Invesco Ltd. 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. Invesco is a global investment manager with more than 8,800 employees and approximately $1.226 trillion in assets under management (AUM) at year-end. It completed its acquisition of OppenheimerFunds on May 24, 2019.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $6.117 billion | $5.314 billion |
| Net revenue (non-GAAP) | $4.415 billion | $3.818 billion |
| Operating income | $808.2 million | $1.205 billion |
| Operating margin | 13.2% | 22.7% |
| Adjusted operating income (non-GAAP) | $1.656 billion | $1.392 billion |
| Adjusted operating margin (non-GAAP) | 37.5% | 36.5% |
| Net income attributable to Invesco | $564.7 million | $882.8 million |
| Diluted EPS | $1.28 | $2.14 |
| Adjusted diluted EPS (non-GAAP) | $2.55 | $2.43 |
| Ending AUM | $1.226 trillion | $888.2 billion |
| Cash and cash equivalents, excluding CIP | $1.049 billion | $1.148 billion |
| Company long-term debt | $2.080 billion | $2.409 billion |
Operating revenue rose 15.1%, while net revenue increased 15.6%, primarily reflecting OppenheimerFunds and higher market levels. Average AUM increased 14.2%. Long-term net flows were negative $34.4 billion; total net flows were negative $27.2 billion. Market gains added $120.4 billion and the acquisition added $224.4 billion to year-end AUM.
Operating expenses grew 29.2% to $5.309 billion, including $673.0 million of transaction, integration and restructuring costs, of which $625.0 million related to OppenheimerFunds. This drove the decline in GAAP operating income and margin. Adjusted operating income and margin improved, but these are non-GAAP measures and exclude specified items.
Cash provided by operating activities was $1.117 billion under GAAP and $1.275 billion excluding consolidated investment products (CIP). Capital expenditures were $124.3 million. Year-end cash excluding CIP was $1.049 billion; the filing states cash held by CIP is unavailable for general company use. Company debt was $2.080 billion, with no credit-facility borrowing outstanding. Debt covenants were met: leverage ratio 1.31x versus a 3.25x maximum, and interest coverage 11.76x versus a 4.00x minimum. The $6.235 billion of CIP debt is generally non-recourse to Invesco and is excluded from company debt.
Quarterly Q4 2019 operating revenue was $1.743 billion, operating income was $314.6 million, net income attributable to Invesco was $179.8 million, and diluted EPS was $0.39. Q4 operating expenses included $136.5 million of transaction, integration and restructuring charges.
Material changes and notable items
- OppenheimerFunds was acquired for approximately $5.6 billion, funded with 81.9 million common shares, $4.0 billion of 5.9% perpetual preferred shares and $35 million cash. The preferred shares are non-cumulative and have a 21-year non-call period. MassMutual held approximately 16.7% of common shares at year-end.
- Management reported $501 million in annualized net expense synergies, exceeding its $475 million target and ahead of schedule. It described the combination as a multi-year growth opportunity and said it expected expanded capabilities to help move net flows in a positive direction; no quantified earnings or revenue guidance is provided in the supplied filing text.
- Invesco repurchased or contracted to repurchase common shares as part of its buyback program. It reported $973 million repurchased since the $1.2 billion plan was announced and said it remained on target to complete the remaining $227 million by Q1 2021.
- GAAP effective tax rate rose to 24.2% from 22.4%. The company’s reported net income also included preferred dividends of $123.6 million in 2019.
- Year-end balance-sheet growth included acquisition-related goodwill of $8.509 billion and intangible assets of $7.358 billion. Management reported no impairment in its 2019 annual reviews.
Outlook, risks and contingencies
Invesco’s results are highly sensitive to market values and client flows because management fees are primarily based on AUM. Key risks include market volatility, sustained outflows or weak investment performance, fee pressure and shifts toward lower-fee passive products, reliance on distribution partners and key investment personnel, foreign-exchange movements, cyber and operational incidents, regulatory changes, and the ability to complete acquisition integration and realize synergies. The filing also discusses Brexit, LIBOR transition, and the potential effects of the coronavirus outbreak identified at the time of filing.
A reasonably possible loss contingency identified during OppenheimerFunds integration could, before insurance or indemnification, be as much as $400 million. The company concluded a loss was reasonably possible but not probable and recorded no accrual; it noted significant uncertainty about the matter. Separately, $357 million of undrawn co-investment and purchase commitments were disclosed. MassMutual also had scheduled redemption rights over approximately $625 million of seed capital; the company said it did not expect to have to fund those redemptions as of the report date.
Management and PwC concluded that internal control over financial reporting was effective as of December 31, 2019, but certain acquired OppenheimerFunds revenue processes—representing approximately 17% of 2019 revenue—were excluded from the assessment and audit while integration continued. The company said integration of those processes was expected during 2020. PwC issued an unqualified opinion on the financial statements and internal controls, subject to that acquired-process scope limitation.
Most important facts for investors to verify
- Whether the $501 million annualized synergy level is sustained and translates into operating improvements after integration costs.
- The status, potential exposure, insurance and indemnification coverage of the OppenheimerFunds-related contingency, estimated at up to $400 million before recoveries.
- Whether OppenheimerFunds revenue processes excluded from the 2019 control assessment were integrated as planned, and whether any control issues emerged.
- Underlying organic flows and performance by asset class and channel, separate from market gains and acquired AUM; 2019 long-term net flows were negative $34.4 billion.
- The sustainability of adjusted results and the reconciliation from non-GAAP measures to GAAP results, particularly given $673.0 million of 2019 transaction, integration and restructuring costs.
- Capital allocation and financing implications of the $4.0 billion preferred stock, common-share repurchases, debt maturities, and the remaining buyback authorization.