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Know what we know
2009 Annual Report
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Federated knows...
Stability
Ranks as a leading global investment manager, managing approximately
$390 billion in assets, delivering competitive and consistent results since 1955
and fostering growth by reinvesting in the company
Investment Solutions
Offers broad product lines spanning domestic and international equity,
fixed-income, alternative and money market strategies with the goal of
long-term consistent, competitive performance
Diligence
Takes the long view, believing that doing business the right way over time
will present opportunity for future growth
Client-centric
Delivers business solutions through consultative meetings, investment forums
and market insights, often delivered proactively at client-specific locations
Corporate Information
CORPORATE OFFICES
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Telephone: 412-288-1900
Email: investors@federatedinv.com
FederatedInvestors.com
WORLDWIDE OPERATIONS
Boston, MA
Dublin, Ireland
Frankfurt, Germany
Houston, TX
New York, NY
Rochester, NY
Tokyo, Japan
Warrendale, PA
Wilmington, DE
CONTACT INFORMATION
Investor Relations: 412-288-1934
Analyst Inquiries: 412-288-1920
Media Relations & Corporate
Communications: 412-288-7895
Customer Service: 800-341-7400
Email: services@federatedinvestors.com
FORM 10-K AND
SHAREHOLDER PUBLICATIONS
For a complimentary copy of Federated’s
Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q or current reports
on Form 8-K as filed with the Securities and
Exchange Commission or a recent earnings
news release, please contact the Investor
Relations department at 412-288-1934 or visit
the About Us section of FederatedInvestors.com.
ANNUAL MEETING
Federated’s Annual Shareholder Meeting will
be held in Room 336 of the David L. Lawrence
Convention Center, 1000 Fort Duquesne
Boulevard, Pittsburgh, PA 15222 at 4 p.m.
local time on Thursday, April 22, 2010.
TRANSFER AGENT
Shareholders of record with questions
concerning account information, certificates,
transferring securities, dividend payments,
requesting direct deposit information or
processing a change of address should
contact:
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
Telephone: 800-736-3001
DIVIDEND PAYMENTS
Subject to approval of the board of directors,
dividends are paid on Federated’s common
stock typically during the months of February,
May, August and November.
MARKET LISTING
Federated Investors, Inc. class B common stock
is traded on the New York Stock Exchange
under the trading symbol FII.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP, Pittsburgh, PA
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Financial Overview (as of and for the years ended December 31,)
SUMMARY OF OPERATIONS (in thousands)
Total revenue
Operating income
Income from continuing operations1
Income from discontinued operations1
Net income1
PER SHARE DATA
Diluted earnings per share:1
Income from continuing operations
Income from discontinued operations
Net income
Cash dividends per share:
Quarterly
Special
Total dividends
MANAGED ASSETS (in millions)
Money market
Fixed-income
Equity
Liquidation portfolios
Total managed assets
09
$ 1,175,950
$ 329,227
$ 197,292
—
$ 197,292
08
$ 1,223,680
$ 361,175
$ 221,509
2,808
$ 224,317
$
$
$
$
1.92
—
1.92
0.96
—
0.96
$
$
$
$
2.15
0.03
2.18
0.93
2.76
3.69
$ 313,260
33,787
29,673
12,596
$ 389,316
$ 355,658
23,486
26,661
1,505
$ 407,310
1Amounts attributable to Federated Investors, Inc.
2009 Annual Report 1
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Dear fellow shareholders:
One of the hallmarks of a leading investment
manager is the ability to sustain high-quality
business performance across a variety of market
cycles. And 2009 was certainly a year of shifting
market cycles, as a difficult economic environ-
ment early in the year
gave way to steadily
improving conditions.
products. As conditions improved, Federated saw
increased demand for our strong line of fixed-in-
come and equity products—gross sales of fluctu-
ating mutual funds increased 64 percent from
2008. The company had particularly strong net
sales of $6.8 billion
in our fixed-income
mutual funds, where investors valued our
consistent performance over multi-year periods.
Throughout, Federated
continued to deliver
quality business per-
formance for our share-
holders. Assets under
management stood at
$389.3 billion at the
end of 2009 with equity
and fixed-income assets
growing $13.3 billion to $63.5 billion and earn-
ings from continuing operations totaling $197.3
million or $1.92 per diluted share.
Federated’s business mix offers shareholders
confidence in our earnings potential over a
variety of market conditions. During the first half
of 2009, Federated benefited from strong
demand for the stability of our liquidity solutions
as investors continued to seek money market
Federated employed capital to benefit share-
holders in 2009. We repurchased 828,918 shares
of class B common stock and paid quarterly
dividends to our shareholders. Quarterly divi-
dends totaled $0.96 per diluted share in 2009.
To further reward shareholders for Federated’s
business success in 2009, Federated announced
in early 2010 that it would pay a special dividend
of $1.26 per share in addition to its regular
quarterly dividend of $0.24 per share. A total of
$1.50 per share was paid in February.
2009 Highlights
(cid:129) Increased equity and fixed-income assets by
$13.3 billion to $63.5 billion, which generated
35 percent of Federated’s revenue for the year.
(cid:129) Reported earnings per diluted share from
continuing operations of $1.92.
2 Federated Investors, Inc.
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(cid:129) Grew money market fund assets $170 billion
over the course of the most recent cycle for
cash management, which dated back to 2007.
(cid:129) Increased fixed-income assets to $33.8 billion,
up $10.3 billion or 44 percent from 2008.
(cid:129) Grew gross sales for equity and bond funds by
64 percent compared to 2008.
(cid:129) Experienced net sales of nearly $2.0 billion
in Federated’s flagship multisector bond
fund—Federated Total Return Bond Fund.
(cid:129) Selected by a large insurer to subadvise three
money market funds totaling $5.6 billion
in assets.
(cid:129) Completed the merger of $257.3 million in
fund assets into Federated Clover Value Fund
and Federated Clover Small Value Fund.
(cid:129) Developed a new closed-end fund late in
2009. Federated Enhanced Treasury Income
Fund (NYSE: FTT) raised $178 million and
began trading on Jan. 27, 2010.
Array of Investment Solutions
Federated’s broad range of investment solutions
and the consistent performance of many of our
leading portfolios over the long term positioned
the company for growth across many market
conditions. In recent market downdrafts, such
as 2000’s technology bubble and 2008’s equity
market tumult, Federated’s variety of investment
solutions enabled the company to sustain strong
performance and reinvest for growth.
In 2009, Federated’s business mix offered our
clients the bond and equity investment solutions
they sought. Bond assets under management
grew 44 percent, with strong flows into
ultrashort products and Federated Total
Return Bond Fund.
Two significant acqui-
sitions completed at
the end of 2008
strengthened our in-
vestment capabilities
by adding teams of in-
vestment professionals
dedicated to managing
alternative
strategies
and value strategies in
the equity markets. We
continued to integrate
these teams’ best ideas
into Federated’s product lines, launching new
value-oriented mutual funds and broadening
2009 Annual Report 3
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the distribution of two alternative-strategy
funds, which complemented our existing
absolute return product, Federated Market
Opportunity Fund.
the
Federated’s equity and bond mutual funds
continue to maintain solid long-term records.
According to Lipper rankings, 62 percent of
Federated’s rated equity assets were in the top
half of their category
for
three-year
period, 81 percent for
the five-year period
and 79 percent for
the 10-year period
ended Dec. 31, 2009.
For bond funds, the
comparable percent-
ages were 68 percent
three-year
for
period, 76 percent for the five-year period and
80 percent for the 10-year period ended
Dec. 31, 2009.
the
As a cash management pioneer and leader for
more than 35 years, Federated has maintained a
steadfast dedication to products and services that
meet investor requirements for diligent credit
4 Federated Investors, Inc.
analysis, broad diversification, competitive yields
and to provide daily liquidity at par. In 2009, we
saw some of the inflows gathered in 2007 and
2008 reenter other market sectors. We continue
to expect that our cash management products will
show growth over time with higher asset highs
and higher asset lows during particular cycles. As
a cash management leader, Federated continues
to actively work with industry groups, regulators
and legislators to strengthen the resiliency of
money market funds to ensure that they remain
an integral part of our nation’s capital markets.
Distribution Strength
Federated’s sales force comprises more than
180 sales professionals who provide investment
solutions to 5,200 client firms, including many
of the world’s largest banks, broker/dealers, cor-
porations and government entities. These firms
trust Federated to manage their customer and/or
institutional assets. In 2009, net sales in bond
funds were $6.8 billion, our best tally in
the decade. Federated, through its operation in
Frankfurt, Germany, was selected by a large
German bank to serve as investment advisor
for a multibillion dollar portfolio of U.S. dollar-
denominated securities.
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J. Christopher Donahue
President and
Chief Executive Officer
John F. Donahue
Chairman
In 2009, Federated appointed an executive
director for international distribution to develop
a global distribution plan to enhance Federated’s
existing efforts in Europe, the Middle East and
Latin America, as well as to explore new oppor-
tunities in the Asia-Pacific and other regions.
Late last year, Federated began to actively seek
acquisitions or partnerships outside the United
States as part of this strategy to expand our global-
distribution footprint.
centric approach. Through consultative meet-
ings, investment forums with industry experts and
market insights that are both on time and
on point, we strive to help our clients build their
businesses. We thank our employees for their
continued dedication to meeting the needs of our
valued clients. And finally, we offer our gratitude
to you, our shareholders, for your support of our
efforts to pursue growth and add shareholder
value in the dynamic asset management industry.
Taking the Long View
Over many years we have built Federated to be a
leading investment manager through substantial
investments in top-notch people, products and
distribution. The result of these investments is
a broad array of high-quality products and a
multi-channeled distribution system to deliver
those products to market. We remain focused on
offering trusted and competitive products to meet
the needs of our clients, and believe our business
mix of products and distribution channels
positions Federated to continue to grow.
As we look to the future, we are grateful
for the trust that investors place in Federated.
Our 1,350 employees take pride in their client-
J. Christopher Donahue
President and Chief Executive Officer
John F. Donahue
Chairman
2009 Annual Report 5
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Directors & Executives
DIRECTORS
John F. Donahue
Chairman and Co-founder,
Federated Investors, Inc.
J. Christopher Donahue
President and Chief Executive Officer,
Federated Investors, Inc.
Committee: Executive
Michael J. Farrell
President,
Farrell & Co.
Committees: Audit, Compensation, Compliance
David M. Kelly
Chairman, Chief Executive Officer
and President (retired),
Matthews International Corporation
Committees: Audit, Compliance
John W. McGonigle
Vice Chairman, Executive Vice President,
Chief Legal Officer and Secretary,
Federated Investors, Inc.
Committee: Executive
EXECUTIVE OFFICERS
John F. Donahue
Chairman and Co-founder,
Federated Investors, Inc.
J. Christopher Donahue
President and Chief Executive Officer,
Federated Investors, Inc.
Brian P. Bouda
Vice President and Chief Compliance Officer,
Federated Investors, Inc.
Gordon J. Ceresino
Vice Chairman,
Federated Investors, Inc.
Thomas R. Donahue
President,
FII Holdings, Inc.
Chief Financial Officer and Treasurer,
Federated Investors, Inc.
John B. Fisher
President and Chief Executive Officer,
Federated Advisory Companies
James L. Murdy
President and Chief Executive Officer (retired),
Allegheny Technologies Incorporated
Committees: Compensation, Compliance
Edward G. O’Connor
Of Counsel, Special Counsel (retired),
Eckert Seamans Cherin & Mellott, LLC
Committees: Audit, Compliance
Richard B. Fisher
Chairman,
Federated Securities Corp.
Vice Chairman and Co-founder,
Federated Investors, Inc.
Eugene F. Maloney
Executive Vice President,
Federated Investors, Inc.
Denis McAuley III
Vice President and Principal Accounting Officer,
Federated Investors, Inc.
John W. McGonigle
Vice Chairman, Executive Vice President,
Chief Legal Officer and Secretary,
Federated Investors, Inc.
Thomas E. Territ
President,
Federated Securities Corp.
6 Federated Investors, Inc.
Federated Investors Inc.
Financial Review
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Management’s Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Management’s Assessment of Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . .29
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm,
on Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm,
on Effectiveness of Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Consolidated Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K and the 2009 Annual Report to Shareholders, including those
related to asset flows and business mix; obligations to make additional contingent payments pursuant to acquisition
agreements; obligations to make additional payments pursuant to employment agreements; the costs associated with the
settlement with the Securities and Exchange Commission and the New York State Attorney General; legal proceedings;
future cash needs and management’s expectations regarding borrowing; future principal uses of cash; performance
indicators; impact of accounting policies and new accounting pronouncements, including the new consolidation standard;
concentration risk; indemnification obligations; the impact of increased regulation (including the possible impact of
recent amendments to Rule 2a-7 of the Investment Company Act of 1940); the prospect of increased marketing and
distribution-related expenses; insurance recoveries; management’s expectations regarding fee waivers and the impact of
such waivers on revenues and net income; the ability to raise additional capital; the rising costs of risk management; the
possibility that money market funds may close to new and/or existing shareholders or their shareholders may become
subject to an interim cash management fee; possible impairment charges; self-funding of B-shares; tax expenses; the
ability to use capital loss carryforwards and the various items set forth under the section entitled Risk Factors 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 Federated 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. Among other risks and uncertainties, market conditions may change significantly resulting in changes to
Federated’s asset flows and business mix, which may cause a decline in revenues and net income, result in impairments
and increase the amount of fee waivers incurred by Federated. The obligation to make contingent payments is based on
certain growth and fund performance targets and will be affected by the achievement of such targets, and the obligation
to make additional payments pursuant to employment agreements is based on satisfaction of certain conditions set forth
in those agreements. Future cash needs and future uses of cash will be impacted by a variety of factors, including the
number and size of any acquisitions, Federated’s success in distributing its products, the resolution of pending litigation,
potential increases in costs relating to risk management, as well as potential changes in assets under management
and/or changes in the terms of distribution and shareholder services contracts with intermediaries who offer Federated’s
products to customers. Federated’s risks and uncertainties also include liquidity and credit risks in Federated’s money
market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in market
values of assets under management, the ability of Federated to keep money market fund products open to new and/or
existing shareholders and to collect fees in connection with the management of such products. Many of these factors
may be more likely to occur as a result of the ongoing threat of terrorism and the increased scrutiny of the mutual fund
industry by federal and state regulators, and the recent and ongoing disruption in global financial markets. As a result,
no assurance can be given as to future results, levels of activity, performance or achievements, and neither Federated
nor any other person assumes responsibility for the accuracy and completeness of such statements in the future. For
more information on these items, see the section entitled Risk Factors herein under Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
2009 Annual Report 7
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and managed assets)
The selected consolidated financial data below should be read in conjunction with Federated Investors, Inc. and its subsidiaries’
(Federated) Consolidated Financial Statements and Notes. The selected consolidated financial data (except managed assets) of Federated
for the five years ended December 31, 2009 have been derived from the audited Consolidated Financial Statements of Federated.
Certain prior year amounts have been revised to reflect the adoption of a new accounting standard regarding noncontrolling interests in
consolidated financial statements and a new accounting standard regarding determining whether instruments granted in share-based
payment transactions are participating securities for purposes of calculating earnings per share. See Management’s Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes which follow.
Years Ended December 31,
Statement of Income Data1, 2, 3
Total revenue
Operating income
Income from continuing operations including
noncontrolling interests in subsidiaries
Amounts attributable to Federated Investors, Inc.
Income from continuing operations
Income (loss) from discontinued operations
Net income
2009
2008
2007
2006
2005
$ 1,175,950
329,227
$ 1,223,680 $ 1,127,644
357,193
361,175
$ 978,858
308,472
$ 896,238
294,894
208,540
228,625
223,236
196,647
171,179
197,292
0
197,292
221,509
2,808
224,317
217,471
0
217,471
191,048
6,681
197,729
160,974
(691)
160,283
Share Data attributable to Federated Investors, Inc.
Earnings per share – Basic1, 2, 3
Income from continuing operations
Income (loss) from discontinued operations
Net income
Earnings per share – Diluted1, 2, 3
Income from continuing operations
Income (loss) from discontinued operations
Net income4
Cash dividends per share5
Weighted-average shares outstanding – basic
Weighted-average shares outstanding – diluted
Balance Sheet Data at Period End
Intangible assets, net and Goodwill3
Total assets3
Long-term debt—recourse6
Long-term debt—nonrecourse7
Federated Investors shareholders’ equity5
Managed Assets (in millions)
As of period end
Average for the period
$
$
$
$
$
$
$
$
1.93
0.00
1.93
1.92
0.00
1.92
0.960
99,923
100,056
662,996
912,433
105,000
13,556
528,207
2.17 $
0.03
2.20
2.12
0.00
2.12
2.15 $
0.03
2.18
3.690 $
99,605
100,395
2.10
0.00
2.10
0.810
100,855
102,067
$
$
$
1.81
0.06
1.87
1.78
0.06
1.85
0.690
104,293
105,855
$
$
$
1.51
(0.01)
1.50
1.48
(0.01)
1.47
0.575
106,114
108,005
657,321 $
846,610
126,000
30,497
423,374
534,603
840,971
71
62,701
574,015
$ 488,650
810,294
160
112,987
529,375
$ 370,026
896,621
243
159,784
540,329
$
$
389,316
405,595
$
$
407,310 $
342,521 $
301,616
265,055
$ 237,440
$ 220,702
$ 213,423
$ 197,647
1 During 2005, charges of $55.6 million were recorded related to Federated’s settlements with government regulators. See Note (21)(c) to the
Consolidated Financial Statements. In addition, 2005 results also included a $23.6 million pretax insurance recovery for related costs incurred, which was
recorded as a reduction to certain operating expenses.
2 During 2009, fee waivers to maintain positive or zero net yields totaled $120.6 million. These fee waivers were partially offset by related reductions in
marketing and distribution expenses of $86.4 million such that the net impact to Federated was $34.2 million in reduced operating income.
3 During 2009, Federated recorded impairments totaling $21.7 million primarily related to intangible and fixed assets. See Note (7) to the Consolidated
Financial Statements.
4 Totals may not sum due to rounding.
5 In 2008, Federated paid $2.76 per share or $281.2 million as a special dividend to shareholders. See Note (16)(a) to the Consolidated Financial
Statements.
6 In 2008, Federated entered into a term-loan facility and began borrowing against its revolving credit facility. See Note (12) to the Consolidated Financial
Statements.
7 In March 2007, Federated began accounting for all new sales of its rights to future distribution fees and contingent deferred sales charges related to
Class B shares of sponsored funds as sales. See Note (1)(l) and Note (13) to the Consolidated Financial Statements.
8 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the
Selected Consolidated Financial Data and the Consolidated Financial Statements appearing elsewhere in this report.
Certain balances in the accompanying Consolidated Financial Statements and the related notes have been reclassified to give
retrospective presentation for the effect of adopting a new accounting standard regarding noncontrolling interests in consolidated
financial statements and a new accounting standard regarding determining whether instruments granted in share-based payment
transactions are participating securities for purposes of calculating earnings per share. See Note (1)(t) and Note (2) to the Consolidated
Financial Statements for additional information.
General
Federated Investors, Inc. (together with its subsidiaries, Federated) is one of the largest investment managers in the United States with
$389.3 billion in managed assets as of December 31, 2009. The majority of Federated’s revenue is derived from advising and
administering Federated mutual funds and Separate Accounts (which include separately managed accounts, institutional accounts, sub-
advised funds and other managed products) in both domestic and international markets. Federated also derives revenue from providing
various other mutual fund-related services, including distribution, shareholder servicing, and retirement plan recordkeeping
services (collectively, Other Services).
Federated’s investment products are primarily distributed in three markets. These markets and the relative percentage of managed assets
at December 31, 2009 attributable to such markets are as follows: wealth management and trust (55%), broker/dealer (27%) and global
institutional (15%).
Investment advisory fees, administrative fees and certain fees for Other Services, such as distribution and shareholder service fees, are
contract-based fees that are generally calculated as a percentage of the net assets of the investment portfolios that are managed by
Federated. As such, Federated’s revenue is primarily dependent upon factors that affect the value of managed assets including market
conditions and the ability to attract and retain assets. Nearly all assets under management in Federated’s investment products can be
redeemed at any time with no advance notice requirement. Fee rates for Federated’s services generally vary by asset type and
investment objective and, in certain instances, decline as the average net assets of the individual portfolios exceed certain thresholds.
Generally, rates charged for advisory services provided to equity products are higher than rates charged on money market and fixed-
income products. Likewise, mutual funds typically have a higher fee rate than Separate Accounts. Accordingly, revenue is also
dependent upon the relative composition of average assets under management across both asset and product types. Federated may waive
certain fees for competitive reasons such as to maintain positive or zero net yields, to meet regulatory requirements (including
settlement-related waivers (see Note (21)(c) to the Consolidated Financial Statements)) or to meet contractual requirements. Since
Federated’s products are largely distributed and serviced through financial intermediaries, Federated pays a significant portion of the
distribution fees earned from sponsored products to the financial intermediaries that sell these products. These payments are generally
calculated as a percentage of net assets attributable to the party receiving the payment and are recorded on the Consolidated Statements
of Income as a marketing and distribution expense.
Federated’s remaining Other Services fees are primarily based on fixed rates per retirement plan participant. Revenue relating to these
services generally depends upon the number of plan participants which may vary as a result of sales and marketing efforts, competitive
fund performance, introduction and market reception of new product features and acquisitions.
Federated’s most significant operating expenses include marketing and distribution costs and compensation and related costs, which
represent fixed and variable compensation and related employee benefits. Certain of these expenses are dependent upon sales, product
performance, levels of assets and asset mix and the willingness to continue fee waivers to maintain positive or zero net yields.
The discussion and analysis of Federated’s financial condition and results of operations are based on Federated’s Consolidated Financial
Statements. Management evaluates Federated’s performance at the consolidated level based on the view that Federated operates in a
single operating segment, the investment management business. Management analyzes all expected revenue and expenses and considers
market demands in determining an overall fee structure for services provided and in evaluating the addition of new business. Federated’s
growth and profitability are dependent upon its ability to attract and retain assets under management and, in light of the recent and
continuing adverse market conditions, are also dependent upon the profitability of those assets, which is impacted, in part, by
management’s decisions regarding fee waivers to maintain positive or zero net yields on certain products. Fees for fund-related services
are ultimately subject to the approval of the independent directors or trustees of the mutual funds. Management believes the most
meaningful indicators of Federated’s performance are assets under management, total revenue and net income, both in total and per
diluted share.
2009 Annual Report 9
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Business Developments
Recent Disruption in Global Financial Markets
In recent years, the financial markets have experienced periods of extreme volatility due to uncertainty and disruption in large segments
of the credit markets. During the latter half of 2008 and early 2009, the disruptions in the financial markets worsened causing severe
dislocations on the functioning of the markets and unprecedented strain on the availability of liquidity in the short-term debt markets,
including the commercial paper markets, which are important for the operation of prime money market funds which invest primarily in
a portfolio of short-term, high-quality, fixed-income securities.
Through the adverse market conditions of 2008, Federated’s government agency and treasury money market funds experienced
significant asset inflows, which drove substantial increases in Federated’s money market managed assets. These funds grew as certain
investors favored the perceived safety and liquidity of portfolios backed by government securities over other investment products. Of
Federated’s total $281.6 billion in money market fund assets at December 31, 2009, $150.2 billion or 53% were invested in government
agency and treasury funds. Reflecting increased market demand beginning in the latter part of 2008 for government securities, and
thereby government and treasury money market funds, yields on such products have decreased to record lows. In certain products, the
gross yield is not sufficient to cover all of the fund’s normal operating expenses. During the fourth quarter 2008, Federated began
waiving fees in order for certain funds to maintain positive or zero net yields.
During the course of 2009, fee waivers to maintain positive or zero net yields progressively increased quarter over quarter as fund yields
declined. These fee waivers which totaled $120.6 million for 2009 were partially offset by a related reduction in marketing and
distribution expenses of $86.4 million such that the net impact to Federated was $34.2 million in reduced operating income. The
impact of these fee waivers was significantly less in 2008 with $3.6 million in waived fees, $1.9 million in reduced marketing and
distribution expenses and a net impact on operating income of $1.7 million. (See Note (23) to the Consolidated Financial Statements
for information regarding the quarterly operating income impact of the fee waivers.) Management expects the fee waivers and the
related reduction in marketing and distribution expense will continue in 2010 and will likely be material. An increase in interest rates
that results in higher yields on securities purchased in money market fund portfolios would reduce the operating income impact of these
waivers. Management is unable to provide a reasonable estimate of the impact of fee waivers expected for 2010 as the amount of the
waivers is contingent on a number of variables including available yields on instruments held by the funds, changes in assets within the
funds, actions by the Federal Reserve and the U.S. Department of the Treasury, changes in expenses of the funds, changes in the mix of
customer assets, and Federated’s willingness to continue the waivers.
For the year ended December 31, 2009, approximately 65% of Federated’s total revenue was attributable to money market managed
assets as compared to 61% and 49% for the same periods of 2008 and 2007, respectively. A significant change in Federated’s money
market business or a significant reduction in money market managed assets due to regulatory changes, changes in the financial markets,
significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-
term interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on Federated’s results of
operations.
Asset Impairments
In 2009, Federated experienced significant declines in the underlying assets under management related to certain customer relationship
intangible assets acquired primarily in connection with one acquisition in a prior year. The declines reflected significant market
depreciation as well as investor net redemptions in 2009, which were incremental to similar significant declines in the latter half of
2008. Management’s quarterly recoverability test of the carrying value of these customer relationships as of March 31, 2009 indicated
that the carrying values were not fully recoverable. Cash flow projections at March 31, 2009 were lower than previous projections
prepared in connection with this recoverability testing as a result of continued managed asset declines due to market depreciation and
net outflows. Management estimated the fair value of these customer relationship intangible assets based upon expected future cash
flows using an income approach valuation methodology with unobservable inputs. Such inputs included (1) an estimated rate of change
for underlying managed assets; (2) expected revenue per managed asset; (3) incremental operating expenses; (4) useful life of the
acquired asset; and (5) a discount rate. Management estimates a rate of change for underlying managed assets based on a combination of
an estimated rate of market appreciation or depreciation and an estimated net redemption or sales rate. Expected revenue per managed
asset, incremental operating expenses and the useful life of the acquired asset are generally based on contract terms and historical
experience. The discount rate is estimated at the current market rate of return. In addition, because of the subjective nature of the
projected discounted cash flows, management considered several scenarios and used probability weighting to calculate the expected
future cash flows attributable to the intangible assets. As a result of this fair value analysis, Federated recorded a $16.0 million
impairment charge in Intangible asset impairment and amortization on the Consolidated Statements of Income to write down these
customer relationship intangible assets to $11.1 million as of March 31, 2009.
As a result of deterioration in the resale market for used aircraft in 2008 and 2009 and management’s intent to sell its aircraft before the
end of its previously estimated useful life, Federated recognized impairment charges totaling $5.2 million to write down the carrying
value of one of Federated’s aircraft in 2009. Based upon independent valuation and market data for similar assets, management estimated
the value of this aircraft less expected costs to sell to be $3.4 million at December 31, 2009. The impairment charges were recorded as
10 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
operating expense in Other on the Consolidated Statements of Income for the year ended December 31, 2009. As a result of adopting a
plan to sell this aircraft late in 2009, the aircraft is included in Other current assets on the Consolidated Balance Sheets as of
December 31, 2009.
Business Combinations and Acquisitions
In 2008, Federated completed two significant business acquisitions. On December 5, 2008, Federated acquired certain assets of David
W. Tice & Associates LLC that relate to the management of the Prudent Bear Fund and the Prudent Global Income Fund (collectively,
the Prudent Bear Funds) with $1.1 billion and $0.4 billion in assets under management, respectively, as of December 5, 2008 (Prudent
Bear Acquisition). On December 1, 2008, Federated acquired certain assets of Clover Capital Management, Inc. (Clover Capital), a
Rochester, New York-based investment manager that specializes in value investing (Clover Capital Acquisition). Clover Capital
managed approximately $2.1 billion in assets as of December 1, 2008, consisting primarily of Separate Accounts.
Federated has completed its detailed valuations to determine the fair value of the identifiable intangible assets associated with the
Prudent Bear and Clover Capital Acquisitions. The valuation results included in the Consolidated Balance Sheet as of December 31,
2009 and the related Consolidated Statements of Income for the year ended December 31, 2009 include certain adjustments to revise
the estimates of fair value as originally recorded as of December 31, 2008. See Note (3) and Note (21)(a) to the Consolidated Financial
Statements for additional information on these acquisitions and the related contingent payments.
Special Cash Dividends
In 2008, Federated paid $2.76 per share or $281.2 million as a special cash dividend to shareholders. This payment was in addition to
the aggregate $0.93 per share, or $94.5 million, regular quarterly cash dividends paid throughout the course of 2008.
A $1.26 per share or $129.8 million special cash dividend was paid in February 2010. This payment was in addition to the regular
quarterly cash dividend of $0.24 per share or $24.7 million also paid in February 2010. See Note (22) to the Consolidated Financial
Statements for more information.
All dividends were considered ordinary dividends for tax purposes.
B-Shares
The income tax provision for continuing operations for 2008 as compared to 2007 reflects a $2.6 million favorable adjustment due
primarily to a correction of deferred tax balances following the full amortization of certain deferred sales commission assets.
In March 2007, pursuant to the terms of a new sales program with an independent third party, Federated began accounting for all new
sales of its rights to future distribution fees and contingent deferred sales charges related to Class B shares of sponsored funds as sales.
The sales of Federated’s rights to future shareholder service fees continued to be accounted for as financings due to Federated’s ongoing
involvement in performing shareholder-servicing activities. Accordingly, nonrecourse debt has been recorded. Federated’s current B-
share funding arrangement expires in February 2010. Management expects to self-fund B-share sales beginning March 2010. Under the
current structure, B-share advanced commissions totaled $6.1 million for 2009.
Other Business Developments
During the third quarter 2008, Federated entered into a variable-rate $140 million term-loan facility that matures on October 31, 2011
(Term Loan). The Term Loan requires quarterly principal payments totaling $21 million and $28 million in 2010 and 2011,
respectively, and a balloon payment of $77 million on October 31, 2011. During the year ended December 31, 2009, Federated repaid
$14 million of its borrowings on its Term Loan. See Note (12) to the Consolidated Financial Statements for additional information.
In the fourth quarter 2007, Federated entered into long-term individual employment contracts with certain key employees responsible
for investment management of the Federated Kaufmann products. The agreements, the terms of which run through December 31,
2014, obligate Federated to make certain compensation payments over the seven-year term of employment. In addition to the base
salary and bonuses that were previously being paid to these employees, and are now covered by the employment contracts, the
agreements included an up-front payment totaling $15 million to these employees, which was accrued in the fourth quarter 2007 and
paid in January 2008.
2009 Annual Report 11
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Asset Highlights
Managed Assets at Period End
in millions as of December 31,
By Asset Class
Money market
Fixed-income
Equity
Liquidation portfolios1
Total managed assets
By Product Type
Mutual Funds:
Money market
Fixed-income
Equity
Total mutual fund assets
Separate Accounts:
Money market
Fixed-income
Equity
Total separate account assets
Liquidation Portfolios1
Total managed assets
Average Managed Assets
in millions for the years ended December 31,
By Asset Class
Money market
Fixed-income
Equity
Liquidation portfolios1
Total average managed assets
By Product Type
Mutual Funds:
Money market
Fixed-income
Equity
Total average mutual fund assets
Separate Accounts:
Money market
Fixed-income
Equity
Total average separate account assets
Liquidation Portfolios1
Total average managed assets
$
$
$
$
$
2009
2008
Percent
Change
$ 313,260 $ 355,658
23,486
26,661
1,505
$ 389,316 $ 407,310
33,787
29,673
12,596
$ 281,569 $ 327,267
19,321
17,562
364,150
28,427
20,960
330,956
31,691
5,360
8,713
45,764
12,596 $
28,391
4,165
9,099
41,655
$
1,505
$ 389,316 $ 407,310
(12 %)
44 %
11 %
737 %
(4 %)
(14 %)
47 %
19 %
(9 %)
12 %
29 %
(4 %)
10 %
737 %
(4 %)
2009
2008
2007
2009
vs. 2008
2008
vs. 2007
343,265 $ 283,901 $ 199,673
28,684
21,779
22,628
26,680
42,443
34,363
6,966
1,160
1,629
405,595 $ 342,521 $ 265,055
311,221 $ 254,330 $ 178,585
23,989
17,886
18,720
18,325
29,480
23,636
353,535
225,951
296,686
32,044
4,695
8,355
45,094
6,966 $
21,088
3,893
12,963
37,944
1,160
405,595 $ 342,521 $ 265,055
29,571
3,908
10,727
44,206
1,629 $
21 %
27 %
(22 %)
328 %
18 %
22 %
28 %
(22 %)
19 %
8 %
20 %
(22 %)
2 %
328 %
18 %
42 %
4 %
(19 %)
40 %
29 %
42 %
5 %
(20 %)
31 %
40 %
0 %
(17 %)
17 %
40 %
29 %
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.
12 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Changes in Federated’s average asset mix year-over-year across both asset and product types have a direct impact on Federated’s
operating income. Asset mix impacts Federated’s total revenue due to the difference in the fee rates per invested dollar earned on each
asset and product type. Equity products generally have a higher management-fee rate than fixed-income products, money market
products and liquidation portfolios. Likewise, mutual fund products typically have a higher management-fee rate than Separate
Accounts. Similarly, traditional separate accounts typically have a higher management-fee rate than liquidation portfolios. Additionally,
certain components of marketing and distribution expense can vary depending upon the asset type, distribution channel and/or the size
of the customer relationship. Federated generally pays out a larger portion of the revenue earned from managed assets in money market
funds than managed assets in equity or fixed-income funds. The following table presents the relative composition of average managed
assets and the percent of total revenue derived from each asset type over the last three years:
By Asset Class
Money market assets
Fixed-income assets
Equity assets
Liquidation portfolios
Other activities
By Product Type
Mutual Funds:
Money market assets
Fixed-income assets
Equity assets
Separate Accounts:
Money market assets
Fixed-income assets
Equity assets
Liquidation Portfolios
Other activities
Percent of Total Average Managed Assets
2009
2008
2007
85%
7%
6%
2%
––
77%
6%
4%
8%
1%
2%
2%
––
83%
7%
10%
0%
––
74%
5%
7%
9%
2%
3%
0%
––
75%
9%
16%
0%
––
67%
7%
11%
8%
2%
5%
0%
––
Percent of Total Revenue
2009
2008
2007
65%
12%
23%
0%
0%
64%
11%
20%
1%
1%
3%
0%
0%
61%
9%
29%
0%
1%
60%
9%
25%
1%
0%
4%
0%
1%
49%
11%
39%
0%
1%
49%
10%
34%
0%
1%
5%
0%
1%
Total managed assets represent the balance of assets under management at a point in time. By contrast, average managed assets represent
the average balance of assets under management during a period of time. Because substantially all revenue and certain components of
marketing and distribution expense are generally calculated daily based on assets under management, changes in average managed assets
are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.
December 31, 2009 period-end managed assets decreased 4% over period-end managed assets at December 31, 2008 as a result of
decreases in money market assets, partially offset by increases in fixed-income and equity assets. Average managed assets for 2009
increased 18% over average managed assets for 2008. Period-end money market assets decreased 12% for 2009 compared to 2008.
Average money market assets increased 21% for 2009 compared to 2008 primarily as a result of the significant inflows of assets into
Federated’s money market funds in late 2008 and early 2009. Period-end equity assets increased 11% for 2009 as compared to 2008 due
primarily to market appreciation. Average equity assets decreased 22% for 2009 compared to 2008 primarily due to market depreciation
and net redemptions which had largely occurred in 2008, partially offset by the Clover Capital and Prudent Bear Acquisitions. Period-
end fixed-income assets increased 44% for 2009 as compared to 2008. Average fixed-income assets increased 27% for 2009 as compared
to 2008 primarily due to positive net sales and, to a lesser extent, market appreciation and the Prudent Bear and Clover Capital
Acquisitions. Liquidation portfolios at December 31, 2009 increased 737% as compared to December 31, 2008. Average assets in
liquidation portfolios increased for 2009 as compared to 2008. These increases were primarily due to the selection of Federated to
advise a multi-billion-dollar portfolio in the third quarter 2009.
December 31, 2008 period-end managed assets increased 35% over period-end managed assets at December 31, 2007 as a result of
increases in money market and fixed-income assets, partially offset by decreases in equity assets. Average managed assets for 2008
increased 29% over average managed assets for 2007. Period-end money market assets increased 50% for 2008 compared to 2007.
Average money market assets increased 42% for 2008 compared to 2007. These increases were largely due to investors’ heightened
concerns about risk and uncertainty in the credit and financial markets and the Federal Reserve’s interest rate cuts beginning in
September 2007. Period-end equity assets decreased 37% for 2008 as compared to 2007. Average equity assets decreased 19% for 2008
compared to 2007 due to market depreciation and, to a lesser extent, net redemptions. Period-end fixed-income assets increased 8% for
2008 as compared to 2007. Average fixed-income assets increased 4% for 2008 as compared to 2007 primarily due to positive net sales.
2009 Annual Report 13
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Changes in Equity and Fixed-Income Fund Managed Assets
in millions for the years ended December 31,
Fixed-Income Funds
Beginning assets
Sales
Redemptions
Net sales
Net exchanges
Acquisition-related
Market gains and losses/reinvestments1
Ending assets
Equity Funds
Beginning assets
Sales
Redemptions
Net redemptions
Net exchanges
Acquisition-related
Market gains and losses/reinvestments1
Ending assets
2009
$ 19,321
16,892
(10,073)
6,819
128
0
2,159
$ 28,427
$ 17,562
5,560
(5,607)
(47)
(90)
257
3,278
$ 20,960
2008
17,943
8,681
(7,242)
1,439
92
658
(811)
19,321
29,145
5,040
(7,205)
(2,165)
(266)
1,191
(10,343)
17,562
$
$
$
$
Percent
Change
8%
95%
39%
374%
39%
(100%)
366%
47%
(40%)
10%
(22%)
(98%)
(66%)
(78 %)
132%
19%
1 Reflects 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
in millions for the years ended December 31,
Fixed-Income Separate Accounts
Beginning assets
Net customer flows2
Acquisition-related
Market gains and losses/reinvestments4
Ending assets
Equity Separate Accounts
Beginning assets
Net customer flows2
Acquisition-related3
Market gains and losses/reinvestments4
Ending assets
Liquidation Portfolios
2009
4,165
510
0
685
5,360
9,099
(1,429)
(257)
1,300
8,713
$
$
$
$
2008
3,754
86
444
(119)
4,165
13,017
(1,375)
1,537
(4,080)
9,099
$
$
$
$
Percent
Change
11%
493%
(100%)
676%
29%
(30%)
4%
(117%)
132%
(4%)
Beginning assets
Net customer flows2
34%
1600%
102%
737%
2 For certain accounts, Net customer flows are calculated as the remaining difference between beginning and ending assets after the calculation of Market
1,505
11,085
6
$ 12,596
Market gains and losses/reinvestments4
1,127
652
(274)
1,505
Ending assets
$
$
$
gains and losses/reinvestments.
3 Includes assets that were reclassified from Equity Separate Accounts to Equity Funds as a result of the acquisition of a previously sub-advised fund during
the third quarter 2009.
4 Reflects 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.
14 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Results of Operations
Revenue. The following table sets forth components of total revenue from continuing operations for the three years ended
December 31:
in millions
Revenue from managed assets
Revenue from sources other than managed assets
Total revenue
2009
2008
2007
$ 1,169.2
6.8
$ 1,176.0
$ 1,212.6
11.1
$ 1,223.7
$ 1,114.1
13.5
$ 1,127.6
2009
vs. 2008
(4%)
(39%)
(4%)
2008
vs. 2007
9%
(18%)
9%
Revenue from managed assets decreased $43.4 million in 2009 as compared to 2008. Certain money market fund fees for 2009 totaling
$120.6 million were voluntarily waived in order to maintain positive or zero net yields. See Business Developments – Recent
Disruption in Global Financial Markets for additional information on the related offsetting reduction in expense and the net impact on
operating income. In addition, revenue from managed assets decreased $113.6 million due to a decrease in average equity assets under
management (excluding assets acquired in connection with the significant acquisitions in the fourth quarter 2008). These decreases were
partially offset by an increase in revenue of $120.2 million due to an increase in average money market assets under management, a
$31.6 million increase in revenue generated from assets acquired in connection with significant acquisitions in the fourth quarter 2008,
a $19.4 million increase due to an increase in average fixed-income managed assets excluding assets from the aforementioned significant
acquisitions and a $12.4 million decrease in voluntary fee waivers for competitive reasons exclusive of fees waived to maintain positive
or zero net yields.
Management expects the fee waivers and the related reduction in marketing and distribution expense will continue in 2010 and will
likely be material. An increase in interest rates that results in higher yields on securities purchased in money market fund portfolios
would reduce the operating income impact of these waivers. Management is unable to provide a reasonable estimate of the impact of
fee waivers expected for 2010 as the amount of the waivers is contingent on a number of variables including available yields on
instruments held by the funds, changes in assets within the funds, actions by the Federal Reserve and the U.S. Department of the
Treasury, changes in expenses of the funds, changes in the mix of customer assets, and Federated’s willingness to continue the waivers.
Federated’s ratio of revenue from managed assets to average managed assets for 2009 was 0.29% as compared to 0.35% for 2008. The
decrease in the rate was primarily due to the increase in average money market managed assets for 2009 as compared to 2008, the
decrease in average equity managed assets for the same periods of comparison as well as the significant increase in voluntary fee waivers
to maintain positive or zero net yields. Average managed assets invested in money market products for 2009 represented 85% of
Federated’s total average managed assets as compared to 83% for 2008, while average equity managed assets represented 6% of total
average managed assets for 2009 as compared to 10% for 2008. Money market products, fixed-income products and liquidation
portfolios generally have a lower management-fee rate than equity products.
Revenue from managed assets increased $98.5 million in 2008 as compared to 2007 primarily due to a $198.3 million increase resulting
from an increase in average money market managed assets. This increase was partially offset by a decrease in revenue of $83.5 million
due to a decrease in average equity assets under management and a decrease of $4.6 million due to a change in the mix of average
fixed-income assets under management in 2008 as compared to 2007. In addition, Federated incurred an increase of $11.0 million in
voluntary fee waivers in 2008 for competitive reasons as compared to the same period in 2007. Of the $11.0 million increase in
voluntary fee waivers, $3.6 million represented fee waivers to maintain positive or zero net yields.
Federated’s ratio of revenue from managed assets to average managed assets for 2008 was 0.35% as compared to 0.42% for 2007. The
decrease in the rate was primarily due to the significant increase in average money market managed assets as well as the significant
decrease in average equity managed assets throughout 2008. Average managed assets invested in money market products for 2008
represented 83% of Federated’s total average managed assets as compared to 75% for 2007, while average equity managed assets
represented 10% of total average managed assets for 2008 as compared to 16% for 2007. Money market and fixed-income products
generally have a lower management-fee rate than equity products.
2009 Annual Report 15
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Operating Expenses. The following table sets forth operating expenses for the three years ended December 31:
in millions
Marketing and distribution
Compensation and related
Amortization of deferred sales commissions
Intangible asset impairment and amortization
All other
Total operating expenses
2009
408.3
254.4
18.5
32.6
132.9
846.7
$
$
2008
2007
2009
vs. 2008
2008
vs. 2007
$
$
440.3
237.2
31.4
18.4
135.2
862.5
$ 354.4
229.1
46.5
19.7
120.8
$ 770.5
(7%)
7%
(41%)
77%
(2%)
(2%)
24%
4%
(32%)
(7%)
12%
12%
Total operating expenses for 2009 decreased $15.8 million compared to 2008. Marketing and distribution expense decreased $32.0
million primarily due to the aforementioned $86.4 million reduction associated with maintaining positive or zero net yields in certain
money market funds, partially offset by a $56.3 million increase related to increased average money market managed assets in 2009 as
compared to 2008. Compensation and related expense increased $17.2 million primarily due to: (1) a $10.0 million increase due to a
full year of expenses in 2009 for the Clover Capital and Prudent Bear Acquisitions as compared to a partial year in 2008, (2) a $3.8
million increase in incentive compensation exclusive of the impact of the Clover Capital and Prudent Bear acquisitions and (3) a $3.3
million increase in share-based compensation due primarily to new share-based awards. Intangible asset impairment and amortization
increased $14.2 million due primarily to the impairment of certain customer relationship intangible assets in the first quarter 2009. See
Business Developments – Asset Impairments for additional information. Amortization of deferred sales commission decreased $12.9
million in 2009 as compared to 2008 primarily due to lower average B-share assets. All other expenses decreased primarily due to a $3.7
million decrease in Advertising and promotional.
Total operating expenses for 2008 increased $92.0 million compared to 2007. Marketing and distribution expense increased $85.9
million primarily due to increased average money market managed assets in 2008 as compared to 2007. Compensation and related
expense increased $8.1 million in 2008 as compared to 2007 primarily due to: (1) a $10.8 million increase in incentive compensation,
(2) an $8.7 million increase in regular pay primarily attributable to annual merit adjustments and higher staffing levels and (3) a $2.4
million increase in stock-based compensation primarily related to new award grants in 2007 and 2008, partially offset by a $15.0 million
decrease in expense related to the payment due upon execution of the Kaufmann employment agreements in 2007 (see Other Business
Developments). Amortization of deferred sales commission decreased $15.1 million in 2008 as compared to 2007 primarily due to
lower average B-share assets. All other expenses increased primarily due to a $7.0 million increase in Professional service fees.
Nonoperating Income (Expenses). Nonoperating expenses, net, decreased $2.0 million in 2009 as compared to 2008 due to a $5.5
million increase in Gain (loss) on securities, net due primarily to increased market values of trading securities and a $1.4 million decrease
in Debt expense – nonrecourse primarily as a result of lower average B-share-related debt balances partially offset by a $3.5 million
decrease in Investment income, net primarily related to a decrease in average investment balances and average yields and a $1.9 million
increase in Debt expense – recourse due to a term-loan facility that Federated entered into in the third quarter 2008.
Nonoperating expenses, net, decreased $0.4 million in 2008 as compared to 2007 due primarily to a $2.4 million decrease in non-
recourse debt expense due primarily to lower average non-recourse debt balances. This decrease was partially offset by a $2.1 million
increase in recourse debt expense due to the Term Loan that was entered into in the third quarter 2008, as well as borrowings on the
existing revolving credit facility.
Income Taxes on Continuing Operations. The income tax provision for continuing operations for 2009, 2008 and 2007 was $118.3
million, $128.2 million and $129.2 million, respectively. The provision for 2009 decreased $9.9 million as compared to 2008 primarily
due to lower Income from continuing operations before taxes partially offset by increases in valuation allowances on certain deferred tax
assets. The provision for 2008 as compared to 2007 decreased $1.0 million and reflects a $2.6 million favorable adjustment due primarily
to a correction of deferred tax balances following the full amortization of certain deferred sales commission assets, partially offset by
higher Income from continuing operations before taxes. The effective tax rate was 36.2% for 2009, 35.9% for 2008 and 36.7% for 2007.
See Note (18) to the Consolidated Financial Statements for additional information on the effective tax rate, as well as other tax
disclosures.
For 2009, Federated’s pretax book income was $35.3 million in excess of federal taxable income due primarily to $19.4 million in
temporary tax differences associated with amortization of certain intangible assets and $15.5 million in temporary tax differences related
to bonus accruals.
For 2008, Federated’s pretax book income was $32.7 million in excess of federal taxable income due primarily to $26.0 million in
temporary tax differences associated with amortization of certain intangible assets and permanent tax differences of $16.7 million
associated with tax deductions on stock options exercised during the year and $6.8 million associated with dividends paid on certain
unvested restricted shares, partially offset by temporary differences of $6.3 million associated with insurance proceeds recognized as
16 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
income in the year of receipt for tax purposes versus a future year for book purposes (see Note (11) to the Consolidated Financial
Statements) and $5.8 million related to deferred sales commissions.
For 2007, Federated’s pretax book income was $20.7 million in excess of federal taxable income due primarily to $17.9 million in
permanent tax differences associated with tax deductions on restricted stock vestings and stock options exercised during the year.
Income from Continuing Operations attributable to Federated Investors, Inc. Income from continuing operations decreased $24.2
million in 2009 as compared to 2008 primarily as a result of the changes in revenues and expenses noted above. Diluted earnings per
share for income from continuing operations for the year ended December 31, 2009 decreased $0.23 as compared to the same period of
2008 primarily due to decreased income from continuing operations.
Income from continuing operations increased $4.0 million in 2008 as compared to 2007 primarily as a result of the changes in revenues
and expenses noted above. Diluted earnings per share for income from continuing operations for the year ended December 31, 2008
increased $0.05 as compared to the same period of 2007 primarily due to decreased weighted-average shares outstanding ($0.03) as well
as the impact of increased income from continuing operations ($0.02).
Discontinued Operations. Discontinued operations, net of tax totaled $2.8 million for 2008. In the second quarter 2008, Federated
recognized a $4.8 million pre-tax gain for the final contingent payment received from the sale of certain assets associated with its
TrustConnect® mutual fund processing business (the Clearing Business) to Matrix Settlement and Clearance Services, LLC (Matrix) in
2006. The final payment, which was received in the third quarter 2008, was earned in the second quarter 2008 and was calculated as a
percentage of Matrix’s second quarter 2008 net revenue above a specific threshold directly attributed to the Clearing Business.
Liquidity and Capital Resources
Liquid Assets. At December 31, 2009, liquid assets, consisting of cash and cash equivalents, short-term investments and receivables,
totaled $132.7 million as compared to $82.5 million in 2008. The increase of $50.2 million primarily reflects an increase of $45.0
million in Cash and cash equivalents which was attributable to the following significant items:
Cash from Operating Activities. Net cash provided by operating activities totaled $274.6 million for 2009 as compared to $311.0
million for 2008. The decrease of $36.4 million was primarily due to: (1) a $22.9 million decrease in Net income including
noncontrolling interests in subsidiaries, (2) a $12.9 million decrease in amortization of deferred sales commissions primarily due to lower
average B-share assets, (3) an $8.6 million reduction in tax benefits from stock-based compensation primarily due to decreased stock
option exercise activity ($4.4 million) and a lower average market price related to those exercises ($1.4 million) and a decrease in tax
benefits related to restricted stock ($1.8 million) primarily as a result of a lower average market price at the time of restricted stock
vesting in 2009 as compared to 2008 and (4) timing differences of $14.4 million in the cash settlement of assets and liabilities. These
items were partially offset by a $21.1 million increase in impairments recorded in 2009 as compared to 2008 (see Business
Developments – Asset Impairments for additional information).
Cash Used in Investing Activities. In 2009, Federated used $51.6 million for investing activities, which included $26.2 million in cash
paid for property and equipment that included the purchase of a new aircraft ($16.5 million) and $24.3 million in cash paid primarily in
connection with a contingent purchase price payment for a prior year acquisition.
Cash Used in Financing Activities. In 2009, Federated used $178.0 million for financing activities. Of this amount, Federated paid
$98.5 million or a total of $0.96 per share in dividends to holders of its common shares in 2009 and $20.1 million to repurchase 0.8
million shares of Class B common stock in the open market under the stock repurchase program and in private transactions. In addition,
Federated repaid $91.8 million and borrowed $54.8 million during the year ended December 31, 2009 in connection with its $200
million revolving credit facility. During the year ended December 31, 2009, Federated also repaid $14 million of its borrowings on its
Term Loan. See Note (12) to the Consolidated Financial Statements for more information on Recourse debt.
Borrowings. During 2008, Federated entered into a $140 million Term Loan with an option to increase its borrowings to $150 million
during the term of the facility upon commitment from the lending banks. The Term Loan requires quarterly principal payments
totaling $21 million and $28 million in 2010 and 2011, respectively, and a balloon payment of $77 million when the loan expires on
October 31, 2011. As mentioned above, during the year ended December 31, 2009, Federated repaid $14 million of its borrowings on
its Term Loan.
Federated also has a $200 million Revolving Credit Facility that expires October 31, 2011 (Revolver). As of December 31, 2009,
Federated had no borrowings against the Revolving Credit Facility. See Note (12) to the Consolidated Financial Statements for more
information on Recourse debt.
Proceeds from the debt facilities have been used for general corporate purposes including cash payments related to acquisitions, regular
quarterly dividends and share repurchase programs. The proceeds were also used to finance a portion of the special cash dividend
payment in 2008.
Both the Revolver and Term Loan have interest coverage ratio covenants (consolidated earnings before interest, taxes, depreciation and
amortization (EBITDA) to consolidated interest expense) of at least 4 to 1 and a leverage ratio covenant (consolidated debt to
2009 Annual Report 17
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
consolidated EBITDA) of no more than 2 to 1, as well as other customary terms and conditions. As of December 31, 2009, the interest
coverage ratio and leverage ratio were 97.1 to 1 and 0.3 to 1, respectively. Federated was in compliance with its interest coverage and
leverage ratios at and during the year ended December 31, 2009. Both the Revolver and Term Loan also have certain stated events of
default and cross default provisions which would permit the lenders to accelerate the repayment of the debt if not cured within the
applicable grace periods. The events of default generally include breaches of contract, failure to make required loan payments,
insolvency, cessation of business, notice of lien or assessment and other proceedings, whether voluntary or involuntary, that would
require the repayment of amounts borrowed.
Future Cash Needs. In addition to the contractual obligations and contingent liabilities described below, management expects that
principal uses of cash will include funding marketing and distribution expenditures, paying incentive and base compensation, repaying
recourse debt obligations, paying shareholder dividends, funding business acquisitions, repurchasing company stock, advancing sales
commissions, seeding new products and funding property and equipment acquisitions, including computer-related software and
hardware. As a result of the highly regulated nature of the investment management business, management anticipates that expenditures
for compliance personnel, compliance systems and related professional and consulting fees may continue to increase. Resolution of the
matters previously described regarding past mutual fund trading issues and related legal proceedings, including the excessive fee cases
could result in payments which may have a material impact on Federated’s liquidity, capital resources and results of operations.
On January 28, 2010, the board of directors declared a $1.50 per share cash dividend to shareholders of record as of February 5, 2010,
which was paid on February 12, 2010. The dividend consists of a $0.24 per share quarterly dividend and a $1.26 per share special
dividend. A significant portion of the dividend was funded by cash on hand. All dividends were considered ordinary dividends for tax
purposes.
After evaluating Federated’s existing liquid assets, expected continuing cash flow from operations, its remaining borrowing capacity
under the Revolver and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have
sufficient liquidity to meet its present and reasonably foreseeable cash needs. In February, Federated borrowed $53.5 million against the
Revolver in order to meet cash needs. In the first half of 2010, management expects to borrow additional amounts under the Revolver
to meet certain future cash needs including the payment of incentive compensation, taxes and contingent consideration under certain
acquisition agreements. Management may choose to borrow additional amounts up to the maximum available under the Revolver
which could cause total outstanding borrowings to total as much as $321 million.
Management estimates that of the $28.1 million of deferred tax assets (net of valuation allowances) at December 31, 2009, $11.9 million
will reverse in 2010.
Financial Position
The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Investments at December 31, 2009 increased $18.3 million from December 31, 2008 primarily due to an increase in trading securities
held by consolidated products as a result of new share subscriptions by redeemable noncontrolling interests.
Prepaid expenses at December 31, 2009 increased $15.8 million from December 31, 2008 primarily due to an increase in prepaid taxes
as a result of required projections used in the calculation of estimated income tax payments.
Deferred sales commissions, net at December 31, 2009 decreased $14.9 million from December 31, 2008 and Long-term debt –
nonrecourse at December 31, 2009 decreased $16.9 million from December 31, 2008 in large part as a result of a decrease in the level
of Class B share sales of sponsored funds in 2009. In addition, the asset and debt balances are reduced each quarter as amortization of the
deferred sales commission asset is recorded and as cash flows from financings prior to March 2007 are recorded, in large part, as a
reduction to the nonrecourse debt.
Other current liabilities at December 31, 2009 increased $19.8 million from December 31, 2008 due primarily to the increase in the
contingent purchase price payment accrual for the Alliance Acquisition at December 31, 2009 as compared to December 31, 2008. Also
included in Other current liabilities at December 31, 2009 and 2008 was $20.8 million and $17.0 million, respectively, related to an
insurance recovery for claims submitted to cover costs associated with the internal review and government investigations into past
mutual fund trading practices and related civil litigation (see Note (21)(c) to the Consolidated Financial Statements). The retention of
these advance insurance payments is contingent upon final approval of the claim by the insurance carrier. In the event that all or a
portion of the claim is denied, Federated will be required to repay all or a portion of these advance payments. Because the outcome of
this claim is uncertain at this time, Federated recorded the advance payments as a liability and will continue to evaluate the contingency
until it is resolved.
Accounts payable and accrued expenses at December 31, 2009 decreased $15.5 million from December 31, 2008 due primarily to
reduced accruals for marketing and distribution expenses due mostly to reductions related to fee waivers to maintain positive or zero net
yields. See Business Developments – Recent Disruption in Global Financial Markets for additional information on these reductions.
18 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Goodwill at December 31, 2009 increased $47.6 million from December 31, 2008. During 2009, Federated recorded goodwill
primarily in connection with contingent purchase price payments and accruals related to the 2005 acquisition of the cash management
business of Alliance Capital Management L.P. (Alliance Acquisition) ($33.4 million) and adjustments to revise the preliminary purchase
price allocations recorded for the Prudent Bear Acquisition ($10.6 million) and the Clover Capital Acquisition ($3.1 million). See
Note (3) and Note (21)(a) to the Consolidated Financial Statements for additional information. As of December 31, 2009, Federated’s
market capitalization exceeded the recorded goodwill balance by more than 350%.
Off-Balance Sheet Arrangements
As of December 31, 2009 and 2008, Federated did not have any material off-balance sheet arrangements.
Contractual Obligations and Contingent Liabilities
Contractual. The following table presents as of December 31, 2009, Federated’s significant minimum noncancelable contractual
obligations by payment date. The payment amounts represent amounts contractually due to the recipient and do not include any
unamortized discounts or other similar carrying value adjustments. Further discussion of the nature of each obligation is included either
in the referenced Note to the Consolidated Financial Statements or in a footnote to the table.
in millions
Long-term debt obligations1
Operating lease obligations
Purchase obligations2
Employment-related commitments3
Acquisition-related contingent payments
Total
Note
Reference
(12)
(17)
(21)(a)
Payments due in
2010
$23.0
12.1
11.1
23.7
34.3
$104.2
2011-2012
$106.3
22.3
5.3
27.2
0
$161.1
2013-2014
$0
21.3
1.3
15.9
0
$38.5
After 2014
$0
9.4
1.2
0
0
$10.6
Total
$129.3
65.1
18.9
66.8
34.3
$314.4
1 Amounts include principal and interest payments. Assuming recourse debt balances and the weighted-average interest rates in effect at December 31,
2009 (see Note (12) to the Consolidated Financial Statements), Federated’s minimum contractual interest payments would be approximately $2 million
and $1.3 million for 2010 and 2011-2012 periods, respectively.
2 Federated is a party to various contracts pursuant to which it receives certain services including legal, access to various fund-related information systems
and research databases, as well as trade order transmission and recovery services. These contracts contain certain minimum noncancelable payments,
cancellation provisions and renewal terms. The contracts expire on various dates through the year 2019. Costs for such services are expensed as
incurred.
3 Federated has certain domestic and international employment arrangements pursuant to which Federated is obligated to make minimum compensation
payments. These contracts expire on various dates through the year 2014.
As part of the Prudent Bear Acquisition, Federated is required to make contingent purchase price payments based upon certain revenue
growth targets over the four-year period following the acquisition date. The purchase price payments, which could total as much as
$99.5 million, will be recorded as additional goodwill at the time the contingency is resolved. As of December 31, 2009, $5.1 million
related to the first contingent purchase price payment was accrued in Other current liabilities, was recorded as goodwill and will be paid
in the first quarter of 2010.
As part of the Clover Capital Acquisition, Federated is required to make contingent purchase price payments based upon growth in
revenues over the five-year period following the acquisition date. The purchase price payments, which could total as much as $56
million, will be recorded as additional goodwill at the time the contingency is resolved. The applicable growth targets were not met for
the first payment related to the anniversary year ended in December 2009. As such, no amounts were accrued in 2009, or will be paid
in 2010.
As part of the 2006 acquisition of MDTA LLC (MDTA), Federated was required to make annual contingent purchase price payments
based upon growth in MDTA net revenues over a three-year period. The first two contingent purchase price payments of $43.3
million and $40.9 million were paid in the third quarters of 2007 and 2008, respectively, and were recorded as goodwill. The applicable
growth targets were not met for the final payment related to the anniversary year ended in July 2009. As such, there will be no further
payments.
As part of the Alliance Acquisition, Federated is required to make contingent purchase price payments over a five-year period. These
payments are calculated as a percentage of revenues less certain operating expenses directly attributed to the assets acquired. The first
four contingent purchase price payments of $10.7 million, $13.3 million, $16.2 million and $19.8 million were paid in the second
quarters of 2006, 2007, 2008 and 2009, respectively. At current asset levels, the final payments in 2010 would total approximately $36
million. As of December 31, 2009, $28.9 million, which includes a $10 million lump-sum payment, was accrued in Other current
liabilities and recorded as goodwill. Contingent payments are recorded as additional goodwill at the time the related contingency is
resolved.
2009 Annual Report 19
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
In the third quarter 2007, Federated completed a transaction with Rochdale Investment Management LLC to acquire certain assets
relating to its business of providing investment advisory and investment management services to the Rochdale Atlas Portfolio (Rochdale
Acquisition). The Rochdale Acquisition agreement provides for two forms of contingent purchase price payments that are dependent
upon asset growth and fund performance through 2012. The first form of contingent payment is payable in 2010 and 2012 and could
aggregate to as much as $20 million. The second form of contingent payment is payable on a semi-annual basis over the five-year
period following the acquisition closing date based on certain revenue earned by Federated from the Federated InterContinental Fund.
As of December 31, 2009, $2.1 million was paid related to these semi-annual contingent purchase price payments and $0.3 million
related to future contingent purchase price payments was accrued in Other current liabilities and recorded as goodwill. Contingent
payments are recorded as additional goodwill at the time the related contingency is resolved.
Pursuant to various significant employment arrangements, Federated may be required to make certain incentive compensation-related
payments. The employment contracts expire on various dates through the year 2014 with payments possible through 2018. As of
December 31, 2009, the maximum bonus payable over the remaining terms of the contracts approximates $91 million, of which
approximately $4 million would be payable in 2010 if the necessary performance targets are met and the employees continue to be
employed as of the relevant payment dates. In addition, certain employees have incentive compensation opportunities related to the
Federated Kaufmann Large Cap Fund (the Fund Bonus). Based on current asset levels, a nominal amount would be paid in 2011 as the
first Fund Bonus payment. Management is unable to reasonably estimate a range of possible bonus payments for the Fund Bonus for
subsequent years due to the wide range of possible growth-rate scenarios.
Pursuant to another acquisition agreement and long-term employment arrangements, Federated may be required to make additional
payments upon the occurrence of certain events. Under these other agreements, payments could occur on an annual basis and continue
through 2013.
Past Mutual Fund Trading Issues and Related Legal Proceedings. During the fourth quarter 2005, Federated entered into
settlement agreements with the Securities and Exchange Commission (SEC) and New York State Attorney General (NYAG) to resolve
the past mutual fund trading issues. Under the terms of the settlements, Federated paid for the benefit of fund shareholders a total of
$80.0 million. In addition, Federated agreed to reduce the investment advisory fees on certain Federated funds by $4.0 million per year
for the five-year period beginning January 1, 2006, based upon effective fee rates and assets under management as of September 30,
2005. Depending upon the level of assets under management in these funds during the five-year period, the actual investment advisory
fee reduction could be greater or less than $4.0 million per year. For the years ended December 31, 2009, 2008 and 2007, these fee
reductions were approximately $3 million, $3 million and $4 million, respectively.
Since October 2003, Federated has been named as a defendant in twenty-three cases filed in various federal district courts and state
courts involving allegations relating to market timing, late trading and excessive fees. All of the pending cases involving allegations
related to market timing and late trading have been transferred to the U.S. District Court for the District of Maryland and consolidated
for pre-trial proceedings. One market timing/late trading case was voluntarily dismissed by the plaintiff without prejudice.
The seven excessive fee cases were originally filed in five different federal courts and one state court. All six of the federal cases are now
consolidated and pending in the U.S. District Court for the Western District of Pennsylvania. The state court case was voluntarily
dismissed by the plaintiff without prejudice.
The plaintiffs in the excessive fee cases seek compensatory damages reflecting a return of all advisory fees earned by Federated in
connection with the management of the Federated Kaufmann Fund since June 28, 2003, as well as attorneys' fees and expenses. The
remaining lawsuits seek unquantified damages, attorneys’ fees and expenses. Federated is defending this litigation. The potential impact
of these lawsuits and similar suits against third parties, as well as the timing of settlements, judgments or other resolution of these
matters, is uncertain. It is possible that an unfavorable determination will cause a material adverse impact on Federated’s financial
position, results of operations and/or liquidity in the period in which the effect becomes reasonably estimable.
The Consolidated Financial Statements for the years ended December 31, 2009, 2008 and 2007 reflect $10.6 million, $7.5 million and
$4.4 million, respectively, for costs associated with various legal, regulatory and compliance matters, including costs incurred on behalf
of the funds, costs incurred and estimated to complete the distribution of Federated’s regulatory settlement, costs related to certain other
undertakings of these settlement agreements, and costs incurred and estimated to resolve certain of the above-mentioned ongoing legal
proceedings. Accruals for these estimates represent management’s best estimate of probable losses at this time. Actual losses may differ
from these estimates, and such differences may have a material impact on Federated’s consolidated results of operations, financial
position or cash flows.
20 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Other Legal Proceedings. Federated has other claims asserted and threatened against it in the ordinary course of business. As of
December 31, 2009, Federated does not believe that a material loss related to these claims is reasonably estimable. These claims are
subject to inherent uncertainties. It is possible that an unfavorable determination will cause a material adverse impact on Federated’s
reputation, financial position, results of operations and/or liquidity in the period in which the effect becomes reasonably estimable.
Variable Interest Entities
Federated is involved with various entities in the normal course of business that may be deemed to be variable interest entities (VIEs).
Federated determined that it was the primary beneficiary of certain investment-fund VIEs and, as a result, consolidated the assets,
liabilities and operations of these VIEs in its Consolidated Financial Statements. See Note (6) to the Consolidated Financial Statements
for more information.
Recent Accounting Pronouncements
(a) In June 2009, the Financial Accounting Standards Board (FASB) issued literature introducing a new consolidation model. The new
literature prescribes a qualitative model for identifying whether a company has a controlling financial interest in a VIE and eliminates
the quantitative model under previous U.S. generally accepted accounting principles (GAAP). The new model identifies two primary
characteristics of a controlling financial interest: (1) the power to direct significant activities of the VIE, and (2) the obligation to absorb
losses of and/or provide rights to receive benefits from the VIE. Under the new accounting standard, a company is required to reassess
on an ongoing basis whether it holds a controlling financial interest in a VIE. A company that holds a controlling financial interest is
deemed to be the primary beneficiary of the VIE and is required to consolidate the VIE. The new consolidation model was effective
January 1, 2010 for calendar-year-end companies.
In December 2009, the FASB exposed for comment a draft amendment to the new consolidation model. The proposed amendment
addresses concerns with the application of the new consolidation model for reporting enterprises in the asset management industry by
proposing a deferral of the effective date of the new rules for certain investment funds including mutual funds, hedge funds, REITs,
private equity funds, and venture capital funds. The proposed amendment, which would most significantly affect investment
management companies, would defer the requirements of the new consolidation model indefinitely until such time that the FASB and
International Accounting Standards Board complete their joint project on consolidation accounting. The proposed amendment would
also indefinitely defer the effective date of the new consolidation model for interests in money market funds that are required to comply
with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940.
Management continues to evaluate and assess the impact of applying the new consolidation model. In light of the proposed deferral
which the FASB is expected to issue in final form in the near future, management does not believe its adoption of the new
consolidation model will have a material impact on Federated’s Consolidated Financial Statements.
(b) On January 1, 2009, Federated adopted a new accounting standard regarding determining whether instruments granted in share-
based payment transactions are participating securities for purposes of calculating earnings per share. This new accounting standard
addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore,
need to be included in the earnings allocation in computing earnings per share under the two-class method. It affects entities that accrue
or pay nonforfeitable cash dividends on share-based payment awards during the awards’ service periods. The prior period basic and
diluted earnings per share data presented have been restated to conform to the new two-class method. As restated, diluted earnings per
share for continuing operations for the years ended December 31, 2008 and December 31, 2007, respectively, were $0.05 and $0.02
less than the amounts previously reported.
(c) On January 1, 2009, Federated adopted a new accounting standard regarding business combinations. This new accounting standard
is intended to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations,
resulting in more complete, comparable and relevant information for investors and other users of financial statements. To achieve this
goal, this new accounting standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired
and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and expands the disclosure requirements for material business combinations. The adoption of this new
accounting standard did not have a material impact on Federated’s financial position and results of operations for the year ended
December 31, 2009, but will have a significant impact on Federated’s accounting for future business combinations in the period of
acquisition.
(d) On January 1, 2009, Federated adopted a new accounting standard regarding noncontrolling interests in consolidated financial
statements. This new accounting standard required the recharacterization of minority interests as noncontrolling interests and the
classification thereof as a component of equity, if permanent. The new accounting standard also required temporary equity classification
for financial instruments issued by a subsidiary that are redeemable or convertible for cash or other assets at the option of the holder.
The new accounting standard eliminated the diversity that existed in accounting for transactions between an entity and noncontrolling
interests by requiring that they be treated as equity transactions. The presentation and disclosure requirements of this new accounting
standard were applied retrospectively and as a result of adoption, Federated has distinguished between temporary and permanent equity.
2009 Annual Report 21
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Federated recharacterized the minority interests in consolidated sponsored investment products as “Redeemable noncontrolling interests
in subsidiaries” and classified them as temporary equity while all other minority interests were recharacterized as “Nonredeemable
noncontrolling interests in subsidiaries” and classified as permanent equity in the Consolidated Financial Statements. The adoption of
this new accounting standard did not have a material impact on Federated’s financial position and results of operations.
For a complete list of new accounting standards recently adopted by Federated and new accounting standards issued, but not yet
adopted by Federated, see Note (2) to the Consolidated Financial Statements.
Critical Accounting Policies
Federated’s Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. In preparing the financial
statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Management continually evaluates the accounting policies and estimates it uses to prepare the
Consolidated Financial Statements. In general, management's estimates are based on historical experience, information from third-party
professionals and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may
differ from those estimates made by management and those differences may be significant.
Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that its
policies regarding accounting for VIE consolidation, intangible assets, income taxes and loss contingencies involve a significant degree of
judgment and complexity.
Variable Interest Entity Consolidation. From time to time, Federated enters into transactions with entities that may be VIEs. Federated
makes judgments and estimates regarding the sufficiency of equity at risk, the rights of various holders of the entity to exercise control
and the rights and obligations of holders to receive returns or absorb losses of the entity in order to determine whether these entities are
VIEs. Whether at the time of Federated’s initial involvement with a VIE or as a result of a reconsideration event, Federated performs
qualitative and quantitative analysis of a VIE to determine whether Federated is the primary beneficiary and therefore, must consolidate
the VIE. In performing these analyses, Federated makes judgments and estimates regarding the future performance of the assets held by
the VIE, taking into account estimates of credit risk, timing of cash flows and other significant factors, and the likelihood of various
outcomes. With respect to a mutual fund that meets the definition of a VIE, reconsideration events occur frequently (e.g. as shares are
issued or redeemed from the fund) but the risk of consolidation by Federated is typically low once the fund is well established. For
CDOs that qualify as VIEs, reconsideration events are typically infrequent.
Accounting for Intangible Assets. Three aspects of accounting for intangible assets require significant management estimates and
judgment: (1) valuation in connection with the initial purchase price allocation; (2) ongoing evaluation for impairment and (3) the
determination of the useful life or whether the life is indefinite. The process of determining the fair value of identifiable intangible assets
at the date of acquisition requires management estimates and judgment as to expectations for earnings on the related managed assets
acquired, redemption rates for such managed assets, growth from sales efforts and the effects of market conditions. Management often
utilizes an independent valuation expert to help with this process. If actual changes in the related managed assets or the projected useful
life of the intangible asset, among other assumptions, differ significantly from the estimates and judgments used in determining the initial
fair value, the intangible asset amounts recorded in the financial statements could be subject to possible impairment or could require an
acceleration in amortization expense that could have a material adverse effect on Federated’s consolidated financial position and results
of operations.
The level, if any, of impairment of customer-related intangible assets is highly dependent upon the remaining level of managed assets
acquired in connection with an acquisition. Management monitors changes in the level of these managed assets for potential indicators
of impairment. The recoverability of a finite-lived customer relationship intangible asset is assessed using an undiscounted cash flow
model that considers various factors to project future cash flows expected to be generated from the respective asset. Indefinite-lived
intangible assets are tested for impairment annually and/or when events or changes in circumstances indicate the assets may be impaired.
Impairment is indicated when the carrying value of the intangible asset exceeds its fair value. In estimating the fair value of the
indefinite-lived intangible assets, Federated considers the results of various valuation techniques including an income approach where
future cash flows are discounted.
In developing cash flow estimates, management considers the following: (1) an estimated rate of change for underlying managed assets;
(2) expected revenue per managed asset; (3) identifiable incremental operating expenses; (4) useful life of the acquired asset; and, for
indefinite-lived intangible assets; (5) the discount rate. Management estimates a rate of change for underlying managed assets based on a
combination of an estimated rate of market appreciation or depreciation and an estimated net redemption or sales rate. Expected
revenue per managed asset, incremental operating expenses and the useful life of the acquired asset are generally based on contract
terms, average market participant data and historical experience.
At December 31, 2009, Federated had $39.7 million in indefinite-lived intangible assets recorded on its Consolidated Balance Sheets.
The indefinite-lived intangible assets related primarily to a renewable investment advisory contract intangible asset acquired in
connection with the Prudent Bear acquisition that was tested for impairment in 2009 at which time it was determined that no
impairment existed.
22 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Of the $34.2 million in finite-lived customer-related intangible assets at December 31, 2009, $18.7 million represented customer-
related assets for which the underlying managed assets have experienced growth since the acquisition date in excess of the assumptions
included in the initial valuation. As of December 31, 2009, the undiscounted cash flow projections for these assets exceeded their
respective carrying values by more than 400% on average assuming a 15% annual decline rate for assets under management. Declines in
assets under management in excess of 65% over the subsequent 12 months could cause the assets to be considered for impairment.
For certain other finite-lived customer-related assets that were impaired in the first quarter 2009 with a remaining fair value of $9.1
million, given the volatility of the markets and the possible impact on the inputs to the recoverability analysis, management performed a
recoverability analysis as of December 31, 2009. Based upon the results of the recoverability analysis, management concluded that the
assets were not further impaired at December 31, 2009. The undiscounted cash flows continue to exceed the carrying amount of the
assets by more than 30%. The undiscounted cash flows were estimated using probability-weighted scenarios which assumed assets under
management growth rates ranging from 35% to -45%. The different scenarios were developed after taking into consideration uncertain
market conditions, the timing and pace of a forecasted recovery and possible prolonged periods of underperformance compared to peer
funds and indices. As of December 31, 2009, declines in assets under management related to these intangible assets in excess of 15%
over the subsequent twelve months could cause the assets to be considered for further impairment.
For the remaining finite-lived customer-related intangible assets, undiscounted cash flow projections as of December 31, 2009 exceeded
the carrying values of the assets by more than 80% on average. The undiscounted cash flows as of December 31, 2009 were estimated
assuming a 15% annual decline rate for assets under management. As of December 31, 2009, declines in assets under management in
excess of 20% over the subsequent 12 months could cause the assets to be considered for impairment.
Actual changes in the underlying managed assets and other assumptions could cause the projected cash flows to vary significantly, which
may cause impairment of the related identifiable intangible asset. The actual amount of an impairment charge, if any, would depend on
the estimated fair value of the intangible asset at that time, which will be determined based on the actual level of managed assets, the
then-current projections of future changes in managed assets, estimated earnings and the discount rate.
Accounting for Income Taxes. Significant management judgment is required in developing Federated’s provision for income taxes,
including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred
tax assets. As of December 31, 2009, Federated had not recorded a valuation allowance on $3.2 million of its deferred tax assets relating
to write-downs of Federated’s CDO investments (all of which was unrecognized for tax purposes). Federated considered various factors
in connection with its evaluation of the partial realizability of these assets including: (1) the fact that the carry-forward period for capital
losses is five years beginning in the first tax year after the losses are recognized and (2) Federated has historically generated capital gains
in times of favorable market conditions. Based on these factors, management believes it is more likely than not that Federated will be
able to utilize a portion of these losses in the future. In the event that Federated’s strategies do not materialize, Federated may be
required to record an additional valuation allowance of as much as $3.2 million for these deferred tax assets.
Significant management judgment is required to account for uncertainty in income taxes. The processes of determining (1) whether it is
more likely than not that a position will be sustained upon examination and (2) the largest amount of tax benefit that is greater than
50% likely of being realized upon ultimate settlement with the taxing authority require management estimates and judgment as to
expectations of the amounts and probabilities of the outcomes that could be realized. Management considers the facts and circumstances
available as of the reporting date in order to determine the appropriate tax benefit to recognize including tax legislation and statutes,
legislative intent, regulations, rulings and case law. Significant differences could exist between the ultimate outcome of the examination
of a tax position and management’s estimate. These differences could have a material impact on Federated’s effective tax rate, results of
operations, financial position and/or cash flows.
Accounting for Loss Contingencies. Federated accrues for estimated costs, including legal costs related to existing lawsuits, claims and
proceedings when it is probable that a loss has been incurred and the costs can be reasonably estimated. Accruals are reviewed at least
quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a
particular matter. Significant differences could exist between the actual cost required to investigate, litigate and/or settle a claim or the
ultimate outcome of a suit and management’s estimate. These differences could have a material impact on Federated’s results of
operations, financial position and/or cash flows.
2009 Annual Report 23
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Risk Factors
Potential Adverse Effects of a Material Concentration in Revenue. For 2009, approximately 65% of Federated’s total revenue was
attributable to money market managed assets as compared to 61% and 49% for 2008 and 2007, respectively. A significant change in
Federated’s money market business or a significant decline in money market managed assets due to regulatory changes, changes in the
financial markets, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of
historically low short-term interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on
Federated’s results of operations.
Potential Adverse Effects of Historically Low Interest Rates. In December 2008, the Federal Reserve cut the federal funds target rate,
a benchmark used by banks to set rates paid on many types of consumer and business loans, to a range between 0% and 0.25%. This
action by the Federal Reserve negatively impacts the yields of money market funds, in particular treasury and government agency
money market funds. Money market fund yields reflect the return on short-term investments (e.g. Treasury bills), less fund expenses.
With short-term interest rates at or near zero, money market funds may not be able to maintain positive yields for shareholders.
Federated voluntarily waives certain fees or assumes expenses of the funds for competitive reasons such as to maintain positive or zero
net yields, which could cause material adverse effects on Federated’s financial position, results of operations or liquidity in the future.
Federated, however, is not obligated to make such fee waivers or to assume such fund expenses.
Federated began waiving fees during the fourth quarter 2008 in order for certain funds to maintain positive or zero net yields. During
the course of 2009, fee waivers to maintain positive or zero net yields progressively increased quarter over quarter as fund yields
declined. These fee waivers which totaled $120.6 million for 2009 were partially offset by a related reduction in marketing and
distribution expenses of $86.4 million such that the net impact to Federated was $34.2 million in reduced operating income. The
impact of these fee waivers was significantly less in 2008 with $3.6 million in waived fees, $1.9 million in reduced marketing and
distribution expenses and a net impact on operating income of $1.7 million. (See Note (23) to the Consolidated Financial Statements
for information regarding the quarterly operating income impact of the fee waivers.) Management expects the fee waivers and the
related reduction in marketing and distribution expense will continue in 2010 and will likely be material. An increase in interest rates
that results in higher yields on securities purchased in money market fund portfolios would reduce the operating income impact of these
waivers. Management is unable to provide a reasonable estimate of the impact of fee waivers expected for 2010 as the amount of the
waivers is contingent on a number of variables including available yields on instruments held by the funds, changes in assets within the
funds, actions by the Federal Reserve and the U.S. Department of the Treasury, changes in expenses of the funds, changes in the mix of
customer assets, and Federated’s willingness to continue the waivers. In addition, in response to the challenges posed by the
unprecedented rate environment, extreme volatility and liquidity concerns that could arise in the marketplace, money market funds
may close to new and/or existing shareholders and/or their shareholders may become subject to an interim cash management service
fee, either of which could cause material adverse effects on Federated’s reputation, financial position, results of operations or liquidity.
Potential Adverse Effects of Rising Interest Rates. In a rising short-term interest rate environment, certain investors using money
market products and other short-term duration fixed-income products for cash management purposes may shift these investments to
direct investments in comparable instruments in order to realize higher yields than those available in money market and other fund
products holding lower-yielding instruments. In addition, rising interest rates will tend to reduce the market value of securities held in
various investment portfolios and other products. Thus, increases in interest rates could have an adverse effect on Federated’s revenue
from money market products and from other fixed-income products.
Potential Adverse Effects of a Decline or Disruption in the Economy or Financial Markets. Economic or financial market
downturns, including disruptions in securities and credit markets, may adversely affect the profitability and performance of, demand for
and investor confidence in Federated’s investment products and services. The ability of Federated to compete and sustain asset and
revenue growth is dependent, in part, on the relative attractiveness of the types of investment products Federated offers and its
investment performance and strategies under prevailing market conditions. In the event of extreme circumstances, including economic,
political, or business crises, Federated’s products may suffer significant net redemptions in assets under management causing severe
liquidity issues in its short-term sponsored investment products and declines in the value of and returns on assets under management, all
of which could cause material adverse effects on Federated’s reputation, financial position, results of operations or liquidity.
Likewise, a service provider or vendor of Federated, including the major banks that provide custody and portfolio accounting services
for Federated’s investment products, could also be adversely affected by the adverse market conditions described above. It is not possible
to predict with certainty the extent to which the services or products Federated receives from such service provider or vendor would be
interrupted or affected by such situations. Accordingly, there can be no assurance that potential service interruption or Federated’s
ability to find a suitable replacement would not have a material adverse effect on Federated’s reputation, financial position, results of
operations or liquidity.
Potential Adverse Effects of Changes in Laws and Regulations on Federated’s Investment Management Business. Federated and
its investment management business are subject to extensive regulation in the United States and abroad. Federated and the Federated
Funds are subject to Federal securities laws, principally the Securities Act of 1933, the Investment Company Act of 1940 (Investment
Company Act) and the Investment Advisers Act of 1940, state laws regarding securities fraud and regulations promulgated by various
24 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
regulatory authorities, including the SEC, the Financial Industry Regulatory Authority (FINRA), the Board of Governors of the
Federal Reserve System, U.S. Department of the Treasury and the New York Stock Exchange (the NYSE). Federated is also affected
by the regulations governing banks and other financial institutions and, to the extent operations take place outside the United States, by
foreign laws and regulatory authorities. Changes in laws, regulations or governmental policies, and the costs associated with compliance,
could materially and adversely affect the business and operations of Federated.
From time to time, the Federal securities laws have been augmented substantially. For example, among other measures, Federated has
been impacted by the Sarbanes-Oxley Act of 2002, the Patriot Act of 2001 and the Gramm-Leach-Bliley Act of 1999. Currently
pending legislation could impose additional requirements and restrictions on, or otherwise affect the operations of, Federated and/or the
Federated Funds. In addition, during the past few years the SEC, FINRA and the NYSE have adopted regulations that have increased
Federated’s operating expenses and affected the conduct of its business, and may continue to do so. In January 2010, the SEC adopted
amendments to Rule 2a-7 of the Investment Company Act which could impact the operation of certain Federated Funds, although
Federated does not expect any such impact to Federated or the Federated Funds to be material. Other significant regulations or
amendments to regulations have been proposed that, if adopted, will affect Federated and the Federated Funds, and Federated
anticipates that other reforms and regulatory actions affecting Federated and/or the mutual fund industry are likely to occur.
Certain regulatory changes by governmental agencies, including the SEC, and industry groups could result in a material adverse effect
on Federated’s business of managing money market funds if enacted. Examples of regulatory changes that could cause such harm
include the imposition of banking regulations on investment advisers, the creation of net capital requirements for investment advisers
and/or a change in the rules governing money market mutual fund net asset value (NAV) calculations including the elimination of
amortized cost accounting, which would result in fluctuating NAVs for money market mutual funds.
Over the past few years, various service industries, including mutual fund service providers, have been the subject of changes in tax
policy that impact their state and local tax liability. Changes that have been adopted or proposed include (1) an expansion of the nature
of a service company's activities that subject it to tax in a jurisdiction, (2) a change in the methodology by which multi-state companies
apportion their income between jurisdictions, and (3) a requirement that affiliated companies calculate their state tax as one combined
entity. As adopted changes become effective and additional jurisdictions effect similar changes, there could be a material adverse effect
on Federated's tax liability and effective tax rate and, as a result, net income.
Potential Adverse Effect of Providing Financial Support to Investment Products. Federated may, at its sole discretion, from time to
time elect to provide financial support to its sponsored investment products. Providing such support utilizes capital that would
otherwise be available for other corporate purposes. Losses on such support, or failure to have or devote sufficient capital to support
products, could have a material adverse effect on Federated’s reputation, financial position, results of operations or liquidity.
Risk of Federated’s Money Market Products’ Ability to Maintain a Stable $1.00 Net Asset Value. Approximately 65% of Federated’s
revenue in 2009 was from managed assets in money market products. 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 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.
No Assurance of Access to Sufficient Liquidity. From time to time, Federated’s operations may require more cash than is then
available from operations. In these circumstances, it may be necessary to borrow from lending facilities or to raise capital by securing
new debt or by selling shares of Federated equity or debt securities. Federated’s ability to raise additional capital in the future will be
affected by several factors including Federated’s creditworthiness, the market value of Federated’s common stock, as well as general
market conditions. There can be no assurance that Federated will be able to obtain these funds and financing on acceptable terms, if at
all.
Retaining and Recruiting Key Personnel. Federated’s ability to locate and retain quality personnel has contributed significantly to its
growth and success and is important to attracting and retaining customers. The market for qualified executives, investment managers,
analysts, traders, sales representatives and other key personnel is extremely competitive. There can be no assurance that Federated will
be successful in its efforts to recruit and retain the required personnel. Federated has encouraged the continued retention of its
executives and other key personnel through measures such as providing competitive compensation arrangements and in certain cases
employment agreements. The loss of any such personnel could have an adverse effect on Federated. In certain circumstances, the
departure of key employees could cause higher redemption rates for certain assets under management or the loss of client accounts.
Moreover, since certain of Federated’s products contribute significantly to its revenues and earnings, the loss of even a small number of
key personnel associated with these products could have a disproportionate impact on Federated’s business.
2009 Annual Report 25
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Various executives, investment, sales and other key personnel own restricted stock and hold stock options subject to vesting periods of
up to ten years from the date acquired or awarded and to provisions that require resale or forfeiture to Federated in certain
circumstances upon termination of employment. In addition, certain of these employees are employed under contracts which require
periodic review of compensation and contain restrictive covenants with regard to divulging confidential information and engaging in
competitive activities.
Potential Adverse Effects of Increased Competition in the Investment Management Business. The investment management
business is highly competitive. Federated competes in the management and distribution of mutual funds and Separate Accounts with
other fund management companies, national and regional broker/dealers, commercial banks, insurance companies and other
institutions. Many of these competitors have substantially greater resources and brand recognition than Federated. Competition is based
on various factors, including business reputation, investment performance, quality of service, the strength and continuity of
management and selling relationships, marketing and distribution services offered, the range of products offered and fees charged.
Many of Federated’s products are designed for use by institutions such as banks, insurance companies and other corporations. A large
portion of Federated’s managed assets, particularly money market and fixed-income managed assets, are held by institutional investors.
Because most institutional investment vehicles are sold without sales commissions at either the time of purchase or the time of
redemption, institutional investors may be more inclined to transfer their assets among various institutional funds than investors in retail
mutual funds. Of Federated’s 145 managed funds, 88 are sold without a sales commission.
A significant portion of Federated’s revenue is derived from providing mutual funds to the wealth management and trust market,
comprising approximately 1,500 banks and other financial institutions. Future profitability of Federated will be affected by its ability to
retain its share of this market, and could also be adversely affected by consolidations occurring in the banking industry, as well as
regulatory changes.
Potential Adverse Effects of Changes in Federated’s Distribution Channels. Federated acts as a wholesaler of investment products to
financial intermediaries including banks, broker/dealers, registered investment advisers and other financial planners. Federated also sells
investment products directly to corporations and institutions. Two intermediary customers, the Bank of New York Mellon
Corporation (including its Pershing subsidiary) and Edward Jones & Co., L.P., accounted for a total of approximately 28% of
Federated’s total revenue for 2009. If one or more of the major financial intermediaries that distribute Federated’s products were to
cease operations or limit or otherwise end the distribution of Federated’s investment products, it could have a material adverse effect on
Federated’s future revenues and, to a lesser extent, net income. There can be no assurance that Federated will continue to have access to
the financial intermediaries that currently distribute Federated products or that Federated’s relationship with such intermediaries will
continue over time. Recently, financial intermediaries have experienced increases in employee turnover rates which may negatively
impact the distribution of our products. In addition, Federated has experienced increases in the cost of distribution as a percentage of
total revenue over the years and expects such costs to continue to increase due to asset growth and the competitive nature of the mutual
fund business, exclusive of decreases related to maintaining positive or zero net yields. Higher distribution costs reduce Federated’s
operating and net income.
Adverse Effects of Declines in the Amount of or Changes in the Mix of Assets Under Management. A significant portion of
Federated’s revenue is derived from investment advisory fees, which are based on the value of managed assets and vary with the type of
asset being managed, with higher fees generally earned on equity products than on fixed-income and money market products and
liquidation portfolios. Likewise, mutual fund products generally have a higher management fee than Separate Accounts. Additionally,
certain components of marketing and distribution expense can vary depending upon the asset type, distribution channel and/or the size
of the customer relationship. Consequently, significant fluctuations in the market value of securities held by, or the level of redemptions
from, the funds or other products advised by Federated may materially affect the amount of managed assets and thus Federated’s
revenue, profitability and ability to grow. Similarly, changes in Federated’s average asset mix across both asset and product types have a
direct impact on Federated’s revenue and profitability. Federated generally pays out a larger portion of the revenue earned from
managed assets in money market funds than managed assets in equity or fixed-income funds. Substantially all of Federated’s managed
assets are in investment products that permit investors to redeem their investment at any time. Additionally, changing market conditions
may continue to cause a shift in Federated’s asset mix towards money market and fixed-income products which may cause a decline in
Federated’s revenue and net income.
Adverse Effects of Poor Investment Performance. Success in the investment management business is largely dependent on investment
performance relative to market conditions and the performance of competing products. Good performance generally assists retention
and growth of assets, resulting in additional revenues. Conversely, poor performance tends to result in decreased sales and increased
redemptions with corresponding decreases in revenues to Federated. Poor performance could, therefore, have a material adverse effect
on Federated’s business, results of operations or business prospects. In terms of revenue concentration by product, approximately 10% of
Federated’s total revenue for 2009 was derived from services provided to one sponsored fund (Government Obligations Fund). A
significant and prolonged decline in the assets under management in this fund could have a material adverse effect on Federated’s future
revenues and, to a lesser extent, net income, due to a related reduction to marketing and distribution expenses associated with this fund.
26 Federated Investors, Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
Operational Risks. Operational risks include, but are not limited to, improper or unauthorized execution and processing of
transactions, deficiencies in operating systems, business disruptions, inadequacies or breaches in Federated’s internal control processes
and noncompliance with regulatory requirements. Management relies on its employees and systems to comply with established
procedures, controls and regulatory requirements. Breakdown or improper use of systems, human error or improper action by
employees, or noncompliance with regulatory rules could cause material adverse effects on Federated’s reputation, financial position,
results of operations and/or liquidity.
No Assurance of Successful Future Acquisitions. Federated’s business strategy contemplates the acquisition of other investment
management companies as well as investment assets. There can be no assurance that Federated will find suitable acquisition candidates at
acceptable prices, have sufficient capital resources to realize its acquisition strategy, be successful in entering into definitive agreements
for desired acquisitions, or successfully integrate acquired companies into Federated, or that any such acquisitions, if consummated, will
prove to be advantageous to Federated.
Impairment Risk. At December 31, 2009, Federated had intangible assets including goodwill totaling $663.0 million on its
Consolidated Balance Sheet, the vast majority of which represent assets capitalized in connection with Federated’s acquisitions and
business combinations. Accounting for intangible assets requires significant management estimates and judgment. Federated may not
realize the value of these intangible assets. Management performs an annual review of the carrying values of goodwill and indefinite-
lived intangible assets and periodic reviews of the carrying values of all other intangible assets to determine whether events and
circumstances indicate that an impairment in value may have occurred. A variety of factors could cause the carrying value of an
intangible asset to become impaired. Should a review indicate impairment, a write-down of the carrying value of the intangible asset
would occur, resulting in a non-cash charge which would adversely affect Federated’s results of operations for the period.
Systems and Technology Risks. Federated utilizes software and related technologies throughout its businesses including both
proprietary systems and those provided by outside vendors. Unanticipated issues could occur and it is not possible to predict with
certainty all of the adverse effects that could result from a failure of a third party to address computer system problems. Accordingly,
there can be no assurance that potential system interruptions or the cost necessary to rectify the problems would not have a material
adverse effect on Federated’s business, financial condition, results of operations or business prospects. In addition, Federated cannot
predict the impact to its business and/or the costs to rectify situations involving unauthorized system access, computer theft and
computer viruses.
Adverse Effects of Rising Costs of Risk Management. Since 2001, expenses related to risk management have increased and
management expects these costs to be significant going forward. As a result of a heightened regulatory environment, management
anticipates that expenditures for risk management personnel, risk management systems and related professional and consulting fees may
continue to increase. Insurance coverage for significant risks may not be available or may only be available at prohibitive costs.
Renewals of insurance policies may expose Federated to additional cost through the assumption of higher deductibles, and co-insurance
liability and/or lower coverage levels. Higher insurance costs, incurred deductibles and lower coverage levels may reduce Federated’s
operating and net income.
Potential Adverse Effects Related to Past Mutual Fund Trading Issues and Related Legal Proceedings. In the fourth quarter 2005,
Federated entered into settlement agreements with the SEC and NYAG to resolve the past mutual fund trading issues. Since October
2003, Federated has been named as a defendant in twenty-three cases filed in various federal district courts and state courts involving
allegations relating to market timing, late trading and excessive fees. The plaintiffs in the excessive fee cases seek compensatory damages
reflecting a return of all advisory fees earned by Federated in connection with the management of the Federated Kaufmann Fund since
June 28, 2003, as well as attorneys' fees and expenses. The remaining lawsuits seek unquantified damages, attorneys’ fees and expenses.
Federated is defending this litigation. The potential impact of these lawsuits and similar suits against third parties is uncertain. It is
possible that an unfavorable determination will cause a material adverse impact to Federated’s reputation, financial position, results of
operations and/or liquidity. Responding to future requests from regulatory authorities, defending pending litigation and addressing the
undertakings required by the settlement agreements will increase Federated’s operating expenses or may reduce Federated’s revenue and
could have other material adverse effects on Federated’s business.
Potential Adverse Effects of Reputational Harm. Any material losses in client or shareholder confidence in Federated or in the mutual
fund industry as a result of pending litigation, previously settled governmental inquiries, economic or financial market downturns or
disruptions, material errors in public news reports, misconduct, rumors on the internet or other matters could increase redemptions
from and reduce sales of Federated Funds and other investment management services, resulting in a decrease in future revenues.
Adverse Effects of Termination or Failure to Renew Fund Agreements. A substantial majority of Federated’s revenues are derived
from investment management agreements with sponsored funds that, as required by law, are terminable upon 60 days notice. In
addition, each such investment management agreement must be approved and renewed annually by each fund’s board of directors or
trustees, including disinterested members of the board, or its shareholders, as required by law. Failure to renew, changes resulting in
lower fees, or termination of a significant number of these agreements could have a material adverse impact on Federated. As required
by the Investment Company Act, each investment advisory agreement with a mutual fund automatically terminates upon its
“assignment,” although new investment advisory agreements may be approved by the mutual fund’s directors or trustees and
2009 Annual Report 27
MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations
shareholders. A sale of a sufficient number of shares of Federated’s voting securities to transfer control of Federated could be deemed an
“assignment” in certain circumstances. An assignment, actual or constructive, will trigger these termination provisions and may
adversely affect Federated’s ability to realize the value of these agreements.
Under the terms of the settlement agreement with the SEC and NYAG, a Federated investment advisory subsidiary may not serve as
investment adviser to any registered investment company unless: (1) at least 75% of the fund’s directors are independent of Federated;
(2) the chairman of each such fund is independent of Federated; (3) no action may be taken by the fund’s board of directors or trustees
or any committee thereof unless approved by a majority of the independent board members of the fund or committee, respectively; and
(4) the fund appoints a senior officer who reports to the independent directors or trustees and is responsible for monitoring compliance
by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are
approved.
Potential Adverse Effects of Unpredictable Events. Unpredictable events, including natural disaster, technology failure, pandemic,
war and terrorist attack, could adversely impact Federated’s ability to conduct business. Such events could cause disruptions in
economic conditions, system interruption, loss of life or unavailability of personnel. As such, there can be no assurance that
unpredictable events, or the costs to address such events, would not have a material adverse effect on Federated’s business, financial
condition, results of operations or business prospects.
Capital Losses on Investments. Federated has and may continue to realize capital losses upon disposition of its investments. To the
extent that these losses are not offset by capital gains in the year realized, there are specific rules in each tax jurisdiction (federal and
state) that dictate the other tax years, if any, in which these losses may be used to offset net capital gains. The inability to utilize the
capital loss deferred tax assets net of a valuation allowance within the prescribed timeframe may increase Federated's federal and/or state
income tax expense.
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of its business, Federated is exposed to risk of loss due to fluctuations in the securities market and general
economy. Management is responsible for identifying, assessing and managing market and other risks to the extent possible.
Market Risk - Investments. Federated’s short-term investments expose it to various market risks. A single investment can expose
Federated to multiple risks. Interest-rate risk is the risk that unplanned fluctuations in earnings will result from interest-rate volatility
while credit risk is the risk that an issuer of debt securities may default on its obligations. At December 31, 2009, Federated was exposed
to interest-rate and, to a lesser extent, credit risk, as a result of holding investments in fixed-income sponsored funds ($6.1 million) and
primarily investment-grade debt securities held by certain sponsored products ($5.3 million). At December 31, 2008, Federated was
exposed to interest-rate and, to a lesser extent, credit risk, as a result of holding investments in fixed-income sponsored funds ($4.2
million) and primarily investment-grade debt securities held by certain sponsored products ($2.1 million). At December 31, 2009 and
2008, management considered a hypothetical 200 basis point fluctuation in interest rates, respectively, and determined that the impact
of such fluctuations on these investments, individually and in the aggregate, would not have a material effect on Federated’s financial
condition or results of operations.
Price risk is the risk that the market price of an investment will decline and ultimately result in the recognition of a loss for Federated.
Federated was exposed to price risk as a result of its $11.4 million and $9.5 million investment primarily in sponsored fluctuating-value
mutual funds at December 31, 2009 and 2008, respectively. Federated’s investment in these products represents its maximum exposure
to loss. At December 31, 2009 and 2008, management considered a hypothetical 20% fluctuation in market value and determined that
the impact of such fluctuations on these investments, individually and in the aggregate, would not have a material effect on Federated’s
financial condition or results of operations.
For further discussion of managed assets and factors that impact Federated’s revenue, see the sections entitled “General,” “Asset
Highlights,” “Contractual Obligations and Contingent Liabilities” and “Risk Factors” herein as well as the section entitled “Regulatory
Matters” in Federated’s Annual Report on Form 10-K for the year ended December 31, 2009 on file with the SEC.
28 Federated Investors, Inc.
MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Federated Investors, Inc.’s (Federated) management is responsible for the preparation, integrity and fair presentation of the consolidated
financial statements in this annual report. These consolidated financial statements and notes have been prepared in conformity with U.S.
generally accepted accounting principles from accounting records which management believes fairly and accurately reflect Federated’s
operations and financial position. The consolidated financial statements include amounts based on management’s best estimates and
judgments considering currently available information and management’s view of current conditions and circumstances.
Management is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to provide
reasonable assurance of the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally
accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is
evaluated for effectiveness by management and tested for reliability. Actions are taken to correct potential deficiencies as they are
identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control
can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in
conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only
reasonable assurance with respect to financial statement preparation.
Management assessed the effectiveness of Federated’s internal control over financial reporting as of December 31, 2009, in relation to
criteria for effective internal control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of
December 31, 2009, its system of internal control over financial reporting is properly designed and operating effectively to achieve the
criteria of the “Internal Control – Integrated Framework.” Ernst & Young LLP, independent registered public accounting firm, has
audited the consolidated financial statements included in this annual report and has issued an attestation report on Federated’s internal
control over financial reporting.
Federated Investors, Inc.
J. Christopher Donahue
President and Chief Executive Officer
February 19, 2010
Thomas R. Donahue
Chief Financial Officer
2009 Annual Report 29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
ON CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Shareholders
Federated Investors, Inc.
We have audited the accompanying consolidated balance sheets of Federated Investors, Inc. and subsidiaries as of December 31, 2009
and 2008, and the related consolidated statements of income, changes in equity, and cash flows for each of the three years in the period
ended December 31, 2009. These financial statements are the responsibility of Federated Investors Inc.’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Federated Investors, Inc. and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note (2) to the consolidated financial statements, effective January 1, 2009, Federated changed its presentation of
noncontrolling interests in the consolidated financial statements with the adoption of Statement of Financial Accounting Standards No.
160, Accounting and Reporting Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No.51 (codified in FASB
ASC Topic 810, Consolidation) and Federated adopted the two-class method of calculating earnings per share with the adoption of
FASB Staff Position Emerging Issues Task Force (“EITF”) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (codified in FASB ASC Topic 260, Earnings Per Share).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Federated
Investors, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
February 19, 2010, expressed an unqualified opinion thereon.
Pittsburgh, Pennsylvania
February 19, 2010
30 Federated Investors, Inc.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders
Federated Investors, Inc.
We have audited Federated Investors, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Federated Investors, Inc.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Federated Investors, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Federated Investors, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of
income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2009, of Federated Investors,
Inc., and our report dated February 19, 2010, expressed an unqualified opinion thereon.
Pittsburgh, Pennsylvania
February 19, 2010
2009 Annual Report 31
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
ASSETS
Current Assets
Cash and cash equivalents
Investments
Receivables—affiliates
Receivables—other, net of reserve of $200 and $247, respectively
Accrued revenue—affiliates
Accrued revenue—other
Prepaid expenses
Current deferred tax asset, net
Other current assets
Total current assets
Long-Term Assets
Goodwill
Customer-related intangible assets, net
Other intangible assets, net
Deferred sales commissions, net of accumulated amortization of $50,018 and $175,369, respectively
Property and equipment, net
Other long-term assets
Total long-term assets
Total assets
LIABILITIES
Current Liabilities
Accrued compensation and benefits
Accounts payable and accrued expenses
Short-term debt—recourse
Other current liabilities
Total current liabilities
Long-Term Liabilities
Long-term debt—recourse
Long-term debt—nonrecourse
Long-term deferred tax liability, net
Other long-term liabilities
Total long-term liabilities
Total liabilities
Commitments and contingencies (Note (21))
TEMPORARY EQUITY
Redeemable noncontrolling interests in subsidiaries
PERMANENT EQUITY
Federated Investors shareholders’ equity
Common stock:
Class A, no par value, 20,000 shares authorized, 9,000 shares issued and outstanding
Class B, no par value, 900,000,000 shares authorized, 129,505,456 shares issued
Retained earnings
Treasury stock, at cost, 26,571,219 and 27,242,712 shares Class B common stock, respectively
Accumulated other comprehensive income, net of tax
Total Federated Investors shareholders’ equity
Nonredeemable noncontrolling interest in subsidiary
Total permanent equity
Total liabilities, temporary equity and permanent equity
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
32 Federated Investors, Inc.
2009
2008
$
$
$
90,452
31,538
9,187
1,497
2,303
6,647
27,090
11,166
4,907
184,787
581,673
71,959
9,364
15,318
40,027
9,305
727,646
912,433
64,387
50,404
21,000
61,207
196,998
105,000
13,556
39,234
14,917
172,707
369,705
$
$
$
45,438
13,209
21,049
2,829
2,277
7,056
11,324
9,600
4,050
116,832
534,100
111,503
11,718
30,261
29,389
12,807
729,778
846,610
59,487
65,880
51,071
41,400
217,838
126,000
30,497
31,648
16,057
204,202
422,040
13,913
779
189
216,820
1,105,073
(795,389)
1,514
528,207
608
528,815
912,433
$
$
189
198,441
1,028,928
(804,481)
297
423,374
417
423,791
846,610
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Years Ended December 31,
Revenue
Investment advisory fees, net—affiliates
Investment advisory fees, net—other
Administrative service fees, net—affiliates
Other service fees, net—affiliates
Other service fees, net—other
Other, net
Total revenue
Operating Expenses
Marketing and distribution
Compensation and related
Professional service fees
Systems and communications
Office and occupancy
Travel and related
Advertising and promotional
Amortization of deferred sales commissions
Intangible asset impairment and amortization
Other
Total operating expenses
Operating income
Nonoperating Income (Expenses)
Gain (loss) on securities, net
Investment income, net
Debt expense—recourse
Debt expense—nonrecourse
Other, net
Total nonoperating expenses, net
Income from continuing operations before income taxes
Income tax provision
Income from continuing operations including noncontrolling interests in subsidiaries
Discontinued operations, net of tax
Net income including noncontrolling interest in subsidiaries
Less: Net income attributable to the noncontrolling interest in subsidiaries
Net income
Amounts attributable to Federated Investors, Inc.
Income from continuing operations
Discontinued operations, net of tax
Net income
Earnings Per Share—Basic
Income from continuing operations
Income from discontinued operations
Net income
Earnings Per Share—Diluted
Income from continuing operations
Income from discontinued operations
Net income
Cash dividends per share
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
2009
2008
2007
$
691,170
58,653
261,610
148,586
10,413
5,518
1,175,950
$ 711,914
63,467
218,735
213,914
7,413
8,237
1,223,680
$
659,489
66,970
166,396
216,347
7,414
11,028
1,127,644
408,300
254,428
38,133
25,189
24,509
11,374
11,085
18,462
32,574
22,669
846,723
329,227
2,271
1,037
(4,345)
(1,366)
(6)
(2,409)
326,818
118,278
208,540
0
208,540
11,248
197,292
440,317
237,186
40,301
23,648
24,342
14,048
14,819
31,376
18,388
18,080
862,505
361,175
(3,242)
4,492
(2,425)
(2,750)
(457)
(4,382)
356,793
128,168
228,625
2,808
231,433
7,116
$ 224,317
197,292
0
197,292
$ 221,509
2,808
$ 224,317
1.93
0.00
1.93
1.92
0.00
1.92
0.96
$
$
$
$
$
2.17
0.03
2.20
2.15
0.03
2.18
3.69
$
$
$
$
$
$
$
$
354,407
229,088
33,262
23,409
22,069
12,852
14,391
46,456
19,702
14,815
770,451
357,193
(5,371)
6,750
(371)
(5,101)
(657)
(4,750)
352,443
129,207
223,236
0
223,236
5,765
217,471
217,471
0
217,471
2.12
0.00
2.12
2.10
0.00
2.10
0.81
$
$
$
$
$
$
$
$
2009 Annual Report 33
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
Balance at January 1, 2007
Net income
Other comprehensive income, net of tax:
Reclassification adjustment, net of unrealized loss
Foreign currency translation
Comprehensive income
Subscriptions – redeemable noncontrolling interest holders
Deconsolidation
Amortization of share-based compensation plans
Restricted stock activity
Dividends declared/Distributions to noncontrolling interest in subsidiaries
Exercise of stock options
Purchase of treasury stock
Balance at December 31, 2007
Net income
Other comprehensive income, net of tax:
Unrealized loss, net of reclassification adjustment
Foreign currency translation
Comprehensive income
Subscriptions – redeemable noncontrolling interest holders
Deconsolidation
Amortization of share-based compensation plans
Restricted stock activity
Dividends declared/Distributions to noncontrolling interest in subsidiaries
Exercise of stock options
Purchase of treasury stock
Balance at December 31, 2008
Net income
Other comprehensive income, net of tax:
Unrealized gain and reclassification adjustment
Foreign currency translation
Comprehensive income
Subscriptions – redeemable noncontrolling interest holders
Deconsolidation
Amortization of share-based compensation plans
Restricted stock activity
Dividends declared/Distributions to noncontrolling interest in subsidiaries
Exercise of stock options
Purchase of treasury stock
Balance at December 31, 2009
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
Class A
9,000
0
0
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
0
0
9,000
Shares
Class B
103,854,734
0
0
0
0
0
0
694,334
0
631,210
(3,430,708)
101,749,570
0
Treasury
25,650,722
0
0
0
0
0
0
(694,334)
0
(631,210)
3,430,708
27,755,886
0
0
0
0
0
0
0
0
758,551
0
1,052,343
(1,297,720)
102,262,744
0
0
0
0
(758,551)
0
(1,052,343)
1,297,720
27,242,712
0
0
0
0
0
0
0
0
1,155,136
0
345,275
(828,918)
102,934,237
0
0
0
(1,155,136)
0
(345,275)
828,918
26,571,219
34 Federated Investors, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
Federated Investors, Inc. Shareholders
k
c
o
t
S
n
o
m
m
o
C
l
a
t
i
p
a
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r
f
s
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i
t
c
a
s
n
a
r
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k
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t
i
d
d
A
i
-
d
i
a
P
d
e
n
s
g
n
i
i
a
t
e
R
n
r
a
E
k
c
o
t
S
y
r
u
s
a
e
r
T
f
o
e
v
i
s
n
e
h
e
r
p
m
o
C
t
e
N
,
e
m
o
c
n
I
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
O
g
n
e
l
b
a
m
e
e
d
e
r
n
o
N
i
l
l
o
r
t
n
o
c
n
o
N
n
i
y
r
a
i
d
i
s
b
u
S
t
s
e
r
e
t
n
I
l
a
t
o
T
y
t
i
u
q
E
t
n
e
n
a
m
r
e
P
g
n
i
l
l
e
l
b
a
m
e
e
d
e
R
o
r
t
n
o
c
n
o
N
/
s
e
i
r
a
i
d
i
s
b
u
S
y
r
a
r
o
p
m
e
T
n
i
s
t
s
e
r
e
t
n
I
y
t
i
u
q
E
l
s
’
r
e
d
o
h
e
r
a
h
S
y
t
i
u
q
E
l
a
t
o
T
x
a
T
$ 1,065,505 $
217,471
(694,786)
0
$ 451
0
$ 529,375
217,471
$ 361
5,595
$ 529,736
223,066
$ 521
170
$
158,205
0
$
0
0
0
0
12,292
50
0
6,342
0
176,889
0
0
0
0
0
13,164
292
0
8,285
0
198,630
0
0
0
0
0
0
0
0
(62)
0
741
0
679
0
0
0
0
0
0
(920)
0
241
0
0
0
(98)
0
0
0
0
0
0
(8,438)
(82,818)
(2,106)
0
1,189,516
224,317
189
0
0
0
0
(11,041)
(373,753)
(300)
0
1,028,928
197,292
0
0
0
10,017
0
7,259
(116,438)
(793,948)
0
0
0
0
13,573
0
18,040
(42,146)
(804,481)
0
0
0
(485)
(97)
183
245
0
0
0
0
0
0
0
879
0
0
0
0
0
0
0
0
297
0
734
483
0
0
0
0
(132)
0
0
0
0
0
18,505
(733)
0
607
0
217,009
0
0
0
(149)
0
149
0
0
0
0
0
(20,652)
(98,230)
(2,133)
0
0
0
0
22,754
0
6,440
(20,102)
(795,389)
0
0
0
0
0
0
0
$1,514
$
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
$ 1,105,073 $
$
85
245
217,801
0
0
12,292
1,567
(82,818)
12,236
(116,438)
574,015
224,317
(296)
(97)
223,924
0
0
13,164
1,904
(373,753)
26,266
(42,146)
423,374
197,292
0
0
5,595
0
0
0
0
(5,623)
0
0
333
7,412
0
0
7,412
0
0
0
0
(7,328)
0
0
417
9,473
85
245
223,396
0
0
12,292
1,567
(88,441)
12,236
(116,438)
574,348
231,729
(296)
(97)
231,336
0
0
13,164
1,904
(381,081)
26,266
(42,146)
423,791
206,765
602
483
198,377
0
0
18,505
1,220
(98,230)
5,063
(20,102)
$ 528,207
0
0
9,473
0
0
0
0
(9,282)
0
0
$ 608
602
483
207,850
0
0
18,505
1,220
(107,512)
5,063
(20,102)
$ 528,815
0
0
7,008
(4,410 )
0
0
(50 )
0
0
3,239
(296 )
0
0
941
(2,772 )
0
0
(333 )
0
0
779
1,775
0
50
11,940
(423 )
0
0
(208 )
0
0
$ 13,913
2009 Annual Report 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31,
Operating Activities
Net income including noncontrolling interest in subsidiaries
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities
Depreciation and other amortization
Impairment of assets
Share-based compensation expense
Amortization of deferred sales commissions
Provision (benefit) for deferred income taxes
(Gain) loss on disposal of assets
Tax (detriment) benefit from share-based compensation
Excess tax benefits from share-based compensation
Net purchases of trading securities
Deferred sales commissions paid
Contingent deferred sales charges received
Proceeds from sale of certain B-share related future revenue
Other changes in assets and liabilities:
Decrease (increase) in receivables, net
(Increase) decrease in prepaid expenses and other assets
(Decrease) increase in accounts payable and accrued expenses
Increase (decrease) in income taxes payable
Increase in other liabilities
Net cash provided by operating activities
Investing Activities
Cash paid for property and equipment
Cash paid for business acquisitions
Purchases of securities available for sale
Proceeds from redemptions of securities available for sale
Proceeds from disposal of business
Decrease in restricted cash equivalents
Net cash used in investing activities
Financing Activities
Dividends paid
Purchases of treasury stock
Distributions to noncontrolling interest in subsidiaries
Contributions from noncontrolling interest in subsidiaries
Proceeds from shareholders for share-based compensation
Excess tax benefits from share-based compensation
Proceeds from new borrowings—recourse
Proceeds from new borrowings—nonrecourse
Payments on debt—recourse
Payments on debt—nonrecourse
Other financing activities
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Income taxes
Interest
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
36 Federated Investors, Inc.
2009
2008
2007
$ 208,540
$ 231,433
$
223,236
23,751
21,663
18,775
18,462
5,250
(47)
(41)
(1,259)
(13,629)
(11,949)
3,399
5,296
13,548
(15,097)
(10,800)
1,007
7,720
274,589
(26,210)
(24,332)
(1,388)
363
0
0
(51,567)
(98,499)
(20,102)
(9,490)
11,521
6,409
1,259
54,800
1,163
(105,871)
(19,198)
0
(178,008)
45,014
45,438
90,452
$
$
24,509
541
15,062
31,376
987
(4,059)
8,576
(6,734)
(4,324)
(11,114)
8,080
5,878
2,136
5,225
(5,180)
429
8,134
310,955
(10,307)
(133,863)
(16)
11,036
4,800
0
(128,350)
(375,651)
(42,146)
(7,649)
502
19,592
6,734
262,400
1,290
(85,489)
(37,100)
0
(257,517)
(74,912)
120,350
45,438
$ 126,837
4,351
$
$ 117,448
1,232
$
25,491
1,175
12,614
46,456
(2,402)
4,280
6,928
(6,001)
(6,446)
(16,365)
11,705
6,348
(3,559)
(16,439)
34,892
(265)
5,351
326,999
(7,689)
(81,447)
(2,215)
1,098
0
29
(90,224)
(83,140)
(117,290)
(5,622)
6,957
7,447
6,001
0
4,192
(83)
(53,534)
(74)
(235,146)
1,629
118,721
120,350
130,524
65
$
$
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(December 31, 2009, 2008 and 2007)
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Federated Investors, Inc. and its subsidiaries (collectively, Federated) provide investment advisory, administrative, distribution and other
services primarily to Federated mutual funds and Separate Accounts (which include separately managed accounts, institutional accounts,
sub-advised funds and other managed products) in both domestic and international markets. For presentation purposes in the
consolidated financial statements, the Federated-sponsored mutual funds are considered to be affiliates of Federated.
The majority of Federated’s revenue is derived from investment advisory services provided to Federated mutual funds and Separate
Accounts through various subsidiaries pursuant to investment advisory contracts. These subsidiaries are registered as investment advisers
under the Investment Advisers Act of 1940 and with certain states.
Shares of the portfolios or classes of shares under management or administration by Federated are distributed by wholly owned
subsidiaries, which are registered broker/dealers under the Securities Exchange Act of 1934 and under applicable state laws. Federated’s
investment products are primarily distributed within the wealth management and trust, broker/dealer and global institutional markets.
(b) Basis of Presentation
The Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP).
In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the
Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates, and such differences may be
material to the Consolidated Financial Statements.
(c) Reclassification of Prior Period Financial Statements
Certain items previously reported have been reclassified to conform with the current year’s presentation.
Certain balances in the accompanying Consolidated Financial Statements and the related notes have been recast to give retrospective
presentation for the effect of adopting a new accounting standard regarding noncontrolling interests in consolidated financial statements.
Prior year earnings per share data has been restated to comply with the current year’s presentation under a new accounting standard
regarding determining whether instruments granted in share-based payment transactions are participating securities for purposes of
calculating earnings per share. See Note (1)(t) and Note (2) for additional information.
(d) Principles of Consolidation
The Consolidated Financial Statements include the accounts of Federated Investors, Inc. and entities or sponsored products in which
Federated holds a controlling financial interest. A controlling financial interest is determined either by the extent of Federated’s
decision-making ability through voting interests, or by the extent of Federated’s participation in the economic risks and rewards of the
entity through variable interests. To the extent Federated’s controlling financial interest in a consolidated subsidiary represents less than
100% of the subsidiary’s equity, Federated recognizes noncontrolling interests in subsidiaries. Further, noncontrolling interests in
subsidiaries whose equity is redeemable or convertible for cash or other assets at the option of the holder represent temporary equity
and are classified as such in the mezzanine section of the Consolidated Balance Sheets. All other noncontrolling interests in subsidiaries
are classified as permanent equity. All significant intercompany accounts and transactions have been eliminated.
The equity method of accounting is used to account for investments in entities in which Federated’s equity investment gives it the
ability to exercise significant influence over the operating and financial policies of the investee. Equity investments are carried at
Federated’s share of net assets and are included in either Investments or Other long-term assets on the Consolidated Balance Sheets
dependent upon management’s ability and intent to sell the investment. The proportionate share of income or loss is included in
Nonoperating income (expenses) – other, net in the Consolidated Statements of Income.
(e) Business Combinations
Business combinations have been accounted for under the purchase method of accounting. Results of operations of an acquired business
are included from the date of acquisition. Management allocates the cost of an acquired entity to acquired assets, including identifiable
intangible assets, and assumed liabilities based on their estimated fair values as of the date of acquisition. Any excess cost of the acquired
entity that exists after this allocation process is recorded as Goodwill on the Consolidated Balance Sheets.
(f) Cash and Cash Equivalents
Cash and cash equivalents include money market accounts and interest-bearing deposits with banks.
(g) Investments
Investments include trading and available-for-sale securities held by Federated. Federated’s trading securities primarily represent
investments in stocks of large- and mid-cap U.S. and international companies and investment-grade debt instruments held by certain
sponsored equity and fixed-income products which are consolidated by Federated as a result of Federated’s relationship as the primary
beneficiary of the product (see Note (6)). Trading securities are carried at fair value based on quoted market prices. Federated’s trading
securities held at December 31, 2009 and 2008 are classified as current and are included in Investments on the Consolidated Balance
Sheets. Changes in the fair values of trading securities are recognized in Gain (loss) on securities, net in the Consolidated Statements of
Income. Federated’s available-for-sale securities include investments in fluctuating-value mutual funds and asset-backed securities. These
2009 Annual Report 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
investments are carried at fair value based on quoted market prices or, in the absence of quoted market prices, discounted cash flows.
These investments may be classified as current or long-term assets and are included in Investments or Other long-term assets,
respectively, on the Consolidated Balance Sheets based on management’s ability or intention to sell the investment. The unrealized
gains or losses on securities available-for-sale are included net of tax in Accumulated other comprehensive income, net of tax on the
Consolidated Balance Sheets. Realized gains and losses on these securities are computed on a specific-identification basis and recognized
in Gain (loss) on securities, net in the Consolidated Statements of Income.
Investments are generally carried at fair value based on quoted market prices in active markets for identical instruments. If quoted
market prices are not available, fair value is generally based upon quoted prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not active, or model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets. In the absence of observable market data inputs and/or value drivers, internally
generated valuation techniques may be utilized in which one or more significant inputs or significant value drivers are unobservable in
the market place. On a periodic basis, management evaluates the carrying value of investments for impairment. With respect to its
investments in fluctuating-value mutual funds, management considers various criteria, including the duration and extent of a decline in
fair value, the ability and intent of management to retain the investment for a period of time sufficient to allow the value to recover and
the financial condition and near-term prospects of the fund and the underlying investments of the fund, to determine whether a decline
in fair value is other than temporary. If, after considering these criteria, management believes that a decline is other than temporary, the
carrying value of the security is written down to fair value through the Consolidated Statements of Income. With respect to Federated’s
investments in asset-backed securities, estimates of future cash flows are updated each quarter based on actual defaults, changes in
anticipated default rates or other portfolio changes. The carrying values of these investments are written down to fair value at that time,
as appropriate. Impairment adjustments are recognized in Gain (loss) on securities, net in the Consolidated Statements of Income.
(h) Derivatives
From time to time, Federated may consolidate a sponsored investment product that holds freestanding derivative financial instruments
for trading purposes. Federated reports derivative instruments at fair value and records the changes in fair value in Nonoperating
Income (Expenses) on the Consolidated Statements of Income. Federated may also enter into derivative financial instruments to hedge
price or interest-rate exposures with respect to variable-rate loan facilities, seed investments in sponsored products or to hedge foreign-
currency exchange risk. As of and for the years ended December 31, 2009 and 2008, Federated did not hold any derivatives designated
in a formal hedge relationship.
(i) Property and Equipment
Property and equipment are initially recorded at cost and are depreciated using the straight-line method over their estimated useful lives
ranging from 1 to 12 years. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated
useful lives or their respective lease terms. As property and equipment are taken out of service, the cost and related accumulated
depreciation and amortization are removed. The write-off of any material residual net book value is reflected as a loss in Operating
expenses – Other in the Consolidated Statements of Income.
Management reviews the remaining useful lives and carrying values of property and equipment to determine whether events and
circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of impairment monitored
by management include a decrease in the market price of the asset, an accumulation of costs significantly in excess of the amount
originally expected in the acquisition or development of the asset, historical and projected cash flows associated with the asset and an
expectation that the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Should
there be an indication of a change in the useful life or an impairment in value, Federated compares the carrying value of the asset to the
probability-weighted undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to
determine whether an impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is
written down to fair value which is determined based on prices of similar assets if available or discounted cash flows. Impairment
adjustments are recognized in Operating Expenses – Other in the Consolidated Statements of Income.
(j) Costs of Computer Software Developed or Obtained for Internal Use
Certain internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized. These
capitalized costs are included in Property and equipment, net on the Consolidated Balance Sheets and are amortized using the straight-
line method over the shorter of the estimated useful life of the software or four years. These assets are subject to the impairment test
used for other categories of property and equipment described in Note (1)(i).
(k) Intangible Assets
Intangible assets, consisting primarily of goodwill, customer relationship intangible assets, renewable investment advisory contracts and
noncompete agreements acquired in connection with various acquisitions, are recorded at fair value determined using a discounted cash
flow model as of the date of acquisition. The discounted cash flow model considers various factors to project future cash flows expected
to be generated from the asset. Given the investment advisory nature of Federated’s business and of the businesses acquired over the
years, these factors typically include: (1) an estimated rate of change for underlying managed assets; (2) expected revenue per managed
asset; (3) incremental operating expenses; (4) useful life of the acquired asset; and (5) a discount rate. Management estimates a rate of
change for underlying managed assets based on a combination of an estimated rate of market appreciation or depreciation and an
38 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
estimated net redemption or sales rate. Expected revenue per managed asset, incremental operating expenses and the useful life of the
acquired asset are generally based on contract terms, average market participant data and historical experience. The discount rate is
estimated at the current market rate of return. After the fair value of all separately identifiable assets has been estimated, goodwill is
recorded to the extent the consideration paid for the acquisition exceeds the sum of the fair values of the separately identifiable acquired
assets and assumed liabilities.
Federated amortizes finite-lived identifiable intangible assets using a method that reflects the pattern in which the economic benefits of
the intangible asset are expected to be consumed or otherwise used. Federated uses either the straight-line or an accelerated method of
amortization after considering specific characteristics of the underlying fund shareholder base to forecast the pattern in which the
economic benefits will be consumed, including fund shareholder behavior, demographics and persistency levels. The assets are
amortized over their estimated useful lives, which range from 3 to 11 years. Management periodically evaluates the remaining useful
lives and carrying values of the intangible assets to determine whether events and circumstances indicate that a change in the useful life
or impairment in value may have occurred.
Indicators of impairment monitored by management include a decline in the level of managed assets, changes to contractual provisions
underlying certain intangible assets and reductions in underlying operating cash flows. Should there be an indication of a change in the
useful life or impairment in value of the finite-lived intangible assets, Federated compares the carrying value of the asset and its related
useful life to the projected undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to
determine whether impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written
down to its fair value determined using discounted cash flows. Federated writes-off the cost and accumulated amortization balances for
all fully amortized intangible assets.
Federated has determined that certain acquired assets, specifically, certain renewable investment advisory contracts, have indefinite
useful lives. In reaching this conclusion, management considered the legal, regulatory and contractual provisions of the investment
advisory contract that enable the renewal of the contract, the level of cost and effort required in renewing the investment advisory
contract, and the effects of obsolescence, demand, competition and other economic factors that could impact the funds’ projected
performance and existence. These indefinite-lived intangible assets are reviewed for impairment annually or whenever events or
circumstances indicate that a change in the useful life or impairment in value may have occurred.
Indicators of impairment monitored by management include a decline in the level of managed assets, changes to contractual provisions
of the renewable investment advisory contracts and reductions in underlying operating cash flows. Should there be an indication of a
change in the useful life or impairment in the value of the indefinite-lived intangible assets, Federated estimates the fair value of the
intangible asset and compares it to the asset’s remaining book value to determine whether an impairment charge is necessary.
Federated tests goodwill for impairment at least annually or when indicators of potential impairment exist. Goodwill is evaluated at the
reporting unit level. Federated has determined that it has a single reporting unit consistent with its single operating segment based on
the fact that Federated’s operations are managed as a single business: investment management. Federated does not have multiple
operating segments or business components for which discrete financial information is prepared. Federated uses a two-step process to
test for and measure impairment which begins with an estimation of the fair value of its reporting unit by considering Federated’s
market capitalization. If Federated’s market capitalization falls to a level below its recorded book value of net assets, Federated’s
goodwill would be considered for possible impairment.
(l) Deferred Sales Commissions and Nonrecourse Debt
Federated pays upfront commissions to broker/dealers to promote the sale of certain mutual fund shares. Under various fund-related
contracts, Federated is entitled to distribution and servicing fees from the mutual fund over the life of such shares. Both of these fees are
calculated as a percentage of average managed assets associated with the related classes of shares. For certain share classes, Federated is
also entitled to receive a contingent deferred sales charge (CDSC), which is collected from certain redeeming shareholders.
For share classes that pay both a distribution fee and CDSC, excluding B-shares, Federated generally capitalizes all or a portion of the
upfront commissions as deferred sales commissions, dependent upon expected recoverability rates. The deferred sales commission asset is
amortized over the estimated period of benefit of one year. Distribution fees are recognized in the Consolidated Statements of Income
over the life of the mutual fund share class. CDSCs collected on these share classes are used to reduce the deferred sales commission
asset.
For share classes that do not charge both a distribution fee and CDSC, Federated expenses the cost of the upfront commission as
incurred in Marketing and distribution in the Consolidated Statements of Income and credits Marketing and distribution for any
CDSCs collected.
Funding of the payments made by Federated of upfront commissions paid upon the sales of Class B shares of sponsored mutual funds is
made through arrangements with an independent third party by selling the rights to all related future distribution fees, servicing fees and
CDSCs. For financial reporting purposes, these arrangements are treated as financings through February 2007. As a result, Federated
capitalized all of the upfront commissions as deferred sales commissions and recognizes B-share-related distribution fees and servicing
fees in the Consolidated Statements of Income even though legal title to these fees has been transferred to the third party. In addition,
2009 Annual Report 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
Federated recorded nonrecourse debt equal to the proceeds received on the sale of future revenue streams. The debt does not contain a
contractual maturity or stated interest rate. Interest rates are imputed based on current market conditions at the time of funding. The
deferred sales commission asset and nonrecourse debt balance are amortized over the estimated life of the B-share fund asset dependent
upon the level and timing of cash flows from the sold future revenue streams, not to exceed eight years. CDSCs collected on the B-
share fund assets are used to reduce the nonrecourse debt and deferred sales commission asset.
In March 2007, Federated entered into a new funding arrangement with an independent third party. The terms of the new program
were written to remove any remote potential for recourse by making clear the fact that Federated is not responsible to indemnify the
purchaser for any action initiated unilaterally by the fund board or others that would result in the termination of the revenue stream
sold to the purchaser. Accordingly, Federated began accounting for all new sales of its rights to future distribution fees and CDSCs
related to Class B shares of sponsored funds as sales. The sales of Federated’s rights to future shareholder service fees continued to be
accounted for as financings due to Federated’s ongoing involvement in performing shareholder-servicing activities. Accordingly,
nonrecourse debt has been recorded.
Federated’s current B-share funding arrangement expires in February 2010. Management expects to self-fund B-share sales beginning in
March 2010. Under the current structure, B-share advanced commissions totaled $6.1 million for 2009.
Federated reviews the carrying value of B-share-related deferred sales commission assets on a periodic basis to determine whether a
significant long-term decline in the equity or bond markets or other events or circumstances indicate that an impairment in value may
have occurred. Should there be an indication of an impairment in value, Federated compares the carrying value of the asset to the
probability-weighted undiscounted cash flows from the sold future revenue streams over the remaining life of the underlying B-share
fund asset to determine whether an impairment has occurred. Management adjusts these asset and debt balances to fair value when
reasonably estimable expected future cash flows are not expected to be sufficient to fully amortize the remaining deferred sales
commission asset and nonrecourse debt balance.
(m) Foreign Currency Translation
The balance sheets of certain wholly owned foreign subsidiaries of Federated are translated at the current exchange rate as of the end of
the accounting period and the related income or loss is translated at the average exchange rate in effect during the period. Net exchange
gains and losses resulting from these translations are excluded from income and are recorded in Accumulated other comprehensive
income, net of tax on the Consolidated Balance Sheets. Foreign currency transaction gains and losses relating to Federated’s foreign
subsidiaries are reflected in Operating Expenses – Other in the Consolidated Statements of Income.
(n) Treasury Stock
Federated accounts for acquisitions of treasury stock at cost and reports total treasury stock held as a deduction from Federated Investors
shareholders’ equity on the Consolidated Balance Sheets. At the date of subsequent reissue, the treasury stock account is reduced by the
cost of such stock on a specific-identification basis. Additional paid-in capital from treasury stock transactions is increased as Federated
reissues treasury stock for more than the cost of the shares. If Federated issues treasury stock for less than its cost, Additional paid-in
capital from treasury stock transactions is reduced to no less than zero. Once this account is at zero, any further required reductions are
recorded to Retained earnings on the Consolidated Balance Sheets. At December 31, 2009 and 2008, there was no balance in
Additional paid-in capital from treasury stock transactions.
(o) Revenue Recognition
Revenue from providing investment advisory, administrative and other services (including distribution, shareholder servicing and
retirement plan recordkeeping) is recognized during the period in which the services are performed. Investment advisory, administrative
and the majority of other service fees are generally calculated as a percentage of total net assets of the investment portfolios that are
managed by Federated. The fair value of the investment portfolios is primarily determined using quoted market prices or independent
third-party broker or dealer price quotes. In limited circumstances, a quotation or price evaluation is not readily available from a
pricing source. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by
the directors/trustees of the sponsored products. For the periods presented, a de minimus amount of assets under management were
priced by Federated management. Federated may waive certain fees for competitive reasons such as to maintain positive or zero net
yields, to meet regulatory requirements (including settlement-related (see Note (21)(c))) or to meet contractual requirements. Federated
waived fees of $645.5 million, $470.0 million and $344.4 million for the years ended December 31, 2009, 2008 and 2007, respectively,
nearly all of which was for competitive reasons. The increase in fee waivers for the year ended December 31, 2009 as compared to the
same period of 2008 was primarily due to a $117.0 million increase in fee waivers to maintain positive or zero net yields and a $74.5
million increase in waivers due to increased money market assets. Fee waivers may continue to increase in order to maintain positive or
zero net yields in addition to other competitive reasons. Fee waivers to maintain positive or zero net yields are partially offset by a
related reduction to marketing and distribution expense (see Note (5) for additional information on the net impact of these waivers).
Federated has contractual arrangements with third parties to provide certain fund-related services. Management considers various factors
to determine whether Federated’s revenue should be recorded based on the gross amount payable by the funds or net of payments to
third-party service providers. Management’s analysis is based on whether Federated is acting as the principal service provider or is
performing as an agent. The primary factors considered include: (1) whether the customer holds Federated or the service provider
40 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
responsible for the fulfillment and acceptability of the services to be provided; (2) whether Federated has any practical latitude in
negotiating the price to pay a third-party provider; (3) whether Federated or the customer selects the ultimate service provider; and (4)
whether Federated has credit risk in the arrangement. Generally, the less the customer is directly involved with or participates in
making decisions regarding the ultimate third-party service provider, the more supportive the facts are that Federated is acting as the
principal in these transactions and should therefore report gross revenues. As a result of considering these factors, investment advisory
fees, distribution fees and certain other service fees are recorded gross of payments made to third parties.
(p) Share-Based Compensation
Federated recognizes compensation costs based on grant-date fair value for all share-based awards granted, modified or settled after
January 1, 2006, as well as for any awards that were granted prior to January 1, 2006 for which requisite service has not yet been
provided.
Federated issues shares for share-based awards from treasury stock. For restricted stock awards, the fair value of the award is calculated as
the difference between the closing market value of Federated’s Class B common stock on the date of grant and the purchase price paid
by the employee, if any. Federated estimates the grant-date fair value of stock options using the Black-Scholes option-pricing model.
Federated’s awards are generally subject to graded vesting schedules. Compensation expense is adjusted for estimated forfeitures and is
recognized on a straight-line or modified straight-line basis over the requisite service period of the award. Compensation expense also
includes dividends paid on actual and estimated forfeited awards. Forfeiture assumptions are evaluated on a quarterly basis and updated
as necessary.
For awards granted prior to January 1, 2006 with provisions that allow for accelerated vesting upon retirement, Federated recognizes
expense over the vesting period of the awards, regardless of the employee’s attainment of retirement age. Beginning January 1, 2006,
for all newly granted awards with provisions that allow for accelerated vesting upon retirement, Federated recognizes expense over the
shorter of the vesting period or the period between grant date and the date on which the employee meets the minimum age
requirement for retirement.
(q) Leases
Federated classifies leases as operating in accordance with the provisions of lease accounting. Rent expense under noncancelable
operating leases with scheduled rent increases or rent holidays is accounted for on a straight-line basis over the lease term, beginning on
the date of initial possession or the effective date of the lease agreement. The amount of the excess of straight-line rent expense over
scheduled payments is recorded as a deferred liability. Build-out allowances and other such lease incentives are recorded as deferred
credits, and are amortized on a straight-line basis as a reduction of rent expense beginning in the period they are deemed to be earned,
which generally coincides with the effective date of the lease. The current portion of unamortized deferred lease costs and build-out
allowances is included in Other current liabilities and the long-term portion is included in Other long-term liabilities on the
Consolidated Balance Sheets.
(r) Advertising Costs
Federated generally expenses the cost of all advertising and promotional activities as incurred. Certain printed matter, however, such as
sales brochures, are accounted for as prepaid supplies and are included in Other current assets on the Consolidated Balance Sheets until
they no longer are owned or expected to be used, at which time their costs are expensed.
(s) Income Taxes
Federated accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for
the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. Federated recognizes a
valuation allowance if, based on the weight of available evidence regarding future taxable income, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Regarding the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, Federated follows a two-step process prescribed by GAAP. The first step for
evaluating a tax position involves first determining whether it is more likely than not that a tax position will be sustained upon
examination by the appropriate taxing authorities. The second step then requires a company to measure the tax position benefit as the
largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Federated classifies any interest and
penalties on tax liabilities on the Consolidated Statements of Income as components of Nonoperating Income (Expenses) – Other, net
and Operating Expenses – Other, respectively.
(t) Earnings Per Share
Basic and diluted earnings per share are calculated under the two-class method. Pursuant to the two-class method, Federated’s unvested
restricted stock awards with nonforfeitable rights to dividends are considered participating securities and are included in the
computation of earnings per share. All prior periods presented have been restated to conform to the two-class method which was
initially adopted by Federated in 2009.
2009 Annual Report 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
(u) Accumulated Other Comprehensive Income
Accumulated other comprehensive income is reported in the Consolidated Balance Sheets and the Consolidated Statements of Changes
in Equity and includes unrealized gains and losses on securities available for sale, net of tax, and foreign currency translation
adjustments, net of tax.
(v) Loss Contingencies
Federated accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings when it is probable that a
loss has been incurred and the costs can be reasonably estimated. Accruals are reviewed at least quarterly and are adjusted to reflect the
impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Significant differences
could exist between the actual cost required to investigate, litigate and/or settle a claim or the ultimate outcome of a suit and
management’s estimate. These differences could have a material impact on Federated’s results of operations, financial position and/or
cash flows. Recoveries of losses are recognized in the Consolidated Statements of Income when receipt is deemed probable.
(w) Business Segments
Business or operating segments are defined as components of an enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to allocate resources and assess performance.
Federated does not have multiple operating segments or business components for which discrete financial information is prepared.
Federated operates in one operating segment, the investment management business. Federated’s Chief Executive Officer (CEO) is
Federated’s chief operating decision maker. Federated’s CEO utilizes a consolidated approach to assess performance and allocate
resources.
(2) Recent Accounting Pronouncements
(a) In January 2010, the Financial Accounting Standards Board (FASB) issued an update to add new requirements for disclosures about
transfers into and out of Levels 1 and 2 fair value measurements and separate enhanced disclosures for Level 3 measurements. The new
requirements also clarify existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used
to measure fair value. The majority of the new requirements are effective for Federated on January 1, 2010. These new rules impact
disclosures only and will have no impact on Federated’s financial position and results of operations.
(b) In June 2009, the FASB issued literature introducing a new consolidation model. The new literature prescribes a qualitative model
for identifying whether a company has a controlling financial interest in a variable interest entity (VIE) and eliminates the quantitative
model under previous GAAP. The new model identifies two primary characteristics of a controlling financial interest: (1) the power to
direct significant activities of the VIE, and (2) the obligation to absorb losses of and/or provide rights to receive benefits from the VIE.
Under the new accounting standard, a company is required to reassess on an ongoing basis whether it holds a controlling financial
interest in a VIE. A company that holds a controlling financial interest is deemed to be the primary beneficiary of the VIE and is
required to consolidate the VIE. The new consolidation model was effective January 1, 2010 for calendar-year-end companies.
In December 2009, the FASB exposed for comment a draft amendment to the new consolidation model. The proposed amendment
addresses concerns with the application of the new consolidation model for reporting enterprises in the asset management industry by
proposing a deferral of the effective date of the new rules for certain investment funds including mutual funds, hedge funds, REITs,
private equity funds, and venture capital funds. The proposed amendment, which would most significantly affect investment
management companies, would defer the requirements of the new consolidation model indefinitely until such time that the FASB and
International Accounting Standards Board complete their joint project on consolidation accounting. The proposed amendment would
also indefinitely defer the effective date of the new consolidation model for interests in money market funds that are required to comply
with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940.
Management continues to evaluate and assess the impact of applying the new consolidation model. In light of the proposed deferral
which the FASB is expected to issue in final form in the near future, management does not believe its adoption of the new
consolidation model will have a material impact on Federated’s Consolidated Financial Statements.
(c) In June 2009, the FASB issued a new accounting standard regarding accounting for transfers of financial assets that removes the
concept of a qualifying special-purpose entity from authoritative guidance and also removes the exception previously under GAAP.
This new accounting standard also clarifies the requirements for isolation and limitations on portions of financial assets that are eligible
for sale accounting. This new accounting standard is effective for fiscal years beginning after November 15, 2009. As such, Federated
plans to adopt this new accounting standard effective January 1, 2010. Management does not expect the adoption of this new
accounting standard to have a material impact on its Consolidated Financial Statements based on the fact that Federated is not currently
involved with any transactions to transfer financial assets.
(d) Effective September 30, 2009, Federated adopted the new FASB Accounting Standards Codification (Codification). The
Codification was officially launched on July 1, 2009, and became the primary source of authoritative GAAP recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the SEC under the authority of Federal securities laws are
also sources of authoritative GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting
42 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
Standards Updates that will be included in the Codification. As the Codification is neither expected nor intended to change GAAP,
Federated’s adoption of the Codification did not have a material impact on its Consolidated Financial Statements.
(e) Effective June 30, 2009, Federated adopted a new accounting standard regarding subsequent events. This new accounting standard
is based upon the same principles that exist within the auditing standards and thus formally establishes accounting standards for
disclosing those events occurring after the balance sheet date but before the financial statements are issued or available to be issued. The
new accounting standard requires public entities to evaluate subsequent events through the date that financial statements are issued,
while all other entities should evaluate subsequent events through the date that financial statements are available to be issued. The new
accounting standard categorizes subsequent events into recognized subsequent events (or historically Type I events) and nonrecognized
subsequent events (or historically Type II events). The new accounting standard also enhances disclosure requirements for subsequent
events. Effective upon issuance, the adoption of the new accounting standard did not have a material impact on Federated’s financial
position or results of operations.
(f) Effective June 30, 2009, Federated adopted a new accounting standard regarding interim disclosures about fair value of financial
instruments. This new accounting standard requires a company to disclose in the body or in the accompanying notes of its summarized
financial information for interim reporting periods the fair value of all financial instruments for which it is practicable to estimate fair
value, whether recognized or not recognized in the balance sheet. This new accounting standard also requires entities to disclose the
methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and
significant assumptions. Federated has presented the necessary disclosures in Note (8).
(g) Effective June 30, 2009, Federated adopted a new accounting standard regarding recognition and presentation of other-than-
temporary impairments. This new accounting standard amends the other-than-temporary impairment guidance for debt securities to
make that guidance more operational and to improve the presentation and disclosure of a company’s investments, including other-than-
temporary impairments on debt and equity securities, in the financial statements. The adoption of this new accounting standard did not
have a material impact on Federated’s financial position and results of operations. Federated has presented the necessary disclosures in
Note (9).
(h) Effective June 30, 2009, Federated adopted a new accounting standard regarding determining fair value when the volume and level
of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This new accounting
standard provides guidance related to: (1) estimating fair value when the volume and level of activity for an asset or liability have
significantly decreased in relation to normal market activity for the asset or liability, and (2) circumstances that may indicate that a
transaction is not orderly (i.e. forced liquidation or distressed sale). This new accounting standard was effective prospectively for interim
and annual reporting periods ending after June 15, 2009. The adoption of this new accounting standard did not have a material impact
on Federated’s financial position and results of operations.
(i) On January 1, 2009, Federated adopted a new accounting standard regarding determining whether instruments granted in share-
based payment transactions are participating securities for purposes of calculating earnings per share. This new accounting standard
addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore,
need to be included in the earnings allocation in computing earnings per share under the two-class method. It affects entities that accrue
or pay nonforfeitable cash dividends on share-based payment awards during the awards’ service periods. The prior period basic and
diluted earnings per share data presented have been restated to conform to the new two-class method. As restated, diluted earnings per
share for continuing operations for the years ended December 31, 2008 and December 31, 2007, respectively, were $0.05 and $0.02
less than the amounts previously reported.
(j) On January 1, 2009, Federated adopted a new accounting standard regarding the determination of the useful life of intangible assets.
This new accounting standard amends the list of factors an entity should consider in developing renewal or extension assumptions used
in determining the useful life of recognized intangible assets. The intent of this new accounting standard is to improve the consistency
between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset
previously under GAAP. The adoption of this new accounting standard did not have a material impact on Federated’s financial position
and results of operations.
(k) On January 1, 2009, Federated adopted a new accounting standard regarding business combinations. This new accounting standard
is intended to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations,
resulting in more complete, comparable and relevant information for investors and other users of financial statements. To achieve this
goal, this new accounting standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired
and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and expands the disclosure requirements for material business combinations. The adoption of this new
accounting standard did not have a material impact on Federated’s financial position and results of operations for the year ended
December 31, 2009, but will have a significant impact on Federated’s accounting for future business combinations in the period of
acquisition.
(l) On January 1, 2009, Federated adopted a new accounting standard regarding noncontrolling interests in consolidated financial
statements. This new accounting standard required the recharacterization of minority interests as noncontrolling interests and the
2009 Annual Report 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
classification thereof as a component of equity, if permanent. The new accounting standard also required temporary equity classification
for financial instruments issued by a subsidiary that are redeemable or convertible for cash or other assets at the option of the holder.
The new accounting standard eliminated the diversity that existed in accounting for transactions between an entity and noncontrolling
interests by requiring that they be treated as equity transactions. The presentation and disclosure requirements of this new accounting
standard were applied retrospectively and as a result of adoption, Federated has distinguished between temporary and permanent equity.
Federated recharacterized the minority interests in consolidated sponsored investment products as “Redeemable noncontrolling interests
in subsidiaries” and classified them as temporary equity while all other minority interests were recharacterized as “Nonredeemable
noncontrolling interests in subsidiaries” and classified as permanent equity in the Consolidated Financial Statements. The adoption of
this new accounting standard did not have a material impact on Federated’s financial position and results of operations.
(m) On January 1, 2009, Federated adopted a new accounting standard regarding fair value measurements related to nonfinancial assets
and liabilities recognized or disclosed at fair value on a nonrecurring basis. These provisions were applied to the determination of fair
value for the nonfinancial assets subject to impairment during 2009. See Note (8) for additional information on the fair value
determinations.
(3) Business Combinations and Acquisitions
Prudent Bear Funds. In 2008, Federated completed the acquisition of certain assets of David W. Tice & Associates LLC that relate to
the management of the Prudent Bear Fund and the Prudent Global Income Fund (collectively, the Prudent Bear Funds) with $1.1
billion and $0.4 billion in assets under management, respectively, as of December 5, 2008 (Prudent Bear Acquisition). In connection
with the acquisition, the assets in the Prudent Bear Funds were transitioned into the newly created Federated Prudent Bear Fund and
the Federated Prudent Global Income Fund. The addition of the Prudent Bear Funds complements Federated’s existing alternative
investment products as well as other core offerings as part of an investor’s overall investment strategy. The initial purchase price for the
transaction was $43 million. As of December 31, 2009, Federated incurred $0.9 million in transaction costs directly attributable to the
acquisition of the Prudent Bear Funds. See Note (21)(a) for information on contingent payments related to this acquisition.
Clover Capital. In 2008, Federated completed the acquisition of certain assets of Clover Capital Management, Inc. (Clover Capital), a
Rochester, New York-based investment manager that specializes in value investing (Clover Capital Acquisition). Clover Capital
managed approximately $2.1 billion in assets as of December 1, 2008, consisting primarily of separately managed accounts. The addition
of Clover Capital results in a suite of traditional value investment offerings for Federated’s clients. The initial purchase price for the
transaction was $30 million. As of December 31, 2009, Federated incurred $0.5 million in transaction costs directly attributable to the
acquisition of Clover Capital. See Note (21)(a) for information on contingent payments related to this acquisition.
Federated has completed its detailed valuations to determine the fair value of the identifiable intangible assets associated with the
Prudent Bear and Clover Capital Acquisitions. The valuation results included in the Consolidated Balance Sheet as of December 31,
2009 and the related Consolidated Statements of Income for the year ended December 31, 2009 include certain adjustments to revise
the December 31, 2008 estimates of fair value. See Note (9) for additional information on these revisions. The final valuation results
indicate $11.7 million of the purchase price is assignable to identifiable intangible assets with a weighted-average useful life of 9 years,
$36.7 million to intangible assets with indefinite lives and $26.1 million to goodwill, all of which is deductible for tax purposes. The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisitions’ closing dates.
Purchase Price Allocations
in millions
Intangible assets
Renewable investment advisory contract (indefinite life)
Customer relationships (10-year weighted-average useful life)1
Noncompete (5-year weighted-average useful life)2
Trade name (indefinite life)
Goodwill
Other long-term assets
Total assets acquired
Liabilities
Total purchase price
Clover
Capital
Prudent
Bear
$
$
0
8.7
0.5
0.6
20.6
0.3
30.7
34.8
0
2.5
1.3
5.5
0
44.1
(0.2)
(0.2)
$
30.5
$
43.9
1
2
The customer relationship intangible assets are being amortized on a straight-line basis over their respective useful lives.
The noncompete assets are being amortized on an accelerated basis over their respective useful lives in a manner that best matches the benefit
received.
44 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
The results of operations for both the Prudent Bear and Clover Capital Acquisitions were included in Federated’s Consolidated
Financial Statements beginning in December 2008 based on the date of each respective acquisition. The following table summarizes
unaudited pro forma financial information assuming both the Prudent Bear Acquisition and the Clover Capital Acquisition occurred at
the beginning of the years presented. This pro forma financial information is for informational purposes only and is not indicative of
actual results that would have occurred had these acquisitions been completed on the assumed dates and it is not indicative of future
results. In addition, the following pro forma financial information has not been adjusted to reflect any operating efficiencies that may
have been realized as a result of the acquisitions.
in millions except for per share data for the years ended,
Revenue
Income from continuing operations attributable to Federated Investors, Inc.
Net income attributable to Federated Investors, Inc.
Earnings per share – Basic
Income from continuing operations attributable to Federated Investors, Inc.
Net income attributable to Federated Investors, Inc.
Earnings per share – Diluted
Income from continuing operations attributable to Federated Investors, Inc.
Net income attributable to Federated Investors, Inc.
2008
$ 1,254.6
227.4
$
230.2
$
$
$
$
$
2.23
2.26
2.21
2.24
2007
1,156.1
220.8
220.8
2.16
2.16
2.13
2.13
$
$
$
$
$
$
$
The pro forma results include adjustments for the effect of acquisition-related expenses including compensation and related,
depreciation and amortization, interest and income tax expense.
Rochdale Investment Management LLC. In the third quarter 2007, Federated completed a transaction with Rochdale Investment
Management LLC (Rochdale) to acquire certain assets relating to its business of providing investment advisory and investment
management services to the Rochdale Atlas Portfolio (Rochdale Acquisition). In connection with the acquisition, on August 24, 2007,
the $366 million of assets in the Rochdale Atlas Portfolio were transitioned into the Federated InterContinental Fund, a new portfolio
created for the purpose of continuing the investment operations of the Rochdale Atlas Portfolio as part of the Federated fund complex.
Federated paid $5.75 million of upfront purchase price in August 2007 and incurred approximately $1 million in transaction costs. To
account for the acquisition, Federated recorded a customer relationship intangible asset and goodwill. See Note (21)(a) for information
on contingent payments related to this acquisition.
(4) Discontinued Operations
In the third quarter 2006, an indirect, wholly owned subsidiary of Federated completed the sale of certain assets associated with its
TrustConnect® mutual fund processing business (the Clearing Business) to Matrix Settlement and Clearance Services, LLC (Matrix).
The sale was completed over a series of closings during 2006.
In connection with the sale, Federated earned and accrued contingent consideration of $4.8 million in the second quarter of 2008,
which was calculated as a percentage of Matrix's second quarter 2008 net revenue above a specific threshold directly attributed to the
Clearing Business. This contingent consideration was received in the third quarter of 2008 and is included, net of tax, as income from
discontinued operations for the year ended December 31, 2008.
(5) Concentration Risk
Revenue concentration by asset class – Approximately 65% of Federated’s total revenue for 2009 was attributable to money market
managed assets. A significant change in Federated’s money market business or a significant reduction in money market managed assets
due to regulatory changes, changes in the financial markets, significant deterioration in investor confidence, persistent declines in or
prolonged periods of historically low short-term interest rates and resulting fee waivers or other circumstances, could have a material
adverse effect on Federated’s results of operations.
Through the adverse market conditions of 2008, Federated’s government agency and treasury money market funds experienced
significant asset inflows, which drove substantial increases in Federated’s money market managed assets. These funds grew as certain
investors favored the perceived safety and liquidity of portfolios backed by government securities over other investment products. Of
Federated’s total $281.6 billion in money market fund assets at December 31, 2009, $150.2 billion or 53% were invested in government
agency and treasury funds. Reflecting increased market demand beginning in the latter part of 2008 for government securities, and
thereby government and treasury money market funds, yields on such products have decreased to record lows. In certain products, the
gross yield is not sufficient to cover all of the fund’s normal operating expenses. During the fourth quarter 2008, Federated began
waiving fees in order for certain funds to maintain positive or zero net yields.
During the course of 2009, fee waivers to maintain positive or zero net yields progressively increased quarter over quarter as fund yields
declined. These fee waivers which totaled $120.6 million for 2009 were partially offset by a related reduction in marketing and
2009 Annual Report 45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
distribution expenses of $86.4 million such that the net impact to Federated was $34.2 million in reduced operating income. The
impact of these fee waivers was significantly less in 2008 with $3.6 million in waived fees, $1.9 million in reduced marketing and
distribution expenses and a net impact on operating income of $1.7 million. (See Note (23) for information regarding the quarterly
operating income impact of the fee waivers.) Management expects the fee waivers and the related reduction in marketing and
distribution expense will continue in 2010 and will likely be material. An increase in interest rates that results in higher yields on
securities purchased in money market fund portfolios would reduce the operating income impact of these waivers. Management is
unable to provide a reasonable estimate of the impact of fee waivers expected for 2010 as the amount of the waivers is contingent on a
number of variables including available yields on instruments held by the funds, changes in assets within the funds, actions by the
Federal Reserve and the U.S. Department of the Treasury, changes in expenses of the funds, changes in the mix of customer assets, and
Federated’s willingness to continue the waivers.
Revenue concentration by product – Approximately 10% of Federated’s total revenue for 2009 was derived from services provided to
one sponsored fund (Government Obligations Fund). A significant and prolonged decline in the assets under management in this fund
could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income, due to a related reduction to
marketing and distribution expenses associated with this fund.
Revenue concentration by customer – Two intermediary customers, the Bank of New York Mellon Corporation (including its
Pershing subsidiary) and Edward Jones & Co., L.P. (Edward Jones), accounted for approximately 19% and 9%, respectively, of
Federated’s total revenue for 2009. Most of this revenue is derived from broker/dealer cash sweep money market products. Significant
changes in Federated’s relationship with these customers could have a material adverse effect on Federated’s future revenues and, to a
lesser extent, net income, due to related material reductions to marketing and distribution expenses associated with such intermediaries.
A listing of Federated’s risk factors is included herein under the section entitled Risk Factors in Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
(6) Consolidation
Federated is involved with various entities in the normal course of business that may be deemed to be voting rights entities or VIEs. In
accordance with Federated’s consolidation accounting policy, Federated first determines whether the entity being evaluated is a voting
rights entity or a VIE. Once this determination is made, Federated proceeds with its evaluation of whether or not to consolidate the
entity. The disclosures below represent the results of such evaluations pertaining to 2009 and 2008.
(a) Consolidated Voting Interest Entities
Federated has a majority interest (50.5%) and acts as the general partner in Passport Research Ltd., a limited partnership. Edward Jones
is the limited partner with a 49.5% interest. The partnership acts as investment adviser to two sponsored funds. Noncontrolling interests
in this subsidiary are included in Nonredeemable noncontrolling interest in subsidiary on the Consolidated Balance Sheets.
(b) Consolidated VIEs
Most of Federated’s sponsored mutual funds meet the definition of a VIE primarily due to the fact that given Federated’s typical series
fund structure, the shareholders of each participating portfolio underlying the series fund generally lack the ability as an individual group
to make decisions through voting rights regarding the board of directors/trustees of the fund. From time to time, Federated invests in
certain of these launched products in order to provide investable cash thereby allowing the product to establish a performance history.
Federated’s investment in these products represents its maximum exposure to loss. As of December 31, 2009 and 2008, Federated was
the sole or majority investor in certain of these various products and was deemed to be the primary beneficiary since Federated’s
majority interest would absorb the majority of the variability of the net assets of the VIE. Federated’s conclusion to consolidate a
sponsored product may vary from period to period based on changes in Federated’s percentage interest in the product resulting from
changes in the number of fund shares held by either Federated or third parties. Given that the products follow investment-company
accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or losses for Federated. There
was no significant impact to the Consolidated Balance Sheets or Statements of Income from entities that were either deconsolidated or
newly consolidated in 2009. At December 31, 2009, the aggregate assets and liabilities of such entities that Federated consolidated were
$22.6 million and $0.5 million, respectively, and Federated recorded $13.9 million to Redeemable noncontrolling interest in
subsidiaries on Federated’s Consolidated Balance Sheets. At December 31, 2008, the aggregate assets and liabilities of such entities that
Federated consolidated were $6.0 million and $0.8 million, respectively, and Federated recorded $0.8 million to Redeemable
noncontrolling interest in subsidiaries on Federated’s Consolidated Balance Sheets. The assets of the products are primarily classified as
Investments on Federated’s Consolidated Balance Sheets. The liabilities of the products are primarily classified as Accounts payable and
accrued expenses on Federated’s Consolidated Balance Sheets and primarily represent operating liabilities of the entities. Neither
creditors nor equity investors in the products have any recourse to Federated’s general credit.
46 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
(c) Non-Consolidated VIEs
At December 31, 2009, Federated was involved with certain VIEs in which it held a significant variable interest or was the sponsor that
held a variable interest, but for which it was not the primary beneficiary. The assets and liabilities of these unconsolidated VIEs and
Federated’s maximum risk of loss related thereto were as follows:
As of December 31, 2009
As of December 31, 2008
Unconsolidated
VIE assets
Unconsolidated
VIE Liabilities
Total
remaining
carrying value
of investment
and maximum
risk of loss
Total
remaining
carrying value
of investment
and maximum
risk of loss
Unconsolidated
VIE assets
Unconsolidated
VIE Liabilities
in millions
Sponsored investment
products1
$
$
$
305,652.4 $
31.1 $
9.0 $
CDOs2
Equity investment
1 The unconsolidated VIE assets for the sponsored investment products represent total net assets under management for the related products. Of
Federated’s $89.2 million invested in these products at December 31, 2009, $81.6 million represents investments in money market products included
in Cash and cash equivalents, with the remaining $7.6 million included in Investments on the Consolidated Balance Sheets. Of Federated’s $43.4
million invested in these products at December 31, 2008, $37.8 million represents investments in money market products included in Cash and cash
equivalents, with the remaining $5.6 million included in Investments on the Consolidated Balance Sheets.
2 The risk of loss does not reflect any potential loss as a result of a related deferred tax asset expiring unutilized.
89.2
0
7.6
$
$
$
336,739.0 $
1,056.4 $
5.2 $
-- $
1,145.8 $
2.3 $
-- $
127.3 $
4.9 $
43.4
0
8.2
Sponsored Investment Products – Federated acts as the investment manager for certain investment products that are deemed to be VIEs,
as disclosed above. In addition to Federated’s involvement as the investment manager, Federated may also hold investments in these
products. Federated is not the primary beneficiary of these VIEs since Federated’s involvement is limited to that of service provider or
represents a minority interest in the fund’s assets under management, or both. As a result, Federated’s variable interest is not deemed to
absorb the majority of the variability of the entity’s net assets and therefore Federated has not consolidated these entities.
CDOs – At December 31, 2009, Federated acted as the investment manager for two CDOs that meet the definition of a VIE due
primarily to the lack of unilateral decision making authority of the equity holders. The CDOs are alternative investment vehicles
created for the sole purpose of issuing collateralized debt instruments that offer investors the opportunity for returns that vary with the
risk level of their investment. The notes issued by the CDOs are backed by diversified portfolios consisting primarily of structured debt
and had original expected maturities of ten to twelve years. Federated’s variable interests in the CDOs are limited to a 25% equity
interest and a fixed, asset-based management fee earned prospectively as services are provided. As an equity holder, Federated
participates in all rights and obligations to income and expected losses of the CDOs on a proportionate basis with all other equity
holders. In its role as investment manager, Federated is not entitled to any additional residual return nor is it obligated to absorb any
expected losses of the entities.
Federated is not the primary beneficiary of these VIEs since as investment manager and a minority equity interest holder, Federated’s
variable interests are not deemed to absorb the majority of the variability of the entities’ net assets and therefore Federated has not
consolidated these entities.
Equity Investment – Federated holds a 12% non-voting, noncontrolling interest in both Dix Hills Partners, LLC, a registered
investment adviser and commodity trading adviser, and its affiliate, Dix Hills Associates, LLC (collectively, Dix Hills). Dix Hills is based
in Jericho, New York and manages over $800 million in both absolute return and enhanced fixed-income mandates, including a hedge
fund strategy and an enhanced cash strategy. Due primarily to the nature of the voting rights of the equity holders, Dix Hills meets the
definition of a VIE, however, with its 12% interest, Federated is not deemed to be the primary beneficiary. Federated’s investment in
Dix Hills is included in Other long-term assets on the Consolidated Balance Sheets.
(7) Fair Value Measurements
Federated measures certain financial and nonfinancial assets and liabilities at fair value using inputs that are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Federated’s market
assumptions.
These two types of inputs create the following fair value hierarchy:
Level 1–Quoted prices for identical instruments in active markets.
Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that
are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets.
2009 Annual Report 47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
Pursuant to this hierarchy, Federated uses observable market data, when available, and minimizes the use of unobservable inputs when
determining fair value.
(a) Fair Value Measurements on a Recurring Basis
Federated’s available-for-sale securities include investments in fluctuating-value mutual funds. Federated’s trading securities primarily
represent investments in equities and investment-grade debt instruments as a result of the consolidation of certain sponsored products
when Federated is deemed to have a controlling financial interest. These financial assets are classified as current on the Consolidated
Balance Sheets.
The following table presents fair value measurements for major categories of Federated’s financial assets measured at fair value on a
recurring basis:
in thousands
Cash and cash
equivalents
Available-for-sale
securities
Trading securities
Total investments
December 31, 2009
Fair Value Measurements Using
December 31, 2008
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$
90,452
$
––
$
7,591
4,803
$ 12,394
$
––
19,144
$ 19,144
$
$
$
––
$ 90,452
$ 45,438
––
––
––
$
7,591
23,947
$ 31,538
$
$
5,615
3,997
9,612
$
$
$
––
$
––
$ 45,438
––
3,597
3,597
$
$
––
––
––
$
5,615
7,594
$ 13,209
Federated did not hold material investments in securities that were measured at fair value using significant unobservable inputs (Level 3)
during the years ended December 31, 2009 or 2008. At December 31, 2009 and 2008, Federated held financial liabilities of $0.2 million
and $0.6 million, respectively, measured at fair value on a recurring basis. These liabilities were classified as short-term and the fair value
was determined primarily using quoted prices for similar instruments (Level 2) and quoted prices for identical instruments (Level 1) as of
December 31, 2009 and 2008, respectively. In addition, with the exception of the aircraft that was classified as held for sale in 2009 (and
further discussed below), Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at
December 31, 2009 and 2008.
(b) Fair Value Measurements on a Nonrecurring Basis
In the first quarter 2009, Federated experienced significant declines in the underlying assets under management related to certain
customer relationship intangible assets acquired primarily in connection with one acquisition in a prior year. The declines reflected
significant market depreciation as well as investor net redemptions in 2009, which were incremental to the significant declines in the
latter half of 2008. Management’s quarterly recoverability test of the carrying value of these customer relationships as of March 31, 2009
indicated that the carrying values were not fully recoverable. Cash flow projections at March 31, 2009 were lower than previous
projections prepared in connection with this recoverability testing as a result of continued managed asset declines due to market
depreciation and net outflows. Management estimated the fair value of these customer relationship intangible assets based upon
expected future cash flows using an income approach valuation methodology with unobservable inputs (Level 3). Such inputs included
(1) an estimated rate of change for underlying managed assets; (2) expected revenue per managed asset; (3) incremental operating
expenses; (4) useful life of the acquired asset; and (5) a discount rate. Management estimates a rate of change for underlying managed
assets based on a combination of an estimated rate of market appreciation or depreciation and an estimated net redemption or sales rate.
Expected revenue per managed asset, incremental operating expenses and the useful life of the acquired asset are generally based on
contract terms, average market participant data and historical experience. The discount rate is estimated at the current market rate of
return. In addition, because of the subjective nature of the projected discounted cash flows, management considered several scenarios
and used probability weighting to calculate the expected future cash flows attributable to the intangible assets. The probability-weighted
scenarios assumed assets under management growth rates ranging from 35% to -30%. As a result of this fair value analysis, Federated
recorded a $16.0 million impairment charge in Intangible asset impairment and amortization on the Consolidated Statements of Income
to write down these customer relationship intangible assets to $11.1 million as of March 31, 2009. Given the uncertainties regarding
future market conditions, the timing and pace of a forecasted recovery and possible prolonged periods of underperformance compared
to peer funds and indices and the significance of these factors to assets under management, management cannot be certain of the
outcome of future undiscounted cash flow analyses.
As a result of deterioration in the resale market for used aircraft in 2008 and 2009 and management’s intent to sell its aircraft before the
end of its previously estimated useful life, Federated recognized impairment charges totaling $5.2 million to write down the carrying
value of one of Federated’s aircraft in 2009. Based upon independent valuation and market data for similar assets (Level 2), management
estimated the value of this aircraft less expected costs to sell to be $3.4 million at December 31, 2009. The impairment charges were
48 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
recorded as operating expense in Other on the Consolidated Statements of Income for the year ended December 31, 2009. As a result
of adopting a plan to sell this aircraft late in 2009, the aircraft is included in Other current assets on the Consolidated Balance Sheets as
of December 31, 2009.
(c) Fair Value Measurements of Other Financial Instruments
The fair value of Federated’s nonrecourse debt is estimated based on estimated annual redemption and market appreciation rates of the
underlying B-share fund assets (see Note (1)(l) and Note (13)). Based on this estimate, the carrying value of nonrecourse debt appearing
on the Consolidated Balance Sheets approximates fair value.
The fair value of Federated’s recourse debt is estimated based on the current market rate for debt with similar remaining maturities.
Based on this fair value estimate, the carrying value of recourse debt appearing on the Consolidated Balance Sheets approximates fair
value.
(8) Investments
Investments as of December 31, 2009 and 2008 included trading and available-for-sale securities. At December 31, 2009 and 2008,
Federated held investments totaling $7.6 million and $5.6 million, respectively, in fluctuating-value mutual funds that were classified as
available-for-sale securities and were included in Investments on the Consolidated Balance Sheets.
Federated’s trading securities totaled $23.9 million and $7.6 million at December 31, 2009 and 2008, respectively. Federated
consolidates certain sponsored products into its Consolidated Financial Statements as a result of Federated’s controlling financial interest
in the products (see Note (6)). As a result, all investments held by these sponsored products were included in Federated’s Consolidated
Balance Sheets as of December 31, 2009 and 2008 as trading securities. Federated’s trading investments primarily represented stocks of
large- and mid-cap U.S. and international companies and investment-grade debt securities and were included in Investments on the
Consolidated Balance Sheets.
Available-for-sale securities (see Note (1)(g)) were as follows:
At December 31, 2009
At December 31, 2008
in thousands
Cost
Gains
Gross Unrealized
(Losses)
0
$
(5)
(5)
Estimated
Market
Value
Cost
Estimated
Market
Value
Gross Unrealized
Gains
(Losses)
0 $ (318)
130
(288)
130 $ (606)
$
Equity mutual funds
Fixed-income mutual funds
Total fluctuating-value mutual funds1
1 As of December 31, 2008 the unrealized losses of $606 related to investments with a fair value of $4,527. Of these, investments with a fair value of
$4,471 with unrealized losses of $562 had sustained continuous unrealized losses for a period shorter than 12 months. In 2009, a portion of the
unrealized losses at December 31, 2008 were deemed to be other-than-temporary losses. As a result, Federated recorded a $314 charge to write
down the carrying value of the investments.
2,644 $ 3,017 $
4,947
7,591 $ 6,091 $
2,301 $
4,620
6,921 $
343
332
675
3,074
$
$
$
$
$
$
2,699
2,916
5,615
2009 Annual Report 49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
The following table presents gains and losses recognized in Gain (loss) on securities, net on the Consolidated Statements of Income in
connection with investments for the years ended December 31:
in thousands
Unrealized gain (loss) on trading securities
Realized gains1,5
Realized losses2,3,5
Impairments4
Gain (loss) on securities, net
1
2009
2,806
1,256
(1,405)
(386)
2,271
$
$
2008
(1,673)
282
(1,353)
(498)
(3,242)
$
$
2007
414
318
(4,928)
(1,175)
(5,371)
$
$
2
3
Realized gains of $1,138, $114 and $318 related to the disposal of trading securities in 2009, 2008 and 2007, respectively. Realized gains of $118 and
$168 related to the disposal of available-for-sale securities in 2009 and 2008, respectively.
Realized losses of $1,405, $1,353 and $4,915 related to the disposal of trading securities in 2009, 2008 and 2007, respectively. Realized losses of $13
related to the disposal of available-for-sale securities in 2007.
In 2007, Federated realized a $4.9 million loss on a $5 million investment in a Federated-sponsored private investment partnership. The partnership was
a short-term investment vehicle whose limited partners were accredited investors. The non-Federated partners redeemed their limited partnership
interests at full value.
4 During 2007, Federated recorded a $1.2 million charge to write down the carrying value of one of its CDOs. The fair value of this investment was
written down as a result of unfavorable changes in estimated future cash flows for the CDO. Such revised cash flow estimates were triggered primarily
by the implication of significant downgrades and rising default rates in the credit markets which became more significant to the CDO’s portfolio of
investments in the fourth quarter 2007, as well as the downgrading of certain of the CDO’s investments in the fourth quarter 2007.
Realized gains and losses are computed on a specific-identification basis and recognized in Gain (loss) on securities, net on the Consolidated
Statements of Income.
5
(9) Intangible Assets and Goodwill
Federated’s identifiable intangible assets consisted of the following at December 31:
in thousands
Finite-lived intangible assets:
Customer relationships1
Noncompete agreements2
Total finite-lived intangible assets3
Indefinite-lived intangible assets:
Renewable investment advisory contracts
Trade names
Total indefinite-lived intangible assets
Total identifiable intangible assets
2009
2008
Accumulated
Amortization
Cost
Carrying
Value
Accumulated
Cost Amortization
Carrying
Value
$ 134,869 $
14,396
149,265
37,800
1,900
39,700
$ 188,965 $
(100,710)
(6,932)
(107,642)
N/A
N/A
N/A
(107,642)
$
$
34,159 $
7,464
41,623
154,121 $
14,496
168,617
37,800
1,900
39,700
81,323 $
44,700
2,000
46,700
215,317 $
(87,318)
(4,778)
(92,096)
N/A
N/A
N/A
(92,096)
$
$
66,803
9,718
76,521
44,700
2,000
46,700
123,221
1 Weighted average amortization period of 9.6 years at December 31, 2009
2 Weighted average amortization period of 7.1 years at December 31, 2009
3 Weighted average amortization period of 9.4 years at December 31, 2009
The decrease of $19.3 million in the cost of the Customer relationship intangible assets at December 31, 2009 as compared to
December 31, 2008 primarily relates to the $16.0 million impairment of certain intangible assets primarily related to one acquisition.
This write-down was recorded in the first quarter 2009 and is reflected in Intangible asset impairment and amortization on the
Consolidated Statement of Income for 2009. See Note (7)(b) for additional information on the impairment.
The decrease of $6.9 million in the cost of the Renewable investment advisory contracts intangible asset at December 31, 2009, as
compared to December 31, 2008, primarily reflects an adjustment to revise the preliminary purchase price allocation recorded for the
Prudent Bear Acquisition. See Note (3) for additional information.
Amortization expense for identifiable intangible assets was $16.6 million, $18.4 million and $19.7 million in 2009, 2008 and 2007,
respectively. This expense is included in Intangible asset impairment and amortization on the Consolidated Statements of Income for
each period. See Note (7)(b) for information regarding the intangible asset impairments.
50 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
Following is a schedule of expected aggregate annual amortization expense for intangible assets in each of the five succeeding years
assuming no new acquisitions or impairments:
in millions
2010
2011
2012
2013
2014
For the years ending
December 31,
14.8
8.6
5.0
4.2
3.3
$
$
$
$
$
Goodwill at December 31, 2009 and 2008 was $581.7 million and $534.1 million, respectively. During 2009, Federated recorded
goodwill primarily in connection with contingent purchase price payments and accruals related to the 2005 acquisition of the cash
management business of Alliance Capital Management L.P. (Alliance Acquisition) ($33.4 million) and adjustments to revise the
preliminary purchase price allocations recorded for the Prudent Bear Acquisition ($10.6 million) and the Clover Capital Acquisition
($3.1 million). See Note (3) for additional information.
(10) Property and Equipment
Property and equipment consisted of the following at December 31:
in thousands
Computer software and hardware1
Transportation equipment
Leasehold improvements
Office furniture and equipment
Total cost
Accumulated depreciation and amortization2
Estimated Useful Life
1 to 5 years
12 years
Up to term of lease
2 to 10 years
2009
$ 35,693
17,833
15,574
6,468
75,568
(35,541)
Property and equipment, net
1 The 2008 amount includes $341 recorded under capital lease arrangements. No such amount was recorded for 2009.
2 The 2008 amount includes $270 related to capital lease arrangements. No such amount was recorded for 2009.
$ 40,027
2008
$ 34,907
11,876
12,820
7,430
67,033
(37,644)
$ 29,389
Depreciation and amortization expense from continuing operations was $7.5 million, $6.2 million and $5.9 million for the years ended
December 31, 2009, 2008 and 2007, respectively, and included the depreciation of assets recorded under capital lease arrangements.
(11) Other Current Liabilities
Federated’s Other current liabilities at December 31, 2009 and 2008 included accruals of $28.9 million and $15.4 million, respectively,
related to the contingent purchase price payments for the Alliance Acquisition which is payable annually in April with a final payment
due in July 2010. Also included in Other current liabilities at December 31, 2009 and 2008 was $20.8 million and $17.0 million,
respectively, related to an insurance recovery for claims submitted to cover costs associated with the internal review and government
investigations into past mutual fund trading practices and related civil litigation (see Note (21)(c)). The retention of these advance
insurance payments is contingent upon final approval of the claim by the insurance carrier. In the event that all or a portion of the claim
is denied, Federated will be required to repay all or a portion of these advance payments. Because the outcome of this claim is uncertain
at this time, Federated recorded the advance payments as a liability and will continue to evaluate the contingency until it is resolved.
2009 Annual Report 51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
(12) Recourse Debt
Recourse debt at December 31 consisted of the following:
Weighted-
Average Interest
Rates at
December 31,
2009
2008
1.72% 3.24%
N/A 1.98%
N/A 6.93%
dollars in thousands
$140 million Term Loan1, 2
$200 million Revolving Credit Facility1
Capital Lease
Total debt – recourse
Less: Short-term debt – recourse
Long-term debt – recourse
1 The terms of these agreements allow up to eight separate borrowing tranches each for the purpose of setting different interest rates and maturities.
2 The current rate is the weighted-average rate of several loan tranches maturing on various dates through February 2, 2010.
Maturity Date
October 31, 2011 $
October 31, 2011
October 31, 2009
0
0
126,000
21,000
105,000 $
2008
140,000
37,000
71
177,071
51,071
126,000
2009
126,000 $
$
Term Loan – During the third quarter 2008, Federated entered into a variable-rate $140 million term-loan facility (Term Loan).
Federated has the option to increase its borrowings to $150 million during the term of the facility upon commitment from the lending
banks. The Term Loan requires quarterly principal payments totaling $21 million and $28 million in 2010 and 2011, respectively, and a
balloon payment of $77 million on October 31, 2011. During the year ended December 31, 2009, Federated repaid $14 million of its
borrowings on its Term Loan. Proceeds from the Term Loan were used for general corporate purposes including cash payments related
to acquisitions, regular quarterly dividends and share repurchase programs. The proceeds were also used to finance a portion of the
special cash dividend payment in 2008.
Borrowings under the Term Loan currently bear interest at Federated’s option at either (1) the one-, two-, three-, six- or twelve-
month London Interbank Offered Rate (LIBOR) plus a spread, currently 100 basis points; or (2) a base rate announced from time to
time by the lending banks.
Revolver – Federated has a $200 million Revolving Credit Facility (the Revolver). Federated pays an annual facility fee, currently 7.5
basis points, based on its credit rating. Borrowings on the Revolver bear interest similar to that under the Term Loan except the
LIBOR spread is currently 22.5 basis points. As of December 31, 2009, all of the Revolver was available for borrowings.
For both the Term Loan and the Revolver (collectively, the Credit Facilities), the LIBOR spreads are dependent upon Federated’s
credit rating. Under the Credit Facilities, Federated can make cash payments for stock repurchases or shareholder dividend payments as
long as cash, cash equivalents or unused borrowing from the Revolver of no less than $10 million is maintained during the payment
period and certain other covenants are maintained. Certain subsidiaries entered into Continuing Agreements of Guaranty and
Suretyship whereby these subsidiaries guarantee payment of all obligations incurred through the Credit Facilities. The Credit Facilities
include customary financial and non-financial covenants. Federated was in compliance with all such covenants at and during the year
ended December 31, 2009.
(13) Deferred Sales Commissions and Nonrecourse Debt
Deferred sales commissions consisted of the following at December 31:
in thousands
Deferred sales commissions on B-shares, net
Other deferred sales commissions, net
Deferred sales commissions, net
$
$
2009
12,585
2,733
15,318
$
$
2008
28,637
1,624
30,261
52 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
Since 1997, Federated has funded sales commissions paid for Class B shares of sponsored mutual funds under various arrangements with
independent third parties by selling its right to future cash flow streams associated with the B-share deferred sales commissions. As a
result of these funding arrangements, Federated has recorded nonrecourse debt, which comprised the following at December 31:
dollars in thousands
Financings between October 2000 and December 2003
Financings between January 2004 and February 2007
Financings between March 2007 and December 2009
Total debt—nonrecourse
Weighted-Average
Interest Rates at
December 31,
2009
2008
N/A 4.75%
7.09% 6.59%
4.56% 5.65%
Maximum Remaining
Amortization Period at
December 31, 2009
(in years)
N/A
5.3
8.1
2009
0
11,007
2,549
13,556
$
$
2008
8,165
20,311
2,021
30,497
$
$
Federated’s nonrecourse debt does not contain a contractual maturity but is amortized up to eight years dependent upon the cash flows
of the related B-share fund assets, which are applied first to interest and then principal. Interest rates are imputed based on current
market conditions at the time of issuance.
Management performs recoverability analyses of the deferred sales commission assets and nonrecourse debt related to B-share financings
to determine if future cash flows related to financings will be sufficient to fully amortize the related asset and debt balances. There were
no material B-share-related adjustments during 2009 or 2008.
Federated’s current B-share funding arrangement expires in February 2010. Management expects to self-fund B-share sales beginning in
March 2010. Under the current structure, B-share advanced commissions totaled $6.1 million for 2009.
(14) Employee Benefit Plans
(a) 401(k)/Profit Sharing Plan
Federated offers a 401(k) plan covering substantially all employees. Under the 401(k) plan, employees can make salary deferral
contributions at a rate of 1% to 50% of their annual compensation (as defined in the 401(k) plan), subject to Internal Revenue Code
limitations. Federated makes a matching contribution in an amount equal to 100% of the first 2% that each participant defers and 50%
of the next 4% of deferral contributions. Forfeitures of unvested matching contributions are used to offset future matching
contributions.
Matching contributions to the 401(k) plan recognized in Compensation and related expense amounted to $3.9 million, $3.5 million and
$3.3 million for 2009, 2008 and 2007, respectively.
Vesting in Federated’s matching contributions commences once a participant in the 401(k) plan has been employed at least two years
and worked at least 1,000 hours per year. Upon completion of two years of service, 20% of Federated’s contribution included in a
participant’s account vests and 20% vests for each of the following four years if the participant works at least 1,000 hours per year.
Employees are immediately vested in their 401(k) salary deferral contributions.
A Federated employee becomes eligible to participate in the profit sharing plan if employed on the last day of the year and has worked
at least 500 hours for the year. The profit sharing plan is a defined contribution plan to which Federated may contribute amounts as
authorized by its board of directors. No contributions have been made to the profit sharing plan in 2009, 2008 or 2007. At
December 31, 2009, the profit sharing plan held 0.7 million shares of Federated Class B common stock.
(b) Employee Stock Purchase Plan
Federated offers an employee stock purchase plan that allows employees to purchase a maximum of 750,000 shares of Class B common
stock. Employees may contribute up to 10% of their salary to purchase shares of Federated’s Class B common stock on a quarterly basis
at the market price. The shares purchased under this plan may be newly issued shares, treasury shares or shares purchased on the open
market. As of December 31, 2009, 106,146 shares were purchased by employees in this plan on the open market since the plan’s
inception in 1998.
(15) Share-Based Compensation Plans
Federated’s long-term stock-incentive compensation has been provided for under the Stock Incentive Plan (the Plan), as amended and
subsequently approved by shareholders in April 2002 and April 2006. Share-based awards are granted to reward Federated’s employees
and independent directors who have contributed to the success of Federated and to provide incentive to increase their efforts on behalf
of Federated. Since the Plan’s inception, a total of 23.6 million shares of Class B common stock have been authorized for granting
share-based awards in the form of restricted stock, stock options or other share-based awards. As of December 31, 2009, 2.7 million
shares are available under the Plan.
Share-based compensation expense was $18.8 million, $15.1 million and $12.6 million for the years ended December 31, 2009, 2008
and 2007, respectively. The associated tax benefits recorded in connection with share-based compensation expense was $7.1 million,
$5.8 million and $4.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009, the
2009 Annual Report 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
maximum remaining unrecognized compensation expense related to share-based awards approximated $66 million which is expected to
be recognized over a weighted-average period of approximately 7 years.
(a) Restricted Stock
Federated’s restricted stock awards represent shares of Federated Class B common stock that may be sold by the awardee only once the
restrictions lapse, as dictated by the terms of the award. The awards are generally subject to graded vesting schedules that vary in length
from three to ten years with a portion of the award vesting each year, as dictated by the terms of the award. For an award with a ten-
year vesting period, the restrictions on the vested portion of the award typically lapse on approximately the award’s fifth- and tenth-year
anniversaries. Certain restricted stock awards granted pursuant to a key employee bonus program have a three-year graded vesting
schedule with restrictions lapsing at each vesting date. During the period of restriction, the recipient receives dividends on all shares
awarded, regardless of their vesting status.
The following table summarizes activity of non-vested restricted stock awards for the year ended December 31, 2009:
Weighted-
Non-vested at January 1, 2009
Granted1
Vested
Forfeited
Restricted
Shares
2,419,210
1,155,136
(342,993)
(30,518)
Average Grant-
Date Fair Value
$28.04
$20.41
$32.39
$30.03
$24.80
Non-vested at December 31, 2009
1 During the first quarter of 2009, Federated awarded 504,136 shares of restricted Federated Class B common stock in connection with a bonus program
in which certain key employees received a portion of their bonus in the form of restricted stock under the Plan. This restricted stock, which was granted
on the bonus payment date and issued out of treasury, generally vests over a three-year period. During the first quarter, third quarter and fourth quarter
of 2009, Federated awarded 100,000 shares, 4,000 shares and 547,000 shares, respectively, of restricted Federated Class B common stock to certain
key employees. The restricted stock awards vest over a ten-year period with restrictions on the vested portion of the awards lapsing on approximately the
awards’ fifth- and tenth-year anniversaries.
3,200,835
Federated awarded 1,155,136 shares of restricted Federated Class B common stock with a weighted-average grant-date fair value of
$20.41 to employees during 2009; awarded 758,551 shares of restricted Federated Class B common stock with a weighted-average
grant-date fair value of $23.53 to employees during 2008; and awarded 694,334 shares of restricted Federated Class B common stock
with a weighted-average grant-date fair value of $33.06 to employees during 2007.
The total fair value of restricted stock vested during 2009, 2008 and 2007 was $6.8 million, $10.1 million and $6.2 million, respectively.
(b) Stock Options
The outstanding stock options were granted with exercise prices that equaled or exceeded the market price of Federated’s Class B
common stock on the grant date. The options generally have graded vesting schedules that vary in length from three to ten years and in
certain cases, may contain accelerated vesting provisions based upon the attainment of specific performance criteria. The stated exercise
period is typically a one-year period following the date on which the entire award becomes fully vested. Each vested option may be
exercised for the purchase of one share of Class B common stock at the exercise price. In some cases, Federated awarded stock options
with no requisite service requirement. These options, which were fully vested on the date of grant, were immediately exercisable and
expire no later than ten years after the grant date.
The following table summarizes the status of and changes in Federated’s stock option program for the year ended December 31, 2009:
Outstanding at January 1, 2009
Granted
Exercised
Forfeited
Outstanding at December 31, 2009
Vested at December 31, 2009
Exercisable at December 31, 2009
Options
4,080,607
12,000
(345,275)
(42,250)
3,705,082
2,277,857
690,082
Weighted-Average
Weighted-Average
Exercise Price
Remaining Contractual
Life (in years)
Aggregate
Intrinsic Value
(in millions)
$26.35
$23.56
$12.87
$26.87
$27.59
$25.81
$24.05
1.6
1.6
1.8
$6.7
$5.7
$3.2
Total options exercised during 2009, 2008 and 2007 were 345,275, 1,052,343 and 631,210, respectively. The total intrinsic value of
stock options exercised during 2009, 2008 and 2007 was $4.0 million, $17.7 million and $18.0 million, respectively.
Federated granted 12,000 stock options to non-management directors with a weighted-average grant-date fair value of $3.38, $4.05 and
$6.96 during each of the second quarters of 2009, 2008 and 2007, respectively. Federated estimated the grant-date fair value using the
54 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
Black-Scholes option-pricing model with the following weighted-average assumptions for options granted in 2009, 2008, and 2007
respectively: dividend yields based on latest annualized dividend of 4.07%, 2.84% and 2.16%; expected volatility factors based on
historical volatility of 24.9%, 15.2% and 16.7%; risk-free interest rates based on the U.S. Treasury strip rate for the expected life of the
option of 1.89%, 3.09% and 4.54%; and an expected life of 5 years for each grant in 2009, 2008 and 2007. The expected life is based on
the assumption that these options will be exercised evenly over the life of the option.
All awards granted in 2009, 2008 and 2007 were granted with an exercise price that was equal to the market price on the date of grant.
(16) Common Stock
The Class A common stockholder has the entire voting rights of Federated; however, without the consent of the majority of the
holders of the Class B common stock, the Class A common stockholder cannot alter Federated’s structure, dispose of all or substantially
all of Federated’s assets, amend the Articles of Incorporation or Bylaws of Federated to adversely affect the Class B common
stockholders, or liquidate or dissolve Federated. With respect to dividends, distributions and liquidation rights, the Class A common
stock and Class B common stock have equal preferences and rights.
(a) Dividends
Cash dividends of $98.5 million, $375.7 million and $83.1 million were paid in 2009, 2008 and 2007, respectively, to holders of
common stock. In the third quarter 2008, Federated paid $2.76 per share or $281.2 million for a special cash dividend in addition to the
regular quarterly cash dividends paid throughout the course of 2008. All dividends are considered ordinary dividends for tax purposes.
(b) Treasury Stock Repurchase
During 2008, the board of directors authorized a share repurchase program that allows Federated to buy back as many as 5 million
shares of Class B common stock following the December 31, 2008 expiration of the previous board-approved share repurchase
program. The current program has no stated expiration date. No other programs exist as of December 31, 2009. The program
authorizes executive management to determine the timing and the amount of shares for each purchase. The repurchased stock will be
held in treasury for employee share-based compensation plans, potential acquisitions and other corporate activities. During the year
ended December 31, 2009, Federated repurchased 0.8 million shares of common stock for $20.1 million, the majority of which were
repurchased in the open market and the remaining shares were repurchased in connection with employee separations and are not
counted against the board-approved share repurchase program. At December 31, 2009, approximately 4.2 million shares remain
available to be purchased under the current buyback program.
Under the Credit Facilities, certain covenants are maintained including one that allows Federated to make cash payments for stock
repurchases or shareholder dividends as long as liquidity of no less than $10 million is maintained during the payment period.
(17) Leases
The following is a schedule by year of future minimum payments required under the operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 2009:
in millions
2010
2011
2012
2013
2014
2015 and thereafter
Total minimum lease payments
$
$
12.1
11.4
10.9
10.7
10.6
9.4
65.1
Federated held a material operating lease at December 31, 2009 for its corporate headquarters building in Pittsburgh, Pennsylvania. This
lease expires in 2014 and has renewal options for two successive terms of five years each. This lease includes provisions for leasehold
improvement incentives, rent escalation and certain penalties for early termination. In addition, at December 31, 2009, Federated had
various other operating lease agreements primarily involving additional facilities and vehicles. These leases are noncancelable and expire
on various dates through the year 2019. Most leases include renewal or purchase options and, in certain leases, escalation clauses.
Rental expenses related to continuing operations were $11.1 million, $11.7 million and $11.8 million for the years ended
December 31, 2009, 2008 and 2007, respectively. In addition, sublease rental income was $0.5 million the year ended December 31,
2007. There was no sublease rental income for the years ended December 31, 2009 and 2008.
2009 Annual Report 55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
(18) Income Taxes
Federated files a consolidated federal income tax return. Financial statement tax expense is determined under the liability method.
Income tax expense (benefit), net from continuing operations consisted of the following components for the years ended December 31:
in thousands
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total
2009
2008
2007
$ 101,649
11,082
297
113,028
8,269
(3,399)
380
$ 118,278
$ 117,210
9,160
811
127,181
1,655
(166)
(502)
$ 128,168
$ 120,184
10,773
652
131,609
(1,848)
(534)
(20)
$ 129,207
The federal net tax effects of timing differences exceeding 5% of pretax income at the statutory federal income tax rate included in
Income tax provision on the Consolidated Statements of Income were ($6.8 million), ($9.1 million) and ($6.8 million) for impairments
and amortization of intangible assets in 2009, 2008 and 2007, respectively.
Discontinued operations, net of tax for the year ended December 31, 2008 included income tax expense of $2.0 million. There were
no discontinued operations in 2009 or 2007.
For the years ended December 31, 2009, 2008 and 2007, the foreign subsidiaries had income from continuing operations before
income taxes of $2.0 million, $6.8 million and $2.8 million, respectively, for which income tax expense of $0.8 million, $1.5 million
and $1.0 million, respectively, has been recorded.
The reconciliation between the Federal statutory income tax rate and Federated’s effective income tax rate attributable to continuing
operations consisted of the following for the years ended December 31:
Expected statutory rate
Increase/(decrease):
State income taxes, net of Federal benefit
Capital loss valuation allowance
Book income of consolidated entities attributable to noncontrolling interests
Other
Effective rate
2009
35.0%
1.5
1.2
(1.3)
(0.2)
36.2%
2008
35.0%
1.6
0.1
(0.8)
0.0
35.9%
2007
35.0%
1.9
0.0
(0.6)
0.4
36.7%
During 2009, changes to the New York City corporate tax rules were enacted. These changes, some of which were retroactive to the
beginning of 2009, resulted in a net favorable adjustment of $2.1 million, comprised of a deferred tax benefit of approximately $3.4
million and a current tax detriment of approximately $1.3 million. Management anticipates its New York City tax expense will increase
going forward as a result of these new rules.
During 2009, Federated recognized a $1.6 million deferred tax asset relating to a net operating loss carryforward acquired in connection
with a prior period acquisition. Management concluded its evaluation of the availability of the loss carryforward for use by Federated as
the acquirer and believes it is more likely than not that Federated will be able to realize the net operating loss carryforwards to partially
offset post-acquisition federal taxable income.
During 2009, Federated recorded an additional $3.7 million valuation allowance primarily related to certain deferred tax assets
generated by charges recorded in prior years to write down the value of Federated’s investments in certain managed CDOs. After
reassessing the viability and timing of certain tax-planning strategies in light of current market conditions, management believes it is
more likely than not that Federated will not be able to realize the full benefit of these deferred tax assets once the capital losses are
recognized for tax purposes.
During 2008, a $2.6 million favorable adjustment was made to the income tax provision due primarily to a correction of deferred tax
balances following the full amortization of certain deferred sales commission assets.
56 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities consisted of the
following as of December 31:
in thousands
Deferred Tax Assets
State tax net operating losses1
Share-based compensation
Deferred income
Write-down of CDO investments2
State taxes
Foreign tax net operating losses1
Federal tax net operating losses
Capital losses3
Other
Total gross deferred tax asset
Valuation allowance1, 2, 3
Total deferred tax asset, net of valuation allowance
Deferred Tax Liabilities
Intangible assets
Property and equipment
State taxes
Deferred sales commissions
Costs of internal-use software
Other
Total gross deferred tax liability
Net deferred tax liability
2009
2008
$ 14,942
8,105
7,274
6,240
2,417
2,176
1,648
898
5,202
48,902
(20,806)
$ 28,096
$ 42,892
4,426
3,696
2,141
1,546
1,462
$ 56,163
$ 28,067
$ 14,548
6,270
5,948
6,557
1,939
2,096
0
887
4,799
43,044
(16,285)
$ 26,759
$ 36,119
2,553
5,701
2,347
1,284
803
$ 48,807
$ 22,048
1 A valuation allowance has been recognized for $2.0 million of the deferred tax asset for foreign tax net operating losses, and for all but $0.8 million of the
deferred tax asset for state tax net operating losses. The $14.9 million deferred tax asset for state net operating losses will expire over the period 2010-
2026. The valuation allowances were recorded due to management’s belief that it is more likely than not that Federated will not realize the full benefit of
these net operating losses.
2 Federated recognized deferred tax assets as a result of charges recorded to write down the value of its investment in certain managed CDOs. The carry-
forward period for capital losses, once recognized, is five years. Management currently believes it is more likely than not that Federated will not fully
realize these deferred tax assets in the future and therefore has recognized a related valuation allowance for $3.2 million.
3 Management currently believes that it is more likely than not that Federated will not realize any benefit from its capital loss deferred tax asset in the future
and, as such, has recognized a valuation allowance for its full amount.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows for the years ending December 31:
in thousands
Balance at beginning of year
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Reductions based on tax positions related to the current year
Reductions based on tax positions related to prior years
Lapse of statute of limitations
Balance at end of year
2009
507
161
0
0
0
(167)
501
$
$
2008
1,146
98
60
(41)
(756)
0
507
$
$
The decrease in unrecognized tax benefits in 2008 relates to the Internal Revenue Service’s approval of a requested change in
accounting method. As of December 31, 2009, there was no reasonable possibility of a significant increase or decrease in unrecognized
tax benefits within the next twelve months.
The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.5 million and $0.5 million as of
December 31, 2009 and 2008, respectively.
As of both December 31, 2009 and 2008, Federated had $0.1 million of interest accrued on tax liabilities on the Consolidated Balance
Sheets. For the year ended December 31, 2008, $0.1 million was recorded for interest in the Consolidated Statements of Income.
There was no interest recorded for the year ended December 31, 2009. As of and for the years ended December 31, 2009 and 2008,
Federated had no amounts accrued for penalties in the Consolidated Balance Sheets or in the Consolidated Statements of Income.
2009 Annual Report 57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
As of December 31, 2009 tax years 2006 through 2008 remained subject to examination by Federated’s major tax jurisdictions, which
include the United States, the states of California, New York and Pennsylvania and the city of New York.
As of December 31, 2008 tax years 2005 through 2007 remained subject to examination by Federated’s major tax jurisdictions, which
include the United States, the states of California, New York and Pennsylvania and the city of New York, with the exception of tax
year 2005, which was effectively settled for New York state tax purposes for its primary taxpayer in that jurisdiction.
(19) Earnings Per Share Attributable to Federated Investors, Inc. Shareholders
The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts
attributable to Federated Investors, Inc. for the years ended December 31:
in thousands, except per share data
Numerator – Basic
Income from continuing operations attributable to Federated Investors, Inc.
Less: Total income available to participating unvested restricted shareholders1
Total income from continuing operations attributable to Federated Common Stock2
2009
2008
2007
$ 197,292 $ 221,509 $ 217,471
(3,322)
$ 192,375 $ 216,340 $ 214,149
(4,917)
(5,169)
Income from discontinued operations attributable to Federated Investors, Inc.
Less: Total income available to participating unvested restricted shareholders1
Total income from discontinued operations attributable to Federated Common Stock2
$
$
0 $
0
0 $
2,808 $
(65)
2,743 $
0
0
0
Net income attributable to Federated Common Stock2
$ 192,375 $ 219,083 $ 214,149
Numerator – Diluted
Income from continuing operations attributable to Federated Investors, Inc.
Less: Total income available to participating unvested restricted shareholders1
Total income from continuing operations attributable to Federated Common Stock2
$ 197,292 $ 221,509 $ 217,471
(3,295)
$ 192,379 $ 216,340 $ 214,176
(4,913)
(5,169)
Income from discontinued operations attributable to Federated Investors, Inc.
Less: Total income available to participating unvested restricted shareholders1
Total income from discontinued operations attributable to Federated Common Stock2
$
$
0 $
0
0 $
2,808 $
(65)
2,743 $
0
0
0
Net income attributable to Federated Common Stock2
$ 192,379 $ 219,083 $ 214,176
Denominator
Basic weighted-average common shares outstanding
Dilutive potential shares from stock options
Diluted weighted-average common shares outstanding
Earnings per share – Basic
Income from continuing operations attributable to Federated Common Stock
Income from discontinued operations attributable to Federated Common Stock
Net income attributable to Federated Common Stock
Earnings per share – Diluted
Income from continuing operations attributable to Federated Common Stock
Income from discontinued operations attributable to Federated Common Stock
Net income attributable to Federated Common Stock
1
99,923
133
100,056
99,605
790
100,395
100,855
1,212
102,067
$
$
$
$
1.93 $
0.00
1.93 $
2.17 $
0.03
2.20 $
1.92 $
0.00
1.92 $
2.15 $
0.03
2.18 $
2.12
0.00
2.12
2.10
0.00
2.10
Income available to participating restricted shareholders includes dividends paid to unvested restricted shareholders, net of estimated and actual forfeited
dividends, and their proportionate share of undistributed earnings.
2 Federated Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class method of
computing earnings per share.
For the years ended December 31, 2009, 2008 and 2007, 2.7 million, 1.3 million and 0.3 million stock option awards, respectively,
were outstanding but not included in the computation of diluted earnings per share for each year because the exercise price was greater
58 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
than the average market price of Federated Class B common stock for each respective year. In the event the awards become dilutive,
these shares would be included in the calculation of diluted earnings per share and would result in additional dilution.
(20) Accumulated Other Comprehensive Income attributable to Federated Shareholders
The components of accumulated other comprehensive income, net of tax, attributable to Federated shareholders are as follows:
in thousands
$
Balance at January 1, 2007
Total change in market value1
Reclassification adjustment2
Gain on currency conversion3
Balance at December 31, 2007
Total change in market value1
Reclassification adjustment2
Loss on currency conversion3
Balance at December 31, 2008
Total change in market value1
Reclassification adjustment2
Gain on currency conversion3
Balance at December 31, 2009
1 The tax (expense) benefit on the change in market value of securities available for sale was ($266), $364 and ($292) for 2009, 2008 and 2007,
$
Unrealized Gain
(Loss) on Securities
Available for Sale
(8)
$
(543)
726
0
175
(675)
190
0
(310)
494
240
0
424
$
$
Foreign
Currency
Translation
Gain (Loss)
459
0
0
245
704
0
0
(97)
607
0
0
483
$ 1,090
Total
451
(543)
726
245
879
(675)
190
(97)
297
494
240
483
1,514
respectively.
2 The tax expense on the reclassification adjustments was $145, $102 and $391 for 2009, 2008 and 2007, respectively.
3 The tax (expense) benefit on the foreign currency translation gain/loss was ($260), $52 and ($132) for 2009, 2008 and 2007, respectively.
(21) Commitments and Contingencies
(a) Contractual
Federated is obligated to make certain future payments under various agreements to which it is a party, including operating leases (see
Note (17)). The following table summarizes minimum noncancelable payments contractually due under Federated’s significant service
contracts and employment arrangements:
in millions
Purchase obligations1
Employment-related commitments2
Total
Payments due in
2010
$11.1
23.7
$34.8
2011
$4.1
17.0
$21.1
2012
$1.2
10.2
$11.4
2013
$0.7
8.3
$9.0
2014
$0.6
7.6
$8.2
After
2014
$1.2
0
$1.2
Total
$18.9
66.8
$85.7
1 Federated is a party to various contracts pursuant to which it receives certain services including legal, access to various fund-related information systems
and research databases, as well as trade order transmission and recovery services. These contracts contain certain minimum noncancelable payments,
cancellation provisions and renewal terms. The contracts expire on various dates through the year 2019. Costs for such services are expensed as
incurred.
2 Federated has certain domestic and international employment arrangements pursuant to which Federated is obligated to make minimum compensation
payments. These contracts expire on various dates through the year 2014.
As part of the Prudent Bear Acquisition, Federated is required to make contingent purchase price payments based upon certain revenue
growth targets over the four-year period following the acquisition. The purchase price payments, which could total to as much as $99.5
million, will be recorded as additional goodwill at the time the contingency is resolved. As of December 31, 2009, $5.1 million related
to the first contingent purchase price payment was accrued in Other current liabilities, was recorded as goodwill and will be paid in the
first quarter of 2010.
As part of the Clover Capital Acquisition, Federated is required to make contingent purchase price payments based upon growth in
revenues over the five-year period following the acquisition date. The purchase price payments, which could total as much as $56
million, will be recorded as additional goodwill at the time the contingency is resolved. The applicable growth targets were not met for
the first payment related to the anniversary year ended in December 2009. As such, no amounts were accrued in 2009, or will be paid
in 2010.
2009 Annual Report 59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
As part of the 2006 acquisition of MDTA LLC (MDTA), Federated was required to make annual contingent purchase price payments
based upon growth in MDTA net revenues over a three-year period. The first two contingent purchase price payments of $43.3
million and $40.9 million were paid in the third quarters of 2007 and 2008, respectively, and were recorded as goodwill. The applicable
growth targets were not met for the final payment related to the anniversary year ending in July 2009. As such, there will be no further
payments.
As part of the Alliance Acquisition, Federated is required to make contingent purchase price payments over a five-year period. These
payments are calculated as a percentage of revenues less certain operating expenses directly attributed to the assets acquired. The first
four contingent purchase price payments of $10.7 million, $13.3 million, $16.2 million and $19.8 million were paid in the second
quarters of 2006, 2007, 2008 and 2009, respectively. At current asset levels, the final payments in 2010 would total approximately $36
million. As of December 31, 2009, $28.9 million, which includes a $10 million lump-sum payment, was accrued in Other current
liabilities and recorded as goodwill. Contingent payments are recorded as additional goodwill at the time the related contingency is
resolved.
In the third quarter 2007, Federated completed a transaction with Rochdale Investment Management LLC to acquire certain assets
relating to its business of providing investment advisory and investment management services to the Rochdale Atlas Portfolio (Rochdale
Acquisition). The Rochdale Acquisition agreement provides for two forms of contingent purchase price payments that are dependent
upon asset growth and fund performance through 2012. The first form of contingent payment is payable in 2010 and 2012 and could
aggregate to as much as $20 million. The second form of contingent payment is payable on a semi-annual basis over the five-year
period following the acquisition closing date based on certain revenue earned by Federated from the Federated InterContinental Fund.
As of December 31, 2009, $2.1 million was paid related to these semi-annual contingent purchase price payments and $0.3 million
related to future contingent purchase price payments was accrued in Other current liabilities and recorded as goodwill. Contingent
payments are recorded as additional goodwill at the time the related contingency is resolved.
Pursuant to various significant employment arrangements, Federated may be required to make certain incentive compensation-related
payments. The employment contracts expire on various dates through the year 2014 with payments possible through 2018. As of
December 31, 2009, the maximum bonus payable over the remaining terms of the contracts approximates $91 million, of which
approximately $4 million would be payable in 2010 if the necessary performance targets are met and the employees continue to be
employed as of the relevant payment dates. In addition, certain employees have incentive compensation opportunities related to the
Federated Kaufmann Large Cap Fund (the Fund Bonus). Based on current asset levels, a nominal amount would be paid in 2011 as the
first Fund Bonus payment. Management is unable to reasonably estimate a range of possible bonus payments for the Fund Bonus for
subsequent years due to the wide range of possible growth-rate scenarios.
Pursuant to another acquisition agreement and long-term employment arrangements, Federated may be required to make additional
payments upon the occurrence of certain events. Under these other agreements, payments could occur on an annual basis and continue
through 2013.
(b) Guarantees and Indemnifications
On an intercompany basis, various wholly owned subsidiaries of Federated guarantee certain financial obligations of Federated Investors,
Inc., and Federated Investors, Inc. guarantees certain financial and performance-related obligations of various wholly owned
subsidiaries. In addition, in the normal course of business, Federated has entered into contracts that provide a variety of
indemnifications. Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated, under
which Federated agrees to hold the other party harmless against losses arising out of the contract, provided the other party’s actions are
not deemed to have breached an agreed upon standard of care. In each of these circumstances, payment by Federated is contingent on
the other party making a claim for indemnity, subject to Federated’s right to challenge the other party’s claim. Further, Federated’s
obligations under these agreements may be limited in terms of time and/or amount. It is not possible to predict the maximum potential
amount of future payments under these or similar agreements due to the conditional nature of Federated’s obligations and the unique
facts and circumstances involved in each particular agreement. Management believes that if Federated were to incur a loss in any of
these matters, such loss should not have a material effect on its business, financial position or results of operations.
(c) Past Mutual Fund Trading Issues and Related Legal Proceedings
During the fourth quarter 2005, Federated entered into settlement agreements with the SEC and New York State Attorney General to
resolve the past mutual fund trading issues. Under the terms of the settlements, Federated paid for the benefit of fund shareholders a
total of $80.0 million. In addition, Federated agreed to reduce the investment advisory fees on certain Federated funds by $4.0 million
per year for the five-year period beginning January 1, 2006, based upon effective fee rates and assets under management as of
September 30, 2005. Depending upon the level of assets under management in these funds during the five-year period, the actual
investment advisory fee reduction could be greater or less than $4.0 million per year. For the years ended December 31, 2009, 2008
and 2007, these fee reductions were approximately $3 million, $3 million and $4 million, respectively.
Since October 2003, Federated has been named as a defendant in twenty-three cases filed in various federal district courts and state
courts involving allegations relating to market timing, late trading and excessive fees. All of the pending cases involving allegations
60 Federated Investors, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
related to market timing and late trading have been transferred to the U.S. District Court for the District of Maryland and consolidated
for pre-trial proceedings. One market timing/late trading case was voluntarily dismissed by the plaintiff without prejudice.
The seven excessive fee cases were originally filed in five different federal courts and one state court. All six of the federal cases are now
consolidated and pending in the U.S. District Court for the Western District of Pennsylvania. The state court case was voluntarily
dismissed by the plaintiff without prejudice.
The plaintiffs in the excessive fee cases seek compensatory damages reflecting a return of all advisory fees earned by Federated in
connection with the management of the Federated Kaufmann Fund since June 28, 2003, as well as attorneys' fees and expenses. The
remaining lawsuits seek unquantified damages, attorneys’ fees and expenses. Federated is defending this litigation. The potential impact
of these lawsuits and similar suits against third parties, as well as the timing of settlements, judgments or other resolution of these
matters, is uncertain. It is possible that an unfavorable determination will cause a material adverse impact on Federated’s financial
position, results of operations and/or liquidity in the period in which the effect becomes reasonably estimable.
The Consolidated Financial Statements for the years ended December 31, 2009, 2008 and 2007 reflect $10.6 million, $7.5 million and
$4.4 million, respectively, for costs associated with various legal, regulatory and compliance matters, including costs incurred on behalf
of the funds, costs incurred and estimated to complete the distribution of Federated’s regulatory settlement, costs related to certain other
undertakings of these settlement agreements, and costs incurred and estimated to resolve certain of the above-mentioned ongoing legal
proceedings. Accruals for these estimates represent management’s best estimate of probable losses at this time. Actual losses may differ
from these estimates, and such differences may have a material impact on Federated’s consolidated results of operations, financial
position or cash flows.
(d) Other Legal Proceedings
Federated has other claims asserted and threatened against it in the ordinary course of business. As of December 31, 2009, Federated
does not believe that a material loss related to these claims is reasonably estimable. These claims are subject to inherent uncertainties. It
is possible that an unfavorable determination will cause a material adverse impact on Federated’s reputation, financial position, results of
operations and/or liquidity in the period in which the effect becomes reasonably estimable.
(22) Subsequent Events
On January 28, 2010, Federated’s board of directors declared a $1.50 per share cash dividend to shareholders of record as of February 5,
2010, which was paid on February 12, 2010. The dividend consists of a $0.24 per share quarterly dividend and a $1.26 per share special
dividend. A significant portion of the dividend was funded by cash on hand. The dividend was considered an ordinary dividend for tax
purposes.
On February 11, 2010, Federated borrowed $53.5 million against the Revolver in order to meet cash needs.
Federated has evaluated subsequent events through February 19, 2010, the date these financial statements were issued.
2009 Annual Report 61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(December 31, 2009, 2008 and 2007)
(23) Supplementary Quarterly Financial Data (Unaudited)
in thousands, except per share data, for the quarters ended
March 31,
June 30,
September 30, December 31,
2009
Revenue1
Operating income1, 2
Net income including noncontrolling interests in subsidiaries
Amounts attributable to Federated Investors, Inc.
$310,643
60,049
37,469
$306,894
88,065
56,083
$293,603
94,733
60,287
$264,810
86,381
54,700
Net income1, 2
Basic earnings per share1, 2
Diluted earnings per share1, 2
Cash dividends per share
Stock price per share3
High
Low
2008
Revenue
Operating income
Net income including noncontrolling interests in subsidiaries
Amounts attributable to Federated Investors, Inc.
Income from continuing operations
Income from discontinued operations4
Net income4
Basic earnings per share5
Income from continuing operations
Income from discontinued operations4
Net income4, 6
Diluted earnings per share5
Income from continuing operations
Income from discontinued operations4
Net income4
Cash dividends per share7
Stock price per share3
High
Low
35,135
0.34
0.34
0.24
23.21
16.10
$305,693
90,944
57,205
55,819
0
55,819
0.55
0.00
0.55
0.54
0.00
0.54
0.21
45.01
36.03
53,274
0.52
0.52
0.24
26.85
21.08
$310,306
91,213
60,045
55,217
2,808
58,025
0.55
0.03
0.57
0.54
0.03
0.57
0.24
41.45
32.30
56,986
0.56
0.56
0.24
27.50
22.35
$305,913
93,260
58,666
56,211
0
56,211
0.52
0.00
0.52
0.52
0.00
0.52
3.00
36.63
17.17
51,897
0.51
0.51
0.24
28.31
24.76
$301,768
85,757
55,519
54,263
0
54,263
0.53
0.00
0.53
0.53
0.00
0.53
0.24
29.59
15.80
1 During the first, second, third and fourth quarters of 2009, fee waivers to maintain positive or zero net yields totaled $9.7 million, $17.0 million, $36.5
million and $57.5 million, respectively. These fee waivers were partially offset by related reductions in marketing and distribution expenses of $4.6 million,
$11.4 million, $27.9 million and $42.6 million such that the net impact to Federated was $5.1 million, $5.6 million, $8.6 million and $14.9 million in
reduced operating income for the first, second, third and fourth quarters of 2009, respectively.
2 Federated recorded impairments totaling $21.7 million primarily related to intangible and fixed assets in the first quarter 2009. See Note (7) for additional
information.
3 Federated’s common stock is traded on the New York Stock Exchange under the symbol “FII.”
4 Income from discontinued operations for the quarter ended June 30, 2008 reflects the recognition of a $4.8 million pre-tax gain related to the final
contingent payment received as a result of the 2006 sale of the Clearing Business.
5 Certain prior year amounts have been restated to reflect the adoption of a new accounting standard regarding determining whether instruments granted
in share-based payment transactions are participating securities for purposes of calculating earnings per share.
6 Totals may not sum due to rounding.
7 For the quarter ended September 30, 2008, Federated paid $2.76 per share for a special cash dividend. This payment was in addition to the $0.24 per
share dividend paid in that quarter. All dividends are considered ordinary dividends for tax purposes.
The approximate number of beneficial shareholders of Federated’s Class A and Class B common stock as of February 5, 2010, was 1 and
72,301, respectively.
62 Federated Investors, Inc.
0339_CvrC1 03/05/2010 8:58 AM Page 2
Federated knows...
Stability
Ranks as a leading global investment manager, managing approximately
$390 billion in assets, delivering competitive and consistent results since 1955
and fostering growth by reinvesting in the company
Investment Solutions
Offers broad product lines spanning domestic and international equity,
fixed-income, alternative and money market strategies with the goal of
long-term consistent, competitive performance
Diligence
Takes the long view, believing that doing business the right way over time
will present opportunity for future growth
Client-centric
Delivers business solutions through consultative meetings, investment forums
and market insights, often delivered proactively at client-specific locations
Corporate Information
CORPORATE OFFICES
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Telephone: 412-288-1900
Email: investors@federatedinv.com
FederatedInvestors.com
WORLDWIDE OPERATIONS
Boston, MA
Dublin, Ireland
Frankfurt, Germany
Houston, TX
New York, NY
Rochester, NY
Tokyo, Japan
Warrendale, PA
Wilmington, DE
CONTACT INFORMATION
Investor Relations: 412-288-1934
Analyst Inquiries: 412-288-1920
Media Relations & Corporate
Communications: 412-288-7895
Customer Service: 800-341-7400
Email: services@federatedinvestors.com
FORM 10-K AND
SHAREHOLDER PUBLICATIONS
For a complimentary copy of Federated’s
Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q or current reports
on Form 8-K as filed with the Securities and
Exchange Commission or a recent earnings
news release, please contact the Investor
Relations department at 412-288-1934 or visit
the About Us section of FederatedInvestors.com.
ANNUAL MEETING
Federated’s Annual Shareholder Meeting will
be held in Room 336 of the David L. Lawrence
Convention Center, 1000 Fort Duquesne
Boulevard, Pittsburgh, PA 15222 at 4 p.m.
local time on Thursday, April 22, 2010.
TRANSFER AGENT
Shareholders of record with questions
concerning account information, certificates,
transferring securities, dividend payments,
requesting direct deposit information or
processing a change of address should
contact:
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
Telephone: 800-736-3001
DIVIDEND PAYMENTS
Subject to approval of the board of directors,
dividends are paid on Federated’s common
stock typically during the months of February,
May, August and November.
MARKET LISTING
Federated Investors, Inc. class B common stock
is traded on the New York Stock Exchange
under the trading symbol FII.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP, Pittsburgh, PA
0339_CvrC1 03/05/2010 8:54 AM Page 1
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2009 Annual Report