Invesco Reports Results for the Three Months Ended September 30, 2014

ATLANTA, Oct. 30, 2014 /PRNewswire/ -- Invesco Ltd. (NYSE: IVZ) today reported financial results for the three months ended September 30, 2014.

"In spite of tremendous volatility in the markets, Invesco continued to deliver strong, long-term investment performance that benefited our clients," said Martin L. Flanagan, president and CEO of Invesco Ltd.  "We believe the greatest opportunity for clients to achieve their investment objectives is by using a well-constructed portfolio that spans asset classes (equity, fixed income, alternatives), investment styles (including active and passive approaches) and vehicles (mutual funds, ETFs, separate accounts).  Invesco is one of the few investment management firms in the world that offers institutions and individual investors a comprehensive range of strategies and solutions that help them achieve their desired outcomes.  This broadly diversified offering, combined with our strong investment performance, contributed to an operating margin of 41.8% during the period, up from 40.2% in the same quarter a year ago."

Assets Under Management

Total assets under management (AUM) at September 30, 2014, were $789.6 billion (June 30, 2014: $802.4 billion), a decrease of $12.8 billion during the third quarter. Total net inflows were $2.0 billion for the third quarter, as detailed below:

Net market losses led to a $5.1 billion decrease in AUM during the third quarter, compared to a $19.9 billion increase in the second quarter 2014. Foreign exchange rate movements led to a $9.7 billion decrease in AUM during the third quarter, compared to a $4.0 billion increase in the second quarter 2014. Average AUM during the third quarter were $801.7 billion, compared to $790.1 billion for the second quarter 2014, an increase of 1.5%. Further analysis is included in the supplementary schedules to this release.

Earnings Summary

The company is presenting both U.S. GAAP earnings information and non-GAAP earnings information in this release. The company believes that the additional disclosure of non-GAAP earnings information provides further transparency into the business on an ongoing operations basis and allows more appropriate comparisons with our industry peers. Management uses these non-GAAP performance measures to evaluate the business, and they are consistent with internal management reporting. These measures are described more fully in the the company's Forms 10-K. Non-GAAP measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies.

U.S. GAAP Earnings

This section comments on the company's third quarter 2014 results as presented in accordance with U.S. GAAP, as compared to the second quarter 2014.

Operating revenues increased 1.6% to $1,311.0 million in the third quarter, from $1,289.9 million in the second quarter 2014. Operating expenses increased by 5.0% to $981.4 million in the third quarter, from $935.1 million in the second quarter 2014.

Operating expenses for the third quarter include a charge of $24.2 million in respect of a multi-year fund reimbursement expense associated with historical private equity management fees. The charge resulted primarily from using a more appropriate methodology regarding the calculation of offsets to management fees. The charge was recorded in general and administrative expenses and reduced diluted EPS by $0.03 for the third quarter.

The effective tax rate on continuing operations increased to 27.3% for the third quarter, from 25.3% for the second quarter 2014. See note 10 on page 22 for further details.

Non-GAAP Earnings

This section discusses the company's third quarter 2014 non-GAAP financial information, as compared to the second quarter 2014. The phrase "as adjusted" is used in the following earnings discussion to identify non-GAAP information, together with the non-GAAP financial measures of net revenues, adjusted operating margin, adjusted net income attributable to common shareholders and adjusted diluted EPS. The most directly comparable U.S. GAAP items are reconciled to these non-GAAP items on pages 10 through 12 of this release.

Net revenues increased by $12.7 million (1.4%) to $913.7 million in the third quarter, from $901.0 million in the second quarter 2014. The change was principally due to increased management fees. Foreign exchange rate changes decreased third quarter net revenues by $9.1 million compared to the second quarter 2014.

Investment management fees, as adjusted, increased $16.5 million (1.6%) to $1,071.0 million in the third quarter, from $1,054.5 million in the second quarter 2014. The increase reflects the higher average AUM and the additional day in the third quarter compared to the second quarter 2014. Foreign exchange rate changes decreased third quarter management fees by $11.5 million when compared to second quarter 2014.

Service and distribution fees, as adjusted, increased $7.4 million (3.4%) to $222.1 million in the third quarter, from $214.7 million in the second quarter 2014.  The increase in service and distribution fees reflects the higher average applicable AUM and the additional day in the third quarter compared to the second quarter.  The increase in service and distribution fees also reflects strong net flows in Continental Europe. Foreign exchange rate changes decreased third quarter service and distribution fees by $0.1 million when compared to second quarter 2014.

Performance fees, as adjusted, were $10.3 million in the third quarter, compared to $7.3 million in the second quarter 2014. Foreign exchange rate changes decreased third quarter performance fees by $0.2 million when compared to the second quarter 2014.

Other revenues, as adjusted, decreased by $4.4 million (11.3%) to $34.5 million in the third quarter, compared to $38.9 million in the second quarter 2014, due to decreased transaction fees from real estate fund activities. Foreign exchange rate changes decreased other revenues by $0.2 million in the third quarter when compared to the second quarter 2014.

Third-party distribution, service and advisory expenses, as adjusted, increased by $9.8 million (2.4%) to $424.2 million in the third quarter from $414.4 million in the second quarter 2014, consistent with the revenues derived from the related retail AUM. Foreign exchange rate changes decreased third-party distribution, service and advisory expenses by $2.9 million in the third quarter when compared to the second quarter 2014.

Total operating expenses, as adjusted, increased by $7.8 million (1.5%) to $531.8 million in the third quarter from $524.0 million in the second quarter 2014. Foreign exchange rate changes decreased third quarter operating expenses by $4.8 million when compared to the second quarter 2014.

Employee compensation expenses, as adjusted, increased by $4.9 million (1.4%) to $349.5 million in the third quarter, from $344.6 million in the second quarter 2014 primarily due to higher incentive compensation and increased headcount. Foreign exchange rate changes decreased third quarter employee compensation expenses by $3.2 million when compared to the second quarter 2014.

Marketing expenses, as adjusted, decreased by $3.5 million (11.3%) to $27.4 million in the third quarter, from $30.9 million in the second quarter 2014 due to reduced advertising. Foreign exchange rate changes decreased third quarter marketing expenses by $0.3 million when compared to the second quarter 2014.

Property, office and technology expenses, as adjusted, increased $1.2 million (1.6%) to $77.3 million in the third quarter, from $76.1 million in the second quarter 2014. The increase reflects higher outsourced administration costs in the third quarter compared to the second quarter. Foreign exchange rate changes decreased third quarter property, office and technology expenses by $0.6 million when compared to the second quarter 2014.

General and administrative expenses, as adjusted, increased $5.2 million (7.2%) to $77.6 million in the third quarter, from $72.4 million in the second quarter 2014.  The increase is largely attributable to a $2.2 million increase in costs associated with the ongoing development of global technology platforms, together with an additional $1.7 million of irrecoverable indirect taxes. Foreign exchange rate changes decreased third quarter general and administrative expenses by $0.7 million when compared to the second quarter 2014.

Non-operating other income and expenses, as adjusted, included equity in earnings from investments of $7.4 million in the third quarter, compared to $4.1 million in the second quarter 2014. Other gains and losses, net in the third quarter were a gain of $1.9 million compared to a second quarter 2014 gain of $14.8 million. The gain in the second quarter 2014 includes $4.7 million realized from the sale and liquidation of CLO products and $5.7 million realized on the sale of other seed investments. Separately, other income of consolidated sponsored investment products (CSIP) was a gain of $7.4 million in the third quarter, of which $3.3 million is attributable to noncontrolling interests. The second quarter 2014 included a CSIP gain of $7.7 million with $3.6 million attributable to noncontrolling interests.

The adjusted effective tax rate increased to 26.6% for the third quarter, from 26.5% for the second quarter 2014.

Balance Sheet and Cash Flow Statement Presentation

The company is presenting in this release both a U.S. GAAP balance sheet and balance sheet information excluding consolidated investment products (CIP), along with a U.S. GAAP statement of cash flows and cash flow statement information excluding CIP. The information presented excluding CIP is a non-GAAP presentation. Balance sheet and cash flow statement information before and after the consolidation of investment products are reconciled on pages 15 and 18, respectively.

The company believes that, by excluding the consolidation of investment products, the non-GAAP balance sheet and cash flow statement information provides a more representative presentation of our financial risks and the company's cash and debt positions, allowing more appropriate comparisons with our industry peers. Management uses these non-GAAP presentations to evaluate the business, and the presentations are consistent with internal management reporting. As demonstrated by the selected balance sheet data that follows, inclusion of the long-term debt of CIP within liquidity measures, such as debt-to-equity ratios, causes the company to appear to be significantly more indebted than is actually the case.

Balance Sheets and Capital Management

Selected balance sheet information is reflected in the table below:

As of September 30, 2014, the company's cash and cash equivalents were $1,352.6 million, with long-term debt of $1,589.1 million. The credit facility balance was zero at September 30, 2014, June 30, 2014 and December 31, 2013.  During the third quarter, Standard & Poor's Ratings Services upgraded the company's senior unsecured debt ratings rating to A from A-. In October 2014, Moody's Investors Service upgraded the company's senior unsecured ratings to A2 from A3.

Dividends paid in the third quarter were $108.6 million, bringing year-to-date dividends paid to $315.7 million. Today the company is announcing a third-quarter cash dividend of 25.0 cents per share. The dividend is payable on December 5, 2014, to shareholders of record at the close of business on November 18, 2014, with an ex-dividend date of November 14, 2014.

During the third quarter the company repurchased $50.0 million of its common shares on the open market, representing 1.3 million shares at a weighted average share price of $39.70. This brings year-to-date repurchases to $219.6 million representing 6.2 million shares.

Headcount

As of September 30, 2014, the company had 6,155 employees, compared to 6,070 employees as of June 30, 2014.

Invesco Ltd. is a leading independent global investment management firm, dedicated to helping investors worldwide achieve their financial objectives. By delivering the combined power of our distinctive investment management capabilities, Invesco provides a wide range of investment strategies and vehicles to our clients around the world. Operating in more than 20 countries, the firm is listed on the New York Stock Exchange under the symbol IVZ. Additional information is available at www.invesco.com.

Members of the investment community and general public are invited to listen to the conference call today, October 30, 2014, at 9:00 a.m. ET by dialing one of the following numbers: 1-866-617-1526 for U.S. and Canadian callers or 1-210-795-0624 for international callers. An audio replay of the conference call will be available until Thursday, November 13, 2014 at 5:00 p.m. ET by calling 1-888-566-0496 for U.S. and Canadian callers or 1-203-369-3055 for international callers. A presentation highlighting the company's performance will be available during a live Webcast and on Invesco's Website at www.invesco.com.

This release, and comments made in the associated conference call today, may include "forward-looking statements." Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, assets under management, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "forecasts," and future or conditional verbs such as "will," "may," "could," "should," and "would" as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q, filed with the Securities and Exchange Commission. You may obtain these reports from the SEC's website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.  

Invesco Ltd.
Notes

We are presenting the following non-GAAP performance measures: net revenues (and by calculation, net revenue yield on AUM), adjusted operating income (and by calculation, adjusted operating margin), and adjusted net income attributable to common shareholders (and by calculation, adjusted diluted earnings per share (EPS)). We believe these non-GAAP measures provide greater transparency into our business on an ongoing operations basis and allow more appropriate comparisons with industry peers. Management uses these performance measures to evaluate the business, and they are consistent with internal management reporting. The most directly comparable U.S. GAAP measures are operating revenues (and by calculation, gross revenue yield on AUM), operating income (and by calculation, operating margin), and net income attributable to common shareholders (and by calculation, diluted EPS). Non-GAAP measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies.

Notes 1 through 8 relate to the income statement reconciliations presented on pages 10 through 12. Further explanations of the reasons the company considers it appropriate to present these adjustments in arriving at the non-GAAP measures can be found in the company's Form 10-K.

Note 9 relates to the balance sheet and cash flow statement reconciliations on pages 15 and 18, respectively.

Note 10 relates to the U.S. GAAP effective tax rate and the impact of non-controlling interests in consolidated investment products (CIP) and consolidated sponsored investment products (CSIP) on the rate.

1.   Acquisition/disposition related adjustments

Acquisition/disposition related adjustments are comprised of amounts incurred by the company in connection with business combinations, intangible asset amortization, gains and losses related to dispositions, and all related tax effects. In addition, the net (income)/loss from discontinued operations associated with the sale of the Atlantic Trust business has been excluded from the non-GAAP income statement information. Exclusion of this line item assists in evaluating the continuing business performance and comparability with our results period to period, and aids comparability with peer companies that may not have similar discontinued operations.

Adjustment amounts related to acquisition and disposition activities are as follows:

2.   Third-party distribution, service and advisory expenses

Third-party distribution, service and advisory expenses include renewal commissions, management fee rebates and distribution costs (12b-1 and marketing support) paid to brokers and independent financial advisors, and other service and administrative fees paid to third parties, which are all closely linked to the revenue earned by the company from AUM but vary extensively by geography due to differences in distribution channels. The non-GAAP presentation nets these costs against revenues to arrive at net revenues, which serves to reflect these costs as revenue sharing activities and to remove distortions caused by differing distribution channel fees.

3.   Proportional share of net revenues and operating income from joint venture investments

The company has two joint ventures in China. Enhancing operations in China is one effort that the company believes could improve its competitive position over time. U.S. GAAP requires classification of the joint venture net income as equity in earnings of unconsolidated affiliates. The non-GAAP adjustment proportionately consolidates these joint ventures, serving to illustrate the contribution of these joint ventures to the operations of the business.

4.   Consolidated investment products (CIP)

Management and performance fees earned by the company, which were eliminated from operating revenues upon consolidation of the CIPs, were $8.7 million in the third quarter (second quarter 2014: $8.7 million; third quarter 2013: $12.0 million) while other revenues of $0.1 million (second quarter 2014: $0.1 million, third quarter 2013: none) were recorded by CIP in the third quarter. By deconsolidating these products in the non-GAAP information, the management and performance fees are added back while the other revenues are excluded. Similarly, the operating expenses of the CIPs and impact on interest income, interest expense, gains and losses, and noncontrolling interests are removed in reconciling from the U.S. GAAP income statement to the non-GAAP information. The consolidation of the investment products resulted in an increase of $2.4 million in net income attributable to common shareholders in the third quarter U.S. GAAP earnings (second quarter 2014: $2.0 million decrease; third quarter 2013: $9.4 million decrease). The above adjustments remove this impact.

5.   Market appreciation / depreciation of deferred compensation awards

This adjustment relates to deferred cash compensation that is linked in value to investment products. The market appreciation of the compensation liability was $0.2 million in the third quarter (second quarter 2014: $3.7 million appreciation; third quarter 2013: $6.5 million appreciation) with an investment loss, inclusive of interest and dividend income, of $2.2 million in the third quarter (second quarter 2014: $7.0 million gain; third quarter 2013: $10.2 million gain) on the assets held to hedge economically the compensation liability. This change in compensation expense and the investment income/loss are adjusted in arriving at the non-GAAP information and, net of the applicable tax charge of $1.3 million in the third quarter (second quarter 2014: $1.0 million credit; third quarter 2013: $1.2 million credit), result in a net income addition of $1.1 million for the third quarter (second quarter 2014: $2.3 million deduction; third quarter 2013: $2.5 million deduction).

6.   Other reconciling items

a.   Included within general and administrative expenses for the third quarter is a charge of $24.2 million in respect of a multi-year fund reimbursement expense associated with historical private equity management fees. The charge resulted primarily from using a more appropriate methodology regarding the calculation of offsets to management fees.

b.   Included within other gains and losses, net for the third quarter 2013 is the mark-to-market of foreign exchange put option contracts intended to provide protection against the impact of a significant decline in the Pound Sterling/U.S. Dollar foreign exchange rate. These contracts provided coverage through March 25, 2014. The adjustment from U.S. GAAP to non-GAAP earnings removes the impact of market volatility; therefore, the company's non-GAAP results include only the amortization of the cost of the contracts during the contract period.

c.   European infrastructure transformational initiative: The company outsourced its European transfer agency and made certain structural changes to product and distribution platforms.

Each of these other reconciling items has been adjusted from U.S. GAAP to arrive at the company's non-GAAP financial measures for the reasons either outlined in the paragraphs above, due to the unique character and magnitude of the reconciling item, or because the item represents a continuation of a reconciling item adjusted from U.S. GAAP in a prior period.

7.   Definition of operating margin and adjusted operating margin

Operating margin is equal to operating income divided by operating revenues. Adjusted operating margin is equal to adjusted operating income divided by net revenues.

8.   Definition of adjusted diluted EPS

Adjusted diluted EPS is equal to adjusted net income attributable to common shareholders divided by the weighted average number of shares outstanding.

9.   Balance sheets and cash flow information excluding CIP

U.S. GAAP condensed consolidating balance sheets and condensed consolidated statements of cash flows reflect the consolidation of CIP. The majority of the company's CIP balances are CLO-related. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company's minimal direct investments in, and management fees generated from, CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Additionally, the investors in the CLOs have no recourse to the general credit of the company for the notes issued by the CLOs. The company therefore does not consider this debt to be a company liability. Similarly, cash held by CIP is not available for general use by the company, nor is company cash available for general use by its CIP.

By deconsolidating the CIP in the condensed consolidated balance sheet information excluding CIP, the assets, liabilities and equity of the CIP are removed and the company's equity interest in the investment products, accounted for as equity method and available-for-sale investments, are replaced. The company considers this a more representative presentation of the company's financial position, and calculations made therefrom, such as debt-to-equity ratios, are more meaningful excluding these balances.

The condensed consolidated cash flow information excluding CIP present the cash flows of the company separately and before consolidation of CIP, as the cash flows of CIP do not form part of the company's cash flow management processes, nor do they form part of the company's significant liquidity evaluations and decisions for the reasons noted.

10. U.S. GAAP Effective Tax Rate

The effective tax rate on continuing operations increased to 27.3% for the third quarter, from 25.3% for the second quarter 2014. The impact of the inclusion of non-controlling interests in CIP and CSIP increased our effective tax rate by 0.3 percentage points for the third quarter, compared to a reduction of 2.8 percentage points on our effective tax rate for the second quarter. The third quarter included a 1.1% rate decrease as result of the fund reimbursement expense (referenced above).

     

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