Invesco Ltd. annual report, FY2018

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Invesco Ltd. — 2018 Form 10-K Summary

Business context and reporting period

Invesco is a global investment manager with one operating segment. This annual report covers the fiscal year ended December 31, 2018; it also presents unaudited fourth-quarter results. Unless otherwise stated, financial amounts are in U.S. dollars. At year-end, Invesco managed $888.2 billion for clients in more than 120 countries.

Financial performance and key metrics

  • Revenue: GAAP operating revenue was $5.314 billion, up 3.0% from 2017. Non-GAAP net revenue was $3.818 billion, up 1.7%. The adoption of new revenue-recognition rules changed the gross presentation of several revenue and expense lines; management said the adoption did not affect net income or EPS.
  • Profit and margins: Operating income fell 5.8% to $1.205 billion; GAAP operating margin declined to 22.7% from 24.8%. Net income attributable to Invesco fell to $882.8 million from $1.127 billion, and diluted EPS declined to $2.14 from $2.75. Non-GAAP adjusted operating income was $1.392 billion, adjusted margin 36.5%, adjusted net income $1.003 billion and adjusted diluted EPS $2.43; these measures exclude specified items and are not GAAP substitutes.
  • Fourth quarter: Operating revenue was $1.256 billion versus $1.376 billion in Q4 2017; operating income was $230.4 million versus $342.6 million. Net income attributable to Invesco was $114.2 million versus $408.2 million, and diluted EPS was $0.28 versus $0.99. The comparison includes a Q4 2017 tax benefit and different market-related and consolidated-fund results.
  • AUM and flows: Ending AUM decreased 5.3% to $888.2 billion from $937.6 billion, despite $47.6 billion of acquisition-related additions and inclusion of 100% of Invesco Great Wall AUM beginning in the third quarter. Total net flows were negative $28.9 billion, versus positive $4.3 billion in 2017; long-term net flows were negative $39.0 billion. Market losses reduced AUM by $67.0 billion and foreign exchange by $12.5 billion. Average AUM increased to $958.7 billion from $875.0 billion. Active AUM fell 9.7% year over year; passive AUM rose 11.1% to $221.0 billion.
  • Cash flow and liquidity: GAAP operating cash flow was $828.8 million. Excluding consolidated investment products (CIP), operating cash flow was $1.063 billion, down from $1.452 billion in 2017. Cash and cash equivalents available to Invesco were $1.148 billion at year-end, down from $2.006 billion. The company reported $102.5 million of capital expenditures, $490.6 million of dividends paid and $1.469 billion of acquisition-related cash outflows. Management said cash, operating cash flow and available credit capacity should meet expected needs; some subsidiary cash is subject to regulatory or jurisdictional restrictions.
  • Debt: Company long-term debt, excluding CIP debt, was $2.409 billion, up from $2.076 billion; $330.8 million was drawn on the $1.5 billion credit facility. The company reported covenant compliance, a 1.51x leverage ratio and 14.37x interest coverage, against limits of 3.25x maximum leverage and 4.00x minimum coverage. Separately, $5.226 billion of CIP debt is generally non-recourse to Invesco and is supported by CIP assets.
  • Shareholder returns: The declared dividend attributable to 2018 was $1.19 per share, versus $1.15 in 2017. A $1.2 billion buyback program was announced; a forward contract covered $300 million of shares, with settlement expected in 2019.

Material changes versus 2017

  • Negative net flows and year-end market declines reversed nine consecutive years of positive net flows. UK, Canadian and Continental European client-domicile AUM declined; Asia AUM increased.
  • Performance fees declined 49.8% to $56.9 million. The mix shifted further toward passive AUM, which generally earns lower fees; net revenue yield declined to 39.8 basis points from 42.9 basis points.
  • Operating expenses rose 5.9% to $4.109 billion. Transaction, integration and restructuring charges increased to $136.9 million from $101.8 million. Interest expense increased to $111.5 million, primarily due to credit-facility borrowings.
  • The effective tax rate rose to 22.4% from 18.8%; 2017 included a $130.7 million tax benefit from U.S. tax reform. Foreign-currency translation reduced 2018 other comprehensive income by $327.1 million.
  • Acquisitions completed included Guggenheim Investments’ ETF business for $1.2 billion and UK advisor-technology provider Intelliflo. The Guggenheim business added $38.1 billion of AUM at acquisition.

Outlook, commentary, risks and contingencies

  • Invesco reported that volatile markets, underperformance in certain capabilities, trade tensions and Brexit uncertainty contributed to negative flows. The filing provides no clear general earnings or revenue guidance.
  • The planned OppenheimerFunds acquisition was expected to close in Q2 2019, subject to approvals. Consideration comprised 81.9 million Invesco common shares and $4 billion of 5.9% perpetual, non-cumulative preferred shares. Management targeted $475 million of expense synergies; the filing cautions that closing, client consents, integration and savings are uncertain.
  • Business-optimization initiatives had generated approximately $56 million of annualized run-rate savings by year-end; savings of up to $58 million were expected at completion in 2019. Approximately $5 million of the estimated $160 million total program cost remained to be incurred.
  • Principal business risks include market declines and outflows, investment underperformance, fee pressure and passive-product shifts, key-personnel retention, acquisition integration, foreign exchange, interest-rate and credit volatility, cyber and operational disruptions, regulatory change, and litigation. Brexit and U.S.–China trade uncertainty were specifically highlighted.
  • Legal proceedings arise in the ordinary course; management reported adequate accruals for estimable probable losses and said it could not estimate a range for other litigation contingencies. A Canadian tax assessment of approximately $8 million was under appeal; no provision was recorded because management believed its position was more likely than not to prevail.
  • Auditors issued unqualified opinions on the financial statements and internal controls, and management reported effective internal control over financial reporting. The filing also describes an auditor-independence issue involving fund investors and PwC; Invesco relied on SEC staff no-action relief.

Important facts for investors to verify

  • Whether OppenheimerFunds closed on the expected terms, how many client consents were obtained, and whether the $475 million synergy target and integration costs remain achievable.
  • Subsequent AUM, net flows and investment performance, especially active strategies, retail flows and the shift toward lower-fee passive products.
  • Underlying cash generation and liquidity after acquisitions, repurchases and dividends, distinguishing Invesco’s own cash and debt from restricted subsidiary balances and non-recourse CIP balances.
  • Progress on debt, covenant headroom and funding implications of the acquisition’s preferred-share distributions.
  • Developments in the Canadian tax appeal, other legal or regulatory matters, and the continued applicability of SEC relief concerning PwC independence.