Invesco Ltd. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Invesco is a global investment manager. Amounts are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,497.6 | $1,720.6 | $4,515.5 | $4,374.6 |
| Operating income | $268.5 | $275.1 | $702.6 | $493.6 |
| Operating margin | 17.9% | 16.0% | 15.6% | 11.3% |
| Net income attributable to Invesco | $191.7 | $167.1 | $313.7 | $384.9 |
| Diluted EPS | $0.41 | $0.36 | $0.68 | $0.89 |
| Net cash from operating activities | Not provided by quarter | $662.7 | $669.3 |
Q3 GAAP revenue fell 13.0% year over year, while operating income declined 2.4% and net income attributable to Invesco rose 14.7%. For the nine-month period, revenue increased 3.2%, operating income increased 42.4%, and attributable net income fell 18.5%. Nine-month results include OppenheimerFunds only from its May 2019 acquisition date, making comparisons less directly comparable.
Non-GAAP net revenue was $1,092.5 in Q3, down 11.1%, and $3,272.6 for nine months, up 4.0%. Adjusted operating income was $406.7 in Q3, down from $502.6, and $1,179.1 for nine months, up from $1,150.3. Adjusted operating margin was 37.2% and 36.0%, respectively, versus 40.9% and 36.5%. Adjusted diluted EPS was $0.53 in Q3 and $1.21 for nine months, versus $0.70 and $1.91. These are non-GAAP measures and should be read with the filing’s reconciliations.
AUM, liquidity and debt
- Quarter-end AUM was $1.218 trillion, up from $1.184 trillion a year earlier. Q3 average AUM was $1.206 trillion, up from $1.188 trillion; management reported $7.8 billion in long-term net inflows for the quarter. Nine-month long-term net flows were negative $25.5 billion.
- Q3 net revenue yield declined to 36.2 basis points from 41.4 basis points a year earlier. Invesco attributed pressure to shifts toward passive and other lower-fee products, including growth in QQQ; management expected near-term revenue-yield pressure to continue.
- Cash and cash equivalents were $1,066.6 at September 30, 2020, compared with $1,049.0 at year-end 2019. Nine-month operating cash flow was $662.7; investing cash flow was negative $829.0 and financing cash flow negative $230.3. The reported cash-flow statement includes consolidated investment products (CIP); the company’s cash excluding CIP was $1,066.6.
- Long-term debt was $2,172.0, including $90.0 drawn under a $1.5 billion credit facility. Invesco reduced the facility balance from $325.6 at June 30. It reported compliance with covenants, a 1.43x leverage ratio and 10.94x interest coverage ratio. Most borrowings had fixed rates.
- Management said available cash, operating cash flow, credit-facility capacity and potential capital-market access should support expected needs. The company did not foresee further share repurchases in 2020 and expected to redeem approximately $200 million of seed investments during the year.
Material changes and unusual items
- Operating expenses declined 15.0% in Q3 and 1.8% for the nine months. Lower transaction and integration charges contributed to the year-over-year decline; pandemic-related reductions in travel and business activity were described as temporary.
- Nine-month general and administrative expense included a $105.3 charge for compensating two funds after a delayed S&P 500 equal-weight index rebalance. Invesco said it would seek insurance recovery, but the amount and timing were uncertain.
- An OppenheimerFunds-related accounting matter involving restated NAVs for four MLP funds led to an estimated $387.8 liability for pre- and post-acquisition activity, including $380.5 reflected in acquisition accounting and $7.3 recorded in earnings. Remediation costs and the extent of Invesco’s ultimate responsibility remained uncertain; estimates excluded possible insurance and seller-indemnity recoveries.
- Management’s strategic expense review targeted $200 million of permanent annual net operating expense improvements. It expected $150 million by the end of 2021 and the remainder by the end of 2022, with estimated restructuring costs of $250–$275 million over two years.
- COVID-19 market volatility affected AUM, yields, client-product liquidity and operating conditions. Other cited uncertainties included Brexit, U.S.–China tensions, foreign-exchange movements and the transition from LIBOR, whose publication beyond 2021 was not guaranteed.
Contingencies and other disclosures
- Undrawn co-investment commitments were $385.1. Approximately $322.7 of MassMutual seed investments were subject to redemption rights that could require Invesco to fund a redemption temporarily if a fund could not meet it.
- Management stated that litigation accruals were adequate for estimable matters and that it could not estimate a range of reasonably possible losses for other litigation contingencies.
- Quarterly dividends declared after quarter-end were $0.155 per common share and $14.75 per preferred share. Preferred shares carry a 5.9% annual dividend rate, payable when declared.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the nine months.
Most important facts for investors to verify
- Whether AUM flows and market conditions stabilize, and whether fee-mix changes continue to reduce revenue yield.
- The final remediation exposure, insurance proceeds and any MassMutual indemnification related to the MLP fund NAV matter.
- Progress, timing, and realized costs of the $200 million annual expense-improvement plan.
- Cash generation and debt reduction, while separating Invesco’s own liquidity from CIP assets and liabilities, which are not generally available to or obligations of the company.
- Whether the $105.3 fund-rebalancing payment is recovered and whether further operational or compliance issues arise.