Invesco Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Invesco is a global investment manager serving retail and institutional clients. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenues | $1,355.8 | $1,192.6 | +13.7% |
| Operating income | $321.1 | $257.9 | +24.5% |
| Operating margin | 23.7% | 21.6% | +2.1 percentage points |
| Net income attributable to Invesco | $253.9 | $212.0 | +19.8% |
| Diluted EPS | $0.62 | $0.52 | +19.2% |
| Dividend declared per share in the quarter | $0.29 | $0.28 | +$0.01 |
Non-GAAP net revenues were $958.0 million, up 10.5%; adjusted operating income was $357.3 million, up 9.5%; adjusted operating margin was 37.3%, versus 37.6%; adjusted diluted EPS was $0.67, versus $0.61. These non-GAAP measures are not substitutes for GAAP results.
Revenue growth reflected higher average assets under management (AUM), foreign exchange benefits, the European ETF acquisition completed in 2017, and a material accounting presentation change under ASC 606. ASC 606 changed reported revenue and expense presentation but did not affect operating income, net income, or EPS; 2017 was not restated, so reported revenue comparisons are not fully like-for-like. The filing attributes $44.5 million of revenue growth to foreign exchange. Performance fees fell 19.5% to $9.1 million.
AUM, cash flow, debt and liquidity
- Ending AUM was $934.2 billion, up from $834.8 billion a year earlier but down from $937.6 billion at December 31, 2017. Average AUM was $951.3 billion, up from $829.8 billion.
- Q1 long-term net flows were positive $0.3 billion: $1.8 billion of passive inflows offset $1.5 billion of active outflows. Net flows included $2.4 billion of institutional long-term inflows and $2.1 billion of retail outflows. Market movements reduced AUM by $12.2 billion; foreign exchange added $7.9 billion.
- GAAP operating cash flow was negative $52.2 million. Excluding consolidated investment products (CIP), operating cash flow was positive $1.1 million, compared with $200.6 million in Q1 2017; the filing cites seasonal variable-compensation payments and prior-year investment-sale proceeds as important comparison factors. GAAP investing cash outflow was $297.8 million, largely reflecting CIP activity.
- Corporate cash and cash equivalents were $1.862 billion at March 31, down from $2.006 billion at year-end. Long-term debt was $2.076 billion, principally fixed-rate senior notes; the floating-rate credit facility had no balance at quarter-end. The reported $4.503 billion of CIP debt is nonrecourse to Invesco and is not a corporate obligation, according to the filing.
- Invesco reported compliance with credit covenants; leverage was 1.14x and interest coverage 19.39x. It stated that cash, operating cash generation, and credit-facility capacity should provide adequate resources, while maintaining a target cash buffer of approximately $1 billion above European regulatory and liquidity requirements. Minimum regulatory capital was $818.5 million.
Material changes, outlook and risks
- Markets were volatile in Q1: the S&P 500 fell 1.2%, FTSE 100 fell 8.2% in sterling terms, and Nikkei 225 fell 7.1% in yen terms. Management highlighted trade-policy uncertainty, inflation and rising-rate concerns, and mixed global market returns. Invesco’s fee revenue is sensitive to market levels, AUM flows, product mix and currency movements.
- On April 6, 2018, after quarter-end, Invesco completed its $1.2 billion acquisition of Guggenheim Investments’ ETF business, adding $38.1 billion of AUM at acquisition. It borrowed approximately $835 million on its credit facility and planned to repay the borrowing during 2018, including by curtailing open-market share repurchases. Management said the acquisition would expand ETF capabilities; its purchase-price allocation was not complete in the filing.
- Management reported $8.2 million of Q1 business-optimization charges. The initiative was expected to cost approximately $158 million in total, with $27 million still to be incurred through 2018. Annualized run-rate savings were about $45 million at quarter-end, with up to $65 million expected by completion in 2018.
- The lower U.S. corporate tax rate contributed to a 20.5% effective tax rate, down from 26.1%. Management intended to use the tax-related cash-flow benefit first to reduce acquisition-related credit-facility borrowing.
- Invesco announced a 30-cent-per-share Q1 dividend after quarter-end, payable June 1, 2018. The filing provides no specific earnings or revenue guidance.
- Risks include market-driven AUM and fee changes, client outflows or underperformance, foreign-exchange and interest-rate exposure, regulatory oversight and litigation, and possible effects on client confidence. Management said it had accrued reasonably estimable legal losses and did not expect litigation to materially affect the business, financial position, results or liquidity; it could not estimate a range of reasonably possible losses for other matters.
Important facts for investors to verify
- How much reported revenue growth reflects underlying fee and AUM trends versus ASC 606 presentation changes, foreign exchange and acquisitions.
- Whether active AUM outflows persist and whether market performance, product mix and passive growth continue to pressure net revenue yield; Q1 net revenue yield was 40.3 basis points versus 41.8 basis points a year earlier.
- Progress in repaying the $835 million acquisition borrowing, the effects of reduced share repurchases, and the Guggenheim ETF business’s contribution to AUM, revenue and costs.
- Whether optimization savings materialize as planned and whether cash generation improves after Q1’s seasonal outflows.
- Developments in regulatory or legal matters, foreign-exchange exposure, and the final purchase-price allocation for the Guggenheim acquisition.