Federated Investors, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The filing identifies the registrant as Federated Investors, Inc. (not Federated Hermes, Inc.). Unless otherwise stated, financial amounts below are in U.S. dollars.
Business context and performance
Federated is an investment manager whose revenue is primarily tied to managed assets and fee rates. Period-end managed assets were $355.8 billion, down 3% year over year; average managed assets were $359.5 billion, down 4%. Equity and fixed-income growth was offset by declines in money market assets.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $220.5 million | $211.5 million | Up 4% |
| Operating income | $59.0 million | $56.6 million | Up 4% |
| Operating margin | 26.8% | 26.8% | Approximately flat |
| Net income attributable to Federated | $36.3 million | $35.2 million | Up $1.1 million |
| Diluted EPS | $0.35 | $0.34 | Up $0.01 |
| Cash from operating activities | $14.7 million | $17.8 million | Down $3.1 million |
| Cash and cash equivalents, quarter-end | $91.8 million | $115.3 million at Dec. 31, 2014 | Down $23.4 million |
| Total debt, quarter-end | $235.9 million | $242.3 million at Dec. 31, 2014 | Down $6.4 million |
Material changes and financial position
- Revenue from managed assets increased $11.0 million. Higher average equity assets contributed $13.1 million and lower money-market fee waivers contributed $12.6 million; lower average money-market assets reduced revenue by $15.0 million.
- Average money-market assets fell 7% year over year; average equity assets rose 18% and fixed-income assets rose 5%. Equity assets benefited from net sales and market appreciation.
- Operating expenses rose 4% to $161.5 million, mainly from compensation and distribution costs. Nonoperating results shifted to a $0.5 million net expense from $0.8 million of net income, including lower securities gains.
- Cash used in financing was $36.1 million, including $26.2 million of dividends, $10.3 million of treasury-stock purchases and $6.4 million of debt repayments. Cash used in investing was $2.0 million.
- Liquid assets, net of noncontrolling interests, were $296.0 million at March 31, versus $318.7 million at year-end. The company reported $200 million available under its revolving credit facility and stated it was in compliance with debt covenants. Its leverage ratio was 0.8-to-1 against a maximum of 3-to-1.
Outlook, risks and unusual items
- Money-market fee waivers: Q1 waivers reduced revenue by $94.1 million, partly offset by $64.6 million lower distribution expense and $2.5 million lower noncontrolling-interest expense; the net pretax impact was $27.0 million, versus $29.7 million a year earlier. Management estimated a negative pretax impact of approximately $24 million in Q2 2015, assuming asset levels and mix remained constant. Higher short-term rates could reduce the impact.
- Regulatory change: U.S. money-market reforms require certain institutional prime and municipal funds to adopt floating NAVs and introduce liquidity-fee and redemption-gate provisions by October 2016. Federated said it was planning product restructuring and development, but the eventual business impact was not yet clear. European money-market reforms and a proposed financial transaction tax were additional uncertainties.
- Revenue concentration: The Federated Kaufmann Fund generated 11% of Q1 revenue; a significant, prolonged decline in its assets could reduce revenue.
- Contingencies: CCM Rochester sought approximately $37 million plus attorneys’ fees in a lawsuit related to an acquisition earn-out. Federated said it would vigorously defend the case, assessed a material loss as remote, and recorded no estimable loss. Acquisition-related contingent liabilities included $1.2 million for the SunTrust transaction and $0.7 million for other arrangements.
- Management said it expected sufficient liquidity for present and reasonably foreseeable needs. The board declared a $0.25-per-share dividend on April 23, payable May 15, 2015. The interest-rate swap expired April 1, 2015.
Important facts for investors to verify
- Whether money-market asset flows and yields improve, and how actual fee waivers compare with management’s Q2 estimate.
- Customer and asset responses to U.S. money-market reform, including product conversions, approvals and implementation costs.
- Trends in equity and fixed-income assets, fee mix, and concentration in the Kaufmann Fund.
- Operating cash generation, planned dividends and repurchases, debt amortization, and continued covenant compliance.
- Developments in the CCM Rochester litigation and the amount and timing of contingent acquisition or employee-related payments.