IVZ.10Q.3Q.2012
Table of Contents                                 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
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
(State or Other Jurisdiction of
Incorporation or Organization)
 
98-0557567
(I.R.S. Employer
Identification No.)
 
 
 
1555 Peachtree Street, N.E., Suite 1800, Atlanta, GA
(Address of Principal Executive Offices)
 
30309
(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 whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o(Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No þ
As of September 30, 2012, the most recent practicable date, 444,042,032 of the company’s common shares par value $0.20 per share, were outstanding.

Table of Contents                                 

TABLE OF CONTENTS
We include cross references to captions elsewhere in this Quarterly Report on Form 10-Q, which we refer to as this “Report,” where you can find related additional information. The following table of contents tells you where to find these captions.
 
 
 
Page
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

2
Table of Contents                                 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Invesco Ltd.
Condensed Consolidated Balance Sheets
(Unaudited)
 
As of
$ in millions, except share data
September 30, 2012
 
December 31, 2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
880.1

 
727.4

Cash and cash equivalents of consolidated investment products
552.7

 
382.3

Unsettled fund receivables
596.0

 
444.4

Accounts receivable
406.1

 
424.4

Accounts receivable of consolidated investment products
58.3

 
98.5

Investments
364.2

 
283.7

Prepaid assets
55.8

 
51.2

Other current assets
81.7

 
150.0

Deferred tax asset, net
26.5

 
28.7

Assets held for policyholders
1,139.3

 
1,243.5

Total current assets
4,160.7

 
3,834.1

Non-current assets:
 
 
 
Investments
223.5

 
200.8

Investments of consolidated investment products
4,717.9

 
6,629.0

Security deposit assets and receivables
30.1

 
81.2

Other non-current assets
17.2

 
17.9

Deferred sales commissions
46.0

 
40.5

Property and equipment, net
329.9

 
312.8

Intangible assets, net
1,295.8

 
1,322.8

Goodwill
7,039.9

 
6,907.9

Total non-current assets
13,700.3

 
15,512.9

Total assets
17,861.0

 
19,347.0

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of total debt
333.5

 
215.1

Unsettled fund payables
598.2

 
439.6

Income taxes payable
64.4

 
59.6

Other current liabilities
719.1

 
841.5

Other current liabilities of consolidated investment products
329.8

 
175.1

Policyholder payables
1,139.3

 
1,243.5

Total current liabilities
3,184.3

 
2,974.4

Non-current liabilities:
 
 
 
Long-term debt
951.6

 
1,069.6

Long-term debt of consolidated investment products
3,855.0

 
5,512.9

Deferred tax liabilities, net
313.5

 
274.0

Security deposits payable
30.1

 
81.2

Other non-current liabilities
329.1

 
297.3

Total non-current liabilities
5,479.3

 
7,235.0

Total liabilities
8,663.6

 
10,209.4

Commitments and contingencies (See Note 10)


 


Equity:
 
 
 
Equity attributable to common shareholders:
 
 
 
Common shares ($0.20 par value; 1,050.0 million authorized; 490.4 million shares issued as of September 30, 2012 and December 31, 2011)
98.1

 
98.1

Additional paid-in-capital
6,122.6

 
6,180.6

Treasury shares
(1,323.0
)
 
(1,280.4
)
Retained earnings
2,720.1

 
2,413.2

Retained earnings appropriated for investors in consolidated investment products
159.1

 
334.3

Accumulated other comprehensive income, net of tax
538.2

 
373.3

Total equity attributable to common shareholders
8,315.1

 
8,119.1

Equity attributable to noncontrolling interests in consolidated entities
882.3

 
1,018.5

Total equity
9,197.4

 
9,137.6

Total liabilities and equity
17,861.0

 
19,347.0

See accompanying notes.

3
Table of Contents                                 

Invesco Ltd.
Condensed Consolidated Statements of Income
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
$ in millions, except per share data
2012
 
2011
 
2012
 
2011
Operating revenues:
 
 
 
 
 
 
 
Investment management fees
818.0

 
779.5

 
2,390.0

 
2,390.9

Service and distribution fees
196.1

 
189.1

 
572.2

 
599.2

Performance fees
3.0

 
2.6

 
38.9

 
14.0

Other
24.3

 
26.6

 
83.0

 
91.0

Total operating revenues
1,041.4

 
997.8

 
3,084.1

 
3,095.1

Operating expenses:
 
 
 
 
 
 
 
Employee compensation
330.9

 
305.5

 
954.0

 
929.7

Third-party distribution, service and advisory
327.2

 
314.4

 
960.9

 
980.7

Marketing
26.4

 
13.1

 
79.7

 
64.9

Property, office and technology
69.1

 
62.7

 
204.4

 
188.6

General and administrative
68.8

 
69.6

 
230.8

 
220.8

Transaction and integration
3.0

 
4.7

 
5.6

 
23.9

Total operating expenses
825.4

 
770.0

 
2,435.4

 
2,408.6

Operating income
216.0

 
227.8

 
648.7

 
686.5

Other income/(expense):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
5.2

 
8.1

 
21.8

 
25.6

Interest and dividend income
2.5

 
3.8

 
7.1

 
8.3

Interest income of consolidated investment products
68.7

 
79.6

 
206.4

 
233.6

Other gains/(losses) of consolidated investment products, net
(25.2
)
 
(93.1
)
 
(69.9
)
 
(243.3
)
Interest expense
(12.6
)
 
(15.3
)
 
(39.6
)
 
(47.5
)
Interest expense of consolidated investment products
(41.9
)
 
(48.7
)
 
(134.4
)
 
(135.2
)
Other gains and losses, net
18.4

 
(19.7
)
 
29.3

 
(5.8
)
Income before income taxes
231.1

 
142.5

 
669.4

 
522.2

Income tax provision
(74.2
)
 
(59.1
)
 
(210.1
)
 
(210.1
)
Net income
156.9

 
83.4

 
459.3

 
312.1

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net 
13.7

 
83.5

 
59.1

 
215.3

Net income attributable to common shareholders
170.6

 
166.9

 
518.4

 
527.4

Earnings per share:
 
 
 
 
 
 
 
— basic

$0.38

 

$0.36

 

$1.14

 

$1.13

— diluted

$0.38

 

$0.36

 

$1.14

 

$1.13

Dividends declared per share

$0.1725

 

$0.1225

 

$0.4675

 

$0.3550

See accompanying notes.


4
Table of Contents                                 

Invesco Ltd.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
$ in millions
2012
 
2011
 
2012
 
2011
Net income
156.9

 
83.4

 
459.3

 
312.1

Other comprehensive income, before tax:
 
 
 
 
 
 
 
Currency translation differences on investments in overseas subsidiaries
171.3

 
(243.4
)
 
155.2

 
(91.1
)
Change in accumulated other comprehensive income related to employee benefit plans
(2.8
)
 
1.7

 
(1.9
)
 
11.9

Change in accumulated other comprehensive income of equity method investments
1.6

 
(5.0
)
 
4.6

 
(6.1
)
Change in net unrealized gains on available-for-sale investments
4.9

 
(12.3
)
 
8.3

 
(14.9
)
Other comprehensive income (loss), before tax
175.0

 
(259.0
)
 
166.2

 
(100.2
)
Income tax related to items of other comprehensive income:
 
 
 
 
 
 
 
Tax benefit (expense) on foreign currency translation adjustments
0.1

 
0.8

 
0.9

 
—

Tax benefit (expense) on comprehensive income related to employee benefit plans
(1.7
)
 
(1.0
)
 
(1.9
)
 
(3.5
)
Tax benefit (expense) on change in net unrealized gains on available-for-sale investments
(0.4
)
 
1.6

 
(0.2
)
 
1.7

Total income tax benefit (expense) related to items of other comprehensive income
(2.0
)
 
1.4

 
(1.2
)
 
(1.8
)
Other comprehensive income (loss), net of tax
173.0

 
(257.6
)
 
165.0

 
(102.0
)
Total comprehensive income
329.9

 
(174.2
)
 
624.3

 
210.1

Comprehensive loss (income) attributable to noncontrolling interests in consolidated entities
(11.0
)
 
69.0

 
59.0

 
194.2

Comprehensive income attributable to common shareholders
318.9

 
(105.2
)
 
683.3

 
404.3

See accompanying notes.


5
Table of Contents                                 

Invesco Ltd.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine months ended September 30,
$ in millions
2012
 
2011
Operating activities:
 
 
 
Net income
459.3

 
312.1

Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
 
 
 
Amortization and depreciation
72.5

 
95.3

Share-based compensation expense
102.9

 
86.0

Gains on disposal of property, equipment, and software, net
(0.5
)
 
—

Purchase of trading investments
(7,573.2
)
 
(8,120.7
)
Proceeds from sale of trading investments
7,564.6

 
8,103.6

Other gains and losses, net
(29.3
)
 
5.8

Other (gains)/losses of consolidated investment products, net
69.9

 
243.3

Tax benefit from share-based compensation
47.7

 
74.2

Excess tax benefits from share-based compensation
(13.7
)
 
(15.8
)
Equity in earnings of unconsolidated affiliates
(21.8
)
 
(25.6
)
Dividends from unconsolidated affiliates
14.7

 
20.1

Changes in operating assets and liabilities:
 
 
 
(Increase)/decrease in cash held by consolidated investment products
(296.0
)
 
296.3

(Increase)/decrease in receivables
151.9

 
41.3

Increase/(decrease) in payables
(231.3
)
 
(473.9
)
Net cash (used in)/provided by operating activities
317.7

 
642.0

Investing activities:
 
 
 
Purchase of property and equipment
(68.4
)
 
(60.6
)
Disposal of property and equipment
0.6

 
12.6

Purchase of available-for-sale investments
(73.9
)
 
(31.1
)
Proceeds from sale of available-for-sale investments
32.9

 
50.2

Purchase of investments by consolidated investment products
(2,338.9
)
 
(2,594.2
)
Proceeds from sale of investments by consolidated investment products
2,484.5

 
3,035.3

Purchase of other investments
(87.7
)
 
(102.3
)
Proceeds from sale of other investments
63.4

 
35.7

Returns of capital and distributions from unconsolidated partnership investments
12.2

 
28.5

Acquisition of businesses
—

 
(14.9
)
Acquisition earn-out payments
(5.6
)
 
(5.4
)
Sale of management contracts
16.4

 
—

Net cash (used in)/provided by investing activities
35.5

 
353.8

Financing activities:
 
 
 
Proceeds from exercises of share options
17.2

 
11.0

Purchases of treasury shares
(190.0
)
 
(333.0
)
Dividends paid
(211.5
)
 
(165.0
)
Excess tax benefits from share-based compensation
13.7

 
15.8

Capital invested into consolidated investment products
19.4

 
27.9

Capital distributed by consolidated investment products
(122.0
)
 
(158.8
)
Net borrowings/(repayments) of debt of consolidated investment products
255.4

 
(434.9
)
Net borrowings/(repayments) under credit facility
215.5

 
74.0

Repayments of senior notes
(215.1
)
 
—

Acquisition of interest in consolidated investment products
—

 
(12.3
)
Net cash (used in)/provided by financing activities
(217.4
)
 
(975.3
)
(Decrease)/increase in cash and cash equivalents
135.8

 
20.5

Foreign exchange movement on cash and cash equivalents
16.9

 
(4.0
)
Cash and cash equivalents, beginning of period
727.4

 
740.5

Cash and cash equivalents, end of period
880.1

 
757.0

Supplemental Cash Flow Information:
 
 
 
Interest paid
(39.0
)
 
(39.1
)
Interest received
3.5

 
8.2

Taxes paid
(154.4
)
 
(137.7
)
See accompanying notes.

6
Table of Contents                                 



Invesco Ltd.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
 
Equity Attributable to Common Shareholders
 
 
 
 
$ in millions
 
Common Shares
 
Additional Paid-in-Capital
 
Treasury Shares
 
Retained Earnings
 
Retained Earnings
Appropriated for
Investors in
Consolidated Investment Products
 
Accumulated Other
Comprehensive Income
 
Total Equity
Attributable to Common Shareholders
 
Noncontrolling
Interests in
Consolidated Entities
 
Total Equity
January 1, 2012
 
98.1

 
6,180.6

 
(1,280.4
)
 
2,413.2

 
334.3

 
373.3

 
8,119.1

 
1,018.5

 
9,137.6

Net income
 
—

 
—

 
—

 
518.4

 
—

 
—

 
518.4

 
(59.1
)
 
459.3

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
164.9

 
164.9

 
0.1

 
165.0

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
683.3

 
(59.0
)
 
624.3

Net income (loss) reclassified to appropriated retained earnings
 
—

 
—

 
—

 
—

 
(51.3
)
 
—

 
(51.3
)
 
51.3

 
—

Currency translation differences on investments in overseas subsidiaries reclassified to appropriated retained earnings
 
—

 
—

 
—

 
—

 
(7.0
)
 
—

 
(7.0
)
 
7.0

 
—

Deconsolidation of consolidated investment products
 
—

 
—

 
—

 
—

 
(116.9
)
 
—

 
(116.9
)
 
—

 
(116.9
)
Change in noncontrolling interests in consolidated entities, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(135.5
)
 
(135.5
)
Dividends
 
—

 
—

 
—

 
(211.5
)
 
—

 
—

 
(211.5
)
 
—

 
(211.5
)
Employee share plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation
 
—

 
102.9

 
—

 
—

 
—

 
—

 
102.9

 
—

 
102.9

Vested shares
 
—

 
(156.9
)
 
156.9

 
—

 
—

 
—

 
—

 
—

 
—

Exercise of options
 
—

 
(17.7
)
 
34.9

 
—

 
—

 
—

 
17.2

 
—

 
17.2

Tax impact of share-based payment
 
—

 
13.7

 
—

 
—

 
—

 
—

 
13.7

 
—

 
13.7

Purchase of shares
 
—

 
—

 
(234.4
)
 
—

 
—

 
—

 
(234.4
)
 
—

 
(234.4
)
September 30, 2012
 
98.1

 
6,122.6

 
(1,323.0
)
 
2,720.1

 
159.1

 
538.2

 
8,315.1

 
882.3

 
9,197.4

See accompanying notes.






7
Table of Contents                                 



Invesco Ltd.
Condensed Consolidated Statements of Changes in Equity (continued)
(Unaudited)

 
 
Equity Attributable to Common Shareholders
 
 
 
 
$ in millions
 
Common Shares
 
Additional Paid-in-Capital
 
Treasury Shares
 
Retained Earnings
 
Retained Earnings
Appropriated for
Investors in
Consolidated Investment Products
 
Accumulated Other
Comprehensive Income
 
Total Equity
Attributable to Common Shareholders
 
Non-Controlling
Interests in
Consolidated Entities
 
Total Equity
January 1, 2011
 
98.1

 
6,262.6

 
(991.5
)
 
1,904.4

 
495.5

 
495.5

 
8,264.6

 
1,096.3

 
9,360.9

Net income
 
—

 
—

 
—

 
527.4

 
—

 
—

 
527.4

 
(215.3
)
 
312.1

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
(123.1
)
 
(123.1
)
 
21.1

 
(102.0
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
404.3

 
(194.2
)
 
210.1

Net income (loss) reclassified to appropriated retained earnings
 
—

 
—

 
—

 
—

 
(277.8
)
 
—

 
(277.8
)
 
277.8

 
—

Currency translation differences on investments in overseas subsidiaries reclassified to appropriated retained earnings
 
—

 
—

 
—

 
—

 
15.1

 
—

 
15.1

 
(15.1
)
 
—

Change in noncontrolling interests in consolidated entities, net
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(146.4
)
 
(146.4
)
Dividends
 
—

 
—

 
—

 
(165.0
)
 
—

 
—

 
(165.0
)
 
—

 
(165.0
)
Employee share plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation
 
—

 
86.0

 
—

 
—

 
—

 
—

 
86.0

 
—

 
86.0

Vested shares
 
—

 
(181.4
)
 
181.4

 
—

 
—

 
—

 
—

 
—

 
—

Exercise of options
 
—

 
(7.1
)
 
18.1

 
—

 
—

 
—

 
11.0

 
—

 
11.0

Tax impact of share-based payment
 
—

 
15.8

 
—

 
—

 
—

 
—

 
15.8

 
—

 
15.8

Purchase of shares
 
—

 
—

 
(404.9
)
 
—

 
—

 
—

 
(404.9
)
 
—

 
(404.9
)
September 30, 2011
 
98.1

 
6,175.9

 
(1,196.9
)
 
2,266.8

 
232.8

 
372.4

 
7,949.1

 
1,018.4

 
8,967.5

See accompanying notes.


8
Table of Contents                                 

Invesco Ltd.
Notes to the Condensed Consolidated Financial Statements
1. ACCOUNTING POLICIES
Corporate Information
Invesco Ltd. (Parent) and all of its consolidated entities (collectively, the company or Invesco) provide retail, institutional and high-net-worth clients with an array of global investment management capabilities. The company’s sole business is investment management.
Basis of Accounting and Consolidation
In the opinion of management, the unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation.
The Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP and consolidate the financial statements of the Parent, all of its controlled subsidiaries, any variable interest entities (VIEs) required to be consolidated, and any non-VIE general partnership investments where the company is deemed to have control. Control is deemed to be present when the Parent, directly or indirectly, 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.
Certain disclosures included in the company’s annual report are not required to be included on an interim basis in the company’s quarterly reports on Forms 10-Q. The company has condensed or omitted these disclosures. Therefore, this Form 10-Q (Report) should be read in conjunction with the company’s annual report on Form 10-K (as amended) for the year ended December 31, 2011.
Use of Estimates
In preparing the financial statements, company 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 and intangible 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.
Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update 2011-04, “Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements” (ASU 2011-04). ASU 2011-04 amends Topic 820 to clarify existing fair value measurement disclosures to (1) specifically provide quantitative information about the significant unobservable inputs used for all level 3 measurements and (2) disclose any transfers between levels 1 and 2 of the fair value hierarchy, not just significant transfers. ASU 2011-04 also requires a number of additional disclosures regarding fair value measurements. Specifically, ASU 2011-04 requires entities to disclose: (1) a qualitative discussion about the sensitivity of recurring level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs; (2) a description of the company’s valuation processes surrounding level 3 measurements; (3) information about when the current use of a non-financial asset measured at fair value differs from its highest and best use; and (4) the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes. ASU 2011-04 amends Topic 820 to change the fair value measurement of financial instruments and the application of premiums and discounts in a fair value measurement. ASU 2011-04 also clarifies existing fair value measurement regarding the concepts of valuation premise, the application of the highest and best use, and the fair value measurement of an instrument classified in an entity’s shareholders’ equity. The adoption of ASU 2011-04 did not have an effect on the company’s current fair value measurements but led to increased disclosures related to the assets and liabilities of the company's consolidated investment products that are classified as level 3 assets within the fair value hierarchy. The amendments to Topic 820 made by ASU 2011-04 are effective for interim and annual periods beginning on or after December 15, 2011, and are accordingly reflected in the fair value disclosure contained in Notes 2, "Fair Value of Assets and Liabilities," and 11, "Consolidated Investment Products."
In June 2011, the FASB issued Accounting Standards Update 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 amends Topic 220 to require the components of net income and other comprehensive income to be presented in one continuous statement, which would be referred to as the statement of comprehensive income, or in two separate but consecutive statements. Prior to ASU 2011-05, there was no requirement to

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present the statement of net income and statement of comprehensive income consecutively. ASU 2011-05 also requires an entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income. This requirement in ASU 2011-05 was amended and deferred in December 2011, when the FASB issued Accounting Standards Update No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive income in Accounting Standards Update No. 2011-05” (ASU 2011-12). As a result of ASU 2011-12, an entity will continue to report items that are reclassified from accumulated other comprehensive income consistent with the requirements in Topic 220 in effect before the adoption of ASU 2011-05. The amendments to Topic 220 made by ASU 2011-05, and the amendments to ASU 2011-05 made by ASU 2011-12, are effective for interim and annual periods beginning on or after December 15, 2011 for public companies, and are accordingly reflected in the financial statement, “Condensed Consolidated Statements of Comprehensive Income."
In September 2011, the FASB issued Accounting Standards Update 2011-08, “Intangibles-Goodwill and Other: Testing Goodwill for Impairment” (ASU 2011-08). ASU 2011-08 amends Topic 350 on testing for goodwill impairment. Specifically, ASU 2011-08 permits an entity the option to first qualitatively assess whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If an entity concludes that this is the case, it would be required to calculate the fair value of the reporting unit under step one of the goodwill impairment test; otherwise, no further testing is required. An entity may bypass the qualitative assessment in any period and proceed directly to step one of the goodwill impairment test, and may resume performing the qualitative assessment in any subsequent period. The amendments made by ASU 2011-08 have been adopted by the company and are effective for interim and annual periods beginning on or after December 15, 2011. They will be contemplated as part of the company's 2012 impairment testing process.
In July 2012, the FASB issued Accounting Standards Update 2012-02, “Intangibles-Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02). ASU 2012-02 amends Topic 350 on testing for impairment of indefinite-lived intangible assets. Specifically, ASU 2012-02 permits an entity the option to first qualitatively assess whether it is more likely than not (a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired. If an entity concludes that this is the case, it would be required to perform the quantitative impairment test and calculate the fair value of the indefinite-lived intangible asset; otherwise, no further testing is required. An entity may bypass the qualitative assessment in any period and proceed directly to the quantitative impairment test, and may resume performing the qualitative assessment in any subsequent period. The amendments made by ASU 2012-02 are effective for interim and annual impairment tests performed for fiscal years beginning on or after September 15, 2012. Early adoption is permitted and the amendments made by 2012-02 will be contemplated as part of the company's 2012 impairment testing process.

2. FAIR VALUE OF ASSETS AND LIABILITIES
The carrying value and fair value of financial instruments is presented in the summary table below. The fair value of financial instruments held by consolidated investment products is presented in Note 11, “Consolidated Investment Products.”
 
September 30, 2012
 
December 31, 2011
$ in millions
Footnote Reference
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Cash and cash equivalents
 
 
880.1

 
880.1

 
727.4

 
727.4

Available for sale investments
3

 
122.0

 
122.0

 
63.5

 
63.5

Assets held for policyholders
 
 
1,139.3

 
1,139.3

 
1,243.5

 
1,243.5

Trading investments
3

 
217.1

 
217.1

 
187.5

 
187.5

Foreign time deposits*
3

 
33.4

 
33.4

 
32.2

 
32.2

Support agreements*
10,11

 
(1.0
)
 
(1.0
)
 
(1.0
)
 
(1.0
)
Policyholder payables
 
 
(1,139.3
)
 
(1,139.3
)
 
(1,243.5
)
 
(1,243.5
)
Put option contracts

 
0.1

 
0.1

 
—

 
—

UIT-related financial instruments sold, not yet purchased
 
 
(1.3
)
 
(1.3
)
 
(1.0
)
 
(1.0
)
Note payable
 
 
(11.3
)
 
(11.3
)
 
(16.8
)
 
(16.8
)
Total debt*
4

 
(1,285.1
)
 
(1,308.2
)
 
(1,284.7
)
 
(1,307.5
)

*
These financial instruments are not measured at fair value on a recurring basis. See the indicated footnotes for additional information about the carrying and fair values of these financial instruments. Foreign time deposits are measured at cost

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plus accrued interest, which approximates fair value, and are accordingly classified as Level 2 securities.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Cash equivalents
Cash equivalents include cash investments in money market funds and time deposits. Cash investments in money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the net asset value of the underlying funds, and are classified within level 1 of the valuation hierarchy.
Available-for-sale investments
Available-for-sale investments include amounts seeded into affiliated investment products, investments in affiliated CLOs, and investments in other debt securities. Seed money investments are investments held in Invesco managed funds with the purpose of providing capital to the funds during their development periods. Seed money is valued under the market approach through the use of quoted market prices available in an active market and is classified within level 1 of the valuation hierarchy; there is no modeling or additional information needed to arrive at the fair values of these investments. CLO assets are valued based on price quotations provided by an independent third-party pricing source, in which case they are classified as level 2, or using an income approach through the use of certain observable and unobservable inputs. Due to current liquidity constraints within the market for CLO products that require the use of unobservable inputs, these investments are classified within level 3 of the valuation hierarchy. Other debt securities are valued using a cost valuation technique due to the lack of available cash flow and market data and are accordingly also classified within Level 3 of the valuation hierarchy.
Assets held for policyholders
Assets held for policyholders represent investments held by one of the company’s subsidiaries, which is an insurance entity that was established to facilitate retirement savings plans in the U.K. The assets held for policyholders are accounted for at fair value pursuant to ASC Topic 944, “Financial Services — Insurance,” and are comprised primarily of affiliated unitized funds. The assets are measured at fair value under the market approach based on the quoted prices of the underlying funds in an active market and are classified within level 1 of the valuation hierarchy. The policyholder payables are indexed to the value of the assets held for policyholders.
Put option contracts
In the second quarter of 2012, the company purchased four put option contracts to hedge economically foreign currency risk on the translation of a portion of its pound sterling-denominated earnings into U.S. dollars.  The economic hedge is predominantly triggered upon the impact of a significant decline in the pound sterling/U.S. dollar foreign exchange rate, which could arise from a Greek Euro exit or other major European economic events.  Open put option contracts are marked-to-market through earnings, which are recorded in the company's consolidated statement of income in other gains and losses. These derivative contracts are valued using option valuation models and are included in other current assets in the company's consolidated balance sheet.  The significant inputs in these models (volatility, forward points and swap curves) are readily available in public markets or can be derived from observable market transactions for substantially the full terms of the contracts and are classified within level 2 of the valuation hierarchy. The cost to the company of these contracts was $2.5 million at their inception date, which represents the company's maximum exposure to loss from the contracts over the 12-month cumulative contract period, and contract maturity ranges from September 25, 2012 to June 25, 2013.  These were the only contracts entered into during the period to hedge economically foreign currency risk. The company recognized a loss of $1.2 million and $2.4 million in the three months ended and nine months ended September 30, 2012 related to the change in market value of these put option contracts.
Trading investments
Trading investments include investments held to hedge economically against costs the company incurs in connection with certain deferred compensation plans in which the company participates, as well as trading and investing activities in equity and debt securities entered into in its capacity as sponsor of unit investment trusts (UITs).
•
Investments related to deferred compensation plans
Investments related to deferred compensation plans are primarily invested in affiliated funds that are held to hedge economically current and non-current deferred compensation liabilities. Investments related to deferred compensation plans are valued under the market approach through the use of quoted prices in an active market and are classified within level 1 of the valuation hierarchy.
•
UIT-related equity and debt securities
At September 30, 2012, UIT-related equity and debt securities consisted of investments in corporate stock, corporate

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bonds, UITs, U.S. state and political subdivisions. Each is discussed more fully below.
•
Corporate stock
The company temporarily holds investments in corporate stock for purposes of creating a UIT. Corporate stocks are valued under the market approach through use of quoted prices on an exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized within level 1 of the valuation hierarchy; otherwise, they are categorized in level 2.
•
Corporate bonds
The company temporarily holds investments in corporate bonds for purposed of creating a UIT. Corporate bonds are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as level 1, 2, or 3.
•
UITs
The company may hold units of its sponsored UITs at period-end for sale in the primary market or secondary market. Equity UITs are valued under the market approach through use of quoted prices on an exchange. Fixed income UITs are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as level 1, 2, or 3.
•
Municipal securities
Municipal securities are valued using recently executed transaction prices, market price quotations (where observable), bond spreads, or credit default swap spreads. The spread data used is for the same maturities as the underlying bonds. If the spread data does not reference the issuers, then data that references comparable issuers is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default spreads, and recovery rates based on collateral value as key inputs. Depending on the nature of the inputs, these investments are categorized as level 1, 2, or 3.
UIT-related financial instruments sold, not yet purchased, and derivative instruments
The company uses U.S. Treasury futures, which are types of derivative financial instruments, to hedge economically fixed income UIT inventory and securities in order to mitigate market risk. Open futures contracts are marked-to-market daily through earnings, which are recorded in the company’s consolidated statement of income in other revenue, along with the mark-to-market on the underlying trading securities held. Fair values of derivative contracts in an asset position are included in other current assets in the company’s consolidated balance sheet. Fair values of derivative contracts in a liability position are included in other liabilities in the company’s consolidated balance sheet. These derivative contracts are valued under the market approach through use of quoted prices in an active market and are classified within level 1 of the valuation hierarchy. At September 30, 2012, there were 15 open futures contracts with a notional value of $2.1 million (December 31, 2011: 10 open futures contracts with a notional value of $1.3 million). Additionally, to hedge economically the market risk associated with equity and debt securities and UITs temporarily held as trading investments, the company will hold short corporate stock, exchange-traded fund, or U.S. treasury security positions. These transactions are recorded as financial instruments sold, not yet purchased and are included in other current liabilities in the company’s consolidated balance sheet. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized within level 1 of the valuation hierarchy; otherwise, they are categorized in level 2.
Note payable
The note payable represents a payable associated with Invesco’s acquired ownership interest in two consolidated real estate funds. As the underlying investments in the funds are carried at fair value (and are disclosed as level 3 assets in the fair value hierarchy table included in Note 11, “Consolidated Investment Products”), management elected the fair value option for the note payable in order to offset the fair value movements recognized from the funds and has recorded the note payable as a level

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3 liability. The fair value of the note payable is measured by reference to the value of the company's ownership interest in the equity of the funds, as this is the contractual amount payable at the reporting date. The value of the funds' equity is driven by the value of the underlying investments of the funds, as these investments make up the majority of the funds' equity. See Note 11, "Consolidated Investment Products," for additional information regarding the valuation of the underlying investments of the funds.
The following table presents, for each of the hierarchy levels described above, the carrying value of the company’s assets and liabilities, including major security type for equity and debt securities, which are measured at fair value on the face of the statement of financial position as of September 30, 2012.

 
As of September 30, 2012
$ in millions
Fair Value Measurements
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Current assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
234.7

 
234.7

 
—

 
—

Investments:*

 

 

 
 
Available-for-sale:

 

 

 
 
Seed money
113.2

 
113.2

 
—

 
—

Trading investments:

 

 

 
 
Investments related to deferred compensation plans
211.7

 
211.7

 
—

 
—

UIT-related equity and debt securities:

 

 

 
 
Corporate stock
1.4

 
1.4

 
—

 
—

UITs
1.3

 
1.3

 
—

 
—

Municipal securities
2.7

 
—

 
2.7

 
—

Assets held for policyholders
1,139.3

 
1,139.3

 
—

 
—

Put option contracts
0.1

 
—

 
0.1

 
—

Total current assets
1,704.4

 
1,701.6

 
2.8

 
—

Non-current assets:
 
 
 
 
 
 
 
Investments — available-for-sale*:
 
 
 
 
 
 
 
CLOs
2.5

 
—

 
—

 
2.5

Other debt securities
6.3

 
—

 
—

 
6.3

Total assets at fair value
1,713.2

 
1,701.6

 
2.8

 
8.8

Current liabilities:
 
 
 
 
 
 
 
Policyholder payables
(1,139.3
)
 
(1,139.3
)
 
—

 
—

UIT-related financial instruments sold, not yet purchased:

 

 
 
 
 
Corporate equities
(1.3
)
 
(1.3
)
 
—

 
—

Note payable
(11.3
)
 
—

 
—

 
(11.3
)
Total liabilities at fair value
(1,151.9
)
 
(1,140.6
)
 
—

 
(11.3
)

*
Current foreign time deposits of $33.4 million and other current investments of $0.5 million are excluded from this table. Non-current equity method and other investments of $202.9 million and $11.8 million, respectively, are also excluded from this table. These investments are not measured at fair value, in accordance with applicable accounting standards.

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The following table presents, for each of the hierarchy levels described above, the carrying value of the company’s assets and liabilities that are measured at fair value as of December 31, 2011:
 
As of December 31, 2011
$ in millions
Fair Value Measurements
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Current assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
257.7

 
257.7

 
—

 
—

Investments:*

 

 

 
 
Available-for-sale:

 

 

 
 
Seed money
63.5

 
63.5

 
—

 
—

Trading investments:

 

 

 
 
Investments related to deferred compensation plans
184.4

 
184.4

 
—

 
—

UIT-related equity and debt securities:

 

 

 
 
Corporate stock
1.1

 
1.1

 
—

 
—

UITs
0.9

 
0.9

 
—

 
—

Municipal securities
1.1

 
—

 
1.1

 
—

Assets held for policyholders
1,243.5

 
1,243.5

 
—

 
—

Total current assets
1,752.2

 
1,751.1

 
1.1

 
—

Current liabilities:
 
 
 
 
 
 
 
Policyholder payables
(1,243.5
)
 
(1,243.5
)
 
—

 
—

UIT-related financial instruments sold, not yet purchased:

 

 

 
 
Corporate equities
(1.0
)
 
(1.0
)
 
—

 
—

Non-current liabilities:

 

 

 

Note payable
(16.8
)
 
—

 
—

 
(16.8
)
Total liabilities at fair value
(1,261.3
)
 
(1,244.5
)
 
—

 
(16.8
)

*
Current foreign time deposits of $32.2 million and other current investments of $0.5 million are excluded from this table. Non-current equity method and other investments of $193.1 million and $7.7 million, respectively, are also excluded from this table. These investments are not measured at fair value, in accordance with applicable accounting standards.

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The following table shows a reconciliation of the beginning and ending fair value measurements for level 3 assets and liabilities during the three and nine months ended September 30, 2012 and September 30, 2011, which are valued using significant unobservable inputs:
 
Three months ended September 30, 2012
 
Nine months ended September 30, 2012
$ in millions
CLOs
 
Other Debt Securities
 
Note Payable
 
CLOs
 
Other Debt Securities
 
Note Payable
Beginning balance
2.5

 
6.3

 
(12.6
)
 
—

 
—

 
(16.8
)
Deconsolidation of consolidated investment products
—

 
—

 
—

 
2.5

 
—

 
—

Purchases, sales, issuances, settlements
—

 
—

 
1.6

 
(0.2
)
 
1.7

 
1.6

Net unrealized gains and losses included in accumulated other comprehensive income/(loss)*
—

 
—

 
—

 
0.2

 
—

 
—

Net unrealized gains and losses included in earnings*
—

 
—

 
—

 
—

 
—

 
3.5

Reclassification
—

 
—

 
—

 
—

 
4.6

 
—

Foreign exchange movements included in earnings
—

 
—

 
(0.3
)
 
—

 
—

 
0.4

Ending balance
2.5

 
6.3

 
(11.3
)
 
2.5

 
6.3

 
(11.3
)

 
Three months ended September 30, 2011
 
Nine months ended September 30, 2011
$ in millions
CLOs
 
Note Payable
 
CLOs
 
Note Payable
Beginning balance
0.4

 
(16.1
)
 
0.5

 
(18.9
)
Purchases, sales, issuances, settlements
—

 
—

 
(0.1
)
 
2.9

Net unrealized gains and losses included in accumulated other comprehensive income/(loss)*
0.1

 
—

 
0.1

 
—

Foreign exchange movements included in earnings
—

 
0.1

 
—

 
—

Ending balance
0.5

 
(16.0
)
 
0.5

 
(16.0
)

*
Of these net unrealized gains and losses included in accumulated other comprehensive income/(loss), no gain and $0.2 million gain for the three and nine months ended September 30, 2012 is attributed to the change in unrealized gains and losses related to assets still held at September 30, 2012 (three and nine months ended September 30, 2011: $0.1 million and $0.1 million unrealized gains and losses related to assets still held at September 30, 2011). Of these net unrealized gains and losses included in earnings, none and $3.5 million for the three and nine months ended September 30, 2012 is attributed to the change in unrealized gains and losses related to the note payable still held at September 30, 2012 (three and nine months ended September 30, 2011: none and none).

Quantitative Information about Level 3 Fair Value Measurements
The following table shows significant unobservable inputs used in the fair value measurement of level 3 assets and liabilities:
Assets and Liabilities *
 
Fair Value at September 30, 2012 ($ in millions)
 
Valuation Technique
 
Unobservable Inputs
 
Range (Weighted Average)
CLOs
 
2.5
 
Discounted Cash Flow- Euro
 
Probability of Default
 
1% - 5%
 
 
 
 
 
 
Spread over Euribor
 
2150 - 2850 bps
 
 
 
 
Discounted Cash Flow- USD
 
Probability of Default
 
1% - 4%
 
 
 
 
 
 
Spread over Libor
 
1350 - 1800 bps

*
Other debt securities of $6.3 million are not included in the table above as they are valued using a cost valuation technique. The note payable of $11.3 million is also not included in the table above as its value is linked to the underlying value of consolidated funds. Both items are more fully discussed in the "Available-for-sale investments" and "Note payable" disclosures above.

For CLO Notes, a change in the assumption used for spreads is generally accompanied by a directionally similar change in default rate. Significant increases in any of these inputs in isolation would result in a significant lower fair value measurements. A directionally-opposite impact would apply for significant decreases in these inputs.

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3. INVESTMENTS
The disclosures below include details of the company’s investments. Investments held by consolidated investment products are detailed in Note 11, “Consolidated Investment Products.”
Current Investments
 
As of
 
September 30,
 
December 31,
$ in millions
2012
 
2011
Available-for-sale investments:
 
 
 
Seed money
113.2

 
63.5

Trading investments:

 
 
Investments related to deferred compensation plans
211.7

 
184.4

UIT-related equity and debt securities
5.4

 
3.1

Foreign time deposits
33.4

 
32.2

Other
0.5

 
0.5

Total current investments
364.2

 
283.7

Non-current Investments
 
As of
 
September 30,
 
December 31,
$ in millions
2012
 
2011
Available-for-sale investments:
 
 
 
CLOs
2.5

 
—

Other debt securities
6.3

 
—

Equity method investments
202.9

 
193.1

Other
11.8

 
7.7

Total non-current investments
223.5

 
200.8

The portion of trading gains and losses for the nine months ended September 30, 2012 that relates to trading securities still held at September 30, 2012 was a $16.0 million net gain.
Realized gains and losses recognized in the income statement during the year from investments classified as available-for-sale are as follows:
 
For the three months ended September 30, 2012
 
For the nine months ended September 30, 2012
$ in millions
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
 
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
Current available-for-sale investments
9.1

 
1.4

 
(0.2
)
 
32.7

 
3.2

 
(0.7
)
Non-current available-for-sale investments
—

 
—

 
—

 
0.2

 
—

 
—

 
For the three months ended September 30, 2011
 
For the nine months ended September 30, 2011
$ in millions
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
 
Proceeds from Sales
 
Gross Realized Gains
 
Gross Realized Losses
Current available-for-sale investments
13.6

 
1.1

 
(0.2
)
 
50.1

 
7.6

 
(0.4
)
Non-current available-for-sale investments
—

 
—

 
—

 
0.1

 
—

 
—

Upon the sale of available-for-sale securities, net realized gains of $2.5 million and $7.2 million were transferred from accumulated other comprehensive income into the Condensed Consolidated Statements of Income during the nine months ended September 30, 2012 and 2011, respectively. The specific identification method is used to determine the realized gain or

16
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loss on securities sold or otherwise disposed.
Gross unrealized holding gains and losses recognized in other accumulated comprehensive income from available-for-sale investments are presented in the table below:
 
September 30, 2012
 
December 31, 2011
$ in millions
Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
 
Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed money
108.9

 
5.8

 
(1.5
)
 
113.2

 
65.7

 
2.2

 
(4.4
)
 
63.5

Current available-for-sale investments
108.9

 
5.8

 
(1.5
)
 
113.2

 
65.7

 
2.2

 
(4.4
)
 
63.5

Non-current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
0.7

 
1.8

 
—

 
2.5

 
—

 
—

 
—

 
—

Other debt securities
6.3

 
—

 
—

 
6.3

 
—

 
—

 
—

 
—

Non-current available-for-sale investments:
7.0

 
1.8

 
—

 
8.8

 
—

 
—

 
—

 
—

 
115.9

 
7.6

 
(1.5
)
 
122.0

 
65.7

 
2.2

 
(4.4
)
 
63.5

Available-for-sale debt securities as of September 30, 2012 by maturity, are set out below:
 
Available-for-Sale
$ in millions
(Fair Value)
Less than one year
—

One to five years
1.7

Five to ten years
2.5

Greater than ten years
4.6

Total available-for-sale
8.8

The following table provides the breakdown of available-for-sale investments with unrealized losses at September 30, 2012:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
$ in millions
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Seed money (49 funds)
 
5.5

 
(0.4
)
 
11.2

 
(1.1
)
 
16.7

 
(1.5
)
The following table provides the breakdown of available-for-sale investments with unrealized losses at December 31, 2011:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
$ in millions
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Seed money (64 funds)
 
37.5

 
(4.4
)
 
—

 
—

 
37.5

 
(4.4
)
The company has reviewed investment securities for other-than-temporary impairment (OTTI) in accordance with its accounting policy and has recognized $0.8 million other-than-temporary impairment charges on available-for-sale investments during the nine months ended September 30, 2012 (nine months ended September 30, 2011: none).
The gross unrealized losses of seed money investments at September 30, 2012 were primarily caused by declines in the market value of the underlying securities in the seeded funds and foreign exchange movements. After conducting a review of the financial condition and near-term prospects of the underlying securities in the seeded funds as well as the severity and duration of the impairment, the company does not consider any material portion of its gross unrealized losses on these securities to be other-than-temporarily impaired. The securities are expected to recover their value over time and the company has the intent and ability to hold the securities until this recovery occurs.



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4. DEBT
The disclosures below include details of the company’s debt. Debt of consolidated investment products is detailed in Note 11, “Consolidated Investment Products.”
 
September 30, 2012
 
December 31, 2011
$ in millions
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Unsecured Senior Notes*:
 
 
 
 
 
 
 
5.625% — due April 17, 2012
—

 
—

 
215.1

 
217.3

5.375% — due February 27, 2013
333.5

 
339.1

 
333.5

 
343.8

5.375% — due December 15, 2014
197.1

 
214.6

 
197.1

 
207.4

Floating rate credit facility expiring June 3, 2016
754.5

 
754.5

 
539.0

 
539.0

Total debt
1,285.1

 
1,308.2

 
1,284.7

 
1,307.5

Less: current maturities of total debt
(333.5
)
 
(339.1
)
 
(215.1
)
 
(217.3
)
Long-term debt
951.6

 
969.1

 
1,069.6

 
1,090.2


*
The company’s Senior Note indentures contain certain restrictions on mergers or consolidations. Beyond these items, there are no other restrictive covenants in the indentures.
The fair market value of the company’s Senior Notes was determined by market quotes provided by Bloomberg, which is considered a Level 2 valuation input. In the absence of an active market, the company relies upon the average price quoted by brokers for determining the fair market value of the debt.
Analysis of Borrowings by Maturity:
$ in millions
September 30, 2012
2012
—

2013
333.5

2014
197.1

2016
754.5

Total debt
1,285.1


At September 30, 2012, the outstanding balance on the credit facility was $754.5 million and the weighted average interest rate on the credit facility was 1.395%. Borrowings under the credit facility will bear interest at (i) LIBOR for specified interest periods or (ii) a floating base rate (based upon the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus 0.50% and (c) LIBOR for an interest period of one month plus 1.00%), plus, in either case, an applicable margin determined with reference to the company’s credit ratings and specified credit default spreads. Based on credit ratings as of September 30, 2012 of the company and such credit default spreads, the applicable margin for LIBOR-based loans was 1.10% and for base rate loans was 0.10%. In addition, the company is required to pay the lenders a facility fee on the aggregate commitments of the lenders (whether or not used) at a rate per annum which is based on the company’s credit ratings. Based on credit ratings as of September 30, 2012, the annual facility fee was equal to 0.15%.
Financial covenants under the credit agreement include: (i) the quarterly maintenance of a debt/EBITDA ratio, as defined in the credit agreement, of not greater than 3.25:1.00 through June 30, 2014, and not greater than 3.00:1.00 thereafter, (ii) a coverage ratio (EBITDA, as defined in the credit agreement, divided by interest payable for the four consecutive fiscal quarters ended before the date of determination) of not less than 4.00:1.00. The company is in compliance with all regulatory minimum net capital requirements.
 
5. SHARE CAPITAL
Movements in the number of common shares issued are represented in the table below:
In millions
September 30, 2012
 
September 30, 2011
Common shares issued
490.4

 
490.4

Less: Treasury shares for which dividend and voting rights do not apply
(46.4
)
 
(39.4
)
Common shares outstanding
444.0

 
451.0


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During the three and nine months ended September 30, 2012, the company repurchased 1.8 million and 8.1 million shares, respectively, in the market at a cost of $40.0 million and $190.0 million, respectively (nine months ended September 30, 2011: 13.4 million shares were repurchased at a cost of $333.0 million). Separately, an aggregate of 1.9 million shares were withheld on vesting events during the nine months ended September 30, 2012 to meet employees’ withholding tax (nine months ended September 30, 2011: 2.7 million). The fair value of these shares withheld at the respective withholding dates was $44.4 million during the nine months ended September 30, 2012 (nine months ended September 30, 2011: $71.9 million). Approximately $542.0 million remained authorized under the company’s share repurchase plan at September 30, 2012 (nine months ended September 30, 2011: $835.4 million).
Total treasury shares at September 30, 2012 were 56.8 million (September 30, 2011: 49.3 million), including 10.4 million unvested restricted stock awards (September 30, 2011: 9.9 million) for which dividend and voting rights apply. The closing market price of common shares at September 30, 2012 was $24.99. The total market value of the company’s 56.8 million treasury shares was $1.4 billion on September 30, 2012.

6. SHARE-BASED COMPENSATION
The company issues equity-settled share-based awards to certain employees, which are measured at fair value at the date of grant, in accordance with ASC Topic 718, “Compensation — Stock Compensation.” The fair value determined at the grant date is expensed, based on the company’s estimate of shares that will eventually vest, on a straight-line or accelerated basis over the vesting period. The company recognized total expenses of $102.9 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $86.0 million) related to equity-settled share-based payment transactions.
Share Awards
Movements on share awards priced in U.S. dollars are detailed below:
 
Nine months ended September 30, 2012
 
Nine months ended September 30, 2011
Millions of shares, except fair values
Time-Vested
 
Performance-Vested
 
Weighted Average Grant Date Fair Value ($)
 
Time-Vested
 
Weighted Average Grant Date Fair Value ($)
Unvested at the beginning of period
17.3

 
—

 
20.34

 
17.4

 
17.25

Granted during the period
5.5

 
0.3

 
24.84

 
5.6

 
26.74

Forfeited during the period
(0.3
)
 
—

 
21.07

 
(0.3
)
 
19.36

Vested and distributed during the period
(5.6
)
 
—

 
18.87

 
(5.2
)
 
18.90

Unvested at the end of the period
16.9

 
0.3

 
22.31

 
17.5

 
20.25


Further details of the performance-vested awards granted in 2012 are included in the Compensation Discussion and Analysis section of the company's 2012 Proxy statement.
On December 4, 2007, in connection with the redomicile of the company from the U.K. to Bermuda, the company’s primary share listing moved from the London Stock Exchange to the New York Stock Exchange. Movements on share awards priced in Pounds Sterling, which were awarded prior to the move of the company’s primary share listing to the New York Stock Exchange, are detailed below:
 
Nine months ended September 30, 2012
 
Nine months ended September 30, 2011
Millions of shares, except fair values
Time-Vested
 
Weighted Average Grant Date Fair Value
(£ Sterling)
 
Time-Vested
 
Performance-Vested
 
Weighted Average Grant Date Fair Value
(£ Sterling)
Unvested at the beginning of period
0.6

 
11.25

 
3.3

 
0.1

 
11.80

Vested and distributed during the period
(0.3
)
 
9.66

 
(2.3
)
 
(0.1
)
 
11.94

Unvested at the end of the period
0.3

 
12.90

 
1.0

 
—

 
11.47


Share awards outstanding at September 30, 2012 had a weighted average remaining contractual life of 1.61 years. The market price of the company’s common stock at September 30, 2012 was $24.99.



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Share Options
The company has not granted share option awards since 2005. All remaining outstanding share option awards were fully vested and were expensed by the company over the applicable vesting periods (the latest of which ended prior to December 31, 2008). At the time of their grants, the exercise prices of the share options were denominated in the company’s trading currency, which was the Pound Sterling. The exercise price remains in Pounds Sterling and was not changed to U.S. Dollars. Therefore, upon exercise of the share options, the Pound Sterling exercise price will be converted into U.S. Dollars using the spot foreign exchange rate in effect on the exercise date.
Changes in outstanding share option awards are as follows:
 
Nine months ended September 30, 2012
 
Nine months ended September 30, 2011
 
Options
(millions of shares)
 
Weighted Average
Exercise Price
(£ Sterling)
 
Options
(millions of shares)
 
Weighted Average
Exercise Price
(£ Sterling)
Outstanding at the beginning of the period
4.5

 
7.85

 
10.7

 
13.85

Forfeited during the period
(0.1
)
 
14.80

 
(0.9
)
 
23.18

Exercised during the period
(1.3
)
 
8.29

 
(0.8
)
 
8.54

Outstanding at the end of the period
3.1

 
7.33

 
9.0

 
13.30

Exercisable at the end of the period
3.1

 
7.33

 
9.0

 
13.30


7. RETIREMENT BENEFIT PLANS
Defined Contribution Plans
The company operates defined contribution retirement benefit plans for all qualifying employees. The assets of the plans are held separately from those of the company in funds under the control of trustees. When employees leave the plans prior to vesting fully in the contributions, the contributions payable by the company are reduced by the amount of forfeited contributions.
The total amounts charged to the Condensed Consolidated Statements of Income for the nine months ended September 30, 2012 and 2011, of $43.6 million and $41.3 million, respectively, represent contributions paid or payable to these plans by the company at rates specified in the rules of the plans. As of September 30, 2012, accrued contributions of $16.5 million (December 31, 2011: $20.0 million) for the current year will be paid to the plans when due.
Defined Benefit Plans
The company maintains legacy defined benefit pension plans for qualifying employees of its subsidiaries in the U.K., Ireland, Germany, and Taiwan. All defined benefit plans are closed to new participants. 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 did not meet retirement eligibility by 2008. The assets of all defined benefit plans are held in separate trustee-administered funds. Under the plans, the employees are generally entitled to retirement benefits based on final salary at retirement.
The components of net periodic benefit cost in respect of these defined benefit plans are as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
Retirement Plans
 
Medical Plan
 
Retirement Plans
 
Medical Plan
$ in millions
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
(1.1
)
 
(1.0
)
 
(0.1
)
 
(0.2
)
 
(3.3
)
 
(3.1
)
 
(0.3
)
 
(0.5
)
Interest cost
(4.7
)
 
(4.6
)
 
(0.6
)
 
(0.7
)
 
(14.3
)
 
(13.7
)
 
(1.8
)
 
(2.0
)
Expected return on plan assets
4.4

 
3.7

 
0.1

 
0.1

 
13.2

 
11.2

 
0.3

 
0.3

Amortization of prior service cost
—

 
(0.8
)
 
0.5

 
0.5

 
—

 
(2.3
)
 
1.5

 
1.5

Amortization of net actuarial (loss)/gain
(0.3
)
 
0.1

 
(0.1
)
 
(0.6
)
 
(0.9
)
 
0.4

 
(0.3
)
 
(2.0
)
Net periodic benefit cost
(1.7
)
 
(2.6
)
 
(0.2
)
 
(0.9
)
 
(5.3
)
 
(7.5
)
 
(0.6
)
 
(2.7
)
The estimated amount of contributions expected to be paid to the retirement plans during 2012 is $6.1 million, with an additional expected contribution of $2.1 million to the medical plan.





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8. TAXATION
At September 30, 2012, the total amount of gross unrecognized tax benefits was $18.6 million as compared to the December 31, 2011, total of $19.5 million. The company and its subsidiaries file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and in numerous foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which the company has unrecognized tax benefits, is finally resolved. To the extent that the company has favorable tax settlements, or determines that accrued amounts are no longer needed due to a lapse in the applicable statute of limitations or other reasons, such liabilities, as well as the related interest and penalty, would be reversed as a reduction of income tax expense (net of federal tax effects, if applicable) in the period such determination is made.

9. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of shares outstanding during the period, excluding treasury shares. The weighted average number of shares outstanding during the period also includes participating securities such as unvested time-based restricted stock awards and restricted stock units that pay dividend equivalents. Diluted earnings per share is computed using the treasury stock method, which requires computing share equivalents and dividing net income attributable to common shareholders by the total weighted average number of shares and share equivalents outstanding during the period.
The calculation of earnings per share is as follows:
In millions, except per share data
Net Income
Attributable to
Common Shareholders
 
Weighted Average Number of Shares
 
Per Share Amount
For the three months ended September 30, 2012:
 
 
 
 
 
Basic earnings per share

$170.6

 
451.3

 

$0.38

Dilutive effect of share-based awards
—

 
1.5

 
—

Diluted earnings per share

$170.6

 
452.8

 

$0.38

For the three months ended September 30, 2011:
 
 
 
 
 
Basic earnings per share

$166.9

 
459.5

 

$0.36

Dilutive effect of share-based awards
—

 
1.5

 
—

Diluted earnings per share

$166.9

 
461.0

 

$0.36

 
 
 
 
 
 
In millions, except per share data
Net Income
Attributable to
Common Shareholders
 
Weighted Average Number of Shares
 
Per Share Amount
For the nine months ended September 30, 2012:
 
 
 
 
 
Basic earnings per share

$518.4

 
453.1

 

$1.14

Dilutive effect of share-based awards
—

 
1.5

 
—

Diluted earnings per share

$518.4

 
454.6

 

$1.14

For the nine months ended September 30, 2011:
 
 
 
 
 
Basic earnings per share

$527.4

 
464.9

 

$1.13

Dilutive effect of share-based awards
—

 
1.9

 
—

Diluted earnings per share

$527.4

 
466.8

 

$1.13


See Note 6, “Share-based Compensation,” for a summary of share awards outstanding under the company’s share-based payment programs. These programs could result in the issuance of common shares that would affect the measurement of basic and diluted earnings per share.
There were no options to purchase or options outstanding for the nine months ended September 30, 2012 (nine months ended September 30, 2011: 4.6 million share options at a weighted average exercise price of £18.94) that were not included in the computation of diluted earnings per share because the options’ exercise price were greater than the average market price of the shares and therefore their inclusion would have been anti-dilutive.





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10. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies may arise in the ordinary course of business.

Off Balance Sheet Commitments
The company has transactions with various private equity, real estate and other investment entities sponsored by the company for the investment of client assets in the normal course of business. Many of the company's investment products are structured as limited partnerships. The company's investment may take the form of the general partner or a limited partner, and the entities are structured such that each partner makes capital commitments that are to be drawn down over the life of the partnership as investment opportunities are identified. Separately, the company entered into a share purchase agreement on September 27, 2012 to acquire 49.0% of Religare Asset Management Limited, a company incorporated in India.  The purchase is subject to regulatory approval. At September 30, 2012, the company’s undrawn capital and purchase commitments were $217.3 million (December 31, 2011: $161.2 million).
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 limited types of investors. In June 2012, the agreements were amended to extend the term through December 31, 2012; further extensions are likely. As of September 30, 2012, the total committed support under these agreements was $21.0 million with an internal approval mechanism to increase the maximum possible support to $66.0 million at the option of the company. The estimated value of these agreements at September 30, 2012, was $1.0 million (December 31, 2011: $1.0 million), which is included in other current liabilities on the Condensed Consolidated Balance Sheet and represents a Level 3 measurement due to its determination from an expected present value technique. The estimated value of these agreements is lower than the maximum support amount, reflecting management’s estimation that the likelihood of funding under the support agreements is low. Significant investor redemptions out of the trusts before the scheduled maturity of the underlying securities or significant credit default issues of the securities held within the trusts’ portfolios could change the company’s estimation of likelihood of funding. No payment has been made under either agreement nor has Invesco realized any loss from the support agreements through the date of this Report. These trusts were not consolidated because the company was not deemed to be the primary beneficiary.
A subsidiary of the company has received assessments related to various prior taxation periods for goods and services tax on revenue to which management fee rebates had been applied in those periods. The assessments, related interest, and penalty amounts are approximately $20.8 million. Management believes Canada Revenue Agency's claims are unfounded and that these assessments are unlikely to stand, and accordingly no provision has been recorded in the Condensed Consolidated Financial Statements.
The Parent and various company subsidiaries have entered into agreements with financial institutions to guarantee certain obligations of other company subsidiaries. The company would be required to perform under these guarantees in the event of certain defaults. The company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Legal Contingencies
In July 2010, various closed-end funds formerly advised by Van Kampen Investments or Morgan Stanley Investment Management included in the acquired business had complaints filed against them in New York State Court commencing derivative lawsuits purportedly brought on behalf of the common shareholders of those funds. The funds are nominal defendants in these derivative lawsuits and the defendants also include Van Kampen Investments (acquired by Invesco on June 1, 2010), Morgan Stanley Investment Management and certain officers and trustees of the funds who are or were employees of those firms. Invesco has certain obligations under the applicable acquisition agreement regarding the defense costs and any damages associated with this litigation. The plaintiffs allege breaches of fiduciary duties owed by the non-fund defendants to the funds’ common shareholders related to the funds’ redemption in prior periods of Auction Rate Preferred Securities (ARPS) theretofore issued by the funds. The complaints are similar to other complaints filed against investment advisers, officers and trustees of closed-end funds in other fund complexes which issued and redeemed ARPS. The complaints allege that the advisers, distributors and certain officers and trustees of those funds breached their fiduciary duty by redeeming ARPS at their liquidation value when there was no obligation to do so and when the value of ARPS in the secondary marketplace were significantly below their liquidation value. The complaints also allege that the ARPS redemptions were principally motivated by the fund sponsors’ interests to preserve distribution relationships with brokers and other financial intermediaries who held ARPS after having repurchased them from their own clients. The complaints do not specify alleged damages. Certain other funds included in the acquired business have received demand letters expressing similar allegations. Such demand letters could be precursors to additional similar lawsuits being commenced against those other funds. The Boards of Trustees of the funds established special committees of independent trustees to conduct an inquiry regarding the allegations set forth in the complaints and demand letters. Those evaluations have been completed, and the Boards of Trustees of the funds

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accepted the recommendation of their special litigation committees to (i) reject the demands contained in the demand letters and (ii) to seek dismissal of the related lawsuits. Motions to dismiss were filed on October 4, 2011, and remain pending.
Invesco believes the cases and other claims identified above should be dismissed or otherwise will terminate, although there can be no assurance of that result. Invesco intends to defend vigorously any cases which may survive beyond initial motions to dismiss. The company cannot predict with certainty, however, the eventual outcome of such cases and other claims, nor whether they will have a material negative impact on the company. The nature and progression of litigation can make it difficult to predict the impact a particular lawsuit will have on the company. There are many reasons that the company cannot make these assessments, including, among others, one or more of the following: the proceeding is in its early stages; the damages sought are unspecified, unsupportable, unexplained or uncertain; the claimant is seeking relief other than compensatory damages; the matter presents novel legal claims or other meaningful legal uncertainties; discovery has not started or is not complete; there are significant facts in dispute; and there are other parties who may share in any ultimate liability.
The company is from time to time involved in litigation relating to other claims arising in the ordinary course of its business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the company’s business, financial position, results of operation or liquidity. In management’s opinion, adequate accrual has been made as of September 30, 2012 to provide for any such losses that may arise from matters for which the company could reasonably estimate an amount. Furthermore, in management’s opinion, it is not possible to estimate a range of reasonably possible losses with respect to other litigation contingencies.
The investment management industry also is subject to extensive levels of ongoing regulatory oversight and examination. In the United States and other jurisdictions in which the company operates, governmental authorities regularly make inquiries, hold investigations and administer market conduct examinations with respect to compliance with applicable laws and regulations. Additional lawsuits or regulatory enforcement actions arising out of these inquiries may in the future be filed against the company and related entities and individuals in the U.S. and other jurisdictions in which the company and its affiliates operate. Any material loss of investor and/or client confidence as a result of such inquiries and/or litigation could result in a significant decline in assets under management, which would have an adverse effect on the company’s future financial results and its ability to grow its business.

11. CONSOLIDATED INVESTMENT PRODUCTS
The company’s risk with respect to each investment in consolidated investment products is limited to its equity ownership and any uncollected management fees. Therefore, the gains or losses of consolidated investment products have not had a significant impact on the company’s results of operations, liquidity or capital resources. The company has no right to the benefits from, nor does it bear the risks associated with, these investments, beyond the company’s minimal direct investments in, and management fees generated from, the investment products. If the company were to liquidate, these investments would not be available to the general creditors of the company, and as a result, the company does not consider investments held by consolidated investment products to be company assets. Additionally, the collateral assets of consolidated collateralized loan obligations (CLOs) are held solely to satisfy the obligations of the CLOs, and the investors in the consolidated CLOs have no recourse to the general credit of the company for the notes issued by the CLOs.   
Collateralized Loan Obligations
A significant portion of consolidated investment products are CLOs. CLOs are investment vehicles created for the sole purpose of issuing collateralized loan instruments that offer investors the opportunity for returns that vary with the risk level of their investment. The notes issued by the CLOs are backed by diversified collateral asset portfolios consisting primarily of loans or structured debt. For managing the collateral for the CLO entities, the company earns investment management fees, including in some cases subordinated management fees, as well as contingent incentive fees. The company has invested in certain of the entities, generally taking a portion of the unrated, junior subordinated position. The company’s investments in CLOs are generally subordinated to other interests in the entities and entitle the company and other subordinated tranche investors to receive the residual cash flows, if any, from the entities. The company’s subordinated interest can take the form of (1) subordinated notes, (2) income notes or (3) preference/preferred shares. The company has determined that, although the junior tranches have certain characteristics of equity, they should be accounted for and disclosed as debt on the company’s Condensed Consolidated Balance Sheet, as the subordinated and income notes have a stated maturity indicating a date for which they are mandatorily redeemable. The preference shares are also classified as debt, as redemption is required only upon liquidation or termination of the CLO and not of the company. The financial information of the consolidated CLOs is included in the company's consolidated financial statements on a one-month lag. 
Prior to the adoption of guidance now encompassed in ASC Topic 810, the company’s ownership interests, which were classified as available-for-sale investments on the company’s Condensed Consolidated Balance Sheets, combined with its other interests (management and incentive fees), were quantitatively assessed to determine if the company is the primary beneficiary of these entities. The company determined, for periods prior to the adoption of this guidance, that it did not absorb the majority

23
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of the expected gains or losses from the CLOs and therefore was not their primary beneficiary.
The company determined that it was the primary beneficiary of certain CLOs, as it has the power to direct the activities of the CLOs that most significantly impact the CLOs’ economic performance, and the obligation to absorb losses/right to receive benefits from the CLOs that could potentially be significant to the CLOs. The primary beneficiary assessment includes an analysis of the rights of the company in its capacity as investment manager. In some CLOs, the company’s role as investment manager provides that the company contractually has the power, as defined in ASC Topic 810, to direct the activities of the CLOs that most significantly impact the CLOs’ economic performance, such as managing the collateral portfolio and its credit risk. In other CLOs, the company determined that it does not have this power in its role as investment manager due to certain rights held by other investors in the products or restrictions that limit the company's ability to manage the collateral portfolio and the CLO's credit risk. Additionally, the primary beneficiary assessment includes an analysis of the company’s rights to receive benefits and obligations to absorb losses associated with its first loss position and management/incentive fees. As part of this analysis, the company uses a quantitative model to corroborate its qualitative assessments. The quantitative model includes an analysis of the expected performance of the CLOs and a comparison of the company’s absorption of this performance relative to the other investors in the CLOs. The company has determined that it could receive significant benefits and/or absorb significant losses from certain CLOs in which it holds a first loss position and has the right to significant fees. It was determined that the company’s benefits and losses from certain other CLOs could not be significant, particularly in situations where the company does not hold a first loss position and where the fee interests are based upon a fixed percentage of collateral asset value.
Private equity, real estate and fund-of-funds (partnerships)
For investment products that are structured as partnerships and are determined to be VIEs, including private equity funds, real estate funds and fund-of-funds products, the company evaluates the structure of the partnership to determine if it is the primary beneficiary of the investment product. This evaluation includes assessing the rights of the limited partners to transfer their economic interests in the investment product. If the limited partners' lack rights to manage their economic interests, they are considered to be de facto agents of the company, resulting in the company determining that it is the primary beneficiary of the investment product. The company generally takes less than a 1% investment in these entities as the general partner. Non-VIE general partnership investments are deemed to be controlled by the company and are consolidated under a voting interest entity (VOE) model, unless the limited partners have the substantive ability to remove the general partner without cause based upon a simple majority vote or can otherwise dissolve the partnership, or unless the limited partners have substantive participating rights over decision making. Interests in unconsolidated private equity funds, real estate funds and fund-of-funds products are classified as equity method investments in the company’s Condensed Consolidated Balance Sheets. The financial information of the consolidated private equity and real estate funds are included in the company's consolidated financial statements on a one-quarter lag.
Other investment products
As discussed in Note 10, “Commitments and Contingencies,” the company has entered into contingent support agreements for two of its investment trusts to enable them to sustain a stable pricing structure, creating variable interests in these VIEs. The company earns management fees from the trusts and has a small investment in one of these trusts. The company was not deemed to be the primary beneficiary of these trusts after considering any explicit and implicit variable interests in relation to the total expected gains and losses of the trusts.
At September 30, 2012, 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.
$ in millions
Footnote Reference
 
Carrying Value
 
Company's Maximum Risk of Loss
CLO investments
3

 
2.5

 
2.5

Partnership and trust investments
—

 
36.9

 
36.9

Investments in Invesco Mortgage Capital Inc.
—

 
30.8

 
30.8

Support agreements*
10

 
(1.0
)
 
21.0

Total
 
 
 
 
91.2


*
As of September 30, 2012, the committed support under these agreements was $21.0 million with an internal approval mechanism to increase the maximum possible support to $66.0 million at the option of the company.

24
Table of Contents                                 

During the nine months ended September 30, 2012, the company invested in and consolidated two new managed CLOs. The table below illustrates the summary balance sheet amounts related to these CLOs before consolidation into the company.
Balance Sheet
$ in millions
CLO - VIE
During the nine months ended September 30, 2012
 
Current assets
516.5

Non-current assets
693.3

Total assets
1,209.8

Current liabilities
406.2

Non-current liabilities
803.6

Total liabilities
1,209.8

Total equity
—

Total liabilities and equity
1,209.8


During the nine months ended September 30, 2012, the company determined it was no longer the primary beneficiary of certain CLOs due to reconsideration and liquidation events. These reconsideration events included the sale of our management agreements and equity interests in certain CLOs and reassessment of the rights held by other unaffiliated investors. The amounts deconsolidated from the Condensed Consolidated Balance Sheet are illustrated in the table below. There was no net impact to the Condensed Consolidated Statement of Income for the nine months ended September 30, 2012 from the deconsolidation of these investment products.
Balance Sheet
$ in millions
CLO - VIE
During the nine months ended September 30, 2012
 
Current assets
181.2

Non-current assets
2,247.4

Total assets
2,428.6

Current liabilities
47.5

Non-current liabilities
2,264.2

Total liabilities
2,311.7

Total equity
116.9

Total liabilities and equity
2,428.6



25
Table of Contents                                 

The following tables reflect the impact of consolidation of investment products into the Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, and the Condensed Consolidated Statements of Income for the nine months ended September 30, 2012 and 2011.
Summary of Balance Sheet Impact of Consolidated Investment Products
$ in millions
 
CLOs-VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Subtotal - Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
As of September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
522.0

 
1.6

 
96.0

 
(48.2
)
 
571.4

 
4,160.7

Non-current assets
 
3,894.8

 
39.2

 
783.9

 
(76.0
)
 
4,641.9

 
13,700.3

Total assets
 
4,416.8

 
40.8

 
879.9

 
(124.2
)
 
5,213.3

 
17,861.0

Current liabilities
 
328.1

 
0.6

 
6.5

 
(14.2
)
 
321.0

 
3,184.3

Long-term debt of consolidated investment products
 
3,929.6

 
—

 
—

 
(74.6
)
 
3,855.0

 
3,855.0

Other non-current liabilities
 
—

 
—

 
—

 
—

 
—

 
1,624.3

Total liabilities
 
4,257.7

 
0.6

 
6.5

 
(88.8
)
 
4,176.0

 
8,663.6

Retained earnings appropriated for investors in consolidated investment products
 
159.1

 
—

 
—

 
—

 
159.1

 
159.1

Other equity attributable to common shareholders
 
—

 
0.1

 
35.7

 
(35.4
)
 
0.4

 
8,156.0

Equity attributable to noncontrolling interests in consolidated entities
 
—

 
40.1

 
837.7

 
—

 
877.8

 
882.3

Total liabilities and equity
 
4,416.8

 
40.8

 
879.9

 
(124.2
)
 
5,213.3

 
17,861.0

 
 
 
 
 
 
 
 
 
 
 
 
 
$ in millions
 
CLOs-VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Subtotal - Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
As of December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
394.5

 
3.1

 
113.7

 
(29.9
)
 
481.4

 
3,834.1

Non-current assets
 
5,682.3

 
42.8

 
903.8

 
(92.5
)
 
6,536.4

 
15,512.9

Total assets
 
6,076.8

 
45.9

 
1,017.5

 
(122.4
)
 
7,017.8

 
19,347.0

Current liabilities
 
179.2

 
0.4

 
5.8

 
(29.9
)
 
155.5

 
2,974.4

Long-term debt of consolidated investment products
 
5,563.3

 
—

 
—

 
(50.4
)
 
5,512.9

 
5,512.9

Other non-current liabilities
 
—

 
—

 
—

 
—

 
—

 
1,722.1

Total liabilities
 
5,742.5

 
0.4

 
5.8

 
(80.3
)
 
5,668.4

 
10,209.4

Retained earnings appropriated for investors in consolidated investment products
 
334.3

 
—

 
—

 
—

 
334.3

 
334.3

Other equity attributable to common shareholders
 
—

 
0.1

 
43.1

 
(42.1
)
 
1.1

 
7,784.8

Equity attributable to noncontrolling interests in consolidated entities
 
—

 
45.4

 
968.6

 
—

 
1,014.0

 
1,018.5

Total liabilities and equity
 
6,076.8

 
45.9

 
1,017.5

 
(122.4
)
 
7,017.8

 
19,347.0

 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of the company’s equity at risk recorded as investments by the company (before consolidation) against either the equity (private equity and real estate partnership funds) or subordinated debt (CLOs) of the funds.

26
Table of Contents                                 

Summary of Income Statement Impact of Consolidated Investment Products
$ in millions
 
CLOs-VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Subtotal - Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
Three months ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Total operating revenues
 
—

 
—

 
—

 
(11.5
)
 
(11.5
)
 
1,041.4

Total operating expenses
 
9.9

 
0.2

 
3.7

 
(11.5
)
 
2.3

 
825.4

Operating income
 
(9.9
)
 
(0.2
)
 
(3.7
)
 
—

 
(13.8
)
 
216.0

Equity in earnings of unconsolidated affiliates
 
—

 
—

 
—

 
(0.5
)
 
(0.5
)
 
5.2

Interest and dividend income
 
68.7

 
—

 
—

 
(3.4
)
 
65.3

 
71.2

Other investment income/(losses)
 
(38.5
)
 
1.6

 
14.2

 
(11.2
)
 
(33.9
)
 
(6.8
)
Interest expense
 
(45.3
)
 
—

 
—

 
3.4

 
(41.9
)
 
(54.5
)
Income before income taxes
 
(25.0
)
 
1.4

 
10.5

 
(11.7
)
 
(24.8
)
 
231.1

Income tax provision
 
—

 
—

 
—

 
—

 
—

 
(74.2
)
Net income
 
(25.0
)
 
1.4

 
10.5

 
(11.7
)
 
(24.8
)
 
156.9

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
 
25.0

 
(1.4
)
 
(9.9
)
 
—

 
13.7

 
13.7

Net income attributable to common shareholders
 
—

 
—

 
0.6

 
(11.7
)
 
(11.1
)
 
170.6

 
 
 
 
 
 
 
 
 
 
 
 
 

$ in millions
 
CLOs-VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Subtotal - Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
Three months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Total operating revenues
 
—

 
—

 
—

 
(12.3
)
 
(12.3
)
 
997.8

Total operating expenses
 
11.6

 
0.2

 
3.4

 
(12.3
)
 
2.9

 
770.0

Operating income
 
(11.6
)
 
(0.2
)
 
(3.4
)
 
—

 
(15.2
)
 
227.8

Equity in earnings of unconsolidated affiliates
 
—

 
—

 
—

 
(0.1
)
 
(0.1
)
 
8.1

Interest and dividend income
 
79.6

 
—

 
—

 
(2.5
)
 
77.1

 
83.4

Other investment income/(losses)
 
(124.4
)
 
1.0

 
26.8

 
3.5

 
(93.1
)
 
(112.8
)
Interest expense
 
(51.2
)
 
—

 
—

 
2.5

 
(48.7
)
 
(64.0
)
Income before income taxes
 
(107.6
)
 
0.8

 
23.4

 
3.4

 
(80.0
)
 
142.5

Income tax provision
 
—

 
—

 
—

 
—

 
—

 
(59.1
)
Net income
 
(107.6
)
 
0.8

 
23.4

 
3.4

 
(80.0
)
 
83.4

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
 
107.6

 
(0.8
)
 
(23.3
)
 
—

 
83.5

 
83.5

Net income attributable to common shareholders
 
—

 
—

 
0.1

 
3.4

 
3.5

 
166.9

 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company.


27
Table of Contents                                 

$ in millions
 
CLOs-VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Subtotal - Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
Nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Total operating revenues
 
—

 
—

 
—

 
(32.4
)
 
(32.4
)
 
3,084.1

Total operating expenses
 
34.0

 
0.7

 
20.8

 
(32.4
)
 
23.1

 
2,435.4

Operating income
 
(34.0
)
 
(0.7
)
 
(20.8
)
 
—

 
(55.5
)
 
648.7

Equity in earnings of unconsolidated affiliates
 
—

 
—

 
—

 
0.1

 
0.1

 
21.8

Interest and dividend income
 
206.4

 
—

 
—

 
(10.3
)
 
196.1

 
213.5

Other investment income/(losses)
 
(79.1
)
 
2.5

 
11.2

 
(13.1
)
 
(78.5
)
 
(40.6
)
Interest expense
 
(144.7
)
 
—

 
—

 
10.3

 
(134.4
)
 
(174.0
)
Income before income taxes
 
(51.4
)
 
1.8

 
(9.6
)
 
(13.0
)
 
(72.2
)
 
669.4

Income tax provision
 
—

 
—

 
—

 
—

 
—

 
(210.1
)
Net income
 
(51.4
)
 
1.8

 
(9.6
)
 
(13.0
)
 
(72.2
)
 
459.3

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
 
51.4

 
(1.8
)
 
9.5

 
—

 
59.1

 
59.1

Net income attributable to common shareholders
 
—

 
—

 
(0.1
)
 
(13.0
)
 
(13.1
)
 
518.4

 
 
 
 
 
 
 
 
 
 
 
 
 

$ in millions
 
CLOs-VIEs
 
Other VIEs
 
VOEs
 
Adjustments(1)
 
Subtotal - Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
Nine months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Total operating revenues
 
—

 
—

 
0.1

 
(35.6
)
 
(35.5
)
 
3,095.1

Total operating expenses
 
35.9

 
0.7

 
9.2

 
(35.6
)
 
10.2

 
2,408.6

Operating income
 
(35.9
)
 
(0.7
)
 
(9.1
)
 
—

 
(45.7
)
 
686.5

Equity in earnings of unconsolidated affiliates
 
—

 
—

 
—

 
(1.0
)
 
(1.0
)
 
25.6

Interest and dividend income
 
233.6

 
—

 
—

 
(5.3
)
 
228.3

 
241.9

Other investment income/(losses)
 
(335.0
)
 
1.9

 
71.3

 
18.5

 
(243.3
)
 
(249.1
)
Interest expense
 
(140.5
)
 
—

 
—

 
5.3

 
(135.2
)
 
(182.7
)
Income before income taxes
 
(277.8
)
 
1.2

 
62.2

 
17.5

 
(196.9
)
 
522.2

Income tax provision
 
—

 
—

 
—

 
—

 
—

 
(210.1
)
Net income
 
(277.8
)
 
1.2

 
62.2

 
17.5

 
(196.9
)
 
312.1

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
 
277.8

 
(1.2
)
 
(61.4
)
 
—

 
215.2

 
215.3

Net income attributable to common shareholders
 
—

 
—

 
0.8

 
17.5

 
18.3

 
527.4

 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Adjustments include the elimination of intercompany transactions between the company and its consolidated investment products, primarily the elimination of management fees expensed by the funds and recorded as operating revenues (before consolidation) by the company.


28
Table of Contents                                 

The carrying value of investments held, derivative contracts, and notes issued by consolidated investment products is also their fair value. The following table presents the fair value hierarchy levels of investments held, derivative contracts, and notes issued by consolidated investment products, which are measured at fair value as of September 30, 2012 and December 31, 2011:
 
As of September 30, 2012
$ in millions
Fair Value Measurements
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
CLO collateral assets:
 
 
 
 
 
 
 
Bank loans
3,711.5

 
—

 
3,711.5

 
—

Bonds
171.8

 
—

 
171.8

 
—

Equity securities
11.6

 
—

 
11.6

 
—

Private equity fund assets:

 
  
 
  
 
  
Equity securities
124.7

 
16.4

 
—

 
108.3

Investments in other private equity funds
534.7

 
—

 
—

 
534.7

Debt securities issued by the U.S. Treasury
10.0

 
10.0

 
—

 
—

Real estate investments
153.6

 
—

 
—

 
153.6

Total assets at fair value
4,717.9

 
26.4

 
3,894.9

 
796.6

Liabilities:

 
 
 
 
 
 
CLO notes
(3,855.0
)
 
—

 
—

 
(3,855.0
)
Total liabilities at fair value
(3,855.0
)
 
—

 
—

 
(3,855.0
)

 
As of December 31, 2011
$ in millions
Fair Value Measurements
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
Assets:
 
 
 
 
 
 
 
CLO collateral assets:
 
 
 
 
 
 
 
Bank loans
5,354.3

 
—

 
5,354.3

 
—

Bonds
292.8

 
—

 
292.8

 
—

Equity securities
35.3

 
—

 
35.3

 
—

CLO-related derivative assets
10.8

 
—

 
10.8

 
—

Private equity fund assets:

 
  
 
  
 
  
Equity securities
138.2

 
11.4

 
0.1

 
126.7

Debt securities
10.0

 
—

 
—

 
10.0

Investments in other private equity funds
559.5

 
—

 
—

 
559.5

Debt securities issued by the U.S. Treasury
6.0

 
6.0

 
—

 
—

Real estate investments
232.9

 
—

 
—

 
232.9

Total assets at fair value
6,639.8

 
17.4

 
5,693.3

 
929.1

Liabilities:
 
 
 
 
 
 
 
CLO notes
(5,512.9
)
 
—

 
—

 
(5,512.9
)
CLO-related derivative liabilities
(5.8
)
 
—

 
(5.8
)
 
—

Total liabilities at fair value
(5,518.7
)
 
—

 
(5.8
)
 
(5,512.9
)





29
Table of Contents                                 

The following table shows a reconciliation of the beginning and ending fair value measurements for level 3 assets and liabilities using significant unobservable inputs:
 
Three months ended September 30, 2012
 
Nine months ended September 30, 2012
$ in millions
Level 3 Assets
 
Level 3 Liabilities
 
Level 3 Assets
 
Level 3 Liabilities
Beginning balance
854.6

 
(5,069.7
)
 
929.1

 
(5,512.9
)
Purchases
6.2

 
—

 
6.7

 
—

Sales
(92.3
)
 
—

 
(148.0
)
 
—

Issuances
—

 
(433.1
)
 
—

 
(758.4
)
Settlements
—

 
354.7

 
—

 
550.5

Deconsolidation of consolidated investment products
—

 
1,550.3

 
—

 
2,123.7

Gains and losses included in the Condensed Consolidated Statements of Income*
23.3

 
(121.2
)
 
14.5

 
(279.9
)
Foreign exchange
4.8

 
(136.0
)
 
(5.7
)
 
22.0

Ending balance
796.6

 
(3,855.0
)
 
796.6

 
(3,855.0
)

 
Three months ended September 30, 2011
 
Nine months ended September 30, 2011
$ in millions
Level 3 Assets
 
Level 3 Liabilities
 
Level 3 Assets
 
Level 3 Liabilities
Beginning balance
909.8

 
(6,292.7
)
 
972.8

 
(5,865.4
)
Purchases
6.1

 
—

 
33.0

 
—

Sales
(26.2
)
 
—

 
(157.7
)
 
—

Settlements
—

 
190.3

 
—

 
450.3

Gains and losses included in the Condensed Consolidated Statements of Income*
35.1

 
249.0

 
82.5

 
(184.7
)
Foreign exchange
6.3

 
(12.9
)
 
0.5

 
(266.5
)
Ending balance
931.1

 
(5,866.3
)
 
931.1

 
(5,866.3
)

*
Included in gains and losses of consolidated investment products in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2012 are $42.6 million in net unrealized gains and $39.5 million in net unrealized gains attributable to investments still held at September 30, 2012 by consolidated investment products (three and nine months ended September 30, 2011: $26.5 million in net unrealized gains and $37.5 million in net unrealized gains attributable to investments still held at September 30, 2011).

Fair value of consolidated CLOs
The company elected the fair value option for collateral assets held and notes issued by its consolidated CLOs to eliminate the measurement and recognition inconsistency that would otherwise arise from measuring assets and liabilities and recognizing the related gains and losses on different accounting bases.
The collateral assets held by consolidated CLOs are primarily invested in senior secured bank loans, bonds, and equity securities. Bank loan investments, which comprise the majority of consolidated CLO portfolio collateral, are senior secured corporate loans from a variety of industries, including but not limited to the aerospace and defense, broadcasting, technology, utilities, household products, healthcare, oil and gas, and finance industries. Bank loan investments mature at various dates between 2012 and 2019, pay interest at Libor or Euribor plus a spread of up to 14.0%, and typically range in S&P credit rating categories from BBB down to unrated. At September 30, 2012 the unpaid principal balance exceeded the fair value of the senior secured bank loans and bonds by approximately $163.0 million (December 31, 2011: $701.0 million excess). Approximately 1.1% of the collateral assets are in default as of September 30, 2012 (December 31, 2011: less than 1% of the collateral assets were in default). CLO investments are valued based on price quotations provided by an independent third-party pricing source. These third party sources aggregate indicative price quotations daily to provide the company with a price for the CLO investments. The company has developed internal controls to review the reasonableness and completeness of theses price quotations on a daily basis. If necessary, price quotations are challenged through the third-party pricing source challenge process. For the three and nine months ended September 30, 2012, there were no price quotation challenges by the company.

30
Table of Contents                                 

In addition, an internal valuation committee conducts an annual due diligence review of all independent third-party pricing sources to review the provider's valuation methodology as well as ensure internal controls exist over the valuation of the CLO investments. In the event that the third-party pricing source is unable to price an investment, other relevant factors, data and information are considered, including: i) information relating to the market for the investment, including price quotations for and trading in the investment, interest in similar investments, the market environment, investor attitudes towards the investment and interests in similar investments; ii) the characteristics of and fundamental analytical data relating to the investment, including, for senior secured corporate loans, the cost, current interest rate, period until next interest rate reset, maturity and base lending rate, the terms and conditions of the senior secured corporate loan and any related agreements, and the position of the senior secured corporate loan in the borrower’s debt structure; iii) the nature, adequacy and value of the senior secured corporate loan’s collateral, including the CLO’s rights, remedies and interests with respect to the collateral; iv) for senior secured corporate loans, the creditworthiness of the borrower, based on an evaluation of its financial condition, financial statements and information about the business, cash flows, capital structure and future prospects; v) the reputation and financial condition of the agent and any intermediate participants in the senior secured corporate loan; and vi) general economic and market conditions affecting the fair value of the senior secured corporate loan.
Notes issued by consolidated CLOs mature at various dates between 2015 and 2023 and have a weighted average maturity of 9.0 years. The notes are issued in various tranches with different risk profiles. The interest rates are generally variable rates based on Libor or Euribor plus a pre-defined spread, which varies from 0.21% for the more senior tranches to 7.10% for the more subordinated tranches. At September 30, 2012, the outstanding balance on the notes issued by consolidated CLOs exceeds their fair value by approximately $0.4 billion (December 31, 2011: $1.0 billion excess). The investors in this debt are not affiliated with the company and have no recourse to the general credit of the company. Notes issued by CLOs are recorded at fair value using an income approach. Fair value is determined using current information, notably market yields and projected cash flows of collateral assets, which are impacted by forecasted default and recovery rates. Market yields, default rates and recovery rates used in the company’s estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising market yields, default rates and lower debt recovery rates, the fair value, and therefore the carrying value, of the notes may be adversely affected. The current liquidity constraints within the market for CLO products require the use of certain unobservable inputs for CLO valuation. Once the undiscounted cash flows of the collateral assets have been determined, the company applies appropriate discount rates that a market participant would use to determine the discounted cash flow valuation of the notes.
Certain CLOs with Euro-denominated debt that were deconsolidated as of August 30, 2012 entered into swap agreements with various counterparties to hedge economically interest rate and foreign exchange risk related to CLO collateral assets with non-Euro interest rates and currencies. These swap agreements were not designated as qualifying as hedging instruments. The fair value of derivative contracts in an asset position was included in the company’s Condensed Consolidated Balance Sheet in other current assets, and the fair value of derivative contracts in a liability position was included in the company’s Condensed Consolidated Balance Sheet in other current liabilities through the date of deconsolidation. These derivative contracts were valued under an income approach using forecasted interest rates and were classified within level 2 of the valuation hierarchy. Changes in fair value of $3.8 million and $10.5 million are reflected as losses in gains/(losses) of consolidated investment products, net on the company’s Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2012 (three and nine months ended September 30, 2011: $4.2 million and $1.5 million, reflected as losses in gains/ (losses) of consolidated investment products). As of September 30, 2012, there were no open swap agreements (December 31, 2011: 70 open swap agreements with a notional value of $123.3 million). Swap maturities were tied to the maturity of the underlying collateral assets.
Fair value of consolidated private equity funds
Consolidated private equity funds are generally structured as partnerships. Generally, the investment strategy of underlying holdings in these partnerships is to seek capital appreciation through direct investments in public or private companies with compelling business models or ideas or through investments in partnership investments that also invest in similar private or public companies. Various strategies may be used. Companies targeted could be distressed organizations, targets of leveraged buyouts or fledgling companies in need of venture capital. Investees of these consolidated investment products may not redeem their investment until the partnership liquidates. Generally, the partnerships have a life that range from seven to twelve years unless dissolved earlier. The general partner may extend the partnership term up to a specified period of time as stated in the Partnership Agreement. Some partnerships allow the limited partners to cause an earlier termination upon the occurrence of certain events as specified in the Partnership Agreement.
For private equity partnerships, fair value is determined by reviewing each investment for the sale of additional securities of an issuer to sophisticated investors or for investee financial conditions and fundamentals. Publicly traded portfolio investments are carried at market value as determined by their most recent quoted sale, or if there is no recent sale, at their most recent bid price. For these investments held by consolidated investment products, level 1 classification indicates that fair values have been determined using unadjusted quoted prices in active markets for identical assets that the partnership has the ability to access.

31
Table of Contents                                 

Level 2 classification may indicate that fair values have been determined using quoted prices in active markets but give effect to certain lock-up restrictions surrounding the holding period of the underlying investments.
The fair value of level 3 investments held by consolidated investment products are derived from inputs that are unobservable and which reflect the limited partnerships’ own determinations about the assumptions that market participants would use in pricing the investments, including assumptions about risk. These inputs are developed based on the partnership’s own data, which is adjusted if information indicates that market participants would use different assumptions. The partnerships which invest directly into private equity portfolio companies (direct private equity funds) take into account various market conditions, subsequent rounds of financing, liquidity, financial condition, purchase multiples paid in other comparable third-party transactions, the price of securities of other companies comparable to the portfolio company, and operating results and other financial data of the portfolio company, as applicable.
The partnerships which invest into other private equity funds (funds-of-funds) take into account information received from those underlying funds, including their reported net asset values and evidence as to their fair value approach, including consistency of their fair value application. These investments do not trade in active markets and represent illiquid long-term investments that generally require future capital commitments. While the partnerships’ reported share of the underlying net asset values of the underlying funds is usually the most significant input in arriving at fair value and is generally representative of fair value, other information may also be used to value such investments at a premium or discount to the net asset values as reported by the funds, including allocations of priority returns within the funds as well as any specific conditions and events affecting the funds.
Fair value of consolidated real estate funds
Consolidated real estate funds are structured as limited liability companies. These limited liability companies invest in other real estate funds, and these investments are carried at fair value and presented as investments in consolidated investment products. The net asset value of the underlying funds, which primarily consists of the real estate investment value and mortgage loans, is adjusted to fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Real estate fund assets are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Due to the illiquid nature of investments made in real estate companies, all of the real estate assets are classified as level 3. The real estate investment vehicles use one or more valuation techniques (e.g., the market approach, the income approach, or the cost approach) for which sufficient and reliable data is available to value investments classified within level 3. The income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
The inputs used by the real estate funds in estimating the value of level 3 investments include the original transaction price, recent transactions in the same or similar instruments, as well as completed or pending third-party transactions in the underlying investment or comparable investments. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability. Other inputs used include discount rates, cap rates and income and expense assumptions. The fair value measurement of level 3 investments does not include transaction costs and acquisition fees that may have been capitalized as part of the investment’s cost basis. Due to the lack of observable inputs, the assumptions used may significantly impact the resulting fair value and therefore the real estate funds’ results of operations.













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Table of Contents                                 

Quantitative Information about Level 3 Fair Value Measurements

The following table shows significant unobservable inputs used in the fair value measurement of level 3 assets and liabilities:
Assets and Liabilities *
 
Fair Value at Sept 30, 2012 ($ in millions)
 
Valuation Technique
 
Unobservable Inputs
 
Range
Private Equity Funds --Equity Securities
 
108.3
 
Market Comparable
 
EBITDA Multiple
 
30 - 40x
 
 
 
 
 
 
Revenue Multiple
 
5 - 15x
 
 
 
 
 
 
Discount
 
20% - 50%
Real Estate Investments
 
153.6
 
Discounted Cash Flow
 
In-Place & Market Rent Rates
 
JPY 250 - JPY 700 per sq ft
 
 
 
 
 
 
Revenue Growth Rate
 
0.0% - 2.0%
 
 
 
 
 
 
Discount Rate
 
5.75% - 8.00%
 
 
 
 
 
 
Exit Capitalization Rate
 
6.00% - 8.25%
 
 
 
 
 
 
Stabilized Occupancy Rate
 
92.0% - 96.0%
 
 
 
 
 
 
Expense Growth Rate
 
1.00%
 
 
 
 
Market Comparable
 
In-Place & Market Rent Rates
 
JPY 250 - JPY 700 per sq ft
 
 
 
 
 
 
Exit Capitalization Rate
 
6.00% - 8.25%
CLO Notes
 
(3,855.0)
 
Discounted Cash Flow- Euro
 
Probability of Default
 
1% - 5%
 
 
 
 
 
 
Spread over Euribor **
 
200- 2550
 
 
 
 
Discounted Cash Flow- USD
 
Probability of Default
 
1% - 4%
 
 
 
 
 
 
Spread over Libor **
 
150 - 1400

*
Certain equity securities held by consolidated private equity funds are valued using third-party pricing information and/or recent private market transactions.  Quantitative unobservable inputs for such valuations were not developed or adjusted by the company. Investments in other private equity funds of $534.7 million are also excluded from the table above as they are valued using the NAV practical expedient.
**
Lower spreads relate to the more senior tranches in the CLO note structure; higher spreads relate to the less senior tranches.
The following narrative will indicate the sensitivity of inputs illustrating the impact of significant increases to the inputs. A directionally-opposite impact would apply for significant decreases in these inputs:
•
For investments held by consolidated private equity funds, significant increases in discounts in isolation would result in significantly lower fair value measurements, while significant increases in EBITDA and revenue multiple assumptions in isolation would result in significantly higher fair value measurements. An increase in discount assumptions would result in a directionally opposite change in the assumptions for EBITDA and revenue multiple resulting in lower fair value measurements.
•
For real estate investments, a change in the revenue growth rate generally would be accompanied by a directionally-similar change in the assumptions for in-place and market rent rates and stabilized occupancy rates. Significant increases in any of the unobservable inputs for in-place and market rent rates and stabilized occupancy rates in isolation would result in significantly higher fair values. An increase in these assumptions would result in a directionally-opposite change in the assumptions for discount rate, exit capitalization rate, and expense growth rate. Significant increases in the assumptions for discount rate, exit capitalization rate, and expense growth rate in isolation would result in significantly lower fair value measurements.
•
For CLO Notes, a change in the assumption used for spreads is generally accompanied by a directionally similar change in default rate. Significant increases in any of these inputs in isolation would result in a significantly lower fair value measurements.



33
Table of Contents                                 

12. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Invesco Holding Company Limited, the Issuer and a subsidiary of Invesco Ltd. (the Parent), issued 5.375% $350.0 million senior notes due 2013, and 5.375% $200.0 million senior notes due 2014. (See Note 4, "Debt," for outstanding balances at September 30, 2012 and June 30, 2012.) 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 100% owned subsidiaries: Invesco Management Group, Inc., Invesco Advisers, Inc., IVZ Inc., and Invesco North American Holdings, Inc. (the Guarantors). The company’s remaining consolidated subsidiaries do not guarantee this debt. The guarantees of each of the Guarantors are joint and several. Presented below are Condensed Consolidating Balance Sheets as of September 30, 2012, and December 31, 2011, Condensed Consolidating Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2012 and 2011, and Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2012 and 2011.

In the disclosure that follows, the Condensed Consolidating Statements of Income and Condensed Consolidating Statements of Cash Flows for the periods ended September 30, 2011 have been revised from the disclosure provided in the company's Form 10-Q filed on October 28, 2011 to conform to the requirements of Rule 3-10 of Regulation S-X. The revised disclosure presents the line items of the Condensed Consolidating Statements of Income and Condensed Consolidating Statements of Cash Flows at a more disaggregated level than that which was previously presented. In the prior disclosure, all intercompany revenue and expense sharing arrangements were presented on a net basis on the Condensed Consolidating Statements of Income. The revised presentation grosses up the intercompany balances and presents them separately as revenues and expenses. In the prior disclosure, certain intercompany loan, capital, and dividend activity was incorrectly classified in the Condensed Consolidating Statements of Cash Flows. The revised presentation corrects the classification of these amounts as cash flows from financing activities on the Condensed Consolidating Statements of Cash Flows.

These corrections to the presentation had no impact to the company's consolidated net income attributable to common shareholders, earnings per share or retained earnings. They did not have any impact on the total equity of the Guarantors, non-Guarantors, Issuer, or Parent entities, nor did these changes impact the non-intercompany balances. These corrections to the presentation had no impact on any liquidity measures of the company, nor did they impact ratios based on the company's balance sheet or income statement. They did not alter the net increase or decrease in cash for the Guarantors, non-Guarantors, Issuer, or Parent entities. There was no impact to the company's loan covenants as a result of these corrections.


34
Table of Contents                                 

The impact of the corrections on the affected condensed consolidating financial statement captions as previously reported in the Company's Form 10-Q for the three and nine months ended September 30, 2011 is quantified in the tables below.
Impact of Revision on Guarantor Condensed Consolidating Statements of Income
 
 
 Guarantors
 
 Non-Guarantors
 
 Issuer
 
 Parent
 
 Adjustments
 
 Consolidated
 $ in millions
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Increase/(decrease) in operating revenues
 
17.0

 
38.8

 
—

 
2.7

 
(58.5
)
 
—

Increase/(decrease) in operating expenses
 
17.0

 
38.8

 
—

 
2.7

 
(58.5
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Increase/(decrease) in operating revenues
 
—

 
157.7

 
—

 
—

 
(157.7
)
 
—

Increase/(decrease) in operating expenses
 
—

 
157.7

 
—

 
—

 
(157.7
)
 
—


Impact of Revision on Guarantor Condensed Consolidating Statements of Cash Flows
 
 
 Guarantors
 
 Non-Guarantors
 
 Issuer
 
 Parent
 
 Adjustments
 
 Consolidated
 $ in millions
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Total change in net cash (used in)/provided by operating activities:
 
301.6

 
49.8

 
(54.0
)
 
(228.7
)
 
(68.7
)
 
—

Total change in net cash (used in)/provided by investing activities:
 
—

 
(90.0
)
 
(51.5
)
 
(0.1
)
 
141.6

 
—

Total change in net cash (used in)/provided by financing activities:
 
(301.6
)
 
40.2

 
105.5

 
228.8

 
(72.9
)
 
—

Total change in (decrease)/increase in cash and cash equivalents:
 
—

 
—

 
—

 
—

 
—

 
—



35
Table of Contents                                 

Condensed Consolidating Balance Sheet
$ in millions
Guarantors
 
Non-Guarantors
 
Issuer
 
Parent
 
Adjustments
 
Consolidated
As of September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
  Cash and cash equivalents
12.9

 
864.2

 
2.8

 
0.2

 
—

 
880.1

  Cash and cash equivalents of consolidated investment products
—

 
552.7

 
—

 
—

 
—

 
552.7

  Unsettled fund receivables
—

 
596.0

 
—

 
—

 
—

 
596.0

  Accounts receivable
152.4

 
253.7

 
—

 
—

 
—

 
406.1

  Accounts receivable of consolidated investment products
—

 
58.3

 
—

 
—

 
—

 
58.3

  Investments
19.8

 
342.6

 
—

 
1.8

 
—

 
364.2

  Prepaid assets
10.5

 
45.2

 
—

 
0.1

 
—

 
55.8

  Other current assets
40.2

 
50.3

 
0.7

 
—

 
(9.5
)
 
81.7

  Deferred tax asset, net
18.2

 
8.3

 
—

 
—

 
—

 
26.5

  Assets held for policyholders
—

 
1,139.3

 
—

 
—

 
—

 
1,139.3

  Intercompany receivables
506.3

 
415.6

 
341.0

 
—

 
(1,262.9
)
 
—

Total current assets
760.3

 
4,326.2

 
344.5

 
2.1

 
(1,272.4
)
 
4,160.7

Non-current assets:
 
 
 
 
 
 
 
 
 
 
 
  Investments
57.5

 
155.2

 
7.4

 
3.2

 
0.2

 
223.5

  Investments of consolidated investment products
—

 
4,717.9

 
—

 
—

 
—

 
4,717.9

  Security deposit assets and receivables
—

 
30.1

 
—

 
—

 
—

 
30.1

  Other non-current assets
9.6

 
4.7

 
2.9

 
—

 
—

 
17.2

  Deferred sales commissions
8.4

 
37.6

 
—

 
—

 
—

 
46.0

  Property and equipment, net
141.9

 
188.0

 
—

 
—

 
—

 
329.9

  Intangible assets, net
1,189.9

 
105.9

 
—

 
—

 
—

 
1,295.8

  Goodwill
2,583.5

 
4,015.0

 
441.4

 
—

 
—

 
7,039.9

  Deferred tax assets,net
—

 
33.8

 
—

 
—

 
(33.8
)
 
—

  Intercompany receivables
—

 
1,408.7

 
598.8

 
—

 
(2,007.5
)
 
—

  Investment in subsidiaries
478.0

 
362.3

 
5,375.8

 
8,651.0

 
(14,867.1
)
 
—

Total non-current assets
4,468.8

 
11,059.2

 
6,426.3

 
8,654.2

 
(16,908.2
)
 
13,700.3

Total assets
5,229.1

 
15,385.4

 
6,770.8

 
8,656.3

 
(18,180.6
)
 
17,861.0

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
  Current maturities of total debt
—

 
—

 
333.5

 
—

 
—

 
333.5

  Unsettled fund payables
—

 
598.2

 
—

 
—

 
—

 
598.2

  Income taxes payable
—

 
63.8

 
10.1

 
—

 
(9.5
)
 
64.4

  Other current liabilities
121.7

 
589.8

 
6.8

 
0.8

 
—

 
719.1

  Other current liabilities of consolidated investment products
—

 
329.8

 
—

 
—

 
—

 
329.8

  Policyholder payables
—

 
1,139.3

 
—

 
—

 
—

 
1,139.3

  Intercompany payables
375.9

 
546.6

 
—

 
340.4

 
(1,262.9
)
 
—

Total current liabilities
497.6

 
3,267.5

 
350.4

 
341.2

 
(1,272.4
)
 
3,184.3

Non-current liabilities:
 
 
 
 
 
 
 
 
 
 
 
  Long-term debt
532.5

 
—

 
419.1

 
—

 
—

 
951.6

  Long-term debt of consolidated investment products
—

 
3,855.0

 
—

 
—

 
—

 
3,855.0

  Deferred tax liabilities, net
340.7

 
6.6

 
—

 
—

 
(33.8
)
 
313.5

  Security deposits payable
—

 
30.1

 
—

 
—

 
—

 
30.1

  Other non-current liabilities
55.7

 
273.4

 
—

 
—

 
—

 
329.1

  Intercompany payables
1,319.8

 
31.0

 
656.7

 
—

 
(2,007.5
)
 
—

Total non-current liabilities
2,248.7

 
4,196.1

 
1,075.8

 
—

 
(2,041.3
)
 
5,479.3

Total liabilities
2,746.3

 
7,463.6

 
1,426.2

 
341.2

 
(3,313.7
)
 
8,663.6

Equity:
 
 
 
 
 
 
 
 
 
 
 
Total equity attributable to common shareholders
2,482.8

 
7,039.5

 
5,344.6

 
8,315.1

 
(14,866.9
)
 
8,315.1

Equity attributable to noncontrolling interests in consolidated entities
—

 
882.3

 
—

 
—

 
—

 
882.3

Total equity
2,482.8

 
7,921.8

 
5,344.6

 
8,315.1

 
(14,866.9
)
 
9,197.4

Total liabilities and equity
5,229.1

 
15,385.4

 
6,770.8

 
8,656.3

 
(18,180.6
)
 
17,861.0



36
Table of Contents                                 

Condensed Consolidating Balance Sheet
$ in millions
Guarantors
 
Non-Guarantors
 
Issuer
 
Parent
 
Adjustments
 
Consolidated
As of December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
  Cash and cash equivalents
20.6

 
703.2

 
3.1

 
0.5

 
—

 
727.4

  Cash and cash equivalents of consolidated investment products
—

 
382.3

 
—

 
—

 
—

 
382.3

  Unsettled fund receivables
—

 
444.4

 
—

 
—

 
—

 
444.4

  Accounts receivable
163.6

 
260.8

 
—

 
—

 
—

 
424.4

  Accounts receivable of consolidated investment products
—

 
98.5

 
—

 
—

 
—

 
98.5

  Investments
4.2

 
266.2

 
—

 
13.3

 
—

 
283.7

  Prepaid assets
9.7

 
41.5

 
—

 
—

 
—

 
51.2

  Other current assets
39.3

 
120.3

 
1.1

 
0.2

 
(10.9
)
 
150.0

  Deferred tax asset, net
18.9

 
9.8

 
—

 
—

 
—

 
28.7

  Assets held for policyholders
—

 
1,243.5

 
—

 
—

 
—

 
1,243.5

  Intercompany receivables
477.0

 
421.4

 
34.8

 
—

 
(933.2
)
 
—

Total current assets
733.3

 
3,991.9

 
39.0

 
14.0

 
(944.1
)
 
3,834.1

Non-current assets:
 
 
 
 
 
 
 
 
 
 
 
  Investments
50.0

 
144.4

 
3.4

 
3.0

 
—

 
200.8

  Investments of consolidated investment products
—

 
6,629.0

 
—

 
—

 
—

 
6,629.0

  Security deposit assets and receivables
—

 
81.2

 
—

 
—

 
—

 
81.2

  Other non-current assets
8.5

 
6.6

 
2.8

 
—

 
—

 
17.9

  Deferred sales commissions
13.9

 
26.6

 
—

 
—

 
—

 
40.5

  Property and equipment, net
145.3

 
167.5

 
—

 
—

 
—

 
312.8

  Intangible assets, net
420.6

 
902.2

 
—

 
—

 
—

 
1,322.8

  Goodwill
2,312.8

 
4,161.8

 
433.3

 
—

 
—

 
6,907.9

  Intercompany receivables
333.0

 
1,450.5

 
567.8

 
—

 
(2,351.3
)
 
—

  Investment In Subsidiaries
1,228.2

 
5.6

 
5,116.3

 
8,465.0

 
(14,815.1
)
 
—

Total non-current assets
4,512.3

 
13,575.4

 
6,123.6

 
8,468.0

 
(17,166.4
)
 
15,512.9

Total assets
5,245.6

 
17,567.3

 
6,162.6

 
8,482.0

 
(18,110.5
)
 
19,347.0

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
  Current maturities of total debt
—

 
—

 
215.1

 
—

 
—

 
215.1

  Unsettled fund payables
—

 
439.6

 
—

 
—

 
—

 
439.6

  Income taxes payable
—

 
63.1

 
7.4

 
—

 
(10.9
)
 
59.6

  Other current liabilities
144.3

 
685.4

 
11.1

 
0.7

 
—

 
841.5

  Other current liabilities of consolidated investment products
—

 
175.1

 
—

 
—

 
—

 
175.1

  Policyholder payables
—

 
1,243.5

 
—

 
—

 
—

 
1,243.5

 Intercompany payables
366.5

 
507.5

 
29.9

 
29.3

 
(933.2
)
 
—

Total current liabilities
510.8

 
3,114.2

 
263.5

 
30.0

 
(944.1
)
 
2,974.4

Non-current liabilities:
 
 
 
 
 
 
 
 
 
 
 
  Long-term debt
539.0

 
—

 
530.6

 
—

 
—

 
1,069.6

  Long-term debt of consolidated investment products
—

 
5,512.9

 
—

 
—

 
—

 
5,512.9

  Deferred tax liabilities, net
29.6

 
244.4

 
—

 
—

 
—

 
274.0

  Security deposits payable
—

 
81.2

 
—

 
—

 
—

 
81.2

  Other non-current liabilities
55.1

 
242.2

 
—

 
—

 
—

 
297.3

  Intercompany payables
1,361.8

 
—

 
656.6

 
332.9

 
(2,351.3
)
 
—

Total non-current liabilities
1,985.5

 
6,080.7

 
1,187.2

 
332.9

 
(2,351.3
)
 
7,235.0

Total liabilities
2,496.3

 
9,194.9

 
1,450.7

 
362.9

 
(3,295.4
)
 
10,209.4

Equity:
 
 
 
 
 
 
 
 
 
 
 
Total equity attributable to common shareholders
2,749.3

 
7,353.9

 
4,711.9

 
8,119.1

 
(14,815.1
)
 
8,119.1

Equity attributable to noncontrolling interests in consolidated entities
—

 
1,018.5

 
—

 
—

 
—

 
1,018.5

Total equity
2,749.3

 
8,372.4

 
4,711.9

 
8,119.1

 
(14,815.1
)
 
9,137.6

Total liabilities and equity
5,245.6

 
17,567.3

 
6,162.6

 
8,482.0

 
(18,110.5
)
 
19,347.0



37
Table of Contents                                 

Condensed Consolidating Statements of Income and Comprehensive Income
$ in millions
Guarantors
 
Non-
Guarantors
 
Issuer
 
Parent
 
Adjustments
 
Consolidated
For the three months ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
Investment management fees
320.0

 
498.0

 
—

 
—

 
—

 
818.0

Service and distribution fees
25.3

 
170.8

 
—

 
—

 
—

 
196.1

Performance fees
—

 
3.0

 
—

 
—

 
—

 
3.0

Other
1.4

 
22.9

 
—

 
—

 
—

 
24.3

Intercompany Revenues
8.7

 
55.7

 
—

 
—

 
(64.4
)
 
—

Total operating revenues
355.4

 
750.4

 
—

 
—

 
(64.4
)
 
1,041.4

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Employee compensation
89.3

 
239.8

 
—

 
1.8

 
—

 
330.9

Third-party distribution, service and advisory
23.8

 
303.4

 
—

 
—

 
—

 
327.2

Marketing
1.4

 
25.0

 
—

 
—

 
—

 
26.4

Property, office and technology
30.6

 
38.4

 
—

 
0.1

 
—

 
69.1

General and administrative
17.0

 
50.2

 
—

 
1.6

 
—

 
68.8

Transaction and integration
—

 
3.0

 
—

 
—

 
—

 
3.0

Intercompany Expenses
55.5

 
8.6

 
—

 
0.3

 
(64.4
)
 
—

Total operating expenses
217.6

 
668.4

 
—

 
3.8

 
(64.4
)
 
825.4

Operating income/(loss)
137.8

 
82.0

 
—

 
(3.8
)
 
—

 
216.0

Other income/(expense):
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
0.3

 
4.5

 
84.1

 
175.3

 
(259.0
)
 
5.2

Interest and dividend income
—

 
22.2

 
13.9

 
0.1

 
(33.7
)
 
2.5

Interest income of consolidated investment products
—

 
68.7

 
—

 
—

 
—

 
68.7

Other gains/(losses) of consolidated investment products, net
—

 
(25.2
)
 
—

 
—

 
—

 
(25.2
)
Interest expense
(33.7
)
 
(0.8
)
 
(10.3
)
 
(1.4
)
 
33.6

 
(12.6
)
Interest expense of consolidated investment products
—

 
(41.9
)
 
—

 
—

 
—

 
(41.9
)
Other gains and losses, net
2.5

 
16.6

 
(1.0
)
 
0.3

 
—

 
18.4

Income before income taxes
106.9

 
126.1

 
86.7

 
170.5

 
(259.1
)
 
231.1

Income tax provision
(42.4
)
 
(31.0
)
 
(0.9
)
 
0.1

 
—

 
(74.2
)
Net income
64.5

 
95.1

 
85.8

 
170.6

 
(259.1
)
 
156.9

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
—

 
13.7

 
—

 
—

 
—

 
13.7

Net income attributable to common shareholders
64.5

 
108.8

 
85.8

 
170.6

 
(259.1
)
 
170.6

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
64.5

 
267.6

 
161.3

 
318.9

 
(482.4
)
 
329.9

Comprehensive loss (income) attributable to noncontrolling interests in consolidated entities
—

 
(11.0
)
 
—

 
—

 
—

 
(11.0
)
Comprehensive income attributable to common shareholders
64.5

 
256.6

 
161.3

 
318.9

 
(482.4
)
 
318.9






38
Table of Contents                                 

Revised Condensed Consolidating Statements of Income and Comprehensive Income
$ in millions
Guarantors
 
Non-Guarantors
 
Issuer
 
Parent
 
Adjustments
 
Consolidated
For the three months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
Investment management fees
278.1

 
501.4

 
—

 
—

 
—

 
779.5

Service and distribution fees
22.5

 
166.6

 
—

 
—

 
—

 
189.1

Performance fees
0.1

 
2.5

 
—

 
—

 
—

 
2.6

Other
19.6

 
24.0

 
—

 
2.7

 
(19.7
)
 
26.6

Intercompany Revenues
5.9

 
32.9

 
—

 
—

 
(38.8
)
 
—

Total operating revenues
326.2

 
727.4

 
—

 
2.7

 
(58.5
)
 
997.8

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Employee compensation
80.3

 
227.9

 
—

 
—

 
(2.7
)
 
305.5

Third-party distribution, service and advisory
39.1

 
275.3

 
—

 
—

 
—

 
314.4

Marketing
—

 
30.1

 
—

 
—

 
(17.0
)
 
13.1

Property, office and technology
24.9

 
37.6

 
—

 
0.2

 
—

 
62.7

General and administrative
21.6

 
47.4

 
—

 
0.6

 
—

 
69.6

Transaction and integration
—

 
4.7

 
—

 
—

 
—

 
4.7

Intercompany Expenses
32.8

 
5.9

 
—

 
0.1

 
(38.8
)
 
—

Total operating expenses
198.7

 
628.9

 
—

 
0.9

 
(58.5
)
 
770.0

Operating income/(loss)
127.5

 
98.5

 
—

 
1.8

 
—

 
227.8

Other income/(expense):
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
0.6

 
7.1

 
109.0

 
170.0

 
(278.6
)
 
8.1

Interest and dividend income
1.2

 
22.9

 
12.2

 
0.4

 
(32.9
)
 
3.8

Interest income of consolidated investment products
—

 
79.6

 
—

 
—

 
—

 
79.6

Other gains/(losses) of consolidated investment products, net
—

 
(93.1
)
 
—

 
—

 
—

 
(93.1
)
Interest expense
(34.1
)
 
(0.3
)
 
(12.6
)
 
(1.2
)
 
32.9

 
(15.3
)
Interest expense of consolidated investment products
—

 
(48.7
)
 
—

 
—

 
—

 
(48.7
)
Other gains and losses, net
(3.2
)
 
(12.1
)
 
(0.3
)
 
(4.1
)
 
—

 
(19.7
)
Income before income taxes
92.0

 
53.9

 
108.3

 
166.9

 
(278.6
)
 
142.5

Income tax provision
3.3

 
(61.5
)
 
(0.9
)
 
—

 
—

 
(59.1
)
Net income
95.3

 
(7.6
)
 
107.4

 
166.9

 
(278.6
)
 
83.4

Net (income)/loss attributable to the noncontrolling interests in consolidated entities, net of tax
—

 
83.5

 
—

 
—

 
—

 
83.5

Net income attributable to common shareholders
95.3

 
75.9

 
107.4

 
166.9

 
(278.6
)
 
166.9

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
94.3

 
(261.4
)
 
(50.3
)
 
(105.2
)
 
148.4

 
(174.2
)
Comprehensive loss (income) attributable to noncontrolling interests in consolidated entities
—

 
69.0

 
—

 
—

 
—

 
69.0

Comprehensive income attributable to common shareholders
94.3

 
(192.4
)
 
(50.3
)
 
(105.2
)
 
148.4

 
(105.2
)


39
Table of Contents                                 

Condensed Consolidating Statements of Income and Comprehensive Income    
$ in millions
Guarantors
 
Non-
Guarantors
 
Issuer
 
Parent
 
Adjustments
 
Consolidated
For the nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
Investment management fees
919.9

 
1,470.1

 
—

 
—

 
—

 
2,390.0

Service and distribution fees
71.4

 
500.8

 
—

 
—

 
—

 
572.2

Performance fees
8.4

 
30.5

 
—

 
—

 
—

 
38.9

Other
9.0

 
74.0

 
—

 
—

 
—

 
83.0

Intercompany Revenues
20.9

 
173.4

 
—

 
—

 
(194.3
)
 
—

Total operating revenues
1,029.6

 
2,248.8

 
—

 
—

 
(194.3
)
 
3,084.1

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Employee compensation
271.2

 
677.6

 
—

 
5.2

 
—

 
954.0

Third-party distribution, service and advisory
66.8

 
894.1

 
—

 
—

 
—

 
960.9

Marketing
3.8

 
75.9

 
—

 
—

 
—

 
79.7

Property, office and technology
87.4

 
116.8

 
—

 
0.2

 
—

 
204.4

General and administrative
56.6

 
170.4

 
—

 
3.8

 
—

 
230.8

Transaction and integration
—

 
5.6

 
—

 
—

 
—

 
5.6

Intercompany Expenses
172.6

 
20.9

 
—

 
0.8

 
(194.3
)
 
—

Total operating expenses
658.4

 
1,961.3

 
—

 
10.0

 
(194.3
)
 
2,435.4

Operating income/(loss)
371.2

 
287.5

 
—

 
(10.0
)
 
—

 
648.7

Other income/(expense):
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
3.0

 
18.0

 
261.7

 
530.6

 
(791.5
)
 
21.8

Interest and dividend income
1.7

 
65.5

 
38.9

 
0.3

 
(99.3
)
 
7.1

Interest income of consolidated investment products
—

 
206.4

 
—

 
—

 
—

 
206.4

Other gains/(losses) of consolidated investment products, net
—

 
(69.9
)
 
—

 
—

 
—

 
(69.9
)
Interest expense
(100.8
)
 
(0.5
)
 
(33.6
)
 
(3.9
)
 
99.2

 
(39.6
)
Interest expense of consolidated investment products
—

 
(134.4
)
 
—

 
—

 
—

 
(134.4
)
Other gains and losses, net
6.8

 
23.4

 
(2.1
)
 
1.2

 
—

 
29.3

Income before income taxes
281.9

 
396.0

 
264.9

 
518.2

 
(791.6
)
 
669.4

Income tax provision
(109.4
)
 
(98.1
)
 
(2.8
)
 
0.2

 
—

 
(210.1
)
Net income
172.5

 
297.9

 
262.1

 
518.4

 
(791.6
)
 
459.3

Net (income)/loss attributable to the noncontrolling interests in consolidated entities, net of tax
—

 
59.1

 
—

 
—

 
—

 
59.1

Net income attributable to common shareholders
172.5

 
357.0

 
262.1

 
518.4

 
(791.6
)
 
518.4

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
174.6

 
460.5

 
335.8

 
683.3

 
(1,029.9
)
 
624.3

Comprehensive loss (income) attributable to noncontrolling interests in consolidated entities
—

 
59.0

 
—

 
—

 
—

 
59.0

Comprehensive income attributable to common shareholders
174.6

 
519.5

 
335.8

 
683.3

 
(1,029.9
)
 
683.3





40
Table of Contents                                 

Revised Condensed Consolidating Statements of Income and Comprehensive Income
$ in millions
Guarantors
 
Non-Guarantors
 
Issuer
 
Parent
 
Adjustments
 
Consolidated
For the nine months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
Investment management fees
874.9

 
1,516.0

 
—

 
—

 
—

 
2,390.9

Service and distribution fees
71.9

 
527.3

 
—

 
—

 
—

 
599.2

Performance fees
0.2

 
13.8

 
—

 
—

 
—

 
14.0

Other
7.4

 
83.6

 
—

 
—

 
—

 
91.0

Intercompany Revenues
23.5

 
134.2

 
—

 
—

 
(157.7
)
 
—

Total operating revenues
977.9

 
2,274.9

 
—

 
—

 
(157.7
)
 
3,095.1

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Employee compensation
254.0

 
670.8

 
—

 
4.9

 
—

 
929.7

Third-party distribution, service and advisory
64.3

 
916.4

 
—

 
—

 
—

 
980.7

Marketing
3.5

 
61.4

 
—

 
—

 
—

 
64.9

Property, office and technology
78.2

 
109.8

 
—

 
0.6

 
—

 
188.6

General and administrative
62.9

 
153.1

 
—

 
4.8

 
—

 
220.8

Transaction and integration
—

 
23.9

 
—

 
—

 
—

 
23.9

Intercompany Expenses
133.8

 
23.5

 
—

 
0.4

 
(157.7
)
 
—

Total operating expenses
596.7

 
1,958.9

 
—

 
10.7

 
(157.7
)
 
2,408.6

Operating income/(loss)
381.2

 
316.0

 
—

 
(10.7
)
 
—

 
686.5

Other income/(expense):
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated affiliates
1.3

 
23.3

 
326.1

 
537.8

 
(862.9
)
 
25.6

Interest and dividend income
1.9

 
65.1

 
37.1

 
0.8

 
(96.6
)
 
8.3

Interest income of consolidated investment products
—

 
233.6

 
—

 
—

 
—

 
233.6

Other gains/(losses) of consolidated investment products, net
—

 
(243.3
)
 
—

 
—

 
—

 
(243.3
)
Interest expense
(102.5
)
 
(1.3
)
 
(37.7
)
 
(2.6
)
 
96.6

 
(47.5
)
Interest expense of consolidated investment products
—

 
(135.2
)
 
—

 
—

 
—

 
(135.2
)
Other gains and losses, net
(2.1
)
 
(4.8
)
 
(1.0
)
 
2.1

 
—

 
(5.8
)
Income before income taxes
279.8

 
253.4

 
324.5

 
527.4

 
(862.9
)
 
522.2

Income tax provision
(66.8
)
 
(130.2
)
 
(13.1
)
 
—

 
—

 
(210.1
)
Net income
213.0

 
123.2

 
311.4

 
527.4

 
(862.9
)
 
312.1

Net (income)/loss attributable to the noncontrolling interests in consolidated entities, net of tax
—

 
215.3

 
—

 
—

 
—

 
215.3

Net income attributable to common shareholders
213.0

 
338.5

 
311.4

 
527.4

 
(862.9
)
 
527.4

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
214.3

 
26.5

 
218.7

 
404.3

 
(653.7
)
 
210.1

Comprehensive loss (income) attributable to noncontrolling interests in consolidated entities
—

 
194.2

 
—

 
—

 
—

 
194.2

Comprehensive income attributable to common shareholders
214.3

 
220.7

 
218.7

 
404.3

 
(653.7
)
 
404.3

            


41
Table of Contents                                 

Condensed Consolidating Statements of Cash Flows
$ in millions
Guarantors
 
Non-Guarantors
 
Issuer
 
Parent
 
Adjustments
 
Consolidated
For the nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by/(used in) operating activities
156.6

 
68.4

 
450.3

 
431.9

 
(789.5
)
 
317.7

Investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital contribution to/(from) subsidiary
—

 
—

 
—

 
(41.7
)
 
41.7

 
—

Purchase of investments by consolidated investment products
—

 
(2,338.9
)
 
—

 
—

 
—

 
(2,338.9
)
Proceeds from sale of investments by consolidated investment products
—

 
2,484.5

 
—

 
—

 
—

 
2,484.5

Purchase of other investments
(7.7
)
 
(78.4
)
 
(1.6
)
 
—

 
—

 
(87.7
)
Other net increases/(decreases) in investing activities
(53.4
)
 
19.0

 
(1.1
)
 
13.1

 
—

 
(22.4
)
Net cash (used in)/provided by investing activities
(61.1
)
 
86.2

 
(2.7
)
 
(28.6
)
 
41.7

 
35.5

Financing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital contribution from/(to) parent
—

 
41.7

 
—

 
—

 
(41.7
)
 
—

Purchases of treasury shares
—

 
—

 
—

 
(190.0
)
 
—

 
(190.0
)
Dividends paid
(435.0
)
 
(354.5
)
 
—

 
(211.5
)
 
789.5

 
(211.5
)
Capital invested into consolidated investment products
—

 
19.4

 
—

 
—

 
—

 
19.4

Capital distributed by consolidated investment products
—

 
(122.0
)
 
—

 
—

 
—

 
(122.0
)
Net borrowings/(repayments) of debt of consolidated investment products
—

 
255.4

 
—

 
—

 
—

 
255.4

Net borrowings/(repayments) under credit facility
(6.5
)
 
—

 
222.0

 
—

 
—

 
215.5

Net intercompany borrowings/(repayments)
338.3

 
135.8

 
(454.8
)
 
(19.3
)
 
—

 
—

Repayments of senior notes
—

 
—

 
(215.1
)
 
—

 
—

 
(215.1
)
Other net increases/(decreases) in financing activities
—

 
13.7

 
—

 
17.2

 
—

 
30.9

Net cash used in financing activities
(103.2
)
 
(10.5
)
 
(447.9
)
 
(403.6
)
 
747.8

 
(217.4
)
(Decrease)/increase in cash and cash equivalents
(7.7
)
 
144.1

 
(0.3
)
 
(0.3
)
 
—

 
135.8

Foreign exchange movement on cash and cash equivalents
—

 
16.9

 
—

 
—

 
—

 
16.9

Cash and cash equivalents, beginning of year
20.6

 
703.2

 
3.1

 
0.5

 
—

 
727.4

Cash and cash equivalents, end of period
12.9

 
864.2

 
2.8

 
0.2

 
—

 
880.1








42
Table of Contents                                 

Revised Condensed Consolidating Statements of Cash Flows
$ in millions
Guarantors
 
Non-Guarantors
 
Issuer
 
Parent
 
Adjustments
 
Consolidated
For the nine months ended September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by/(used in) operating activities
263.3

 
417.2

 
11.2

 
211.3

 
(261.0
)
 
642.0

Investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital contribution to/(from) subsidiary
—

 
—

 
(116.0
)
 
(23.1
)
 
139.1

 
—

Purchase of investments by consolidated investment products
—

 
(2,594.2
)
 
—

 
—

 
—

 
(2,594.2
)
Proceeds from sale of investments by consolidated investment products
—

 
3,035.3

 
—

 
—

 
—

 
3,035.3

Purchase of other investments
(10.0
)
 
(92.3
)
 
—

 
—

 
—

 
(102.3
)
Other net increases/(decreases) in investing activities
(25.3
)
 
22.1

 
1.4

 
16.8

 
—

 
15.0

Net cash (used in)/provided by investing activities
(35.3
)
 
370.9

 
(114.6
)
 
(6.3
)
 
139.1

 
353.8

Financing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital contribution from/(to) parent
116.0

 
23.1

 
—

 
—

 
(139.1
)
 
—

Purchases of treasury shares
—

 
—

 
—

 
(333.0
)
 
—

 
(333.0
)
Dividends paid
—

 
(261.0
)
 
—

 
(165.0
)
 
261.0

 
(165.0
)
Capital invested into consolidated investment products
—

 
27.9

 
—

 
—

 
—

 
27.9

Capital distributed by consolidated investment products
—

 
(158.8
)
 
—

 
—

 
—

 
(158.8
)
Net borrowings/(repayments) of debt of consolidated investment products
—

 
(434.9
)
 
—

 
—

 
—

 
(434.9
)
Net borrowings/(repayments) under credit facility
74.0

 
—

 
—

 
—

 
—

 
74.0

Net intercompany borrowings/(repayments)
(417.6
)
 
27.8

 
105.5

 
284.3

 
—

 
—

Other net increases/(decreases) in financing activities
—

 
3.5

 
—

 
11.0

 
—

 
14.5

Net cash used in financing activities
(227.6
)
 
(772.4
)
 
105.5

 
(202.7
)
 
121.9

 
(975.3
)
(Decrease)/increase in cash and cash equivalents
0.4

 
15.7

 
2.1

 
2.3

 
—

 
20.5

Foreign exchange movement on cash and cash equivalents
—

 
(4.0
)
 
—

 
—

 
—

 
(4.0
)
Cash and cash equivalents, beginning of year
12.4

 
725.9

 
1.1

 
1.1

 
—

 
740.5

Cash and cash equivalents, end of period
12.8

 
737.6

 
3.2

 
3.4

 
—

 
757.0




43
Table of Contents                                 

13. RELATED PARTIES

Certain managed funds are deemed to be affiliated entities under the related party definition in ASC 850, "related Party Disclosures." Additionally, related parties include those defined in the company's currently effective proxy statement.

 
Three months ended September 30,
 
Nine months ended September 30,
 
2012
 
2011
 
2012
 
2011
$ in millions
 
 
 
 
 
 
 
Affiliated operating revenues:
 
 
 
 
 
 
 
Investment management fees
700.6

 
666.8

 
2,040.1

 
2,056.7

Service and distribution fees
181.6

 
189.0

 
557.4

 
598.7

Performance fees
2.0

 
0.8

 
33.8

 
10.0

Other
23.6

 
24.0

 
76.7

 
87.1

Total affiliated operating revenues
907.8

 
880.6

 
2,708.0

 
2,752.5


 
As of
 
September 30, 2012
 
December 31, 2011
Affiliated asset balances:
 
 
 
Cash equivalents
200.7

 
257.7

Unsettled fund receivables
152.1

 
178.8

Accounts receivable
220.4

 
247.8

Current investments
326.2

 
248.9

Assets held for policyholders
1,139.0

 
1,243.1

Other current assets
26.1

 
22.1

Non-current investments
210.5

 
184.5

Other non-current assets
1.9

 
1.9

Affiliated asset balances
2,276.9

 
2,384.8

 
 
 
 
Affiliated liability balances:
 
 
 
Unsettled fund payables
281.3

 
205.0

Other current liabilities
61.6

 
63.5

Other non-current liabilities
107.8

 
191.6

Affiliated liability balances
450.7

 
460.1


14. SUBSEQUENT EVENTS
On November 1, 2012, the company announced a third quarter 2012 dividend of $0.1725 per share, payable on December 7, 2012, to shareholders of record at the close of business on November 19, 2012.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto, which appear elsewhere in this Report. Except for the historical financial information, this Report may include statements that constitute “forward-looking statements” under the United States securities laws. Forward-looking statements include information concerning possible or assumed future results of our operations, expenses, earnings, liquidity, cash flows and capital expenditures, industry or market conditions, assets under management, acquisition activities and the effect of completed acquisitions, debt levels and our ability to obtain additional financing or make payments on our debt, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, when used in this Report, the documents

44
Table of Contents                                 

incorporated by reference herein or such other documents or statements, words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “projects,” “forecasts,” and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” and any other statement that necessarily depends on future events, are intended to identify forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in Part II, "Other Information," Item 1A., "Risk Factors."
References
In this Report, unless otherwise specified, the terms “we,” “our,” “us,” “company,” “Invesco,” and “Invesco Ltd.” refer to Invesco Ltd., a company incorporated in Bermuda, and its subsidiaries.
Executive Overview
The following executive overview summarizes the significant trends affecting our results of operations and financial condition for the periods presented. This overview and the remainder of this management’s discussion and analysis supplements, and should be read in conjunction with the Condensed Consolidated Financial Statements of Invesco Ltd. and its subsidiaries and the notes thereto contained elsewhere in this Report.
Invesco is a leading independent global investment manager with offices in more than 20 countries. As of September 30, 2012, we managed $683.0 billion in assets for retail, institutional and high-net-worth investors around the world. By delivering the combined power of our distinctive worldwide investment management capabilities, Invesco provides a comprehensive array of enduring solutions for our clients. We have a significant presence in the institutional and retail segments of the investment management industry in North America, U.K., Europe and Asia-Pacific, serving clients in more than 100 countries.
During the third quarter, global equity markets rebounded from declines experienced in the second quarter largely as a result of actions of central banks in the U.S. and Europe. The Federal Reserve in the U.S announced additional quantitative easing measures, which are unlimited in size and duration. Additionally, the European Central Bank announced a bond buying program of its own targeting the bonds of those nations that request aid from the European Stability Mechanism. The U.S. treasury 10-year bond returns increased 0.9% during the quarter, while the 30-year treasury bond declined by only 0.3%.
The table below summarizes the returns of several major market indices for the three and nine months ended September 30, 2012 and 2011:
Index
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2012
 
2011
 
2012
 
2011
S&P 500
 
5.8
 %
 
(14.3
)%
 
14.6
%
 
(10.0
)%
FTSE 100
 
3.1
 %
 
(13.7
)%
 
3.1
%
 
(13.1
)%
Nikkei 225
 
(1.5
)%
 
(11.4
)%
 
4.9
%
 
(14.9
)%
MSCI Emerging Markets
 
7.0
 %
 
(23.2
)%
 
4.9
%
 
(23.5
)%
A significant portion of our business and AUM is based outside of the U.S. The strengthening or weakening of the U.S. dollar against other currencies, primarily the Pound Sterling, Canadian dollar, Yen and Euro, will impact our reported revenues and expenses from period to period. Additionally, our revenues are directly influenced by the level and composition of our AUM. Therefore, movements in global capital market levels, net new business inflows (or outflows) and changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period.
Over the past six years, we have focused on our multi-year strategy to grow and strengthen our business. Our commitment to investment excellence enables us to deliver strong, long-term investment performance to our clients.  We have worked to enhance the depth and breadth of our investment capabilities and made successful strategic acquisitions that further expanded our capabilities.  We also worked to further enhance the effectiveness of our global operating platform.  The depth, breadth and strength of our business have put us in a position to evolve our capital management priorities, as further discussed in the "Liquidity and Capital Resources" and "Dividends" sections of this Management's Discussion and Analysis.
As it has been in the past, our first priority is to reinvest in our business in ways that enhance our ability to deliver strong investment performance to our clients.  In addition, dividends are now featured more prominently among our priorities, which will provide a more committed level of return to our shareholders.  We will also continue our program of repurchasing shares. Furthermore, as we have said in the past, our goal is to achieve a cash buffer of approximately $1 billion in excess of regulatory requirements. These priorities reflect our confidence in our ability to grow our business organically by meeting client needs and to further strengthen our capital position over time.


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Although acquisitions are no longer a strategic priority, they may present themselves as opportunities that we will consider. In this light, the company entered into a share purchase agreement on September 27, 2012 to acquire 49.0% of Religare Asset Management Limited (“Religare”), a company incorporated in India.  The purchase is subject to regulatory approval.  The company expect closing to take place within 3 to 4 months of the signing date.


Presentation of Management’s Discussion and Analysis of Financial Condition and Results of Operations
The company provides investment management services to, and has transactions with, various private equity, real estate, fund-of-funds, collateralized loan obligation products (CLOs), and other investment entities sponsored by the company for the investment of client assets in the normal course of business. The company serves as the investment manager, making day-to-day investment decisions concerning the assets of the products. Certain of these entities are consolidated under variable interest or voting interest entity consolidation guidance and are referred to as “consolidated investment products.” See Part I, Item 1, Financial Statements — Note 11, “Consolidated Investment Products,” for additional details.
The majority of the company’s consolidated investment products balances are CLO-related. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company’s minimal direct investments in, and management fees generated from, the CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Conversely, if the CLOs were to liquidate, their investors would have no recourse to the general credit of the company. The company therefore does not consider this debt to be a company liability.
The impact of consolidation of investment products is so significant to the presentation of the company’s financial statements (but not to the underlying financial condition or results of operations of the company) that the company has elected to deconsolidate these products in its non-GAAP disclosures. The following discussion therefore combines the results presented under U.S. generally accepted accounting principles (GAAP) with the company’s non-GAAP presentation. There are four distinct sections within this Management’s Discussion and Analysis of Financial Condition and Results of Operations after the Assets Under Management discussion:
•
Results of Operations (for the three and nine months ended September 30, 2012 compared with the three and nine months ended September 30, 2011);
•
Schedule of Non-GAAP Information;
•
Balance Sheet Discussion; and
•
Liquidity and Capital Resources.
Each of the financial statement summary sections (Results of Operations, Balance Sheet Discussion, and Liquidity and Capital Resources) begins with a table illustrating the impact of the consolidation of investment products. The narrative that follows each of these sections separately provides discussion of the underlying financial statement activity for the company, before consolidation of investment products, as well as of the financial statement activity of consolidated investment products. Additionally, wherever a non-GAAP measure is referenced, a disclosure will follow in the narrative or in the note referring the reader to the Schedule of Non-GAAP Information, where additional details regarding the use of the non-GAAP measure by the company are disclosed, along with reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures. To further enhance the readability of the Results of Operations section, separate tables for each of the revenue, expense, and non-operating income/expense sections of the income statement introduce the narrative that follows, providing a section-by-section review of the company’s income statements for the periods presented.

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Summary Operating Information
Summary operating information is presented in the table below:
 
Three months ended September 30,
 
Nine months ended September 30,
$ in millions, other than per share amounts, operating margins, ratios and AUM
2012
 
2011
 
2012
 
2011
U.S. GAAP Financial Measures Summary
 
 
 
 
 
 
 
Operating revenues

$1,041.4

 

$997.8

 

$3,084.1

 

$3,095.1

Operating income

$216.0

 

$227.8

 

$648.7

 

$686.5

Operating margin
20.7
%
 
22.8
%
 
21.0
%
 
22.2
%
Net income attributable to common shareholders

$170.6

 

$166.9

 

$518.4

 

$527.4

Diluted EPS

$0.38

 

$0.36

 

$1.14

 

$1.13

Debt/equity ratio (%)
55.9
%
 
74.4
%
 
55.9
%
 
74.4
%
 
 
 
 
 
 
 
 
Non-GAAP Financial Measures Summary
 
 
 
 
 
 
 
Net revenues(1)

$734.7

 

$706.1

 

$2,183.1

 

$2,181.6

Adjusted operating income(2)

$250.4

 

$255.7

 

$768.6

 

$812.6

Adjusted operating margin(2)
34.1
%
 
36.2
%
 
35.2
%
 
37.2
%
Adjusted net income attributable to common shareholders(3)

$188.4

 

$192.3

 

$574.1

 

$591.1

Adjusted diluted EPS(3)

$0.42

 

$0.42

 

$1.26

 

$1.27

Debt/equity ratio excluding consolidated investment products(%)(4)
15.7
%
 
16.5
%
 
15.7
%
 
16.5
%
 
 
 
 
 
 
 
 
Assets Under Management
 
 
 
 
 
 
 
Ending AUM (billions)

$683.0

 

$598.4

 

$683.0

 

$598.4

Average AUM (billions)

$667.9

 

$632.7

 

$659.1

 

$638.5


(1)
Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of the net revenues of our joint venture investments, plus management and performance fees earned from, less other revenue recorded by, consolidated investment products. See “Schedule of Non-GAAP Information” for the reconciliation of operating revenues to net revenues.
(2)
Adjusted operating margin is adjusted operating income divided by net revenues. Adjusted operating income includes operating income plus our proportional share of the operating income of our joint venture investments, transaction and integration charges, amortization of acquisition-related prepaid compensation and other intangibles, compensation expense related to market valuation changes in deferred compensation plans, the operating income impact of the consolidation of investment products, European infrastructure expenses and other reconciling items. See “Schedule of Non-GAAP Information” for the reconciliation of operating income to adjusted operating income.
(3)
Adjusted net income attributable to common shareholders is net income attributable to common shareholders adjusted to add back transaction and integration charges, amortization of acquisition-related prepaid compensation and other intangibles, and the tax cash flow benefits resulting from tax amortization of goodwill and indefinite-lived intangible assets. Adjusted net income attributable to common shareholders excludes the net income of consolidated investment products, and the net income impact of deferred compensation plans, European infrastructure expenses and other reconciling items. By calculation, adjusted diluted EPS is adjusted net income attributable to common shareholders divided by the weighted average number of diluted shares outstanding. See “Schedule of Non-GAAP Information” for the reconciliation of net income to adjusted net income.
(4)
The debt-to-equity ratio excluding consolidated investment products is a non-GAAP financial measure. See the "Liquidity and Capital Resources" section for a recalculation of this ratio and the "Balance Sheet Discussion" section for a reconciliation of debt and equity balances before and after the consolidation of investment products.

Investment Capabilities Performance Overview
Invesco’s first strategic priority is to achieve strong investment performance over the long-term for our clients. Long-term performance in our equities capabilities, as measured by the percentage of AUM ahead of benchmark and ahead of peer median, is generally strong with certain capabilities demonstrating outstanding performance. Within our equity asset class, U.S. Core, U.S. Value, U.K., and Global Ex-U.S. and Emerging Markets funds have strong long-term performance, with 80% or

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more of assets ahead of benchmarks and peer group medians on a 5- year basis. Our Balanced asset class also reflects solid long-term performance, with 95% and 78% of assets ahead of benchmarks and peers, respectively, on a 5-year basis. Within our fixed income asset class our Global and U.S. fixed income products have achieved strong long-term performance with 79% or more of AUM ahead of peers on a 5- year basis.
 
 
Benchmark Comparison
 
Peer Group Comparison
 
 
% of AUM Ahead of
Benchmark
 
% of AUM In Top Half of
Peer Group
 
 
1yr
 
3yr
 
5yr
 
1yr
 
3yr
 
5yr
Equities
U.S. Core
15
%
 
29
%
 
94
%
 
37
%
 
40
%
 
80
%
 
U.S. Growth
8
%
 
28
%
 
22
%
 
8
%
 
3
%
 
60
%
 
U.S. Value
15
%
 
55
%
 
99
%
 
59
%
 
73
%
 
96
%
 
Sector
60
%
 
59
%
 
66
%
 
22
%
 
36
%
 
48
%
 
U.K.
86
%
 
100
%
 
97
%
 
8
%
 
98
%
 
95
%
 
Canadian
74
%
 
51
%
 
54
%
 
71
%
 
51
%
 
51
%
 
Asian
28
%
 
44
%
 
46
%
 
22
%
 
32
%
 
31
%
 
Continental European
48
%
 
70
%
 
93
%
 
37
%
 
57
%
 
56
%
 
Global
37
%
 
88
%
 
67
%
 
51
%
 
89
%
 
44
%
 
Global Ex U.S. and Emerging Markets
84
%
 
83
%
 
96
%
 
82
%
 
83
%
 
86
%
Other
Alternatives
50
%
 
57
%
 
68
%
 
65
%
 
51
%
 
14
%
 
Balanced
52
%
 
53
%
 
95
%
 
98
%
 
36
%
 
78
%
Money Market
Money Market
63
%
 
35
%
 
75
%
 
96
%
 
96
%
 
94
%
Fixed Income
U.S. Fixed Income
84
%
 
62
%
 
75
%
 
73
%
 
82
%
 
79
%
 
Global Fixed Income
84
%
 
62
%
 
75
%
 
93
%
 
39
%
 
83
%
 
Stable Value
100
%
 
100
%
 
100
%
 
100
%
 
100
%
 
100
%

Note:
AUM measured in the one-, three-, and five-year peer group rankings represents 59%, 58%, and 55% of total Invesco AUM, respectively, and AUM measured versus benchmark on a one-, three-, and five-year basis represents 70%, 69%, and 65% of total Invesco AUM, respectively, as of September 30, 2012. Peer group rankings are sourced from a widely-used third party ranking agency in each fund’s market (Lipper, Morningstar, Russell, Mercer, eVestment Alliance, SITCA) and are asset-weighted in USD. Rankings are as of prior quarter-end for most institutional products and preceding month-end for Australian retail funds due to their late release by third parties. Rankings for the most representative fund in each GIPS composite are applied to all products within each GIPS composite. Excludes passive products, closed-end funds, private equity limited partnerships, non-discretionary direct real estate, unit investment trusts, CLOs, alternative and stable value products. Certain funds and products were excluded from the analysis because of limited benchmark or peer group data. Had these been available, results may have been different. These results are preliminary and subject to revision. Performance assumes the reinvestment of dividends. Past performance is not indicative of future results and may not reflect an investor’s experience.

Assets Under Management movements for the three months ended September 30, 2012 compared with the three months ended September 30, 2011
AUM at September 30, 2012, were $683.0 billion (June 30, 2012: $646.6 billion; September 30, 2011: $598.4 billion). During the three months ended September 30, 2012, long-term net inflows increased AUM by $9.4 billion, while market movements increased AUM by $22.1 billion. AUM decreased $1.7 billion during the three months ended September 30, 212 due to a disposition of AUM related to certain European CLO products. We experienced net inflows in institutional money market funds of $2.3 billion, and increases in AUM of $4.3 billion due to changes in foreign exchange rates during the three months ended September 30, 2012. During the three months ended September 30, 2011, long-term net inflows increased AUM by $3.3 billion, while negative market movements decreased AUM by $52.2 billion. We experienced net outflows in institutional money market funds of $1.1 billion and decreases in AUM of $5.3 billion due to changes in foreign exchange rates during the three months ended September 30, 2011. Average AUM during the three months ended September 30, 2012, were $667.9 billion compared to $632.7 billion for the three months ended September 30, 2011.
The discussion below includes presentation of AUM as Passive and Active. Passive AUM includes ETFs, UITs, non-fee earning leverage, foreign exchange overlays and other passive mandates. Active AUM is total AUM less Passive AUM.
Long-term net inflows during the three months ended September 30, 2012 were $9.4 billion and included net inflows of passive AUM of $5.8 billion. Net long-term flows were split between inflows from our retail distribution channel of $6.3 billion and inflows from our institutional channel of $2.9 billion, which were primarily in the fixed income and balanced asset

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classes. Our balanced asset class experienced net inflows of $3.7 billion, including approximately $4.5 billion in positive flows related to our balanced risk allocation strategies, for which we continue to see strong demand. These inflows were partially offset by outflows of traditional balanced products. The Invesco Balanced Risk Allocation Fund established its three-year track record during the second quarter of 2012, raising its profile in the market. This quarterly period marks the twelfth consecutive quarter of positive flows into the balanced risk allocation strategies.
As discussed in the “Executive Overview” section of this Management’s Discussion and Analysis, during the three months ended September 30, 2012, the S&P 500 Index increased 5.8%, the FTSE increased 3.1%, the MSCI Emerging Markets index increased 7.0%, while the Nikkei 225 was down 1.5%. Of the $22.1 billion increase in AUM resulting from market gains during the three months ended September 30, 2012, $14.8 billion of this increase was due to the change in value of our equity asset class, with balanced, fixed income and alternative asset classes also experiencing gains. Of the $52.2 billion decrease in AUM resulting from market losses during the three months ended September 30, 2011, $42.3 billion of this increase was due to the change in value of our equity asset class.
The impact of the change in foreign exchange rates in the three months ended September 30, 2012, was driven primarily by the strengthening of the Pound Sterling, the Euro, the Canadian Dollar and the Japanese Yen relative to the U.S. Dollar, which was reflected in the translation of our Sterling-based, Euro-based, Canadian Dollar-based and Japanese Yen-based AUM into U.S. Dollars. The impact of the change in foreign exchange rates in the three months ended September 30, 2011, was driven by the weakening of the Pound Sterling, Canadian Dollar, and Euro relative to the U.S. Dollar, partially offset by strengthening of the Japanese Yen relative to the U.S. Dollar.
The table below illustrates the spot foreign exchange rates for translation into the U.S. Dollar, the reporting currency of the company, at September 30, 2012 and 2011, as compared with the rates that existed at June 30, 2012 and 2011:
 
September 30, 2012
 
June 30, 2012
 
September 30, 2011
 
June 30, 2011
Pound Sterling ($ per £)
1.62

 
1.57

 
1.56

 
1.61

Canadian Dollar (CAD per $)
0.98

 
1.02

 
1.04

 
0.96

Japan (¥ per $)
77.80

 
79.82

 
77.09

 
80.66

Euro ($ per €)
1.29

 
1.27

 
1.34

 
1.45


Net revenue yield decreased 0.6 basis points to 44.0 basis points in the three months ended September 30, 2012, from the three months ended September 30, 2011 level of 44.6 basis points. Market driven changes in our asset mix significantly impact our net revenue yield calculation. Our equity AUM generally earn a higher net revenue rate than money market AUM. Strong sales in our passive ETF products have contributed to passive AUM representing 17.3% of total AUM as at September 30, 2012, compared to 14.6% at September 30, 2011. The net revenue yield on passive AUM was approximately 10 basis points compared to approximately 51 basis points from active AUM (before performance fees) during the three months ended September 30, 2012, contributing to the overall yield reduction.
Gross revenue yield on AUM decreased 0.8 basis points to 62.6 basis points in the three months ended September 30, 2012, from the three months ended September 30, 2011, level of 63.4 basis points. Management does not consider gross revenue yield, the most comparable U.S. GAAP-based measure to net revenue yield, to be a meaningful effective fee rate measure. The numerator of the gross revenue yield measure, operating revenues, excludes the management and performance fees earned from consolidated investment products; however the denominator of the measure includes the AUM of these investment products. Therefore, the gross revenue yield measure is not considered representative of the company’s true effective fee rate from AUM. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues (gross revenues) to net revenues.

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Changes in AUM were as follows:
 
2012
 
2011
$ in billions
Total AUM
 
Active
 
Passive
 
Total AUM
 
Active
 
Passive
June 30
646.6

 
539.0

 
107.6

 
653.7

 
561.9

 
91.8

Long-term inflows
42.3

 
26.3

 
16.0

 
45.9

 
27.8

 
18.1

Long-term outflows
(32.9
)
 
(22.7
)
 
(10.2
)
 
(42.6
)
 
(27.2
)
 
(15.4
)
Long-term net flows
9.4

 
3.6

 
5.8

 
3.3

 
0.6

 
2.7

Net flows in institutional money market funds
2.3

 
2.3

 
—

 
(1.1
)
 
(1.1
)
 
—

Market gains and (losses)/reinvestment
22.1

 
17.7

 
4.4

 
(52.2
)
 
(45.2
)
 
(7.0
)
Acquisitions/(dispositions), net
(1.7
)
 
(1.7
)
 
—

 
—

 
—

 
—

Foreign currency translation
4.3

 
4.2

 
0.1

 
(5.3
)
 
(5.2
)
 
(0.1
)
September 30
683.0

 
565.1

 
117.9

 
598.4

 
511.0

 
87.4

Average long-term AUM
599.8

 
486.2

 
113.6

 
564.3

 
472.9

 
91.4

Average institutional money market AUM
68.1

 
68.1

 
—

 
68.4

 
68.4

 
—

Average AUM
667.9

 
554.3

 
113.6

 
632.7

 
541.3

 
91.4

Gross revenue yield on AUM(1)
62.6bps

 
73.6bps

 
9.5bps

 
63.4bps

 
72.4bps

 
10.4bps

Gross revenue yield on AUM before performance fees(1)
62.5bps

 
73.4bps

 
9.5bps

 
63.2bps

 
72.2bps

 
10.4bps

Net revenue yield on AUM(2)
44.0bps

 
51.1bps

 
9.5bps

 
44.6bps

 
50.4bps

 
10.4bps

Net revenue yield on AUM before performance fees(2)
43.8bps

 
50.8bps

 
9.5bps

 
44.5bps

 
50.2bps

 
10.4bps


(1)
Gross revenue yield on AUM is equal to annualized total operating revenues divided by average AUM, excluding joint venture (JV) AUM. Our share of the average AUM in the three months ended September 30, 2012, for our JVs in China was $2.9 billion (three months ended September 30, 2011: $3.3 billion). It is appropriate to exclude the average AUM of our JVs for purposes of computing gross revenue yield on AUM, because the revenues resulting from these AUM are not presented in our operating revenues. Under U.S. GAAP, our share of the pre-tax earnings of the JVs is recorded as equity in earnings of unconsolidated affiliates on our Condensed Consolidated Statements of Income.
(2)
Net revenue yield on AUM is equal to annualized net revenues divided by average AUM. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues.


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Our AUM by channel, by asset class, and by client domicile were as follows:
Total AUM by Channel(1) 
$ in billions
Total
 
Retail
 
Institutional
 
Private Wealth Management
June 30, 2012 AUM
646.6

 
396.7

 
231.0

 
18.9

Long-term inflows
42.3

 
33.2

 
8.1

 
1.0

Long-term outflows
(32.9
)
 
(26.9
)
 
(5.2
)
 
(0.8
)
Long-term net flows
9.4

 
6.3

 
2.9

 
0.2

Net flows in institutional money market funds
2.3

 
—

 
2.3

 
—

Market gains and (losses)/reinvestment
22.1

 
16.9

 
4.7

 
0.5

Acquisitions/dispositions, net
(1.7
)
 
—

 
(1.7
)
 
—

Foreign currency translation
4.3

 
3.5

 
0.8

 
—

September 30, 2012 AUM
683.0

 
423.4

 
240.0

 
19.6

June 30, 2011 AUM
653.7

 
401.7

 
234.5

 
17.5

Long-term inflows
45.9

 
35.6

 
9.5

 
0.8

Long-term outflows
(42.6
)
 
(34.6
)
 
(7.6
)
 
(0.4
)
Long-term net flows
3.3

 
1.0

 
1.9

 
0.4

Net flows in institutional money market funds
(1.1
)
 
—

 
(1.1
)
 
—

Market gains and (losses)/reinvestment
(52.2
)
 
(43.9
)
 
(7.2
)
 
(1.1
)
Foreign currency translation
(5.3
)
 
(4.4
)
 
(0.9
)
 
—

September 30, 2011 AUM
598.4

 
354.4

 
227.2

 
16.8

Passive AUM by Channel(1) 
$ in billions
Total
 
Retail
 
Institutional
 
Private Wealth Management
June 30, 2012 AUM
107.6

 
86.9

 
20.7

 
—

Long-term inflows
16.0

 
13.5

 
2.5

 
—

Long-term outflows
(10.2
)
 
(10.1
)
 
(0.1
)
 
—

Long-term net flows
5.8

 
3.4

 
2.4

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
4.4

 
4.4

 
—

 
—

Foreign currency translation
0.1

 
—

 
0.1

 
—

September 30, 2012 AUM
117.9

 
94.7

 
23.2

 
—

June 30, 2011 AUM
91.8

 
76.7

 
15.1

 
—

Long-term inflows
18.1

 
16.2

 
1.9

 
—

Long-term outflows
(15.4
)
 
(15.2
)
 
(0.2
)
 
—

Long-term net flows
2.7

 
1.0

 
1.7

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
(7.0
)
 
(6.7
)
 
(0.3
)
 
—

Foreign currency translation
(0.1
)
 
—

 
(0.1
)
 
—

September 30, 2011 AUM
87.4

 
71.0

 
16.4

 
—


See accompanying notes to these AUM tables on the following page.

     

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Total AUM by Asset Class(2) 
$ in billions
Total
 
Equity
 
Fixed Income
 
Balanced
 
Money Market
 
Alternatives(3)
June 30, 2012 AUM
646.6

 
283.8

 
155.6

 
51.5

 
71.0

(4) 
84.7

Long-term inflows
42.3

 
19.9

 
11.7

 
5.7

 
0.7

 
4.3

Long-term outflows
(32.9
)
 
(20.7
)
 
(4.5
)
 
(2.0
)
 
(0.9
)
 
(4.8
)
Long-term net flows
9.4

 
(0.8
)
 
7.2

 
3.7

 
(0.2
)
 
(0.5
)
Net flows in institutional money market funds
2.3

 
—

 
—

 
—

 
2.3

 
—

Market gains and (losses)/reinvestment
22.1

 
14.8

 
3.6

 
2.1

 
0.1

 
1.5

Acquisitions/dispositions, net
(1.7
)
 
—

 
—

 
—

 
—

 
(1.7
)
Foreign currency translation
4.3

 
2.8

 
0.6

 
0.6

 
—

 
0.3

September 30, 2012 AUM
683.0

 
300.6

 
167.0

 
57.9

 
73.2

(4) 
84.3

June 30, 2011 AUM
653.7

 
301.9

 
145.8

 
44.5

 
74.4

 
87.1

Long-term inflows
45.9

 
23.8

 
10.3

 
2.8

 
0.9

 
8.1

Long-term outflows
(42.6
)
 
(27.0
)
 
(7.7
)
 
(1.6
)
 
(0.5
)
 
(5.8
)
Long-term net flows
3.3

 
(3.2
)
 
2.6

 
1.2

 
0.4

 
2.3

Net flows in institutional money market funds
(1.1
)
 
—

 
—

 
—

 
(1.1
)
 
—

Market gains and (losses)/reinvestment
(52.2
)
 
(42.3
)
 
(1.2
)
 
(3.1
)
 
—

 
(5.6
)
Foreign currency translation
(5.3
)
 
(3.2
)
 
(0.5
)
 
(1.1
)
 
(0.1
)
 
(0.4
)
September 30, 2011 AUM
598.4

 
253.2

 
146.7

 
41.5

 
73.6

 
83.4

Passive AUM by Asset Class(2) 
$ in billions
Total
 
Equity
 
Fixed Income
 
Balanced
 
Money Market
 
Alternatives(3)
June 30, 2012 AUM
107.6

 
54.6

 
33.9

 
—

 
—

 
19.1

Long-term inflows
16.0

 
10.6

 
3.9

 
—

 
—

 
1.5

Long-term outflows
(10.2
)
 
(9.0
)
 
(0.5
)
 
—

 
—

 
(0.7
)
Long-term net flows
5.8

 
1.6

 
3.4

 
—

 
—

 
0.8

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
4.4

 
3.0

 
0.3

 
—

 
—

 
1.1

Foreign currency translation
0.1

 
—

 
—

 
—

 
—

 
0.1

September 30, 2012 AUM
117.9

 
59.2

 
37.6

 
—

 
—

 
21.1

June 30, 2011 AUM
91.8

 
45.7

 
26.7

 
—

 
—

 
19.4

Long-term inflows
18.1

 
12.6

 
2.9

 
—

 
—

 
2.6

Long-term outflows
(15.4
)
 
(12.6
)
 
(0.6
)
 
—

 
—

 
(2.2
)
Long-term net flows
2.7

 
—

 
2.3

 
—

 
—

 
0.4

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
(7.0
)
 
(6.0
)
 
0.5

 
—

 
—

 
(1.5
)
Foreign currency translation
(0.1
)
 
—

 
—

 
—

 
—

 
(0.1
)
September 30, 2011 AUM
87.4

 
39.7

 
29.5

 
—

 
—

 
18.2


See accompanying notes to these AUM tables on the following page.

   

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Table of Contents                                 

Total AUM by Client Domicile(5) 
$ in billions
Total
 
U.S.
 
Canada
 
U.K.
 
Continental Europe
 
Asia
June 30, 2012 AUM
646.6

 
447.3

 
23.5

 
92.8

 
34.4

 
48.6

Long-term inflows
42.3

 
30.9

 
0.8

 
3.4

 
4.6

 
2.6

Long-term outflows
(32.9
)
 
(20.9
)
 
(1.1
)
 
(3.7
)
 
(3.0
)
 
(4.2
)
Long-term net flows
9.4

 
10.0

 
(0.3
)
 
(0.3
)
 
1.6

 
(1.6
)
Net flows in institutional money market funds
2.3

 
2.4

 
0.1

 
(0.1
)
 
(0.1
)
 
—

Market gains and (losses)/reinvestment
22.1

 
14.8

 
0.8

 
4.5

 
1.3

 
0.7

Acquisitions/dispositions, net
(1.7
)
 
—

 
—

 
—

 
(1.7
)
 
—

Foreign currency translation
4.3

 
—

 
0.9

 
2.7

 
0.1

 
0.6

September 30, 2012 AUM
683.0

 
474.5

 
25.0

 
99.6

 
35.6

 
48.3

June 30, 2011 AUM
653.7

 
439.9

 
27.5

 
97.1

 
37.9

 
51.3

Long-term inflows
45.9

 
31.9

 
0.6

 
3.5

 
4.3

 
5.6

Long-term outflows
(42.6
)
 
(28.5
)
 
(1.2
)
 
(3.3
)
 
(5.5
)
 
(4.1
)
Long-term net flows
3.3

 
3.4

 
(0.6
)
 
0.2

 
(1.2
)
 
1.5

Net flows in institutional money market funds
(1.1
)
 
(0.9
)
 
—

 
—

 
(0.2
)
 
—

Market gains and (losses)/reinvestment
(52.2
)
 
(31.4
)
 
(2.1
)
 
(8.1
)
 
(3.5
)
 
(7.1
)
Foreign currency translation
(5.3
)
 
—

 
(2.0
)
 
(2.5
)
 
(1.1
)
 
0.3

September 30, 2011 AUM
598.4

 
411.0

 
22.8

 
86.7

 
31.9

 
46.0

Passive AUM by Client Domicile(5) 
$ in billions
Total
 
U.S.
 
Canada
 
U.K.
 
Continental Europe
 
Asia
June 30, 2012 AUM
107.6

 
100.7

 
—

 
—

 
1.4

 
5.5

Long-term inflows
16.0

 
15.7

 
—

 
—

 
—

 
0.3

Long-term outflows
(10.2
)
 
(9.9
)
 
—

 
—

 
(0.2
)
 
(0.1
)
Long-term net flows
5.8

 
5.8

 
—

 
—

 
(0.2
)
 
0.2

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
4.4

 
4.3

 
—

 
—

 
0.1

 
—

Foreign currency translation
0.1

 
—

 
—

 
—

 
—

 
0.1

September 30, 2012 AUM
117.9

 
110.8

 
—

 
—

 
1.3

 
5.8

June 30, 2011 AUM
91.8

 
88.0

 
—

 
—

 
1.4

 
2.4

Long-term inflows
18.1

 
18.0

 
—

 
—

 
0.1

 
—

Long-term outflows
(15.4
)
 
(15.3
)
 
—

 
—

 
(0.1
)
 
—

Long-term net flows
2.7

 
2.7

 
—

 
—

 
—

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
(7.0
)
 
(6.6
)
 
—

 
—

 
(0.2
)
 
(0.2
)
Foreign currency translation
0.1

 
—

 
—

 
—

 
—

 
(0.1
)
September 30, 2011 AUM
87.6

 
84.1

 
—

 
—

 
1.2

 
2.1


(1)
Channel refers to the distribution channel from which the AUM originated. Retail AUM arose from client investments into funds available to the public with shares or units. Institutional AUM originated from individual corporate clients, endowments, foundations, government authorities, universities, or charities. Private Wealth Management AUM arose from high net worth client investments.

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Table of Contents                                 

(2)
Asset classes are descriptive groupings of AUM by common type of underlying investments.
(3)
The alternatives asset class includes absolute return, real estate, commodities, currencies, financial structures, Global Macro, REITS, private capital, and Risk Premia Capture.
(4)
Ending Money Market AUM includes $69.3 billion in institutional money market AUM and $3.9 billion in retail money market AUM.
(5)
Client domicile disclosure groups AUM by the domicile of the underlying clients.


Results of Operations for the three months ended September 30, 2012 compared with the three months ended September 30, 2011
Adoption of Guidance now encompassed in Accounting Standards Codification (ASC) Topic 810, “Consolidation”
The company provides investment management services to, and has transactions with, various private equity, real estate, fund-of-funds, collateralized loan obligation products (CLOs), and other investment entities sponsored by the company for the investment of client assets in the normal course of business. The company serves as the investment manager, making day-to-day investment decisions concerning the assets of the products. Certain of these entities are consolidated under variable interest or voting interest entity consolidation guidance. See Part I, Item 1, Financial Statements — Note 11, “Consolidated Investment Products,” for additional details.
The majority of the company’s consolidated investment products balances were CLO-related as of September 30, 2012. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company’s minimal direct investments in, and management fees generated from, the CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Conversely, if the CLOs were to liquidate, their investors would have no recourse to the general credit of the company. The company therefore does not consider this debt to be a company liability. The discussion that follows will separate consolidated investment product results of operations from the company’s investment management operations through the use of non-GAAP financial measures. See “Schedule of Non-GAAP Information” for additional details and reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures.
Summary of Income Statement Impact of Consolidated Investment Products
$ in millions
 
 Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
Three months ended September 30, 2012
 
 
 
 
Total operating revenues
 
(11.5
)
 
1,041.4

Total operating expenses
 
2.3

 
825.4

Operating income
 
(13.8
)
 
216.0

Equity in earnings of unconsolidated affiliates
 
(0.5
)
 
5.2

Interest and dividend income
 
65.3

 
71.2

Other investment income/(losses)
 
(33.9
)
 
(6.8
)
Interest expense
 
(41.9
)
 
(54.5
)
Income before income taxes
 
(24.8
)
 
231.1

Income tax provision
 
—

 
(74.2
)
Net income
 
(24.8
)
 
156.9

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
 
13.7

 
13.7

Net income attributable to common shareholders
 
(11.1
)
 
170.6






54
Table of Contents                                 

$ in millions
 
Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
Three months ended September 30, 2011
 
 
 
 
Total operating revenues
 
(12.3
)
 
997.8

Total operating expenses
 
2.9

 
770.0

Operating income
 
(15.2
)
 
227.8

Equity in earnings of unconsolidated affiliates
 
(0.1
)
 
8.1

Interest and dividend income
 
77.1

 
83.4

Other investment income/(losses)
 
(93.1
)
 
(112.8
)
Interest expense
 
(48.7
)
 
(64.0
)
Income before income taxes
 
(80.0
)
 
142.5

Income tax provision
 
—

 
(59.1
)
Net income
 
(80.0
)
 
83.4

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
 
83.5

 
83.5

Net income attributable to common shareholders
 
3.5

 
166.9

Operating Revenues and Net Revenues
The main categories of revenues, and the dollar and percentage change between the periods, were as follows:
 
Three months ended September 30,
 
 
 
 
$ in millions
2012
 
2011
 
$ Change
 
% Change
Investment management fees
818.0

 
779.5

 
38.5

 
4.9
 %
Service and distribution fees
196.1

 
189.1

 
7.0

 
3.7
 %
Performance fees
3.0

 
2.6

 
0.4

 
15.4
 %
Other
24.3

 
26.6

 
(2.3
)
 
(8.6
)%
Total operating revenues
1,041.4

 
997.8

 
43.6

 
4.4
 %
Third-party distribution, service and advisory expenses
(327.2
)
 
(314.4
)
 
(12.8
)
 
4.1
 %
Proportional share of revenues, net of third-party distribution expenses, from joint venture investments
9.0

 
10.4

 
(1.4
)
 
(13.5
)%
Management fees earned from consolidated investment products
11.1

 
11.9

 
(0.8
)
 
(6.7
)%
Performance fees earned from consolidated investment products
0.4

 
0.4

 
—

 
—
 %
Net revenues
734.7

 
706.1

 
28.6

 
4.1
 %

Operating revenues increased by $43.6 million (4.4%) in the three months ended September 30, 2012 to $1,041.4 million (three months ended September 30, 2011: $997.8 million). Net revenues increased by $28.6 million (4.1%) in the three months ended September 30, 2012 to $734.7 million (three months ended September 30, 2011: $706.1 million). Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of net revenues from joint venture arrangements, plus management and performance fees earned from, less other revenues recorded by, consolidated investment products. See “Schedule of Non-GAAP Information” for additional important disclosures regarding the use of net revenues.

A significant portion of our business and managed AUM are based outside of the U.S. The income statements of foreign currency subsidiaries are translated into U.S. dollars, the reporting currency of the company, using average foreign exchange rates. Foreign exchange rate movements offset the increase in operating revenues by $5.3 million during the three months September 30, 2012 when compared to the three months ended September 30, 2011. Additionally, our revenues are directly influenced by the level and composition of our AUM as more fully discussed above. Movements in global capital market levels, net new business inflows (or outflows) and changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period.

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Table of Contents                                 

Investment management fees
Investment management fees increased by $38.5 million (4.9%) in the three months ended September 30, 2012 to $818.0 million (three months ended September 30, 2011: $779.5 million) due primarily to increases in mutual fund fees, institutional fees and collective fees. Foreign exchange rate movements offset the increase in investment management fees by $4.6 million during the three months ended September 30, 2012, compared to the three months ended September 30, 2011. As discussed above, the net revenue yield is lower in the current period due to changes in the composition of our AUM. The weighting of AUM flows into passive products has lowered the net revenue yield, despite the average AUM increasing. This is partly offset by the lapse of fee waiver agreements related to U.S. mutual fund mergers that commenced in June 2011. Some of these fee waivers lapsed in mid-2012 and, as a result, revenue increased in the three months ended September 30, 2012, compared to the three months ended September 30, 2011.
See the company’s disclosures regarding the changes in AUM during the three months ended September 30, 2012 in the “Assets Under Management” section above for additional information regarding the movements in AUM. Investment management fees were also impacted by foreign exchange rate movement in AUM.
Service and distribution fees
In the three months ended September 30, 2012, service and distribution fees increased by $7.0 million (3.7%) to $196.1 million, (three months ended September 30, 2011: $189.1 million) due to increases in distribution and redemption fees of $4.4 million, transfer agent fees of $2.1 million, and administration fees of $0.8 million. The impact of foreign exchange rate movements offset increase the in service and distribution fees by $0.3 million during the three months ended September 30, 2012 compared to the three months ended September 30, 2011.
Performance fees
Of our $683.0 billion in AUM at September 30, 2012, approximately $48.9 billion, or 7.2%, have the potential to earn performance fees. In the three months ended September 30, 2012 recognized performance fees were $3.0 million, an increase of $0.4 million from the comparative period (three months ended September 30, 2011: $2.6 million). The performance fees generated in the three months ended September 30, 2012 arose primarily from products managed by the UK group and the Asia Pacific group. The performance fees generated in the three months ended September 30, 2011 arose primarily due to products managed by the UK group and the real estate group.
Other revenues
In the three months ended September 30, 2012, other revenues decreased by $2.3 million (8.6%) to $24.3 million (three months ended September 30, 2011: $26.6 million). The decrease in other revenues was driven by a decrease in transaction commissions of $1.9 million, UIT revenues of $1.3 million, and acquisition and disposition fees of $0.7 million. These decreases were offset by increases in mutual fund front end fees of $1.3 million and other revenues of $0.4 million during the period. The impact of foreign exchange rate movements offset the increase in other revenues by $0.1 million during the three months ended September 30, 2012, compared to the three months ended September 30, 2011.
Third-party distribution, service and advisory expenses
Third-party distribution, service and advisory expenses increased by $12.8 million (4.1%) in the three months ended September 30, 2012 to $327.2 million (three months ended September 30, 2011: $314.4 million). The increase in third-party distribution, service and advisory expenses is closely linked to the increase in service and distribution fees and investment management fees over this period. The increased expenses include increases in distribution fees of $12.2 million and administration fees of $0.6 million.
Proportional share of revenues, net of third-party distribution expenses, from joint venture investments
Management believes that the addition of our proportional share of revenues, net of third-party distribution expenses, from joint venture arrangements should be added to operating revenues to arrive at net revenues, as it is important to evaluate the contribution to the business that our joint venture arrangements are making. See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net revenues.
Our proportional share of revenues, net of third-party distribution expenses decreased by $1.4 million (13.5%) to $9.0 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $10.4 million). Our share of the Invesco Great Wall joint venture’s average AUM in the three months ended September 30, 2012 was $2.9 billion (three months ended September 30, 2011: $3.3 billion).
Management and performance fees earned from consolidated investment products
Management believes that the consolidation of investment products may impact a reader’s analysis of our underlying results of operations and could result in investor confusion or the production of information about the company by analysts or external

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Table of Contents                                 

credit rating agencies that is not reflective of the underlying results of operations and financial condition of the company. Accordingly, management believes that it is appropriate to adjust operating revenues for the impact of consolidated investment products in calculating net revenues. As management and performance fees earned by Invesco from the consolidated products are eliminated upon consolidation of the investment products, management believes that it is appropriate to add these operating revenues back in the calculation of net revenues. Such fees were $11.5 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $12.3 million). See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net revenues.
Operating Expenses
The main categories of operating expenses, and the dollar and percentage changes between periods, are as follows:
 
Three months ended September 30,
 
 
 
 
$ in millions
2012
 
2011
 
$ Change
 
% Change
Employee compensation
330.9

 
305.5

 
25.4

 
8.3
 %
Third-party distribution, service and advisory
327.2

 
314.4

 
12.8

 
4.1
 %
Marketing
26.4

 
13.1

 
13.3

 
101.5
 %
Property, office and technology
69.1

 
62.7

 
6.4

 
10.2
 %
General and administrative
68.8

 
69.6

 
(0.8
)
 
(1.1
)%
Transaction and integration
3.0

 
4.7

 
(1.7
)
 
(36.2
)%
Total operating expenses
825.4

 
770.0

 
55.4

 
7.2
 %

The table below sets forth these cost categories as a percentage of total operating expenses and operating revenues, which we believe provides useful information as to the relative significance of each type of expense:
 
 
 
% of Total
 
% of
 
 
 
% of Total
 
% of
Three months ended:
September 30,
 
Operating
 
Operating
 
September 30,
 
Operating
 
Operating
$ in millions
2012
 
Expenses
 
Revenues
 
2011
 
Expenses
 
Revenues
Employee compensation
330.9

 
40.1
%
 
31.8
%
 
305.5

 
39.7
%
 
30.6
%
Third-party distribution, service and advisory
327.2

 
39.6
%
 
31.4
%
 
314.4

 
40.8
%
 
31.5
%
Marketing
26.4

 
3.2
%
 
2.5
%
 
13.1

 
1.7
%
 
1.3
%
Property, office and technology
69.1

 
8.4
%
 
6.6
%
 
62.7

 
8.1
%
 
6.3
%
General and administrative
68.8

 
8.3
%
 
6.6
%
 
69.6

 
9.0
%
 
7.0
%
Transaction and integration
3.0

 
0.4
%
 
0.4
%
 
4.7

 
0.7
%
 
0.5
%
Total operating expenses
825.4

 
100.0
%
 
79.3
%
 
770.0

 
100.0
%
 
77.2
%

During the three months ended September 30, 2012, operating expenses increased by $55.4 million (7.2%) to $825.4 million (three months ended September 30, 2011 $770.0 million). The impact of foreign exchange rate movements offset increase the in operating expenses by $6.4 million during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.
Employee Compensation
Employee compensation increased $25.4 million (8.3%) to $330.9 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $305.5 million). The increase in employee compensation is primarily due to increases in base salaries and variable compensation of $20.7 million during the three months ended September 30, 2012 from the three months ended September 30, 2011. Additionally, included in compensation expenses are share-based compensation costs, which increased $7.7 million during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase in share-based compensation costs during the period reflects a previous change in our vesting service period from three to four years, which results in 2012 being the first year with four award tranches being expensed, as compared to three award tranches in previous years. The impact of foreign exchange rate movements offset the increase in employee compensation expense by $3.0 million during the three months ended September 30, 2012 compared to the three months ended September 30, 2011.
Headcount at September 30, 2012 was 6,101 (September 30, 2011: 6,192).

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Table of Contents                                 

Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses are discussed above in the operating and net revenues section.
Marketing
Marketing expenses increased by $13.3 million (101.5%) in the three months ended September 30, 2012 to $26.4 million (three months ended September 30, 2011: $13.1 million). The increase during the three months ended September 30, 2012 is primarily driven by increases in corporate sponsorship expenses of $10.6 million, driven by the termination in the comparative period of the company's sponsorship and naming rights commitments related to a sports stadium in Denver, Colorado, which resulted in a marketing expense reduction of $10.4 million recognized in that period, and reduced advertising expenses of $2.9 million, as compared to the three months ended September 30, 2011. The impact of foreign exchange rate movements offset the increase in marketing expense by $0.3 million during the three months ended September 30, 2012 compared to the three months ended September 30, 2011.
Property, Office and Technology
Property, office and technology expenses increased by $6.4 million (10.2%) to $69.1 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $62.7 million). Property and office expenses increased $1.7 million over the comparable 2011 period, due primarily to an increase of $1.4 million in depreciation and improvements. Technology and communications expenses increased $5.5 million compared to the three months ended September 30, 2011, primarily due increases in technology expenses associated with continued investment in fixed income trading, portfolio management and risk reporting systems, together with increased outsourced administration expenses. The impact of foreign exchange rate movements offset the increase in property, office and technology expenses by $0.8 million during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.
General and Administrative
General and administrative expenses decreased by $0.8 million (1.1%) to $68.8 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $69.6 million). The impact of foreign exchange rate movements decreased general and administrative expenses by $0.8 million during the three months ended September 30, 2012.
Transaction and integration
Transaction and integration charges were $3.0 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $4.7 million) and relate to the business acquired in 2010. Transaction and integration expenses during the three months ended September 30, 2012 relate to the final round of open-ended fund mergers and include professional services and shareholder communications costs. Transaction and integration expenses for the three months ended September 30, 2011 included $2.2 million of professional services and other costs, principally legal, proxy solicitation, consultancy, mutual fund and insurance, $1.8 million of property and office costs, $0.4 million of employee compensation costs, $0.2 million of marketing and client services and $0.1 million of technology and communication.
Operating Income, Adjusted Operating Income, Operating Margin and Adjusted Operating Margin
Operating income decreased by $11.8 million (5.2%) to $216.0 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $227.8 million). Operating margin (operating income divided by operating revenues), decreased from 22.8% in the three months ended September 30, 2011 to 20.7% in the three months ended September 30, 2012. The decrease in operating income and margin resulted from a lower relative increase in operating revenues (4.4%) than in operating expenses (7.2%). Adjusted operating income decreased by $5.3 million (2.1%) to $250.4 million in the three months ended September 30, 2012 from $255.7 million in the three months ended September 30, 2011. Adjusted operating margin decreased to 34.1% in the three months ended September 30, 2012 from 36.2% in the three months ended September 30, 2011. See “Schedule of Non-GAAP Information” for definitions of these measures and a reconciliation of operating revenues to net revenues, a reconciliation of operating income to adjusted operating income and additional important disclosures regarding net revenues, adjusted operating income and adjusted operating margin.








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Other Income and Expenses
The main categories of other income and expenses, and the dollar and percentage changes between periods are as follows:
 
Three months ended September 30,
 
 
 
 
$ in millions
2012
 
2011
 
$ Change
 
% Change
Equity in earnings of unconsolidated affiliates
5.2

 
8.1

 
(2.9
)
 
(35.8
)%
Interest and dividend income
2.5

 
3.8

 
(1.3
)
 
(34.2
)%
Interest income of consolidated investment products
68.7

 
79.6

 
(10.9
)
 
(13.7
)%
Other gains/(losses) of consolidated investment products, net
(25.2
)
 
(93.1
)
 
67.9

 
N/A

Interest expense
(12.6
)
 
(15.3
)
 
2.7

 
(17.6
)%
Interest expense of consolidated investment products
(41.9
)
 
(48.7
)
 
6.8

 
(14.0
)%
Other gains and losses, net
18.4

 
(19.7
)
 
38.1

 
N/A

Total other income and expenses
15.1

 
(85.3
)
 
100.4

 
N/A


Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates decreased by $2.9 million (35.8%) to $5.2 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $8.1 million). The decrease in equity in earnings is impacted by a decrease of $1.8 million in our share of the market-driven valuation changes in the underlying holdings of certain partnership investments, including our investment in Invesco Mortgage Capital Inc., and a net decrease of $1.1 million in the joint venture investments in China from the comparative period.
Interest and dividend income and interest expense
Interest and dividend income decreased by $1.3 million (34.2%) to $2.5 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $3.8 million). The decrease in interest and dividend income for the three months ended September 30, 2012 is driven by a decrease of $1.0 million in dividend income on investments held to hedge economically deferred compensation plans.
Interest expense decreased by $2.7 million (17.6%) to $12.6 million in the three months ended September 30, 2012 (three months ended September 30, 2011: $15.3 million) due to a combination of lower average debt balances and lower borrowing costs versus the comparative period.
Other gains and losses, net
Other gains and losses, net were a net gain of $18.4 million in the three months ended September 30, 2012 as compared to a net loss of $19.7 million in the three months ended September 30, 2011. Included in other gains and losses for the third quarter of 2012 is a net gain of $9.7 million resulting from the appreciation of investments held for our deferred compensation plans (three months ended September 30, 2011: $20.0 million net loss), a net gain on the sale of CLO management contracts of $8.3 million, and net gains from seed and other investments of $1.3 million (three months ended September 30, 2011: $0.9 million net realized gains). These gains are offset by a net loss of $1.4 million related to the mark-to-market of 12-month foreign exchange put option contracts intended to provide protection against the impact of a significant decline in the pound sterling/U.S dollar foreign exchange rate. In the three months ended September 30, 2012, we incurred $0.5 million in net foreign exchange gains on inter-group loans (three months ended September 30, 2011: $0.7 million in net foreign exchange losses).
Non-operating income and expense of consolidated investment products
In the three months ended September 30, 2012, interest income of consolidated investment products decreased by $10.9 million (13.7%) to $68.7 million (three months ended September 30, 2011: $79.6 million) primarily due the impact of deconsolidated CLOs and the impact of certain CLOs entering their amortization period. Interest expense of consolidated investment products decreased by $6.8 million (14.0%) to $41.9 million (three months ended September 30, 2011: $48.7 million) primarily due to the impact of deconsolidated CLOs.
Included in other gains/(losses) of consolidated investment products, net, are realized and unrealized gains and losses on the underlying investments and debt of consolidated investment products. In the three months ended September 30, 2012, other gains/(losses) of consolidated investment products were a net loss of $25.2 million, as compared to a net loss of $93.1 million in the three months ended September 30, 2011. The net loss in the 2012 period is primarily due to losses associated with the increase in market value of the long-term debt of CLOs exceeding gains associated with private equity and CLO investments.

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The net loss in the 2011 period is primarily due to the loss in the market value of the investments of consolidated investment products exceeding the gain in the market value of the long term debt of the consolidated investment products.
Net impact of consolidated investment products and related noncontrolling interests in noncontrolling entities
As illustrated in the Summary of Income Statement Impact of Consolidated Investment Products for the three months ended September 30, 2012 and 2011 at the beginning of this Results of Operations section, the consolidation of investment products during the three months ended September 30, 2012 resulted in an decrease to net income of $24.8 million before attribution to noncontrolling interests (three months ended September 30, 2011: $80.0 million decrease to net income). Invesco invests in only a portion of these products, and as a result this net loss is offset by noncontrolling interests of $13.7 million (three months ended September 30, 2011: $83.5 million), resulting in a net decrease in net income of the company of $11.1 million (three months ended September 30, 2011: $3.5 million net increase).
Consolidated investment products are taxed at the investor level and not at the product entity level; therefore, there is no tax provision reflected in the net impact of consolidated investment products.
Noncontrolling interests in consolidated entities represent the profit or loss amounts attributed to third party investors in consolidated investment products. Movements in amounts attributable to noncontrolling interests in consolidated entities on the company’s Consolidated Statements of Income generally offset the gains and losses, interest income and interest expense of consolidated investment products.
Additionally, consolidated investment products represent approximately 1% of the company's AUM. Therefore, the net gains or losses of consolidated investment products is not indicative of the performance of the company's aggregate assets under management.
Income Tax Expense
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., the U.K., and Canada.
UK Finance Act 2012 proposed to reduce the U.K. statutory corporate tax rate to 24% effective April 1, 2012 and 23% effective April 1, 2013. The Act received Royal Assent on July 17, 2012, and therefore was enacted for U.S. GAAP purposes during the third quarter. The rate reduction did not have a material impact on our effective tax rate in the quarter. The 2012 U.K. Budget proposes to further reduce the rate to 22% beginning April 1, 2014. As of September 30, 2012, the Canadian federal and provincial statutory tax rate was 26.5%. The U.S. federal statutory tax rate was 35%.
Our effective tax rate, for the three months ended September 30, 2012, was 32.1%, down from 41.5% for the three months ended September 30, 2011. The inclusion of losses from non-controlling interests in consolidated entities increased our effective tax rate by 1.8% in 2012 and 15.3% in 2011. The three months ended September 30, 2012 rate reflects an unfavorable impact from the gain on sale of CLO management contracts in the quarter. The three month ended September 30, 2011 rate reflects a favorable impact from the release of a provision for uncertain tax positions as a result of the statute of limitation closing in the quarter.

Assets Under Management movements for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011

AUM at September 30, 2012 were $683.0 billion (September 30, 2011: $598.4 billion). During the nine months ended September 30, 2012, long-term net inflows increased AUM by $11.5 billion, while positive market movements increased AUM by $43.9 billion. AUM decreased $1.7 billion during the nine months ended September 30, 212 due to a disposition of AUM related to certain European CLO products. We experienced no change in AUM related to net flows in institutional money market funds, and increases in AUM of $4.0 billion due to changes in foreign exchange rates during the nine months ended September 30, 2012. During the nine months ended September 30, 2011, long-term net inflows increased AUM by $13.6 billion, while negative market movements decreased AUM by $36.1 billion. We experienced net inflows in institutional money market funds of $5.0 billion and decreases in AUM of $0.6 billion due to changes in foreign exchange rates during the nine months ended September 30, 2011. Average AUM during the nine months ended September 30, 2012 were $659.1 billion compared to $638.5 billion for the nine months ended September 30, 2011.
The discussion below includes presentation of AUM as Passive and Active. Passive AUM includes ETFs, UITs, non-fee earning leverage, foreign exchange overlays and other passive mandates. Active AUM is total AUM less Passive AUM.
Long-term net inflows during the nine months ended September 30, 2012 were $11.5 billion and included net inflows of Passive AUM of $12.0 billion, offset by outflows of Active AUM of $0.5 billion. Net long-term flows were driven by net

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inflows into our retail and high net worth distribution channels of $10.8 billion and $1.0 billion, respectively, while our institutional distribution channel experienced net outflows of $0.3 billion. On an asset class basis, the inflows were in the balanced and fixed income asset classes, offset by outflows primarily in equities and alternatives. Our balanced asset class experienced net inflows of $9.1 billion, including approximately $10.9 billion in positive flows related to our balanced risk allocation strategies, for which we continue to see strong demand, which was partially offset by outflows from traditional balanced products. The Invesco Balanced Risk Allocation Fund established its three-year track record during the nine months ended September 30, 2012, raising its profile in the market. The three months ended September 30, 2012 marks the twelfth consecutive quarter of positive flows into the balanced risk allocation strategies.
Net flows in the nine months ended September 30, 2011 included net inflows into our Retail and Institutional distribution channels of $7.9 billion and $5.0 billion, respectively.
As discussed in the “Executive Overview” section of this Management's Discussion and Analysis, the S&P 500, the FTSE 100, the Nikkei 225 and the MSCI Emerging Markets index increased 14.6%, 3.1%, 4.9% and 4.9%, respectively during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, our equity AUM increased in line with equity markets globally. Of the $43.9 billion increase in AUM resulting from market gains during the nine months ended September 30, 2012, $30.4 billion of this increase was due to the change in value of our equity asset class. Our other asset classes were also impacted positively by the change in market valuations during the period. Of the $36.1 billion decrease in AUM resulting from market movements during the nine months ended September 30, 2011, $31.8 billion of this decrease was due to the change in value of our equity asset class.
The impact of the change in foreign exchange rates in the nine months ended September 30, 2012 was driven primarily by the strengthening of the Pound Sterling and Canadian Dollar relative to the U.S. Dollar, which was reflected in the translation of our Sterling-based and Canadian Dollar-based AUM into U.S. Dollars,offset by the weakening of the Euro and the Japanese Yen relative to the U.S. Dollar, which was reflected in the translation of our Euro-based and Yen-based AUM into U.S. Dollars. The impact of the change in foreign exchange rates in the nine months ended September 30, 2011 was driven by the weakening of the U.S. Dollar relative to the the Pound Sterling, the Euro, the Canadian Dollar and the Japanese Yen.
The table below illustrates the spot foreign exchange rates for translation into the U.S. Dollar, the reporting currency of the company, at September 30, 2012 and 2011, as compared with the rates that existed at December 31, 2011 and 2010:
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
 
December 31, 2010
Pound Sterling ($ per £)
1.62

 
1.56

 
1.56

 
1.56

Canadian Dollar (CAD per $)
0.98

 
1.02

 
1.04

 
0.99

Japan (¥ per $)
77.80

 
76.95

 
77.09

 
81.08

Euro ($ per €)
1.29

 
1.30

 
1.34

 
1.34


Net revenue yield decreased to 44.2 basis points in the nine months ended September 30, 2012 from the nine months ended September 30, 2011 level of 45.6 basis points. Market driven changes in our asset mix significantly impact our net revenue yield calculation. Strong sales in our passive ETF products have contributed to passive AUM representing 17.3% of total AUM as at September 30, 2012, compared to 14.6% at September 30, 2011. The net revenue yield on passive AUM was approximately 9 basis points compared to approximately 51 basis points from active AUM (before performance fees) during the nine months ended September 30, 2012, contributing to the overall yield reduction.
Gross revenue yield on AUM decreased 2.3 basis points to 62.7 basis points in the nine months ended September 30, 2012 from the nine months ended September 30, 2011 level of 65.0 basis points. Management does not consider gross revenue yield, the most comparable U.S. GAAP-based measure to net revenue yield, to be a meaningful effective fee rate measure. The numerator of the gross revenue yield measure, operating revenues, excludes the management and performance fees earned from consolidated investment products; however the denominator of the measure includes the AUM of these investment products. Therefore, the gross revenue yield measure is not considered representative of the company's true effective fee rate from AUM. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues (gross revenues) to net revenues.

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Changes in AUM were as follows:
 
2012
 
2011
$ in billions
Total AUM
 
Active
 
Passive
 
Total AUM
 
Active
 
Passive
January 1
625.3

 
529.0

 
96.3

 
616.5

 
535.7

 
80.8

Long-term inflows
122.3

 
77.5

 
44.8

 
136.5

 
84.7

 
51.8

Long-term outflows
(110.8
)
 
(78.0
)
 
(32.8
)
 
(122.9
)
 
(82.8
)
 
(40.1
)
Long-term net flows
11.5

 
(0.5
)
 
12.0

 
13.6

 
1.9

 
11.7

Net flows in institutional money market funds
—

 
—

 
—

 
5.0

 
5.0

 
—

Market gains and (losses)/reinvestment
43.9

 
34.3

 
9.6

 
(36.1
)
 
(31.0
)
 
(5.1
)
Acquisitions/dispositions, net
(1.7
)
 
(1.7
)
 
—

 
—

 
—

 
—

Foreign currency translation
4.0

 
4.0

 
—

 
(0.6
)
 
(0.6
)
 
—

September 30
683.0

 
565.1

 
117.9

 
598.4

 
511.0

 
87.4

Average long-term AUM
590.3

 
481.2

 
109.1

 
570.6

 
480.1

 
90.5

Average institutional money market AUM
68.8

 
68.8

 
—

 
67.9

 
67.9

 
—

Average AUM
659.1

 
550.0

 
109.1

 
638.5

 
548.0

 
90.5

Gross revenue yield on AUM(1)
62.7bps

 
73.4bps

 
9.1bps

 
65.0bps

 
74.0bps

 
10.9bps

Gross revenue yield on AUM before performance fees(1)
61.9bps

 
72.4bps

 
9.1bps

 
64.7bps

 
73.6bps

 
10.9bps

Net revenue yield on AUM(2)
44.2bps

 
51.1bps

 
9.1bps

 
45.6bps

 
51.3bps

 
10.9bps

Net revenue yield on AUM before performance fees(2)
43.4bps

 
50.2bps

 
9.1bps

 
45.3bps

 
50.9bps

 
10.9bps


(1)
Gross revenue yield on AUM is equal to annualized total operating revenues divided by average AUM, excluding joint venture (JV) AUM. Our share of the average AUM in the nine months ended September 30, 2012 for our JVs in China was $3.0 billion (nine months ended September 30, 2011: $3.4 billion). It is appropriate to exclude the average AUM of our JVs for purposes of computing gross revenue yield on AUM, because the revenues resulting from these AUM are not presented in our operating revenues. Under U.S. GAAP, our share of the pre-tax earnings of the JVs is recorded as equity in earnings of unconsolidated affiliates on our Condensed Consolidated Statements of Income.
(2)
Net revenue yield on AUM is equal to annualized net revenues divided by average AUM. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues.




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Our AUM by channel, by asset class, and by client domicile were as follows:
Total AUM by Channel(1) 
$ in billions
Total
 
Retail
 
Institutional
 
Private Wealth Management
January 1, 2012 AUM
625.3

 
373.9

 
233.5

 
17.9

Long-term inflows
122.3

 
98.9

 
20.5

 
2.9

Long-term outflows
(110.8
)
 
(88.1
)
 
(20.8
)
 
(1.9
)
Long-term net flows
11.5

 
10.8

 
(0.3
)
 
1.0

Net flows in institutional money market funds
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
43.9

 
34.7

 
8.5

 
0.7

Acquisitions/dispositions, net
(1.7
)
 
—

 
(1.7
)
 
—

Foreign currency translation
4.0

 
4.0

 
—

 
—

September 30, 2012 AUM
683.0

 
423.4

 
240.0

 
19.6

January 1, 2011 AUM
616.5

 
378.1

 
221.4

 
17.0

Long-term inflows
136.5

 
105.2

 
28.8

 
2.5

Long-term outflows
(122.9
)
 
(97.3
)
 
(23.8
)
 
(1.8
)
Long-term net flows
13.6

 
7.9

 
5.0

 
0.7

Net flows in institutional money market funds
5.0

 
—

 
5.0

 
—

Market gains and (losses)/reinvestment
(36.1
)
 
(30.4
)
 
(4.8
)
 
(0.9
)
Foreign currency translation
(0.6
)
 
(1.2
)
 
0.6

 
—

September 30, 2011 AUM
598.4

 
354.4

 
227.2

 
16.8


Passive AUM by Channel(1) 
$ in billions
Total
 
Retail
 
Institutional
 
Private Wealth Management
January 1, 2012 AUM
96.3

 
76.9

 
19.4

 
—

Long-term inflows
44.8

 
40.2

 
4.6

 
—

Long-term outflows
(32.8
)
 
(31.9
)
 
(0.9
)
 
—

Long-term net flows
12.0

 
8.3

 
3.7

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
9.6

 
9.5

 
0.1

 
—

Foreign currency translation
—

 
—

 
—

 
—

September 30, 2012 AUM
117.9

 
94.7

 
23.2

 
—

January 1, 2011 AUM
80.8

 
70.6

 
10.2

 
—

Long-term inflows
51.8

 
44.3

 
7.5

 
—

Long-term outflows
(40.1
)
 
(39.2
)
 
(0.9
)
 
—

Long-term net flows
11.7

 
5.1

 
6.6

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
(5.1
)
 
(4.7
)
 
(0.4
)
 
—

Foreign currency translation
—

 
—

 
—

 
—

September 30, 2011 AUM
87.4

 
71.0

 
16.4

 
—


See accompanying notes to these AUM tables on the following page.
     

63
Table of Contents                                 

Total AUM by Asset Class(2) 
$ in billions
Total
 
Equity
 
Fixed
Income
 
Balanced
 
Money
Market
  
Alternatives(3)
January 1, 2012 AUM
625.3

 
271.0

 
149.0

 
44.6

 
74.0

  
86.7

Long-term inflows
122.3

 
62.1

 
29.4

 
15.2

 
2.1

  
13.5

Long-term outflows
(110.8
)
 
(65.7
)
 
(19.7
)
 
(6.1
)
 
(2.7
)
 
(16.6
)
Long-term net flows
11.5

 
(3.6
)
 
9.7

 
9.1

 
(0.6
)
 
(3.1
)
Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

  
—

Market gains and (losses)/reinvestment
43.9

 
30.4

 
7.7

 
3.5

 
(0.2
)
  
2.5

Acquisitions/dispositions, net
(1.7
)
 
—

 
—

 
—

 
—

 
(1.7
)
Foreign currency translation
4.0

 
2.8

 
0.6

 
0.7

 
—

  
(0.1
)
September 30, 2012 AUM
683.0

 
300.6

 
167.0

 
57.9

 
73.2

(5) 
84.3

January 1, 2011 AUM
616.5

 
294.0

 
132.0

 
43.5

 
68.3

  
78.7

Long-term inflows
136.5

 
71.6

 
32.4

 
7.6

 
1.6

  
23.3

Long-term outflows
(122.9
)
 
(80.3
)
 
(19.7
)
 
(6.2
)
 
(1.4
)
 
(15.3
)
Long-term net flows
13.6

 
(8.7
)
 
12.7

 
1.4

 
0.2

 
8.0

Net flows in institutional money market funds
5.0

 
—

 
—

 
—

 
5.0

 
—

Market gains and (losses)/reinvestment(6)
(36.1
)
 
(31.8
)
 
1.9

 
(3.0
)
 
0.2

  
(3.4
)
Foreign currency translation
(0.6
)
 
(0.3
)
 
0.1

 
(0.4
)
 
(0.1
)
  
0.1

September 30, 2011 AUM
598.4

 
253.2

 
146.7

 
41.5

 
73.6

 
83.4


Passive AUM by Asset Class(2) 
$ in billions
Total
 
Equity
 
Fixed
Income
 
Balanced
 
Money
Market
 
Alternatives(3)
January 1, 2012 AUM
96.3

 
45.6

 
30.0

 
—

 
—

 
20.7

Long-term inflows
44.8

 
32.2

 
8.7

 
—

 
—

 
3.9

Long-term outflows
(32.8
)
 
(26.7
)
 
(1.7
)
 
—

 
—

 
(4.4
)
Long-term net flows
12.0

 
5.5

 
7.0

 
—

 
—

 
(0.5
)
Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
9.6

 
8.1

 
0.6

 
—

 
—

 
0.9

Foreign currency translation
—

 
—

 
—

 
—

 
—

 
—

September 30, 2012 AUM
117.9

 
59.2

 
37.6

 
—

 
—

 
21.1

January 1, 2011 AUM
80.8

 
42.8

 
19.8

 
—

 
—

 
18.2

Long-term inflows
51.8

 
33.8

 
10.4

 
—

 
—

 
7.6

Long-term outflows
(40.1
)
 
(32.3
)
 
(1.4
)
 
—

 
—

 
(6.4
)
Long-term net flows
11.7

 
1.5

 
9.0

 
—

 
—

 
1.2

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
(5.1
)
 
(4.6
)
 
0.7

 
—

 
—

 
(1.2
)
Foreign currency translation
—

 
—

 
—

 
—

 
—

 
—

September 30, 2011 AUM
87.4

 
39.7

 
29.5

 
—

 
—

 
18.2


See accompanying notes to these AUM tables on the following page.

64
Table of Contents                                 

  
Total AUM by Client Domicile(5) 
$ in billions
Total
 
U.S.
 
Canada
 
U.K.
 
Continental
Europe
 
Asia
January 1, 2012 AUM
625.3

 
430.0

 
23.4

 
89.8

 
32.0

 
50.1

Long-term inflows
122.3

 
85.8

 
2.5

 
10.1

 
14.8

 
9.1

Long-term outflows
(110.8
)
 
(72.1
)
 
(3.7
)
 
(11.8
)
 
(11.0
)
 
(12.2
)
Long-term net flows
11.5

 
13.7

 
(1.2
)
 
(1.7
)
 
3.8

 
(3.1
)
Net flows in institutional money market funds
—

 
0.2

 
0.2

 
—

 
—

 
(0.4
)
Market gains and (losses)/reinvestment
43.9

 
30.6

 
1.7

 
8.5

 
1.4

 
1.7

Acquisitions/dispositions, net
(1.7
)
 
—

 
—

 
—

 
(1.7
)
 
—

Foreign currency translation
4.0

 
—

 
0.9

 
3.0

 
0.1

 
—

September 30, 2012 AUM
683.0

 
474.5

 
25.0

 
99.6

 
35.6

 
48.3

January 1, 2011 AUM
616.5

 
415.4

 
27.9

 
92.1

 
35.3

 
45.8

Long-term inflows
136.5

 
92.2

 
2.0

 
11.3

 
14.0

 
17.0

Long-term outflows
(122.9
)
 
(82.1
)
 
(4.4
)
 
(10.8
)
 
(15.0
)
 
(10.6
)
Long-term net flows
13.6

 
10.1

 
(2.4
)
 
0.5

 
(1.0
)
 
6.4

Net flows in institutional money market funds
5.0

 
5.5

 
0.1

 
(0.5
)
 
(0.1
)
 
—

Market gains and (losses)/reinvestment
(36.1
)
 
(20.0
)
 
(1.6
)
 
(5.1
)
 
(2.2
)
 
(7.2
)
Foreign currency translation
(0.6
)
 
—

 
(1.2
)
 
(0.3
)
 
(0.1
)
 
1.0

September 30, 2011 AUM
598.4

 
411.0

 
22.8

 
86.7

 
31.9

 
46.0


Passive AUM by Client Domicile(5) 
$ in billions
Total
 
U.S.
 
Canada
 
U.K.
 
Continental
Europe
 
Asia
January 1, 2012 AUM
96.3

 
89.6

 
—

 
—

 
1.3

 
5.4

Long-term inflows
44.8

 
44.2

 
—

 
—

 
0.2

 
0.4

Long-term outflows
(32.8
)
 
(32.3
)
 
—

 
—

 
(0.4
)
 
(0.1
)
Long-term net flows
12.0

 
11.9

 
—

 
—

 
(0.2
)
 
0.3

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
9.6

 
9.3

 
—

 
—

 
0.2

 
0.1

Foreign currency translation
—

 
—

 
—

 
—

 
—

 
—

September 30, 2012 AUM
117.9

 
110.8

 
—

 
—

 
1.3

 
5.8

January 1, 2011 AUM
80.8

 
77.3

 
—

 
—

 
1.2

 
2.3

Long-term inflows
51.8

 
51.4

 
—

 
—

 
0.4

 
—

Long-term outflows
(40.1
)
 
(39.8
)
 
—

 
—

 
(0.3
)
 
—

Long-term net flows
11.7

 
11.6

 
—

 
—

 
0.1

 
—

Net flows in institutional money market funds
—

 
—

 
—

 
—

 
—

 
—

Market gains and (losses)/reinvestment
(5.1
)
 
(4.8
)
 
—

 
—

 
(0.1
)
 
(0.2
)
Foreign currency translation
—

 
—

 
—

 
—

 
—

 
—

September 30, 2011 AUM
87.4

 
84.1

 
—

 
—

 
1.2

 
2.1


(1)
Channel refers to the distribution channel from which the AUM originated. Retail AUM arose from client investments into funds available to the public with shares or units. Institutional AUM originated from individual corporate clients,

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Table of Contents                                 

endowments, foundations, government authorities, universities, or charities. Private Wealth Management AUM arose from high net worth client investments.
(2)
Asset classes are descriptive groupings of AUM by common type of underlying investments.
(3)
The alternatives asset class includes absolute return, real estate, commodities, currencies, financial structures, Global Macro, REITS, private capital, and Risk Premia Capture.
(4)
Ending Money Market AUM includes $69.3 billion in institutional money market AUM and $3.9 billion in retail money market AUM.
(5)
Client domicile disclosure groups AUM by the domicile of the underlying clients.
(6)
As a result of fund mergers in the second quarter of 2011, the market gains and losses / reinvestment line includes $0.9 billion transferred from the balanced to the equity asset class.

Results of Operations for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011
Adoption of Guidance now encompassed in Accounting Standards Codification (ASC) Topic 810, “Consolidation”
The company provides investment management services to, and has transactions with, various private equity, real estate, fund-of-funds, collateralized loan obligation products (CLOs), and other investment entities sponsored by the company for the investment of client assets in the normal course of business. The company serves as the investment manager, making day-to-day investment decisions concerning the assets of the products. Certain of these entities are consolidated under variable interest or voting interest entity consolidation guidance. See Part I, Item 1, Financial Statements — Note 11, “Consolidated Investment Products,” for additional details.
The guidance now encompassed in ASC Topic 810, which was effective January 1, 2010, had a significant impact on the presentation of the company’s financial statements, as its provisions required the company to consolidate certain CLOs that were not previously consolidated.
The majority of the company’s consolidated investment products balances were CLO-related as of September 30, 2012. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company’s minimal direct investments in, and management fees generated from, the CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Conversely, if the CLOs were to liquidate, their investors would have no recourse to the general credit of the company. The company therefore does not consider this debt to be a company liability. The discussion that follows will separate consolidated investment product results of operations from the company’s investment management operations through the use of non-GAAP financial measures. See “Schedule of Non-GAAP Information” for additional details and reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures.

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Summary of Income Statement Impact of Consolidated Investment Products
$ in millions
 
 Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
Nine months ended September 30, 2012
 
 
 
 
Total operating revenues
 
(32.4
)
 
3,084.1

Total operating expenses
 
23.1

 
2,435.4

Operating income
 
(55.5
)
 
648.7

Equity in earnings of unconsolidated affiliates
 
0.1

 
21.8

Interest and dividend income
 
196.1

 
213.5

Other investment income/(losses)
 
(78.5
)
 
(40.6
)
Interest expense
 
(134.4
)
 
(174.0
)
Income before income taxes
 
(72.2
)
 
669.4

Income tax provision
 
—

 
(210.1
)
Net income
 
(72.2
)
 
459.3

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
 
59.1

 
59.1

Net income attributable to common shareholders
 
(13.1
)
 
518.4


$ in millions
 
 Impact of Consolidated Investment Products
 
Invesco Ltd. Consolidated
Nine months ended September 30, 2011
 
 
 
 
Total operating revenues
 
(35.5
)
 
3,095.1

Total operating expenses
 
10.2

 
2,408.6

Operating income
 
(45.7
)
 
686.5

Equity in earnings of unconsolidated affiliates
 
(1.0
)
 
25.6

Interest and dividend income
 
228.3

 
241.9

Other investment income/(losses)
 
(243.3
)
 
(249.1
)
Interest expense
 
(135.2
)
 
(182.7
)
Income before income taxes
 
(196.9
)
 
522.2

Income tax provision
 
—

 
(210.1
)
Net income
 
(196.9
)
 
312.1

Net (income)/loss attributable to noncontrolling interests in consolidated entities, net
 
215.2

 
215.3

Net income attributable to common shareholders
 
18.3

 
527.4




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Operating Revenues and Net Revenues
The main categories of revenues, and the dollar and percentage change between the periods, were as follows:
 
Nine months ended September 30,
 
 
 
 
$ in millions
2012
 
2011
 
$ Change
 
% Change
Investment management fees
2,390.0

 
2,390.9

 
(0.9
)
 
—
 %
Service and distribution fees
572.2

 
599.2

 
(27.0
)
 
(4.5
)%
Performance fees
38.9

 
14.0

 
24.9

 
177.9
 %
Other
83.0

 
91.0

 
(8.0
)
 
(8.8
)%
Total operating revenues
3,084.1

 
3,095.1

 
(11.0
)
 
(0.4
)%
Third-party distribution, service and advisory expenses
(960.9
)
 
(980.7
)
 
19.8

 
(2.0
)%
Proportional share of revenues, net of third-party distribution expenses, from joint venture investments
27.5

 
31.6

 
(4.1
)
 
(13.0
)%
Management fees earned from consolidated investment products
31.2

 
35.2

 
(4.0
)
 
(11.4
)%
Performance fees earned from consolidated investment products
1.2

 
0.4

 
0.8

 
N/A

Net revenues
2,183.1

 
2,181.6

 
1.5

 
0.1
 %

Operating revenues decreased by $11.0 million (0.4%) in the nine months ended September 30, 2012 to $3,084.1 million (nine months ended September 30, 2011: $3,095.1 million). Net revenues increased by $1.5 million (0.1%) in the nine months ended September 30, 2012 to $2,183.1 million (nine months ended September 30, 2011: $2,181.6 million). Net revenues are operating revenues less third-party distribution, service and advisory expenses, plus our proportional share of net revenues from joint venture arrangements, plus management and performance fees earned from, less other revenues recorded by, consolidated investment products. See “Schedule of Non-GAAP Information” for additional important disclosures regarding the use of net revenues. A significant portion of our business and managed AUM are based outside of the U.S. The income statements of foreign currency subsidiaries are translated into U.S. dollars, the reporting currency of the company, using average foreign exchange rates. The impact of foreign exchange rate movements decreased operating revenues by $27.0 million , and was 0.9% of total operating revenues, during the nine months ended September 30, 2012 when compared to the nine months ended September 30, 2011. Additionally, our revenues are directly influenced by the level and composition of our AUM as more fully discussed above. Movements in global capital market levels, net new business inflows (or outflows) and changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period.
Investment management fees
Investment management fees decreased by $0.9 million in the nine months ended September 30, 2012 to $2,390.0 million (nine months ended September 30, 2011: $2,390.9 million) due primarily to changes in the mix of AUM between asset classes, together with the impact of foreign exchange rate movement. The impact of foreign exchange rate movements decreased investment management fees by $23.7 million during the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. As discussed above, the net revenue yield is lower in the current period due to changes in the composition of our AUM. The weighting of AUM flows into passive products has lowered the net revenue yield, despite the increase in average AUM. In addition, management fees were reduced in the first half of 2012 due to the acquisition integration-related U.S. mutual fund mergers that commenced in June 2011, some of these lapsed in mid-2012 and revenue increased in the last 3 months of the year-to-date period. As previously discussed, acquisition integration-related fee waivers amounted to approximately $30 million on an annualized basis. See the company's disclosures regarding the changes in AUM and revenue yields during the nine months ended September 30, 2012 in the “Assets Under Management” section above for additional information regarding the movements in AUM.
Service and distribution fees
In the nine months ended September 30, 2012, service and distribution fees decreased by $27.0 million (4.5%) to $572.2 million, (nine months ended September 30, 2011: $599.2 million) due primarily to decreases in transfer agency fees of $9.2 million, distribution and redemption fees of $8.5 million, and administration and custodial fees of $7.2 million. The fee reductions are attributable to the fund mergers and fee waivers associated with the U.S. mutual fund product realignment, the continued conversion of B-share fee structures to class A-shares that generate a lower annual service fee, and other changes in the AUM mix as a larger percentage of AUM charges no or lower distribution fees. The impact of foreign exchange rate movements accounted for $2.1 million of decrease in service and distribution fees during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2012.

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Performance fees
Of our $683.0 billion in AUM at September 30, 2012, only approximately $48.9 billion, or 7.2%, could potentially earn performance fees. In the nine months ended September 30, 2012 recognized performance fees were $38.9 million, an increase of $24.9 million from the comparative period (nine months ended September 30, 2011: $14.0 million). The performance fees generated in the nine months ended September 30, 2012 arose primarily from a bank loan partnership managed by our fixed income group, the UK group, the European real estate group, and the Asia Pacific group. The performance fees generated in the nine months ended September 30, 2011 arose primarily due to products managed in the U.K., in our private equity group and in Asia Pacific.
Other revenues
In the nine months ended September 30, 2012, other revenues decreased by $8.0 million (8.8%) to $83.0 million (nine months ended September 30, 2011: $91.0 million). Other revenues include decreases in UIT revenues of $5.1 million, mutual funds front end fees of $3.8 million, transaction commissions of $2.4 million, and other revenues of $1.4 million, offset by increase in acquisition and disposition fees of $5.5 million during the nine months ended September 30, 2012 compared to nine months ended September 30, 2011. The impact of foreign exchange rate movements accounted for $0.8 million (10.0%) of the decrease in other revenues during the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011.
Third-party distribution, service and advisory expenses
Third-party distribution, service and advisory expenses decreased by $19.8 million (2.0%) in the nine months ended September 30, 2012 to $960.9 million (nine months ended September 30, 2011: $980.7 million). The decrease in third-party distribution, service and advisory expenses is closely linked to the reduction in service and distribution fees over this period. The reduction in third-party distribution, service and advisory expenses expenses includes decreases in renewal commissions of $8.5 million, external commissions of $5.2 million, and sub advisory fees of $4.0 million. The decreases are offset by increases in transfer agent fees of $3.7 million, and administration fees of $0.9 million. The impact of foreign exchange rate movements accounted for $9.2 million of the decrease in third-party distribution, service and advisory expenses
Proportional share of revenues, net of third-party distribution expenses, from joint venture investments
Management believes that the addition of our proportional share of revenues, net of third-party distribution expenses, from joint venture arrangements should be added to operating revenues to arrive at net revenues, as it is important to evaluate the contribution to the business that our joint venture arrangements are making. See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net revenues.
Our proportional share of revenues, net of third-party distribution expenses decreased by $4.1 million (13.0%) to $27.5 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $31.6 million). Our share of the Invesco Great Wall joint venture’s average AUM in the nine months ended September 30, 2012 was $3.0 billion (nine months ended September 30, 2011: $3.4 billion).
Management and performance fees earned from consolidated investment products
Management believes that the consolidation of investment products may impact a reader’s analysis of our underlying results of operations and could result in investor confusion or the production of information about the company by analysts or external credit rating agencies that is not reflective of the underlying results of operations and financial condition of the company. Accordingly, management believes that it is appropriate to adjust operating revenues for the impact of consolidated investment products in calculating net revenues. As management and performance fees earned by Invesco from the consolidated products are eliminated upon consolidation of the investment products, management believes that it is appropriate to add these operating revenues back in the calculation of net revenues. See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net revenues.
Management and performance fees earned from consolidated investment products decreased by $3.2 million (9.0%) to $32.4 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $35.6 million), primarily due to the impact of funds deconsolidated as of September 30, 2012.





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Operating Expenses
The main categories of operating expenses, and the dollar and percentage changes between periods, are as follows:
 
Nine months ended September 30,
 
 
 
 
$ in millions
2012
 
2011
 
$ Change
 
% Change
Employee compensation
954.0

 
929.7

 
24.3

 
2.6
 %
Third-party distribution, service and advisory
960.9

 
980.7

 
(19.8
)
 
(2.0
)%
Marketing
79.7

 
64.9

 
14.8

 
22.8
 %
Property, office and technology
204.4

 
188.6

 
15.8

 
8.4
 %
General and administrative
230.8

 
220.8

 
10.0

 
4.5
 %
Transaction and integration
5.6

 
23.9

 
(18.3
)
 
(76.6
)%
Total operating expenses
2,435.4

 
2,408.6

 
26.8

 
1.1
 %

The table below sets forth these cost categories as a percentage of total operating expenses and operating revenues, which we believe provides useful information as to the relative significance of each type of expense:
Nine months ended:
 
 
 
 
 
 
 
 
 
 
 
$ in millions
September 30, 2012
 
% of Total
Operating Expenses
 
% of
Operating Revenues
 
September 30, 2011
 
% of Total
Operating Expenses
 
% of
Operating Revenues
Employee compensation
954.0

 
39.2
%
 
30.9
%
 
929.7

 
38.6
%
 
30.0
%
Third-party distribution, service and advisory
960.9

 
39.4
%
 
31.2
%
 
980.7

 
40.7
%
 
31.7
%
Marketing
79.7

 
3.3
%
 
2.6
%
 
64.9

 
2.7
%
 
2.1
%
Property, office and technology
204.4

 
8.4
%
 
6.6
%
 
188.6

 
7.8
%
 
6.1
%
General and administrative
230.8

 
9.5
%
 
7.5
%
 
220.8

 
9.2
%
 
7.1
%
Transaction and integration
5.6

 
0.2
%
 
0.2
%
 
23.9

 
1.0
%
 
0.8
%
Total operating expenses
2,435.4

 
100.0
%
 
79.0
%
 
2,408.6

 
100.0
%
 
77.8
%

During the nine months ended September 30, 2012, operating expenses increased by $26.8 million (1.1%) to $2,435.4 million (nine months ended September 30, 2011: $2,408.6 million). The impact of foreign exchange rate movements offset the increase in operating expenses by $27.0 million during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
Employee Compensation
Employee compensation increased $24.3 million (2.6%) to $954.0 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $929.7 million). Direct compensation increased $45.3 million due to increases in base salaries and variable compensation of $26.9 million and share-based costs of $18.4 million during the nine months ended September 30, 2012 compared to nine months ended September 30, 2011. The increase in share-based compensation costs during the period reflects a previous change in our vesting service period from three to four years, which results in 2012 being the first year with four award tranches being expensed, as compared to three award tranches in previous years. The increase in employee compensation is offset by decreases in staff benefits expense of $8.3 million due primarily to a $15.0 million reduction in amortization of prepaid compensation related to the 2006 acquisition of W.L. Ross & Co., which was fully amortized in 2011. Other decreases are in staff related costs, including payroll taxes and termination costs, of $1.6 million during the nine months ended September 30, 2012 from the nine months ended September 30, 2011. The impact of foreign exchange rate movements offset the increase in employee compensation by $11.1 million, during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
Headcount at September 30, 2012 was 6,101 (September 30, 2011: 6,192).
Third-Party Distribution, Service and Advisory Expenses
Third-party distribution, service and advisory expenses are discussed above in the operating and net revenues section.



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Marketing
Marketing expenses increased by $14.8 million (22.8%) in the nine months ended September 30, 2012 to $79.7 million (nine months ended September 30, 2011: $64.9 million). The increase during the nine months ended September 30, 2012 includes increases in corporate sponsorships of $7.6 million, driven by the termination in the comparative period of the company's sponsorship and naming rights commitments related to a sports stadium in Denver, Colorado, which resulted in a marketing expense reduction of $10.4 million recognized in that period. Other marketing expenses increases were advertising expense of $6.2 million, client event expense of $1.7 million, and other marketing costs of $0.7 million as compared to the nine months ended September 30, 2011. The impact of foreign exchange rate movements offset the increase in marketing expenses by $1.2 million during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
Property, Office and Technology
Property, office and technology expenses increased by $15.8 million (8.4%) to $204.4 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $188.6 million). Property and office expenses increased $7.2 million over the comparable 2011 period, due to increases in rent expense of $3.9 million and depreciation and improvements of $3.2 million. The increase in rent expense includes a $1.7 million exit charge for leased space, related to consolidation of office space. Technology and communications expenses increased $11.1 million primarily due to continued investment in portfolio management and client engagement technology initiatives, which also contributed to increase in depreciation and maintenance expenses of $6.8 million, together with increased outsourced administration costs of $3.4 million. The impact of foreign exchange rate movements offset the increase in property, office and technology expenses by $2.5 million during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
General and Administrative
General and administrative expenses increased by $10.0 million (4.5%) to $230.8 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $220.8 million). Increase in general and administrative expense is largely due to expenses of our consolidated investment products, including legal and fund launch costs for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. The impact of foreign exchange rate movements offset the increase in general and administrative expenses by $3.0 million during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.
Transaction and integration
Transaction and integration charges were $5.6 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $23.9 million) and relate to the business acquired in 2010. Transaction and integration expenses during the nine months ended September 30, 2012 include $5.4 million relating to the final round of open-ended fund mergers and include professional services and shareholder communications costs and $0.2 million in marketing and property, office and technology costs. Transaction and integration expenses for the nine months ended September 30, 2011 include $16.6 million of professional services and other costs, principally legal, proxy solicitation, consultancy and insurance, $3.0 million of property and office, $2.8 million of employee compensation costs, $1.1 million of technology and communication costs and $0.4 million of marketing and client services.
Operating Income, Adjusted Operating Income, Operating Margin and Adjusted Operating Margin
Operating income decreased by $37.8 million (5.5%) to $648.7 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $686.5 million). Operating margin (operating income divided by operating revenues), decreased from 22.2% in the nine months ended September 30, 2011 to 21.0% in the nine months ended September 30, 2012. The decrease in operating income and margin resulted from a lower relative increase in operating revenues (0.4%) than in operating expenses (1.1%) during the period. Adjusted operating income, decreased by $44.0 million (5.4%) to $768.6 million in the nine months ended September 30, 2012 from $812.6 million in the nine months ended September 30, 2011. Adjusted operating margin is equal to adjusted operating income divided by net revenues. Adjusted operating margin decreased to 35.2% in the nine months ended September 30, 2012 from 37.2% in the nine months ended September 30, 2011. See “Schedule of Non-GAAP Information” for definitions of these measures and a reconciliation of operating revenues to net revenues, a reconciliation of operating income to adjusted operating income and additional important disclosures regarding net revenues, adjusted operating income and adjusted operating margin.

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Other Income and Expenses
The main categories of other income and expenses, and the dollar and percentage changes between periods are as follows:
 
Nine months ended September 30,
 
 
 
 
$ in millions
2012
 
2011
 
$ Change
 
% Change
Equity in earnings of unconsolidated affiliates
21.8

 
25.6

 
(3.8
)
 
(14.8
)%
Interest and dividend income
7.1

 
8.3

 
(1.2
)
 
(14.5
)%
Interest income of consolidated investment products
206.4

 
233.6

 
(27.2
)
 
(11.6
)%
Other gains/(losses) of consolidated investment products, net
(69.9
)
 
(243.3
)
 
173.4

 
(71.3
)%
Interest expense
(39.6
)
 
(47.5
)
 
7.9

 
(16.6
)%
Interest expense of consolidated investment products
(134.4
)
 
(135.2
)
 
0.8

 
(0.6
)%
Other gains and losses, net
29.3

 
(5.8
)
 
35.1

 
N/A

Total other income and expenses
20.7

 
(164.3
)
 
185.0

 
(112.6
)%
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates decreased by $3.8 million (14.8%) to $21.8 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $25.6 million). The decrease in equity in earnings is driven by the declines in our pre-tax earnings of our joint venture investments in China of $2.9 million and decrease of $0.9 million in our share of the market-driven valuation changes in the underlying holdings of certain partnership investments, including our investment in Invesco Mortgage Capital Inc.
Interest and dividend income and interest expense
Interest and dividend income decreased by $1.2 million (14.5%) to $7.1 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $8.3 million). The decrease in interest and dividend income is due to decrease in dividend income of $1.2 million on investments held to hedge economically deferred compensation plans. This dividend income is passed through to employee participants in the deferred compensation plans. See “Schedule of Non-GAAP Information” for additional details. Interest expense decreased by $7.9 million (16.6%) to $39.6 million in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $47.5 million) due to a combination of lower average debt balances and lower borrowing costs versus the comparative period.
Other gains and losses, net
Other gains and losses, net were a net gain of $29.3 million in the nine months ended September 30, 2012 as compared to a net loss of $5.8 million in the nine months ended September 30, 2011. Included in other gains and losses for the nine months ended September 30, 2012 is a net gain of $17.4 million resulting from the appreciation of investments held for our deferred compensation plans (nine months ended September 30, 2011: $12.6 million net loss), a gain on the sale of CLO management contracts of $8.3 million, a $3.5 million gain on an acquisition-related loan note held to hedge the company's net interest in a consolidated investment products, and net gains from seed and other investments of $2.8 million (nine months ended September 30, 2011: $7.2 million net gains). These gains were offset by a net loss of $2.4 million related to the mark-to-market of 12-month foreign exchange put option contracts intended to provide protection against the impact of a significant decline in the Pound Sterling/U.S Dollar foreign exchange rate. We incurred $0.8 million in other-than-temporary impairment charges related to seed money investments during the nine months ended September 30, 2012 (nine months ended September 30, 2011: none). In addition, for the nine months ended September 30, 2012, we incurred $0.5 million in net foreign exchange gains on inter-group loans (nine months ended September 30, 2011: $0.4 million in net foreign exchange losses).
Non-operating income and expense of consolidated investment products
In the nine months ended September 30, 2012, interest income of consolidated investment products decreased by $27.2 million (11.6%) to $206.4 million (nine months ended September 30, 2011: $233.6 million) primarily due to the impact of CLO deconsolidation and the impact of certain CLOs entering their amortization period. Interest expense of consolidated investment products decreased by $0.8 million (0.6%) to $134.4 million (nine months ended September 30, 2011: $135.2 million) primarily due to CLO deconsolidation.
Included in other gains/(losses) of consolidated investment products, net, are realized and unrealized gains and losses on the underlying investments and debt of consolidated investment products. In the nine months ended September 30, 2012, other gains/(losses) of consolidated investment products were a net loss of $69.9 million, as compared to a net loss of $243.3 million in the nine months ended September 30, 2011. The net loss in the 2012 period is primarily due to losses associated with real estate investments and increases in the market value long-term debt of CLOs that more than offset gains in the market value of

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investments held by CLOs. The net loss in the 2011 period is primarily due to an increase in the market value of long term debt of consolidated investment products which exceeded the increase in the market value of investments of consolidated investment products.
Net impact of consolidated investment products and related noncontrolling interests in noncontrolling entities
As illustrated in the Summary of Income Statement Impact of Consolidated Investment Products for the nine months ended September 30, 2012 and 2011 at the beginning of this Results of Operations section, the consolidation of investment products during the nine months ended September 30, 2012 resulted in a decrease to net income of $72.2 million before attribution to noncontrolling interests (nine months ended September 30, 2011: $196.9 million decrease to net income). Invesco invests in only a portion of these products, and as a result this net loss is offset by noncontrolling interests of $59.1 million (nine months ended September 30, 2011: $215.2 million offset to net loss), resulting in a net decrease in net income of the company of $13.1 million (nine months ended September 30, 2011: $18.3 million net increase).
Consolidated investment products are taxed at the investor level and not at the product entity level; therefore, there is no tax provision reflected in the net impact of consolidated investment products.
Noncontrolling interests in consolidated entities represent the profit or loss amounts attributed to third party investors in consolidated investment products. Movements in amounts attributable to noncontrolling interests in consolidated entities on the company's Consolidated Statements of Income generally offset the gains and losses, interest income and interest expense of consolidated investment products.
Additionally, consolidated investment products represent approximately 1% of the company's AUM. Therefore, the net gains or losses of consolidated investment products is not indicative of the performance of the company's aggregate assets under management.
Income Tax Expense
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., the U.K., and Canada.
UK Finance Act 2012 proposed to reduce the U.K. statutory corporate tax rate to 24% effective April 1, 2012 and 23% effective April 1, 2013. The Act received Royal Assent on July 17, 2012, and therefore was enacted for U.S. GAAP purposes during the third quarter. The rate reduction did not have a material impact on our effective tax rate in the quarter. The 2012 U.K. Budget proposes to further reduce the rate to 22% beginning April 1, 2014. As of September 30, 2012, the Canadian federal and provincial statutory tax rate was 26.5%. The U.S. federal statutory tax rate was 35%.
Our effective tax rate, for the nine months ended September 30, 2012, was 31.4%, down from 40.2% for the nine months ended September 30, 2011. The inclusion of losses from non-controlling interests in consolidated entities increased our effective tax rate by 2.5% in 2012 and 11.7% in 2011.   The nine months ended September 30, 2012 rate reflects an unfavorable impact from the gain on sale of CLO management contracts in the quarter offset by a more favorable profit mix. The nine months ended September 30, 2011 rate reflects a favorable impact from the release of a provision for uncertain tax positions as a result of the statute of limitation closing in the quarter.

Schedule of Non-GAAP Information
We are presenting the following non-GAAP performance measures: net revenue (and by calculation, net revenue yield on AUM), adjusted operating income (and by calculation, adjusted operating margin), adjusted net income attributable to common shareholders (and by calculation, adjusted diluted earnings per share (EPS)). We believe these non-GAAP measures provide greater transparency into our business and allow more appropriate comparisons with industry peers. Management uses these performance measures to evaluate the business, and they are consistent with internal management reporting. The most directly comparable U.S. GAAP measures are operating revenues (and by calculation, gross revenue yield on AUM), operating income (and by calculation, operating margin), net income (and by calculation, diluted EPS). Each of these measures is discussed more fully below.
These non-GAAP measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate. The Schedule of Non-GAAP Information contained in the company’s most recent annual report on Form 10-K contains expanded definitions of reconciling items from U.S. GAAP to non-GAAP information, including the reasons why management believes that the presentation of our non-GAAP measures provides useful information to investors.


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The following are reconciliations of operating revenues, operating income (and by calculation, operating margin), and net income (and by calculation, diluted EPS) on a U.S. GAAP basis to net revenues, adjusted operating income (and by calculation, adjusted operating margin), and adjusted net income attributable to common shareholders (and by calculation, adjusted EPS):
 
Three months ended September 30,
 
Nine months ended September 30,
$ in millions, except per share data
2012
 
2011
 
2012
 
2011
Operating revenues, U.S. GAAP basis
1,041.4

 
997.8

 
3,084.1

 
3,095.1

Third-party distribution, service and advisory expenses(1)
(327.2
)
 
(314.4
)
 
(960.9
)
 
(980.7
)
Proportional share of net revenues from joint venture arrangements(2)
9.0

 
10.4

 
27.5

 
31.6

Management fees earned from consolidated investment products eliminated upon consolidation(3)
11.1

 
11.9

 
31.2

 
35.2

Performance fees earned from consolidated investment products eliminated upon consolidation(3)
0.4

 
0.4

 
1.2

 
0.4

Net revenues
734.7

 
706.1

 
2,183.1

 
2,181.6

Operating income, U.S. GAAP basis
216.0

 
227.8

 
648.7

 
686.5

Proportional share of operating income from joint venture investments(2)
3.6

 
4.7

 
11.6

 
14.9

Transaction and integration charges(4)
3.0

 
4.7

 
5.6

 
23.9

Amortization of acquisition-related prepaid compensation(4)
—

 
5.0

 
—

 
15.0

Amortization of other intangibles(4)
5.3

 
14.2

 
24.7

 
36.1

Change in contingent consideration estimates(4)
—

 
(4.4
)
 
(2.3
)
 
(10.8
)
Compensation expense related to market valuation changes in deferred compensation plans(5)
4.7

 
(6.3
)
 
11.0

 
0.3

Consolidation of investment products(3)
13.8

 
15.1

 
55.4

 
45.6

Other reconciling items(7)
4.0

 
(5.1
)
 
13.9

 
1.1

Adjusted operating income
250.4

 
255.7

 
768.6

 
812.6

Operating margin*
20.7
%
 
22.8
%
 
21.0
%
 
22.2
%
Adjusted operating margin**
34.1
%
 
36.2
%
 
35.2
%
 
37.2
%
Net income attributable to common shareholders, U.S. GAAP basis
170.6

 
166.9

 
518.4

 
527.4

Transaction and integration charges, net of tax(4)
1.9

 
2.9

 
3.5

 
14.8

Amortization of acquisition-related prepaid compensation(4)
—

 
5.0

 
—

 
15.0

Amortization of other intangibles, net of tax(4)
4.9

 
13.1

 
22.5

 
32.7

Change in contingent consideration estimates(4)
—

 
(4.4
)
 
(2.3
)
 
(10.8
)
Deferred compensation plan market valuation changes and dividend income less compensation expense, net of tax(5)
(4.5
)
 
7.9

 
(7.2
)
 
5.7

Deferred income taxes on intangible assets(4)
6.6

 
6.0

 
19.6

 
20.7

Consolidation of investment products(3)
11.1

 
(3.5
)
 
13.1

 
(18.3
)
Gain on sale of management contracts, net of tax(6)
(5.8
)
 
—

 
(5.8
)
 
—

Other reconciling items(7)
3.6

 
(1.6
)
 
12.3

 
3.9

Adjusted net income attributable to common shareholders
188.4

 
192.3

 
574.1

 
591.1

Average shares outstanding — diluted
452.8

 
461.0

 
454.6

 
466.8

Diluted EPS

$0.38

 

$0.36

 

$1.14

 

$1.13

Adjusted diluted EPS***

$0.42

 

$0.42

 

$1.26

 

$1.27


*
Operating margin is equal to operating income divided by operating revenues.
**
Adjusted operating margin is equal to adjusted operating income divided by net revenues.
***
Adjusted diluted EPS is equal to adjusted net income attributable to common shareholders divided by the weighted average shares outstanding amount used in the calculation of diluted EPS.

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(1)
Third-party distribution, service and advisory expenses
Third-party distribution, service and advisory expenses include renewal commissions, management fee rebates and distribution costs (12b-1 and marketing support) paid to brokers and independent financial advisors. While the terms used for these types of expense vary by geography, they are all expense items that are closely linked to the value of AUM and the revenue earned by Invesco from AUM. Since the company has been deemed to be the principal in the third-party arrangements, the company must reflect these expenses gross of operating revenues under U.S. GAAP. Management believes that the deduction of third-party distribution, service and advisory expenses from operating revenues in the computation of net revenues (and by calculation, net revenue yield on AUM) and the related computation of adjusted operating income (and by calculation, adjusted operating margin) appropriately reflects the nature of these expenses as revenue-sharing activities, as these costs are passed through to external parties who perform functions on behalf of, and distribute, the company’s managed funds. Further, these expenses vary extensively by geography due to the differences in distribution channels. The net presentation assists in identifying the revenue contribution generated by the business, removing distortions caused by the differing distribution channel fees and allowing for a fair comparison with U.S. peer investment managers and within Invesco’s own investment units. Additionally, management evaluates net revenue yield on AUM, which is equal to net revenues divided by average AUM during the reporting period. This financial measure is an indicator of the basis point net revenues we receive for each dollar of AUM we manage and is useful when evaluating the company’s performance relative to industry competitors and within the company for capital allocation purposes.
(2)    Proportional share of net revenues and operating income from joint venture investments
The company has two joint venture investments in China. Enhancing our operations in China is one effort that we believe could improve our competitive position over time. Accordingly, we believe that it is appropriate to evaluate the contribution of our joint venture investments to the operations of the business.
(3)    Consolidated investment products
See Part I, Item 1, Financial Statements, Note 11, “Consolidated Investment Products” for a detailed analysis of the impact to the company’s Condensed Consolidated Financial Statements from the consolidation of investment products. The reconciling items add back the management and performance fees earned by Invesco from the consolidated products and remove the revenues and expenses recorded by the consolidated products that have been included in the U.S. GAAP Condensed Consolidated Statements of Income. Additionally, before the consolidation of investment products, the company's interest is accounted for as equity method (private equity and real estate partnership funds) available-for-sale (CLOs) investments.  Reconciling items for the three and nine months ended September 30, 2012 also include the cumulative gains that were recorded in other accumulated comprehensive income before consolidation upon the sale of the equity interests in certain CLOs during the period.
(4)     Acquisition-related reconciling items
Acquisition-related adjustments include transaction and integration expenses and intangible asset amortization related to acquired assets, amortization of prepaid compensation related to the 2006 acquisition of W.L. Ross & Co., and tax cash flow benefits resulting from tax amortization of goodwill and indefinite-lived intangible assets. These charges reflect the legal, regulatory, advisory, valuation, integration-related employee incentive awards and other professional or consulting fees, general and administrative costs, including travel costs related to the transaction and the costs of temporary staff involved in executing business combinations, and the post closing costs of integrating acquired businesses into the company’s existing operations including incremental costs associated with achieving synergy savings. Transaction and integration expenses include legal costs related to the defense of auction rate preferred securities complaints raised in the pre-acquisition period with respect to various closed-end funds included in the acquisition. See Part I, Item 1, Financial Statements, Note 10, “Commitments and Contingencies” for additional information. Additionally, acquisition-related reconciling items include changes in estimates of acquisition earn-out liabilities booked from prior acquisitions, which is offset in the period by increased amortization related to the write-off of related management contract intangible assets.
(5)    Market movement on deferred compensation plan liabilities
Certain deferred compensation plan awards involve a return to the employee linked to the appreciation (depreciation) of specified investments, typically the funds managed by the employee. Invesco hedges economically the exposure to market movements by holding these investments on its balance sheet. U.S. GAAP requires the appreciation (depreciation) in the compensation liability to be expensed over the award vesting period in proportion to the vested amount of the award as part of compensation expense. The full value of the investment appreciation (depreciation) is immediately recorded below operating income in other gains and losses. This creates a timing

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difference between the recognition of the compensation expense and the investment gain or loss impacting net income attributable to common shareholders and diluted EPS which will reverse over the life of the award and net to zero at the end of the multi-year vesting period. During periods of high market volatility these timing differences impact compensation expense, operating income and operating margin in a manner which, over the life of the award, will ultimately be offset by gains and losses recorded below operating income on the Condensed Consolidated Statements of Income. The non-GAAP measures exclude the mismatch created by differing U.S. GAAP treatments of the market movement on the liability and the investments.
Additionally, dividend income from investments held to hedge economically deferred compensation plans is recorded as dividend income and as compensation expense on the company’s Condensed Consolidated Statements of Income on the record dates. This dividend income is passed through to the employee participants in the plan and is not retained by the company. The non-GAAP measures exclude this dividend income and related compensation expense.
(6)    Gain on sale of management contracts
Included in other gains and losses, net in the third quarter of 2012 is a gain of $8.3 million ($5.8 million, net of tax) related to the sale of the management contracts for certain European collateralized loan obligation products (CLOs). To aid comparability of our results period to period, and aid comparability with peer companies that may not have similar disposition-related gains, this gain and the associated taxation have been excluded in arriving at the company's non-GAAP results. The company's tax income provision included a taxation charge of $2.5 million in the third quarter related to this gain.
(7)    Other reconciling items
•
European infrastructure transformational initiative: As announced in 2011, the company is outsourcing its European transfer agency and is making certain structural changes to product and distribution platforms. Expenses incurred related to the European infrastructure activities are excluded in arriving at the non-GAAP financial information. For the three and nine months ended September 30, 2012, this adjustment includes $1.3 million and $3.6 million in compensation expenses, primarily due to severance costs (three and nine months ended September 30, 2011: $3.1 million and $6.4 million); $1.4 million and $5.2 million in general and administrative costs, primarily related to professional contractor services and mutual fund costs (three and nine months ended September 30, 2011: $1.3 million and $3.9 million); $0.6 million and $1.5 million in shareholder communication-related costs (three and nine months ended September 30, 2011: none); and $0.7 million and $3.5 million of property, office and technology costs (three and nine months ended September 30, 2011: $0.2 million and $0.9 million). The company's income tax provision included tax benefits of $0.7 million and $2.7 million in the third quarter 2012 relating to this charge (three and nine months ended September 30, 2011: $0.6 million and $1.2 million).
•
Included within other gains and losses, net is a loss of $0.4 million and $1.4 million for the three and nine months ended September 30, 2012 (three and nine months ended September 30, 2011: none), related to the mark-to-market of four foreign exchange put option contracts intended to provide protection against the impact of a significant decline in the pound sterling/U.S dollar foreign exchange rate.  The cost to the company of these contracts was $2.5 million at their inception date, which represents the company's maximum exposure to loss from the contracts over the 12-month cumulative contract period, and contract maturity ranges from September 25, 2012 to June 25, 2013.  The adjustment from U.S. GAAP to non-GAAP earnings removes the impact of market volatility; therefore, the company's non-GAAP results include only the amortization of the cost of the contracts during the contract period. The company's income tax provision included tax benefits of $0.1 million and $0.3 million for the three and nine months ended September 30, 2012, relating to this loss.
•
During the three months ended September 30, 2011, the company terminated its sponsorship and associated naming rights commitments related to a sports stadium in Denver, Colorado, resulting in a marketing expense reduction of $10.4 million recognized in the period from the reversal of a cumulative deferred credit. The company's income tax provision included a taxation charge of $4.0 million in the third quarter 2011 relating to the credit. Due to the unique character and magnitude of this expense reduction, the company is reversing this gain in its reconciliation of operating income to adjusted operating income.
•
Included within general and administrative expenses in the first quarter of 2011 was an additional charge of $0.4 million relating to a levy from the U.K. Financial Services Compensation Scheme. Assessments were levied upon all Financial Services Authority (FSA)-registered investment management companies in proportion to their “eligible income” (as defined by the FSA) to cover claims resulting from failures of non-affiliated investment firms. The company's income tax provision included tax benefits of $0.1 million in the first quarter of 2011 relating to this charge.

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Due to the unique character and/or magnitude of these items, their impact has been excluded in calculating the non-GAAP financial measures.


Balance Sheet Discussion
Summary of Balance Sheet Impact of Consolidated Investment Products is presented below and reflects the consolidation of investment products. The majority of the company’s consolidated investment products ("CIP") were CLOs as of September 30, 2012. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company’s minimal direct investments in, and management fees generated from, CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Conversely, if the CLOs were to liquidate, their investors would have no recourse to the general credit of the company. The company therefore does not consider this debt to be a company liability.



Summary of Balance Sheet Impact of Consolidated Investment Products
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
$ in millions
 
Impact of Consolidated investment products
 
Consolidated Total
 
 
Impact of Consolidated investment products
 
Consolidated Total
 
 
Impact of Consolidated investment products
 
Consolidated Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
—

 
880.1

 
 
—

 
727.4

 
 
—

 
757.0

Cash and cash equivalents of CIP
 
552.7

 
552.7

 
 
382.3

 
382.3

 
 
356.7

 
356.7

Unsettled fund receivables
 
—

 
596.0

 
 
—

 
444.4

 
 
—

 
605.5

Accounts receivable
 
(5.4
)
 
406.1

 
 
(10.2
)
 
424.4

 
 
(10.6
)
 
431.5

Accounts receivable of CIP
 
58.3

 
58.3

 
 
98.5

 
98.5

 
 
89.3

 
89.3

Investments
 
(34.2
)
 
364.2

 
 
—

 
283.7

 
 
—

 
295.2

Prepaid assets
 
—

 
55.8

 
 
—

 
51.2

 
 
0.2

 
56.7

Other current assets
 
—

 
81.7

 
 
10.8

 
150.0

 
 
18.7

 
105.5

Deferred tax asset, net
 
—

 
26.5

 
 
—

 
28.7

 
 
—

 
29.7

Assets held for policyholders
 
—

 
1,139.3

 
 
—

 
1,243.5

 
 
—

 
1,255.3

Total current assets
 
571.4

 
4,160.7

 
 
481.4

 
3,834.1

 
 
454.3

 
3,982.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
 
(76.0
)
 
223.5

 
 
(92.6
)
 
200.8

 
 
(93.3
)
 
186.9

Investments of CIP
 
4,717.9

 
4,717.9

 
 
6,629.0

 
6,629.0

 
 
6,970.9

 
6,970.9

Security deposit assets and receivables
 
—

 
30.1

 
 
—

 
81.2

 
 
—

 
92.7

Other non-current assets
 
—

 
17.2

 
 
—

 
17.9

 
 
—

 
27.8

Deferred sales commissions
 
—

 
46.0

 
 
—

 
40.5

 
 
—

 
40.4

Property and equipment, net
 
—

 
329.9

 
 
—

 
312.8

 
 
—

 
275.8

Intangible assets, net
 
—

 
1,295.8

 
 
—

 
1,322.8

 
 
—

 
1,303.4

Goodwill
 
—

 
7,039.9

 
 
—

 
6,907.9

 
 
—

 
6,857.5

Total non-current assets
 
4,641.9

 
13,700.3

 
 
6,536.4

 
15,512.9

 
 
6,877.6

 
15,755.4

Total assets
 
5,213.3

 
17,861.0

 
 
7,017.8

 
19,347.0

 
 
7,331.9

 
19,737.8




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Summary of Balance Sheet Impact of Consolidated Investment Products(continued)
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
$ in millions
 
Impact of Consolidated investment products
 
Consolidated Total
 
 
Impact of Consolidated investment products
 
Consolidated Total
 
 
Impact of Consolidated investment products
 
Consolidated Total
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current maturities of total debt
 
—

 
333.5

 
 
—

 
215.1

 
 
—

 
215.1

Unsettled fund payables
 
—

 
598.2

 
 
—

 
439.6

 
 
—

 
605.6

Income taxes payable
 
—

 
64.4

 
 
—

 
59.6

 
 
—

 
54.9

Other current liabilities
 
(8.8
)
 
719.1

 
 
(19.6
)
 
841.5

 
 
(18.8
)
 
744.9

Other current liabilities of CIP
 
329.8

 
329.8

 
 
175.1

 
175.1

 
 
237.4

 
237.4

Policyholder payables
 
—

 
1,139.3

 
 
—

 
1,243.5

 
 
—

 
1,255.3

Total current liabilities
 
321.0

 
3,184.3

 
 
155.5

 
2,974.4

 
 
218.6

 
3,113.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
—

 
951.6

 
 
—

 
1,069.6

 
 
—

 
1,174.6

Long-term debt of CIP
 
3,855.0

 
3,855.0

 
 
5,512.9

 
5,512.9

 
 
5,866.3

 
5,866.3

Deferred tax liabilities, net
 
—

 
313.5

 
 
—

 
274.0

 
 
—

 
274.7

Security deposits payable
 
—

 
30.1

 
 
—

 
81.2

 
 
—

 
92.7

Other non-current liabilities
 
—

 
329.1

 
 
—

 
297.3

 
 
—

 
248.8

Total non-current liabilities
 
3,855.0

 
5,479.3

 
 
5,512.9

 
7,235.0

 
 
5,866.3

 
7,657.1

Total liabilities
 
4,176.0

 
8,663.6

 
 
5,668.4

 
10,209.4

 
 
6,084.9

 
10,770.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity attributable to common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares
 
—

 
98.1

 
 
—

 
98.1

 
 
—

 
98.1

Additional paid-in-capital
 
—

 
6,122.6

 
 
—

 
6,180.6

 
 
—

 
6,175.9

Treasury shares
 
—

 
(1,323.0
)
 
 
—

 
(1,280.4
)
 
 
—

 
(1,196.9
)
Retained earnings
 
18.9

 
2,720.1

 
 
31.9

 
2,413.2

 
 
30.2

 
2,266.8

Retained earnings appropriated for investors in CIP
 
159.1

 
159.1

 
 
334.3

 
334.3

 
 
232.8

 
232.8

Accumulated other comprehensive income, net of tax
 
(18.4
)
 
538.2

 
 
(30.8
)
 
373.3

 
 
(29.8
)
 
372.4

Total equity attributable to common shareholders
 
159.6

 
8,315.1

 
 
335.4

 
8,119.1

 
 
233.2

 
7,949.1

Equity attributable to noncontrolling interests in consolidated entities
 
877.7

 
882.3

 
 
1,014.0

 
1,018.5

 
 
1,013.8

 
1,018.4

Total equity
 
1,037.3

 
9,197.4

 
 
1,349.4

 
9,137.6

 
 
1,247.0

 
8,967.5

Total liabilities and equity
 
5,213.3

 
17,861.0

 
 
7,017.8

 
19,347.0

 
 
7,331.9

 
19,737.8


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The company’s Condensed Consolidated Statement of Changes in Equity in Part I, Item 1, “Financial Statements,” contains a detailed analysis of the changes in balance sheet equity line items. The following discussion presents a comparative analysis of significant balance sheet assets and liabilities.
  Cash and Cash Equivalents
See “Liquidity and Capital Resources — Cash Flows Discussion” for details of the movements in the company’s cash and cash equivalents balances in the periods presented.
     Unsettled Fund Receivables
Unsettled fund receivables increased by $151.6 million from $444.4 million at December 31, 2011 to $596.0 million at September 30, 2012, due primarily to higher transaction activity between funds and investors in September 2012 when compared to December 2011 in our U.K. and offshore funds, together with $21.7 million of unsettled balances associated with the unit investment trust (UIT) products.
     Investments (current and non-current)
As of September 30, 2012, we had $587.7 million in investments, of which $364.2 million were current investments and $223.5 million were non-current investments. Included in current investments are $113.2 million of seed money investments in affiliated funds used to seed funds as we launch new products, and $211.7 million of investments related to assets held for deferred compensation plans, which are also held primarily in affiliated funds. Seed investments increased by $49.7 million during the nine months to September 30, 2012, due primarily to seed money investment additions and market improvement increases, offset by disposals of seed money investments. Investments held to hedge deferred compensation awards increased by $27.3 million during the nine month period, primarily attributable to additional investments in affiliated funds to hedge economically new employee plan awards. Included in non-current investments are $202.9 million in equity method investments in our Chinese joint ventures and in certain of the company’s private equity partnerships, real estate partnerships and other co -investments (December 31, 2011: $193.1 million). The increase of $9.8 million in equity method investments is primarily driven by an increase of $22.1 million due to capital calls in co-investments, including Asian real estate funds of $7.8 million, Private Wealth funds of $6.6 million and U.S real estate funds of $5.3 million and an increase in valuation of $16.2 million. The increases in partnership investments are offset by distributions and capital returns of $27.4 million during the period. The value of the joint venture investments has decreased by $1.1 million during the period as a result of current year earnings of $10.6 million, $1.3 million in positive impact of foreign exchange rate movements, offset by dividends paid of $13.0 million.
     Assets Held for Policyholders and Policyholder Payables
The decrease in the balance of assets held for policyholders and the offsetting policyholder payables from $1,243.5 million at December 31, 2011, to $1,139.3 million at September 30, 2012 was the result of a third party transfer of administration contracts to another provider, offset by the increase in the market values of these assets and liabilities.
     Intangible assets, net
Intangible assets reflect a net decrease of $27.0 million from $1,322.8 million at December 31, 2011, to $1,295.8 million at September 30, 2012. The decrease in intangible assets, net is due to amortization of $24.6 million, $3.0 million adjustment for sale of CLO management contracts, offset by increase in foreign currency translation of $0.6 million.
     Goodwill
Goodwill increased by $132.0 million from $6,907.9 million at December 31, 2011, to $7,039.9 million at September 30, 2012. The increase is due to the impact of foreign currency translation for certain subsidiaries whose functional currency differs from that of the Parent.
     Current Portion of total debt
The current portion of total debt increased by $118.4 million from December 31, 2011 as a result of the reclassification of the $333.5 million 5.375% senior notes that mature on February 27, 2013 out of long-term and into current, net of the April 2012 repayment of the $215.1 million of outstanding 5.625% Senior Notes, offset by the net draw on credit facility of $0.4 million.
     Long-term debt
The non-current portion of our total debt was $951.6 million at September 30, 2012 (December 31, 2011: $1,069.6 million). The decrease during the nine months ended September 30, 2012 is due to the reclassification of the $333.5 million 5.375% senior notes that mature on February 27, 2013 out of long term into current, offset by a net draw on the credit facility of $0.4 million.



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Liquidity and Capital Resources
Our capital structure, together with available cash balances, cash flows generated from operations, existing capacity under our credit facility, proceeds from public offering of our shares and further capital market activities, if necessary, should provide us with sufficient resources to meet present and future cash needs, including operating, debt and other obligations as they come due and anticipated future capital requirements. On April 17, 2012, the company repaid the $215.1 million of outstanding 5.625% senior notes that matured on that date. The repayment was funded from the credit facility and existing cash on hand. The company's 5.375% senior notes, which have a carrying value of $333.5 million at September 30, 2012, mature on February 27, 2013. We have reduced our leverage at September 30, 2012, from a year ago, as illustrated by the change in our debt-to-equity ratios in the table below.
As discussed in the "Executive Overview" of this Management's Discussion and Analysis, our capital management priorities have evolved with the growth and success of our business and include:
- reinvestment in the business;
- steady annual growth of dividends (as illustrated and further discussed in the "Dividends" section below);
- share repurchase; and
- establishment of an approximate $1 billion cash buffer in excess of regulatory requirements.
These priorities are executed in a manner consistent with our desire to maintain a strong, investment-grade credit rating.
During the three and nine months ended September 30, 2012 there were 1.8 million and 8.1 million, respectively, of common shares purchased in the market at a cost of $190.0 million.
Our ability to continue to access the capital markets in a timely manner depends on a number of factors, including our Moody’s and Standard & Poor’s credit ratings of A3/Stable and A-/Stable, respectively, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. If we are unable to access capital markets in a timely manner, our business could be adversely impacted.
Certain of our subsidiaries are required to maintain minimum levels of capital. These and other similar provisions of applicable law may have the effect of limiting withdrawals of capital, repayment of intercompany loans and payment of dividends by such entities. A sub-group of Invesco subsidiaries, including all of our regulated EU subsidiaries, is subject to consolidated capital requirements under applicable European Union (EU) directives, and capital is maintained within this sub-group to satisfy these regulations. These requirements mandate the retention of liquid resources in those jurisdictions, which we meet in part by holding cash and cash equivalents. This retained cash can be used for general business purposes in the European sub-group or in the countries where it is located. Due to the capital restrictions, the ability to transfer cash between certain jurisdictions may be limited. In addition, transfers of cash between international jurisdictions may have adverse tax consequences that may substantially limit such activity. At September 30, 2012, the European sub-group had cash and cash equivalent balances of $578.0 million (December 31, 2011: $440.0 million), much of which is used to satisfy these regulatory requirements. We are in compliance with all regulatory minimum net capital requirements. The total amount of non-U.S. cash and cash equivalents was $706.4 million at September 30, 2012 (December 31, 2011: $551.8 million).
In addition, the company is required to hold cash deposits with clearing organizations or to otherwise segregate cash to maintain compliance with federal and other regulations in connection with its UIT broker dealer entity, which was included in the acquired business. At September 30, 2012 these cash deposits totaled $11.3 million.
The consolidation of $4.4 billion and $3.9 billion of total assets and long-term debt of certain CLO products as of September 30, 2012, respectively, did not impact the company’s liquidity and capital resources. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company’s minimal direct investments in, and management fees generated from, these products, which are eliminated upon consolidation. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Conversely, if the CLOs were to liquidate, their investors would have no recourse to the general credit of the company. The company therefore does not consider this debt to be an obligation of the company. See Part I, Item 1, “Financial Statements — Note 11, “Consolidated Investment Products,” for additional details.


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Selected balance sheet information is reflected in the table below:
 
 
Excluding Consolidated Investment Products (CIP)(Non-GAAP)(1)
 
Including Consolidated Investment Products (CIP)(U.S. GAAP)
 
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
 
September 30, 2012
 
December 31, 2011
 
September 30, 2011
$ in millions
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
880.1

 
727.4

 
757.0

 
880.1

 
727.4

 
757.0

Investments of CIP
 
—

 
—

 
—

 
4,717.9

 
6,629.0

 
6,970.9

Total assets(1)
 
12,647.7

 
12,329.2

 
12,405.9

 
17,861.0

 
19,347.0

 
19,737.8

 
 
 
 
 
 
 
 
 
 
 
 
 
Current maturities of total debt
 
333.5

 
215.1

 
215.1

 
333.5

 
215.1

 
215.1

Long-term debt
 
951.6

 
1,069.6

 
1,174.6

 
951.6

 
1,069.6

 
1,174.6

Long-term debt of CIP
 
—

 
—

 
—

 
3,855.0

 
5,512.9

 
5,866.3

Total debt / Total debt plus CIP debt
 
1,285.1

 
1,284.7

 
1,389.7

 
5,140.1

 
6,797.6

 
7,256.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities(1)
 
4,487.6

 
4,541.0

 
4,685.4

 
8,663.6

 
10,209.4

 
10,770.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity(1)
 
8,160.1

 
7,788.2

 
7,720.5

 
9,197.4

 
9,137.6

 
8,967.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Debt/Equity % (1) (2)
 
15.7
%
 
16.5
%
 
18.0
%
 
55.9
%
 
74.4
%
 
80.9
%

(1)
The balance sheet line items excluding consolidated investment products are non-GAAP financial measures. See the "Balance Sheet Discussion" section for a fully expanded balance sheet before and after the consolidation of investment products.
(2)
The debt-to-equity ratio excluding CIP is a non-GAAP financial measure. The debt-to-equity ratio is calculated as total debt divided by total equity for the balance sheet excluding CIP and total debt plus long-term debt of CIP divided by equity for the balance sheet including CIP. Management believes that it is important to illustrate for users of our financial statements that calculating a balance sheet measure, such as the debt-to-equity ratio, including the impact of CIP causes the company to appear far more indebted than is the case. As disclosed above, the debt of CIP is not the company's debt, nor do the noteholders of the CIP debt have any recourse to the company.

Cash Flows Discussion
The ability to consistently generate cash from operations in excess of capital expenditures and dividend payments is one of our company’s fundamental financial strengths. Operations continue to be financed from current earnings and borrowings. Our principal uses of cash, other than for operating expenses, include dividend payments, capital expenditures, acquisitions, purchase of our shares in the open market and investments in certain new investment products.
Cash flows of consolidated investment products (discussed in Part I, Item 1, Financial Statements — Note 11, “Consolidated Investment Products”) (CIPs) are reflected in Invesco’s cash used in operating activities, provided by investing activities and provided by financing activities. Cash held by consolidated investment products is not available for general use by Invesco, nor is Invesco cash available for general use by its consolidated investment products. Accordingly, the table below presents the consolidated total cash flows of the company and separately presents the impact to the cash flows from the consolidation of investment products. The cash flows of consolidated investment products do not form part of the company’s cash flow management processes, nor do they form part of the company’s significant liquidity evaluations and decisions for the reasons noted. The discussion that follows the table will focus on the company’s cash flows.

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Summary of Cash Flow Statement Impact of Consolidated Investment Products
 
Nine Months Ended September 30, 2012
$ in millions
 
Impact of Consolidated Investment Products
 
Consolidated Total
Operating activities
 
 
 
 
Net income
 
(72.2
)
 
459.3

Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
 
 
 
 
Amortization and depreciation
 
—

 
72.5

Share-based compensation expense
 
—

 
102.9

Gains on disposals of property, equipment, and software, net
 
—

 
(0.5
)
Purchase of trading investments
 
—

 
(7,573.2
)
Proceeds from sale of trading investments
 
—

 
7,564.6

Other gains and losses, net
 
8.7

 
(29.3
)
Losses/(gains) of consolidated investment products, net
 
69.9

 
69.9

Tax benefit from share-based compensation
 
—

 
47.7

Excess tax benefits from share-based compensation
 
—

 
(13.7
)
Equity in earnings of unconsolidated affiliates
 
(0.1
)
 
(21.8
)
Dividends from unconsolidated affiliates
 
—

 
14.7

Changes in operating assets and liabilities
 
 
 
 
Decrease/(increase) in cash held by CIP
 
(296.0
)
 
(296.0
)
Decrease/(increase) in receivables
 
23.8

 
151.9

(Decrease)/increase in payables
 
(21.9
)
 
(231.3
)
Net cash provided by/(used in) operating activities
 
(287.8
)
 
317.7

 
 
 
 
 
Investing activities
 
 
 
 
Purchase of property and equipment
 
—

 
(68.4
)
Disposal of property and equipment
 
—

 
0.6

Purchase of available-for-sale investments
 
11.0

 
(73.9
)
Proceeds from available-for-sale investments
 
(13.4
)
 
32.9

Purchase of investments by CIP
 
(2,338.9
)
 
(2,338.9
)
Proceeds from sale of investments by CIP
 
2,484.5

 
2,484.5

Purchase of other investments
 
0.5

 
(87.7
)
Proceeds from sale of other investments
 
—

 
63.4

Returns of capital and distributions from equity method investments
 
(8.7
)
 
12.2

Acquisition earn-out payments
 
—

 
(5.6
)
Sale of management contracts
 
—

 
16.4

Net cash provided by/(used in) investing activities
 
135.0

 
35.5

 
 
 
 
 
Financing activities
 
 
 
 
Proceeds from exercises of share options
 
—

 
17.2

Purchases of treasury shares
 
—

 
(190.0
)
Dividends paid
 
—

 
(211.5
)
Excess tax benefits from share-based compensation
 
—

 
13.7

Capital invested into CIP
 
19.4

 
19.4

Capital distributed by CIP
 
(122.0
)
 
(122.0
)
Net borrowings/(repayments) of debt of CIP
 
255.4

 
255.4

Net borrowings/(repayments) under credit facility
 
—

 
215.5

Repayments of senior notes
 
—

 
(215.1
)
Net cash (used in)/provided by financing activities
 
152.8

 
(217.4
)
(Decrease)/increase in cash and cash equivalents
 
—

 
135.8

Foreign exchange movement on cash and cash equivalents
 
—

 
16.9

Cash and cash equivalents, beginning of period
 
—

 
727.4

Cash and cash equivalents, end of period
 
—

 
880.1



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Summary of Cash Flow Statement Impact of Consolidated Investment Products (continued)
 
Nine Months Ended September 30, 2011
$ in millions
 
Impact of Consolidated Investment Products
 
Consolidated Total
Operating activities
 
 
 
 
Net income
 
(197.0
)
 
312.1

Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
 
 
 
 
Amortization and depreciation
 
—

 
95.3

Share-based compensation expense
 
—

 
86.0

Gains on disposals of property, equipment, and software, net
 
—

 
—

Purchase of trading investments
 
—

 
(8,120.7
)
Proceeds from sale of trading investments
 
—

 
8,103.6

Other gains and losses, net
 
—

 
5.8

Losses/(gains) of consolidated investment products, net
 
243.3

 
243.3

Tax benefit from share-based compensation
 
—

 
74.2

Excess tax benefits from share-based compensation
 
—

 
(15.8
)
Equity in earnings of unconsolidated affiliates
 
1.1

 
(25.6
)
Dividends from unconsolidated affiliates
 
—

 
20.1

Changes in operating assets and liabilities
 
—

 
 
Decrease/(increase) in cash held by CIP
 
296.3

 
296.3

Decrease/(increase) in receivables
 
19.0

 
41.3

(Decrease)/increase in payables
 
(238.0
)
 
(473.9
)
Net cash provided by/(used in) operating activities
 
124.7

 
642.0

 
 
 
 
 
Investing activities
 
 
 
 
Purchase of property and equipment
 
—

 
(60.6
)
Disposal of property and equipment
 
—

 
12.6

Purchase of available-for-sale investments
 
—

 
(31.1
)
Proceeds from available-for-sale investments
 
(3.4
)
 
50.2

Purchase of investments by CIP
 
(2,594.2
)
 
(2,594.2
)
Proceeds from sale of investments by CIP
 
3,035.3

 
3,035.3

Purchase of other investments
 
6.6

 
(102.3
)
Proceeds from sale of other investments
 
—

 
35.7

Returns of capital and distributions from equity method investments
 
(3.2
)
 
28.5

Sale of management contracts
 
—

 
(14.9
)
Acquisition earn-out payments
 
—

 
(5.4
)
Net cash provided by/(used in) investing activities
 
441.1

 
353.8

 
 
 
 
 
Financing activities
 
 
 
 
Proceeds from exercises of share options
 
—

 
11.0

Purchases of treasury shares
 
—

 
(333.0
)
Dividends paid
 
—

 
(165.0
)
Excess tax benefits from share-based compensation
 
—

 
15.8

Capital invested into CIP
 
27.9

 
27.9

Capital distributed by CIP
 
(158.8
)
 
(158.8
)
Net borrowings/(repayments) of debt of CIP
 
(434.9
)
 
(434.9
)
Net borrowings/(repayments) under credit facility
 
—

 
74.0

Repayments of senior notes
 
—

 
—

Acquisition of noncontrolling interest in CIP
 
—

 
(12.3
)
Net cash (used in)/provided by financing activities
 
(565.8
)
 
(975.3
)
(Decrease)/increase in cash and cash equivalents
 
—

 
20.5

Foreign exchange movement on cash and cash equivalents
 
—

 
(4.0
)
Cash and cash equivalents, beginning of period
 
—

 
740.5

Cash and cash equivalents, end of period
 
—

 
757.0


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Operating Activities
During the nine months ended September 30, 2012, cash provided by operating activities decreased $324.3 million to $317.7 million from cash provided by operating activities of $642.0 million during the nine months ended September 30, 2011. The impact of consolidated investment products to cash provided by operating activity was $287.8million of cash used during the nine months ended September 30, 2012 compared to $124.7 million of cash generated in the nine months ended September 30, 2011. The sum of the operating, investing and financing cash flows of consolidated investment products offsets to a zero impact to the company’s change in cash and cash equivalent balances from period to period. Excluding the impact of consolidated investment products, cash provided by operations was $605.5 million in the nine months ended September 30, 2012 compared to cash provided by operations of $517.3 million in the nine months ended September 30, 2011.
The $605.5 million of cash provided by operations during the nine months ended September 30, 2012 included:
•
net purchases of trading investments of $8.6 million. Trading investments are held to provide an economic hedge against staff deferred compensation plan awards together with investments held for a short period, often only a few days, for the purpose of creating a UIT.
•
net cash provided by other operating activities of $614.1 million, representing net income, as adjusted for non-cash items, and the changes in operating assets and liabilities. This nine month period included the use of $373.2 million of cash to pay the annual staff bonuses, related payroll taxes, payroll taxes on annual share award vesting, and annual pension contributions.
The $517.3 million of cash provided by operations during the nine months ended September 30, 2011, included:
•
net purchases of trading investments of $17.1 million, primarily to provide an economic hedge against staff deferred compensation plan awards, and
•
net cash provided by other operating activities of $534.4 million, representing net income as adjusted for non-cash items and the changes in operating assets and liabilities. This nine month period included the use of $384.8 million of cash to pay the annual staff bonuses, related payroll taxes, payroll taxes on then annual share award vesting, and annual pension contributions, all of which result in increased operating cash utilization in the first half of the calendar year.
A $22.4 million increase in net income together with increased realization of accounts receivables into cash and the receipt of the $45.0 million this period related to the legal settlement accrued in 2011, contributed to the increase of $88.2 million of cash provided by operations in the nine months ended September 30, 2012 from the nine months ended September 30, 2011. The $22.4 million increase in net income reflects the exclusion of the impact of consolidated investment products.
Investing Activities
Net cash provided by investing activities totaled $35.5 million for the nine months ended September 30, 2012 (nine months ended September 30, 2011: net cash provided of $353.8 million). The impact of consolidated investment products on investing activities , including investment purchases, sales and returns of capital, was $135.0 million contributed (nine months ended September 30, 2011: $441.1 million contributed). Excluding the impact of these consolidated investment product cash flows, net cash used in investing activities was $99.5 million (nine months ended September 30, 2011: net cash used of $87.3 million).
During the nine months ended September 30, 2012 the company purchased available-for-sale investments and other investments of $173.1 million (nine months ended September 30, 2011: $140.0 million) and had capital expenditures of $68.4 million (nine months ended September 30, 2011: $60.6 million). These cash outflows were partly offset from collected proceeds of $130.6 million from sales and returns of capital of investments in the nine months ended September 30, 2012 (nine months ended September 30, 2011: $121.0 million).
Our capital expenditures related principally in each year to technology initiatives, including enhancements to platforms from which we maintain our portfolio management systems and fund accounting systems, improvements in computer hardware and software desktop products for employees, new telecommunications products to enhance our internal information flow, and back-up disaster recovery systems. Also, in each year, a portion of these costs related to leasehold improvements made to the various buildings and workspaces used in our offices. These projects have been funded with proceeds from our operating cash flows.
During the nine months ended September 30, 2012, net acquisition payments were $5.6 million, compared to $20.3 million during the nine months ended September 30, 2011. The sale of CLO management contracts contributed $16.4 million during the nine months ended September 30, 2012.
Financing Activities
Net cash used in financing activities totaled $217.4 million for the nine months ended September 30, 2012 (nine months ended September 30, 2011: $975.3 million net cash used). As shown in the table above, the financing activities of the consolidated investment products provided cash of $152.8 million (nine months ended September 30, 2011: $565.8 million used). Excluding the impact of consolidated investment products, financing activities used cash of $370.2 million in the nine

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months ended September 30, 2012 (nine months ended September 30, 2011: $409.5 million net cash used).
Other financing cash flows during the nine months ended September 30, 2012 included a $215.1 million payment of a senior note (nine months ended September 30, 2011: none), $215.5 million net borrowings from the credit facility (nine months ended September 30, 2011: $74.0 million), $211.5 million of dividend payments for the dividends declared in January, April and July (nine months ended September 30, 2011: dividends paid of $165.0 million), the purchase of treasury shares through market transactions totaling $190.0 million (nine months ended September 30, 2011: $333.0 million), cash inflows from the exercise of options of $17.2 million (nine months ended September 30, 2011: $11.0 million) and excess tax benefits cash inflows from share-based compensation of $13.7 million (nine months ended September 30, 2011: $15.8 million).

Dividends
Invesco declares and pays dividends on a quarterly basis in arrears. On July 26, 2012, the company’s Board of Directors declared a second quarter 2012 cash dividend of 17.25 cents per share, which was paid on September 7, 2012 to shareholders of record at the close of business on August 22, 2012. On November 1, 2012, the company announced a third quarter 2012 cash dividend of 17.25 cents per share, which is payable on December 7, 2012 to shareholders of record at the close of business on November 19, 2012.

Share Repurchase Plan
During the three and nine months ended September 30, 2012, the company repurchased 1.8 million and 8.1 million common shares, respectively, in the market at a cost of $40.0 million and $190.0 million, respectively (nine months ended September 30, 2011: 13.4 million shares were repurchased at a cost of $333.0 million), leaving approximately $542 million authorized at September 30, 2012 (September 30, 2011: $835.4 million ). Separately, an aggregate of 1.9 million shares were withheld on vesting events during the nine months ended September 30, 2012, to meet employees’ tax obligations (nine months ended September 30, 2011: 2.7 million). The fair value of these shares withheld at the respective withholding dates was $44.4 million (nine months ended September 30, 2011: $71.9 million).

Debt
Our total indebtedness at September 30, 2012 was $1,285.1 million (December 31, 2011 is $1,284.7 million) and was comprised of the following:
$ in millions
September 30, 2012
 
December 31, 2011
Unsecured Senior Notes:
 
 
 
5.625% — due April 17, 2012
—

 
215.1

5.375% — due February 27, 2013
333.5

 
333.5

5.375% — due December 15, 2014
197.1

 
197.1

Floating rate credit facility expiring June 3, 2016
754.5

 
539.0

Total debt
1,285.1

 
1,284.7

Less: current maturities of total debt
(333.5
)
 
(215.1
)
Long-term debt
951.6

 
1,069.6


For the nine months ended September 30, 2012 the company’s weighted average cost of debt was 3.18% (nine months ended September 30, 2011: 3.45%). Total debt increased from $1,284.7 million at December 31, 2011, to $1,285.1 million at September 30, 2012, as the increase in the credit facility borrowings exceeded the retirement of the 2012 Senior Note.
Financial covenants under the credit agreement include: (i) the quarterly maintenance of a debt/EBITDA ratio, as defined in the credit agreement, of not greater than 3.25:1.00 through June 30, 2014, and not greater than 3.00:1.00 thereafter, (ii) a coverage ratio (EBITDA, as defined in the credit agreement, divided by interest payable for the four consecutive fiscal quarters ended before the date of determination) of not less than 4.00:1.00. As of September 30, 2012, we were in compliance with our financial covenants. At September 30, 2012 our leverage ratio was 1.04:1.00 (December 31, 2011: 1.01:1.00), and our interest coverage ratio was 23.86:1.00 (December 31, 2011: 20.93:1.00).

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The September 30, 2012 coverage ratio calculations are as follows:
$ millions
Total
 
Q3 2012
 
Q2 2012
 
Q1 2012
 
Q4 2011
Net income attributable to common shareholders
720.7

 
170.6

 
153.9

 
193.9

 
202.3

Net (income)/loss attributable to consolidated investment products
11.2

 
11.1

 
6.2

 
(4.2
)
 
(1.9
)
Tax expense
286.1

 
74.2

 
62.3

 
73.6

 
76.0

Amortization/depreciation
94.6

 
21.6

 
26.6

 
24.3

 
22.1

Interest expense
53.9

 
12.6

 
13.4

 
13.6

 
14.3

Share-based compensation expense
132.0

 
35.9

 
37.0

 
30.0

 
29.1

Unrealized (gains) and losses from investments, net*
(12.7
)
 
(6.3
)
 
4.5

 
(7.1
)
 
(3.8
)
EBITDA**
1,285.8

 
319.7

 
303.9

 
324.1

 
338.1

Adjusted debt**

$1,331.3

 
 
 
 
 
 
 
 
Leverage ratio (Debt/EBITDA — maximum 3.25:1.00)
1.04

 
 
 
 
 
 
 
 
Interest coverage (EBITDA/Interest Expense — minimum 4.00:1.00)
23.86

 
 
 
 
 
 
 
 

*
Adjustments for unrealized gains and losses from investments, as defined in our credit facility, include non-cash gains and losses on investments to the extent that they do not represent anticipated future cash receipts or expenditures.
**
EBITDA and Adjusted debt are non-GAAP financial measures; however management does not use these measures for anything other than these debt covenant calculations. The calculation of EBITDA above (a reconciliation from net income attributable to common shareholders) is defined by our credit agreement, and therefore net income attributable to common shareholders is the most appropriate GAAP measure from which to reconcile to EBITDA. The calculation of adjusted debt is defined in our credit facility and equals total long-term debt of $1,285.1 million plus $46.2 million in letters of credit.

Off Balance Sheet Commitments
See Part I, Item 1, Financial Statements - Note 10, “Commitments and Contingencies - Off Balance Sheet Commitments,” for more information regarding undrawn capital commitments and support agreements.
Contractual Obligations
We have future obligations under various contracts relating to debt and interest payments, financing and operating leases, long-term defined benefit pension and post-retirement medical plans, and acquisition contracts. During the nine months ended September 30, 2012, there were no significant changes to these obligations reported in our Annual Report on Form 10-K for the year ended December 31, 2011.

Critical Accounting Policies and Estimates
There have been no significant changes to the accounting policies that we believe are the most critical to an understanding of our results of operations and financial condition, which are disclosed in our most recent Form 10-K for the year ended December 31, 2011.
Recent Accounting Standards
See Part I, Item 1, “Financial Statements — Note 1, Accounting Policies — Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of its business, the company is primarily exposed to market risk in the form of securities market risk, interest rate risk, and foreign exchange rate risk.
AUM Market Price Risk
The company’s investment management revenues are comprised of fees based on a percentage of the value of AUM. Declines in equity or fixed income security market prices could cause revenues to decline because of lower investment management fees by:
•
Causing the value of AUM to decrease,

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•
Causing the returns realized on AUM to decrease (impacting performance fees).
•
Causing clients to withdraw funds in favor of investments in markets that they perceive to offer greater opportunity and that the company does not serve,
•
Causing clients to rebalance assets away from investments that the company manages into investments that the company does not manage, and/or
•
Causing clients to reallocate assets away from products that earn higher revenues into products that earn lower revenues.
Underperformance of client accounts relative to competing products could exacerbate these factors.
Securities Market Risk
The company has investments in sponsored investment products that invest in a variety of asset classes. Investments are generally made to establish a track record or to hedge exposure to certain deferred compensation plans. The company’s exposure to market risk arises from its investments. A 20% increase or decrease in the fair value of investments exposed to market risk is not material to the operating results of the company.
Interest Rate Risk
Interest rate risk relates to the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The company is exposed to interest rate risk primarily through its external debt and cash and cash equivalent investments. On September 30, 2012, the interest rates on 41% of the company’s borrowings were fixed for a weighted average period of 1.1 years. Borrowings under the credit facility, which represent 59% of the company’s borrowings, have floating interest rates. A 1% change in the level of interest rates on current debt levels would change annualized interest expense by $7.5 million but would not have a material impact on the ability of the company to continue to service its indebtedness.
Foreign Exchange Rate Risk
The company has transactional currency exposures that occur when any of the company’s subsidiaries receives or pays cash in a currency different from its functional currency. Such exposure arises from sales or purchases by operating subsidiaries in currencies other than the subsidiaries’ functional currencies. These exposures are not actively managed.
The company also has certain investments in foreign operations, whose net assets and results of operations are exposed to foreign currency translation risk when translated into U.S. dollars upon consolidation into Invesco Ltd. The company generally does not hedge these exposures; however, in the three months ended June 30, 2012, the company purchased four put option contracts to hedge economically foreign currency risk on the translation of its pound sterling-denominated earnings into U.S. dollars.  The economic hedge is predominantly triggered upon the impact of a significant decline in the pound sterling/U.S. dollar foreign exchange rate, which could arise from a Greek Euro exit or other major European economic events.  See Note 2, “Fair Value of Assets and Liabilities,” for additional details.
The company is exposed to foreign exchange revaluation into the income statement on monetary assets and liabilities that are held by subsidiaries in different functional currencies than the subsidiaries’ functional currencies. Net foreign exchange revaluation losses were $1.3 million for nine months ended September 30, 2012 and $1.0 million losses for the comparable prior year period, and are included in general and administrative and other gains and losses, net on the Condensed Consolidated Statements of Income. We continue to monitor our exposure to foreign exchange revaluation.

Item 4. Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information the company is required to disclose in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of September 30, 2012. 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

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to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
We have evaluated any change in our internal control over financial reporting that occurred during the nine months ended September 30, 2012 and have concluded that there was no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
See Part I, Item 1, Note 10, “Commitments and Contingencies,” for information regarding legal proceedings.

Item 1A. Risk Factors

Volatility and disruption in world capital and credit markets, as well as adverse changes in the global economy, can negatively affect Invesco's revenues, operations, financial condition and liquidity and may continue to do so.

The capital and credit markets continue to experience substantial volatility. In this regard:

•
In the event of extreme circumstances, including economic, political, or business crises, such as a widespread systemic failure in the global financial system or additional failures of firms that have significant obligations as counterparties on financial instruments, we may suffer significant declines in assets under management and severe liquidity or valuation issues in the short-term sponsored investment products in which client and company assets are invested, all of which would adversely affect our operating results, financial condition, liquidity, credit ratings, ability to access capital markets, and retention and ability to attract key employees. Additionally, these factors could impact our ability to realize the carrying value of our goodwill and other intangible assets.
•
In addition to the impact of the market volatility on client portfolios, the illiquidity and volatility of both the global fixed income and equity markets could negatively affect our ability to manage client inflows and outflows from pooled investment vehicles or to timely meet client redemption requests.
•
Our money market funds have always maintained a $1.00 net asset value (NAV); however, we do not guarantee such level. Market conditions could lead to severe liquidity issues in money market products, which could affect their NAVs. If the NAV of one of our money market funds were to decline below $1.00 per share, such funds could experience significant redemptions in assets under management, loss of shareholder confidence and reputational harm. In 2010, the SEC adopted new rules governing U.S. registered money market funds. These rules are designed to significantly strengthen the regulatory requirements governing money market funds, increase the resilience of such funds to economic stresses, and reduce the risk of runs on these funds. Regulators in the U.S. continue to evaluate whether to propose mandating a variable (“floating”) NAV for money market funds. The company believes such a change would have significant adverse consequences on the money market funds industry and the short-term credit markets.
•
Even if legislative or regulatory initiatives or other efforts successfully stabilize and add liquidity to the financial markets, we may need to modify our strategies, businesses or operations, and we may incur increased capital requirements and constraints or additional costs in order to satisfy new regulatory requirements or to compete in a changed business environment.

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

If we are unable to effect appropriate expense reductions in a timely manner in response to declines in our revenues, or if we are otherwise unable to adapt to rapid changes in the global marketplace, our profitability, financial condition and results of operations would be adversely affected.







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

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

Declines in the market value of the assets in the funds and accounts managed. These could be caused by price declines in the securities markets generally or by price declines in the market segments in which those assets are concentrated. Approximately 44% of our total assets under management were invested in equity securities and approximately 56% were invested in fixed income and other investments at September 30, 2012. Our AUM as of September 30, 2012, were $683.0 billion. We cannot predict whether volatility in the markets will result in substantial or sustained declines in the securities markets generally or result in price declines in market segments in which our assets under management are concentrated. Any of the foregoing could negatively impact our revenues, income and operating margin.

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

Declines in the value of seed capital and partnership investments. The company has investments in sponsored investment products that invest in a variety of asset classes, including, but not limited to equities, fixed income products, private equity, and real estate. Investments in these products are generally made to establish a track record, meet purchase size requirements for trading blocks, or demonstrate economic alignment with other investors in our funds. Adverse market conditions may result in the need to write down the value of these seed capital and partnership investments. As of September 30, 2012, the company had $254.7 million in seed capital and partnership investments.

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 of 1940, as amended), and must be renewed annually by the disinterested members of each fund's board of directors or trustees, as required by law. In addition, the board of trustees or directors of certain other fund accounts of Invesco or our subsidiaries generally may terminate these investment advisory agreements upon written notice for any reason. Mutual fund and unit trust investors may generally withdraw their funds at any time without prior notice. Institutional clients may elect to terminate their relationships with us or reduce the aggregate amount of assets under our management, and individual clients may elect to close their accounts, redeem their shares in our funds, or shift their funds to other types of accounts with different fee structures. Any termination of or failure to renew a significant number of these agreements, or any other loss of a significant number of our clients or assets under management, would adversely affect our revenues and profitability.

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

Certain institutional investors using money market products and other short-term duration fixed income products for cash management purposes may shift these investments to direct investments in comparable instruments in order to realize higher yields than those available in money market and other fund products holding lower yielding instruments. These redemptions would reduce managed assets, thereby reducing our revenues. In addition, rising interest rates will tend to reduce the market

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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 $30.8 million invested in Invesco Mortgage Capital Inc., $43.1 million of equity at risk invested in our collateralized loan obligation products, and $46.2 million invested in fixed income seed money at September 30, 2012, the valuation of which could change with changes in interest and default rates.

We operate in an industry that is highly regulated in many countries, and any enforcement action or adverse changes in the laws or regulations governing our business could decrease our revenues and profitability.
As with all investment management companies, our activities are highly regulated in almost all countries in which we conduct business. Laws and regulations applied at the national, state or provincial and local level generally grant governmental agencies and industry self-regulatory authorities broad administrative discretion over our activities, including the power to limit or restrict our business activities, conduct examinations, risk assessments, investigations and capital adequacy reviews, and impose remedial programs to address perceived deficiencies. Subsidiaries operating in the European Union (“EU”) also are subject to various EU Directives, which are implemented by member state national legislation. As a result of regulatory oversight, we could face requirements which negatively impact the way in which we conduct business, impose additional capital requirements and involve enforcement actions which could lead to sanctions including 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, or the imposition of fines and censures on us or our employees. Judgments or findings of wrongdoing by regulatory or governmental authorities, or in private litigation against us could affect our reputation, increase our costs of doing business and/or negatively impact our revenues, any of which could have a material negative impact on our results of operations, financial condition or liquidity.
Certain of our subsidiaries are required to maintain minimum levels of capital and such capital requirements may be increased from time-to-time. These and other similar provisions of applicable law may have the effect of limiting withdrawals of capital, repayment of intercompany loans and payment of dividends by such entities. A sub-group of Invesco subsidiaries, including all of our regulated EU subsidiaries, is subject to consolidated capital requirements under EU Directives, and capital is maintained within this sub-group to satisfy these regulations. At September 30, 2012, the European sub-group had cash and cash equivalent balances of $578.0 million (September 30, 2011: $501.6 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 regulatory requirements, certain of these EU subsidiaries may be required to limit their dividends to the parent company, Invesco Ltd.
The regulatory environment in which we operate frequently changes and has seen significant increased regulation in recent years. Various changes in law and regulation have been enacted or adopted and are being implemented or otherwise developed in multiple jurisdictions globally in response to the crisis in the financial markets that began in 2007. Various other proposals remain under consideration by legislators, regulators, and other government officials and other public policy commentators. Certain enacted provisions and certain other proposals are potentially far reaching and, depending upon their implementation, could have a material impact on Invesco's business. While many of these provisions appear designed to address perceived problems in the banking sector, certain of the provisions will or may be applied to other financial services companies, including investment managers. 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 have imposed and may continue to impose additional costs, which could negatively impact our profitability.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010. While Invesco does not believe that the Dodd-Frank Act will fundamentally change the investment management industry or cause Invesco to reconsider its basic strategy, certain provisions will, and other provisions may, require us to change or impose new limitations on the manner in which we conduct business; they also will or may increase regulatory burdens and related compliance costs. In addition, the scope and impact of many provisions of the Dodd-Frank Act will be determined by implementing regulations, some of which require lengthy proposal and promulgation periods. Moreover, the Dodd-Frank Act mandates many regulatory studies, some of which pertain directly to the investment management industry, which could lead to additional legislation or regulation. As a result of these uncertainties regarding implementation of the

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Dodd-Frank Act and such other future potential legislative or regulatory changes, the impact of the Dodd-Frank Act on the investment management industry and Invesco cannot be predicted at this time.
The European Union has promulgated or is considering various new or revised directives pertaining to financial services, including investment managers. Such directives are progressing at various stages, and are being or will or would be implemented by national legislation in member states. As with the Dodd-Frank Act, Invesco does not believe implementation of these directives will fundamentally change our industry or cause us to reconsider our fundamental strategy, but it does appear certain provisions will, and other provisions may, require us to change or impose new limitations on the manner in which we conduct business; they also will or may increase regulatory burdens and compliance costs. Similar developments are being implemented or considered in other jurisdictions where we do business; such developments could have similar effects.
Potential developments under enacted and proposed legal and regulatory changes, and related matters, include, without limitation:
•
Expanded prudential regulation over investment management firms.
•
New or increased capital requirements and related regulation (including new capital requirements pertaining to money market funds).
•
Additional change to the regulation of money market funds in the U.S. The SEC in 2010 adopted changes to Rule 2a-7, the primary securities regulation governing U.S. registered money market funds. These new rules were designed to significantly strengthen the regulatory requirements governing money market funds, increase the resilience of such funds to economic stresses, and reduce the risk of runs on these funds. Regulators in the U.S. continue to evaluate whether to propose additional legal and regulatory changes impacting money market funds. Invesco believes certain potential changes that have been the subject of media reports would have significant adverse consequences on the money market funds industry and the short-term credit markets.
•
Changes to the distribution of investment funds and other investment products. In the U.S., the SEC previously has proposed and may repropose significant changes to Rule 12b-1. Invesco believes these proposals could increase operational and compliance costs. The U.K. Financial Services Authority is implementing its Retail Distribution Review, which is expected to reshape the manner in which retail investment funds are sold in the U.K. The EU adopted the Alternative Investment Fund Manager Directive; implementing legislation in member states could, among other elements, impose restrictions on the marketing and sale within the EU of private equity and other alternative investment funds sponsored by non-EU managers. Various regulators have promulgated or are considering other new disclosure and suitability requirements pertaining to the distribution of investment funds and other investment products, including enhanced standards and requirements pertaining to disclosures made to retail investors at the point of sale.
•
Guidelines regarding the structure and components of compensation, including under the Dodd-Frank Act and various EU Directives.
•
New and potentially complex and burdensome tax reporting and tax withholding obligations and related compliance activities pertaining to sponsored investment products, including obligations under the Foreign Account Tax Compliance Act (FATCA) and similar requirements which may be imposed by other countries.
•
Heightened regulatory examinations and inspections, including enforcement reviews, and a more aggressive posture regarding commencing enforcement proceedings resulting in fines, penalties and additional remedial activities. Without limiting the generality of the foregoing, regulators in the United States and the United Kingdom have taken and can be expected to continue to take a more aggressive posture on bringing enforcement proceedings.
•
Changes impacting certain other products or markets (e.g., retirement savings).
•
Enhanced licensing and qualification requirements for key personnel.
•
Other additional rules and regulations and disclosure requirements. Certain provisions impose additional disclosure burdens on public companies, including Invesco. Certain proposals could impose requirements for more widespread disclosures of compensation to highly-paid individuals. Depending upon the scope of any such requirements, Invesco could be disadvantaged in retaining key employees vis-à-vis private companies, including hedge fund sponsors.
•
Strengthening standards regarding various ethical matters, including enhanced focus of U.S. regulators and law enforcement agencies on compliance with the Foreign Corrupt Practices Act and the enactment of the U.K. Bribery Act.
•
Other changes impacting the identity or the organizational structure of regulators with supervisory authority over Invesco.
Invesco cannot at this time predict the full impact of potential legal and regulatory changes or possible enforcement proceedings on its business. It is possible such changes could impose new compliance costs or capital requirements or impact

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Invesco in other ways that could have a material adverse impact on Invesco's results of operations, financial condition or liquidity. Similarly, regulatory enforcement actions which impose significant penalties or compliance obligations or which result in significant reputational harm could have similar material adverse effects on Invesco. Moreover, certain legal or regulatory changes could require us to modify our strategies, businesses or operations, and we may incur other new constraints or costs in order to satisfy new regulatory requirements or to compete in a changed business environment.
To the extent that existing or future regulations affecting the sale of our products and services or our investment strategies cause or contribute to reduced sales or increased redemptions of our products or impair the investment performance of our products, our aggregate assets under management and results of operations might be adversely affected.
Civil litigation and governmental investigations and enforcement actions 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, including civil litigation and governmental investigations and enforcement actions. These actions can arise from normal business operations and/or matters that have been the subject of previous regulatory actions. See Part I, Item 1, Note 10, "Commitments and Contingencies,” for additional information. Judgments in civil litigation or findings of wrongdoing by regulatory or governmental authorities against us could affect our reputation, increase our costs of doing business and/or negatively impact our revenues, any of which could have a material negative impact on our results of operations, financial condition or liquidity.
Our investment management professionals and other key employees are a vital part of our ability to attract and retain clients, and the loss of key individuals or a significant portion of those professionals could result in a reduction of our revenues and profitability.

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

If our reputation is harmed, we could suffer losses in our business, revenues and net income.
Our business depends on earning and maintaining the trust and confidence of clients, regulators and other market participants, and our good reputation is critical to our business. Our reputation is vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries, investigations or findings of wrongdoing, material errors in public reports, employee dishonesty or other misconduct and rumors, among other things, can substantially damage our reputation, even if they are baseless or eventually satisfactorily addressed. Further, our business requires us to continuously manage actual and potential conflicts of interest, including situations where our services to a particular client conflict, or are perceived to conflict, with the interests of another client or those of Invesco. The willingness of clients to enter into transactions in which such a conflict might arise may be affected, if we fail - or appear to fail - to deal appropriately with conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation or regulatory enforcement actions.
We have procedures and controls that are designed to address and manage these risks, but this task can be complex and difficult, and if our procedures and controls fail our reputation could be damaged. 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 results of operations, financial condition or liquidity.
Failure to comply with client contractual requirements and/or investment guidelines could result in damage awards against us and loss of revenues due to client terminations.

Many of the investment management agreements under which we manage assets or provide products or services specify investment guidelines or contractual requirements that Invesco is required to observe in the provision of its services. A failure to comply with these guidelines or contractual requirements could result in damage to our reputation or in our clients seeking to recover losses, withdrawing their assets or terminating their contracts, any of which could cause our revenues and net income to decline. We maintain various compliance procedures and other controls to prevent, detect and correct such errors. When an

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error is detected, we typically will make a payment into the applicable client account to correct it. Significant errors could impact our results of operations.

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

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

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

In recent years there have been several instances of industry consolidation, both in the area of distributors and manufacturers of investment products. Further consolidation may occur in these areas in the future. The increasing size and market influence of certain distributors of our products and of certain direct competitors may have a negative impact on our ability to compete at the same levels of profitability in the future, should we find ourselves unable to maintain relevance in the markets in which we compete.

We may engage in strategic transactions that could create risks.

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

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

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

Our access to the capital markets depends significantly on our credit ratings. We have received credit ratings of A3/Stable and A-/Stable from Moody's and Standard & Poor's credit rating agencies, respectively, as of the date hereof. We believe that rating agency concerns include but are not limited to the fact that our revenues are exposed to equity market volatility and the potential impact from regulatory changes to the industry. Additionally, the rating agencies could decide to downgrade the entire investment management industry, based on their perspective of future growth and solvency. Material deterioration of these factors, and others defined by each rating agency, could result in downgrades to our credit ratings, thereby limiting our ability to generate additional financing. Our credit facility borrowing rates are tied to our credit ratings. Management believes that solid investment grade ratings are an important factor in winning and maintaining institutional business and strives to manage the company to maintain such ratings.

A reduction in our long-term credit ratings could increase our borrowing costs, could limit our access to the capital markets, and may result in outflows thereby reducing AUM and revenues. Continued volatility in global finance markets may also affect our ability to access the capital markets should we seek to do so. If we are unable to access capital markets in a timely manner, our business could be adversely affected.




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Our indebtedness could adversely affect our financial position or results of operations.

As of September 30, 2012, we had outstanding total debt of $1,285.1 million, excluding long-term debt of consolidated investment products, and total equity attributable to common shareholders of $8,156.0 million, excluding retained earnings appropriated for investors in consolidated investment products. The amount of indebtedness we carry could limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or other purposes, increase our vulnerability to adverse economic and industry conditions, limit our flexibility in planning for, or reacting to, changes in our business or industry, and place us at a disadvantage in relation to our competitors. Any or all of the above factors could materially adversely affect our financial position or results of operations.

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

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

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

We sell a significant portion of our investment products through a variety of financial intermediaries, including major wire houses, regional broker-dealers, banks and financial planners in North America, and independent brokers and financial advisors, banks and financial organizations in Europe and Asia. Increasing competition for these distribution channels could cause our distribution costs to rise, which would lower our net revenues. Following the financial crisis, there has been consolidation of banks and broker-dealers, particularly in the U.S., and a limited amount of migration of brokers and financial advisors away from major banks to independent firms focused largely on providing advice. If these trends continue, our distribution costs could increase as a percentage of our revenues generated. Additionally, particularly outside of the U.S., certain of the intermediaries upon whom we rely to distribute our investment products also sell their own competing proprietary funds and investment products, which could limit the distribution of our products. Increasingly, investors, particularly in the institutional market, rely on external consultants and other unconflicted third parties for advice on the choice of investment manager. These consultants and third parties tend to exert a significant degree of influence and they may favor a competitor of Invesco as better meeting their particular client's needs. There is no assurance that our investment products will be among their recommended choices in the future. If one of our major distributors were to cease operations, it could have a significant adverse effect on our revenues and profitability. Any failure to maintain strong business relationships with these distribution sources and the consultant community would impair our ability to sell our products, which in turn could have a negative effect on our revenues and profitability.

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

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

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

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

The ability to consistently and reliably obtain accurate securities pricing information, process client portfolio and fund shareholder transactions and provide reports and other customer service to fund shareholders and clients in other accounts

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managed by us is essential to our continuing success. In recent periods, illiquid markets for certain types of securities have required increased use of fair value pricing, which is dependent on certain subjective judgments that have the potential to be challenged. Any delays or inaccuracies in obtaining pricing information, processing such transactions or such reports, other breaches and errors, and any inadequacies in other customer service, could result in reimbursement obligations or other liabilities, or alienate customers and potentially give rise to claims against us. Our customer service capability, as well as our ability to obtain prompt and accurate securities pricing information and to process transactions and reports, is highly dependent on communications and information systems and on third-party vendors. These systems or vendors could suffer deficiencies, failures or interruptions due to various natural or man-made causes, and our back-up procedures and capabilities may not be adequate to avoid extended interruptions in operations. Certain of these processes involve a degree of manual input, and thus similar problems could occur from time to time due to human error.

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

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

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

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

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

We have goodwill and indefinite-lived intangible assets on our balance sheet that are subject to annual impairment reviews. We also have definite-lived intangible assets on our balance sheet that are subject to impairment testing if indicators of impairment are identified. Goodwill and intangible assets totaled $7,039.9 million and $1,295.8 million, respectively, at September 30, 2012 (December 31, 2011: $6,907.9 million and $1,322.8 million, respectively). We may not realize the value of such assets. We perform impairment reviews of the book values of these assets on an annual basis or more frequently if impairment indicators are present. A variety of factors could cause such book values to become impaired. Should valuations be deemed to be impaired, a write-down of the related assets would occur, adversely affecting our results of operations for the period. See Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Goodwill” and “- Intangibles,” in our Annual Report on Form 10-K for additional details of our goodwill impairment analysis process.

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.

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

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

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

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

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

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

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

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

The company and its subsidiaries are subject to income taxes as well as non-income based taxes, in both the United States and various foreign jurisdictions and are subject to ongoing tax audits in various jurisdictions. 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. Tax authorities may disagree with certain positions we have taken and assess additional taxes. 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.


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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Equity Securities
The following table sets forth information regarding purchases of our common shares by us and any affiliated purchases during the three months ended September 30, 2012:
Month
Total Number of Shares Purchased(1)
 
Average Price Paid Per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced Plans or Programs(2)
 
Maximum Number at end of period (or Approximate
Dollar Value) of Shares
that May Yet Be Purchased
Under the Plans
or Programs(2) (millions)
July 1-31, 2012
928,647

 
22.22

 
925,000

 
$
561.4

August 1-31, 2012
891,864

 
22.12

 
879,000

 
$
542.0

September 1-30, 2012
71,658

 
23.66

 
—

 
$
542.0

Total
1,892,169

 
 
 
1,804,000

 
 

(1)
An aggregate of 88,169 shares were surrendered to us by Invesco employees to satisfy tax withholding obligations or loan repayments in connection with the vesting of equity awards.
(2)
On April 23, 2008, our board of directors authorized a share repurchase authorization of up to $1.5 billion of our common shares with no stated expiration date.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
Not applicable.


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Item 6. Exhibits
Exhibit Index
3.1
Memorandum of Association of Invesco Ltd., incorporating amendments up to and including December 4, 2007, incorporated by reference to exhibit 3.1 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007
 
 
3.2
Amended and Restated Bye-Laws of Invesco Ltd., incorporating amendments up to and including December 4, 2007, incorporated by reference to exhibit 3.2 to Invesco’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 12, 2007
 
 
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
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Schema Document
 
 
101.CAL
XBRL Calculation Linkbase Document
 
 
101.LAB
XBRL Labels Linkbase Document
 
 
101.PRE
XBRL Presentation Linkbase Document
 
 
101.DEF
XBRL Definition Linkbase Document

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
INVESCO LTD.
November 1, 2012
/s/ MARTIN L. FLANAGAN  
 
Martin L. Flanagan 
 
President and Chief Executive Officer 
 
 
November 1, 2012
/s/ LOREN M. STARR  
 
Loren M. Starr 
 
Senior Managing Director and Chief Financial Officer 

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