Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.59 for Q3 2018, compared to $0.56 for the same quarter last year on net income of $59.6 million for Q3 2018 compared to $56.4 million for Q3 2017. Federated reported EPS of $1.57 for both YTD 2018 and 2017 on YTD 2018 net income of $158.8 million compared to $159.5 million of net income for the same period last year. The results in this press release include the acquisition of Hermes Fund Managers Limited (Hermes), beginning July 1, 2018.
Federated's YTD 2018 results include a $27.2 million pre-tax net expense, representing $0.21 per diluted share net of tax, primarily from entering into two foreign exchange derivative instruments used to eliminate exposure to fluctuations in the British pound sterling in preparation for the Q3 2018 Hermes acquisition payment. In addition, Federated has incurred $9.9 million and $12.7 million for Q3 2018 and YTD 2018, respectively, in transaction-related costs directly attributable to the Hermes acquisition.
Federated's total managed assets were a record $437.2 billion at Sept. 30, 2018 with the completion of the Hermes acquisition, up $73.5 billion or 20 percent from $363.7 billion at Sept. 30, 2017 and up $57.5 billion or 15 percent from $379.7 billion at June 30, 2018. Total average managed assets for Q3 2018 were $433.9 billion, up $73.4 billion or 20 percent from $360.5 billion reported for Q3 2017 and up $47.9 billion or 12 percent from $386.0 billion reported for Q2 2018.
"Hermes incorporates environmental, social and governance factors into a wide range of actively managed strategies and stewardship services," said J. Christopher Donahue, president and chief executive officer. "Hermes and Federated are off to an exciting and promising start together. With demand for ESG investing on the rise, we look forward to Hermes' continued growth as we begin to offer Hermes' strategies to U.S. investors."
Federated's board of directors declared a dividend of $0.27 per share. The dividend is payable on Nov. 15, 2018 to shareholders of record as of Nov. 8, 2018. During Q3 2018, Federated purchased 276,982 shares of Federated class B common stock for $5.9 million.
Federated's equity assets were a record $84.1 billion at Sept. 30, 2018, primarily due to the inclusion of $25.7 billion of Hermes' assets. Equity assets were up $22.4 billion or 36 percent from $61.7 billion at Sept. 30, 2017 and up $26.1 billion or 45 percent from $58.0 billion at June 30, 2018. Top-selling equity funds during Q3 2018 on a net basis were Federated MDT Small Cap Core Fund, Federated Kaufmann Small Cap Fund, Federated MDT Small Cap Growth Fund, Federated MDT Mid Cap Growth Fund and Hermes SDG Engagement Equity Fund.
Federated's fixed-income assets were a record $65.4 billion at Sept. 30, 2018, primarily resulting from the inclusion of $2.8 billion of Hermes' assets. Fixed-income assets were up $12.7 billion or 24 percent from $52.7 billion at Sept. 30, 2017 and up $4.0 billion or 7 percent from $61.4 billion at June 30, 2018. Top-selling fixed-income funds during Q3 2018 on a net basis were Federated Ultrashort Bond Fund, Federated Institutional High Yield Bond Fund, Federated Short-Term Income Fund, Federated Floating Rate Strategic Income Fund and Federated Total Return Bond Fund.
Money market assets were $264.2 billion at Sept. 30, 2018, up $20.4 billion or 8 percent from $243.8 billion at Sept. 30, 2017 and up $9.0 billion or 4 percent from $255.2 billion at June 30, 2018. Money market fund assets were $183.0 billion at Sept. 30, 2018, up $5.1 billion or 3 percent from $177.9 billionat Sept. 30, 2017 and up $10.3 billion or 6 percent from $172.7 billion at June 30, 2018. Federated's money market separate account assets were $81.3 billion at Sept. 30, 2018, up $15.3 billion or 23 percent from $66.0 billion at Sept. 30, 2017 and down $1.3 billion or 2 percent from $82.6 billion at June 30, 2018.
Financial Summary
Q3 2018 vs. Q3 2017
Revenue increased $30.3 million or 11 percent primarily due to the consolidation of Hermes' revenue. This increase was partially offset by 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 Q3 2018, Federated derived 66 percent of its revenue from long-term assets (45 percent from equity assets, 15 percent from fixed-income assets, and 6 percent from alternative/private markets and multi-asset), 33 percent from money market assets, and 1 percent from sources other than managed assets.
Operating expenses increased $37.1 million or 20 percent primarily due to the consolidation of Hermes' expenses. This increase was partially offset by a decrease in distribution expense due to the adoption of the new revenue recognition accounting standard and a change in the mix of average money market fund assets.
Q3 2018 vs. Q2 2018
Revenue increased $52.6 million or 21 percent and operating expenses increased $51.5 million or 29 percent primarily due to the consolidation of Hermes.
Nonoperating income (expenses), net increased $30.9 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 (FX Forward Loss).
YTD 2018 vs. YTD 2017
Revenue increased $3.8 million primarily due to the consolidation of Hermes revenue. This increase was significantly offset by a decrease in revenue due to the adoption of the new revenue recognition accounting standard, a change in the mix of average money market assets and a previously disclosed Q1 2017 change in a customer relationship.
For the first nine months of 2018, Federated derived 63 percent of its revenue from long-term assets (42 percent from equity assets, 16 percent from fixed-income assets, and 5 percent from alternative/private markets and multi-asset), and 37 percent from money market assets.
Operating expenses increased by $12.2 million or 2 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 $36.1 million due primarily to the FX Forward Loss. In addition, investment income, net decreased due to 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 the nine-month period ended Sept. 30, 2018 as compared to the same period in 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, currency fluctuations, fee waivers, acquisitions, 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 Investors, Inc. is one of the largest investment managers in the United States, managing $437.2 billion in assets as of Sept. 30, 2018. With 129 funds and a variety of separately managed account options, Federated provides comprehensive investment management to more than 9,600 institutions and intermediaries including corporations, government entities, insurance companies, foundations and endowments, banks and broker/dealers. Federated ranks in the top 6 percent of equity fund managers in the industry, the top 8 percent of money market fund managers and the top 11 percent of fixed-income fund managers1. Federated also ranks as the seventh-largest separately managed accounts manager2. 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.
