Federated Investors, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The filing identifies the registrant as Federated Investors, Inc.
Business and key financials
Federated is an investment manager with $366.7 billion of managed assets at quarter-end, up 1% year over year. Revenue is primarily tied to assets under management and fee rates; money market funds remain a significant business.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $211.9M | $238.5M | $663.6M | $700.9M |
| Operating income | $57.8M | $90.0M | $192.0M | $229.4M |
| Net income attributable to Federated | $37.7M | $55.8M | $121.1M | $138.5M |
| Diluted EPS | $0.36 | $0.54 | $1.16 | $1.33 |
| Operating margin | 27.3% | 37.8% | 28.9% | 32.7% |
For the nine months, cash from operations was $122.2M (versus $239.9M); investing activities used $11.4M and financing activities used $100.1M. Cash and cash equivalents were $78.3M at September 30. Total debt was $286.9M, down from $318.8M at year-end 2012; $200M of revolving capacity was undrawn. Liquid assets, net of noncontrolling interests, were $284.9M. The company paid $0.73 per share in dividends during the first nine months.
Changes versus prior period
- Q3 revenue fell 11% and nine-month revenue fell 5%; net income fell 32% and 13%, respectively.
- Money market fee waivers rose as low short-term rates reduced fund yields. The pre-tax impact was $30.3M in Q3 and $75.8M for nine months, versus $16.3M and $55.7M in the comparable periods.
- Period-end equity assets increased 14% to $40.3B, while fixed-income assets declined 3% to $50.0B. Money market assets were essentially flat at $270.3B.
- Distribution expense declined, partly offsetting lost waiver-related revenue. Professional service fees were higher year over year, notably because Q3 2012 included $17.3M of insurance proceeds recognized as a reduction of that expense.
Outlook, risks and unusual items
- Management expected Q4 2013 fee waivers to have a negative pre-tax impact approximately equal to Q3’s $30.3M, assuming assets and mix remained constant. It could not predict when short-term rates would rise; higher yields would reduce waiver costs.
- Management said the effective tax rate could approach 38% after elimination of a capital-loss deferred-tax valuation allowance.
- The SEC had proposed money-market reforms, including floating NAV for institutional prime funds or liquidity fees and redemption gates. Federated warned that floating NAV and related valuation changes could materially harm its money-market business. European money-market reforms and a proposed financial transactions tax were additional uncertainties.
- A $3.1M impairment charge reduced the carrying value of a 12% investment in a private investment manager to $0.6M, reflecting underperformance and reduced growth expectations.
- Acquisition-related contingent payments and employment incentives remain potential cash obligations. The SunTrust acquisition’s estimated remaining payments were about $10M over three years, with no contractual maximum; certain employment arrangements had up to $44M of possible bonuses over their remaining terms.
- Management believed available liquidity, operating cash flow and borrowing capacity would meet foreseeable needs. It reported compliance with debt covenants; leverage was 0.9x against a maximum of 2.5x.
- Management reported no material change in market-risk exposure, no material change in internal financial controls, and no material loss from ordinary-course legal claims considered reasonably possible.
Important facts for investors to verify
- Whether money-market fee waivers continue at or above the disclosed level, and how changing rates, asset mix and intermediary cost-sharing affect net earnings.
- Final U.S. and European money-market regulatory outcomes and their effects on assets, products and revenues.
- Asset flows and performance in equity and fixed-income strategies, and concentration in the Federated Kaufmann Fund and Federated Prime Obligations Fund, which each generated a material share of revenue.
- Cash-flow conversion, debt repayment, contingent acquisition payments and the carrying value of the impaired private investment.
- The filing declared a subsequent $0.25-per-share dividend, payable November 15, 2013 to shareholders of record November 8, 2013.