Invesco Ltd. — Q1 2015 Form 10-Q
Business and period: Invesco is a global investment manager serving retail and institutional clients. This unaudited quarterly report covers the three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $1,291.6m | $1,269.5m | +1.7% |
| Operating income | $338.1m | $244.3m | +38.4% |
| Operating margin (GAAP) | 26.2% | 19.2% | +7.0 pts |
| Net income attributable to Invesco | $259.6m | $187.8m | +38.2% |
| Diluted EPS | $0.60 | $0.43 | +$0.17 |
| Net revenues (non-GAAP) | $917.5m | $887.8m | +3.3% |
| Adjusted operating income (non-GAAP) | $374.4m | $363.0m | +3.1% |
| Adjusted operating margin (non-GAAP) | 40.8% | 40.9% | -0.1 pts |
| Adjusted diluted EPS (non-GAAP) | $0.63 | $0.60 | +$0.03 |
Investment management fees rose 3.7% to $1,001.4m; performance fees rose 50.5% to $46.8m. Service and distribution fees fell 10.6% to $213.4m, largely reflecting a U.K. fee presentation change. Operating expenses declined 7.0% to $953.5m. The statutory operating-margin improvement mainly reflects lower expenses against modest revenue growth; adjusted margin was essentially flat.
Net cash used in operating activities was $56.3m, versus $219.2m used in Q1 2014. Excluding consolidated investment products (CIP), operating cash use was $47.0m versus $23.5m. Investing activities used $366.5m and financing activities provided $178.9m. Cash and cash equivalents ended the quarter at $1,219.7m, down $294.5m from year-end 2014. Dividends paid were $108.1m and share repurchases were $76.6m.
At March 31, total assets were $21,961.2m and total liabilities were $12,920.8m. Corporate long-term debt was $1,600.6m; the additional $5,479.7m of CIP debt is associated with consolidated funds and, according to Invesco, is nonrecourse to the company. Debt-to-equity was 19.8% excluding CIP versus 79.8% on the consolidated basis. Invesco reported compliance with credit-facility covenants and regulatory capital requirements; its covenant leverage and interest-coverage ratios were 0.93:1 and 24.16:1, respectively.
Assets under management and period comparison
- Ending AUM was $798.3bn, up from $787.3bn at March 31, 2014. Average AUM was $795.4bn versus $779.6bn.
- Long-term net inflows were $10.3bn, compared with $6.5bn in Q1 2014. Total net flows were positive $1.7bn versus outflows of $0.9bn, as institutional money-market and PowerShares QQQ outflows partly offset long-term inflows.
- Market gains added $14.4bn to AUM, while currency translation reduced AUM by $9.5bn. Foreign exchange movements reduced reported operating revenue by $59.5m year over year.
- Q1 2014 expenses included a $31.1m U.K. FCA penalty, $35.8m in property-exit charges, $7.2m in related severance, and a $5.3m fund-reimbursement expense. These items explain much of the year-over-year reduction in reported expenses.
Management commentary, outlook and risks
Management cited positive global equity-market returns and reported $10.3bn of long-term net inflows, attributing flows in part to investment performance and the breadth of its strategies. It emphasized diversified AUM by geography, asset class and distribution channel. The filing provides no specific earnings or revenue guidance. Management stated that available cash, operating cash flows and committed credit capacity should meet expected needs, while describing an approximate $1bn cash buffer above regulatory requirements as a capital-management priority.
Key exposures include market levels and client flows affecting AUM-based fees, investment performance, product and geographic mix, foreign exchange, interest rates, and regulatory requirements. Invesco said no material changes to market-risk exposures or risk factors had occurred. It noted ongoing regulatory oversight and litigation; management considered accruals adequate for estimable matters and did not expect ultimate resolution to materially affect the business, but said a range of possible losses for other litigation could not be estimated.
Unusual items include a $302.9m currency-translation loss in other comprehensive income, contributing to a $42.8m comprehensive loss attributable to Invesco despite positive net income. Adoption of ASU 2014-13 reduced retained earnings appropriated for CIP by $17.6m and increased CIP debt by the corresponding amount. A first-quarter dividend of $0.27 per share was declared on April 30, payable June 5, 2015.
Important facts for investors to verify
- Assess the sustainability of long-term inflows, the offset from money-market and QQQ outflows, and subsequent AUM and fee-yield trends.
- Separate recurring expense and margin performance from the unusually high Q1 2014 charges; compare GAAP results with the company’s non-GAAP reconciliations.
- Track the effects of currency movements on revenue, AUM and equity, including the sterling hedge and its coverage and cost.
- Distinguish Invesco’s corporate debt and available cash from consolidated CIP balances; review debt covenants, jurisdictional cash restrictions and liquidity needs.
- Monitor regulatory and legal developments, capital commitments ($152.2m undrawn), and any changes in contingent exposures.