Invesco Ltd. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Invesco is a global investment manager. All financial amounts below are in U.S. dollars; income-statement and cash-flow amounts are in millions unless noted.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $1,439.4 | $1,360.6 | $2,654.0 | $2,716.4 |
| Operating income | $18.3 | $331.3 | $218.5 | $652.4 |
| Operating margin, GAAP | 1.3% | 24.3% | 8.2% | 24.0% |
| Net income attributable to Invesco | $40.1 | $245.1 | $217.8 | $499.0 |
| Diluted EPS | $0.09 | $0.59 | $0.52 | $1.21 |
| Adjusted operating income | $363.4 | $376.6 | $647.7 | $733.9 |
| Adjusted operating margin | 35.2% | 38.7% | 33.8% | 38.0% |
| Adjusted diluted EPS | $0.65 | $0.66 | $1.21 | $1.32 |
Adjusted figures are non-GAAP measures; the filing cautions they are not substitutes for GAAP results and may not be comparable with similarly titled measures at other companies.
- Q2 revenue rose 5.8%, while six-month revenue fell 2.3%. Q2 growth included $217.1 million of OppenheimerFunds revenue recognized after the acquisition closed May 24.
- Q2 transaction, integration and restructuring expense was $304.9 million, including $295.7 million related to OppenheimerFunds; six-month expense was $351.0 million. These charges were the main reason GAAP operating income and earnings fell sharply.
- Cash from operating activities was $347.4 million for the first half, versus $396.8 million a year earlier. Excluding consolidated investment products (CIP), operating cash flow was $425.3 million versus $438.2 million.
- At June 30, cash and cash equivalents were $1,199.4 million and long-term debt was $2,120.5 million. The company reported $5,149.6 million of CIP debt, which management says is nonrecourse and does not affect Invesco’s liquidity. The $1.5 billion revolving credit facility had $41.4 million outstanding.
- Total assets were $38.5 billion and total liabilities $23.8 billion. These balances include CIP and $11.5 billion each of policyholder assets and matching payables; management’s adjusted balance-sheet presentation excludes these items.
Material changes and business developments
- Invesco acquired OppenheimerFunds on May 24 for approximately $5.6 billion of consideration: $19.6 million cash, 81.9 million common shares or awards, and $4.0 billion of preferred shares. The preliminary allocation included $5.205 billion of intangible assets and $1.181 billion of goodwill.
- OppenheimerFunds added $224.4 billion of AUM. Ending AUM was $1.198 trillion, compared with $963.3 billion a year earlier; much of the increase reflects the acquisition and market gains. Q2 total net flows were negative $4.5 billion, including negative $3.9 billion in long-term net flows.
- Management is targeting $475 million of net expense synergies. It expects approximately $450 million of transaction, integration and restructuring costs and an additional $120 million of integration-related compensation expense for certain OppenheimerFunds employees. The filing notes that pro forma results exclude expected synergies.
- The acquisition issued perpetual, non-cumulative preferred shares with a 5.9% annual dividend rate and a 21-year non-call period. Preferred dividends are payable when declared; the company said $64.4 million would be reflected in Q3 2019 income following the initial dividend declaration.
- Invesco repurchased shares and entered into forward purchase contracts. A further $200 million forward contract was expected to be completed in Q3 2019 and settle in 2021.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided. Management said it was progressing with integration and pursuing the stated synergy target while continuing investments in distribution, investment capabilities, technology and automation.
- Management expects capital resources, operating cash flows and credit-facility capacity to be sufficient for foreseeable needs. It targets approximately $1 billion of cash above European regulatory and liquidity requirements and reported compliance with regulatory capital requirements and debt covenants.
- At June 30, the debt covenant leverage ratio was 1.68x against a 3.25x maximum; interest coverage was 10.14x against a 4.00x minimum. Credit ratings reported at filing were BBB+/Stable, A2/Stable and A-/Positive.
- Risks include market declines or underperformance reducing AUM, fee revenue and performance fees; client outflows and product-mix changes; foreign-exchange movements; interest-rate and credit risks; and continuing Brexit uncertainty. Management noted UK-domiciled client AUM of $76.3 billion, down from $88.6 billion a year earlier.
- The company is subject to ongoing regulatory inquiries and ordinary-course litigation. Management said recorded accruals were adequate for estimable losses, but it could not estimate a range of reasonably possible losses for other litigation contingencies. Undrawn co-investment commitments were $335 million.
- Management reported disclosure controls were effective, while excluding OppenheimerFunds’ internal controls from the assessment during integration. The filing reported no significant changes in previously disclosed risk factors.
Important facts for investors to verify
- Whether OppenheimerFunds integration delivers the $475 million targeted net expense synergies, and the timing and total of integration charges, including the stated $450 million and $120 million items.
- How post-acquisition AUM flows, market movements, fee yields and client retention affect recurring revenue; distinguish acquisition-driven AUM growth from organic growth.
- The effect of the $4.0 billion preferred shares, including dividends and their priority over common-share distributions, on earnings available to common shareholders and capital allocation.
- Cash generation and liquidity excluding CIP, the use of forward share-purchase contracts, and debt-covenant headroom as integration progresses.
- Developments in Brexit, regulatory matters, litigation and uncertain tax positions; the filing says unrecognized tax benefits were $69.7 million and could change by $5 million to $15 million within twelve months.