Invesco Ltd. — Second-Quarter 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Financial amounts are in U.S. dollars unless noted. Invesco is a global investment manager. Comparisons below are with the corresponding 2014 period. The filing presents U.S. GAAP results and, separately, management’s non-GAAP measures; these are not interchangeable.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,318.1 million | $1,289.9 million | $2,609.7 million | $2,559.4 million |
| Operating income | $364.0 million | $354.8 million | $702.1 million | $599.1 million |
| Operating margin (GAAP) | 27.6% | 27.5% | 26.9% | 23.4% |
| Net income attributable to Invesco | $257.3 million | $274.5 million | $516.9 million | $462.3 million |
| Diluted EPS | $0.60 | $0.63 | $1.20 | $1.06 |
| Net revenues (non-GAAP) | $936.6 million | $901.0 million | $1,854.1 million | $1,788.8 million |
| Adjusted operating income (non-GAAP) | $390.2 million | $377.0 million | $764.5 million | $740.0 million |
| Adjusted operating margin (non-GAAP) | 41.7% | 41.8% | 41.2% | 41.4% |
| Adjusted diluted EPS (non-GAAP) | $0.63 | $0.65 | $1.26 | $1.25 |
- Revenue mix: Q2 investment management fees rose 2.3% to $1,055.7 million; service and distribution fees rose 2.3% to $219.6 million. Six-month performance fees increased 48.2% to $53.5 million, while service and distribution fees fell 4.5% to $433.0 million.
- Expenses and margins: Operating expenses increased 2.0% in Q2 to $954.1 million, but declined 2.7% for the half year to $1,907.6 million. The six-month decline chiefly reflects prior-year property optimization and FCA penalty charges. Adjusted operating margin remained broadly stable year over year.
- Profit change: Q2 income before tax fell to $353.4 million from $423.6 million, including less favorable investment gains/losses at consolidated investment products (CIP). Six-month income before tax increased to $738.7 million from $721.4 million. The six-month effective tax rate was 28.5%, versus 27.2%.
- Assets under management (AUM): Period-end AUM was $803.6 billion, versus $802.4 billion a year earlier; average AUM was $810.9 billion in Q2, up from $790.1 billion. Long-term net inflows were $5.9 billion in Q2 and $16.2 billion for the half year. Total net flows were $3.0 billion and $4.7 billion, respectively, after outflows from QQQ and institutional money market funds. Q2 market movements reduced AUM by $6.2 billion; foreign exchange added $8.5 billion.
- Cash flow: Six-month operating cash flow was $458.5 million, versus $550.3 million; excluding CIP, management reported operating cash flow of $385.1 million, versus $313.7 million. Investing activities used $397.8 million and financing activities used $104.0 million. Cash and cash equivalents ended at $1,465.7 million, down from $1,514.2 million at year-end 2014. Capital expenditures were $50.4 million; dividends paid were $224.6 million; market share repurchases cost $158.1 million.
- Debt and liquidity: Long-term corporate debt was $1,597.5 million, including $7.9 million drawn on a $1.25 billion revolving facility. Corporate debt-to-equity, excluding CIP, was 19.1%; the GAAP ratio including CIP was 77.4%, principally because it includes $5,432.1 million of product debt that management says is nonrecourse to Invesco and does not affect corporate liquidity. The company reported compliance with debt covenants and regulatory capital requirements; covenant leverage was 0.93x and interest coverage 23.63x.
- Balance sheet: Total assets were $22,898.3 million and total liabilities $13,644.1 million. Assets and policyholder payables each included $3,458.6 million, substantially offsetting balances. Corporate cash is subject to regulatory and jurisdictional restrictions; European subsidiaries held $1,178.1 million in cash and equivalents.
Material changes, management commentary, and outlook
- Management attributed revenue growth to higher average AUM and long-term flows, with reported revenue also pressured by foreign exchange: currency movements reduced operating revenue by $51.0 million in Q2 and $95.6 million in the first half versus 2014.
- Market conditions were volatile in Q2, with declines in most major markets cited by management. The company emphasizes that AUM levels, investment performance, flows, asset mix, and foreign exchange affect fees and results.
- Management stated that its cash, operating cash generation, credit facility, and potential capital-market access should provide resources for obligations and expected capital needs. Capital priorities include reinvestment, moderate dividend growth, share repurchases, and an approximately $1 billion cash buffer above regulatory requirements. No quantified earnings or AUM guidance was provided in the supplied filing text.
- The board declared a quarterly dividend of $0.27 per share on July 30, payable September 4, 2015. At June 30, approximately $1,068.7 million remained authorized under the share repurchase plan.
- Unusual items include an $8.4 million Q2 loss on sterling put options intended as an economic hedge; a $4.7 million Q2 fund-reimbursement charge; and a $6.4 million property-related credit in Q2 tied to a prior business optimization initiative. Six-month 2014 comparisons included a $31.1 million FCA penalty and related legal costs.
- Invesco acquired investment management contracts in the first half, recording $119.3 million of indefinite-lived intangibles and a $117.8 million contingent consideration liability linked to future revenues. Adoption of ASU 2014-13 changed accounting for consolidated CLOs, including a $17.6 million reduction to opening retained earnings appropriated for CIP investors.
- Risks include market and AUM declines, client outflows, investment underperformance, currency and interest-rate movements, regulatory changes and enforcement, litigation, and constraints on transferring cash across jurisdictions. The filing reports $139.5 million of undrawn capital commitments. Management said litigation losses that can be reasonably estimated were accrued, but a range of reasonably possible losses for other contingencies could not be estimated.
Important facts for investors to verify
- Reconcile GAAP and non-GAAP results, especially the effects of CIP consolidation and the adjustments used in adjusted margin and adjusted EPS.
- Track AUM flows by channel, asset class, and domicile, along with investment performance and the impact of market and currency movements on fee revenue.
- Assess the sustainability of expense reductions against compensation, technology, distribution, consulting, and regulatory costs, and distinguish recurring costs from unusual credits or charges.
- Review corporate debt, covenant headroom, restricted or jurisdictionally held cash, and the difference between corporate obligations and nonrecourse CIP debt.
- Monitor regulatory developments and contingencies, including the new or changing money-market, fiduciary, EU financial-services, and private-equity requirements described in the filing.