Invesco Ltd. — Q1 2017 Form 10-Q
Business context and period: Global investment manager; unaudited quarter ended March 31, 2017. Unless stated otherwise, financial amounts are in U.S. dollars. Comparisons are with Q1 2016 or December 31, 2016, as applicable.
Financial performance and position
| Metric | Q1 2017 | Comparable period |
|---|---|---|
| Operating revenue | $1,192.6 million | $1,148.7 million, Q1 2016 |
| Operating income / margin | $258.6 million / 21.7% | $274.4 million / 23.9%, Q1 2016 |
| Net income attributable to Invesco | $212.0 million | $161.0 million, Q1 2016 |
| Diluted EPS / declared dividends per share | $0.52 / $0.28 | $0.38 / $0.27, Q1 2016 |
| Non-GAAP net revenues; adjusted operating income and margin | $867.1 million; $327.1 million / 37.7% | $818.1 million; $307.1 million / 37.5%, Q1 2016 |
| Adjusted net income / adjusted diluted EPS | $250.5 million / $0.61 | $204.8 million / $0.49, Q1 2016 |
| Ending AUM / average AUM | $834.8 billion / $829.8 billion | $771.5 billion / $747.5 billion, Q1 2016 |
| Cash and cash equivalents | $1,397.0 million | $1,328.0 million, Dec. 31, 2016 |
| Long-term debt (Invesco) | $2,093.6 million | $2,102.4 million, Dec. 31, 2016 |
- Revenue grew 3.8%; investment management fees rose 4.6% and service and distribution fees rose 4.4%, while performance fees fell 22.1%. Management estimated foreign exchange reduced operating revenue by $35.8 million year over year. Average AUM increased 11.0%, but net revenue yield declined 2.0 basis points to 41.8 basis points.
- Operating expenses increased 6.8% to $934.0 million, outpacing revenue growth. Employee compensation rose 15.2% to $396.8 million. Operating margin narrowed, while net income increased partly because other income and equity-method earnings improved versus Q1 2016.
- Operating cash flow was $315.9 million versus cash used of $32.2 million in Q1 2016. Excluding consolidated investment products (CIP), operating cash flow was $196.8 million, versus cash used of $42.0 million. Cash flow comparisons were affected by working-capital movements and trading investments.
- Investing cash use was $37.6 million; financing cash use was $223.7 million, including $114.8 million of dividends. Cash increased $69.0 million during the quarter. CIP cash and assets are not available for Invesco’s general use.
- Invesco reported $2,093.6 million of long-term debt; its $1.25 billion credit facility had $19.4 million drawn. The weighted average cost of debt was 3.90%. Leverage and interest coverage ratios were 1.33:1 and 16.99:1, respectively, within stated covenants. Debt and assets of consolidated CLOs are separate from Invesco’s corporate obligations and are generally without recourse to Invesco.
- Total assets were $26,598.9 million and total liabilities were $18,558.0 million at March 31. The balance sheet includes $9,230.5 million of policyholder assets and an equal liability.
Material changes and management commentary
- AUM rose from $812.9 billion at year-end, driven by $23.1 billion in market gains, $4.1 billion of currency translation and $1.8 billion of long-term net inflows. Total net flows were negative $5.3 billion, mainly because institutional money market funds had $8.1 billion of net outflows. Active long-term AUM had $0.5 billion of net outflows; passive long-term AUM had $2.3 billion of inflows.
- Management cited positive equity-market returns in Q1 and highlighted diversified client, geographic and product exposure. It also noted long-term outflows in Canada and Europe, offset by positive flows in the U.S. and Asia-Pacific operations.
- Business optimization charges were $24.7 million in Q1. The transformation program is estimated to cost $128 million in total, with $38 million remaining through mid-2018. Management reported approximately $28 million of annualized run-rate savings to date and expects up to $50 million at completion.
- Compensation included $19.7 million of costs associated with multiple senior executive retirements, including accelerated vesting of deferred compensation; management described the number and scale of retirements in one quarter as unprecedented. Q1 also included $15.7 million of severance costs.
- On April 27, 2017, Invesco announced a definitive agreement to acquire European ETF provider Source, which had approximately $18 billion of managed AUM and $7 billion of externally managed AUM as of March 31. The filing does not provide the purchase price or expected closing date. The company also announced a Q1 dividend of $0.29 per share, payable June 2, 2017.
- No specific earnings or revenue guidance was provided. Management stated that capital, operating cash flow, available credit and access to capital markets are expected to support current and future needs, while noting that capital-market access depends on ratings and market conditions.
Risks, contingencies and notable items
- Results are sensitive to AUM market levels, investment performance, client flows, asset mix, fee yields and foreign-exchange movements. Management noted Brexit-related uncertainty could keep sterling weak and weigh on U.S.-dollar reported AUM and results. Foreign exchange movements reduced Q1 operating revenue by $35.8 million year over year.
- Invesco had $224.3 million of undrawn capital commitments to investment entities. Litigation and regulatory inquiries arise in the ordinary course; management said estimated accruals were adequate for reasonably estimable losses, but it could not estimate a range for other litigation contingencies. A material loss of investor or client confidence could reduce AUM.
- Management reported compliance with regulatory minimum net capital requirements; the minimum requirement was $623.0 million. Certain regulated subsidiaries face restrictions that may limit transfers or distributions of capital. The company reported $1,254.9 million of non-U.S. cash, not all of which may be freely transferable.
- Foreign-currency put options generated an $8.2 million mark-to-market loss in Q1. The company stated that its sterling hedge covered approximately 75% of sterling-based operating income through June 2018 and was extended in April through December 2018. Management cautioned that future results may differ materially from forward-looking statements.
- Adoption of the new revenue-recognition standard is planned for January 1, 2018; management had not selected an adoption method. It did not anticipate a significant timing change for management and service fees, but was still assessing performance fees, contract costs, disclosures and gross-versus-net presentation.
Important facts for investors to verify
- Whether AUM inflows, particularly active long-term flows, improve and whether the institutional money market outflows persist.
- Whether revenue yield stabilizes as asset mix, passive AUM share and currency exposure change.
- How much of the Q1 expense increase reflects exceptional retirement and optimization charges, and whether savings arrive on schedule against the remaining program costs.
- The Source acquisition’s purchase price, financing, closing conditions, integration costs and expected contribution, which are not clear from this filing.
- Corporate liquidity and covenant headroom, including the distinction between Invesco obligations and debt and cash of consolidated investment products.
- Future effects of foreign exchange, market performance, client confidence, regulatory or legal matters, and implementation of pending accounting standards.