Invesco Ltd. — Q1 2016 Form 10-Q
Business context and reporting period. Invesco is a global investment manager. This unaudited quarterly filing covers the three months ended March 31, 2016, with comparisons to Q1 2015. Results reflect volatile markets and a change in consolidation accounting effective January 1, 2016; consolidated investment products (CIP) can materially affect GAAP presentation, although Invesco says their assets and debt are not generally available to or obligations of the company.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Operating revenue | $1,148.7 million | $1,291.6 million; down 11.1% |
| Operating income / margin | $274.4 million / 23.9% | $338.1 million / 26.2% |
| Net income attributable to Invesco | $161.0 million | $259.6 million |
| Diluted EPS | $0.38 | $0.60 |
| Adjusted operating income / margin (non-GAAP) | $307.1 million / 37.5% | $374.4 million / 40.8% |
| Adjusted diluted EPS (non-GAAP) | $0.49 | $0.63 |
| Ending AUM | $771.5 billion | $798.3 billion; down 3.4% |
| Operating cash flow | $(68.8) million GAAP; $(78.6) million excluding CIP | $(56.3) million GAAP |
Revenue fell as average AUM declined 6.0%, performance fees dropped 69.0% to $14.5 million, and net revenue yield decreased to 43.8 basis points from 46.1. Operating expenses declined 8.3% to $874.3 million, but by less than revenue. The effective tax rate was 31.3%, versus 26.3%, including an increase related to the Religare impairment.
Cash and cash equivalents were $1.455 billion at quarter-end, down $396.9 million from December 31, 2015. Cash used in investing activities was $107.1 million and cash used in financing activities was $212.9 million; financing uses included $125.0 million of share repurchases and $113.0 million of dividends paid. Working-capital movements, including receivables, contributed to operating cash use.
Long-term corporate debt was $2.073 billion; the $1.25 billion revolving credit facility was undrawn. The company reported a 26.2% debt-to-equity ratio excluding CIP (non-GAAP), versus 64.5% including CIP, and said it complied with debt covenants. Covenant leverage was 1.29x and interest coverage 18.61x. Management cited maintaining an approximately $1 billion cash buffer above European regulatory and liquidity requirements as a capital priority. Some cash is subject to regulatory or jurisdictional transfer restrictions.
Material changes and management commentary
- Long-term net outflows were $1.3 billion, compared with $10.3 billion of inflows in Q1 2015. Asia had $3.6 billion of long-term inflows, partially offset by outflows in the U.S., Continental Europe and the U.K. Institutional flows were positive; retail flows were negative.
- Reported AUM also reflected $3.0 billion of market losses, $2.6 billion of favorable foreign-exchange translation and $3.6 billion of net dispositions. Average AUM was $747.5 billion, versus $795.4 billion.
- Invesco adopted ASU 2015-02 on January 1, changing which investment products are consolidated. It deconsolidated certain products and consolidated others; this makes some balance-sheet and income-statement comparisons less directly comparable. CIP debt is non-recourse to Invesco, according to the filing.
- Management described significant global market volatility. It highlighted positive institutional business activity and Asia-Pacific wins, while noting long-term outflows in U.S. and European operations.
Outlook, risks, and unusual items
- No specific earnings or AUM guidance is provided. Management said results are sensitive to market levels, AUM flows and mix, performance, and foreign-exchange movements.
- A business-support transformation program includes shared services, outsourcing, automation and office optimization. Q1 business-optimization charges were $6.8 million; estimated 2016 implementation costs were up to $85 million.
- The filing identifies the June 23, 2016 U.K. Brexit vote as a source of market and currency uncertainty. Invesco reported new sterling hedges covering April 2016 through March 2017, with a $1.4355 strike.
- A $17.8 million non-cash impairment of the Religare investment was recorded in Q1, reflecting rupee depreciation. Invesco acquired the remaining 51% of Religare on April 5, 2016. A $6.0 million provision for regulatory investigations was also recorded; management said reasonably estimable losses had been accrued but could not estimate a range for other litigation contingencies.
- Undrawn capital commitments were $172.9 million. Management said it had made adequate accruals for estimable legal losses and did not expect the ultimate resolution of known claims to materially affect the company, while warning that regulatory matters or loss of client confidence could reduce AUM.
- The board announced a Q1 dividend of $0.28 per share, payable June 3, 2016. Future dividends remain subject to board discretion and financial conditions.
Important facts for investors to verify
- Whether AUM flows, asset mix and fee yield stabilize, particularly in U.S. and European businesses.
- How much reported performance changes reflect recurring operations versus the ASU 2015-02 consolidation changes and non-GAAP adjustments.
- Whether operating cash flow improves as receivables and other working-capital balances normalize, and how cash availability is affected by regulatory restrictions.
- The actual cost and benefits of the transformation program, and developments in regulatory investigations, Brexit-related exposure and the Religare acquisition.