Business context and reporting period
Federated Investors, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company provides investment management, advisory, administrative, distribution and related services. At quarter-end, managed assets were $392.2 billion, up 8% year over year.
Financial performance and liquidity
Amounts below are in millions, except per-share data; comparisons are with Q1 2017 unless stated otherwise.
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $263.9 | $273.5; down 3.5% |
| Operating income | $79.7 | $77.8; up 2.4% |
| Operating margin | 30.2% | 28.4% |
| Net income attributable to Federated | $60.3 | $49.6; up 21.5% |
| Diluted EPS | $0.60 | $0.49 |
| Cash from operations | $48.1 | $33.2 |
| Cash and cash equivalents at quarter-end | $325.6 | $316.3 at Dec. 31, 2017 |
| Long-term debt | $165.0 | $170.0 at Dec. 31, 2017 |
Q1 cash used in investing activities was $3.1 million and cash used in financing activities was $35.6 million, including $25.3 million in dividends, $5.0 million of debt repayment and $4.0 million of share repurchases. The quarterly dividend was $0.25 per share. Management said available liquidity and expected operating cash flows should be sufficient for foreseeable needs. The company had $210 million available to borrow under its credit facility and was in compliance with its covenants; leverage ratio was 0.4 to 1 against a maximum of 3 to 1.
Material changes and management commentary
- Revenue fell $9.6 million despite growth in average managed assets. The company cited $8.6 million of customer-related fund expense reimbursements newly presented as a revenue reduction under Topic 606, a customer relationship change, and money-market asset mix. Lower voluntary money-market yield waivers and higher average equity and fixed-income assets partially offset the declines.
- Total operating expenses fell $11.5 million, mainly reflecting lower distribution expense and Topic 606 presentation changes; compensation expense rose $5.0 million, primarily from incentive compensation. Results also benefited from a lower effective tax rate, 24.0% versus 36.9%, following the Tax Act. Net gains on securities shifted to a $1.2 million loss from a $2.6 million gain.
- Average managed assets increased 10% to $398.0 billion. Average money-market, equity and fixed-income assets rose 8%, 5% and 23%, respectively. Period-end equity assets were down 1% year over year; Q1 equity and fixed-income flows included net redemptions, while fixed-income assets also benefited from higher assets in separate accounts.
- Revenue concentration remains notable: approximately 17% came from the Strategic Value Dividend strategy and 14% from one intermediary, Bank of New York Mellon and its Pershing subsidiary. A significant, prolonged decline in the strategy or deterioration in the intermediary relationship could harm results.
Outlook, risks, contingencies and unusual items
No formal earnings or revenue guidance is provided in the filing. Management identified market conditions, asset flows and mix, yields and money-market fee waivers, customer relationships, and regulation as factors that could materially affect revenue, earnings and cash flow. Substantially all managed assets may be redeemed or withdrawn without advance notice. Regulatory and compliance demands may also increase costs; the company said the ultimate effects of regulatory changes and potential U.S. deregulation are uncertain. Brexit and European money-market reforms were additional sources of uncertainty.
After quarter-end, on April 12, 2018, Federated agreed to acquire a 60% interest in Hermes Fund Managers Limited for £246 million, subject to adjustments and regulatory and other approvals; closing was expected in Q3 2018. The purchase was to be funded with cash and the revolving credit facility. On April 13, the company entered a forward transaction to buy £250 million for approximately $358.0 million, including an estimated amount for Hermes excess regulatory capital. On April 26, the board declared a $0.27 per-share dividend payable May 15.
Compensation arrangements could require approximately $9 million of future minimum payments and, subject to asset levels and performance goals, up to an additional $31 million. Management did not believe a material loss from ordinary-course legal claims or indemnifications was reasonably possible. No goodwill impairment indicators were identified. Adoption of Topic 606 changed presentation and included cumulative-effect adjustments; the company recorded $8.6 million of consideration payable to customers as a revenue reduction in Q1.
Important facts for investors to verify
- How much of reported revenue and expense movement reflects Topic 606 presentation changes versus underlying business trends.
- Whether managed-asset growth persists, particularly given equity and fixed-income net redemptions and the exposure to concentrated strategies and intermediaries.
- Hermes acquisition closing conditions, final purchase price and funding, including foreign-exchange settlement and resulting debt and liquidity.
- Money-market fee waiver levels, rising-rate effects, customer mix and the impact of regulatory developments on assets, fees and costs.
- Whether operating cash flow, debt repayment, dividends and repurchases remain consistent with liquidity needs and acquisition plans.