Invesco Ltd. 10-Q Summary: Second Quarter 2016
Reporting period: Quarter and six months ended June 30, 2016; comparisons are to the corresponding 2015 periods. Invesco is a global investment manager. Unless stated otherwise, financial amounts are in U.S. dollars; figures below are in millions.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenues | $1,189.4 | $1,318.1 | $2,338.1 | $2,609.7 |
| Operating income | $301.5 | $364.0 | $575.9 | $702.1 |
| Operating margin | 25.3% | 27.6% | 24.6% | 26.9% |
| Net income attributable to Invesco | $225.5 | $257.3 | $386.5 | $516.9 |
| Diluted EPS | $0.54 | $0.60 | $0.92 | $1.20 |
| Adjusted operating income (non-GAAP) | $330.4 | $390.2 | $637.5 | $764.5 |
| Adjusted operating margin (non-GAAP) | 38.6% | 41.7% | 38.1% | 41.2% |
| Adjusted diluted EPS (non-GAAP) | $0.56 | $0.63 | $1.04 | $1.26 |
Operating revenue fell 9.8% in Q2 and 10.4% year to date. Investment management fees declined 10.3% and 9.6%, respectively, while service and distribution fees fell 7.4% in both periods. The company attributed pressure to lower average AUM, weaker fee yields and currency translation; lower third-party distribution costs partly offset revenue declines. Net revenue, a company-defined non-GAAP measure, was $856.6 million in Q2 and $1,674.7 million for the half year, down 8.5% and 9.7%, respectively. Net revenue yield was 43.7 basis points in Q2 versus 46.2 a year earlier.
Cash flow and liquidity: Six-month operating cash flow was $174.6 million, versus $458.5 million in 2015. The filing attributes $109.8 million of cash use to consolidated investment products (CIP); excluding CIP, operating cash flow was $284.4 million. Investing activities used $482.8 million and financing activities used $37.2 million. Cash and cash equivalents were $1,446.2 million at June 30, down from $1,851.4 million at year-end 2015. Invesco reported $2,072.7 million of corporate long-term debt and no borrowings on its $1.25 billion credit facility. Debt covenants were met; leverage was 1.33x and interest coverage 17.57x. Separately reported CIP debt of $3,529.6 million is associated with consolidated investment products and, according to the company, is not a corporate obligation or available to general creditors.
AUM and capital: Ending AUM was $779.6 billion, down from $803.6 billion a year earlier; average AUM was $784.5 billion in Q2 versus $810.9 billion. Q2 long-term net inflows were $4.5 billion, all in passive products, but the PowerShares QQQ fund had $3.8 billion of net outflows. Six-month long-term net inflows were $3.2 billion, with strong Asia inflows offset by outflows elsewhere. Dividends declared were $0.28 per share in Q2. The company repurchased 11.7 million shares for $325 million during the first half.
Material changes versus prior periods
- Lower AUM and a less favorable asset mix contributed to fee and yield pressure. Average AUM declined 3.3% in Q2 and 4.6% for the first half; net revenue yield declined in both periods.
- Currency movements, particularly the post-Brexit weakening of sterling, reduced reported revenues by $18.8 million in Q2 and $43.5 million in the first half versus 2015. Sterling translation also reduced Q2 AUM by $7.7 billion.
- Operating expenses fell 6.9% in Q2 and 7.6% year to date, mainly reflecting lower distribution expenses and expense controls. Property, office and technology costs increased.
- First-half equity in earnings of affiliates included a $17.8 million non-cash impairment tied to the Indian rupee’s decline, recorded as Invesco acquired the remaining 51% of its Indian asset-management joint venture on April 5.
- Adoption of consolidation accounting guidance changed which investment products were consolidated; this affects comparability of reported balance-sheet and income-statement amounts. Invesco provides non-GAAP measures that exclude or adjust for CIP and other items.
Outlook, commentary, risks and unusual items
- Management said Brexit-related uncertainty could keep sterling weak and pressure U.S.-dollar-reported AUM and results. Sterling put options were intended to cover approximately 75% of sterling-based operating income through March 31, 2017; the company recorded a $9.1 million net hedge gain in the first half.
- A business-transformation program begun in late 2015 includes shared services, outsourcing, automation and office-footprint optimization. Charges were $17.1 million year to date; implementation costs for 2016 were estimated at up to $85 million.
- On July 22, 2016, the board authorized an additional $1.5 billion for share repurchases. On July 28, the company announced a $0.28-per-share dividend payable September 2, 2016. Future dividends remain subject to board approval and business conditions.
- Legal and regulatory matters arise in the ordinary course. Management said recorded accruals were adequate for estimable matters and did not expect their ultimate resolution to materially affect the company, but it could not estimate a range of reasonably possible losses for other litigation contingencies. First-half general and administrative expense included a net $1.1 million regulatory settlement charge; Q2 included a $4.9 million settlement credit.
- PwC identified an auditor-independence issue under the SEC Loan Rule involving lenders that own shares of certain Invesco funds. Invesco intended to rely on SEC Staff no-action relief expiring December 20, 2017, while PwC pursued permanent relief. If relief is unavailable, a different auditor or other steps could add costs and affect filings or financing arrangements.
- Other risks include market-driven changes in AUM and fees, client outflows, foreign-exchange and interest-rate movements, regulatory and tax changes, and liquidity or valuation stress in managed products. The filing gives no specific earnings or revenue guidance.
Important facts for investors to verify
- Whether net flows, particularly in U.S. and European businesses and the QQQ product, improve or deteriorate, and whether Asia’s inflows persist.
- How Brexit and sterling movements affect reported AUM, fee revenue and the effectiveness of the currency hedges.
- Whether reported and adjusted margins stabilize as revenue pressure, expense actions and transformation costs evolve; review the company’s non-GAAP reconciliations.
- Corporate liquidity and debt-covenant headroom, distinguishing Invesco’s own debt and cash from ring-fenced CIP balances.
- Resolution of the PwC independence issue before the SEC relief expires, and any resulting audit, filing or financing consequences.
- Progress and final cost of the business-transformation program, and the cash and share-count effects of repurchases and the expanded authorization.
- Purchase accounting and subsequent performance for the Indian asset-management acquisition and Jemstep, including the $17.8 million impairment and preliminary acquired-asset valuations.