Federated Investors, Inc. (issuer named in filing) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing identifies the registrant as Federated Investors, Inc.; the request metadata names Federated Hermes, Inc.
Business context and performance
Federated managed $351.6 billion at quarter-end, primarily through sponsored funds and separate accounts. Revenue depends on managed assets, asset mix, fee rates, and fee waivers. Equity products generally earn higher advisory fees than money market and fixed-income products.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $213.0 million | $223.8 million | $424.5 million | $451.8 million |
| Operating income | $58.8 million | $66.0 million | $115.5 million | $134.2 million |
| Net income attributable to Federated | $36.9 million | $40.4 million | $72.1 million | $83.4 million |
| Diluted EPS | $0.35 | $0.39 | $0.69 | $0.80 |
| Operating margin | 27.6% | 29.5% | 27.2% | 29.7% |
For the six months, operating cash flow was $65.2 million (versus $67.5 million); investing activities used $22.4 million; financing activities used $86.2 million. Cash and cash equivalents were $61.1 million at June 30, down from $104.4 million at December 31, 2013. Liquid assets, net of noncontrolling interests, were $271.7 million, compared with $303.2 million at year-end.
Debt totaled $255.0 million: $25.5 million current and $229.5 million long-term. The company had a fully available $200 million revolving facility. Its reported leverage ratio was 0.9:1 against a 3.0:1 maximum; interest coverage was 28:1 against a 4:1 minimum. The company reported compliance with covenants. The board declared a $0.25-per-share dividend payable August 15, 2014.
Material changes versus comparable periods
- Q2 revenue declined 5% and six-month revenue declined 6%; six-month net income fell 14% and diluted EPS fell from $0.80 to $0.69.
- Average managed assets fell 4% in Q2 and 3% in the first half. Period-end assets were down 3% year over year to $351.6 billion.
- Equity assets provided a partial offset: period-end equity assets rose 29% year over year and average equity assets rose 22%. Money market assets fell 9% at period-end; average money market assets fell 7% in Q2 and 6% in the first half.
- Money market fee waivers increased. Their estimated pretax impact was $29.6 million in Q2 2014 versus $23.7 million a year earlier, and $59.3 million for the first half versus $45.5 million.
- Operating expenses declined 2% in Q2 and 3% in the first half, as lower distribution expenses more than offset higher compensation costs.
Outlook, risks, and unusual items
- Management estimated third-quarter 2014 money market fee waivers could have an approximately $31 million negative pretax impact, assuming asset levels and mix remained constant. It could not predict when short-term rates would rise; waivers could continue for the foreseeable future.
- The SEC adopted money market fund reforms on July 23, 2014, after quarter-end. Rules include floating NAV requirements for institutional prime and institutional municipal funds, potential liquidity fees and redemption gates, and additional disclosure, diversification, and stress-testing requirements. Management said the eventual business impact was not yet assessable and warned reforms could materially adversely affect results, financial condition, or cash flows.
- Management also cited proposed European money market reforms and a financial transactions tax as potential adverse risks, with timing and effects uncertain.
- CCM Rochester sued over a prior acquisition earn-out, seeking approximately $37 million plus attorneys’ fees. Federated denied the claims, intended to defend them, and assessed a material loss as remote; no loss was estimated.
- Acquisition-related contingent payments and performance-based employee arrangements remain obligations. Management estimated up to $32 million of potential payments under certain employment arrangements through 2018; actual amounts depend on specified conditions.
- Federated stated it expected sufficient liquidity for foreseeable needs and was not projecting a draw on the revolving facility during the next 12 months. It reported no goodwill impairment indicators.
Key facts for investors to verify
- Confirm the issuer identity and reporting scope: the filing names Federated Investors, Inc., while the request metadata names Federated Hermes, Inc.
- Track managed-asset levels and flows, especially money market outflows and equity growth, and their effect on fee revenue.
- Monitor actual money market waiver costs against the approximately $31 million Q3 pretax estimate and assess sensitivity to yields, asset mix, and intermediary sharing.
- Assess implementation and business effects of U.S. and European money market regulation, including potential product changes and customer responses.
- Follow debt amortization, liquidity, covenant headroom, the interest-rate swap’s scheduled expiration, and the outcome of the CCM litigation.