Invesco Ltd. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Invesco is a global investment manager. Results include OppenheimerFunds from its May 24, 2019 acquisition; comparisons with 2018 are therefore not fully like-for-like.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $1,720.6M | $1,341.8M | $4,374.6M | $4,058.2M |
| Operating income | $275.1M | $322.1M | $493.6M | $974.5M |
| Operating margin | 16.0% | 24.0% | 11.3% | 24.0% |
| Net income attributable to Invesco | $167.1M | $269.6M | $384.9M | $768.6M |
| Diluted EPS | $0.36 | $0.65 | $0.89 | $1.86 |
| Adjusted operating income (non-GAAP) | $502.6M | $357.8M | $1,150.3M | $1,091.6M |
| Adjusted operating margin (non-GAAP) | 40.9% | 37.0% | 36.5% | 37.7% |
| Adjusted diluted EPS (non-GAAP) | $0.70 | $0.66 | $1.91 | $1.99 |
Q3 revenue rose 28.2%, principally reflecting OppenheimerFunds, while operating expenses increased 41.8% to $1,445.5M. Transaction, integration and restructuring costs were $185.5M in Q3 and $536.5M for the nine-month period, heavily weighing on GAAP operating income and earnings. Adjusted measures exclude specified items and are not substitutes for GAAP results.
- Cash flow: Nine-month operating cash flow was $653.0M versus $662.1M in 2018. Excluding consolidated investment products (CIP), operating cash flow was $769.3M versus $887.4M. Investing cash flow was negative $769.3M; financing cash flow was negative $123.9M. Cash and cash equivalents attributable to Invesco were $1,048.6M at September 30, down from $1,147.7M at year-end 2018.
- Debt and liquidity: Long-term debt was $2,296.6M, down from $2,408.8M at year-end; this excludes $5,484.3M of non-recourse CIP debt. The company reported covenant compliance, a 1.40x leverage ratio and 12.67x interest coverage. It stated that cash, operating cash flow and available credit should provide sufficient resources; credit-facility capacity was not clearly quantified in the supplied filing text.
- AUM and flows: Ending AUM was $1.184T, up from $980.9B a year earlier, including $224.4B added through OppenheimerFunds. Q3 total net flows were negative $5.8B, including negative $11.1B long-term net flows; nine-month total net flows were negative $6.8B. Nine-month market gains added $80.8B. Average AUM was $1.188T in Q3 versus $985.1B in Q3 2018.
- Margins and revenue mix: Q3 net revenue (non-GAAP) was $1,228.7M, up 27.1%; adjusted operating margin expanded to 40.9%. For nine months, net revenue rose 8.6% to $3,147.3M, while adjusted margin declined to 36.5% from 37.7%. Management noted foreign-exchange headwinds to reported revenue.
Material changes and unusual items
- Invesco acquired OppenheimerFunds for approximately $5.6B, funded with $35M cash, common shares and $4.0B of perpetual preferred shares carrying a 5.9% non-cumulative dividend and a 21-year non-call period. MassMutual held approximately 16.7% of common shares at quarter-end and all preferred shares.
- Management reported $501M in annualized net expense synergies achieved, above its $475M target and ahead of schedule. It said acquisition-related costs would rise from the original projection due to fund mergers and additional severance associated with increased savings. The filing does not provide a revised total cost estimate.
- Q3 GAAP EPS declined to $0.36 from $0.65, while adjusted EPS increased to $0.70 from $0.66. The gap reflects, in large part, acquisition-related charges and preferred dividends.
- The company repurchased shares through forward contracts and market purchases; $743M remained under the share-repurchase authorization. Forward-contract shares are expected to settle on April 1, 2021.
- Currency translation reduced AUM by $8.2B in Q3 and $7.1B in the nine-month period. Foreign-currency translation losses were $133.4M in Q3 in other comprehensive income.
- Management cited volatile markets, trade tensions, concerns about global growth and Brexit uncertainty. UK-domiciled client AUM was $70.1B, compared with $85.9B a year earlier. LIBOR phaseout after 2021 may affect some portfolios and instruments.
Outlook, risks and contingencies
The filing gives no formal earnings or revenue guidance. Management described OppenheimerFunds as a multi-year growth opportunity and said integration and synergy work would continue. Results remain sensitive to market levels, client flows, asset mix and fee yields, foreign exchange, investment performance, interest rates, and client confidence. Regulatory investigations or litigation could harm confidence and reduce AUM; management said it had accrued estimable legal losses but could not estimate a range for other litigation contingencies.
Other items to monitor include $282.9M of undrawn co-investment commitments; $70.0M of gross unrecognized tax benefits, with a possible $5M–$15M change over the next 12 months; and a new Atlanta headquarters lease expected to commence in 2022, with approximately $232.5M of obligations over 15 years. The company reported effective disclosure controls, while excluding OppenheimerFunds’ internal-control assessment during integration.
Important facts for investors to verify
- Whether reported synergies are sustainable and whether integration costs, fund mergers and severance remain above the initial plan.
- Organic AUM flows and fee yields, separating acquisition-driven AUM and market effects from recurring client demand.
- The earnings and cash-flow impact of preferred dividends, share repurchases and forward-contract settlement.
- Liquidity and debt covenant headroom, distinguishing Invesco obligations from non-recourse CIP balances.
- Developments in Brexit, LIBOR transition, tax positions, regulatory matters and litigation contingencies.