Federated Investors, Inc. (identified in the filing; metadata names Federated Hermes)
Business context and reporting period: Unaudited Form 10-Q for the quarter ended March 31, 2013, compared with the three months ended March 31, 2012 unless otherwise noted. The filing describes an investment manager with $377.3 billion in managed assets at quarter-end, up 4% year over year.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $228.0 million | $230.3 million | Down 1% |
| Operating income | $68.2 million | $70.3 million | Down 3% |
| Operating margin | 29.9% | 30.5% | Down 0.6 percentage points |
| Net income attributable to Federated | $43.0 million | $42.3 million | Up 2% |
| Basic and diluted EPS | $0.41 | $0.41 | Unchanged |
| Cash dividends per share | $0.24 | $0.24 | Unchanged |
| Operating cash flow | $19.8 million | $30.3 million | Down $10.5 million |
Revenue and margins: Revenue from managed assets fell $2.6 million, principally reflecting $6.9 million of additional money-market fee waivers and a $2.8 million leap-year comparison effect; higher average fixed-income and equity assets partly offset the decline. Total operating expenses were essentially flat at $159.8 million. The income tax rate declined to 35.5% from 36.5%.
Assets and liquidity: Period-end managed assets were $377.3 billion; average managed assets were $381.2 billion, up 3%. Period-end fixed-income and equity assets rose 14% and 11%, respectively; money-market assets rose 2%. Cash and cash equivalents were $56.4 million at March 31, 2013, down from $67.6 million at year-end. Management reported liquid assets, net of noncontrolling interests, of $248.4 million, versus $271.9 million at year-end. Investing activities provided $4.5 million; financing activities used $35.4 million.
Debt: Term-loan debt totaled $308.1 million, including $42.5 million classified as short-term; the filing reports a fixed rate of 3.646% through an interest-rate swap. The $200 million revolving facility was entirely undrawn. The company reported covenant compliance, an interest-coverage ratio of 28:1 against a 4:1 minimum, and leverage of 0.88:1 against a 2.5:1 maximum.
Material changes and unusual items
- Money-market fee waivers had a $21.7 million negative pretax impact in Q1 2013, compared with $22.3 million in Q1 2012. Waivers reduced reported revenue by $87.3 million, partly offset by $64.8 million of lower distribution expense and $0.8 million of lower income attributable to noncontrolling interests.
- Operating cash flow declined largely because of higher tax payments, including a $5.0 million federal extension payment not made in Q1 2012, and vendor-payment timing.
- Consolidation of a sponsored investment company increased investments in consolidated investment companies by $65.4 million and redeemable noncontrolling interests by $71.7 million from year-end. The fund’s assets are restricted to its own use.
- Q1 included $2.9 million of net gains on securities, compared with $2.1 million a year earlier. Intangible-asset-related expense was $0.8 million, versus $0.02 million, largely reflecting acquisition-related items.
Outlook, risks, and contingencies
- Assuming money-market asset levels and mix remain constant, management said Q2 2013 fee waivers could have a negative pretax impact similar to Q1’s $21.7 million. Waivers may continue for the foreseeable future; their level depends on rates, asset mix, expenses, regulatory developments, and other factors.
- Management said it expected sufficient liquidity for present and reasonably foreseeable needs and did not project drawing on the revolver during the next 12 months, while retaining the option to borrow.
- Potential U.S. and European money-market reforms—including floating NAV, capital buffers, redemption restrictions, or related measures—could harm the attractiveness of money-market funds and materially affect the business. A proposed European financial-transactions tax could also affect products.
- Revenue is exposed to asset values, flows, product mix, and fee waivers. Money-market assets represented 43% of Q1 revenue; two sponsored funds each contributed approximately 10% of revenue.
- Estimated remaining SunTrust acquisition contingent payments were about $11 million over three years, subject to asset levels and not capped. Maximum bonuses under specified employment arrangements were approximately $43 million over their remaining terms; none was payable during the rest of 2013.
- The company reported no material loss reasonably possible from ordinary-course legal claims and no material change in the risk factors from its 2012 Form 10-K. No goodwill impairment indicators were identified at quarter-end.
Investor verification priorities
- Confirm the registrant’s identity and applicable reporting history: this filing is for Federated Investors, Inc., notwithstanding the request metadata’s Federated Hermes name.
- Track money-market fee waivers, short-term interest rates, asset mix, and any SEC, FSOC, or European regulatory proposals.
- Review asset flows and revenue concentration in the Prime Obligations Fund and Kaufmann Fund, alongside the growth in fixed-income and equity assets.
- Monitor cash generation, cash balances, debt repayments, contingent acquisition payments, and the company’s liquidity and covenant headroom.
- Verify the timing and payment of the subsequently declared $0.24-per-share dividend and assess whether the stated Q2 waiver outlook materialized.