Invesco Ltd. quarterly report, Q3 FY2016

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Invesco Ltd. — Q3 2016 Form 10-Q

Business and period: Invesco is a global investment manager. This unaudited filing covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless stated otherwise. Amounts are in U.S. dollars.

Financial performance and condition

  • Q3 revenue and earnings: Operating revenue was $1.202 billion, down 5.6%; operating income was $306.3 million, down 13.2%; operating margin was 25.5%, versus 27.7%. Net income attributable to Invesco was $241.2 million, down 3.2%; diluted EPS was $0.58, unchanged.
  • Nine-month results: Operating revenue was $3.540 billion, down 8.8%; operating income was $882.2 million, down 16.4%; operating margin was 24.9%, versus 27.2%. Net income attributable to Invesco was $627.7 million, down 18.1%; diluted EPS was $1.51, versus $1.78.
  • Management’s non-GAAP measures: Q3 adjusted operating income was $339.3 million and adjusted operating margin 39.7%, versus $373.4 million and 41.4%. Adjusted diluted EPS was $0.60, versus $0.61. For nine months, adjusted operating income was $976.8 million and adjusted margin 38.6%, versus $1.138 billion and 41.3%; adjusted diluted EPS was $1.64, versus $1.87. These are non-GAAP measures and should be considered alongside GAAP results.
  • Revenue drivers: Q3 investment management fees fell 5.0% to $965.9 million; performance fees fell 78.2% to $3.4 million. Nine-month investment management fees declined 8.1% to $2.826 billion and performance fees declined 61.2% to $26.8 million. Management cited foreign-exchange effects, lower revenue yields and changes in asset mix; lower performance fees also reflected unusually strong real estate and U.K. fee contributions in 2015.
  • AUM and flows: Ending AUM was $820.2 billion, up from $755.8 billion a year earlier. Q3 long-term net inflows were $12.2 billion, compared with $3.9 billion of outflows in Q3 2015; nine-month long-term net inflows were $15.4 billion, versus $12.3 billion. Nine-month total net inflows were $21.8 billion, including $11.7 billion into institutional money-market funds and $5.3 billion of outflows from PowerShares QQQ. Equity long-term flows were negative for the nine months, offset by inflows in fixed income and alternatives.
  • Margins and fee yield: Q3 net revenue yield on AUM declined 3.8 basis points to 42.0; nine-month yield declined 2.9 basis points to 43.1. Management attributed the decline principally to a lower proportion of higher-fee equity and balanced assets, currency mix and continued shifts toward lower-fee products.
  • Cash flow and liquidity: Nine-month operating cash flow was $542.1 million, versus $555.6 million; excluding consolidated investment products (CIP), operating cash flow was $722.2 million, versus $757.6 million. Investing cash outflow was $751.8 million, including $121.9 million for business purchases and $101.3 million of capital expenditure. Financing cash inflow was $16.5 million; excluding CIP, financing used $743.2 million, including $346.3 million of dividends and $385.0 million of share repurchases. Cash and cash equivalents were $1.581 billion at September 30, down from $1.851 billion at year-end 2015.
  • Debt and capital: Corporate long-term debt was $2.073 billion; the $1.25 billion revolving credit facility had no borrowings. The company reported covenant compliance, a 1.36:1 leverage ratio (maximum 3.25:1) and 16.60:1 interest coverage (minimum 4.00:1). The $3.860 billion of CIP debt is associated with consolidated products and, management states, is not an obligation of Invesco and has no recourse to its general credit. The company reported $1.793 billion remaining under share repurchase authorizations.

Changes, outlook, and material considerations

  • Operating environment: Management reported positive market returns and lower volatility in Q3. The filing cautions that Brexit developments could keep sterling weak and adversely affect dollar-reported AUM and results. Foreign-exchange movements reduced operating revenue by $40.9 million in Q3 and $84.6 million for the nine months year over year. Put options were intended to hedge approximately 75% of sterling- and euro-based operating income through 2017.
  • Business optimization: The support-function transformation generated $11.7 million of Q3 charges and $28.8 million year to date; cumulative charges since inception were $45.0 million. Management reported $13.9 million in annualized run-rate expense savings as of quarter-end.
  • Unusual items and accounting: Invesco recorded a noncash $17.8 million impairment in Q1 on its former 49% Indian joint-venture investment, associated with rupee depreciation, and acquired the remaining interest on April 5, 2016. Adoption of ASU 2015-02 changed consolidation of investment products, including deconsolidations and newly consolidated entities; this affects reported balance-sheet and income-statement comparisons. CIP assets and cash are not generally available for corporate use.
  • Dividend: The company declared a Q3 dividend of $0.28 per share, payable December 5, 2016. The filing provides no specific earnings or AUM guidance; future dividends remain subject to board approval and financial conditions.
  • Risks and contingencies: Results are sensitive to AUM market levels, client flows, investment performance, product and geographic mix, currencies, interest rates, and competition. The company cited ongoing regulatory oversight and litigation risk; management said it had accrued reasonably estimable losses, but could not estimate a range for other litigation contingencies. Undrawn investment commitments were $217.2 million. Certain subsidiaries’ regulatory capital requirements can limit transfers of cash; reported minimum regulatory capital was $591.7 million, and the company stated it was compliant.

Investor verification priorities

  1. Reconcile GAAP results with management’s non-GAAP adjustments, particularly business optimization, business-combination items, deferred compensation and CIP.
  2. Assess whether positive AUM flows can persist and whether asset mix, passive growth and currency movements will continue to pressure fee yields and revenue.
  3. Review the economic impact of Brexit and the effectiveness, cost and coverage of the sterling and euro hedges.
  4. Distinguish corporate debt and available cash from CIP balances, and assess restricted cash, regulatory capital needs and the capacity for dividends and buybacks.
  5. Track delivery of the stated optimization savings against continuing transformation costs, and monitor legal, regulatory and investment-commitment exposures.