Invesco Ltd. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 23, 2017. Invesco is a global investment manager with one reported operating segment. It managed $812.9 billion in assets at year-end.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Operating revenue | $4,734.4 million | $5,122.9 million | Down 7.6% |
| Net revenue (non-GAAP) | $3,393.2 million | $3,643.2 million | Down 6.9% |
| Operating income | $1,176.4 million | $1,358.4 million | Down 13.4% |
| Operating margin | 24.8% | 26.5% | Down 1.7 percentage points |
| Adjusted operating income (non-GAAP) | $1,312.8 million | $1,493.7 million | Down 12.1% |
| Adjusted operating margin (non-GAAP) | 38.7% | 41.0% | Down 2.3 percentage points |
| Net income attributable to Invesco | $854.2 million | $968.1 million | Down 11.8% |
| Diluted EPS | $2.06 | $2.26 | Down 8.8% |
Performance fees fell 48.4% to $44.3 million. Management cited currency translation, lower average AUM and a less favorable asset mix; the stronger U.S. dollar reduced operating revenue by $136.8 million year over year. Average AUM was $788.8 billion, down from $794.7 billion, while ending AUM rose 4.8% to $812.9 billion.
- Long-term net inflows were $12.7 billion; total net inflows were $22.9 billion, including $12.8 billion of institutional money-market inflows and offset by $2.6 billion of outflows from PowerShares QQQ.
- Market gains and reinvestment added $37.7 billion to AUM; foreign exchange translation reduced AUM by $22.1 billion.
- Cash and cash equivalents were $1.328 billion, down from $1.851 billion. Operating cash flow was $129.3 million on a consolidated basis; excluding cash flows of consolidated investment products (CIP), company operating cash flow was $843.5 million, versus $1.030 billion in 2015.
- Company long-term debt was $2.102 billion, excluding $4.403 billion of CIP debt, which management says is nonrecourse and does not affect corporate liquidity. Year-end leverage and interest-coverage ratios were 1.35x and 16.69x, respectively; the company reported compliance with credit covenants.
- Total assets were $25.734 billion and equity attributable to Invesco was $7.504 billion. The balance sheet includes substantial policyholder assets and liabilities, which are equal and offsetting.
Fourth quarter: Operating revenue was $1,194.7 million versus $1,239.7 million in Q4 2015; operating income was $294.2 million versus $303.6 million. Net income attributable to Invesco was $226.5 million versus $201.9 million, and diluted EPS was $0.55 versus $0.48.
Material changes and notable items
- Invesco acquired the remaining 51% of its India asset-management joint venture, taking ownership to 100%, and acquired digital-advice technology provider Jemstep. The acquisitions contributed to $121.9 million of business purchases and added $63.4 million of intangible assets.
- The company repurchased 18.1 million shares for $535.0 million and paid $460.4 million in dividends. The annual dividend attributable to FY 2016 was reported as $1.12 per share, up 3.7% from FY 2015.
- Business optimization charges were $49.9 million in 2016. Management estimated up to $30 million of additional implementation costs in 2017 and expected eventual savings to more than offset implementation expense within three years after completion.
- A $17.8 million non-cash impairment was recorded on the former India joint-venture investment, related to rupee depreciation. Goodwill impairment testing found no impairment at the annual review date.
- Adoption of consolidation guidance changed which investment products were consolidated, including deconsolidations and newly consolidated funds. Year-over-year comparisons of reported results and balance-sheet amounts are therefore affected; CIP balances are largely separate from corporate resources.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management emphasized long-term investment performance, client service, product development and global-platform efficiency. It reported 72% and 75% of measured, ranked active assets in the top half of peer groups over three- and five-year periods, respectively; these rankings cover only a portion of total AUM and past performance is not indicative of future results.
- Key business risks include market declines and client outflows, fee pressure and passive-product growth, investment underperformance, regulatory change, currency fluctuations, cyber and operational incidents, and dependence on key employees and distribution partners. Brexit-related volatility and sterling weakness were specifically noted.
- Regulatory changes—including U.S. money-market-fund rules and Department of Labor fiduciary rules—may increase compliance costs or affect product demand and distribution. The company also highlighted potential tax-law changes and uncertainty around international tax developments.
- Legal and regulatory matters arise in the ordinary course. Management said adequate accruals had been made for estimable losses and did not expect ultimate resolution to materially affect the company, but it could not estimate a range of reasonably possible losses for other contingencies.
- PwC identified an auditor-independence issue involving lender relationships and ownership of certain Invesco-advised funds. The SEC staff’s no-action relief for a similar situation was expected to expire December 20, 2017; permanent relief was not established in the filing. A change of auditor or other action could add cost and affect filings or financing covenants.
- Management and PwC concluded internal control over financial reporting was effective as of year-end. The filing reports investment-grade ratings of A/Stable, A2/Stable and A-/Positive from S&P, Moody’s and Fitch, respectively.
Most important facts for investors to verify
- Whether AUM flows, investment performance and the mix of higher-fee versus lower-fee products sustain revenue and margin, particularly as FX and fee pressure continue.
- The reconciliation and ongoing implications of non-GAAP measures, especially net revenue and adjusted operating margin, against GAAP results.
- Corporate liquidity and debt capacity after buybacks, dividends, acquisitions and optimization spending; distinguish Invesco debt and cash from nonrecourse CIP balances and restricted subsidiary cash.
- Actual timing, costs and realized savings from the business transformation, and financial performance of the India and Jemstep acquisitions.
- Resolution of the PwC independence matter before the stated no-action relief expires, as well as developments in legal, regulatory and tax contingencies.