Invesco Ltd. — Q3 2018 Form 10-Q
Business context and period. Invesco is a global investment manager serving retail and institutional clients. This unaudited report covers the quarter and nine months ended September 30, 2018; financial amounts below are in U.S. dollars unless stated otherwise. Results are affected by assets under management (AUM), market movements, client flows, product mix and foreign exchange rates.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenues | $1,341.8m | $1,337.7m | $4,058.2m | $3,784.7m |
| Operating income | $322.1m | $360.3m | $974.5m | $936.5m |
| Operating margin | 24.0% | 26.9% | 24.0% | 24.7% |
| Net income attributable to Invesco | $269.6m | $267.5m | $768.6m | $719.1m |
| Diluted EPS | $0.65 | $0.65 | $1.86 | $1.76 |
| Adjusted operating income (non-GAAP) | $357.8m | $402.4m | $1,091.6m | $1,084.7m |
| Adjusted operating margin (non-GAAP) | 37.0% | 41.2% | 37.7% | 39.4% |
| Adjusted diluted EPS (non-GAAP) | $0.66 | $0.71 | $1.99 | $1.97 |
Q3 revenue was nearly flat year over year, while operating income fell 10.6% and GAAP operating margin contracted 2.9 percentage points. Nine-month revenue rose 7.2% and operating income rose 4.1%. Adjusted results are non-GAAP measures and exclude specified items; they should not be treated as substitutes for GAAP results.
- Q3 investment management fees fell 2.2% to $1,038.9m, despite average AUM increasing 10.6%; the comparison reflects revenue-recognition presentation changes, foreign exchange and product mix. Performance fees fell 81.3% to $7.9m, while service and distribution fees rose 14.0% to $248.0m.
- For the nine months, investment management fees rose 3.5% to $3,133.1m and performance fees declined 59.3% to $28.6m. ASC 606 adoption materially changed gross revenue and expense presentation, but management said adoption did not affect net income or EPS.
- Q3 expenses rose 4.3% to $1,019.7m; nine-month expenses rose 8.3% to $3,083.7m. Higher distribution costs and property, office and technology costs contributed to the increases.
- Effective tax rates were 17.8% for Q3 and 20.4% for the nine-month period, down from 31.0% and 28.3%, respectively, in 2017. Lower U.S. federal tax rates were a significant factor.
AUM, cash flow, debt and liquidity
- Ending AUM was $980.9bn, up from $917.5bn a year earlier. Q3 average AUM was $985.1bn versus $890.8bn.
- Q3 long-term net outflows were $11.2bn, compared with $4.1bn of inflows a year earlier. Nine-month long-term net outflows were $18.9bn, versus $6.0bn of inflows in 2017. Passive AUM inflows partly offset active outflows. Q3 market gains added $14.3bn to AUM; acquisitions added $9.5bn.
- Net revenue yield on AUM declined to 39.3 basis points in Q3 from 43.9 basis points, and to 39.8 basis points for the nine months from 42.8 basis points. Management cited lower performance fees, product mix and a greater share of lower-fee passive AUM.
- Cash and cash equivalents available to Invesco were $1,631.5m at September 30, down from $2,006.4m at year-end 2017. Consolidated cash flow from operations was $662.1m for nine months; excluding CIP, it was $887.4m, down from $1,028.4m in 2017. Investing cash use excluding CIP was $1,542.8m, including $1,469.3m for acquisitions.
- Long-term debt was $2,814.6m, up from $2,075.8m at year-end, including $737.2m drawn on the credit facility. The company reported a 1.61:1 leverage ratio and 16.59:1 interest coverage ratio, within covenant limits of 3.25:1 maximum leverage and 4.00:1 minimum coverage. Weighted-average debt cost for the nine months was 3.81%.
- Invesco reported $414.2m of undrawn co-investment commitments. It said it remained compliant with regulatory minimum capital requirements and reported a $734.4m minimum regulatory capital requirement. CIP assets and debt are consolidated for accounting purposes but are not available to Invesco or obligations of the company; policyholder assets and liabilities offset.
Material changes, outlook and notable items
- Acquisitions: Invesco completed the $1.2bn Guggenheim ETF business acquisition in April and acquired UK digital-advice platform Intelliflo in June. Guggenheim added $38.1bn of AUM at acquisition. Purchase-price allocations were preliminary.
- OppenheimerFunds agreement after quarter-end: On October 17, 2018, Invesco agreed to acquire MassMutual’s asset-management affiliate for 81.9m Invesco common shares and $4bn of perpetual, non-cumulative preferred shares carrying a 5.9% fixed rate. Closing was expected in Q2 2019, subject to approvals. Management said the deal would add approximately $250bn of AUM; integration, financing and execution remain important considerations.
- Capital returns: The company announced a $1.2bn common-share buyback over two years, and entered a $300m forward purchase contract. It announced a Q3 dividend of $0.30 per share, payable December 3, 2018. The company said the buyback would be funded from operating cash flows, not leverage.
- Cost program: Business optimization charges were $14.5m in Q3 and $28.7m for nine months. Total initiative costs were estimated at approximately $160m; management reported $54m of annualized run-rate savings by Q3 and expected up to $62m by completion in 2018.
- China joint venture: Invesco began reporting 100% of Invesco Great Wall’s AUM and flows in Q3 after reaching an agreement in principle to obtain a majority stake. The company’s non-GAAP operating presentation was adjusted to reflect this basis; the change affects comparability.
- Market and business risks: Management described divergent markets, trade and tariff concerns, Brexit uncertainty and rising U.S. and UK interest rates. AUM-linked revenues are exposed to market declines, client outflows, underperformance, product mix and currency movements. Management also identified regulatory and litigation exposure; it said it had accrued estimable losses and did not expect known claims to materially affect the company, while noting that a range of reasonably possible losses could not be estimated for other contingencies.
- Other unusual items: Q3 general and administrative expense included a $26.7m credit for recoverable VAT relating cumulatively to 2014 through Q2 2018. The company also recorded a $1.5m additional tax expense while refining its estimate under the 2017 Tax Act. It expected to finalize the tax accounting in Q4 2018.
Investor verification priorities
- Track long-term flows, especially persistent active-product outflows, and the effect of passive AUM growth on revenue yield and margins.
- Reconcile GAAP and non-GAAP results, including ASC 606 presentation changes, the Invesco Great Wall reporting change and acquisition-related adjustments.
- Assess funding, preferred-share obligations, dilution and integration risks associated with the pending OppenheimerFunds transaction, alongside the planned repurchases and dividends.
- Monitor credit-facility repayment, leverage and covenant headroom; distinguish corporate cash and debt from consolidated investment-product balances.
- Verify delivery of the cost-savings program and the final tax accounting, and follow material regulatory, litigation and co-investment commitment developments.