Federated Investors, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are with December 31, 2010. The filing identifies the registrant as Federated Investors, Inc. Unless stated otherwise, dollar amounts below are in millions.
Business context and key financial metrics
Federated manages investment products and related services. Period-end managed assets were $354.9 billion, up 1% from March 31, 2010; average managed assets were $356.3 billion, down 3%. Money market assets generated approximately 49% of quarterly revenue.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $238.9 | $233.0 | +2.5% |
| Operating income | $56.5 | $71.8 | -21.3% |
| Operating margin | 23.7% | 30.8% | -7.1 percentage points |
| Net income attributable to Federated | $33.2 | $42.0 | -20.9% |
| Diluted EPS | $0.32 | $0.38 | -$0.06 |
| Net cash from operating activities | $46.5 | $33.4 | +$13.1 |
Net margin was approximately 13.9%, compared with 18.0% a year earlier. Cash and cash equivalents were $176.8 at March 31, down from $198.8 at year-end; current assets were $353.1 and current liabilities $166.5. Total liabilities were $603.1. Recourse debt was $393.1 and nonrecourse debt $2.4. The $200 million revolving credit facility was undrawn and available; it was due to expire October 31, 2011. Federated reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue rose $5.9, mainly reflecting lower money-market fee waivers and higher average fixed-income and equity assets; average money-market assets fell 6%.
- Operating expenses increased $21.2, or 13%. Professional service fees rose $16.1, principally due to legal costs; distribution expense increased $6.2.
- Quarterly operating income and net income declined despite revenue growth. Higher legal costs and distribution expense more than offset revenue gains.
- Operating cash flow increased to $46.5, including $10.0 of insurance proceeds related to legal claims. Investing activities used $46.4, including $44.7 paid for acquisition-related contingent consideration. Financing activities used $22.1, including $25.0 in dividends and $10.6 in term-loan repayments.
- The Q1 2010 dividend of $1.50 per share included a $1.26 special dividend; Q1 2011 dividends were $0.24 per share.
Outlook, risks, contingencies and unusual items
- Money-market fee waivers: Q1 waivers were $63.4, partly offset by $49.5 of lower distribution expense and $0.8 attributable to noncontrolling interests, for a $13.1 reduction in pretax income. Management expected elevated waivers to continue at least through Q2 2011; assuming market conditions and asset levels remained constant, it estimated a Q2 pretax impact of approximately $17.5. Actual amounts could differ materially.
- Legal matter: Q1 operating income included $18.2 of accrued legal and related costs associated with litigation over fees charged to the Federated Kaufmann Fund. The company reached a final settlement on April 28, 2011 and was pursuing insurance reimbursement. Management said differences from its cost estimate were not expected to be material.
- Acquisition obligations: SunTrust contingent payments were estimated at up to $26 over five years, with no contractual maximum; the recorded fair-value liability was $18.4. A separate $44.7 contingent payment for the Prudent Bear acquisition was paid in Q1. Other acquisition and employment-related contingent payments also remain possible.
- Concentration and market risks: Money-market assets accounted for approximately 49% of revenue. Two sponsored funds accounted for approximately 12% and 11% of revenue, respectively; one intermediary customer accounted for approximately 11%. Risks include persistently low or rising interest rates, asset outflows, investment performance, regulation (including potential money-market reforms), litigation and liquidity or credit stress.
- Management stated it expected sufficient liquidity for present and reasonably foreseeable needs. It was considering replacement borrowing arrangements for the revolver expiring in October 2011 and was not then projecting a draw for the rest of 2011.
- The filing reported no material changes in market-risk disclosures or risk factors from the 2010 annual report. Disclosure controls were assessed as effective as of March 31, 2011.
Important facts for investors to verify
- Whether money-market yields and fee-waiver levels track management’s Q2 estimate, and how those waivers affect net income after distribution-expense offsets.
- Final costs and insurance recovery for the Kaufmann Fund litigation settlement, including resolution of the $10.0 insurance advance recorded as a liability.
- Net flows, average asset levels and mix, particularly money-market assets and the higher-fee fixed-income and equity businesses.
- Terms and availability of replacement financing for the expiring $200 million revolver, and continued covenant compliance.
- Actual SunTrust contingent consideration and other acquisition-related payments compared with recorded liabilities and estimates.