Invesco Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Invesco is a global investment manager; quarter-end AUM was $745.5 billion, excluding the Atlantic Trust business classified as discontinued operations. Unless noted, financial amounts are U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $1,171.8 million | $1,013.9 million | $3,419.5 million | $3,003.7 million |
| Operating income | $286.0 million | $210.9 million | $826.9 million | $637.1 million |
| Operating margin | 24.4% | 20.8% | 24.2% | 21.2% |
| Net income attributable to common shareholders | $228.1 million | $170.6 million | $652.9 million | $518.4 million |
| Diluted EPS | $0.51 | $0.38 | $1.45 | $1.14 |
| Adjusted diluted EPS (non-GAAP) | $0.55 | $0.40 | $1.55 | $1.23 |
| Adjusted operating margin (non-GAAP) | 40.2% | 34.5% | 39.5% | 35.8% |
- Q3 operating revenue rose 15.6%; investment management fees increased 15.7%, reflecting higher average AUM, improved fee yield and the lapse of prior fee waivers. Net revenue, a company-defined non-GAAP measure, increased 15.3% to $816.4 million.
- Q3 operating expenses rose 10.3%, slower than revenue growth. Third-party distribution and service costs increased with revenue; marketing costs fell, while general and administrative expense rose, including legal, fund-launch and regulatory-related costs.
- For the nine months, net cash provided by operating activities was $589.9 million on a consolidated basis. Management reported $743.1 million excluding CIP cash flows; CIP cash is not available for Invesco’s general use. Investing activities used $18.9 million and financing activities used $235.5 million. Cash and cash equivalents ended at $1,174.5 million.
- At September 30, long-term debt was $1,387.6 million: $788.0 million drawn under a floating-rate credit facility and $599.6 million of 3.125% senior notes due 2022. The company’s weighted-average debt cost for the nine-month period was 2.08%. Debt/equity was 16.5% excluding CIP; the reported ratio including CIP was 59.1%, largely reflecting consolidated investment-product debt that Invesco says is nonrecourse to it.
- Assets were $18,763.5 million and total equity was $9,119.4 million. The balance sheet includes substantial consolidated investment-product assets and liabilities, as well as policyholder assets and matching payables; these should not be treated as freely available company resources.
Changes versus the comparable periods
- Growth reflected higher AUM and market valuations, net inflows, a more favorable mix toward higher-yielding equity and balanced funds, and fee-waiver lapses. Q3 average AUM increased 12.5% year over year to $729.4 billion; nine-month average AUM increased to $713.6 billion from $640.4 billion.
- Q3 total net AUM inflows were $9.1 billion, including $5.0 billion in long-term flows; nine-month inflows were $29.2 billion, including $20.7 billion long-term. Market gains added $22.4 billion in Q3 and $51.6 billion over nine months.
- Q3 net revenue yield increased to 44.8 basis points from 43.7; the nine-month yield rose to 44.7 from 43.8. Foreign exchange movements reduced operating revenue by $13.6 million in Q3 and $42.7 million over nine months.
- Operating cash flow improved from $317.7 million to $589.9 million for the nine-month comparison. Debt increased from $1,186.0 million at year-end 2012, primarily due to additional credit-facility borrowing.
- Quarterly declared dividends rose to $0.225 per share from $0.1725 a year earlier. The company paid $279.2 million in dividends and repurchased $120.5 million of shares in the first nine months.
Outlook, management commentary and risks
- No formal earnings or revenue guidance is provided. Management’s capital priorities are business reinvestment, moderate annual dividend growth, share repurchases, and a target cash buffer of about $1 billion above regulatory requirements. Management stated that it aims to preserve an investment-grade credit profile.
- The proposed sale of Atlantic Trust to CIBC, announced at a base price of $210 million less estimated working-capital and cash-funding requirements of about $30 million, was expected to close in Q4 2013 subject to regulatory approval. Management estimated annualized reductions of approximately $115 million in net revenue, $85 million in adjusted operating expenses and $0.05 in adjusted diluted EPS; it intended to use proceeds for share repurchases. The transaction had not closed as of the filing.
- On October 11, 2013, the board authorized an additional $1.5 billion for the share-repurchase program. On October 31, the company announced a $0.225-per-share Q3 dividend, payable December 9, 2013.
- U.K. equities head Neil Woodford was due to leave in April 2014; he was the named lead manager for $48.5 billion of U.K. equity AUM. Mark Barnett was named as successor after the transition period.
- Results remain sensitive to market levels, AUM flows and mix, investment performance, foreign exchange rates and client redemptions. Invesco disclosed an ongoing U.K. FCA review of compliance matters from May 2008 to November 2012; it could not estimate a potential fine, but believed any fine would not materially affect financial position or liquidity.
- A Canadian subsidiary faced approximately $20.9 million of goods-and-services-tax assessments, interest and penalties relating to prior periods. Management considered the claims unfounded and recorded no provision. The filing also describes pending litigation relating to auction-rate preferred securities; a Massachusetts case was dismissed, with plaintiffs appealing, while other motions remained pending.
- Off-balance-sheet exposures included $151.4 million of undrawn investment commitments and $21.0 million of support commitments for two investment trusts, with an option to increase the maximum support to $66.0 million. One trust agreement terminated in October 2013; no support payment or loss had been recorded as of the report.
- Atlantic Trust’s discontinued operations included $24.0 million of pretax costs over nine months related to the pending sale and unauthorized personal transactions of a former employee. The company also changed its balance-sheet presentation to a non-classified format; prior balance-sheet amounts were reclassified.
Important facts for investors to verify
- Whether the Atlantic Trust sale closed on the expected terms and how the proceeds, lost earnings and stated EPS impact compared with management’s estimates.
- Whether AUM inflows, investment performance and revenue yield remain strong, particularly given institutional long-term outflows in Q3 and sensitivity to market and currency movements.
- How operating cash generation and the larger credit-facility balance evolve while Invesco funds dividends, repurchases, investment and its target cash buffer; also monitor floating-rate exposure and covenant compliance.
- Developments and any financial consequences from the FCA review, Canadian tax assessments, auction-rate litigation and trust-support commitments.
- How much reported earnings growth depended on market-driven gains, noncontrolling interests and management’s non-GAAP adjustments; the filing cautions that non-GAAP measures may not be comparable across companies.