Federated Investors, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing names the registrant as Federated Investors, Inc.; the supplied company metadata says Federated Hermes, so the entity/name should be verified.
Business context
Federated manages investment products and provides advisory, administration, distribution and shareholder services. Managed assets were $352.3 billion at September 30, 2014, down 4% year over year. Money market assets represented 71% of managed assets but 32% of nine-month revenue; equity assets represented 13% of managed assets and 44% of revenue.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $216.9 million | $211.9 million | $641.4 million | $663.6 million |
| Operating income | $60.8 million | $57.8 million | $176.3 million | $192.0 million |
| Net income attributable to Federated | $37.6 million | $37.7 million | $109.6 million | $121.1 million |
| Diluted EPS | $0.36 | $0.36 | $1.05 | $1.16 |
| Operating margin | About 28.0% | About 27.3% | About 27.5% | About 28.9% |
Q3 revenue grew 2%, mainly on higher average equity assets, while nine-month revenue fell 3%, reflecting lower money market assets and increased fee waivers, partly offset by equity growth. Nine-month operating income declined 8% and attributable net income declined 9%. Compensation costs rose; distribution and professional-service expenses fell over the nine-month period.
Cash flow: Nine-month operating cash flow was $111.7 million, versus $122.2 million in 2013. Investing activities used $9.8 million and financing activities used $115.9 million. Cash and cash equivalents ended at $90.5 million, versus $104.4 million at year-end 2013.
Debt and liquidity: Debt totaled $248.6 million at September 30, down from $276.3 million at December 31, 2013. The $200 million revolving facility was fully available. The company reported compliance with debt covenants, with leverage of 0.9x against a 3.0x maximum and interest coverage of 31x against a 4.0x minimum. Management said available liquidity and expected cash flows should cover foreseeable needs.
Liquid assets, net of noncontrolling interests, were $299.5 million, compared with $303.2 million at year-end 2013. The quarterly dividend was $0.25 per share; $0.75 per share was paid during the first nine months.
Material changes and outlook
- Period-end equity assets rose 25% year over year, while money market assets fell 9%; total managed assets declined 4%.
- Money market fee waivers had a negative pretax impact of $30.2 million in Q3 and $89.5 million for the first nine months, compared with $30.3 million and $75.8 million, respectively, in 2013. Management estimated an approximately $30 million negative pretax impact in Q4 2014, assuming asset levels and mix remained constant.
- The SEC adopted money market fund reforms in July 2014, including floating NAV requirements for institutional prime and municipal funds and possible liquidity fees and redemption gates. Major requirements had compliance dates in 2015–2016. Management said the floating NAV could materially harm the money market business; the ultimate impact and effectiveness of potential product responses were uncertain.
- Management also cited prolonged low short-term rates, possible further money market regulation, European money market reform and a potential financial transactions tax as risks. The filing gives no specific earnings or revenue forecast beyond the fee-waiver estimate.
- A lawsuit by CCM seeks approximately $37 million plus attorneys’ fees over acquisition earn-out and alleged marketing obligations. Federated disputed the claims, was seeking dismissal, and assessed a material loss as remote; no loss was estimable.
- Federated reported a $29 million maximum potential incentive-compensation obligation through 2018, contingent on performance goals. It estimated a 2015 fund bonus of about $2 million if stated asset and other inputs remained constant.
Important facts for investors to verify
- Confirm the issuer’s identity and applicable reporting entity, given the filing’s “Federated Investors, Inc.” name and the supplied “Federated Hermes, Inc.” metadata.
- Track money market asset flows, short-term yields, fee waivers and the estimated Q4 2014 waiver impact.
- Assess exposure to SEC and international regulatory changes, including the potential effect on fund assets and business economics.
- Monitor equity performance and flows, which supported revenue as money market assets declined, and the 11% revenue contribution from the Federated Kaufmann Fund.
- Follow the CCM litigation, contingent acquisition payments, debt repayment and liquidity; management’s loss assessment is not a guarantee of the outcome.