Invesco Ltd. — Q2 2020 Form 10-Q
Business and period: Invesco is a global investment manager. This unaudited quarterly report covers the three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Results were shaped by COVID-19 market volatility and the May 2019 OppenheimerFunds acquisition. Dollar amounts are in millions unless stated otherwise.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,419.0 | $1,439.4 | $3,017.9 | $2,654.0 |
| Operating income | $117.1 | $18.3 | $434.1 | $218.5 |
| Operating margin | 8.3% | 1.3% | 14.4% | 8.2% |
| Net income attributable to Invesco | $40.5 | $40.1 | $122.0 | $217.8 |
| Diluted EPS | $0.09 | $0.09 | $0.26 | $0.52 |
| Adjusted operating income | $359.7 | $363.4 | $772.4 | $647.7 |
| Adjusted operating margin | 34.8% | 35.2% | 35.4% | 33.8% |
| Adjusted net income attributable to Invesco | $159.7 | $280.4 | $315.0 | $505.2 |
| Adjusted diluted EPS | $0.35 | $0.65 | $0.68 | $1.21 |
- Q2 revenue declined 1.4% year over year; six-month revenue rose 13.7%, primarily reflecting OppenheimerFunds and higher service and distribution fees. Q2 investment management fees fell 3.2%, while performance fees declined 77.7% to $3.5.
- Q2 GAAP operating income increased as transaction, integration and restructuring expense fell to $71.7 from $304.9. This comparison also includes a $105.3 expense for a fund rebalancing error. Adjusted operating income was slightly lower year over year. Non-GAAP measures exclude specified items and are not substitutes for GAAP results.
- Ending AUM was $1.145 trillion, versus $1.198 trillion a year earlier; Q2 average AUM was $1.119 trillion versus $1.056 trillion. Q2 total net outflows were $29.5 billion and six-month outflows were $31.6 billion. Market recovery lifted Q2 ending AUM, but management cited lower average AUM and a shift toward lower-fee products as revenue pressures.
- Six-month operating cash flow was $260.9; excluding consolidated investment products (CIP), it was $268.7, compared with $425.3 in the prior-year period. Investing cash flow was a $743.0 outflow and financing cash flow a $71.3 inflow, both including substantial CIP activity. Cash and cash equivalents at June 30 were $987.1 for Invesco and $284.1 held by CIP; CIP cash is not available for Invesco’s general use.
- Long-term debt was $2,407.0, including $325.6 drawn on a $1.5 billion credit facility; the weighted-average debt cost for the six months was 3.68%. Invesco reported compliance with covenants, a 1.59 leverage ratio against a 3.25 maximum, and 10.79 interest coverage against a 4.00 minimum. CIP debt of $6,247.6 is consolidated but has no recourse to Invesco.
- Total assets were $35,579.1 and total liabilities $21,408.6 at June 30. These totals include CIP and policyholder balances; policyholder assets and liabilities offset, and CIP balances are not equivalent to Invesco’s own available resources or obligations.
Material changes versus prior period
- Q2 net revenue, a company-defined non-GAAP measure, was $1,034.3, nearly flat versus $1,031.5. Net revenue yield declined to 37.0 basis points from 39.1 basis points. Management attributed pressure to product mix and pandemic-related market effects.
- For the six months, GAAP net income attributable to Invesco and diluted EPS fell from $217.8 and $0.52 to $122.0 and $0.26. Preferred dividends of $118.4 were recorded in 2020, versus none in 2019; the 2019 comparison also predates a full six months of OppenheimerFunds results.
- At June 30, the credit-facility balance was $325.6, down from $508.0 at March 31 but up from zero at December 31, 2019. Total long-term debt rose $326.7 from year-end.
- Common dividends were reduced to $0.155 per share beginning with the dividend declared in April 2020. The company said it did not foresee additional share repurchases in 2020; no open-market repurchases occurred in the first half.
Outlook, risks and unusual items
- Management expects market uncertainty and the shift toward lower-yielding products to continue pressuring revenue and revenue yield in the near term. It expects pandemic-related savings, including reduced travel and business activity, to be temporary. No specific earnings or revenue forecast was provided.
- COVID-19 creates uncertainty around markets, AUM, client flows, product liquidity and operations, including remote-work, service-provider and cybersecurity risks. Management reported that most employees were working remotely and that it had maintained client service to date.
- The SteelPath MLP funds’ historical financial statements were restated after incorrect NAVs dating back to 2015 were identified. Invesco recorded an estimated $387.8 liability for pre- and post-acquisition activity; the pre-acquisition portion was reflected in acquisition accounting. Remediation costs and Invesco’s ultimate responsibility remain uncertain, and the estimate excludes possible insurance or seller-indemnity recoveries.
- A missed April 24 rebalance of two equal-weight S&P 500 funds was corrected on April 29. Invesco paid $105.3 to compensate the funds; insurance recovery is uncertain.
- Other risks include Brexit-related AUM and currency effects, the transition from LIBOR after 2021, foreign exchange movements, investment-market exposure and regulatory or litigation matters. Management said it could not estimate a range of reasonably possible losses for certain litigation contingencies.
Most important facts to verify
- Track AUM flows, average AUM and fee yield, including whether mix-related pressure persists after the Q2 market rebound.
- Review the final scope and costs of the SteelPath restatement and remediation, as well as any insurance or MassMutual indemnification recoveries.
- Confirm any recovery of the $105.3 fund-rebalancing payment and monitor related control or compliance developments.
- Monitor cash generation excluding CIP, credit-facility borrowings, covenant headroom, debt maturities and the company’s dividend and capital-return decisions.
- Assess continuing COVID-19, market, operational, cybersecurity, regulatory and legal developments; the filing notes that actual results may differ materially from estimates and expectations.