Invesco Ltd. — Q1 2020 Form 10-Q
Business and period: Invesco is a global investment manager. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Results include OppenheimerFunds from its May 2019 acquisition, so year-over-year comparisons reflect both the acquisition and sharply weaker markets during the COVID-19 shock.
Financial results and key metrics
- Revenue: GAAP operating revenue was $1.599 billion, up 31.6%. Investment management fees rose 26.5% to $1.168 billion and service and distribution fees rose 66.8% to $365.8 million; performance fees fell 78.0% to $4.8 million. Non-GAAP net revenue was $1.146 billion, up 29.2%.
- Profit and margins: Operating income was $317.0 million, up from $200.2 million; GAAP operating margin was 19.8%, versus 16.5%. Net income attributable to Invesco was $81.5 million, versus $177.7 million, and diluted EPS was $0.18, versus $0.44. Adjusted operating income was $412.7 million and adjusted margin was 36.0%, versus $284.3 million and 32.0%; adjusted net income was $155.3 million and adjusted diluted EPS was $0.34, versus $224.8 million and $0.56.
- Major earnings items: Other gains and losses were a $106.5 million loss, compared with a $31.1 million gain in Q1 2019. The 2020 loss included $67.7 million of losses on deferred-compensation investments and instruments and $45.6 million of net seed-investment losses. Transaction, integration and restructuring expense was $75.5 million, including $71.1 million related to OppenheimerFunds. The effective tax rate was 32.4%, versus 25.8%.
- AUM and flows: Ending AUM was $1.053 trillion, down from $1.226 trillion at December 31, 2019; average AUM was $1.176 trillion, up from $932.8 billion in Q1 2019. Quarterly market losses reduced AUM by $162.7 billion; total net flows were negative $2.1 billion. Management said the AUM decline pressured revenue and expected near-term pressure to continue.
- Cash flow and liquidity: GAAP operating cash flow was negative $77.0 million, versus negative $120.4 million; excluding consolidated investment products (CIP), operating cash flow was negative $78.3 million, versus negative $59.1 million. Investing cash flow was negative $452.0 million and financing cash flow was positive $96.3 million. Cash and cash equivalents available to Invesco were $940.5 million at quarter-end, down from $1.049 billion at year-end; additional CIP cash is not available for general corporate use.
- Debt: Long-term debt was $2.589 billion, up from $2.080 billion, including $508 million drawn on the $1.5 billion credit facility. The company reported compliance with its debt covenants; leverage was 1.68x against a 3.25x maximum and interest coverage was 11.13x against a 4.00x minimum.
- Other balance-sheet items: Total assets were $37.011 billion and total liabilities were $22.892 billion; these GAAP totals include substantial CIP and policyholder balances. Goodwill was $8.544 billion and intangible assets were $7.325 billion. The company’s interim impairment tests found no impairment, but management cautioned that prolonged or worsening market conditions could lead to future impairment.
Material changes, outlook and risks
- COVID-19 market turmoil drove a $162.7 billion AUM market decline; major equity indices fell substantially in the quarter. Management cited continued uncertainty and expected AUM-related revenue pressure in the near term. The filing provides no numerical earnings or revenue guidance.
- To preserve capital and build liquidity, Invesco reduced its common dividend to $0.155 per share beginning with the second-quarter payment, planned to redeem up to $200 million of seed investments where appropriate, and did not expect further 2020 share repurchases if unfavorable markets continued. It also cited lower variable compensation and discretionary spending. The board retains discretion over future dividends.
- SteelPath fund matter: Following regulatory consultation, the company concluded that some costs related to historical NAV and financial-statement errors at four acquired MLP funds were probable. It recorded an estimated $387.8 million liability: $380.5 million for pre-acquisition activity, treated as an acquisition accounting adjustment, and $7.3 million for post-acquisition activity recognized in earnings. Estimates exclude potential insurance or seller-indemnity recoveries and certain remediation and communication costs; the amount and Invesco’s ultimate responsibility remain uncertain.
- COVID-19 risks include further market and AUM declines, client outflows, reduced liquidity in managed products, and operational disruption affecting Invesco or key service providers. Other cited risks include Brexit and currency movements, the LIBOR transition, regulatory and legal matters, and possible goodwill or intangible impairment. Management said remote-working operations were functioning effectively at the reporting date.
- Management stated that existing cash, operating cash flows, credit-facility capacity and potential capital-market access should provide resources for obligations, while noting that market conditions and credit access could affect financing. The company reported investment-grade ratings and compliance with regulatory minimum capital requirements.
Investor verification priorities
- Track post-quarter AUM, flows, fee yields and revenue trends to assess the extent and duration of COVID-19-related pressure.
- Review updates to the SteelPath remediation estimate, shareholder reimbursements, insurance recoveries and MassMutual indemnification.
- Monitor cash generation, credit-facility borrowing, debt covenants and the execution of announced capital-preservation measures.
- Assess whether weaker markets or forecasts trigger goodwill or intangible-asset impairment in later tests.
- Compare GAAP results with management’s non-GAAP measures and note the acquisition-related adjustments and market-sensitive gains and losses.