Federated Investors, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The filing identifies the registrant as Federated Investors, Inc. (not Federated Hermes, Inc.). Unless noted otherwise, amounts are U.S. dollars.
Business context and reporting period
Federated manages investment products and provides related administrative, distribution and shareholder services. Managed assets were $363.8 billion at June 30, 2013, up 2% year over year. Money market assets accounted for 42% of first-half revenue, down from 47% a year earlier.
Financial performance and position
- Q2 revenue: $223.8 million, down 4% from $232.1 million. Operating income was $66.0 million versus $69.0 million; net income attributable to Federated was $40.4 million, essentially unchanged. Diluted EPS was $0.39 in both periods.
- First-half revenue: $451.8 million, down 2% from $462.4 million. Operating income was $134.2 million versus $139.4 million; net income attributable to Federated was $83.4 million, up from $82.7 million. Diluted EPS was $0.80 in both periods.
- Margins: Operating margin was approximately 29.5% in Q2 2013 versus 29.7% in Q2 2012, and 29.7% for first-half 2013 versus 30.1% a year earlier. First-half net margin was approximately 18.5% versus 17.9%.
- Revenue drivers: Higher money-market fee waivers reduced revenue by $21.6 million in Q2 and $28.6 million in the first half versus 2012. These declines were partly offset by growth in average equity and fixed-income assets. Distribution expense fell $8.5 million in Q2 and $12.0 million in the first half, partly offsetting the waivers; compensation expense increased.
- Assets under management: Period-end equity assets rose 17% year over year, fixed income 2%, and money market 1%. Average managed assets increased 3% in both Q2 and the first half. First-half fixed-income funds and accounts had net redemptions of $1.8 billion; equity products had net sales of $285 million.
- Cash flow: First-half operating cash flow was $67.5 million, down from $83.3 million. Investing activities provided $24.7 million and financing activities used $72.4 million. Cash and cash equivalents ended the period at $87.4 million, up from $67.6 million at year-end 2012.
- Debt and liquidity: Debt totaled $297.5 million, including $42.5 million classified as short-term; the $200 million revolving facility was undrawn and fully available. The term loan’s rate was fixed at 3.646% through an interest-rate swap. Federated reported compliance with covenants, with leverage of 0.8x against a 2.5x maximum. Management said available liquidity and expected cash flows should meet foreseeable needs.
- Dividends: $0.48 per share was paid in the first half. After quarter-end, the board declared a $0.25-per-share dividend payable August 15, 2013.
Outlook, risks, contingencies and notable items
- Management estimated that, assuming money-market asset levels and mix remained constant, Q3 2013 fee waivers could reduce pre-tax income by approximately $28 million. The impact depends on asset levels, yields, expenses, product mix, intermediary cost-sharing and whether Federated continues the waivers.
- The SEC’s June 2013 money-market reform proposal included alternatives involving floating NAVs or liquidity fees and redemption gates, plus other changes. Federated warned that certain reforms could materially harm its money-market business; final rules and their impact were not yet known. Potential European reforms and a proposed financial transactions tax were additional uncertainties.
- Persistently low short-term rates could continue to require fee waivers. Money-market regulatory changes, asset outflows, market movements and concentration in two sponsored funds were identified as risks.
- Remaining contingent acquisition payments were uncertain and tied to asset levels, revenues or growth targets. The filing estimated about $10 million of remaining SunTrust payments over three years; a Clover Capital payment could approximate $9 million in 2013 if assumptions held. Certain employment arrangements had maximum potential bonuses of approximately $43 million over their remaining terms.
- Ordinary-course legal claims were disclosed; management did not believe a material loss was reasonably possible. No material change to previously disclosed risk factors or market-risk exposures was reported. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether money-market regulatory proposals change materially and what final requirements mean for Federated’s AUM, revenues and distribution costs.
- Actual fee-waiver levels versus the approximately $28 million Q3 pre-tax estimate, and how short-term rates and asset mix affect them.
- Trends in equity and fixed-income flows, money-market asset retention and revenue concentration in the Kaufmann and Prime Obligations funds.
- Operating cash-flow conversion, debt repayment, covenant headroom and future contingent acquisition or compensation payments.