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Federated Investors Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: July 27, 2012 06:22PM
Federated Investors Inc. (FII) filed Quarterly Report for the period ended 2012-06-30.
Highlight of Business Operations:The interest rate swap (the Swap) that Federated entered into with PNC Bank, National Association and certain other banks during 2010 to hedge its interest rate risk associated with the prior $425 million term loan remains in effect. Under the Swap, which expires on April 1, 2015, Federated will receive payments based on LIBOR plus a spread and will make payments based on an annual fixed rate of 3.646%. The Swap requires monthly cash settlements of interest paid or received. The differential between the interest paid or interest received from the monthly settlements will be recorded as adjustments to Debt expense on the Consolidated Statements of Income. The Swap is accounted for as a cash flow hedge and has been determined to be highly effective. Federated evaluates effectiveness using the long-haul method. Changes in the fair value of the Swap will likely be offset by an equal and opposite change in the fair value of the hedged item, therefore very little, if any, net impact on reported earnings is expected. The fair value of the Swap agreement at June 30, 2012 was a liability of $13.7 million which was recorded in Other current liabilities on the Consolidated Balance Sheet. The entire amount of this loss in fair value was recorded in Accumulated other comprehensive loss, net of tax on the Consolidated Balance Sheet at June 30, 2012. During the next twelve months management expects to charge $6.5 million of this loss to Debt expense on the Consolidated Statements of Income as a component of Federated s fixed interest rate of 3.646%. This amount could differ from amounts actually recognized due to changes in interest rates subsequent to June 30, 2012 and will not affect the amount of interest expense recognized in total on the Credit Agreement for any period presented. During the three- and six-month periods ended June 30, 2012, $1.9 million and $3.7 million, respectively, were charged to Debt expense on the Consolidated Statements of Income as a component of Federated s fixed interest rate associated with the Swap. During the three- and six-month periods ended June 30, 2011, $2.1 million and $4.2 million, respectively, were charged to Debt expense on the Consolidated Statements of Income as a component of Federated s fixed interest rate associated with the Swap.
Period-end money market assets at June 30, 2012 remained flat as compared to June 30, 2011. Average money market assets remained flat for the three-month period ended June 30, 2012 and increased 2% for the six-month period ended June 30, 2012 as compared to the same periods in 2011. Period-end fixed-income assets at June 30, 2012 increased 15% as compared to June 30, 2011 and average fixed-income assets for the three- and six-month periods ended June 30, 2012 increased 13% and 12%, respectively, as compared to the same periods in 2011 primarily due to positive net sales and market appreciation. Period-end equity assets at June 30, 2012 increased 6%
as compared to June 30, 2011. Average equity assets for the three- and six-month periods ended June 30, 2012 both increased 5% as compared to the same periods in 2011 primarily due to positive net sales. As expected, liquidation portfolios at June 30, 2012 decreased 18% as compared to June 30, 2011 and average assets in liquidation portfolios decreased 18% and 17%, respectively, for the three- and six-month periods ended June 30, 2012 as compared to the same periods in 2011 due to the gradual liquidation of the portfolio.
Revenue from managed assets decreased $2.2 million for the six-month period ended June 30, 2012 as compared to the same period in 2011 primarily due to an increase of $7.9 million in voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net yields and a decrease of $7.1 million due to a change in the mix of average equity assets. The decrease in revenue was partially offset by an increase of $8.7 million resulting from higher average fixed-income assets and an increase of $4.5 million due to higher average money market assets.
Risk of Federated s Money Market Products Ability to Maintain a Stable $1.00 Net Asset Value. Approximately 47% of Federated s total revenue for the first six months of 2012 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the Federal Deposit Insurance Corporation. Although money market funds seek to preserve an NAV of $1.00 per share, it is possible for an investor to lose money by investing in these funds. Federated devotes substantial resources including significant credit analysis to the management of its products. Federated money market funds have always maintained a $1.00 NAV; however, there is no guarantee that such results will be achieved in the future. Market conditions could lead to severe liquidity issues and/or further persistent declines in or additional prolonged periods of historically low yields in money market products which could impact their NAVs. If the NAV of a Federated money market fund were to decline to less than $1.00 per share, Federated money market funds would likely experience significant redemptions in assets under management, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated s financial position, results of operations or liquidity.