Federated Investors, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is under the name Federated Investors, Inc. (the company identified in the request as Federated Hermes). Federated is an investment manager, with $360.4 billion in managed assets at quarter-end.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $272.8 million | $286.7 million | $546.3 million | $558.8 million |
| Operating income | $84.2 million | $87.7 million | $162.0 million | $162.2 million |
| Net income attributable to Federated | $53.5 million | $52.7 million | $103.1 million | $98.2 million |
| Diluted EPS | $0.53 | $0.51 | $1.01 | $0.94 |
- Operating margin was approximately 30.9% in Q2 versus 30.6% a year earlier, and 29.7% for the first half versus 29.0%. Net margin attributable to Federated was approximately 19.6% and 18.9% for Q2 2017 and Q2 2016, respectively, and 18.9% and 17.6% for the respective six-month periods.
- First-half operating cash flow was $98.9 million, up from $89.2 million. Investing activities provided $8.1 million; financing activities used $96.7 million. Cash ended the period at $115.2 million, up from $104.8 million at year-end 2016.
- At June 30, total assets were $1.14 billion, total liabilities $478.5 million, and liquid assets net of noncontrolling interests $296.7 million, compared with $310.3 million at December 31, 2016.
- Debt was $178.5 million, all long-term, versus $191.3 million at year-end 2016. A new $375 million revolving facility matures June 5, 2022; $196.5 million was available. The company reported compliance with covenants.
- Cash dividends paid were $0.50 per share for the first half. A further $0.25 per-share dividend was declared July 27, payable August 15, 2017.
Changes and business drivers
- Q2 revenue fell $13.9 million year over year; first-half revenue fell $12.6 million. Lower average money-market assets and a change in a customer relationship were the principal drags, partly offset by higher equity assets and lower voluntary yield-related fee waivers.
- First-half money-market revenue share declined to 41% from 47%; equity revenue share rose to 42% from 37%. Average money-market assets declined 5% for both Q2 and the first half, while average equity assets rose 11% in Q2 and 16% for the first half.
- Period-end managed assets were down 2% year over year to $360.4 billion: money-market assets fell 5%, while equity assets rose 6% and fixed-income assets rose 4%. Fund assets declined 14%, partly offset by a 48% rise in separate-account assets.
- Operating expenses declined $10.5 million in Q2 and $12.3 million in the first half, chiefly from lower distribution costs and compensation. Higher securities gains helped lift net income despite lower revenue and operating income.
- The effective tax rate rose to 37.1% in Q2 and 37.0% for the first half, from 35.7% in both comparable 2016 periods.
Outlook, risks and unusual items
- The filing gives no formal earnings or revenue guidance. Management said it expects sufficient liquidity for present and reasonably foreseeable needs, considering liquid assets, operating cash flow and borrowing capacity.
- Management expects the customer-relationship change to reduce pre-tax income by about $2 million per quarter in future quarters compared with Q4 2016, including the related fee-waiver impact.
- Regulation remains a significant uncertainty, including U.S. money-market rules, the Department of Labor fiduciary rule, proposed SEC requirements, and European money-market reforms. The company said compliance, technology and product-related efforts may increase expenses and affect assets, revenues and operating income. The ultimate impact and timing of several rules remained uncertain.
- Revenue concentration warrants attention: one intermediary customer generated approximately 16% of first-half 2017 revenue; the Federated Strategic Value Dividend strategy generated approximately 18%. The filing warns that significant adverse changes in either could harm revenue.
- Voluntary money-market yield-related fee waivers had a first-half pre-tax impact of $0.8 million, down from $14.4 million a year earlier as fund yields improved. Q2 impact was reported as zero, versus $5.0 million in Q2 2016.
- Net securities gains were $2.2 million in Q2 and $4.8 million for the first half, compared with a Q2 2016 loss of $0.6 million. The comparison reflects 2016 impairment of two available-for-sale securities and 2017 gains on redemptions.
- Federated repurchased 1.1 million shares for $28.3 million in the first half; 2.8 million shares remained authorized for repurchase. It paid $50.9 million in dividends during the period.
- Management reported no material loss reasonably possible from the disclosed ordinary-course legal claims or indemnifications. There were no material changes to the prior annual report’s risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether money-market asset levels, interest rates and fee waivers continue to improve, and how much that affects revenue and margins.
- Developments in the customer relationship associated with the expected quarterly pre-tax reduction, and the durability of the company’s major strategy and intermediary revenue concentrations.
- Net flows and fee-generating mix across funds and separate accounts, particularly continued fund outflows and growth in separate accounts.
- Implementation, cost and business effects of U.S. and European regulatory changes, including any subsequent changes to timing or requirements.
- Debt, liquidity, capital returns and compliance with credit-facility covenants as the company funds dividends, repurchases, acquisitions and regulatory investment.