Invesco Ltd. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited financial statements, prepared under U.S. GAAP. Invesco is a global investment manager. Unless otherwise noted, amounts are U.S. dollars.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Operating revenue | $1,141.8 million | $1,033.7 million; up 10.5% |
| Net revenue (non-GAAP) | $816.5 million | $736.3 million; up 10.9% |
| Operating income / margin | $273.4 million / 23.9% | $229.8 million / 22.2% |
| Adjusted operating income / margin (non-GAAP) | $313.6 million / 38.4% | $269.2 million / 36.6% |
| Net income / net income attributable to common shareholders | $199.6 million / $222.2 million | $74.8 million / $193.9 million |
| Diluted EPS / adjusted diluted EPS (non-GAAP) | $0.49 / $0.52 | $0.43 / $0.44 |
| Cash and cash equivalents | $884.7 million | $835.5 million at Dec. 31, 2012 |
| Company debt, excluding consolidated investment products | $1,514.5 million | $1,186.0 million at Dec. 31, 2012 |
| Assets under management (ending / average) | $729.3 billion / $712.7 billion | $672.8 billion ending / $658.2 billion average in Q1 2012 |
Investment management fees rose 10.5%; performance fees increased to $36.1 million from $20.5 million. The effective tax rate declined to 30.7% from 49.6%. Common-shareholder income exceeded consolidated net income because losses attributable to noncontrolling interests were added back in determining the common-shareholder result.
Cash flow: Reported operating cash flow was negative $484.6 million, investing cash flow was positive $146.4 million, and financing cash flow was positive $418.8 million. Management said operating cash use excluding consolidated investment products was $45.5 million, reflecting seasonal bonus, payroll-tax and pension payments and net trading-investment purchases. Consolidated cash flows include investment products and are not all available to Invesco. The filing does not present a free-cash-flow measure.
Margins and liquidity: GAAP operating margin improved as revenue growth exceeded expense growth. The company reported $884.7 million of cash, while noting that some cash is subject to regulatory or jurisdictional restrictions; its stated objective was a cash buffer of about $1 billion above regulatory requirements. The company’s debt/equity ratio excluding consolidated investment products was 18.7%, compared with 14.5% at year-end 2012. Consolidated investment-product debt of $4,221.4 million is reported under GAAP but, principally for CLOs, is described as nonrecourse and unavailable to general creditors.
Material changes and business drivers
- AUM increased $41.6 billion during the quarter: net inflows of $19.2 billion and market gains of $31.4 billion were partly offset by $9.0 billion of adverse currency translation. Long-term net inflows were $14.8 billion.
- Revenue growth also reflected higher average AUM, higher performance fees, and the lapse of certain U.S. mutual-fund fee waivers that had reduced prior-year fees. Foreign exchange movements reduced year-over-year operating revenue by $14.9 million.
- Operating expenses rose 8.0% to $868.4 million, including higher employee compensation and distribution expenses; marketing and general and administrative expenses declined.
- Other losses of consolidated investment products were $21.1 million, versus $121.9 million in Q1 2012, a major factor in the increase in consolidated net income. These product-level results were substantially offset by noncontrolling interests and are not representative of overall AUM performance.
- In March, Invesco completed the purchase of a 49% interest in India’s Religare Asset Management Limited. The investment is accounted for under the equity method.
Outlook, capital allocation, risks and unusual items
- Management identified reinvestment in the business, moderate dividend growth, share repurchases, and building an approximately $1 billion excess cash buffer as capital priorities. No earnings or revenue guidance was provided in the supplied filing text.
- On April 11, 2013, Invesco agreed to sell Atlantic Trust Private Wealth Management to CIBC for $210 million cash, subject to regulatory approval and expected to close in the second half of 2013. Management estimated annualized reductions of about $115 million in net revenue and $85 million in adjusted operating expenses, and adjusted diluted EPS dilution of $0.05; it intended to use proceeds for share repurchases, expected to offset about $0.03 per share. The business was expected to be treated as held for sale and discontinued operations beginning in Q2.
- On April 30, the company announced a Q1 dividend of $0.225 per share, payable June 7. This was subsequent to quarter-end; the dividend declared for the preceding quarter was $0.1725 per share.
- Debt rose primarily from a $328.5 million net draw on the credit facility used for seasonal compensation and tax payments, pension contributions, share repurchases and the Religare investment. Invesco reported covenant compliance, with leverage of 1.22x against a maximum of 3.25x and interest coverage of 26.29x against a minimum of 4.00x. A 1% interest-rate change was estimated to alter annualized interest expense by $9.2 million.
- Risks include sensitivity of fee revenue to markets, AUM and investment performance; foreign-exchange exposure; and regulatory, litigation and tax matters. The company disclosed pending auction-rate preferred-securities litigation with unspecified damages and a Canadian tax assessment of approximately $20.6 million, which management considered unfounded and did not accrue. It also had $134.8 million of undrawn investment commitments and contingent support agreements with $21 million committed support (potentially up to $66 million subject to internal approval); no support payments had been made.
- Unusual items included a $2.7 million prior-period distribution expense associated with the European infrastructure initiative, excluded from adjusted results; a $3.0 million U.K. compensation-scheme levy; and a $2.5 million legal-settlement credit within general and administrative expense. Adjusted measures are non-GAAP and may not be comparable with other companies’ measures.
Important facts for investors to verify
- Whether AUM inflows, fee yields and investment performance remained durable after the quarter, and how much reported growth depended on market appreciation and performance fees.
- The Atlantic Trust sale’s closing, proceeds, discontinued-operations treatment, and actual revenue, expense and EPS effects versus management estimates.
- Cash genuinely available for corporate use after regulatory and jurisdictional restrictions, and the company’s ability to meet its excess-cash objective while funding dividends and repurchases.
- Credit-facility borrowing, covenant headroom and interest-rate exposure; distinguish Invesco’s own debt from nonrecourse consolidated investment-product debt.
- Developments in the disclosed litigation, Canadian tax assessment, contingent support obligations and other regulatory matters.