Federated Investors, Inc. Reports Fourth Quarter and Full-Year 2018 Earnings

PITTSBURGH, Jan. 24, 2019 /PRNewswire/ -- Federated Investors, Inc. (NYSE: FII), one of the world's largest investment managers, today reported earnings per diluted share (EPS) for Q4 2018 of $0.61, down from $1.31 for the same quarter last year, on net income of $61.5 million for Q4 2018, compared to $131.8 million for Q4 2017.  Full-year 2018 EPS was $2.18, down from $2.87 for 2017 on net income of $220.3 million for 2018, compared to $291.3 million for 2017.  Federated's Q4 2017 and full-year 2017 results included $70.4 million of net income, representing $0.70 and $0.69 per share for Q4 2017 and full-year 2017, respectively, resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act). The results in this press release include the acquisition of Hermes Fund Managers Limited (Hermes), beginning July 1, 2018.

Management believes adjusted EPS and adjusted net income for 2017, which are non-GAAP financial measures, are useful measures for investors to evaluate Federated's financial performance as a result of the tax-rate changes resulting from the Tax Act.  The adjusted measures reflect what earnings would have been in 2017 had the tax law changes not reduced the federal corporate income tax rate from 35 percent to 21 percent, resulting in a revaluation of Federated's net deferred tax liability in 2017.  As such, Federated's Q4 2017 adjusted EPS was $0.61, matching Q4 2018 EPS, and adjusted net income was $61.4 million, compared to net income of $61.5 million for Q4 2018.  Full-year 2017 adjusted EPS was $2.18, matching 2018 EPS, and adjusted net income was $220.9 million, compared to net income of $220.3 million for 2018¹.

Federated's total managed assets were $459.9 billion at Dec. 31, 2018, up $62.3 billion or 16 percent from $397.6 billion at Dec. 31, 2017 and up $22.7 billion or 5 percent from $437.2 billion at Sept. 30, 2018.  Average managed assets for Q4 2018 were $443.7 billion, up $61.7 billion or 16 percent from $382.0 billion reported for Q4 2017 and up $9.8 billion or 2 percent from $433.9 billion reported for Q3 2018.

"As the Federal Reserve raised short-term interest rates four times in 2018, Federated's wide range of liquidity products offered competitive yields for investors seeking cash-management solutions," said J. Christopher Donahue, president and chief executive officer.  "Federated's money market assets increased nearly $38 billion in the fourth quarter, crossing the $300 billion threshold."

Federated's board of directors declared a quarterly dividend of $0.27 per share.  The dividend is payable on Feb. 15, 2019 to shareholders of record as of Feb. 8, 2019.  During Q4 2018, Federated purchased 95,298 shares of Federated class B common stock for $2.2 million, bringing the total shares of Class B common stock purchased in 2018 to 1,205,790 shares for $29.1 million.

Federated's equity assets were $72.5 billion at Dec. 31, 2018, up $9.7 billion or 15 percent from $62.8 billion at Dec. 31, 2017 and down $11.6 billion or 14 percent from $84.1 billion at Sept. 30, 2018.  Top-selling equity funds on a net basis during Q4 2018 were Hermes SDG Engagement Equity Fund, Federated MDT Small Cap Growth Fund, Federated Kaufmann Small Cap Fund, Hermes Global Equity ESG Fund and Hermes Global Emerging Markets Small and Mid Cap Equity Fund.

"With the 2018 acquisition of a controlling interest in London-based Hermes Investment Management complete, Hermes is integrated into Federated's performance," Donahue said.  "Hermes' ESG strategies, which invest with an emphasis on environmental, social and governance factors, were among Federated's equity fund net-sales leaders in the fourth quarter, which highlights investor interest in these products."

Federated's fixed-income assets were $63.2 billion at Dec. 31, 2018, down $1.0 billion or 2 percent from $64.2 billion at Dec. 31, 2017 and down $2.2 billion or 3 percent from $65.4 billion at Sept. 30, 2018.  Top-selling fixed-income funds on a net basis during Q4 2018 included Federated Ultrashort Bond Fund, Federated Municipal Ultrashort Fund, Federated Short-Term Income Fund, Federated Government Ultrashort Duration Fund and Federated Real Return Bond Fund.

Federated's money market assets were $301.8 billion at Dec. 31, 2018, up $36.6 billion or 14 percent from $265.2 billion at Dec. 31, 2017 and up $37.6 billion or 14 percent from $264.2 billion at Sept. 30, 2018.  Money market mutual fund assets were $208.5 billion at Dec. 31, 2018, up $23.0 billion or 12 percent from $185.5 billion at Dec. 31, 2017 and up $25.5 billion or 14 percent from $183.0 billion at Sept. 30, 2018.  Federated's money market separate account assets were $93.3 billion at Dec. 31, 2018, up $13.6 billion or 17 percent from $79.7 billion at Dec. 31, 2017 and up $12.0 billion or 15 percent from $81.3 billion at Sept. 30, 2018.

Financial Summary

Q4 2018 vs. Q4 2017

Revenue increased $28.9 million or 10 percent primarily due to the consolidation of Hermes' revenue, which included performance fees of $5.8 million and higher average money market assets.  This increase in revenue was partially offset by a decrease in revenue from lower average equity assets, a decrease in revenue due to the adoption of the new revenue recognition accounting standard and higher voluntary fee waivers for certain money market funds for competitive purposes.

During Q4 2018, Federated derived 63 percent of its revenue from long-term assets (41 percent from equity assets, 14 percent from fixed-income assets and 8 percent from alternative/private markets and multi-asset), 36 percent from money market assets, and 1 percent from sources other than managed assets.

Operating expenses increased $31.8 million or 17 percent primarily due to the consolidation of Hermes' expenses.  This increase was partially offset by a decrease in expense due to the adoption of the new revenue recognition accounting standard.

Nonoperating (expenses) income, net decreased $8.5 million primarily due to a decrease in the market value of investments, fewer gains realized from the redemption of investments and a decrease in the market value of derivatives used to hedge foreign exchange risk.

Q4 2018 vs. Q3 2018

Revenue decreased $1.4 million primarily due to a decrease in revenue from lower average equity assets.  This decrease was partially offset by an increase in revenue from higher average money market assets and an increase in performance fees.

Operating expenses decreased by $7.5 million or 3 percent primarily due to a decrease in transaction-related costs associated with the acquisition of Hermes.

Nonoperating (expenses) income, net decreased $8.0 million primarily due to private equity carried interest income received in Q3 2018 on assets managed by a nonconsolidated entity, a decrease in the market value of derivatives used to hedge foreign exchange risk and a decrease in the market value of investments, primarily from securities held by consolidated investment companies.

2018 vs. 2017

Revenue increased $32.8 million or 3 percent primarily due to the Hermes acquisition.  This increase in revenue included performance fees of $8.6 million that were recorded in 2018, compared to $0.3 million in 2017.  This increase in revenue was offset by a decrease in revenue due to the adoption of the new revenue recognition accounting standard, higher voluntary fee waivers for certain money market funds for competitive purposes, and a previously disclosed Q1 2017 change in a customer relationship.

During 2018, Federated derived 62 percent of its revenue from long-term assets (41 percent from equity assets, 16 percent from fixed-income assets and 5 percent from multi-asset and alternative/private markets), 37 percent from money market assets and 1 percent from sources other than managed assets.

Operating expenses increased by $44.0 million or 6 percent primarily due to the consolidation of Hermes' expenses.  This increase was partially offset by a decrease in expense due to the adoption of the new revenue recognition accounting standard and a change in the mix of average money market fund assets.

Nonoperating (expenses) income, net decreased $44.6 million primarily due to a loss recorded in Q2 2018 from two foreign currency forward derivative instruments entered into in connection with the Hermes acquisition, a decrease in the market value of investments, primarily from securities held by consolidated investment companies, and fewer gains realized from the redemption of investments in 2018 as compared to 2017.

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 and mix, product sales and redemptions, market appreciation or depreciation, revenues, fee waivers, expenses and regulatory changes, can significantly impact Federated's business activity levels and financial results.  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 (SEC).

Federated will host an earnings conference call at 9 a.m. Eastern on Jan. 25, 2019.  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 via the About Federated section of FederatedInvestors.com.  A replay will be available from approximately 12:30 p.m. Eastern on Jan. 25, 2019 until Feb. 1, 2019 by calling 877-481-4010 (domestic) or 919-882-2331 (international) and entering access code 41747.  An online replay will be available via FederatedInvestors.comfor one year.

Federated Investors, Inc. is a leading global investment manager with $459.9 billion in assets under management as of Dec. 31, 2018.  Our investment solutions span 130 equity, fixed-income, alternative/private markets, multi-asset and money market funds and a range of separately managed account strategies.  Providing comprehensive investment management to more than 9,500 institutions and intermediaries, our clients include corporations, government entities, insurance companies, foundations and endowments, banks and broker/dealers.  Headquartered in Pittsburgh, Federated's nearly 1,900 employees include those in New York, Boston, London and several other offices worldwide.  In 2018, Federated acquired a majority interest in Hermes Investment Management, which provides world-class active management and stewardship services.

Federated ranks in the top 6 percent of equity fund managers in the industry, the top 7 percent of money market fund managers and the top 11 percent of fixed-income fund managers².  Federated also ranks as the 10th-largest SMA manager³.  Information regarding Hermes is available at Hermes-Investment.com.  An analyst presentation that includes information about Hermes also is available.  For more information, visit FederatedInvestors.com.

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1) Reconciliation of Non-GAAP Financial Measures (Adjusted EPS and Adjusted Net Income): For Q4 2017, GAAP EPS of $1.31, less $0.70 resulting from the revaluation of Federated's net deferred tax liability, results in an adjusted EPS of $0.61 and GAAP net income of $131.8 million, less $70.4 million resulting from the revaluation of Federated's deferred tax liability, results in an adjusted net income of $61.4 million. For full-year 2017, GAAP EPS of $2.87, less $0.69 resulting from the revaluation of Federated's net deferred tax liability, results in an adjusted EPS of $2.18, and GAAP net income of $291.3 million, less $70.4 million resulting from the revaluation of Federated's deferred tax liability, results in adjusted net income of $220.9 million.
2) Strategic Insight as of Dec. 31, 2018.  Based on assets under management in U.S. open-end funds.
3) Money Management Institute/Cerulli Associates, Q3 2018.
Federated Securities Corp. is distributor of the Federated funds.
Separately managed accounts are made available through Federated Global Investment Management Corp., Federated Investment Counseling, Federated MDTA LLC, Hermes Investment Management Limited and Hermes European Equities Limited, each a registered investment adviser.

Certain statements in this press release, such as those related to the level of fee waivers and expenses incurred by the company, performance, investor preferences and demand, asset flows and mix, and expenses 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 and expenses in future quarters, predict whether performance fees or carried interest will be earned, sustain product demand, and asset flows and mix, which could vary significantly depending on various factors, such as market conditions, investment performance and investor behavior. Other risks and uncertainties include the risk factors discussed in the company's annual and quarterly reports as filed with the SEC. 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.