Federated Investors, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. The filing registrant is Federated Investors, Inc. (the company name in the request reflects a later name).
Business context
Federated managed $363.6 billion at quarter-end, up 2% year over year; average managed assets were $370.1 billion, up 4%. Money market assets accounted for 77% of average managed assets but 46% of revenue. Fixed-income and equity assets contributed 21% and 32% of revenue, respectively.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $230.3 million | $238.9 million; down 4% |
| Operating income | $70.3 million | $56.5 million; up 24% |
| Operating margin | 30.5% | 23.7% |
| Net income attributable to Federated | $42.3 million | $33.2 million; up 27% |
| Basic and diluted EPS | $0.41 | $0.32 |
| Cash dividends per share | $0.24 | $0.24 |
| Operating cash flow | $30.3 million | $46.5 million |
Cash and cash equivalents were $51.5 million at March 31, versus $49.3 million at year-end 2011. Liquid assets (cash, investments and receivables) were $351.1 million, up $7.3 million from year-end. Recourse debt totaled $350.6 million, including $42.5 million classified as short-term; the $200 million revolving facility was fully available. The company reported compliance with debt covenants, with leverage of 1.14x against a 2.5x maximum and interest coverage of 21.22x against a 4.0x minimum.
Changes, outlook and risks
- Revenue fell $8.6 million, primarily as higher money-market fee waivers reduced revenue by $17.0 million year over year. Average money-market and fixed-income assets partly offset the decline. Revenue yield on average managed assets decreased to 0.25% from 0.27%.
- Operating expenses declined $22.5 million, including $15.9 million lower professional fees, mainly reflecting nonrecurring legal-proceeding expenses in Q1 2011; distribution expense fell $3.0 million. These reductions more than offset lower revenue, increasing operating income.
- Money-market fee waivers reduced revenue by $80.4 million and operating income by $22.9 million in Q1 2012; after noncontrolling interests, the net pretax impact was $22.3 million. Management expected waivers to continue at least until late 2014 and estimated a roughly $20 million net pretax impact in Q2 2012, assuming asset levels remained constant. Estimates are subject to market, asset, rate and other changes.
- Management said existing liquid assets, operating cash flow and borrowing capacity should be sufficient for present and reasonably foreseeable cash needs. The company did not project drawing on the revolver for the remainder of 2012, but said total borrowings could reach $540 million if it chose to borrow.
- Material risks include potential money-market regulation (including floating NAV, capital requirements or redemption restrictions), prolonged low rates and fee waivers, market-driven outflows or asset-value declines, and concentration: one intermediary generated about 11% of revenue; the Prime Obligations and Kaufmann funds generated about 11% and 10%, respectively. The company also disclosed a $10 million liability for insurance proceeds subject to an unresolved dispute with insurers, acquisition-related contingent payments, and ordinary-course legal claims for which management did not consider a material loss reasonably possible.
- The board declared a $0.24-per-share dividend on April 26, 2012, payable May 15, 2012. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track money-market yields, fee-waiver levels and any regulatory proposals, and compare realized impacts with management’s Q2 estimate and duration outlook.
- Review AUM flows and mix—especially money-market, fixed-income and equity assets—and performance of the two revenue-concentrated funds and the major intermediary relationship.
- Reconcile operating cash flow and cash balances with debt amortization, dividends, contingent acquisition payments and available revolver capacity.
- Monitor the insurer dispute over the $10 million advance, acquisition-related contingent liabilities and any changes in legal contingencies.