Invesco Ltd. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report; fourth-quarter figures are included as supplementary data. Invesco is a global investment manager with one reported operating segment. It managed $792.4 billion of assets at year-end, serving clients in more than 100 countries.
Financial and operating performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenues | $5,147.1 million | $4,644.6 million | +10.8% |
| Net revenues (non-GAAP) | $3,608.3 million | $3,252.0 million | +11.0% |
| Operating income | $1,276.9 million | $1,120.2 million | +14.0% |
| Operating margin | 24.8% | 24.1% | +0.7 percentage points |
| Adjusted operating income (non-GAAP) | $1,495.0 million | $1,292.1 million | +15.7% |
| Adjusted operating margin (non-GAAP) | 41.4% | 39.7% | +1.7 percentage points |
| Net income attributable to common shareholders | $988.1 million | $940.3 million | +5.1% |
| Diluted EPS | $2.27 | $2.10 | +8.1% |
| Adjusted diluted EPS (non-GAAP) | $2.51 | $2.13 | +17.8% |
Investment management fees rose 12.6% to $4,054.1 million, reflecting higher average AUM and improved net revenue yield. Average AUM increased 8.9% to $790.3 billion. Net revenue yield rose to 45.7 basis points from 44.8 basis points, helped by a greater share of higher-fee equity, alternatives and balanced assets.
AUM and flows: Year-end AUM increased 1.8% from $778.7 billion. Long-term net inflows were $8.1 billion, but total net flows were negative $8.4 billion, including $10.7 billion of outflows from PowerShares QQQ and $5.8 billion from institutional money market funds. Market gains added $34.7 billion; currency translation reduced AUM by $12.6 billion. A $13.1 billion withdrawal by one U.K. client dominated regional U.K. outflows.
Cash, debt and liquidity: Cash and cash equivalents were $1,514.2 million, up from $1,331.2 million. Cash from operating activities was $1,200.4 million on a consolidated basis; excluding consolidated investment products (CIP), it was $1,076.1 million versus $1,064.3 million. Capital expenditures were $133.2 million. The company paid $424.0 million in dividends and spent $269.6 million on open-market repurchases. Company long-term debt was $1,589.3 million; the credit facility had no outstanding borrowings. Debt-to-equity excluding CIP was 19.1%, and the company reported compliance with its credit covenants.
Reported U.S. GAAP totals include substantial assets and debt of consolidated CLOs and other investment products. The filing states this debt is not an Invesco obligation and is without recourse to the company; excluding CIP provides a more relevant view of company leverage. European subsidiary cash is subject to regulatory capital and transfer restrictions.
Fourth quarter: Operating revenues were $1,276.7 million versus $1,225.1 million in Q4 2013; operating income was $348.2 million versus $293.3 million. Diluted EPS was $0.62 versus $0.64; the prior-year quarter included discontinued-operation results associated with the Atlantic Trust sale.
Material changes, outlook and risks
- Growth in revenues and operating margins accompanied improved long-term investment performance: 77% and 81% of ranked actively managed assets outperformed peers over three and five years, respectively. These rankings covered 60% of total AUM; past performance is not indicative of future results.
- Operating expenses rose 9.8% to $3,870.2 million. General and administrative costs increased 27.4%, including a $31.1 million U.K. FCA penalty, $0.5 million of related legal costs, and $31.1 million in fund reimbursement expenses. The FCA matter concerned compliance during May 2008–November 2012; management said current systems and controls were adequate. These items and other adjustments affect comparisons with the company’s non-GAAP results.
- A $40.3 million business-optimization charge covered property exit costs and severance and reduced 2014 diluted EPS by $0.07. The FCA penalty and related legal costs also reduced diluted EPS by $0.07.
- Management emphasized continued investment in products, capabilities, technology, distribution and personnel, and execution of its global-platform strategy. No quantitative earnings or AUM guidance is provided in the supplied filing text.
- Key risks include market declines and AUM outflows, investment underperformance, fee pressure and investor shifts to passive products, regulatory change, litigation, key-person retention, cyber and operational failures, counterparty risk, and foreign-exchange movements. Management estimated a 10% sterling decline could reduce annual EPS by approximately $0.05–$0.06 and operating margin by 10–20 basis points; in January 2015 it entered hedges covering approximately 75% of 2015 sterling earnings translation exposure.
- The filing identifies $158.8 million of undrawn capital and purchase commitments, in addition to disclosed contractual obligations. Management said it could not estimate a reasonably possible loss range for certain other litigation matters. A Canadian tax assessment of approximately $20.7 million was resolved in the company’s favor, with no amount due.
Investor verification priorities
- Reconcile reported GAAP results with adjusted, non-GAAP measures and review the specific exclusions, especially fund reimbursements, the FCA settlement and optimization costs.
- Assess the sustainability and composition of AUM flows, including the large U.K. client withdrawal, QQQ and money-market outflows, and the distinction between market-driven AUM growth and net new business.
- Confirm company-only leverage and liquidity, separating Invesco debt and usable cash from non-recourse CIP balances and cash restricted within regulated subsidiaries.
- Review the status and potential financial exposure of ongoing legal, regulatory and tax matters, and the effect of evolving money-market and distribution regulations.
- Evaluate dividend and repurchase capacity against operating cash generation, capital needs, debt service and the company’s stated cash-buffer and investment-grade priorities.