Invesco Ltd. reported financial results for the three months ended March 31, 2017.

"Our continued focus on delivering strong investment performance to clients helped us achieve positive long-term net inflows of $1.8 billion during the quarter and an adjusted net income growth of 4.3% quarter over quarter," said Martin L. Flanagan, president and CEO of Invesco.  "Based on the strong fundamentals in our business, we're increasing our quarterly dividend to $0.29 per share, which represents a 3.6% increase over the prior year."

The company also announced that it has entered into a definitive agreement to acquire Source, a leading, independent specialist provider of exchange-traded funds based in Europe.  The transaction includes approximately $18 billion in Source-managed AUM, plus approximately $7 billion of externally managed AUM (as of March 31, 2017).  The acquisition brings additional talent and a broad array of funds that further expand the depth and breadth of Invesco's active, passive and alternative capabilities and expertise, enhancing the firm's ability to help clients achieve their investment objectives.

"We're excited about this opportunity to build on Invesco's 40 years of factor investing experience and our existing PowerShares ETF business, which will significantly enhance our ability to deliver meaningful solutions to institutional and retail clients in Europe and around the world," said Martin L. Flanagan, president and CEO.  "The addition of Source will help us meet increasing demands from clients who want to work with investment organizations that can deliver across the full range of investment capabilities and support the outcomes they seek."

The transaction, deemed not material to the company's financial position, will be funded with available cash.  It is expected to close in the third quarter of 2017, subject to regulatory approval.

Assets Under Management

Total assets under management at March 31, 2017, were $834.8 billion (December 31, 2016: $812.9 billion), an increase of $21.9 billion during the first quarter. Long-term net inflows were $1.8 billion and total net outflows were $5.3 billion for the first quarter, as detailed below:

Net market gains led to increases of $23.1 billion in AUM during the first quarter, compared to net market gains of $6.4 billion in the fourth quarter 2016. Foreign exchange rate movements led to a $4.1 billion increase in AUM during the first quarter, compared to a $14.8 billion decrease in the fourth quarter 2016. Average AUM during the first quarter were $829.8 billion, compared to $809.0 billion for the fourth quarter 2016, an increase of 2.6%. Further analysis is included in the supplementary schedules to this release.

Operating Results

This section discusses the company's first quarter 2017 results, as compared to the fourth quarter 2016, and comments on significant items that have impacted the company's results as presented in accordance with U.S. GAAP.

Operating revenues decreased $2.1 million (0.2%) to $1,192.6 million in the first quarter, from $1,194.7 million in the fourth quarter 2016. Foreign exchange rate changes decreased first quarter operating revenues by $0.2 million compared to the fourth quarter 2016.

Investment management fees increased $8.3 million (0.9%) to $955.2 million in the first quarter, from $946.9 million in the fourth quarter 2016. The increase reflects the higher average AUM during the first quarter compared to the fourth quarter 2016, partially offset by fewer days in the first quarter as compared to fourth quarter 2016.

Service and distribution fees decreased $2.7 million (1.3%) to $206.4 million in the first quarter, from $209.1 million in the fourth quarter 2016.

Performance fees were $11.3 million in the first quarter, compared to $17.5 million in the fourth quarter 2016. Performance fees recorded in the first quarter were primarily from bank loan products, real estate funds and U.K. investment trusts.

Other revenues decreased by $1.5 million (7.1%) to $19.7 million in the first quarter, compared to $21.2 million in the fourth quarter 2016. Real estate transaction fees were down $2.6 million, offset by increased UIT revenues of $1.6 million.

Operating expenses increased $33.5 million (3.7%) to $934.0 million in the first quarter, from $900.5 million in the fourth quarter 2016, primarily related to increased employee compensation costs, offset by lower marketing and general and administrative expenses. Business optimization charges were $24.7 million in the first quarter, compared to $21.0 million in the fourth quarter. Total costs of these initiatives at completion are estimated to be approximately $128 million, of which $38 million remains to be incurred through mid-2018.  As of the end of the first quarter 2017, this initiative has produced annualized run-rate expense savings of $28 million, and by completion in mid-2018, the expected annualized run-rate savings will be up to $50 million. Foreign exchange rate changes decreased first quarter operating expenses by $0.6 million when compared to the fourth quarter 2016.

Third-party distribution, service and advisory expenses decreased by $0.2 million (0.1%) to $349.3 million in the first quarter from $349.5 million in the fourth quarter 2016.

Employee compensation expenses increased by $57.8 million (17.1%) to $396.8 million in the first quarter, from $339.0 million in the fourth quarter 2016. The first quarter included a $22.0 million seasonal increase in payroll tax and employee benefit costs. The first quarter also reflects a significant expense for multiple senior executive retirements. The number of senior executive retirements and magnitude of their retirement costs incurred in one quarter was unprecedented for Invesco. These retirements, including, among others, the former Senior Managing Director of EMEA and the Chairman of our Private Equity business resulted in additional compensation expenses of $18.3 million related to accelerated vesting of deferred compensation and other separation costs. Staff severance costs related to business optimization were $15.7 million in the first quarter compared to $12.2 million in the fourth quarter. The fourth quarter of 2016 included an incremental credit of $8.6 million related to an employee benefit plan termination.  

Marketing expenses decreased by $10.8 million (30.7%) to $24.4 million in the first quarter, from $35.2 million in the fourth quarter 2016, reflecting a seasonal reduction in client events and other marketing activities.

Property, office and technology expenses increased $0.2 million (0.2%) to $85.5 million in the first quarter, from $85.3 million in the fourth quarter 2016.

General and administrative expenses decreased $13.5 million (14.8%) to $78.0 million in the first quarter, from $91.5 million in the fourth quarter 2016 reflecting a $10.8 million reduction in fund costs incurred by consolidated investment products.

Equity in earnings of unconsolidated affiliates increased $6.3 million to $17.7 million in the first quarter from $11.4 million in the fourth quarter 2016 primarily from an increase in earnings from our real estate partnerships, offset by lower earnings due to expenses associated with our China joint venture. Non-operating other income and expenses in the first quarter also included a $28.5 million net gain comprised of market-driven gains and losses of investments held by consolidated investment products (CIP) and net interest income of CIP (fourth quarter 2016: $9.8 million gain).

Other gains and losses, net was a gain in the first quarter of $6.2 million compared to a gain of $15.6 million in the fourth quarter. The components and variances are included in the table below:

The foreign exchange hedge contract gains and losses reflect the mark to market of all the open put option contracts. Further details of these foreign exchange hedge contracts are given below in the capital management section.

The effective tax rate decreased to 26.1% for the first quarter, from 29.9% for the fourth quarter 2016. The impact of the inclusion of non-controlling interests in CIP decreased our effective tax rate by 0.2% for the first quarter, compared to an increase of 0.8% for the fourth quarter 2016. First quarter 2017 included a 0.4% rate decrease related to excess tax benefits on share based compensation for vestings of our annual share awards.  Included in the rate decrease for first quarter were expenses related to the retirement costs and business optimization costs discussed above, changes in our profit mix and movement from our foreign currency hedge contracts.

Capital Management

As of March 31, 2017, the company's cash and cash equivalents were $1,397.0 million, with long-term debt of $2,093.6 million. The credit facility balance was $19.4 million at March 31, 2017 and $28.7 million at December 31, 2016.

Dividends paid in the first quarter were $114.8 million. Today the company is announcing a first-quarter cash dividend of 29.0 cents, an increase of 3.6%. The dividend is payable on June 2, 2017, to shareholders of record at the close of business on May 12, 2017, with an ex-dividend date of May 10, 2017.

In April 2017 the company received $7.8 million from the first quarter's Pound Sterling - U.S. Dollar hedge contract. On March 30, Invesco extended its hedge of approximately 75% of the GBP-based operating income for each quarter by a half year, through June 29, 2018. Additionally, on April 18, Invesco extended the hedge through December 31, 2018.  This hedge is in the form of purchased put option contracts set at a strike level of $1.250 based on the average daily foreign exchange rate for the applicable time period.

Headcount

As of March 31, 2017, the company had 6,847 employees, compared to 6,790 employees as of December 31, 2016.