Federated Investors, Inc. — Q3 2017 Form 10-Q
Period: Quarter and nine months ended September 30, 2017. The filing identifies the registrant as Federated Investors, Inc. (the company associated with the requested Federated Hermes name). Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context and reporting period
Federated is an investment manager whose revenue largely depends on assets under management (AUM), asset and product mix, fee rates, and fee waivers. Managed assets were $363.7 billion at September 30, 2017, essentially unchanged from a year earlier. Money market assets were 67% of period-end AUM; equity and fixed-income assets were 18% and 15%, respectively.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $278.3 | $294.6 | $824.6 | $853.5 |
| Operating income | $88.7 | $88.6 | $250.7 | $250.9 |
| Operating margin | 31.9% | 30.1% | 30.4% | 29.4% |
| Net income attributable to Federated | $56.4 | $54.9 | $159.5 | $153.1 |
| Diluted EPS | $0.56 | $0.54 | $1.57 | $1.48 |
| Dividends per share | $0.25 | $0.25 | $0.75 | $0.75 |
For the nine months, operating cash flow was $190.7 million versus $175.5 million; investing activities provided $8.0 million, while financing activities used $142.1 million. Cash and equivalents were $161.4 million at quarter-end, up from $104.8 million at December 31, 2016. Management reported liquid assets, net of noncontrolling interests, of $344.2 million.
Debt was $175.0 million, all long-term, with no short-term debt at quarter-end. The amended revolving credit facility matures June 2022; $200 million was available to borrow. Federated reported compliance with its covenants, a 96-to-1 interest coverage ratio against a 4-to-1 minimum, and a 0.5-to-1 leverage ratio against a 3-to-1 maximum.
Material changes versus comparable periods
- Revenue declined 5.5% in Q3 and 3.4% for the first nine months. Management attributed the nine-month decrease principally to lower average money market assets and a change in a customer relationship; reduced voluntary yield-related fee waivers and stronger equity and fixed-income assets partly offset the decline.
- Net income attributable to Federated increased 2.8% in Q3 and 4.2% year to date. Operating income was nearly flat in both comparisons; lower expenses helped offset weaker revenue.
- Average managed assets fell 1% for both the quarter and nine-month period. For the nine months, average money market assets decreased 4%, while average equity assets rose 12% and fixed-income assets rose 2%.
- Period-end money market assets decreased 2% year over year, while equity and fixed-income assets increased 5% and 2%. Money market fund assets fell 15%, partly offset by growth in money market separate accounts.
- Voluntary yield-related waivers had a net pretax impact of $0.8 million for the first nine months, compared with $18.6 million in the prior-year period, primarily reflecting higher money market yields.
- The company refinanced its prior term loan and revolving facility in June 2017 with a $375 million revolving facility. It also repurchased $42.3 million of shares in the first nine months and paid $76.3 million in dividends.
Outlook, management commentary, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management said it expected sufficient liquidity for present and reasonably foreseeable cash needs, based on liquid assets, operating cash flow and borrowing capacity. The board declared a subsequent $0.25-per-share dividend, payable November 15, 2017.
- Regulation: Money-market reforms and the Department of Labor fiduciary rule could affect product offerings, asset mix, intermediary relationships, revenue and compliance costs. Timing and effects remained uncertain, including proposed delays or changes to requirements.
- Interest rates and waivers: Higher short-term rates had nearly eliminated the pretax impact of voluntary yield-related waivers; future waiver levels remain sensitive to yields, expenses and money-market asset mix.
- Concentration: One investment strategy generated about 18% of revenue in both the quarter and nine-month period. The Bank of New York Mellon Corporation, including Pershing, accounted for about 16% of revenue in both periods.
- Market and flow exposure: Most managed assets can be redeemed or withdrawn without advance notice. Market movements, investor preferences, net flows and asset mix can therefore affect fees and earnings.
- Other risks: The filing discusses potential effects of Brexit, European money-market regulation and possible financial transaction taxes. Management said Brexit had not significantly affected the business as of quarter-end. It reported no material change in market-risk exposures.
- Contingencies: Federated disclosed approximately $6 million of minimum future compensation payments and up to another $8 million in performance-related payments, subject to asset levels and performance goals. Management did not believe a material loss from ordinary-course legal claims or indemnifications was reasonably possible.
Most important facts for investors to verify
- Whether money-market AUM and fee income stabilize, and whether higher yields continue to reduce waiver costs.
- The persistence and financial effect of the customer-relationship decline, alongside the disclosed 16% revenue concentration in BNY Mellon/Pershing.
- Whether equity and fixed-income growth and market appreciation can offset money-market outflows and net redemptions.
- Actual implementation, cost and commercial effects of U.S. and European regulatory changes, particularly money-market and fiduciary rules.
- Liquidity, debt and capital returns: the $175 million borrowing, $200 million stated facility availability, covenant headroom, dividends and remaining share-repurchase authorization.