Invesco Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Invesco is a global investment manager. Amounts are in U.S. dollars unless noted. The filing presents consolidated investment products (CIP), whose assets and debt generally are not available to or recourse against Invesco, and policyholder balances that are offsetting.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Operating revenue | $1,214.6 million | $1,355.8 million; down 10.4% |
| Operating income / margin | $200.2 million / 16.5% | $321.1 million / 23.7% |
| Net income attributable to Invesco | $177.7 million | $253.9 million |
| Diluted EPS | $0.44 | $0.62 |
| Net revenue (non-GAAP) | $887.1 million | $958.0 million; down 7.4% |
| Adjusted operating income / margin (non-GAAP) | $284.3 million / 32.0% | $357.3 million / 37.3% |
| Adjusted net income / diluted EPS (non-GAAP) | $224.8 million / $0.56 | $273.9 million / $0.67 |
| Ending AUM | $954.8 billion | $934.2 billion at March 31, 2018; average AUM was $932.8 billion versus $951.3 billion |
| Operating cash flow | $(120.4) million GAAP; $(59.1) million excluding CIP | $(52.2) million GAAP; $1.1 million excluding CIP |
| Cash and cash equivalents | $1,017.1 million, excluding $251.2 million held by CIP | $1,147.7 million at December 31, 2018 |
| Long-term debt | $2,515.7 million | $2,408.8 million at December 31, 2018 |
Q1 GAAP other income included $31.1 million of net gains, versus a $5.4 million loss in Q1 2018. The effective tax rate was 25.8%, compared with 20.5%. The board declared a subsequent quarterly dividend of $0.31 per share, payable June 3, 2019; Q1 dividends paid were $120.1 million.
Material changes versus the prior comparable period
- Investment management fees fell 11.5% to $923.7 million; service and distribution fees fell 10.9% to $219.3 million. Performance fees rose to $21.8 million from $9.1 million, primarily from real estate products.
- Average AUM declined 1.9% year over year, while ending AUM increased from a year earlier. Q1 2019 total net flows were positive $3.5 billion, including $6.8 billion of institutional money market inflows; long-term net flows were negative $5.4 billion, including negative $9.3 billion in active AUM and positive $3.9 billion in passive AUM. Market gains added $60.9 billion to AUM.
- GAAP operating expenses declined 2.0% to $1,014.4 million, but transaction, integration and restructuring costs increased to $46.1 million from $18.5 million. Q1 2019 included $34.9 million of OppenheimerFunds acquisition-related costs.
- Invesco reported $46.1 million of transaction, integration and restructuring costs, and disclosed a target of $475 million in OppenheimerFunds expense synergies with approximately $450 million of total integration costs expected.
- Reported operating cash flow was negative; excluding CIP, it was negative $59.1 million versus positive $1.1 million in Q1 2018. The company attributed Q1 seasonality in part to bonus payments and changes in operating balances.
Outlook, risks and unusual items
- Invesco expected the OppenheimerFunds acquisition to close May 24, 2019. Consideration was to include 81.9 million common shares and $4 billion of perpetual, non-cumulative preferred shares paying a fixed 5.9%, with a 21-year non-call period. The filing estimated a $5.6 billion purchase price using Invesco’s March 29 share price; MassMutual was expected to hold approximately 15.7% of Invesco after closing.
- The company announced a $1.2 billion share buyback program for completion within two years. It repurchased 2.6 million shares for $50 million in Q1; $350 million had been purchased under the program to date.
- Management described sufficient resources to meet expected needs, targeting an approximately $1 billion cash buffer above European regulatory and liquidity requirements. It reported compliance with debt covenants: leverage ratio 1.66x against a 3.25x maximum and interest coverage 12.54x against a 4.00x minimum. Credit ratings were BBB+/Stable, A2/Stable and A-/Positive.
- Market gains supported AUM in Q1, but revenue remains sensitive to market levels, net flows, product mix and foreign exchange. Management cited Brexit uncertainty and reduced U.K.-domiciled client AUM year over year. Investment underperformance and regulatory or legal matters could also affect client confidence and AUM.
- Undrawn co-investment commitments were $348.8 million. Management said adequate accruals were recorded for estimable litigation losses, but it could not estimate a range for other litigation contingencies; it did not expect the ultimate resolution of current claims to materially affect the company.
- Q1 adopted lease accounting, recognizing an initial right-of-use asset of approximately $200.9 million and lease liability of approximately $251.5 million; the income-statement impact was not material. Management reported no material change in risk factors from its 2018 Form 10-K and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the OppenheimerFunds acquisition closed on schedule, and whether its financing, expected synergies and integration costs developed as described.
- Subsequent AUM flows, especially persistent long-term and active outflows, and the effect of product mix and fee yields on revenue.
- Cash generation excluding CIP, debt and credit-facility usage, and capacity to fund dividends, repurchases and acquisition-related needs while maintaining the targeted liquidity buffer.
- Whether reported GAAP and adjusted results remain comparable, including the nature and recurrence of acquisition costs and market-driven gains included in other income.
- Developments in Brexit, litigation and regulatory inquiries, and any resulting effect on client confidence, AUM or financial results.