Invesco Ltd. — Q3 2015 Form 10-Q
Business and period: Invesco is a global investment manager serving retail and institutional clients. This unaudited quarterly report covers the three and nine months ended September 30, 2015; amounts below are in U.S. dollars. Comparisons are with 2014 unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,273.5m | $1,311.0m | $3,883.2m | $3,870.4m |
| Operating income / GAAP margin | $352.7m / 27.7% | $329.6m / 25.1% | $1,054.8m / 27.2% | $928.7m / 24.0% |
| Net income attributable to Invesco | $249.3m | $256.0m | $766.2m | $718.3m |
| Diluted EPS | $0.58 | $0.59 | $1.78 | $1.65 |
| Adjusted operating income / margin (non-GAAP) | $373.4m / 41.4% | $381.9m / 41.8% | $1,138.0m / 41.3% | $1,121.9m / 41.5% |
| Adjusted net income / diluted EPS (non-GAAP) | $261.4m / $0.61 | $278.2m / $0.64 | $804.9m / $1.87 | $822.2m / $1.88 |
Operating expenses were $920.8m in Q3, down 6.2%, and $2,828.4m for nine months, down 3.9%. The Q3 effective tax rate was 29.4%, versus 27.3%; the nine-month rate was 28.8%, versus 27.2%. Dividends declared were $0.27 per share in Q3, compared with $0.25.
Cash, balance sheet and debt
- Cash and cash equivalents were $1,590.7m at September 30, 2015, up from $1,514.2m at year-end 2014.
- Nine-month net cash from operating activities was $555.6m, versus $1,017.4m. Excluding consolidated investment products (CIP), operating cash flow was $757.6m, versus $696.8m. Capital expenditures were $88.1m.
- Corporate long-term debt was $1,689.3m, including a $99.5m credit-facility draw; it was $1,589.3m at year-end 2014. The $1.25bn facility was extended to August 2020. Invesco reported compliance with its covenants; leverage and interest-coverage ratios were 0.97x and 23.05x.
- Reported debt-to-equity was 83.1% including CIP and 20.8% excluding CIP. The $5,669.7m of CIP debt is associated with consolidated products and, according to the filing, is nonrecourse to Invesco and does not represent corporate borrowing.
- Total assets were $24,962.2m and total liabilities $15,930.0m. These totals include CIP and policyholder assets and matching liabilities; policyholder balances rose to $5,500.5m from $1,697.9m.
Material changes and operating trends
- Q3 revenue fell 2.9%, while nine-month revenue rose 0.3%. Q3 investment-management fees declined 2.9%; nine-month fees increased 1.0%. Currency translation reduced revenue by $42.2m in Q3 and $137.9m for the nine-month period.
- Q3 operating income and GAAP margin improved despite lower revenue, helped by lower expenses. Nine-month operating income rose 13.6%, with lower general and administrative and property/office costs contributing; prior-year expenses included a $31.1m U.K. FCA penalty and a $24.2m fund-reimbursement charge.
- Ending AUM was $755.8bn, down from $789.6bn a year earlier. Q3 total net outflows were $6.3bn, including $3.9bn of long-term outflows; market losses reduced AUM by $35.6bn and currency translation by $5.9bn. For the first nine months, long-term net inflows were $12.3bn, but money-market and PowerShares QQQ outflows contributed to total net outflows of $1.6bn.
- Net revenue yield was 45.8 basis points in Q3, versus 45.6; excluding performance fees it was 44.9, versus 45.1. For nine months, yield was 46.0, versus 45.6; excluding performance fees it was unchanged at 44.7.
- Q3 performance fees increased to $15.6m from $8.2m; nine-month performance fees increased to $69.1m from $44.3m. The nine-month 2015 amount included $41.1m from real estate.
Outlook, commentary and risks
- Management cited extreme market volatility in Q3 amid uncertainty over U.S. interest rates, concerns about China and global growth, and declines in major equity indices. The filing gives no specific earnings or AUM guidance.
- Management said diversified client, asset-class and distribution exposure supports resilience and reported $12.3bn of long-term net inflows year to date, despite Q3 volatility. Investment performance was mixed: 53%, 73% and 83% of ranked active assets were in the top half of peer groups over one-, three- and five-year periods, respectively.
- Key business sensitivities include market declines and client withdrawals, investment underperformance, fee and product mix, foreign exchange, and interest rates. Invesco economically hedged about 75% of the currency translation exposure on pound-denominated earnings with options through March 31, 2016; the options generated a $7.6m nine-month loss.
- The company reported ordinary-course litigation and ongoing regulatory oversight, with no reasonably estimable range for certain possible losses; management stated accrued amounts were adequate for estimable matters and did not expect ultimate resolution to materially affect the business or financial position. It also disclosed $124.4m of undrawn investment commitments and approximately $33.6m of letters of credit.
- After quarter-end, Invesco issued $500m of 3.75% senior notes due 2026, with proceeds intended partly to repay credit-facility borrowings. It announced a $0.27-per-share dividend payable December 7, 2015.
Important facts for investors to verify
- Whether AUM flows, market returns and currency movements continue to pressure fee revenue and reported AUM.
- How much of earnings and margin comparisons reflect recurring operations versus prior-year charges and 2015 contingent-consideration fair-value changes.
- The distinction between corporate debt and consolidated CIP debt, and the effect of CIP presentation on GAAP balance-sheet and cash-flow totals.
- Cash availability across jurisdictions given regulatory capital requirements and possible limits on transfers between subsidiaries.
- Developments in litigation and regulatory matters, and the use of proceeds from the post-quarter $500m notes offering.