Invesco Ltd. 2014 Second-Quarter Form 10-Q Summary
Business context and reporting period
Invesco is a global investment manager. This unaudited 10-Q covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Results include consolidated investment products (CIP), whose assets and debt are generally ring-fenced from Invesco. The company also presents non-GAAP measures that exclude or adjust for CIP and other items.
Financial and operating results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $1,289.9m | $1,135.5m | $2,559.4m | $2,247.7m |
| Operating income | $354.8m | $273.9m | $599.1m | $540.9m |
| Operating margin | 27.5% | 24.1% | 23.4% | 24.1% |
| Net income attributable to common shareholders | $274.5m | $202.6m | $462.3m | $424.8m |
| Diluted EPS | $0.63 | $0.45 | $1.06 | $0.94 |
| Adjusted operating margin (non-GAAP) | 41.8% | 39.3% | 41.4% | 39.1% |
| Adjusted diluted EPS (non-GAAP) | $0.65 | $0.50 | $1.25 | $1.00 |
Second-quarter operating revenue rose 13.6% and operating income rose 29.5% year over year. For the first half, revenue increased 13.9%, while operating expenses rose 14.9%; GAAP operating margin consequently fell 0.7 percentage point. Management attributed higher revenue mainly to increased investment-management fees, AUM and favorable asset-class mix. Adjusted results exclude specified items and are not GAAP measures.
Assets under management were $802.4bn at June 30, up from $705.6bn a year earlier. Average AUM was $790.1bn in Q2 versus $719.8bn. Q2 net flows were negative $8.8bn, including $6.9bn of long-term outflows and $3.0bn of outflows from PowerShares QQQ; positive market movements added $19.9bn and currency translation added $4.0bn. First-half total net flows were negative $9.7bn, versus positive $20.1bn in 2013. First-half net revenue yield was 45.6 basis points, up from 44.7 basis points.
Cash, liquidity and debt
Cash and cash equivalents were $1,196.0m at June 30, down from $1,331.2m at year-end 2013. Six-month consolidated operating cash flow was $550.3m, investing cash outflow was $969.8m and financing cash inflow was $268.8m. Management reports operating cash flow excluding CIP of $313.7m; CIP cash is not available for general corporate use. Capital expenditures were $49.8m. Dividends paid were $207.1m and share repurchases cost $169.6m.
Corporate long-term debt was $1,588.9m, with no balance drawn on the $1.25bn credit facility. The company reported a 0.98:1 leverage ratio and 26.96:1 interest coverage ratio, within its covenant limits. Debt-to-equity was 18.7% excluding CIP; the GAAP ratio including CIP was 63.2%. CIP debt of $4,301.5m is associated with consolidated products and, according to the filing, is non-recourse to Invesco. The company stated that it met regulatory minimum capital requirements and maintained an approximate $1bn cash buffer target, while noting that some subsidiary cash is subject to regulatory or jurisdictional restrictions.
Material changes, outlook and risks
- Q2 revenue growth and margin improvement coincided with positive equity and bond markets, but client flows weakened. A single $13.1bn U.K. client withdrawal contributed to Q2 outflows; U.K. equity-income AUM also faced outflows following the announced departure of manager Neil Woodford. AUM and fee revenue remain sensitive to market levels, investment performance, flows, asset mix and foreign exchange.
- First-half unusual charges included $43.0m of business-optimization costs ($35.8m for leased properties and $7.2m severance), a £18.6m ($31.1m) FCA penalty plus $0.5m legal costs, and $5.3m of fund reimbursement settlement costs. The FCA penalty related to compliance matters from May 2008 to November 2012. Management said its current systems and controls were adequate and compliant.
- Q2 income benefited from a favorable tax settlement: the filing says $7.9m of previously unrecognized tax benefits were recognized and tax expense fell by $4.8m, net of federal tax effects. Six-month gross unrecognized tax benefits were $8.8m.
- Pending or continuing matters include closed-end-fund litigation alleging fiduciary-duty breaches in connection with auction-rate preferred securities redemptions, and a Canadian tax assessment of approximately $21.9m, including interest and penalties. The company disputes the Canadian claim and recorded no provision; the Tax Court decision was pending. Management cannot predict litigation outcomes.
- The SEC’s July 2014 money-market-fund rules were expected to apply to approximately $30bn of Invesco AUM and require implementation over two years. The U.K. retail distribution review and fee changes were not expected by management to significantly affect net revenue. The filing provides no quantified earnings or revenue guidance.
- Management cited diversified AUM and access to cash flows, credit facilities and capital markets as liquidity strengths, but noted risks from market declines, underperformance, client withdrawals, inflation, interest rates, currency movements, regulatory constraints and access to financing. The company held investment-grade ratings of A-/Positive from S&P and A3/Stable from Moody’s.
Important facts for investors to verify
- Whether long-term outflows, particularly in U.K. equity income and retail channels, persist and how AUM mix affects fee yield.
- The sustainability of reported earnings growth after unusual charges, favorable tax items, market-related gains and non-GAAP adjustments.
- Corporate liquidity and debt covenant headroom, distinguishing Invesco obligations and available cash from CIP balances and restricted subsidiary cash.
- Developments in the FCA-related compliance matter, auction-rate securities litigation and the Canadian tax assessment.
- Implementation effects of money-market reforms and U.K. distribution and fee changes on AUM, product demand and revenue.