Invesco Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Invesco is a global investment manager. Unless otherwise noted, financial amounts are U.S. dollars; figures are in millions. Comparisons are with the corresponding 2013 periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue (GAAP) | $1,311.0 | $1,171.8 | $3,870.4 | $3,419.5 |
| Operating income (GAAP) | $329.6 | $286.0 | $928.7 | $826.9 |
| Operating margin (GAAP) | 25.1% | 24.4% | 24.0% | 24.2% |
| Net income attributable to common shareholders | $256.0 | $228.1 | $718.3 | $652.9 |
| Diluted EPS | $0.59 | $0.51 | $1.65 | $1.45 |
| Net revenues (non-GAAP) | $913.7 | $816.4 | $2,702.5 | $2,394.7 |
| Adjusted operating margin (non-GAAP) | 41.8% | 40.2% | 41.5% | 39.5% |
| Adjusted diluted EPS (non-GAAP) | $0.64 | $0.55 | $1.88 | $1.55 |
Revenue growth reflected higher average AUM, fee yield and foreign-exchange translation. Investment management fees rose 14.5% in Q3 and 15.1% year to date. Reported operating expenses increased 10.8% and 13.5%, respectively; Q3 GAAP margin improved, while year-to-date GAAP margin edged down. Non-GAAP measures exclude or adjust for items including consolidated investment products and specified unusual expenses and are not substitutes for GAAP results.
Cash flow, balance sheet and capital
- Cash and cash equivalents were $1,352.6 at September 30, versus $1,331.2 at December 31, 2013. Nine-month consolidated operating cash flow was $1,017.4; management reported $696.8 excluding consolidated investment products (CIP). CIP cash is not available for general corporate use.
- Consolidated investing cash outflow was $1,449.6, substantially affected by CIP investment activity; excluding CIP, investing cash outflow was $265.8. Financing cash inflow was $476.1 including CIP, but excluding CIP financing used $387.1.
- Corporate long-term debt was $1,589.1, largely fixed-rate senior notes; the $1.25 billion credit facility had no borrowings. The reported debt/equity ratio was 68.9% including CIP debt and 18.9% excluding CIP. Invesco says CIP debt is nonrecourse and does not represent corporate obligations. Credit covenants were met; leverage and interest-coverage ratios were 0.96:1 and 24.21:1, respectively.
- Operating cash flow excluding CIP was below the comparable prior-year amount ($696.8 versus $743.1). The company paid $315.7 in dividends and spent $219.6 on market share repurchases during the nine months. A quarterly dividend of $0.25 per share was declared October 30, payable December 5, 2014.
Assets under management and material changes
- Ending AUM was $789.6 billion, up from $745.5 billion a year earlier; nine-month average AUM was $790.5 billion versus $713.6 billion.
- Q3 long-term net inflows were $6.0 billion, but total net flows were $2.0 billion after $3.2 billion of QQQ outflows and $0.8 billion of institutional money-market outflows. Market declines reduced AUM by $5.1 billion and currency translation by $9.7 billion in the quarter.
- For the first nine months, long-term net inflows were $5.6 billion, offset by QQQ outflows of $7.5 billion and institutional money-market outflows of $5.8 billion. U.K. client long-term outflows were $16.7 billion, associated with the departure of former U.K. equities head Neil Woodford; management said U.K. equity-income outflows improved to $1.9 billion in Q3.
- Net revenue yield increased to 45.6 basis points in Q3 and year to date, from 44.8 and 44.7 basis points, respectively, reflecting asset-class and geographic mix. Continental Europe represented 9.0% of AUM, compared with 6.9% a year earlier.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management says capital, operating cash flows and available credit capacity should meet anticipated needs; stated capital priorities include business investment, measured dividend growth, repurchases and maintaining an approximately $1 billion cash buffer above regulatory requirements.
- Management described mixed markets and increased volatility in Q3. AUM and fee revenue remain sensitive to market levels, flows, investment performance, asset mix and foreign-exchange movements. The U.S. dollar’s strength reduced reported AUM by $9.7 billion in Q3 and $5.6 billion year to date.
- Q3 general and administrative expense included a $24.2 million multi-year fund-reimbursement charge related to historical private-equity management fees. Nine-month expenses also included a $31.1 million U.K. Financial Conduct Authority penalty and $0.5 million related legal costs, plus $35.8 million of property charges and $7.2 million of severance from a business-optimization initiative.
- Invesco reported upgrades to its senior unsecured ratings to A/Stable from S&P and A2/Stable from Moody’s. New U.S. money-market rules will require floating NAVs for institutional prime and municipal funds; management estimated approximately $30 billion of AUM would be affected, with implementation required by October 2016.
- After quarter-end, on October 22, 2014, a court dismissed with prejudice the ARPS-related lawsuits against certain funds; plaintiffs had 30 days to appeal. A Canadian tax assessment, including interest and penalties, was approximately $21.1 million; the company was awaiting the Tax Court decision and recorded no provision, believing the claim unfounded.
- Management stated that disclosure controls were effective and there had been no material change in internal control over financial reporting. The filing reported no significant change in risk factors from the 2013 Form 10-K.
Important facts for investors to verify
- Review the quality and persistence of AUM flows, particularly continued U.K. outflows, QQQ and money-market activity, and whether improved fee yield persists.
- Assess recurring profitability separately from the FCA penalty, fund-reimbursement charge, business-optimization costs and other non-GAAP adjustments.
- Distinguish Invesco’s corporate cash, debt and cash flows from consolidated fund balances; verify the nonrecourse nature and limited economic exposure associated with CIP.
- Monitor currency, market and performance risks, including the implementation and potential client effects of floating-NAV money-market rules.
- Track the ARPS appeal period and outcome of the Canadian tax proceeding, and confirm the effects of repurchases, dividends and the company’s liquidity buffer.