Invesco Ltd. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter data. Invesco is a global investment manager; year-end AUM was $778.7 billion. Financial statement amounts below are U.S. dollars.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Operating revenues | $4,644.6 million | $4,050.4 million |
| Net revenues (non-GAAP) | $3,252.0 million | $2,836.0 million |
| Operating income / margin | $1,120.2 million / 24.1% | $842.6 million / 20.8% |
| Adjusted operating income / margin (non-GAAP) | $1,292.1 million / 39.7% | $1,012.1 million / 35.7% |
| Net income attributable to common shareholders | $940.3 million | $677.1 million |
| Diluted EPS | $2.10 | $1.49 |
| Adjusted diluted EPS (non-GAAP) | $2.13 | $1.65 |
| Cash and cash equivalents | $1,331.2 million | $835.5 million |
| Long-term debt, excluding CIP debt | $1,588.6 million | $1,186.0 million |
| Ending AUM | $778.7 billion | $667.4 billion |
Operating revenues rose 14.7%, reflecting higher average AUM, market appreciation, positive flows, improved revenue yield and the expiration of acquisition-related fee waivers. Operating expenses increased 9.9%, with higher compensation, distribution and technology costs. Net revenue yield increased to 44.8 basis points from 43.9 basis points.
Net cash provided by operating activities was $780.2 million on a consolidated basis. Management reported $1,064.3 million of operating cash generation excluding consolidated investment products (CIP). Investing activities used $239.9 million and financing activities used $59.3 million. Cash increased by $495.7 million during the year. Some cash is held in regulated subsidiaries and may not be freely transferable.
Debt-to-equity was 19.1% excluding CIP, versus 14.5% in 2012; the GAAP ratio including CIP was 64.3%. The $4,181.7 million of CIP debt is associated primarily with CLOs, whose collateral is ring-fenced and whose investors have no recourse to Invesco’s general credit. The company had no balance outstanding on its $1.25 billion credit facility at year-end and reported compliance with its covenants.
Fourth-quarter snapshot
Unaudited Q4 operating revenues were $1,225.1 million, operating income was $293.3 million, and net income attributable to common shareholders was $287.4 million. Diluted EPS was $0.64, including $0.15 from discontinued operations. Discontinued-operations income in the quarter was $66.4 million, including the Atlantic Trust sale gain.
Material changes versus the prior comparable period
- Ending AUM grew 16.7% to $778.7 billion. Net flows added $34.4 billion and market gains/reinvestment added $78.8 billion; foreign exchange reduced AUM by $1.9 billion.
- Long-term net inflows were $21.7 billion, compared with $10.4 billion in 2012. Retail long-term flows were positive, including a return to positive net flows in equities; institutional long-term net flows were $0.3 billion.
- Operating income increased 32.9% and operating margin improved 3.3 percentage points. Adjusted operating margin rose 4.0 points.
- Operating cash flow declined $39.1 million year over year as reported, although management’s measure excluding CIP increased to $1,064.3 million from $872.1 million.
- Invesco completed the Atlantic Trust sale to CIBC on December 31, 2013. Atlantic Trust is presented as discontinued operations; 2013 included a $77.5 million pretax sale gain. Net cash proceeds were $137 million, with a further $59 million estimated for the first half of 2014.
- In Q4, Invesco issued $1.0 billion of senior notes and used $699.4 million of net proceeds to repay credit-facility borrowings. Year-end debt was higher than in 2012, while the weighted-average cost of debt for FY2013 was 2.49%, versus 3.16%.
Outlook, management commentary, risks and unusual items
The filing gives no specific numerical earnings, revenue or AUM guidance. Management described continued investment in products, capabilities, brand, technology and its global platform, and reported strong flows into the new U.K. Global Targeted Return product. It also launched liquid-alternative products and completed European transfer-agency outsourcing. Management noted that results are sensitive to financial markets, AUM flows and mix, investment performance, fee competition and currency movements.
- Key-person and flow risk: U.K. Equities head Neil Woodford announced his departure, effective April 29, 2014. He was lead manager for $46.6 billion of U.K. equity AUM; U.K. equity income AUM had $4.8 billion of net outflows from October 15 through year-end.
- Regulatory and litigation risk: The FCA was reviewing compliance matters for May 2008 through November 2012. The company could not estimate a potential fine. Invesco also disclosed ongoing auction-rate-preferred-securities litigation and a Canadian tax assessment of approximately $20.6 million, for which no provision was recorded because management considered the claim unlikely to stand.
- Other notable items: A $31.9 million payment to a managed investment trust was recorded in Q4 and terminated a support agreement. Invesco also wrote off $11.7 million of capitalized IT software costs. The company reported no goodwill or indefinite-lived-intangible impairment in its annual reviews.
- Capital returns: The company repurchased 13.9 million shares for $470.5 million in 2013 and paid $379.7 million in dividends. The fiscal-year dividend was reported as $0.90 per share, up 30.4% from 2012; future dividends remain subject to board approval and financial conditions.
- Principal operating exposures: Market declines or net outflows can reduce fee revenue; a 10% decline in average AUM would, assuming unchanged yield, produce a corresponding revenue decline. Other disclosed risks include regulation, fee pressure, counterparty exposure, systems or cyber incidents, foreign exchange, and potential impairment of goodwill and intangibles.
Important facts for investors to verify
- Reconcile GAAP results with management’s non-GAAP measures, including the adjustments used for net revenues, adjusted operating income and adjusted EPS.
- Track AUM flows, market-driven AUM changes and fee mix, especially U.K. equity income flows following the portfolio-manager transition.
- Confirm receipt and final amount of the estimated $59 million of additional Atlantic Trust sale proceeds, and assess the continuing-business impact of the divestiture.
- Monitor the FCA review, ARPS litigation and Canadian tax assessment for developments, potential costs and any effects on client confidence or AUM.
- Assess liquidity availability across jurisdictions and distinguish Invesco’s $1.59 billion of corporate debt from non-recourse CIP debt.