Invesco Ltd. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless noted. Invesco is a global investment manager. Assets under management (AUM) and revenue are sensitive to market levels, client flows, product mix and foreign exchange. AUM figures below exclude Atlantic Trust, reported as discontinued operations and held for sale.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue (GAAP) | $1,135.5m | $981.8m | $2,247.7m | $1,989.8m |
| Net revenue (non-GAAP) | $790.3m | $685.9m | $1,578.3m | $1,397.2m |
| Operating income | $273.9m | $199.8m | $540.9m | $426.2m |
| Operating margin | 24.1% | 20.4% | 24.1% | 21.4% |
| Adjusted operating income (non-GAAP) | $310.6m | $244.8m | $616.8m | $509.6m |
| Adjusted operating margin (non-GAAP) | 39.3% | 35.7% | 39.1% | 36.5% |
| Net income attributable to common shareholders | $202.6m | $153.9m | $424.8m | $347.8m |
| Diluted EPS | $0.45 | $0.34 | $0.94 | $0.76 |
| Adjusted diluted EPS (non-GAAP) | $0.50 | $0.40 | $1.00 | $0.83 |
- Revenue and earnings: Q2 GAAP operating revenue rose 15.7% and net revenue rose 15.2%; six-month increases were 13.0% for both measures. Higher investment management and service/distribution fees reflected greater average AUM and a more favorable revenue mix. Q2 performance fees fell to $6.0m from $15.6m; six-month fees increased to $42.1m from $36.0m.
- Profit and margins: Operating income grew faster than expenses in both comparisons. Q2 operating expenses rose 10.2% and six-month expenses rose 9.2%. Management cited higher compensation and distribution costs, partly offset by lower marketing and general and administrative expenses.
- Cash flow: For the six months, GAAP operating cash flow was $255.6m, investing cash flow was negative $78.4m, and financing cash flow was negative $60.8m. Cash and equivalents increased $116.4m before a $35.7m adverse foreign-exchange movement, ending at $916.2m. Excluding consolidated investment products, management reported operating cash generation of $288.7m.
- Debt and liquidity: Company debt was $1,445.6m at June 30, up from $1,186.0m at year-end 2012, primarily due to a $259.5m net credit-facility draw. Debt comprised $846.0m on a floating-rate facility and $599.6m of 3.125% senior notes due 2022. The company reported compliance with debt covenants and regulatory net-capital requirements. Its debt/equity ratio excluding consolidated investment products was 17.9%, versus 14.5% at year-end. Management’s capital priorities include reinvestment, dividends, share repurchases and a target cash buffer of approximately $1bn above regulatory requirements; some cash is subject to jurisdictional restrictions.
- Balance sheet: Total assets were $18.14bn and total equity $8.75bn at June 30. GAAP balances include consolidated investment products, principally CLOs; management says their collateral and debt are not available to or obligations of Invesco’s general creditors. Excluding those products, reported total assets were $13.21bn.
- AUM and flows: Ending AUM was $705.6bn, up from $627.6bn a year earlier but down from $707.7bn at March 31. Six-month total net inflows were $20.1bn and market gains added $29.2bn, partly offset by $11.1bn of currency translation losses. Q2 net inflows were $1.4bn, while market movements and FX reduced AUM by $1.3bn and $2.2bn, respectively.
Material changes and management commentary
- Q2 markets were volatile as investors reacted to potential U.S. Federal Reserve tapering: U.S. Treasury prices, emerging-market equities and commodities declined, while U.S. equities posted a modest gain. Management noted the business’s sensitivity to market performance, client flows and currency movements.
- Invesco completed a 49% investment in India’s Religare Asset Management in Q1 2013; results are included through equity-method accounting.
- In April, Invesco agreed to sell Atlantic Trust to CIBC for a $210m base price, subject to adjustments and regulatory approval, with closing expected in the second half of 2013. Management estimated a run-rate reduction of about $115m in annual revenue, $85m in annual adjusted operating expenses and $0.05 in adjusted diluted EPS. It intended to use proceeds to repurchase shares. Atlantic Trust recorded a Q2 discontinued-operations loss of $4.6m after tax; Q2 sale-related and other specified costs included $13.9m before tax.
- The quarter’s tax rate on continuing operations increased to 28.6% from 21.3%, with management attributing the change primarily to a smaller impact from income attributable to noncontrolling interests. For the six months, the rate declined to 29.6% from 30.9%.
- The filing provides no formal earnings or revenue guidance. Management’s stated outlook includes the Atlantic Trust transaction estimates and its capital-management priorities.
Risks, contingencies and unusual items
- Results depend on AUM levels and mix; market declines, underperformance, client withdrawals and foreign-exchange movements can reduce fees and earnings. A 1% change in interest rates on current company debt would change annualized interest expense by an estimated $8.5m.
- Invesco disclosed pending lawsuits concerning auction-rate preferred-security redemptions by certain acquired closed-end funds, including a 2013 Massachusetts suit; motions to dismiss remained pending. Management intends to defend the matters but says outcomes and potential losses cannot be predicted with certainty.
- A Canadian tax assessment, including interest and penalties, was approximately $20.2m. Management considers the claim unfounded and recorded no provision. Gross unrecognized tax benefits were $17.0m at June 30.
- Support agreements for two investment trusts committed $21.0m, with internal approval to raise the maximum to $66.0m. No payments or losses had occurred; management assessed the likelihood of funding as low. Undrawn investment commitments were $141.3m.
- Consolidated CLO collateral included approximately 2.1% assets in default, compared with less than 1.8% at year-end 2012. CLO valuations rely in part on unobservable inputs; changes in default, spread or recovery assumptions can affect fair values.
- Other notable items include substantial foreign-currency translation losses in other comprehensive income (six-month OCI loss of $292.3m, largely currency-related), and a $4.7m Q2 tax benefit from enacted Canadian tax law. The company reported no material change in risk factors from its 2012 Form 10-K.
Important facts for investors to verify
- Whether Atlantic Trust closes on the expected timetable and final proceeds, adjustments, expenses and impact on recurring earnings and AUM.
- How much of the $916.2m cash balance is available for general use after regulatory and jurisdictional constraints, and progress toward management’s approximately $1bn excess-cash target.
- Whether AUM flows, fee yields and investment performance remain supportive after the volatile second quarter; note that Q2 net inflows were modest and equity outflows persisted.
- The drivers and sustainability of reported versus adjusted earnings and margins; adjusted measures are non-GAAP and exclude specified items.
- Developments in the Canadian tax assessment, auction-rate securities litigation and trust-support commitments, including any change in estimated exposure.
- Credit-facility borrowings, covenant compliance and the distinction between Invesco’s debt and debt of consolidated investment products, which management excludes from its underlying debt analysis.