||||||
Other realized losses |
— | (1.7 | ) | (2.0 | ) | |||||||
Net foreign exchange losses |
(10.3 | ) | — | (11.5 | ) | |||||||
Total other losses |
(23.9 | ) | (1.7 | ) | (24.8 | ) | ||||||
Other gains and losses, net |
9.9 | 26.8 | 13.4 | |||||||||
16. TAXATION
The company’s (provision)\benefit for income taxes is summarized as follows:
| $ in millions | 2007 | 2006 | 2005 | |||||||||
Current: |
||||||||||||
Federal |
(107.4 | ) | (98.2 | ) | (11.7 | ) | ||||||
State |
(9.0 | ) | (10.4 | ) | (6.2 | ) | ||||||
Foreign |
(260.6 | ) | (181.8 | ) | (114.3 | ) | ||||||
| (377.0 | ) | (290.4 | ) | (132.2 | ) | |||||||
Deferred: |
||||||||||||
Federal |
25.1 | 25.9 | (38.7 | ) | ||||||||
State |
2.5 | (1.2 | ) | 0.9 | ||||||||
Foreign |
(7.9 | ) | 11.1 | 18.9 | ||||||||
| 19.7 | 35.8 | (18.9 | ) | |||||||||
Total income tax
(provision)\benefit |
(357.3 | ) | (254.6 | ) | (151.1 | ) | ||||||
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The net deferred tax recognized in our balance sheet at December 31 includes the following:
| $ in millions | 2007 | 2006 | ||||||
Deferred Tax Assets: |
||||||||
Deferred compensation arrangements |
116.7 | 112.9 | ||||||
Onerous lease provisions |
19.1 | 16.7 | ||||||
Tax loss carryforwards |
55.1 | 43.1 | ||||||
Post-retirement medical, pension and other benefits |
33.3 | 32.5 | ||||||
Fixed asset depreciation |
12.8 | 7.5 | ||||||
Unrealized foreign exchange |
13.8 | 13.3 | ||||||
Investment basis differences |
10.1 | 5.2 | ||||||
Other |
17.0 | 11.4 | ||||||
Total Deferred
Tax Assets |
277.9 | 242.6 | ||||||
Valuation Allowance |
(51.2 | ) | (39.2 | ) | ||||
Deferred Tax Assets, net of valuation allowance |
226.7 | 203.4 | ||||||
Deferred Tax Liabilities: |
||||||||
Deferred sales commissions |
(17.8 | ) | (20.2 | ) | ||||
Intangible asset amortization |
(17.9 | ) | (16.7 | ) | ||||
Undistributed earnings of subsidiaries |
(14.1 | ) | (7.0 | ) | ||||
Basis differences on available-for-sale assets |
(4.1 | ) | (3.2 | ) | ||||
Revaluation reserve |
(6.4 | ) | (6.4 | ) | ||||
Other |
(0.1 | ) | (5.7 | ) | ||||
Total Deferred Tax Liabilities |
(60.4 | ) | (59.2 | ) | ||||
Net Deferred Tax Assets |
166.3 | 144.2 | ||||||
Net current deferred tax assets of $32.5 million (2006: $25.7 million) are included in other
current assets on the Consolidated Balance Sheets (see Note 4).
A reconciliation between the statutory rate and the effective tax rate on income from operations
for the years ended December 31, 2007, 2006 and 2005 is as follows:
| 2007 | 2006 | 2005 | ||||||||||||||||
Statutory Rate |
35.0 | % | 30.0 | % | 30.0 | % | ||||||||||||
Foreign jurisdiction statutory income tax rates |
(4.6 | %) | 2.5 | % | 5.3 | % | ||||||||||||
State taxes, net of federal tax effect |
0.9 | % | 2.1 | % | 1.9 | % | ||||||||||||
Additional tax on unremitted earnings |
1.1 | % | 0.9 | % | 0.0 | % | ||||||||||||
Change in valuation allowance for unrecognized tax losses |
0.8 | % | 0.0 | % | 1.2 | % | ||||||||||||
Non-deductible expenses related to relisting/redomicile |
0.4 | % | 0.0 | % | 0.0 | % | ||||||||||||
Europe and
Asia restructuring provisions |
0.0 | % | 0.0 | % | 2.6 | % | ||||||||||||
Non-deductible
investment write-off/non-taxable income |
(0.3 | %) | (0.5 | %) | 1.5 | % | ||||||||||||
Other |
1.3 | % | (0.5 | %) | (1.7 | %) | ||||||||||||
Effective tax rate (excluding minority interest) |
34.6 | % | 34.5 | % | 40.8 | % | ||||||||||||
Income from minority interests |
(5.9 | %) | (9.9 | %) | (9.4 | %) | ||||||||||||
Effective
tax rate per Consolidated Statements of Income |
28.7 | % | 24.6 | % | 31.4 | % | ||||||||||||
The company’s effective tax rate for 2006 and 2005 is reconciled to the U.K. statutory tax rate of
30% as that was the statutory rate of our predecessor company INVESCO PLC. As a result of the
change in our domicile in 2007 to Bermuda, the U.S. statutory rate of 35.0% is used for 2007.
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The company’s subsidiaries operate in several taxing jurisdictions around the world, each with its
own statutory income tax rate. As a result, the blended average statutory tax rate will vary from
year to year depending on the mix of the profits and losses of the company’s subsidiaries. The
majority of our profits are earned in the U.S., Canada and the U.K. The current U.K. statutory tax
rate is 30.0%, the Canadian statutory tax rate is 36.0% and the U.S. Federal statutory tax rate is
35.0%.
On July 19, 2007, legislation was enacted that will decrease the U.K.’s tax rate to 28.0% effective
April 1, 2008. On December 14, 2007, legislation was enacted to reduce the Canadian income tax rate
over the next five years. Beginning January 1, 2008, the Canadian 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.
The reduction in our Canadian and U.K. deferred tax assets in 2007 as a result of these rate
changes increased our effective tax rate by 0.3% and is included in “Other” above.
At December 31, 2007, the company had tax loss carryforwards accumulating in certain subsidiaries
in the aggregate of $139.8 million (2006: $107.1 million), approximately $13.9 million of which
expire between 2008 and 2013, with the remaining $125.9 million having an indefinite life. A full
valuation allowance has been recorded against the deferred tax assets related to these losses based
on a history of losses in these subsidiaries which make it unlikely that the deferred tax assets
will be realized.
Deferred tax liabilities are recognized for taxes that would be payable on the unremitted earnings
of the company’s subsidiaries, consolidated investment products, and joint ventures except where
it is our intention to continue to indefinitely reinvest the undistributed earnings. Our Canadian
and U.S. subsidiaries continue to be directly owned by Invesco
Holding Company Limited (formerly INVESCO PLC, our predecessor
company), which
is directly owned by Invesco, Ltd. Our Canadian unremitted earnings, for which we are indefinitely
reinvested, are estimated to be $880 million at December 31, 2007 compared with $600 million at
December 31, 2006. If distributed as a dividend, Canadian withholding tax of 5.0% would be due.
Deferred tax liabilities in the amount of $14.1 million (2006: $7.0 million) for additional U.K.
tax have been recognized for unremitted earnings of certain subsidiaries that have regularly
remitted earnings and are expected to continue to remit earnings in the foreseeable future.
Dividends from our investment in the U.S. should not give rise to additional tax as there is no
withholding tax between the U.S. and U.K., the underlying U.S. tax rate is greater than the U.K.
tax rate, and we have U.K. tax credits available. There are no additional taxes on dividends from
the U.K. to Bermuda.
FIN 48, which became effective on January 1, 2007, clarifies the accounting for uncertain income
tax positions. Upon adoption of FIN 48, the company recognized an
increase of approximately $17.6
million in income tax reserves for uncertain income tax positions, and a corresponding reduction to
beginning retained earnings.
At adoption, the company had approximately $68.5 million of gross unrecognized income tax benefits
(UTBs). Of this total, $29.0 million (net of tax benefits in other jurisdictions and the federal
benefit of state taxes) represents the amount of unrecognized tax benefits that, if recognized,
would favorably affect the effective tax rate in future periods. A reconciliation of the change in
the UTB balance from January 1, 2007 to December 31, 2007 is as follows:
| Gross Unrecognized | ||||
| $ in millions | Income Tax Benefits | |||
Balance at January 1, 2007 |
68.5 | |||
Additions for tax positions related to the
current year |
8.6 | |||
Additions for tax positions related to prior years |
— | |||
Other reductions for tax positions related to
prior years |
(4.2 | ) | ||
Settlements |
(3.9 | ) | ||
Balance at December 31, 2007 |
69.0 | |||
The company recognizes accrued interest and penalties, as appropriate, related to unrecognized tax
benefits as a component of the income tax provision. At December 31, 2007, the total amount of
gross unrecognized tax benefits was $69.0 million. Of this total, $24.8 million (net of tax
benefits in other jurisdictions and the federal benefit of state taxes) represents the amount of
unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in
future periods. The Consolidated Balance Sheet includes accrued interest and
penalties of $30.8 million at December 31, 2007, including
$3.5 million in 2007 tax expense. As a
result of the expiration of statutes of limitations for various jurisdictions and anticipated
legislative changes it is reasonably possible that the company’s gross unrecognized tax benefits
balance may change within the next twelve months by a range of zero to $15.0 million. The company
and its subsidiaries are routinely examined by various taxing authorities worldwide. The company
and its subsidiaries file income tax returns in the federal jurisdiction, various states and
foreign jurisdictions. With few exceptions, the company is no longer subject to income tax
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examinations by the primary tax authorities for years before 2003. Management monitors changes in
tax statutes and regulations and the issuance of judicial decisions to determine the potential
impact to uncertain income tax positions. As of December 31, 2007, management had identified no
other potential subsequent events that could have a significant impact on the unrecognized tax
benefits balance.
17. EARNINGS PER SHARE
The calculation of earnings per share is as follows:
| Weighted Average | ||||||||||||||
| in millions, except per share data | Net Income | Number of Shares* | Per Share Amount* | |||||||||||
2007 |
||||||||||||||
Basic earnings per share |
$ | 673.6 | 398.0 | $ | 1.69 | |||||||||
Dilutive effect of share-based awards |
— | 12.3 | — | |||||||||||
Diluted earnings per share |
$ | 673.6 | 410.3 | $ | 1.64 | |||||||||
2006 |
||||||||||||||
Basic earnings per share |
$ | 482.7 | 396.1 | $ | 1.22 | |||||||||
Dilutive effect of share-based awards |
— | 10.0 | — | |||||||||||
Diluted earnings per share |
$ | 482.7 | 406.1 | $ | 1.19 | |||||||||
2005 |
||||||||||||||
Basic earnings per share |
$ | 219.8 | 397.0 | $ | 0.55 | |||||||||
Dilutive effect of share-based awards |
— | 5.5 | — | |||||||||||
Diluted earnings per share |
$ | 219.8 | 402.5 | $ | 0.54 | |||||||||
| * | Prior period weighted average number of shares and earnings per share amounts have been adjusted to give effect to the one-for-two reverse stock split that the company effected on December 4, 2007 in connection with its relisting and redomicile. See Note 1 for additional information. |
See Note 19 for a summary of share awards outstanding under the company’s stock-based payment
programs. These programs could result in the issuance of common shares that would affect the
measurement of basic and diluted earnings per share.
Options to purchase 15.5 million common shares at a weighted average exercise price of
1886p were outstanding during the year ended December 31, 2007 (2006: 37.1 million share options
over the ordinary shares of INVESCO PLC at a weighted average exercise price of 917p; 2005: 108.8
million share options over the ordinary shares of INVESCO PLC at a weighted average exercise price
of 607p), but were not included in the computation of diluted earnings per share because the
option’s exercise price was greater than the average market price of the common shares and
therefore their inclusion would have been anti-dilutive. No shares of time-vested share incentive
awards and no contingently issuable shares (including performance-vested share incentive awards)
were excluded from the computation of diluted earnings per share during the year ended December 31,
2007, 2006 and 2005 due to their inclusion being anti-dilutive.
The
company excluded 1.0 million contingently issuable common shares from the diluted earnings per
share computation for the year ended December 31, 2007 (2006: 42.2 million contingently issuable
ordinary shares of INVESCO PLC) because the necessary performance conditions for the shares to be
issuable had not been satisfied at the end of the period.
18. CONSOLIDATED INVESTMENT PRODUCTS
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 in which the company
is the primary beneficiary and are consolidated into the company’s financial statements. Other
partnership entities are consolidated under EITF 04-5, as the company is the general partner and is
presumed to have control, in the absence of substantive kick-out or participating rights of the
other limited partners. The following table reflects this impact of consolidation of these
investment products into the income statements for the periods ended December 31, 2007, 2006 and
2005 and balance sheets as of December 31, 2007 and 2006. The company’s risk is limited to its
equity ownership (generally less than 5%) and any uncollected management fees. During the fourth
quarter of 2007, the company deconsolidated several variable interest entities, as the company
determined that it was no longer the primary beneficiary of the arrangements as a result of
reconsideration events.
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Balance Sheets
| Other | ||||||||||||||||
| Variable | Consolidated | |||||||||||||||
| Before | Interest | Investment | Consolidated | |||||||||||||
| $ in millions | Consolidation | Entities | Products | Total | ||||||||||||
As of December 31, 2007 |
||||||||||||||||
Current assets |
4,155.8 | 34.3 | 4.3 | 4,194.4 | ||||||||||||
Non-current assets |
7,543.4 | 816.5 | 370.9 | 8,730.8 | ||||||||||||
Total assets |
11,699.2 | 850.8 | 375.2 | 12,925.2 | ||||||||||||
Current liabilities |
3,634.1 | 5.9 | 0.9 | 3,640.9 | ||||||||||||
Non-current liabilities |
1,455.9 | (1.0 | ) | 117.6 | 1,572.5 | |||||||||||
Total liabilities |
5,090.0 | 4.9 | 118.5 | 5,213.4 | ||||||||||||
Minority interests in
equity of consolidated
entities |
14.0 | 850.5 | 256.7 | 1,121.2 | ||||||||||||
Total shareholders’ equity |
6,595.2 | (4.6 | ) | — | 6,590.6 | |||||||||||
Total liabilities,
minority interests and
shareholders’ equity |
11,699.2 | 850.8 | 375.2 | 12,925.2 | ||||||||||||
| Other | ||||||||||||||||
| Variable | Consolidated | |||||||||||||||
| Before | Interest | Investment | Consolidated | |||||||||||||
| $ in millions | Consolidation | Entities | Products | Total | ||||||||||||
As of December 31, 2006 |
||||||||||||||||
Current assets |
3,630.0 | 76.6 | 2.4 | 3,709.0 | ||||||||||||
Non-current assets |
7,054.7 | 1,214.9 | 249.9 | 8,519.5 | ||||||||||||
Total assets |
10,684.7 | 1,291.5 | 252.3 | 12,228.5 | ||||||||||||
Current liabilities |
3,356.7 | 8.0 | 0.7 | 3,365.4 | ||||||||||||
Non-current liabilities |
1,157.5 | (0.2 | ) | 37.2 | 1,194.5 | |||||||||||
Total liabilities |
4,514.2 | 7.8 | 37.9 | 4,559.9 | ||||||||||||
Minority interests in
equity of consolidated
entities |
5.1 | 1,285.1 | 214.4 | 1,504.6 | ||||||||||||
Total shareholders’ equity |
6,165.4 | (1.4 | ) | — | 6,164.0 | |||||||||||
Total liabilities,
minority interests and
shareholders’ equity |
10,684.7 | 1,291.5 | 252.3 | 12,228.5 | ||||||||||||
| Statements of Income | ||||||||||||||||
| Other | ||||||||||||||||
| Variable | Consolidated | |||||||||||||||
| Before | Interest | Investment | Consolidated | |||||||||||||
| $ in millions | Consolidation | Entities | Products | Total | ||||||||||||
Year ended December 31, 2007 |
||||||||||||||||
Total operating revenues |
3,872.4 | (0.7 | ) | 7.2 | 3,878.9 | |||||||||||
Total operating expenses |
(2,876.3 | ) | (2.8 | ) | (5.5 | ) | (2,884.6 | ) | ||||||||
Operating income |
996.1 | (3.5 | ) | 1.7 | 994.3 | |||||||||||
Equity in earnings of unconsolidated affiliates |
52.2 | (4.1 | ) | — | 48.1 | |||||||||||
Interest income |
48.5 | — | — | 48.5 | ||||||||||||
Other investment income |
9.9 | 202.7 | 11.6 | 224.2 | ||||||||||||
Interest expense |
(71.3 | ) | — | — | (71.3 | ) | ||||||||||
Income before income taxes and minority
interest |
1,035.4 | 195.1 | 13.3 | 1,243.8 | ||||||||||||
Income tax provision |
(357.5 | ) | 0.2 | — | (357.3 | ) | ||||||||||
Income before minority interest |
677.9 | 195.3 | 13.3 | 886.5 | ||||||||||||
Minority interest income of consolidated
entities, net of tax |
(4.3 | ) | (195.3 | ) | (13.3 | ) | (212.9 | ) | ||||||||
Net income |
673.6 | — | — | 673.6 | ||||||||||||
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| Other | ||||||||||||||||
| Variable | Consolidated | |||||||||||||||
| Before | Interest | Investment | Consolidated | |||||||||||||
| $ in millions | Consolidation | Entities | Products | Total | ||||||||||||
Year ended December 31, 2006 |
||||||||||||||||
Total operating revenues |
3,231.5 | 10.7 | 4.5 | 3,246.7 | ||||||||||||
Total operating expenses |
(2,478.2 | ) | (5.4 | ) | (3.9 | ) | (2,487.5 | ) | ||||||||
Operating income |
753.3 | 5.3 | 0.6 | 759.2 | ||||||||||||
Equity in earnings of unconsolidated affiliates |
9.9 | (5.6 | ) | — | 4.3 | |||||||||||
Interest income |
26.9 | — | — | 26.9 | ||||||||||||
Other investment income |
26.8 | 246.5 | 47.8 | 321.1 | ||||||||||||
Interest expense |
(77.2 | ) | — | — | (77.2 | ) | ||||||||||
Income before income taxes and minority
interest |
739.7 | 246.2 | 48.4 | 1,034.3 | ||||||||||||
Income tax provision |
(256.3 | ) | 1.7 | — | (254.6 | ) | ||||||||||
Income before minority interest |
483.4 | 247.9 | 48.4 | 779.7 | ||||||||||||
Minority interest income of consolidated
entities, net of tax |
(0.7 | ) | (247.9 | ) | (48.4 | ) | (297.0 | ) | ||||||||
Net income |
482.7 | — | — | 482.7 | ||||||||||||
| Other | ||||||||||||||||
| Variable | Consolidated | |||||||||||||||
| Before | Interest | Investment | Consolidated | |||||||||||||
| $ in millions | Consolidation | Entities | Products | Total | ||||||||||||
Year ended December 31, 2005 |
||||||||||||||||
Total operating revenues |
2,878.1 | (8.2 | ) | 2.7 | 2,872.6 | |||||||||||
Total operating expenses |
(2,453.9 | ) | (8.2 | ) | (2.6 | ) | (2,464.7 | ) | ||||||||
Operating income |
424.2 | (16.4 | ) | 0.1 | 407.9 | |||||||||||
Equity in earnings of unconsolidated affiliates |
— | 0.7 | — | 0.7 | ||||||||||||
Interest income |
16.7 | — | — | 16.7 | ||||||||||||
Other investment income |
13.4 | 125.6 | 3.2 | 142.2 | ||||||||||||
Interest expense |
(85.1 | ) | — | — | (85.1 | ) | ||||||||||
Income before income taxes and minority
interest |
369.2 | 109.9 | 3.3 | 482.4 | ||||||||||||
Income tax provision |
(148.3 | ) | (2.8 | ) | — | (151.1 | ) | |||||||||
Income before minority interest |
220.9 | 107.1 | 3.3 | 331.3 | ||||||||||||
Minority interest income of consolidated
entities, net of tax |
(1.1 | ) | (107.1 | ) | (3.3 | ) | (111.5 | ) | ||||||||
Net income |
219.8 | — | — | 219.8 | ||||||||||||
At December 31, 2007, the company’s maximum risk of loss in significant VIEs in which the company
is not the primary beneficiary is presented in the table below.
| Company’s | ||||
| Maximum | ||||
| Risk of | ||||
| $ in millions | Loss | |||
Collateralized debt obligations |
39.0 | |||
Private equity investments |
19.6 | |||
Support agreements (See Note 22) |
33.0 | |||
Total |
91.6 | |||
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19. SHARE-BASED COMPENSATION
The company recognized total expenses of $105.2 million, $140.6 million and $40.6 million related
to equity-settled share-based payment transactions in 2007, 2006 and 2005, respectively. The total
income tax benefit recognized in the Consolidated Statements of
Income for share-based compensation
arrangements was $36.8 million for 2007 (2006: $47.4 million; 2005: $13.7 million).
Cash
received from exercise of share options and similar instruments
granted under share-based
compensation arrangements was $137.4 million in 2007 (2006: $66.8 million; 2005: $7.7 million).
The tax benefit realized from share option exercises was $38.2 million in 2007 (2006: $17.9
million; 2005: $nil).
Share Incentive Awards
Share incentive awards, which are used to retain and motivate key executives and the next
generation of management of the company and to ensure future succession in the business, are
broadly classified into two categories: time-vested and performance-vested share awards. All equity
awards are granted under the company’s Global Stock Plan (GSP).
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 incentive awards are granted in the form of restricted shares or deferred
share awards. Dividends accrue directly to the employee holder of restricted shares, and cash
payments in lieu of dividends are made to employee holders of certain deferred share awards. There
is therefore no discount to the fair value of these share incentive awards at their grant date.
Pursuant to these plans, the company granted 6.8 million awards in 2007 at a weighted average share
price of 1251p. Throughout this note, share award numbers and share prices have been adjusted to
reflect the one-for-two share consolidation that occurred on December 4, 2007.
| 2007 | ||||||||||||
| Weighted Average | ||||||||||||
| Time- | Performance- | Grant Date | ||||||||||
| millions of shares, except fair values | Vested | Vested | Fair Value (pence) | |||||||||
Unvested at the beginning of year |
15.6 | 4.6 | 750.10 | |||||||||
Granted during the year |
4.9 | 1.9 | 1251.24 | |||||||||
Forfeited during the year |
(1.4 | ) | (0.3 | ) | 852.30 | |||||||
Vested and distributed during the year |
(3.9 | ) | — | 664.76 | ||||||||
| — | ||||||||||||
Unvested at the end of the year |
15.2 | 6.2 | 915.69 | |||||||||
| 2006 | 2005 | |||||||||||||||
| Time- | Performance- | Time- | Performance- | |||||||||||||
| millions of shares | Vested | Vested | Vested | Vested | ||||||||||||
Unvested at the beginning of year |
16.6 | 2.5 | 15.8 | — | ||||||||||||
Granted during the year |
1.7 | 2.2 | 2.5 | 2.5 | ||||||||||||
Forfeited during the year |
(0.7 | ) | (0.1 | ) | (1.7 | ) | — | |||||||||
Vested and distributed during the year |
(2.0 | ) | — | — | — | |||||||||||
Unvested at the end of the year |
15.6 | 4.6 | 16.6 | 2.5 | ||||||||||||
The awards outstanding at December 31, 2007 had a weighted average remaining contractual life of
2.01 years.
The total grant date fair value of shares vested during 2007 was $51.7 million (2006: $29.3
million; 2005: $8.1million). The weighted average fair value at the date of grant of these share
incentive awards was 665p (2006: 684p; 2005: 668p).
Deferred share awards 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 2007. The assumptions
used in the Black-Scholes model for these awards granted in 2006 and 2005 are as follows:
| 2006 | 2005 | |||||||
Weighted average share price |
1034p | 666p | ||||||
Expected term |
5.3 years | 4.0 years | ||||||
Expected dividend yield |
1.84 | % | 2.25 | % | ||||
At December 31, 2007, there was $209.4 million of total unrecognized compensation cost related to
non-vested share incentive awards; that cost is expected to be recognized over a weighted average
period of 1.80 years.
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Table of Contents
Share Options
The company maintains two option plans: the 2000 Share Option Plan and the No. 3 Executive Share
Option Scheme. As of December 31, 2007, 29.7 million shares were reserved for awards under these
option plans. The company has not made any awards under the latter plan since April 2003.
Since November 2002, the exercises of share options awarded under the 2000 Plan are subject to the
satisfaction of the performance conditions described further below. The performance targets for the
plan for options granted after November 2002 provide that an option granted to an eligible employee
may be exercised only if earnings per share since the date of the award has grown by a specified
percentage in excess of a weighted average of the U.K. Retail Price Index and the U.S. Consumer
Price Index (the Composite Index) over the preceding three years. Upon the exercise of share
options, the company either issues new shares or can utilize shares held by employee trusts (see
Note 11) to satisfy the exercise.
The share option plans provide for a grant price equal to the quoted market price of the company’s
shares on the date of grant. The cliff vesting period is three years. If the options remain
unexercised after a period of 10 years from the date of grant, the options expire. Furthermore,
options are forfeited if the employee leaves the company before the options vest.
| 2007 | 2006 | 2005 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Price | Price | Price | ||||||||||||||||||||||
| $ in millions, except prices | Options | (pence) | Options | (pence) | Options | (pence) | ||||||||||||||||||
Outstanding at the beginning of year |
40.5 | 1220.54 | 64.4 | 1086.18 | 67.5 | 1114.40 | ||||||||||||||||||
Granted during the year |
— | — | — | — | 3.1 | 665.00 | ||||||||||||||||||
Forfeited during the year |
(3.1 | ) | 1399.81 | (19.1 | ) | 936.38 | (5.7 | ) | 1243.44 | |||||||||||||||
Exercised during the year |
(7.7 | ) | 855.27 | (4.8 | ) | 673.44 | (0.5 | ) | 517.76 | |||||||||||||||
Outstanding at the end of the year |
29.7 | 1296.72 | 40.5 | 1220.54 | 64.4 | 1086.18 | ||||||||||||||||||
Exercisable at the end of the year |
21.3 | 1546.31 | 24.4 | 1560.44 | 31.7 | 1409.50 | ||||||||||||||||||
No grants were issued in 2007 or 2006. The options outstanding at December 31, 2007 had a range of
exercise prices from 50p to 3360p, and a weighted average remaining contractual life of 4.19 years
(for options exercisable at December 31, 2007, the weighted average remaining contractual life is
3.13 years). The weighted average grant date fair value of options granted during 2005 was 394p.
The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and
2005 was $67.9 million, $40.4 million and $3.0 million, respectively. At December 31, 2007, the
aggregate intrinsic value of options outstanding and options exercisable was $275.5 million and
$122.1 million, respectively. The market price at the end of 2007 was $31.38 (2006: 1192p). Upon
exercise, the sterling exercise price will be converted to U.S. dollars using the foreign exchange
rate in effect on the exercise date.
On February 12, 2007, 6.2 million performance-based share options granted in 2003 vested. No
expense for these options was recorded in 2004, 2005 or during the first six months of 2006 based
upon the expectation that the required performance targets for the vesting of these options would
not be attained. As a result of the improved performance in 2006, the company recorded a charge of
$44.7 million in the second half of 2006 ($0.08 per share, net of tax), representing the current
year and cumulative previously unrecognized cost to the company of these awards.
The share option programs were valued using a stochastic model (a lattice model) using the
following assumptions for 2005 (no grants were issued in 2007 or 2006):
| 2005 | ||||
Weighted average share price |
876p | |||
Weighted average exercise price |
878p | |||
Expected volatility |
52.0 | % | ||
Expected term |
7.8 years | |||
Risk free rate |
4.2 | % | ||
Expected dividends |
2.2 | % | ||
Expected volatility was determined by calculating the historical volatility of the company’s share
price over the previous five years. The expected life used in the model has been adjusted, based on
management’s best estimate, for the effects of non-transferability, exercise restrictions, and
behavioral considerations.
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Table of Contents
At December 31, 2007, there was $3.3 million of total unrecognized compensation cost related to
non-vested share options under the two option plans; that cost is expected to be recognized over a
weighted average period of 1 year.
Sharesave Plans
The company operates a number of sharesave plans under which eligible employees may save up to £250
per month for periods up to three years. Options awarded under these plans may be exercised at the
end of the contract periods, or alternatively the employee may have his or her savings returned. At December 31, 2007, 1.0 million
shares were reserved for awards under sharesave plans.
The employee share purchase plans are open to almost all employees and provide for a purchase price
equal to the market price on the date of grant, less 15.0% to 20.0%. The shares can be purchased at
the end of the 27- to 42-month savings contract. As of December 31, 2007, there are 1.0 million
options to purchase shares outstanding under these programs. The fair value of these options was
determined using the stochastic valuation model (a lattice model), and the weighted average
contractual life of these awards is 1.89 years at December 31, 2007.
At December 31, 2007, there was $5.2 million of total unrecognized compensation cost related to
non-vested share options granted under sharesave plans; that cost is expected to be recognized over
a weighted average period of 1.46 years.
Employee Share Ownership Plan
The company sponsors the Invesco Employee Share Ownership Plan (ESOP) for certain of its U.S.-based
employees. The ESOP was a leveraged employee stock ownership retirement plan designed to invest
primarily in company shares. The plan was closed to further participants effective
January 1, 2000, and no contributions were made into this plan after this date. All shares held by
the ESOP have been allocated to employee accounts.
Adoption of FAS 123(R)
As a result of adopting FAS 123(R) on January 1, 2006, the company’s income before income taxes and
minority interest and net income for the year ended December 31, 2006 are $63.8 million and $42.0 million lower,
respectively, than if it had continued to account for share-based compensation under APB 25. Basic
and diluted earnings per share for the year ended December 31,
2006 are $0.10 lower than if the company continued to account for share-based compensation under APB 25.
Prior to adoption of FAS 123(R), the company presented all tax benefits of deductions resulting
from the exercise of share options as operating activities in the Consolidated Statements of Cash
Flows. FAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options (excess tax benefits) to
be classified as financing activities. The $12.3 million excess tax benefit classified as a
financing activity in 2006 would have been classified as an operating activity if the company had
not adopted FAS 123(R).
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Table of Contents
The following table illustrates the effect of the change from applying the APB 25 option of FAS 123
to applying FAS 123(R) in 2006 on income before income taxes and minority interest, net income, net
cash provided by operating activities, net cash used in financing activities and earnings per
share:
| 2006 | ||||||||||||||||
| Income before | Net cash | Net cash | ||||||||||||||
| income taxes and | provided by | used in | ||||||||||||||
| minority | operating | financing | ||||||||||||||
| $ in millions, except earnings per share | interest | Net income | activities | activities | ||||||||||||
As reported |
1,034.3 | 482.7 | 455.9 | (163.1 | ) | |||||||||||
Add: Total
share-based compensation
expense determined under FAS 123(R) for
all awards, net of related tax effects
of $47.4 million |
140.6 | 93.2 | (5.6 | ) | (12.3 | ) | ||||||||||
Deduct: Share-based compensation
expense calculated under APB 25, net of
related tax effects of $25.6 million |
(76.8 | ) | (51.2 | ) | — | — | ||||||||||
Pro forma amounts |
1,098.1 | 524.7 | 450.3 | (175.4 | ) | |||||||||||
Earnings per share: |
||||||||||||||||
Basic—as reported |
$ | 1.22 | ||||||||||||||
Basic—pro forma |
$ | 1.32 | ||||||||||||||
Diluted—as reported |
$ | 1.19 | ||||||||||||||
Diluted—pro forma |
$ | 1.29 | ||||||||||||||
The following table illustrates the effect of the change from applying FAS 123(R) in 2005 on net income and earnings per share:
| 2005 | ||||
| $ in millions, except earnings per share | Net income | |||
As reported |
219.8 | |||
Deduct:
Total share-based compensation expense determined under
FAS 123(R) for all awards, net of related tax effects of $17.7
million |
(34.9 | ) | ||
Add: Share-based compensation expense calculated under APB
25, net of related tax effects of $13.7 million |
26.9 | |||
Pro forma amount |
211.8 | |||
Earnings per share: |
||||
Basic—as reported |
$ | 0.55 | ||
Basic—pro forma |
$ | 0.53 | ||
Diluted—as reported |
$ | 0.54 | ||
Diluted—pro forma |
$ | 0.53 | ||
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20. OPERATING LEASES
The company leases office space in the majority of its locations of business under non-cancelable
operating leases. Sponsorship and naming rights commitments relate to INVESCO Field at Mile High, a
sports stadium in Denver, Colorado. These leases and commitments expire on varying dates through
2022. Certain leases provide for renewal options and contain escalation clauses providing for
increased rent based upon maintenance, utility and tax increases.
As of December 31, 2007, the company’s total future commitments by year under non-cancelable
operating leases are as follows:
| Sponsorship and | ||||||||||||||||
| $ in millions | Total | Buildings | Naming Rights | Other | ||||||||||||
2008 |
64.5 | 56.6 | 6.0 | 1.9 | ||||||||||||
2009 |
63.7 | 55.9 | 6.0 | 1.8 | ||||||||||||
2010 |
57.3 | 49.6 | 6.0 | 1.7 | ||||||||||||
2011 |
50.7 | 43.1 | 6.0 | 1.6 | ||||||||||||
2012 |
49.1 | 41.5 | 6.0 | 1.6 | ||||||||||||
Thereafter |
302.7 | 247.9 | 51.5 | 3.3 | ||||||||||||
Gross
lease commitments |
588.0 | 494.6 | 81.5 | 11.9 | ||||||||||||
Less: future minimum
payments expected to
be received under
non-cancelable
subleases |
(159.1 | ) | (159.1 | ) | — | — | ||||||||||
Net lease
commitments |
428.9 | 335.5 | 81.5 | 11.9 | ||||||||||||
The company recognized $57.7 million, $46.6 million, and $52.9 million in operating lease costs in
the Consolidated Statements of Income in 2007, 2006 and 2005, respectively. These costs are net of
$1.6 million, $1.8 million and $1.0 million of sublease income in 2007, 2006 and 2005,
respectively.
The company maintains approximately $39.2 million in letters of credit from a variety of banks. The
letters of credit are generally one-year automatically-renewable facilities and are maintained for
various reasons. Approximately $26.1 million of the letters of credit support office lease
obligations.
21. RETIREMENT BENEFIT PLANS
Defined Contribution Plans
The company operates defined contribution retirement benefit plans for all qualifying employees.
The assets of the plans are held separately from those of the company in funds under the control of
trustees. When employees leave the plans prior to vesting fully in the contributions, the
contributions payable by the company are reduced by the amount of forfeited contributions.
The total cost charged to the Consolidated Statements of Income for the year ended December 31,
2007 of $44.3 million (2006: $38.1 million; 2005: $60.5 million) represents contributions payable
to these plans by the company at rates specified in the rules of the plans. As of December 31,
2007, contributions of $21.2 million (2006: $19.5 million) due for the current year had not been
paid to the plans.
Defined Benefit Plans
The company maintains legacy defined benefit pension plans for qualifying employees of its
subsidiaries in the U.K., Ireland, Germany, Taiwan and the U.S. All defined benefit plans are
closed to new participants, and the U.S. plan benefits have been frozen. The company also maintains
a post-retirement medical plan in the U.S., which was closed to new participants in 2005. In 2006,
the plan was amended to eliminate benefits for all participants who will not meet retirement
eligibility by 2008. The assets of all defined benefit schemes are held in separate
trustee-administered funds. Under the plans, the employees are generally entitled to retirement
benefits based on final salary at retirement.
The most recent actuarial valuations of plan assets and the present value of the defined benefit
obligation were valued as of December 31, 2007. The benefit obligation, the related current service
cost and prior service cost were measured using the projected unit credit method.
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Table of Contents
Obligations and Funded Status
The amounts included in the Consolidated Balance Sheets arising from the company’s obligations and
plan assets in respect of its defined benefit retirement plans is as follows:
| Retirement Plans | Medical Plan | |||||||||||||||
| $ in millions | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Benefit obligation |
(381.0 | ) | (378.8 | ) | (47.7 | ) | (44.6 | ) | ||||||||
Fair value of plan assets |
341.3 | 329.5 | 7.6 | 7.3 | ||||||||||||
Funded status |
(39.7 | ) | (49.3 | ) | (40.1 | ) | (37.3 | ) | ||||||||
Amounts recognized in
the Consolidated Balance
Sheets: |
||||||||||||||||
Non-current assets |
1.6 | 1.9 | — | — | ||||||||||||
Current liabilities |
(3.2 | ) | — | (0.7 | ) | (0.8 | ) | |||||||||
Non-current liabilities |
(38.1 | ) | (51.2 | ) | (39.4 | ) | (36.5 | ) | ||||||||
Funded status |
(39.7 | ) | (49.3 | ) | (40.1 | ) | (37.3 | ) | ||||||||
| Changes in the benefit obligations were as follows: | ||||||||||||||||
| Retirement Plans | Medical Plan | |||||||||||||||
| $ in millions | 2007 | 2006 | 2007 | 2006 | ||||||||||||
January 1 |
378.7 | 334.4 | 44.6 | 72.4 | ||||||||||||
Service cost |
7.5 | 8.4 | 0.1 | 0.7 | ||||||||||||
Interest cost |
19.3 | 16.1 | 2.6 | 2.5 | ||||||||||||
Contributions from plan participants |
— | — | 0.7 | 0.8 | ||||||||||||
Actuarial (gains)/losses |
(19.7 | ) | (0.6 | ) | 2.1 | (3.7 | ) | |||||||||
Exchange difference |
4.3 | 38.9 | — | — | ||||||||||||
Benefits paid |
(9.0 | ) | (7.6 | ) | (2.4 | ) | (2.2 | ) | ||||||||
Plan amendments |
0.2 | — | — | (25.9 | ) | |||||||||||
Settlement and other |
(0.3 | ) | (10.8 | ) | — | — | ||||||||||
December 31 |
381.0 | 378.8 | 47.7 | 44.6 | ||||||||||||
| Plan amendments in 2006 for the medical plan reflect the adjustment to eliminate benefits for all participants who will not meet retirement eligibility by 2008. | ||||||||||||||||
| Key assumptions used in plan valuations are detailed below. Appropriate local mortality tables are also used. The weighted average assumptions used to determine defined benefit obligations at December 31, 2007 and 2006 are: | ||||||||||||||||
| Retirement Plans | Medical Plan | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Discount rate |
5.73 | % | 5.10 | % | 5.75 | % | 5.75 | % | ||||||||
Expected rate of salary increases |
5.82 | % | 5.41 | % | N/A | N/A | ||||||||||
Future
pension/ medical cost trend rate increases |
3.28 | % | 2.86 | % | 5.50%-9.00 | % | 5.50%-9.00 | % | ||||||||
| Changes in the fair value of plan assets in the current period were as follows: | ||||||||||||||||
| Retirement Plans | Medical Plan | |||||||||||||||
| $ in millions | 2007 | 2006 | 2007 | 2006 | ||||||||||||
January 1 |
329.5 | 254.1 | 7.3 | 7.0 | ||||||||||||
Actual return on plan assets |
10.1 | 31.6 | 0.5 | 0.6 | ||||||||||||
Exchange difference |
3.4 | 32.9 | — | — | ||||||||||||
Contributions from the company |
7.6 | 27.7 | — | — | ||||||||||||
Contributions from plan participants |
— | — | 0.4 | 0.5 | ||||||||||||
Benefits paid |
(9.0 | ) | (7.6 | ) | (0.6 | ) | (0.8 | ) | ||||||||
Settlement and other |
(0.3 | ) | (9.2 | ) | — | — | ||||||||||
| — - | ||||||||||||||||
December 31 |
341.3 | 329.5 | 7.6 | 7.3 | ||||||||||||
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The components of the amount recognized in accumulated other comprehensive income/(loss) at
December 31, 2007 and 2006 are as follows:
| Retirement Plans | Medical Plan | |||||||||||||||
| $ in millions | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Prior service cost/(credit) |
0.4 | 0.3 | (19.9 | ) | (21.9 | ) | ||||||||||
Transition obligation |
(0.1 | ) | (0.1 | ) | — | — | ||||||||||
Net actuarial loss/(gain) |
55.4 | 62.7 | 23.3 | 25.8 | ||||||||||||
| 55.7 | 62.9 | 3.4 | 3.9 | |||||||||||||
The amounts in accumulated other comprehensive income expected to be amortized into net periodic
benefit cost during the year ending December 31, 2008 are as follows:
| $ in millions | Retirement Plans | Medical Plan | ||||||
Prior service cost/(credit) |
— | (2.0 | ) | |||||
Net actuarial loss/(gain) |
1.4 | 3.7 | ||||||
Total |
1.4 | 1.7 | ||||||
The total accumulated benefit obligation, the accumulated benefit obligation and fair value of plan
assets for plans with accumulated benefit obligations in excess of plan assets and the projected
benefit obligation and fair value of plan assets for pension plans with projected benefit
obligations in excess of plan assets are as follows:
| Retirement Plans | ||||||||
| $ in millions | 2007 | 2006 | ||||||
Plans with accumulated benefit obligation in excess of plan assets: |
||||||||
Accumulated benefit obligation |
(342.0 | ) | (300.8 | ) | ||||
Fair value of plan assets |
327.4 | 284.4 | ||||||
Plans with projected benefit obligation in excess of plan assets: |
||||||||
Projected benefit obligation |
(368.7 | ) | (346.6 | ) | ||||
Fair value of plan assets |
327.4 | 295.5 | ||||||
Components of Net Periodic Benefit Cost
The components of net periodic benefit cost in respect of these defined benefit plans are as
follows:
| Retirement Plans | Medical Plan | |||||||||||||||||||||||
| $ in millions | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||||||||||
Service cost |
(7.6 | ) | (8.4 | ) | (18.3 | ) | (0.1 | ) | (0.7 | ) | (4.2 | ) | ||||||||||||
Interest cost |
(19.3 | ) | (16.1 | ) | (15.1 | ) | (2.6 | ) | (2.5 | ) | (3.8 | ) | ||||||||||||
Expected return on plan assets |
22.6 | 19.0 | 15.3 | 0.4 | 0.5 | 0.5 | ||||||||||||||||||
Amortization of prior service cost/(credit) |
— | — | — | 2.0 | 1.8 | (0.4 | ) | |||||||||||||||||
Amortization of net actuarial gain/(loss) |
(1.9 | ) | (3.0 | ) | (4.1 | ) | (4.6 | ) | (4.5 | ) | (1.9 | ) | ||||||||||||
Settlement |
(0.1 | ) | (0.1 | ) | — | — | — | — | ||||||||||||||||
Net periodic benefit cost |
(6.3 | ) | (8.6 | ) | (22.2 | ) | (4.9 | ) | (5.4 | ) | (9.8 | ) | ||||||||||||
Assumptions
The weighted average assumptions used to determine net periodic benefit cost for the years ended
December 31, 2007, 2006 and 2005 are:
| Retirement Plans | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Discount rate |
5.10 | % | 4.61 | % | 5.22 | % | ||||||
Expected return on plan assets |
6.74 | % | 6.84 | % | 6.95 | % | ||||||
Expected rate of salary increases |
5.41 | % | 4.82 | % | 4.76 | % | ||||||
Future pension rate increases |
2.86 | % | 2.75 | % | 2.75 | % | ||||||
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| Medical Plan | ||||||||||||||||
| 2007 | 2006 | 2005 | ||||||||||||||
Discount rate |
5.75 | % | 5.75 | % | 5.50 | % | ||||||||||
Expected return on plan assets |
7.00 | % | 7.00 | % | 8.00 | % | ||||||||||
Expected rate of salary increases |
N/A | N/A | 4.50 | % | ||||||||||||
Future medical cost trend rate
increases |
5.50%-9.00 | % | 5.50%-9.00 | % | 5.50%-9.00 | % | ||||||||||
In developing the expected rate of return, the company considers long-term compound annualized
returns based on historical and current market data. Using this reference information, the company
develops forward-looking return expectations for each asset category and an expected long-term rate
of return for a targeted portfolio. Discount rate assumptions were based upon AA-rated corporate
bonds of suitable terms and currencies.
The assumed health care cost rates are as follows:
| Medical Plan | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Health care cost trend rate assumed for next year |
9.0 | % | 9.0 | % | 9.0 | % | ||||||
Rate to which cost trend rate gradually declines |
5.5 | % | 5.5 | % | 5.5 | % | ||||||
Year the rate reaches level it is assumed to remain thereafter |
2011 | 2010 | 2009 | |||||||||
A one percent change in the assumed rate of increase in healthcare costs would have the following
effects:
| $ in millions | Increase | Decrease | ||||||
Effect on aggregate service and interest costs |
0.4 | (0.3 | ) | |||||
Effect on defined benefit obligation |
5.9 | (4.9 | ) | |||||
Plan Assets
The analysis of the plan assets at the balance sheet date was as follows:
| Retirement Plans | Medical Plan | |||||||||||||||||||||||
| % Fair Value | % Fair Value | |||||||||||||||||||||||
| $ in millions | 2007 | of Plan Assets | 2006 | 2007 | of Plan Assets | 2006 | ||||||||||||||||||
Equity instruments |
222.4 | 65.2 | 230.0 | 3.5 | 46.1 | 2.9 | ||||||||||||||||||
Debt instruments |
97.3 | 28.5 | 76.8 | 3.8 | 50.0 | 4.1 | ||||||||||||||||||
Other assets |
21.6 | 6.3 | 22.7 | 0.3 | 3.9 | 0.3 | ||||||||||||||||||
| 341.3 | 100.0 | 329.5 | 7.6 | 100.0 | 7.3 | |||||||||||||||||||
The investment policies and strategies for plan assets held by defined benefit plans include:
| • | Funding — to have sufficient assets available to pay members benefits; | |
| • | Security — to maintain the minimum Funding Requirement; | |
| • | Stability — to have due regard to the employer’s ability in meeting contribution payments given their size and incidence. |
Certain plan assets are invested in affiliated funds. Plan assets are not held in company stock.
Cash Flows
The estimated amounts of contributions expected to be paid to the plans during 2008 is $7.9 million
for retirement plans, with no expected contribution to the medical plan.
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There are no future annual benefits of plan participants covered by insurance contracts issued by
the employer or related parties.
The benefits expected to be paid in each of the next five fiscal years and in the five fiscal years
thereafter are as follows:
| Retirement | Medical | |||||||
| $ in millions | Plans | Plan | ||||||
Expected benefit payments: |
||||||||
2008 |
8.9 | 2.0 | ||||||
2009 |
8.3 | 2.2 | ||||||
2010 |
9.0 | 2.4 | ||||||
2011 |
11.2 | 2.5 | ||||||
2012 |
10.9 | 2.6 | ||||||
Thereafter in the succeeding five years |
68.3 | 14.1 | ||||||
Adoption of FASB Statement No. 158
Effective December 31, 2006, the company adopted the recognition and disclosure provisions of FASB
Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans — an Amendment of FASB Statement No. 87, 88, 106 and 132(R).” FASB Statement No. 158
required the company to recognize the funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of its retirement plans and medical plan in the
December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other
comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at
adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and
unrecognized transition obligation remaining from the initial adoption of FASB Statement No. 87,
“Employers’ Accounting for Pensions”, all of which were previously netted against the plans’ funded
status in the company’s balance sheet pursuant to the provisions of FASB Statement No. 87. These
amounts will be subsequently recognized as net periodic pension cost pursuant to the company’s
historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that
arise in subsequent periods will be recognized as a component of other comprehensive income. Those
amounts will be subsequently recognized as a component of net periodic pension cost on the same
basis as the amounts recognized in accumulated other comprehensive income at the adoption of FASB
Statement No. 158.
The incremental effects of adopting the provisions of FASB Statement No. 158 on the company’s
Consolidated Balance Sheet at December 31, 2006 are presented in the following table. The adoption
of FASB Statement No. 158 had no effect on the company’s Consolidated Statement of Income for the
year ended December 31, 2006, or for any prior period presented, and it will not affect the
company’s operating results in future periods.
The following table illustrates the effect of the adoption of the recognition provisions of FASB
Statement No. 158 at December 31, 2006:
| Before | ||||||||||||
| Application | After Application | |||||||||||
| $ in million | of FAS 158 | Adjustments | of FAS 158 | |||||||||
Asset for pension benefits |
5.1 | (3.2 | ) | 1.9 | ||||||||
Non-current deferred income tax asset |
107.5 | 11.0 | 118.5 | |||||||||
Total assets |
12,220.7 | 7.8 | 12,228.5 | |||||||||
Liability for pension benefits |
57.2 | 31.3 | 88.5 | |||||||||
Total liabilities |
4,591.2 | 31.3 | 4,559.9 | |||||||||
Accumulated other comprehensive income |
638.0 | (23.5 | ) | 614.5 | ||||||||
Total shareholders’ equity |
6,187.5 | (23.5 | ) | 6,164.0 | ||||||||
22. OTHER COMMITMENTS AND CONTINGENCIES
Commitments and contingencies may arise in the ordinary course of business.
The
company’s private equity products are structured as limited
partnerships. The company’s investment may
take the form of the general partner or a limited partner. The private equity funds 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, 2007, the company’s undrawn capital
commitments were $60.2 million (2006: $19.2 million).
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The volatility and valuation dislocations that occurred during 2007 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. The fair value of these agreements at December 31, 2007 was estimated to be $4.5
million, which was recorded in other current liabilities on the Consolidated Balance Sheet at that
date as a guarantee obligation in accordance with FASB Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others – An Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34.” As of the date of this Annual Report on Form 10-K, the maximum
support that could be provided under these agreements is $33.0 million. No payments have been made
under either agreement nor has Invesco realized any losses from the support agreements through the
date of this Report. These trusts were not consolidated because the company was not deemed to be
the primary beneficiary under FIN 46R.
Acquisition Contingencies
Contingent consideration related to acquisitions includes the following:
| • | $500.0 million earn-out relating to the PowerShares acquisition. A contingent payment up to a maximum of $500.0 million will be due in October 2011, five years after the date of acquisition. The maximum payment would require a compound annual growth rate in management fees of 100%. At the company’s option, up to 35% of the contingent payment is payable in equity. | |
| • | $220.0 million earn-out relating to the WL Ross acquisition. Contingent payments of up to $55.0 million are due each year for the five years following the October 2006 date of acquisition based on the size and number of future fund launches. The maximum contingent payments of $220.0 million would require annual fund launches to total $4.0 billion. The first anniversary payment equaled $44.8 million and was paid in October 2007. |
Legal Contingencies
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. On September 15, 2006, the court dismissed the ERISA
lawsuit with prejudice. The plaintiff has appealed that dismissal to the United States Court of
Appeals for the Fourth Circuit. Oral argument was held on December 5, 2007. The company and
plaintiffs have reached a settlement in principle of the shareholder class action and derivative
lawsuits. The proposed settlement, which is subject to court approval, calls for a payment by the
company of $9.8 million, recorded in general and administrative costs in the 2007 Consolidated
Statement of Income, in exchange for dismissal with prejudice of all pending claims. In addition,
under the terms of the proposed settlement the company may incur certain costs in connection with
providing notice of the proposed settlement 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 company and/or company-affiliated parties have also been named as defendants in a lawsuit
alleging that one or more of the company’s funds inadequately employed fair value pricing, and
thereby made such funds more susceptible to market timing. The lawsuit is a purported class action
seeking unspecified monetary damages. It is now pending in the State court in Madison County,
Illinois after a series of removals to the United States District Court for the Southern District
of Illinois and remands back to the State Court.
The Auditor of the State of West Virginia, in his capacity as securities commissioner, has
initiated administrative proceedings against many mutual fund companies, including AIM, seeking
disgorgement and other monetary relief based on allegations similar to those underlying the market
timing lawsuits. The action against AIM was initiated on August 30, 2005. AIM’s time to respond to
the Auditor’s proceeding has not yet elapsed.
Although there can be no assurances, based on information currently available, the company does not
believe it is probable that the ultimate outcome of any of these actions will have a material
adverse effect on the company’s consolidated financial position or results of operations.
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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.
23. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial assets and liabilities consist of the following:
| Note | 2007 Book | 2007 Fair | 2006 Book | 2006 Fair | ||||||||||||||||
| $ in millions | Reference | Value | Value | Value | Value | |||||||||||||||
Cash and cash equivalents |
1 | 915.8 | 915.8 | 778.9 | 778.9 | |||||||||||||||
Cash and cash equivalents of
consolidated investment
products |
18 | 36.6 | 36.6 | 55.4 | 55.4 | |||||||||||||||
Investments |
3 | 299.5 | 299.5 | 267.7 | 267.6 | |||||||||||||||
Investments of consolidated
investment products |
18 | 1,205.6 | 1,205.6 | 1,482.0 | 1,482.0 | |||||||||||||||
Assets held for policyholders |
5 | 1,898.0 | 1,898.0 | 1,574.9 | 1,574.9 | |||||||||||||||
Policyholder payables |
5 | (1,898.0 | ) | (1,898.0 | ) | (1,574.9 | ) | (1,574.9 | ) | |||||||||||
Total debt |
10 | (1,276.4 | ) | (1,261.0 | ) | (1,279.0 | ) | (1,263.5 | ) | |||||||||||
Borrowings of consolidated
investment products |
18 | (116.6 | ) | (116.6 | ) | (37.0 | ) | (37.0 | ) | |||||||||||
In determining the fair value of its financial instruments, the company uses a variety of methods
and assumptions that are based on market conditions and risk existing at each balance sheet date.
For the majority of financial instruments, standard market conventions and techniques such as
quoted market prices and discounted cash flow analysis are used to determine fair value. Dealer
quotes are used for the remaining financial instruments. All methods of assessing fair value
result in a general approximation of value, and such value may never actually be realized.
Cash and cash equivalents, marketable securities and investments are financial assets with carrying
values that approximate fair value because of the short maturity of those instruments. Because an
active market does not exist for the company’s debt in which to obtain current market price
information, fair value amounts disclosed in the table above were derived from indicative pricing
and analysis from various debt market-makers. Such analysis included comparison of the terms of the
company’s debt with other actively traded debt of similar companies.
The company does not hold collateral as security for its financial assets, nor have any other
credit enhancements been offered to the other party to the receivables.
Book value approximates fair value for cash deposits, which comprise deposits placed primarily in
affiliated money market accounts and seven-day deposits. Interest income recognized during the year
was $48.5 million (2006: $26.9 million; 2005: $16.7 million).
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24. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Prior to the December 4, 2007, redomicile and relisting discussed in Note 1, Invesco Holding
Company Limited (the “Issuer”, formerly INVESCO PLC), a subsidiary of Invesco Ltd. (the “Parent”)
issued 5.625% $300.0 million senior notes
due 2012, 4.5% $300.0 million senior notes due 2009,
5.375% $350.0 million senior notes due 2013 and 5.375% $200.0 million senior notes due 2014. These
senior notes are fully and unconditionally guaranteed as to payment of principal, interest and any
other amounts due thereon by the Parent together with the following wholly owned subsidiaries: A
I M Management Group, Inc., AIM Advisors, Inc., INVESCO North American Holdings, Inc., and INVESCO
Institutional (N.A.), Inc. (the “Guarantors”). The company’s remaining consolidated subsidiaries
are “Non-Guarantors.” The guarantees of each of the guarantor subsidiaries are joint and several.
Presented below are condensed consolidating balance sheets as of
December 31, 2007 and 2006 and condensed consolidating income and cash flow statements of the
company for the years ended December 31, 2007, 2006 and 2005. The 2007 data has been presented
with the new Parent separately stated.
Condensed Consolidating Balance Sheets
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
2007 |
||||||||||||||||||||||||
Assets held for policyholders |
— | 1,898.0 | — | — | — | 1,898.0 | ||||||||||||||||||
Other current assets |
109.4 | 2,159.3 | 16.1 | 11.6 | — | 2,296.4 | ||||||||||||||||||
Total current assets |
109.4 | 4,057.3 | 16.1 | 11.6 | — | 4,194.4 | ||||||||||||||||||
Goodwill |
2,302.8 | 4,040.2 | 505.0 | — | — | 6,848.0 | ||||||||||||||||||
Investments in subsidiaries |
662.5 | 1,759.6 | 1,514.5 | 6,605.2 | (10,541.8 | ) | — | |||||||||||||||||
Other non-current assets |
101.4 | 1,770.6 | 10.8 | — | — | 1,882.8 | ||||||||||||||||||
Total assets |
3,176.1 | 11,627.7 | 2,046.4 | 6,616.8 | (10,541.8 | ) | 12,925.2 | |||||||||||||||||
Policyholder payables |
— | 1,898.0 | — | — | — | 1,898.0 | ||||||||||||||||||
Other current liabilities |
427.8 | 1,305.4 | 4.3 | 5.4 | — | 1,742.9 | ||||||||||||||||||
Total current liabilities |
427.8 | 3,203.4 | 4.3 | 5.4 | — | 3,640.9 | ||||||||||||||||||
Intercompany balances |
121.2 | 218.3 | (360.3 | ) | 20.8 | — | — | |||||||||||||||||
Non-current liabilities |
24.8 | 271.3 | 1,276.4 | — | — | 1,572.5 | ||||||||||||||||||
Total liabilities |
573.8 | 3,693.0 | 920.4 | 26.2 | — | 5,213.4 | ||||||||||||||||||
Minority interests in equity
of consolidated entities |
— | 1,121.2 | — | — | — | 1,121.2 | ||||||||||||||||||
Total shareholders’ equity |
2,602.3 | 6,813.5 | 1,126.0 | 6,590.6 | (10,541.8 | ) | 6,590.6 | |||||||||||||||||
Total liabilities, minority
interests and shareholders’
equity |
3,176.1 | 11,627.7 | 2,046.4 | 6,616.8 | (10,541.8 | ) | 12,925.2 | |||||||||||||||||
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| Parent | ||||||||||||||||||||
| Non- | and | |||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer* | Eliminations | Consolidated | |||||||||||||||
2006 |
||||||||||||||||||||
Assets held for policyholders |
— | 1,574.9 | — | — | 1,574.9 | |||||||||||||||
Other current assets |
142.4 | 1,950.1 | 41.6 | — | 2,134.1 | |||||||||||||||
Total current assets |
142.4 | 3,525.0 | 41.6 | — | 3,709.0 | |||||||||||||||
Goodwill |
2,318.5 | 3,555.2 | 487.0 | — | 6,360.7 | |||||||||||||||
Investments in subsidiaries |
476.0 | 2,306.5 | 6,475.8 | (9,258.3 | ) | — | ||||||||||||||
Other non-current assets |
94.3 | 2,064.3 | 0.2 | — | 2,158.8 | |||||||||||||||
Total assets |
3,031.2 | 11,451.0 | 7,004.6 | (9,258.3 | ) | 12,228.5 | ||||||||||||||
Policyholder payables |
— | 1,574.9 | — | — | 1,574.9 | |||||||||||||||
Other current liabilities |
284.6 | 1,126.5 | 379.4 | — | 1,790.5 | |||||||||||||||
Total current liabilities |
284.6 | 2,701.4 | 379.4 | — | 3,365.4 | |||||||||||||||
Intercompany balances |
151.1 | 376.6 | (527.7 | ) | — | — | ||||||||||||||
Non-current liabilities |
0.7 | 204.9 | 988.9 | — | 1,194.5 | |||||||||||||||
Total liabilities |
436.4 | 3,282.9 | 840.6 | — | 4,559.9 | |||||||||||||||
Minority interests in equity
of consolidated entities |
— | 1,504.6 | — | — | 1,504.6 | |||||||||||||||
Total shareholders’ equity |
2,594.8 | 6,663.5 | 6,164.0 | (9,258.3 | ) | 6,164.0 | ||||||||||||||
Total liabilities, minority
interests and shareholders’
equity |
3,031.2 | 11,451.0 | 7,004.6 | (9,258.3 | ) | 12,228.5 | ||||||||||||||
| * | Prior to December 4, 2007, the Parent entity, INVESCO PLC, was also the issuer of the debt. |
Condensed Consolidating Statements of Income
| Non- | ||||||||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||||||||
2007 |
||||||||||||||||||||||||||||||
Total operating revenues |
772.3 | 3,106.6 | — | — | — | 3,878.9 | ||||||||||||||||||||||||
Total operating expenses |
(562.7 | ) | (2,282.9 | ) | (28.2 | ) | (10.8 | ) | — | (2,884.6 | ) | |||||||||||||||||||
Operating income/(loss) |
209.6 | 823.7 | (28.2 | ) | (10.8 | ) | — | 994.3 | ||||||||||||||||||||||
Equity in earnings of
unconsolidated affiliates |
75.9 | 183.1 | 684.7 | 684.4 | (1,580.0 | ) | 48.1 | |||||||||||||||||||||||
Other income/(expense) |
(1.5 | ) | 214.4 | (11.5 | ) | — | — | 201.4 | ||||||||||||||||||||||
Income/(loss) before income
taxes and minority interest |
284.0 | 1,221.2 | 645.0 | 673.6 | (1,580.0 | ) | 1,243.8 | |||||||||||||||||||||||
Income tax (provision)/benefit |
(71.6 | ) | (293.2 | ) | 7.5 | — | — | (357.3 | ) | |||||||||||||||||||||
Income before minority interest |
212.4 | 928.0 | 652.5 | 673.6 | (1,580.0 | ) | 886.5 | |||||||||||||||||||||||
Minority interest income of
consolidated entities, net
of tax |
— | (212.9 | ) | — | — | — | (212.9 | ) | ||||||||||||||||||||||
Net income |
212.4 | 715.1 | 652.5 | 673.6 | (1,580.0 | ) | 673.6 | |||||||||||||||||||||||
| Parent | ||||||||||||||||||||||
| Non- | and | |||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer* | Eliminations | Consolidated | |||||||||||||||||
2006 |
||||||||||||||||||||||
Total operating revenues |
769.0 | 2,477.7 | — | — | 3,246.7 | |||||||||||||||||
Total operating expenses |
(540.5 | ) | (1,928.3 | ) | (18.7 | ) | — | (2,487.5 | ) | |||||||||||||
Operating income/(loss) |
228.5 | 549.4 | (18.7 | ) | — | 759.2 | ||||||||||||||||
Equity in earnings of unconsolidated affiliates |
60.9 | 147.3 | 481.6 | (685.5 | ) | 4.3 | ||||||||||||||||
Other income/(expense) |
(4.3 | ) | 262.8 | 12.3 | — | 270.8 | ||||||||||||||||
Income/(loss) before income taxes and minority
interest |
285.1 | 959.5 | 475.2 | (685.5 | ) | 1,034.3 | ||||||||||||||||
Income tax (provision)/benefit |
(79.8 | ) | (182.3 | ) | 7.5 | — | (254.6 | ) | ||||||||||||||
Income before minority interest |
205.3 | 777.2 | 482.7 | (685.5 | ) | 779.7 | ||||||||||||||||
Minority interest income of consolidated
entities, net of tax |
— | (297.0 | ) | — | — | (297.0 | ) | |||||||||||||||
Net income |
205.3 | 480.2 | 482.7 | (685.5 | ) | 482.7 | ||||||||||||||||
| * | Prior to December 4, 2007, the Parent entity, INVESCO PLC, was also the issuer of the debt. |
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Table of Contents
| Parent | ||||||||||||||||||||
| Non- | and | |||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer* | Eliminations | Consolidated | |||||||||||||||
2005 |
||||||||||||||||||||
Total operating revenues |
722.6 | 2,150.0 | — | — | 2,872.6 | |||||||||||||||
Total operating expenses |
(570.8 | ) | (1,895.2 | ) | 1.3 | — | (2,464.7 | ) | ||||||||||||
Operating income/(loss) |
151.8 | 254.8 | 1.3 | — | 407.9 | |||||||||||||||
Equity in earnings of unconsolidated affiliates |
79.3 | 80.1 | 252.0 | (410.7 | ) | 0.7 | ||||||||||||||
Other income/(expense) |
(31.3 | ) | 137.6 | (32.5 | ) | — | 73.8 | |||||||||||||
Income/(loss) before income taxes and minority
interest |
199.8 | 472.5 | 220.8 | (410.7 | ) | 482.4 | ||||||||||||||
Income tax (provision)/benefit |
(40.4 | ) | (109.7 | ) | (1.0 | ) | — | (151.1 | ) | |||||||||||
Income before minority interest |
159.4 | 362.8 | 219.8 | (410.7 | ) | 331.3 | ||||||||||||||
Minority interest income of consolidated
entities, net of tax |
— | (111.5 | ) | — | — | (111.5 | ) | |||||||||||||
Net income |
159.4 | 251.3 | 219.8 | (410.7 | ) | 219.8 | ||||||||||||||
| * | Prior to December 4, 2007, the Parent entity, INVESCO PLC, was also the issuer of the debt. |
Condensed Consolidating Statements of Cash Flows
| Non- | ||||||||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer | Parent | Eliminations | Consolidated | ||||||||||||||||||
2007 |
||||||||||||||||||||||||
Net cash provided by operating activities |
14.6 | 469.9 | 418.0 | 92.7 | (81.5 | ) | 913.7 | |||||||||||||||||
Net cash (used in)/provided by investing
activities |
(9.1 | ) | (33.6 | ) | 203.0 | — | (206.7 | ) | (46.4 | ) | ||||||||||||||
Net cash used in financing activities |
— | (296.3 | ) | (646.0 | ) | (86.7 | ) | 288.2 | (740.8 | ) | ||||||||||||||
Increase/(decrease) in cash and cash
equivalents |
5.5 | 140.0 | (25.0 | ) | 6.0 | — | 126.5 | |||||||||||||||||
| Parent | ||||||||||||||||||||
| Non- | and | |||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer* | Eliminations | Consolidated | |||||||||||||||
2006 |
||||||||||||||||||||
Net cash provided by operating activities |
124.5 | 362.1 | 34.5 | (65.2 | ) | 455.9 | ||||||||||||||
Net cash (used in)/provided by investing
activities |
(134.8 | ) | (132.4 | ) | 8.5 | — | (258.7 | ) | ||||||||||||
Net cash provided by/(used in) financing
activities |
0.5 | (214.7 | ) | (14.1 | ) | 65.2 | (163.1 | ) | ||||||||||||
(Decrease)/increase in cash and cash
equivalents |
(9.8 | ) | 15.0 | 28.9 | — | 34.1 | ||||||||||||||
| * Prior to December 4, 2007, the Parent entity, INVESCO PLC, was also the issuer of the debt. | ||||||||||||||||||||
| Parent | ||||||||||||||||||||
| Non- | and | |||||||||||||||||||
| $ in millions | Guarantors | Guarantors | Issuer* | Eliminations | Consolidated | |||||||||||||||
2005 |
||||||||||||||||||||
Net cash provided by operating activities |
19.9 | 347.6 | 143.1 | (203.7 | ) | 306.9 | ||||||||||||||
Net cash (used in)/provided by investing
activities |
(28.1 | ) | 1.4 | 138.7 | — | 112.0 | ||||||||||||||
Net cash used in financing activities |
— | (172.9 | ) | (281.8 | ) | 203.7 | (251.0 | ) | ||||||||||||
(Decrease)/increase in cash and cash
equivalents |
(8.2 | ) | 176.1 | — | — | 167.9 | ||||||||||||||
| * | Prior to December 4, 2007, the Parent entity, INVESCO PLC, was also the issuer of the debt. |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
N/A
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We have evaluated, with the participation of our chief executive officer and chief financial
officer, the effectiveness of our disclosure controls and procedures as of December 31, 2007. There
are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can only provide
reasonable
assurance of achieving their control objectives. Based upon our evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure.
Report of Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and
15d-15(f). Under the supervision and with the participation of our chief executive officer and
chief financial officer, management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework. Based on our assessment, management concluded that our internal
control over financial reporting was effective as of December 31, 2007.
Our management, including our chief executive officer and chief financial officer, has evaluated
any change in our internal control over financial reporting that occurred during the fourth quarter
of 2007, and has concluded that there was no change during the fourth quarter of 2007 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
Since the evaluation date referenced above, there have been no significant changes in our internal
control over financial reporting or in other factors that could significantly affect these
controls.
Our independent auditors, Ernst & Young LLP, have issued an audit report on the effectiveness of
our internal control over financial reporting. This report appears in
Part II, Item 8, “Financial Statements and Supplementary
Data” of this Annual Report
on Form 10-K.
Item 9B. Other Information
None.
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Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Invesco
has filed the certification of its Chief Financial Officer with the
New York Stock Exchange (“NYSE”) as required pursuant to
Section 303A.12 of the NYSE Listed Company Manual. In addition,
Invesco has filed the Sarbanes-Oxley Act Section 302 certifications of
its Chief Executive Officer and Chief Financial Officer with the
Securities and Exchange Commission, which certifications are attached
hereto as Exhibit 31.0 and Exhibit 31.1, respectively.
The information required by this Item will be included in the definitive Proxy Statement for the
company’s annual meeting of shareholders, which will be filed with the SEC no later than 120 days
after the close of the fiscal year ended December 31, 2007, and is incorporated by reference in
this Report.
Item 11. Executive Compensation
The information required by this Item will be included in the definitive Proxy Statement for the
company’s annual meeting of shareholders, which will be filed with the SEC no later than 120 days
after the close of the fiscal year ended December 31, 2007, and is incorporated by reference in
this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item will be included in the definitive Proxy Statement for the
company’s annual meeting of shareholders, which will be filed with the SEC no later than 120 days
after the close of the fiscal year ended December 31, 2007, and is incorporated by reference in
this Report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the definitive Proxy Statement for the
company’s annual meeting of shareholders, which will be filed with the SEC no later than 120 days
after the close of the fiscal year ended December 31, 2007, and is incorporated by reference in
this Report.
Item 14. Principal Accountant Fees and Services
The information required by this Item will be included in the definitive Proxy Statement for the
company’s annual meeting of shareholders, which will be filed with the SEC no later than 120 days
after the close of the fiscal year ended December 31, 2007, and is incorporated by reference in
this Report.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The
financial statements filed as part of this Report are listed in Part
II, Item 8, “Financial Statements and Supplementary
Data.”
(a)(2) No
financial statement schedules are required to be filed as part of this Report because all such schedules have been omitted.
Such omission has been made on the basis that information is provided
in the financial statements or related footnotes in Part II, Item 8,
“Financial Statements and
Supplementary Data,” or is not required to be filed as the
information is not applicable.
(a)(3) The
exhibits listed on the Exhibit Index are included with this
Report.
Exhibit Index
3.1
|
Memorandum of Association of Invesco Ltd., incorporating amendments up to and including December 4, 2007, incorporated by reference to exhibit 3.1 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007 | |
3.2
|
Amended and Restated Bye-Laws of Invesco Ltd., incorporating amendments up to and including December 4, 2007, incorporated by reference to exhibit 3.2 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007 | |
4.1
|
Specimen Certificate for Common Shares of Invesco Ltd., incorporated by reference to exhibit 4.1 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007 | |
4.2
|
Indenture, dated as of February 27, 2003, for AMVESCAP’s 5.375% Senior Notes Due 2013, among AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., INVESCO North American Holdings, Inc. and SunTrust Bank, incorporated by reference to exhibit 2.12 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003 | |
4.3
|
Indenture, dated as of December 14, 2004, for AMVESCAP’s 4.500% Senior Notes due 2009 among AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., INVESCO North American Holdings, Inc. and SunTrust Bank, incorporated by reference to exhibit 2.10 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Securities and Exchange Commission on June 29, 2005 | |
4.4
|
Indenture, dated as of December 14, 2004, for AMVESCAP’s 5.375% Senior Notes due 2014, among AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., INVESCO North American Holdings, Inc. and SunTrust Bank, incorporated by reference to exhibit 2.11 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Securities and Exchange Commission on June 29, 2005 | |
4.5
|
Indenture, dated as of April 11, 2007, for AMVESCAP’s 5.625% Senior Notes Due 2012, among AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., INVESCO North American Holdings, Inc. and The Bank of New York Trust Company, N.A., incorporated by reference to exhibit 99.1 to AMVESCAP’s Report on Form 6-K, filed with the Securities and Exchange Commission on April 18, 2007 | |
4.6
|
Supplemental Indenture, dated as of November 27, 2007, among INVESCO PLC, a public limited company organized under the laws of England and Wales, and formerly known as AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., and INVESCO North American Holdings, Inc., Invesco Ltd., a Bermuda corporation, and U.S. Bank National Association, as Successor Trustee to SunTrust Bank, incorporated by reference to exhibit 4.1 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 30, 2007 |
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Table of Contents
4.7
|
Supplemental Indenture No. 2, dated as of November 27, 2007, among INVESCO PLC, a public limited company organized under the laws of England and Wales, and formerly known as AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., and INVESCO North American Holdings, Inc., Invesco Ltd., a Bermuda corporation, and The Bank of New York Trust Company, N.A., incorporated by reference to exhibit 4.2 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 30, 2007 | |
4.8
|
Supplemental Indenture, dated as of November 27, 2007, among INVESCO PLC, a public limited company organized under the laws of England and Wales, and formerly known as AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., and INVESCO North American Holdings, Inc., Invesco Ltd., a Bermuda corporation, and U.S. Bank National Association, as Successor Trustee to SunTrust Bank, incorporated by reference to exhibit 4.3 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 30, 2007 | |
4.9
|
Supplemental Indenture, dated as of November 27, 2007, among INVESCO PLC, a public limited company organized under the laws of England and Wales, and formerly known as AMVESCAP PLC, A I M Advisors, Inc., A I M Management Group Inc., INVESCO Institutional (N.A.), Inc., and INVESCO North American Holdings, Inc., Invesco Ltd., a Bermuda corporation, and U.S. Bank National Association, as Successor Trustee to SunTrust Bank, incorporated by reference to exhibit 4.4 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 30, 2007 | |
4.10
|
Guarantee, dated February 27, 2003, with respect to AMVESCAP’s 5.375% Senior Notes Due 2013, made by A I M Management Group Inc., A I M Advisors, Inc., INVESCO Institutional (N.A.), Inc. and INVESCO North American Holdings, Inc., incorporated by reference to exhibit 4.20 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 27, 2003. | |
10.1
|
Amended and Restated Five Year Credit Agreement, dated as of December 3, 2007, among INVESCO PLC, Invesco Ltd., the banks, financial institutions and other institutional lenders from time to time a party thereto and Bank of America, N.A., as administrative agent | |
10.2
|
Third Amended and Restated Purchase and Sale Agreement, dated as of August 18, 2003, among Citibank, N.A., Citicorp North America, Inc., A I M Management Group Inc., A I M Distributors, Inc., A I M Advisors, Inc. and Invesco Funds Group, Inc. | |
10.3
|
Amendment No. 4 to Facility Documents, dated as of August 24, 2001 among A I M Management Group Inc., A I M Advisors, Inc., A I M Distributors, Inc., Citibank, N.A., Bankers Trust Company and Citicorp North America, Inc., incorporated by reference to exhibit 4.4 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2001, filed with the Securities and Exchange Commission on April 4, 2002 | |
10.4
|
Amendment No. 5 to Facility Documents, dated as of August 18, 2003, among Invesco Funds Group, Inc., A I M Management Group Inc., A I M Advisors, Inc., A I M Distributors, Inc., Citibank, N.A., Citicorp North America, Inc. and Deutsche Bank Trust Company Americas |
106
Table of Contents
10.5
|
Global Stock Plan, as amended and restated as of August 31, 2005 | |
10.6
|
No. 3 Executive Share Option Scheme, as revised as of August 2006 | |
10.7
|
2000 Share Option Plan, as revised as of January 26, 2005 | |
10.8
|
Invesco ESOP, as amended and restated, generally effective as of February 1, 2005 | |
10.9
|
Wholesale Representatives Deferral Plan, amended and restated effective as of December 10, 2002 | |
10.10
|
2003 Share Option Plan (Canada), dated June 2003 | |
10.11
|
Deferred Fees Share Plan, incorporated by reference to exhibit 4.22 to Invesco’s Annual Report on Form 20-F for the year ended December 31, 2000, filed with the Securities and Exchange Commission on May 17, 2001. | |
10.12
|
Rules of the AMVESCAP International Sharesave Plan, dated May 8, 1997 | |
10.13
|
Master Employment Agreement, dated July 28, 2005, between Martin L. Flanagan and AMVESCAP PLC, incorporated by reference to exhibit 4.18 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2005, filed with the Securities and Exchange Commission on June 23, 2006. | |
10.14
|
Global Partner Agreement, dated November 10, 2005, between AMVESCAP PLC and Loren M. Starr | |
10.15
|
Global Partner Agreement, dated January 1, 2001, between AIM Funds Management Inc. and Philip A. Taylor | |
10.16
|
Global Partner Agreement, dated July 12, 2001, between INVESCO UK Limited and Robert J. Yerbury | |
10.17
|
Global Partners Employment Contract, dated April 1, 2000, between INVESCO Pacific Holdings Limited and Andrew Lo | |
10.18
|
Global Partner Agreement, dated January 3, 2001, between James I. Robertson and AMVESCAP Group Services, Inc., incorporated by reference to exhibit 4.16 to AMVESCAP’s Annual Report on Form 20-F for the year ended December 31, 2004, filed with the Securities and Exchange Commission on June 29, 2005. | |
16
|
Letter, dated January 17, 2008, from Ernst & Young LLP (UK) to the Commission, incorporated by reference to exhibit 16 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 18, 2008 | |
21
|
List of Subsidiaries | |
23.1
|
Consent of Ernst & Young LLP, dated February 25, 2008 | |
31.1
|
Certification of Martin L. Flanagan pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Loren M. Starr pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Martin L. Flanagan pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Loren M. Starr pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
107
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| Invesco Ltd. | ||||||
| By: | /s/ MARTIN L. FLANAGAN | |||||
| Name: | Martin L. Flanagan | |||||
| Title: | President and Chief Executive Officer | |||||
| Date: | February 29, 2008 | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated and on
the dates indicated.
| Name | Title | Date | ||
/s/ MARTIN L. FLANAGAN
|
Chief Executive
Officer (Principal
Executive Officer) and
President; Director
|
February 29, 2008 | ||
/s/ LOREN M. STARR
|
Senior Managing
Director and Chief
Financial Officer
(Principal Financial
Officer)
|
February 29, 2008 | ||
/s/ DAVID A. HARTLEY
|
Chief Accounting
Officer (Principal
Accounting Officer)
|
February 29, 2008 | ||
/s/ REX D. ADAMS
|
Chairman and Director | February 29, 2008 | ||
/s/ SIR JOHN BANHAM
|
Director | February 29, 2008 | ||
/s/ JOSEPH R. CANION
|
Director | February 29, 2008 | ||
/s/ JEROME P. KENNEY
|
Director | February 29, 2008 | ||
/s/ DENIS KESSLER
|
Director | February 29, 2008 | ||
/s/ EDWARD P. LAWRENCE
|
Director | February 29, 2008 | ||
/s/ J. THOMAS PRESBY
|
Director | February 29, 2008 | ||
/s/ JAMES I. ROBERTSON
|
Director | February 29, 2008 |
108