Federated Investors, Inc. (2015 Form 10-Q)
Business context and reporting period. The filing is for the quarter ended September 30, 2015, with year-to-date comparisons through September 30. The 2015 filing names the registrant Federated Investors, Inc. The investment manager reported $351.0 billion in managed assets at quarter-end, broadly unchanged from a year earlier. Money market assets were 70% of average assets for the first nine months but generated 32% of revenue; equity assets were 15% of average assets and generated 47% of revenue.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $234.3 million | $216.9 million | $683.0 million | $641.4 million |
| Operating income | $74.2 million | $60.8 million | $202.6 million | $176.3 million |
| Net income attributable to Federated | $44.1 million | $37.6 million | $122.2 million | $109.6 million |
| Diluted earnings per share | $0.42 | $0.36 | $1.17 | $1.05 |
- Q3 revenue rose 8%, operating income 22%, and net income 18% year over year. Nine-month revenue increased 6%, operating income 15%, and net income 11%. Operating margin was approximately 31.7% for Q3 versus 28.0% a year earlier; nine-month operating margin was approximately 29.7% versus 27.5%.
- For the first nine months, operating cash flow was $152.2 million, compared with $111.7 million in 2014. Investing activities used $7.3 million and financing activities used $119.0 million. Cash and cash equivalents were $141.2 million at September 30.
- Total debt was $223.1 million, comprising $25.5 million short-term and $197.6 million long-term debt. The $200 million revolving facility was fully available. The company reported compliance with its covenants; its leverage ratio was 0.7 to 1 against a 3 to 1 maximum.
- Current assets were $362.9 million and current liabilities $141.7 million. Management reported $335.5 million in liquid assets, net of noncontrolling interests.
- Federated paid $0.75 per share in dividends during the first nine months and repurchased $37.1 million of stock. A further $0.25 per share dividend was declared for payment in November 2015.
Changes versus the prior comparable period
- Revenue growth reflected lower money-market fee waivers and stronger equity assets. Nine-month average equity assets increased 14%, while average money market assets declined 4%; average managed assets overall fell 2% for the nine-month period.
- Distribution expense increased 10% in Q3 and 6% year to date, primarily because lower fee waivers reduced related expense offsets. Nine-month compensation expense rose 2%.
- Net securities results shifted to a $4.3 million loss in Q3 from a $0.4 million loss in Q3 2014, including a $1.3 million impairment of an available-for-sale security. For the nine months, the result was a $5.5 million loss versus a $4.0 million gain.
- Debt declined from $242.3 million at December 31, 2014 to $223.1 million at September 30, 2015 after $19.1 million of principal repayments. The interest-rate swap expired in April 2015.
Outlook, risks, contingencies and notable items
- No formal earnings or revenue guidance was provided. Assuming money-market asset levels and mix remain constant, management expected fourth-quarter 2015 voluntary yield-related fee waivers to have a negative pretax income impact approximately equal to Q3’s $20.3 million. Higher short-term rates would likely reduce the impact; timing and extent were uncertain.
- Management said it expected sufficient liquidity for present and reasonably foreseeable cash needs, considering operating cash flow, liquid assets and borrowing capacity. It did not project drawing on the revolving facility over the next 12 months.
- Money-market regulation is a significant business risk. The SEC’s 2014 reforms require floating NAVs for certain institutional funds and permit liquidity fees and redemption gates for certain funds, with key requirements scheduled for October 2016. Federated was restructuring and developing products in response; management warned reforms could adversely affect the business. Low interest rates and continuing fee waivers also pressure revenue.
- Other risks include asset-market volatility, investor redemptions and preferences, regulatory and compliance costs, and proposed U.S. and European rules. Federated noted one sponsored fund generated 11% of revenue in both the quarter and nine-month period.
- A former acquisition target sought approximately $37 million in damages and attorneys’ fees in litigation. Federated said it considered a material loss remote; no loss was estimable and no accrual was reported. Certain employment and incentive arrangements could involve payments of up to $28 million over their remaining terms, based on stated asset levels and performance goals.
- Management reported no goodwill impairment indicators at quarter-end and no material change in market-risk disclosures. Disclosure controls were considered effective.
Most important facts for investors to verify
- Whether money-market fee waivers, interest rates and asset mix track management’s stated expectations, including the projected Q4 waiver impact.
- Managed-asset flows and market performance, particularly equity and money-market assets, and the concentration in the Federated Kaufmann Fund.
- The effects, implementation costs and customer response to money-market regulatory changes and product restructuring.
- Cash generation, planned debt repayments, distributions and repurchases, and covenant compliance.
- Developments in the CCM litigation and potential acquisition- and employment-related contingent payments.