Invesco Ltd. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Invesco is a global investment manager. Unless otherwise noted, financial amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $1,360.6 million | $1,254.4 million | $2,716.4 million | $2,447.0 million |
| Operating income | $331.3 million | $318.3 million | $652.4 million | $576.2 million |
| Operating margin | 24.3% | 25.4% | 24.0% | 23.5% |
| Net income attributable to Invesco | $245.1 million | $239.6 million | $499.0 million | $451.6 million |
| Diluted EPS | $0.59 | $0.58 | $1.21 | $1.10 |
| Non-GAAP net revenue | $974.0 million | $906.3 million | $1,932.0 million | $1,773.4 million |
| Non-GAAP adjusted operating margin | 38.7% | 39.3% | 38.0% | 38.5% |
- Q2 operating revenue increased 8.5%; operating income rose 4.1%, while the GAAP operating margin declined 1.1 percentage points. Six-month revenue increased 11.0% and operating income 13.2%.
- Q2 adjusted net income was $273.1 million and adjusted diluted EPS $0.66, versus $264.5 million and $0.64 a year earlier. Six-month adjusted net income was $547.0 million and adjusted diluted EPS $1.32, versus $515.0 million and $1.26. These are non-GAAP measures.
- Ending AUM was $963.3 billion, up from $858.3 billion a year earlier; Q2 average AUM was $973.9 billion versus $849.2 billion. The Guggenheim ETF acquisition contributed $38.1 billion of AUM. Q2 long-term net flows were outflows of $8.0 billion; six-month outflows were $7.7 billion.
- Net revenue yield on AUM fell to 40.0 basis points in Q2 from 42.7 and to 40.1 basis points for the first half from 42.2. Management cited product mix and a higher passive-AUM share as factors.
- Six-month cash from operating activities was $396.8 million under GAAP; excluding consolidated investment products (CIP), operating cash flow was $438.2 million, down from $581.1 million. The 2017 comparison included $161.0 million of investment dispositions.
- At June 30, cash excluding CIP was $1.48 billion and long-term debt was $2.96 billion, compared with $2.01 billion and $2.08 billion at year-end 2017. The increase in debt largely funded acquisitions. The $5.01 billion of CIP debt is reported on the consolidated balance sheet but is non-recourse to Invesco and is not treated by management as company debt.
- Credit-facility leverage was 1.62:1, versus 1.18:1 at year-end; interest coverage was 18.29:1. Invesco reported compliance with its covenants. The quarterly dividend declared was $0.30 per share; six-month dividends paid were $244.0 million.
Material changes, outlook and risks
- Invesco acquired Guggenheim Investments’ ETF business for $1.2 billion in April and UK adviser-technology provider Intelliflo in June. Purchase-price allocations were preliminary. Goodwill and intangible assets increased materially as a result.
- ASC 606 was adopted in 2018. It changed the gross-versus-net presentation of certain revenue and expenses; management said it did not affect net income or EPS. Comparatives were not restated, so reported revenue and expense growth is not fully comparable. The filing quantifies presentation effects, including a $11.8 million increase in Q2 reported revenue relative to the pre-adoption presentation.
- Management intends to use cash generated by the lower U.S. corporate tax rate first to reduce acquisition-related credit-facility borrowings. It planned to repay a significant portion during 2018 and curtailed open-market repurchases. Management’s longer-term capital priorities include reinvestment, moderate dividend growth, repurchases and an approximately $1 billion cash buffer above European regulatory and liquidity requirements.
- Business-optimization initiatives had estimated total costs of about $156 million, with about $20 million remaining through 2018. Management reported approximately $52 million in annualized run-rate savings at quarter-end and expected up to $65 million at completion in 2018. These are management estimates, not guarantees.
- Invesco expected to report 100% of Invesco Great Wall flows and AUM beginning in Q3 and estimated its Q3 total flows, including money market, at approximately $6 billion. This is an expectation, not formal earnings guidance.
- Key exposures include market-driven AUM and fee changes, client outflows, investment performance, foreign exchange, interest rates and regulatory requirements. Management noted continued market volatility and geopolitical and trade-policy uncertainty. The company hedged approximately 75% of pound-sterling-based operating income through June 2019.
- Undrawn co-investment commitments were $426.5 million. The filing describes ordinary-course litigation and ongoing regulatory oversight; management stated that reasonably estimable losses were accrued, but it could not estimate a range for other litigation contingencies. Management did not expect known claims to materially affect the business, financial position, results or liquidity.
- The company reported effective disclosure controls and no significant change in risk factors from its 2017 Form 10-K. No material changes to contractual obligations were reported.
Most important facts for investors to verify
- Whether long-term net outflows persist and how AUM, fee yield and passive-product mix affect recurring revenue.
- Organic operating and cash-flow trends after separating acquisition effects, foreign exchange and ASC 606 presentation changes.
- Integration and performance of the Guggenheim ETF business and Intelliflo, including final purchase-price allocations and acquisition-related costs.
- Progress in repaying credit-facility borrowings, leverage and liquidity relative to management’s stated cash-buffer and capital-allocation priorities.
- Whether the expected business-optimization savings and Invesco Great Wall flows are achieved, and any material developments in litigation or regulatory matters.