Federated Investors, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing identifies the registrant as Federated Investors, Inc. (the company is identified in the request metadata as Federated Hermes, Inc.). Federated reported $349.4 billion in managed assets at quarter-end and operates an investment-management business, earning most revenue from advisory, administration, distribution and shareholder services.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $225.8 | $231.5 | $464.7 | $464.5 |
| Operating income | $72.1 | $83.9 | $128.6 | $155.7 |
| Net income attributable to Federated | $42.4 | $47.7 | $75.6 | $89.7 |
| EPS, basic and diluted | $0.41 | $0.46 | $0.73 | $0.85 |
| Operating margin | 31.9% | 36.2% | 27.7% | 33.5% |
- Q2 revenue fell about 2%, operating income about 14%, and attributable net income about 11%. First-half revenue was essentially flat, while operating income declined about 17% and attributable net income about 16%.
- Average managed assets rose 5% in Q2 and 1% in the first half. Period-end managed assets increased 4% year over year. First-half average money-market assets declined 1%, while fixed-income and equity averages increased 18% and 7%, respectively.
- Operating cash flow was $74.2 million for the first half, versus $99.7 million in 2010. Investing activities used $51.1 million and financing activities used $66.5 million. Cash and cash equivalents ended June at $155.2 million, down $43.5 million from year-end 2010.
- At June 30, cash, investments and receivables totaled $313.8 million, according to management. Recourse debt was $382.5 million and nonrecourse debt was $1.4 million. A $200 million revolving facility was fully available; no revolver borrowings were outstanding. The company reported compliance with debt covenants, with leverage of 1.16x against a 2.5x maximum.
- Cash dividends paid in the first half totaled $50.0 million, or $0.48 per share. The board declared a further $0.24-per-share dividend payable August 15, 2011.
Material changes and unusual items
- Management attributed the Q2 managed-asset revenue decline mainly to $21.1 million of additional money-market fee waivers, partly offset by higher average assets. First-half revenue was supported by fixed-income and equity growth, offset by higher waivers and slightly lower average money-market assets.
- First-half fee waivers totaled $142.8 million, partly offset by $107.3 million of lower distribution costs and $3.0 million of lower noncontrolling-interest income, for a $32.5 million reduction in pretax income. The Q2 net pretax impact was $19.4 million.
- First-half professional service fees included a $17.6 million charge related primarily to legal proceedings, including the Kaufmann Fund fee cases, which reached final settlement in April 2011. The comparable 2010 period included $25.0 million of insurance proceeds that reduced operating expenses and a $7.0 million impairment charge; these items complicate year-over-year expense comparisons.
- Federated amended and restated its credit agreement in June. The term loan balance was $382.5 million, with quarterly principal payments and a June 2016 maturity. An existing interest-rate swap fixes the relevant rate at 3.646% through April 2015; its June fair-value liability was $13.3 million.
- First-half cash paid for acquisitions was $45.3 million, including a $44.7 million contingent payment relating to an earlier acquisition. The SunTrust acquisition has additional contingent payments; management estimated these could total $26 million over five years, with no contractual maximum.
Outlook, risks and contingencies
- Management expected money-market fee waivers and related distribution-cost reductions to continue into 2012. Assuming asset levels remained constant, it estimated a Q3 2011 net pretax impact of approximately $23 million. Actual amounts depend on yields, fund assets, expenses, policy actions and the company’s waiver decisions.
- Management stated it expected sufficient liquidity for present and reasonably foreseeable needs. It was not then projecting use of the revolver for the rest of 2011, but retained the option to borrow under the facility.
- Key exposures include continued low short-term rates and fee waivers, shifts in money-market assets or investor confidence, investment performance and redemptions, and potential regulation of money-market funds, including possible changes to stable-NAV practices. Money-market assets generated approximately 47% of first-half revenue.
- Revenue concentration also included the Federated Kaufmann Fund (about 13% of revenue), Federated Prime Obligations Fund (about 12%), and Bank of New York Mellon, including Pershing (about 11% for the first half). A material decline in these relationships or assets could affect results.
- Federated reported ordinary-course legal claims for which a material loss was not reasonably estimable. It also recorded a $10 million liability for insurance advances while pursuing reimbursement; if unsuccessful, it may have to repay some or all of those proceeds. Acquisition-related contingent payments and employment incentive arrangements are additional obligations.
- Management reported effective disclosure controls as of June 30, 2011, no material change in internal control over financial reporting during the quarter, and no material change to the risk factors disclosed in the prior annual report.
Important facts for investors to verify
- Whether money-market yields, assets and fee-waiver costs develop in line with management’s Q3 estimate and expectations through 2012.
- Drivers of falling operating income and margins despite higher average assets in several categories, including the legal expense comparison and fee-waiver offsets.
- Debt repayment schedule, swap exposure, covenant headroom and the company’s stated liquidity outlook.
- Actual future contingent payments for SunTrust and prior acquisitions, and the outcome of the insurance-reimbursement dispute and legal proceedings.
- Changes in assets and revenue concentration in money-market products, the two identified funds and the Bank of New York Mellon relationship.