Federated Investors, Inc. Reports Third Quarter 2010 Earnings

- Equity fund flows turn positive for Q3 2010

- Solid fixed-income flows boost bond assets to more than $40 billion

- Board declares $0.24 per share quarterly dividend

Oct 28, 2010, 16:01 ET from Federated Investors, Inc.

PITTSBURGH, Oct. 28 /PRNewswire-FirstCall/ -- Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.42 for the quarter ended Sept. 30, 2010 compared to $0.56 for the same quarter last year.  Net income was $43.1 million for Q3 2010 compared to $57.0 million for Q3 2009.    

Federated reported YTD 2010 EPS of $1.27 compared to $1.42 for the same period in 2009.  For the nine months ended Sept. 30, 2010, net income was $132.7 million compared to $145.4 million for the same period in 2009.

Federated's total managed assets were $341.3 billion at Sept. 30, 2010, down $51.0 billion or 13 percent from $392.3 billion at Sept. 30, 2009 and up $4.5 billion or 1 percent from $336.8 billion reported at June 30, 2010.  Average managed assets for Q3 2010 were $338.6 billion, down $69.5 billion or 17 percent from $408.1 billion reported for Q3 2009 and up $1.5 billion from $337.1 billion reported for Q2 2010.   As the equity and fixed-income markets contracted in 2007 and 2008, Federated's money market assets increased by $182 billion and as markets recovered in 2009 and 2010, Federated's assets reflected industry trends as $95 billion flowed out of Federated's money market products.  Since the end of 2006, Federated's money market managed assets have increased $87.3 billion to $260.9 billion at Sept. 30, 2010.

"As investor interest in equities began to increase, Federated saw strong flows into our Strategic Value Dividend Fund and Prudent Bear Fund, both of which are well suited to clients who want a long-term hedge against market uncertainty," said J. Christopher Donahue, president and chief executive officer.  "Federated's diversified product mix also benefited investors seeking portfolio balance, as our flagship fixed-income offering, Total Return Bond Fund, continued to see strong flows -- and, in fact, has shown positive net flows for the last 19 quarters."

Federated's board of directors declared a quarterly dividend of $0.24 per share.  The dividend is payable on Nov. 15, 2010 to shareholders of record as of Nov. 8, 2010.  During Q3 2010, Federated purchased 147,849 shares of Federated class B common stock for $2.7 million.

Federated's fixed-income assets were $40.2 billion at Sept. 30, 2010, up $8.2 billion or 26 percent from $32.0 billion at Sept. 30, 2009 and up $2.2 billion or 6 percent from $38.0 billion at June 30, 2010.  Federated experienced continued positive flows into its bond funds during the quarter, bringing total net YTD bond fund inflows to nearly $2.4 billion.  Net sales were driven by strong flows into Federated Total Return Bond Fund, a multi-sector product, flows into several short-duration funds and Federated Institutional High Yield Bond Fund.  

Federated's equity assets were $29.1 billion at Sept. 30, 2010,  the same as equity assets on Sept. 30, 2009 and up $2.3 billion or 9 percent from $26.8 billion at June 30, 2010.   Net sales were led by Federated Strategic Value Dividend Fund, Federated Prudent Bear Fund, Federated Max-Cap Index Fund, Federated Clover Small Value Fund and Federated Kaufmann Large Cap Fund.

Money market assets in both funds and separate accounts were $260.9 billion at Sept. 30, 2010, down $57.2 billion or 18 percent from $318.1 billion at Sept. 30, 2009 and up $0.4 billion from $260.5 billion at June 30, 2010.  Money market mutual fund assets were $233.6 billion at Sept. 30, 2010, down $54.0 billion or 19 percent from $287.6 billion at Sept. 30, 2009 and up $2.4 billion or 1 percent from $231.2 billion at June 30, 2010.  Assets at Sept. 30, 2010  included $11.0 billion transitioned from SunTrust Banks, Inc.'s products late in the quarter. Federated expects an additional $3.5 billion to transition from SunTrust products into Federated money market funds before year-end.

Financial Summary

Q3 2010 vs. Q3 2009

For Q3 2010, revenue decreased by $51.4 million or 18 percent from the same quarter last year.  The decrease in revenue primarily reflects a decrease of $42.9 million resulting from lower average money market managed assets.  This decrease was partially offset by the impact of increased average fixed-income and equity managed assets.  As detailed at the end of this financial summary, voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields increased during Q3 2010 compared to Q3 2009.    

In Q3 2010, Federated derived 51 percent of its revenue from money market assets, 48 percent from fluctuating assets (30 percent from equity assets and 18 percent from fixed-income assets) and 1 percent from other products and services.

Operating expenses for Q3 2010 were $167.1 million compared to $198.9 million for Q3 2009.  This decrease was primarily a result of lower distribution expenses due to the aforementioned fee-waiver-related reductions and lower average money market managed assets.

Q3 2010 vs. Q2 2010

Compared to the prior quarter, revenue increased by $10.7 million or 5 percent. As detailed at the end of this financial summary, voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields decreased during Q3 2010 compared to Q2 2010.  In addition, revenue increased due to one additional day in Q3 2010 compared to Q2 2010 and an increase in average fixed-income and money market fund managed assets.

Operating expenses for Q3 2010 increased by $19.5 million or 13 percent compared to Q2 2010, primarily due to the Q2 2010 recognition of insurance proceeds that reduced operating expenses by $25.0 million, partially offset by a noncash impairment charge of $7.0 million during Q2 2010 related to intangible and fixed assets associated with a prior-year acquisition.  

YTD 2010 vs. YTD 2009

Revenue for the first nine months of 2010 decreased by $204.5 million or 22 percent compared to the same period last year.  The decrease in revenue primarily reflects a $149.8 million decrease resulting from lower average money market managed assets.  This decrease was partially offset by the impact of increased average fixed- income and equity managed assets. As detailed at the end of this financial summary, voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields increased for YTD 2010 compared to YTD 2009.  

For YTD 2010, Federated derived 50 percent of its revenue from money market assets, 49 percent from fluctuating assets (31 percent from equity assets and 18 percent from fixed-income assets) and 1 percent from other products and services.  

Operating expenses for YTD 2010 decreased by $192.4 million or 29 percent compared to the same period last year.  The decrease primarily reflects a decrease in distribution expenses largely related to the aforementioned fee waivers and lower average money market managed assets.  The decrease in operating expenses was also attributable to  the recognition of insurance proceeds in Q2 2010.  In addition, intangible asset impairment and amortization decreased $12.2 million due primarily to the decrease in the impairment charges recorded for certain intangible assets in the first nine months of 2010 as compared to the same period in 2009.  

Nonoperating expense increased $5.6 million for YTD 2010 compared to YTD 2009  primarily due to an increase in recourse debt expense associated with the company's term loan, which was amended and restated in Q2 2010 to $425 million.  

Federated's level of business activity and financial results are dependent upon many factors including market conditions, investment performance and investor behavior.  These factors and others including asset levels, product sales and redemptions, market appreciation or depreciation, revenues, fee waivers and expenses can impact Federated's activity levels and financial results significantly.  Risk factors and uncertainties that can influence Federated's financial results are discussed in the company's annual and quarterly reports as filed with the Securities and Exchange Commission.

Fee waivers to produce positive or zero net yields could vary significantly based on market conditions.  The amount of these waivers will be determined by a variety of factors including, but not limited to, available yields on instruments held by the money market funds, changes in assets within money market funds, actions by the Federal Reserve and the U.S. Department of the Treasury, changes in the mix of money market customer assets, changes in expenses of the money market funds and Federated's willingness to continue these waivers.

Money Market Fund Yield Waiver Impact

(in millions)

Quarter Ended

Nine Months Ended

(Decrease)/Increase

Sept. 30, 2010

Sept. 30, 2009

Change Q3 2009 to Q3 2010

Quarter ended June 30, 2010

Change Q2 2010 to Q3 2010

Sept. 30, 2010

Sept. 30, 2009

Change YTD 2009 to YTD 2010

Revenue

$  (53.8)

$    (36.5)

$  (17.3)

$    (58.3)

$    4.5

$  (181.6)

$  (63.1)

$    (118.5)

Distribution expense

(42.8)

(27.9)

(14.9)

(45.3)

2.5

(139.8)

(43.8)

(96.0)

Operating Income

$  (11.0)

$    (8.6)

$    (2.4)

$    (13.0)

$    2.0

$    (41.8)

$  (19.3)

$    (22.5)

Federated will host an earnings conference call at 9 a.m. Eastern on Friday, Oct. 29, 2010.  Investors are invited to listen to Federated's earnings teleconference by calling 877-407-0782 (domestic) or 201-689-8567 (international) prior to the 9 a.m. start time.  The call may also be accessed in real time on the Internet via the About Us section of FederatedInvestors.com.  A replay will be available after 12:30 p.m. and until Nov. 5, 2010 by calling 877-660-6853 (domestic) or 201-612-7415 (international) and entering codes 286 and 358170.

Federated Investors, Inc. is one of the largest investment managers in the United States, managing $341.3 billion in assets as of Sept. 30, 2010.  With 134 funds and a variety of separately managed account options, Federated provides comprehensive investment management to approximately 5,200 institutions and intermediaries including corporations, government entities, insurance companies, foundations and endowments, banks and broker/dealers.  Federated ranks in the top 2 percent of money market fund managers in the industry, the top 7 percent of fixed-income fund managers and the top 7 percent of equity fund managers(1).  For more information, visit FederatedInvestors.com.

(1) Strategic Insight, Aug. 31, 2010.  Based on assets under management in open-end funds.

Federated Securities Corp. is distributor of the Federated funds.  

Separately managed accounts are made available through Federated Global Investment Management Corp., Federated Investment Counseling and Federated MDTA LLC, each a registered investment advisor.

Certain statements in this press release, such as those related to the level of fee waivers incurred by the company, product demand and asset flows and the timing of acquisition closings, constitute or may constitute forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the company, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  Other risks and uncertainties include the ability of the company to predict the level of fee waivers in future quarters, which could vary significantly depending on a variety of factors identified above, and include the ability of the company to sustain product demand and asset flows, which could vary significantly depending on market conditions, investment performance and investor behavior.  Other risks and uncertainties also include the possibility that acquisitions do not close within anticipated timeframes, and also include the risk factors discussed in the company's annual and quarterly reports as filed with the Securities and Exchange Commission.  As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither the company nor any other person assumes responsibility for the accuracy and completeness of such statements in the future.

Unaudited Condensed Consolidated Statements of Income

(in thousands, except per share data)

Quarter Ended Sept. 30,

% Change Q3 2009 to Q3 2010

Quarter Ended June 30, 2010

% Change Q2 2010 to Q3 2010

2010

2009

Revenue

   Investment advisory fees, net

$  163,783

$  190,012

(14)%

$  155,954

5%

   Administrative service fees, net

53,085

65,267

(19)

51,899

2

   Other service fees, net

24,645

36,957

(33)

23,083

7

   Other, net

660

1,367

(52)

548

20

       Total Revenue

242,173

293,603

(18)

231,484

5

Operating Expenses

   Compensation and related

61,387

62,232

(1)

60,686

1

   General and administrative

       Distribution

68,800

95,911

(28)

62,779

10

       Professional service fees

9,401

10,089

(7)

(9,884)

195

       Office and occupancy  

5,841

6,001

(3)

4,853

20

       Systems and communications

5,362

6,058

(11)

5,877

(9)

       Advertising and promotional

2,724

2,529

8

2,600

5

       Travel and related

2,692

2,316

16

2,884

(7)

       Other

4,494

4,677

(4)

5,403

(17)

       Total general and administrative

99,314

127,581

(22)

74,512

33

   Intangible asset impairment and amortization

3,397

3,953

(14)

9,311

(64)

   Amortization of deferred sales commissions

2,987

5,104

(41)

3,114

(4)

         Total Operating Expenses        

167,085

198,870

(16)

147,623

13

   Operating Income

75,088

94,733

(21)

83,861

(10)

Nonoperating Income (Expenses)

   Investment income (loss), net

4,475

1,685

166

(1,608)

378

   Debt expense––recourse

(4,958)

(1,112)

346

(4,619)

7

   Other, net

(65)

(415)

(84)

(66)

(2)

       Total Nonoperating (Expenses) Income, net

(548)

158

(447)

(6,293)

(91)

   Income before income taxes

74,540

94,891

(21)

77,568

(4)

   Income tax provision

26,477

34,604

(23)

29,293

(10)

   Net income including noncontrolling interests in subsidiaries

48,063

60,287

(20)

48,275

(0)

       Less: Net income attributable to noncontrolling interests in subsidiaries

5,007

3,301

52

625

701

   Net Income

$  43,056

$  56,986

(24)%

$  47,650

(10)%

Amounts Attributable to Federated

   Earnings Per Share(1)

       Basic and Diluted

$  0.42

$  0.56

(25)%

$  0.46

(9)%

   Weighted-average shares outstanding

       Basic

99,916

99,958

99,943

       Diluted

99,954

100,086

99,996

   Dividends declared per share

$  0.24

$  0.24

$  0.24

1) Unvested share-based payment awards that receive non-forfeitable dividend rights are considered participating securities and are required to be included in the computation of earnings per share under the "two-class method."   Total income available to participating restricted shareholders was $1.3 million, $1.4 million and $1.5 million for the quarterly periods ended Sept. 30, 2010, Sept. 30, 2009 and June 30, 2010, respectively.

Unaudited Condensed Consolidated Statements of Income

(in thousands, except per share data)

Nine Months Ended Sept. 30,

% Change

2010

2009

Revenue

   Investment advisory fees, net

$  474,230

$  574,238

(17)%

   Administrative service fees, net

161,233

199,726

(19)

   Other service fees, net

68,981

132,874

(48)

   Other, net

2,182

4,302

(49)

           Total Revenue

706,626

911,140

(22)

Operating Expenses

   Compensation and related

186,469

192,068

(3)

   General and administrative

       Distribution

190,068

333,301

(43)

       Professional service fees

9,596

29,873

(68)

       Office and occupancy

16,990

18,315

(7)

       Systems and communications

16,996

17,871

(5)

       Travel and related

8,005

7,631

5

       Advertising and promotional

7,480

8,238

(9)

       Other

14,467

17,396

(17)

       Total general and administrative

263,602

432,625

(39)

   Amortization of deferred sales commissions

9,274

14,936

(38)

   Intangible asset impairment and amortization

16,522

28,665

(42)

           Total Operating Expenses

475,867

668,294

(29)

   Operating Income

230,759

242,846

(5)

Nonoperating Income (Expenses)

   Investment income, net

2,893

2,493

16

   Debt expense––recourse

(10,196)

(3,370)

203

   Other, net

(310)

(1,161)

(73)

           Total Nonoperating Expenses, net

(7,613)

(2,038)

274

   Income before income taxes

223,146

240,808

(7)

   Income tax provision

82,613

86,970

(5)

   Net income including noncontrolling interests in subsidiaries

140,533

153,838

(9)

       Less: Net income attributable to the noncontrolling interests in subsidiaries

7,820

8,444

(7)

   Net Income

$  132,713

$  145,394

(9) %

Amounts Attributable to Federated

Earnings Per Share(1)

       Basic and Diluted

$  1.27

$  1.42

(11)%

   Weighted-average shares outstanding

       Basic

99,907

99,976

       Diluted

99,991

100,096

   Dividends declared per share

$  1.98

$  0.72

1) Unvested share-based payment awards that receive non-forfeitable dividend rights are considered participating securities and are required to be included in the computation of earnings per share under the "two-class method."   Total income available to participating restricted shareholders was $5.8 million and $3.5 million the nine months ended Sept. 30, 2010 and Sept. 30, 2009,  respectively.

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

Sept. 30,

Dec. 31,

2010

2009

Assets

   Cash and other investments

$   315,910

$    121,990

   Other current assets

41,372

62,797

   Deferred sales commissions, net

11,228

15,318

   Intangible assets, net and goodwill

701,254

662,996

   Other long-term assets

49,378

49,332

           Total Assets

$   1,119,142

$  912,433

Liabilities and Equity

   Current liabilities

$    194,252

$    196,998

   Long-term debt-recourse

371,875

105,000

   Long-term debt-nonrecourse

6,639

13,556

   Other long-term liabilities

73,013

54,151

   Equity excluding treasury stock

1,269,098

1,338,117

   Treasury stock

(795,735)

(795,389)

           Total Liabilities and Equity

$    1,119,142

$    912,433

Changes in Equity and Fixed-Income Fund Managed Assets

(in millions)

Quarter Ended

Nine Months Ended

Sept. 30, 2010

June 30, 2010

Sept. 30, 2009

Sept. 30, 2010

Sept. 30, 2009

Equity Funds

   Beginning assets

$     19,344

$     21,445

$   17,966

$  20,960

$  17,562

       Sales

1,639

1,409

1,503

4,532

4,005

       Redemptions

(1,582)

(1,851)

(1,377)

(5,104)

(4,119)

           Net sales (redemptions)

57

(442)

126

(572)

(114)

       Net exchanges

(31)

(13)

(12)

(54)

(79)

       Acquisition related

0

0

257

0

257

       Market gains (losses) and reinvestments(1)

1,955

(1,646)

2,013

991

2,724

   Ending assets

$  21,325

$    19,344

$  20,350

$  21,325

$  20,350

Fixed-Income Funds

   Beginning assets

$  30,651

$    30,007

$    24,100

$  28,427

$  19,321

       Sales

3,655

3,572

4,789

11,775

12,537

       Redemptions

(2,829)

(3,262)

(2,971)

(9,393)

(6,978)

           Net sales

826

310

1,818

2,382

5,559

   Net exchanges

20

8

53

51

101

   Market gains and reinvestments(1)

714

326

989

1,351

1,979

   Ending assets

$  32,211

$  30,651

$  26,960

$  32,211

$  26,960

1) Reflects the approximate changes in the market value of the securities held by the funds and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.

Changes in Equity and Fixed-Income Separate Account Assets and Liquidation Portfolios

(in millions)

Quarter Ended

Nine Months Ended

Sept. 30, 2010

June 30, 2010

Sept. 30, 2009

Sept. 30, 2010

Sept. 30, 2009

Equity Separate Accounts(1)

   Beginning assets

$     7,470

$     8,621

$    8,245

$    8,713

$    9,099

       Sales(2)

522

344

1,225

       Redemptions(2)

(975)

(692)

(2,389)

       Net redemptions(2)

(453)

(348)

(281)

(1,164)

(1,096)

       Net exchanges

9

12

20

31

70

       Acquisition related

0

0

(257)

0

(257)

       Market gains (losses) and reinvestments(3)

782

(815)

1,047

228

958

   Ending assets

$    7,808

$    7,470

$    8,774

$    7,808

$    8,774

Fixed-Income Separate Accounts(1)

   Beginning assets

$    7,361

$    5,520

$    4,583

$    5,360

$    4,165

       Sales(2)

530

2,164

3,289

       Redemptions(2)

(244)

(336)

(1,078)

           Net sales(2)

286

1,828

188

2,211

269

       Market gains and reinvestments(3)

316

13

308

392

645

   Ending assets

$    7,963

$    7,361

$    5,079

$    7,963

$    5,079

Liquidation Portfolios(4)

   Beginning assets

$   11,491

$     11,930

$     556

$    12,596

$    1,505

       Sales(2)

3

3

10

       Redemptions(2)

(423)

(442)

(1,535)

           Net  (redemptions) sales(2)

(420)

(439)

12,516

(1,525)

11,563

       Market gains and reinvestments(3)

0

0

1

0

5

   Ending assets

$  11,071

$    11,491

$  13,073

$    11,071

$    13,073

1) Includes separately managed accounts, institutional accounts and sub-advised funds (both variable annuity and other) and other managed products.  

2) For certain accounts, Sales, Redemptions or Net sales (redemptions) are calculated as the remaining difference between beginning and ending assets after the calculation of Market gains (losses) and reinvestments.  Sales and Redemptions data was not reported prior to 2010, therefore some historical data is not available.  

3) Reflects the approximate changes in the market value of the securities held in the portfolios, and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.  

4) Liquidation portfolios include portfolios of distressed fixed-income securities and liquidating collateralized debt obligation (CDO) products.  In the distressed security category, Federated has been retained by a third party to manage these assets through an orderly liquidation process that will generally occur over a multi-year period.  In the case of liquidating CDOs, the CDO structure has unwound earlier than expected due to events of default related to certain distressed securities in the portfolio.  Management-fee rates earned from these portfolios are significantly different than those of traditional separate account mandates.

MANAGED ASSETS

(in millions)

Sept. 30, 2010

June 30, 2010

March 31, 2010

Dec. 31, 2009

Sept. 30, 2009

By Asset Class

       Equity

$  29,133

$  26,814

$  30,066

$  29,673

$  29,124

       Fixed-income

40,174

38,012

35,527

33,787

32,039

       Money market

260,899

260,519

272,344

313,260

318,064

       Liquidation portfolios(1)

11,071

11,491

11,930

12,596

13,073

           Total Managed Assets

$  341,277

$  336,836

$  349,867

$  389,316

$  392,300

By Product Type

       Mutual Funds:

           Equity

$  21,325

$  19,344

$  21,445

$  20,960

$  20,350

           Fixed-income

32,211

30,651

30,007

28,427

26,960

           Money market

233,611

231,205

240,160

281,569

287,634

       Total Fund Assets

$  287,147

$  281,200

$  291,612

$  330,956

$  334,944

       Separate Accounts:

           Equity

$  7,808

$  7,470

$  8,621

$  8,713

$  8,774

           Fixed-income

7,963

7,361

5,520

5,360

5,079

           Money market

27,288

29,314

32,184

31,691

30,430

       Total Separate Accounts

$   43,059

$  44,145

$  46,325

$  45,764

$  44,283

       Total Liquidation Portfolios(1)

$  11,071

$  11,491

$  11,930

$  12,596

$  13,073

       Total Managed Assets

$  341,277

$  336,836

$  349,867

$  389,316

$  392,300

AVERAGE MANAGED ASSETS

Quarter Ended

(in millions)

Sept. 30, 2010

June 30, 2010

March 31, 2010

Dec. 31,  2009

Sept. 30, 2009

By Asset Class

       Equity

$  28,033

$  28,781

$  29,493

$  29,343

$  27,872

       Fixed-income

39,192

35,920

34,962

33,164

30,376

       Money market

260,098

260,634

290,094

312,761

336,530

       Liquidation portfolios(1)

11,313

11,759

12,320

12,881

13,370

           Total Avg. Assets

$  338,636

$  337,094

$  366,869

$  388,149

$  408,148

By Product Type

       Mutual Funds:

           Equity

$  20,411

$  20,590

$  20,971

$  20,625

$  19,215

           Fixed-income

31,491

30,266

29,329

27,903

25,499

           Money market

232,230

230,353

255,985

283,353

304,959

       Total Avg. Fund Assets

$  284,132

$  281,209

$  306,285

$  331,881

$   349,673

       Separate Accounts:

           Equity

$  7,622

$  8,191

$  8,522

$  8,718

$  8,657

           Fixed-income

7,701

5,654

5,633

5,261

4,877

           Money market

27,868

30,281

34,109

29,408

31,571

       Total Avg. Separate Accts.

$  43,191

$  44,126

$  48,264

$  43,387

$  45,105

       Total Avg. Liquidation Portfolios(1)

$  11,313

$  11,759

$  12,320

$  12,881

$  13,370

       Total Avg. Managed Assets

$  338,636

$  337,094

$  366,869

$  388,149

$  408,148

1) Liquidation portfolios include portfolios of distressed fixed-income securities and liquidating collateralized debt obligation (CDO) products.  In the distressed security category, Federated has been retained by a third party to manage these assets through an orderly liquidation process that will generally occur over a multi-year period.  In the case of liquidating CDOs, the CDO structure has unwound earlier than expected due to events of default related to certain distressed securities in the portfolio.  Management-fee rates earned from these portfolios are significantly different than those of traditional separate account mandates.

SOURCE Federated Investors, Inc.



RELATED LINKS

http://FederatedInvestors.com