Invesco Ltd. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing also reports unaudited fourth-quarter results. Invesco is a global investment manager operating as one investment-management segment; it managed $937.6 billion in AUM at year-end.
Financial performance and key metrics
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Operating revenue | $5,160.3 million | $4,734.4 million | +9.0% |
| Net revenue (non-GAAP) | $3,754.9 million | $3,393.2 million | +10.7% |
| Operating income | $1,277.1 million | $1,176.4 million | +8.6% |
| Operating margin | 24.7% | 24.8% | Down 0.1 percentage point |
| Adjusted operating income (non-GAAP) | $1,480.2 million | $1,312.8 million | +12.8% |
| Adjusted operating margin (non-GAAP) | 39.4% | 38.7% | Up 0.7 percentage point |
| Net income attributable to Invesco | $1,127.3 million | $854.2 million | +32.0% |
| Diluted EPS | $2.75 | $2.06 | +33.5% |
| Adjusted net income (non-GAAP) | $1,105.9 million | $924.1 million | −2.0% |
| Adjusted diluted EPS (non-GAAP) | $2.70 | $2.23 | +21.1% |
Fourth-quarter 2017 operating revenue was $1,375.6 million, operating income was $344.3 million, net income attributable to Invesco was $408.2 million, and diluted EPS was $0.99. Fourth-quarter income-tax benefit was $23.2 million; the filing attributes the large annual tax-rate decline primarily to the 2017 Tax Act’s deferred-tax remeasurement benefit.
- AUM and flows: Ending AUM rose from $812.9 billion to $937.6 billion, supported by $66.0 billion in market gains, $21.4 billion in foreign-exchange translation, and the $26.0 billion European ETF acquisition. Long-term net inflows were $11.5 billion, compared with $16.5 billion in 2016; total net flows were $11.3 billion after money-market and non-management-fee flows. Average AUM increased to $875.0 billion from $788.8 billion.
- Revenue mix and fees: Investment-management fees increased 9.4%, while performance fees increased to $113.3 million from $44.3 million. Net revenue yield edged down to 42.9 basis points from 43.0; excluding performance fees, it fell to 41.5 from 42.4 basis points. Management cited a higher passive-AUM mix, including the European ETF acquisition, as a source of fee-yield dilution.
- Cash flow and capital spending: Reported operating cash flow was $1,370.7 million, versus $171.3 million in 2016. Excluding consolidated investment products (CIP), management reported operating cash flow of $1,431.9 million, up from $885.5 million. Net investing cash use was $961.1 million, including $299.2 million for the European ETF business; capital expenditures were $111.7 million. Cash and cash equivalents ended the year at $2,006.4 million, up from $1,328.0 million.
- Debt and liquidity: Company long-term debt was $2,075.8 million, excluding $4,799.8 million of CIP debt, which Invesco says is not a company obligation and is without recourse to its general credit. The $1.5 billion credit facility had no balance outstanding at year-end. Leverage and interest-coverage ratios were 1.18x and 18.64x, respectively, versus covenant limits of 3.25x maximum and 4.00x minimum. The company reported compliance with covenants and regulatory capital requirements; minimum regulatory capital was $761.4 million.
Material changes versus the prior year
- Operating revenue and operating income recovered from 2016 declines, aided by higher average AUM, market appreciation, increased performance fees, and the European ETF acquisition. Operating expenses rose 9.1%, including higher compensation, technology, and acquisition/optimization costs, so GAAP operating margin was nearly flat.
- Net income attributable to Invesco increased substantially, while adjusted net income declined. The comparison was affected by a $130.7 million provisional tax benefit from the 2017 Tax Act and other reconciling items; adjusted measures exclude specified items and are non-GAAP.
- Passive AUM increased to $199.0 billion, or 21.2% of total AUM, from $144.4 billion, or 17.8%. The Source European ETF acquisition added $26.0 billion of AUM at acquisition.
- Invesco did not repurchase shares in the open market during 2017, in preparation for the planned Guggenheim ETF purchase; it paid $471.6 million in dividends. The annual dividend declared per share was reported as $1.15 in the financial data, while management’s dividend discussion describes $1.16 attributable to the fiscal year.
Outlook, commentary, risks, and unusual items
- Planned acquisition: Invesco agreed to acquire Guggenheim Investments’ ETF business, comprising 76 ETFs and $38.4 billion of AUM at December 31, 2017, for $1.2 billion cash. Closing was expected in Q2 2018. Management anticipated financing approximately 80% with the credit facility, repaying borrowing during 2018, and curtailing open-market repurchases.
- Cost transformation: Business-optimization charges were $58.0 million in 2017. The initiative had generated $43.8 million in annualized run-rate savings by year-end; management estimated up to $35 million of incremental 2018 implementation costs and targeted annualized savings of up to $65 million at completion.
- Tax and regulation: The U.S. corporate tax rate was reduced to 21% effective January 1, 2018. The $130.7 million tax benefit was provisional, and the company said its Tax Act analysis remained incomplete. MiFID II research costs in Europe were to be absorbed by Invesco, with no material financial-statement impact expected.
- Principal business risks: AUM and fee revenue are exposed to market declines, net outflows, relative investment performance, shifts toward lower-fee passive products, fee pressure, and client or intermediary concentration. Other material risks include regulatory change, foreign-exchange movements, cyber and operational disruptions, key-person retention, acquisitions and integration, and restrictions on transferring subsidiary cash.
- Contingencies and unusual items: A Canadian subsidiary appealed approximately $7.8 million of GST assessments; no provision was recorded because management believed its position was more likely than not to prevail. Management stated that recorded legal accruals were adequate and that other litigation outcomes could not be reliably estimated. The Tax Act benefit, elevated performance fees, executive retirement costs, and business-optimization charges affected reported comparisons.
Most important facts for investors to verify
- Reconcile GAAP and adjusted earnings, especially the $130.7 million provisional tax benefit and the difference between GAAP and adjusted net income.
- Assess the quality and persistence of AUM growth: separate market and currency gains, acquired AUM, long-term flows, and money-market flows; monitor active-versus-passive mix and fee yield.
- Track the Guggenheim ETF transaction’s closing, financing, integration, debt repayment, and effect on margins and repurchases.
- Distinguish corporate cash flow and debt from CIP balances, which are consolidated for accounting but described as unavailable to Invesco or non-recourse.
- Follow the Canadian tax appeal, evolving Tax Act estimates, regulatory requirements, and other litigation or compliance developments.