Invesco Ltd. — FY2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; fourth-quarter figures are unaudited. Invesco is a global investment manager operating as one investment-management segment. It managed $775.6 billion in AUM at year-end, across retail and institutional clients in more than 100 countries.
Financial results and key metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Operating revenues | $5,122.9 million | $5,147.1 million | Down 0.5% |
| Net revenues (non-GAAP) | $3,643.2 million | $3,608.3 million | Up 1.0% |
| Operating income | $1,358.4 million | $1,276.9 million | Up 6.4% |
| Operating margin | 26.5% | 24.8% | Up 1.7 percentage points |
| Adjusted operating income (non-GAAP) | $1,493.7 million | $1,495.0 million | Down 0.1% |
| Adjusted operating margin (non-GAAP) | 41.0% | 41.4% | Down 0.4 percentage points |
| Net income attributable to Invesco | $968.1 million | $988.1 million | Down 2.0% |
| Diluted EPS | $2.26 | $2.27 | Down $0.01 |
| Adjusted diluted EPS (non-GAAP) | $2.44 | $2.51 | Down $0.07 |
The U.S. dollar’s appreciation reduced 2015 operating revenues by $219.1 million versus 2014. Average AUM rose 0.6% to $794.7 billion, while year-end AUM declined 2.1% to $775.6 billion. Long-term net inflows were $16.2 billion, partly offset by $11.9 billion of institutional money-market outflows, $1.8 billion of outflows from PowerShares QQQ, negative market movement of $2.6 billion and adverse currency translation of $16.0 billion.
Operating cash flow was $1,053.5 million, down from $1,200.4 million; management’s cash-flow discussion excludes $23.1 million of 2015 cash flow attributable to consolidated investment products (CIP). Capital expenditures were $124.5 million. Cash and cash equivalents were $1,851.4 million at year-end, up $337.2 million.
Company long-term debt, excluding CIP debt, was $2,072.8 million, compared with $1,576.8 million a year earlier. Debt-to-equity excluding CIP was 26.1%, versus 18.9%. The reported $5,437.0 million of CIP debt is associated with consolidated funds, principally CLOs; Invesco states it is not an obligation of the company and is not available to general creditors. The company reported compliance with credit-facility covenants, with leverage of 1.21x against a 3.25x maximum and interest coverage of 21.11x against a 4.00x minimum.
Material changes versus the prior comparable period
- Annual operating income and reported operating margin improved, while attributable net income and EPS edged lower. Adjusted operating income and adjusted margin were essentially flat and modestly lower, respectively.
- Operating revenue was nearly flat, but net revenue increased. Performance fees rose 40.6% to $85.9 million; service and distribution fees fell 4.2% to $855.4 million.
- Operating expenses declined 2.7% to $3,764.5 million, including lower property/office and general and administrative costs; foreign exchange also reduced reported expenses.
- Year-end AUM fell from $792.4 billion to $775.6 billion, despite stronger long-term net inflows than in 2014 ($16.2 billion versus $8.1 billion). Market gains of $34.7 billion in 2014 became a $2.6 billion loss in 2015.
- Quarter four 2015 operating revenues were $1,239.7 million, operating income $303.6 million, net income attributable to Invesco $201.9 million and diluted EPS $0.48. The comparable 2014 quarter figures were $1,276.7 million, $348.2 million, $269.8 million and $0.62.
Outlook, management commentary, risks and unusual items
- Management described volatile markets and emphasized long-term investment performance, client service, global capabilities and operational efficiency. It reported 79% and 85% of measured ranked actively managed assets in the top half of peer groups over three- and five-year periods, respectively; rankings covered only a portion of total AUM.
- A business transformation program was begun in 2015, with up to $85 million of incremental implementation costs estimated for 2016. Management expects ongoing savings to more than offset implementation expense within three years after completion. The filing provides no specific earnings or revenue guidance.
- 2015 included $12.6 million in provisions related to regulatory investigations and $0.5 million in related legal fees, including $7.6 million associated with the private-equity business. A further $4.7 million fund-reimbursement expense related to historical private-equity management fees was recorded. Management said reserves were adequate for estimable legal matters, but could not estimate a range of reasonably possible losses for other contingencies.
- Other notable items included a $27.1 million gain from remeasurement of contingent consideration tied to the Deutsche Bank U.S. commodity ETF business acquisition, and $7.7 million of losses on currency hedging options. A $500 million, 3.75% senior-note issuance due 2026 increased company debt; proceeds partly repaid the credit facility.
- After year-end, Invesco announced its acquisition of Jemstep, a digital-advice technology provider. The planned purchase of the remaining 51% of its India joint venture, Religare Invesco, was subject to regulatory approval and expected to close in early 2016. A $7.2 billion Rhode Island 529 mandate was expected to fund in July 2016.
- Key risks include market declines and AUM outflows, fee pressure and shifts to passive products, investment underperformance, foreign-exchange exposure, regulatory changes and enforcement, litigation, technology/cyber and operational failures, key-person retention, and debt or subsidiary-capital restrictions. Management estimated that a 10% decline in sterling could reduce annual EPS by approximately $0.05–$0.06 and operating margin by 10–20 basis points.
Most important facts for investors to verify
- Reconcile GAAP results with the company’s non-GAAP measures and review the adjustments, particularly the 2015 regulatory, optimization and fund-reimbursement items.
- Assess the sustainability and composition of AUM flows, including long-term inflows, money-market outflows, asset-class mix, currency translation and fee yield.
- Confirm the company’s actual exposure to CIP and CSIP, including the distinction between consolidated fund debt and Invesco’s own debt, liquidity and economic risk.
- Track the outcome and potential cost of regulatory investigations and historical private-equity fee reimbursements, along with any further disclosures on legal contingencies.
- Monitor execution costs and realized savings from the transformation program, as well as approvals, closing and integration of the Religare and Jemstep transactions.