Invesco Ltd. — Q2 2017 Form 10-Q
Business and period: Invesco is a global investment manager. This unaudited filing covers the three and six months ended June 30, 2017; comparisons are with the same 2016 periods unless stated otherwise. Amounts are U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Operating revenue | $1,254.4m | $1,189.4m | $2,447.0m | $2,338.1m |
| Operating income | $318.9m | $301.5m | $577.5m | $575.9m |
| GAAP operating margin | 25.4% | 25.3% | 23.6% | 24.6% |
| Net income attributable to Invesco | $239.6m | $225.5m | $451.6m | $386.5m |
| Diluted EPS | $0.58 | $0.54 | $1.10 | $0.92 |
| Dividends declared per share | $0.29 | $0.28 | $0.57 | $0.55 |
- Q2 operating revenue rose 5.5%, led by investment management fees (+6.7%) and performance fees (+87.6%); other revenue fell 47.4%. H1 revenue increased 4.7%.
- Q2 operating income grew 5.8%; H1 operating income was nearly flat. H1 operating expenses rose 6.1%, faster than revenue, with employee compensation up 9.7%.
- Management’s non-GAAP measures showed Q2 adjusted operating income of $356.5m and adjusted margin of 39.3%, versus $330.4m and 38.6% a year earlier. H1 adjusted operating income was $683.6m and adjusted margin 38.5%, versus $637.5m and 38.1%. Adjusted diluted EPS was $0.64 for Q2 and $1.26 for H1. These company-defined measures exclude specified items and are not GAAP substitutes.
- Ending AUM was $858.3bn, up from $779.6bn a year earlier. Average AUM was $849.2bn for Q2 and $839.5bn for H1. Long-term net flows were outflows of $0.6bn in Q2 and inflows of $1.2bn in H1; market gains and currency translation contributed materially to AUM growth. Net revenue yield declined to 42.7 basis points in Q2 and 42.2 basis points in H1.
Financial position, cash flow and liquidity
- At June 30, cash and cash equivalents were $1.646bn, versus $1.328bn at year-end 2016. Total assets were $28.249bn and total liabilities $19.746bn; both include consolidated investment products and policyholder assets and related liabilities.
- H1 net cash from operating activities was $781.6m, compared with $213.6m in H1 2016. Excluding consolidated investment products (CIP), operating cash provided was $569.1m, versus $323.4m. Investing cash provided was $68.3m consolidated ($19.8m excluding CIP); financing cash used was $587.9m consolidated ($326.9m excluding CIP). Dividends paid were $233.7m.
- Corporate long-term debt was $2.075bn, down from $2.102bn at December 31, 2016; weighted average debt cost was 3.93%. The $1.25bn revolving credit facility had no balance outstanding. Reported covenant leverage was 1.29x against a 3.25x maximum, and interest coverage was 17.02x against a 4.00x minimum. The separate $3.930bn of CIP debt is generally non-recourse to Invesco and is not treated by management as corporate debt.
- Invesco reported compliance with regulatory capital requirements; minimum regulatory capital was $731.4m. Management said available cash, operating cash flow and credit capacity should meet current and future needs, and identified an approximate $1bn cash buffer above European regulatory and liquidity requirements as a capital-management priority.
Changes, outlook and material items
- H1 investment management fees increased 5.7%, while performance fees rose 19.7%; higher average AUM supported fee growth. However, long-term flows were mixed by geography, with H1 outflows in the U.S. and U.K. offset by inflows in Continental Europe and Asia.
- Foreign exchange movements reduced operating revenue by $36.4m in Q2 and $72.4m in H1 versus 2016. Management cited Brexit-related uncertainty and a weaker average pound as risks to reported AUM, revenue and fee mix. Currency put options hedge a portion of earnings exposure; they generated $17.4m of mark-to-market losses in H1.
- Business optimization charges were $36.7m in H1. The initiative’s estimated total cost is $133m, with $31m remaining through 2018; reported annualized run-rate savings were about $31m, with up to $50m expected by completion in 2018.
- Invesco had agreed to acquire European ETF provider Source, with closing expected in Q3 2017. Source had approximately $18bn of managed AUM and $7bn of externally managed AUM at June 30. The filing gives no formal earnings or revenue guidance.
- Other unusual items included $19.7m of H1 costs associated with accelerated deferred-compensation vesting and other separation costs for multiple senior executive retirements, and $3.2m of H1 impairment charges on available-for-sale investments. Q2 net income also reflected volatile investment, deferred-compensation and CIP valuation items.
- A Canadian tax dispute remained under appeal after a Tax Court ruling for the tax authority. Assessments including interest were about $6.6m, secured by a letter of credit; management recorded no provision, but estimated a further $6.5m could be payable for later periods if the appeal fails. The company also disclosed ordinary-course litigation and regulatory scrutiny; management said adequately estimable losses were accrued, but could not estimate a range for other contingencies.
Most important facts for investors to verify
- Whether AUM flows improve, particularly in the U.S. and U.K., and whether market gains are masking underlying flow weakness.
- Whether fee-yield pressure persists as product, channel and currency mix changes.
- Progress and realized savings from the optimization program, including remaining costs, and the Source acquisition’s closing and integration.
- Corporate liquidity and covenant headroom, separating Invesco obligations from consolidated but generally non-recourse CIP balances.
- Outcome of the Canadian tax appeal, exposure to other regulatory or legal matters, and the effectiveness and cost of currency hedges.