Invesco Ltd. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Invesco is a global investment manager. Amounts are U.S. dollars; financial statement amounts are in millions unless noted. Prior-period income statement figures are presented on a continuing-operations basis following the December 2013 sale of Atlantic Trust.
Financial performance and key metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenues | $1,269.5 | $1,112.2 | +14.1% |
| Operating expenses | $1,025.2 | $845.2 | +21.3% |
| Operating income | $244.3 | $267.0 | -8.5% |
| Operating margin | 19.2% | 24.0% | -4.8 percentage points |
| Net income attributable to common shareholders | $187.8 | $222.2 | -15.5% |
| Diluted EPS | $0.43 | $0.49 | -12.2% |
| Adjusted operating income (non-GAAP) | $363.0 | $306.2 | +18.5% |
| Adjusted operating margin (non-GAAP) | 40.9% | 38.9% | +2.0 percentage points |
| Adjusted diluted EPS (non-GAAP) | $0.60 | $0.50 | +20.0% |
Investment management fees rose 14.3% to $965.4 million, broadly tracking higher average AUM; service and distribution fees increased 15.7% to $238.6 million. Performance fees fell 13.9% to $31.1 million. Reported revenue growth was partly offset by operating expenses rising faster, particularly property/office/technology and general and administrative costs. The effective tax rate was 29.9%, versus 30.6%.
Cash flow and liquidity: Consolidated operating cash flow was a use of $219.2 million, compared with a use of $484.6 million a year earlier. Management reports that, excluding consolidated investment products (CIP), operating cash use was $23.5 million versus $45.5 million. Consolidated investing cash use was $544.5 million; financing provided $408.3 million. Cash and cash equivalents ended at $978.7 million, down from $1,331.2 million at year-end 2013. Q1 cash outflows included $98.0 million of dividends and $119.6 million of open-market share repurchases.
Debt: Corporate long-term debt was $1,588.7 million, essentially unchanged from year-end; the $1.25 billion credit facility had no borrowings. Corporate debt-to-equity was 19.3% excluding CIP (non-GAAP), versus 19.1% at year-end. Including CIP debt, reported debt-to-equity was 71.3%; management emphasizes that CIP debt is supported by CIP assets and is non-recourse to Invesco. The company reported compliance with debt covenants and regulatory capital requirements; covenant leverage was 1.03x against a 3.25x maximum.
Assets under management and material changes
- Ending AUM was $787.3 billion, up from $707.7 billion a year earlier; average AUM increased to $779.6 billion from $691.6 billion.
- Long-term net inflows were $6.5 billion, down from $14.3 billion in Q1 2013. Total net flows were an outflow of $0.9 billion, including $6.1 billion of institutional money-market outflows and $1.3 billion of outflows from PowerShares QQQ.
- Market gains added $9.4 billion to AUM, compared with $30.6 billion in the prior-year quarter. Net revenue yield was 45.6 basis points in both periods; excluding performance fees it rose to 43.8 basis points from 43.3.
- Results were affected by mixed markets and currency translation; foreign exchange movements increased reported operating revenue by $14.7 million year over year. The company cited stronger equity/balanced AUM mix as a support to yield.
- U.K. equity income experienced $3.4 billion of Q1 net outflows. Excluding those outflows, EMEA long-term net inflows were $6.5 billion. After quarter-end, Invesco reported approximately $13 billion of U.K. outflows in April following the departure of Neil Woodford; Mark Barnett had been named lead manager of the affected funds effective March 6.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided in the supplied filing text. Management says its cash, operating cash generation, credit facility and access to capital markets are expected to support operating, debt and capital needs, while maintaining an approximate $1 billion cash buffer above regulatory requirements.
- Q1 operating expenses included a $31.1 million (£18.6 million) U.K. FCA penalty and $0.5 million related legal costs, following an April 28, 2014 settlement over alleged rule violations during May 2008–November 2012. Management said current systems and controls are adequate; the charge reduced diluted EPS by $0.07.
- A business optimization initiative produced $43.0 million of charges: $35.8 million for vacated leased properties and $7.2 million for severance. Management’s non-GAAP reconciliation also excluded $5.3 million of fund reimbursement settlement costs. These items contributed to the substantial gap between GAAP and adjusted results.
- Other risks include sensitivity of fees to market levels and AUM flows, foreign exchange, investment performance and retention of investment personnel, regulatory scrutiny, and the ability to access capital markets. The filing reports no significant change in the previously disclosed risk factors. Management identified pending litigation relating to auction-rate preferred securities redemptions and a Canadian tax assessment of approximately $20.6 million, for which it recorded no provision and considers the claim unfounded.
- Atlantic Trust’s sale was completed December 31, 2013. Q1 2014 discontinued operations recorded a $2.0 million net loss, versus $4.1 million net income in Q1 2013.
- Management’s non-GAAP measures adjust for items including CIP consolidation, acquisition/disposition items, compensation-plan market movements, business optimization and regulatory charges. They are not substitutes for GAAP measures and may not be comparable with similarly titled peer measures.
Most important facts for investors to verify
- Whether AUM flows, particularly U.K. equity income flows after Woodford’s departure and the April outflow, stabilize or deteriorate further.
- Whether higher AUM and revenue growth translate into improved GAAP operating profitability, given the sharp increase in reported expenses and the unusual Q1 charges.
- The basis and persistence of adjusted results, including the detailed add-backs underlying adjusted operating income and adjusted EPS.
- Corporate liquidity and capital allocation after the cash decline, share repurchases and dividend payments; also confirm restrictions on cash held in regulated subsidiaries.
- Developments in the FCA settlement’s implementation, the auction-rate securities litigation, and the Canadian tax assessments.
- The distinction between Invesco’s corporate debt and consolidated CIP debt when assessing leverage and liquidity; CIP balances are large but, according to the filing, generally non-recourse to the company.