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2014 Annual Report
Celebrating 60 Years
From humble beginnings in a ground-floor office
at a landmark Downtown Pittsburgh building that
no longer exists, Federated Investors, Inc. stands
today as one of the nation’s largest investment
managers – a leader in innovative investment
management products and services that reflect
the entrepreneurial spirit upon which the
company was founded. As Federated celebrates its
60th anniversary in 2015, we remain committed
to seeking growth for our shareholders.
1955 – John F. Donahue
founds the company
with Richard B. Fisher
and legal counsel
Thomas J. Donnelly.
All three attended high
school together.
1955 – Federated’s
first office was in the
Jenkins Arcade in
downtown Pittsburgh.
1962 – The Empire Fund,
one of Federated’s first
exchange funds, attracted
$300 million in assets.
Financial Overview
(as of and for the years ended Dec. 31,)
Summary of Operations
(in thousands)
Total revenue
Operating income
Net income1
Per Share Data
Diluted earnings per share1
Cash dividends per share
Managed Assets
(in millions)
Money market
Fixed income
Equity
Liquidation portfolio
Total managed assets
2014 2013
$ 859,250 $ 878,365
$ 237,949 $ 251,743
$ 149,236 $ 162,177
$ 1.42 $ 1.55
$ 1.00 $ 0.98
$ 258,772 $ 275,952
52,707 50,126
51,426 44,148
0 5,858
$ 362,905 $ 376,084
Equity Assets
(in billions)
$51.4
$44.1
$35.0
Gross Equity Sales
(in billions)
Sources of Revenue
($859.3 million)
$14.7
$11.9
$10.5
12
13
14
12
13
14
Equity
■ Equity and fixed income 67%
45%
22%
32%
1%
■ Fixed income
■ Money market
■ Other
1Amounts attributable to Federated Investors, Inc.
2014 Annual Report
1
Dear Fellow Shareholders:
Over the past 60 years, Federated Investors, Inc. has served as a
beacon for investors seeking time-tested investment solutions and innovative
money-management ideas. That tradition continued in 2014, as Federated
provided quality investment performance in products designed to succeed in
a variety of market conditions, including the challenges of the low-rate
environment and the market volatility experienced in the fourth quarter.
Federated’s equity and fixed-income assets under management rose 10 percent
to $104.1 billion, with equity assets alone increasing 16 percent from a year
ago to a record $51.4 billion. In 2014, 45 percent of Federated’s revenue was
driven by the company’s equity assets under management. Overall assets under
management were $362.9 billion at year-end. Earnings per diluted share were
$1.42 based on net income of $149.2 million.
Federated’s strength continues to be a business mix that provides earnings
potential across a variety of market cycles. On the equity side, Federated saw
continued interest in its income-oriented strategies and portfolios that mixed
equity income with fixed-income securities, be they taxable or municipal.
In addition, the company had growth among its strongest performing products,
such as Federated International Leaders Fund, a foreign large blend equity
strategy, and Federated Kaufmann Large Cap Fund, a growth strategy. Gross
sales of equity funds and equity separate accounts rose to $14.7 billion, a
23 percent increase from the previous year.
In 2014, Federated continued to employ capital to benefit shareholders.
The company repurchased 940,417 shares of class B common stock and,
through year-end, paid quarterly dividends to our shareholders for the
68th consecutive quarter. Dividends totaled $1.00 per share in 2014.
Federated has generated $3.9 billion in cash from operations since the
company’s initial public offering in 1998, and Federated’s use of cash
has included $1.6 billion for dividends, $1 billion for share repurchases
and $886 million for acquisitions.
1971 – Federated
co-founder Richard B.
Fisher established early
relationships with
broker/dealers through
his sales efforts for the
Fund for U.S. Government
Securities.
1976 – Created the
first institutional-only
money market fund and
one of the first municipal
bond funds.
1986 – Federated moved
its headquarters to the
newly built Federated
Investors Tower in Liberty
Center, downtown
Pittsburgh, Pa.
2
Federated Investors, Inc.
2014 Highlights
■ Grew equity assets by 16 percent to a record $51.4 billion, generating
45 percent of Federated’s annual revenue.
■ Realized record net equity sales of $4.3 billion on gross sales of
$14.7 billion.
■ Generated 67 percent of Federated’s revenue for the year from equity
and fixed-income assets.
■ Earned top-decile performance on a three-year basis with eight equity
funds, or more than 30 percent of equity strategies.
■ Grew high-yield bond assets by $1 billion to $7.2 billion.
■ Reached $24.3 billion in strategic value dividend strategy assets, a nearly
$5 billion increase over the previous year, including a $3 billion increase
in the strategy’s SMA assets.
■ Enhanced our alternatives/managed risk team with the addition of a
senior vice president and consolidated the personnel working in the
liquid alternatives space under his leadership.
■ Signed a distribution agreement with RJ Delta Fund Management, an
Argentina-based subsidiary of Raymond James, to distribute Federated’s
equity and fixed-income products to pension plans in Chile.
Equity Assets
$51.4 billion
■ Value
■ Growth
■ Balanced/Asset Allocation
■ International/Global
■ Blend
■ Alternative
$ 29.1
$ 9.1
$ 5.3
$ 4.2
$ 3.2
$ 0.5
Fixed-Income Assets
$52.7 billion
■ Multisector
■ Municipal
■ High-Yield
■ U.S. Corporate
■ U.S. Government
■ Mortgage-Backed
■ International/Global
$ 23.3
$ 7.4
$ 7.2
$ 5.8
$ 5.1
$ 2.1
$ 1.8
Money Market Assets
$258.8 billion
■ Government
■ Prime
■ Tax-Free
■ Non-U.S. Domiciled
$ 126.0
$ 105.1
$ 18.4
$ 9.3
2014 Annual Report
3
Regulatory changes for money market funds
As a cash-management leader for more than 40 years, Federated has advocated for
the utility of money market funds on behalf of the more than 50 million investors
who use them as cash-management tools. In July 2014, the U.S. Securities and
Exchange Commission (SEC) voted to adopt new rules that will significantly
change the marketplace for money market mutual funds over the next 18 months
as these regulations are implemented.
While the company was disappointed with the SEC’s decision, we remain
committed to providing a variety of liquidity-management solutions for our
clients, including those that meet the needs of our institutional prime and
institutional municipal customers. In our money market product line,
Federated looks to the future, where we will continue to provide solutions
for our customers. In addition, we will consider other cash-management
vehicles to help meet the needs of our cash-management clients.
Investment solutions for a variety of markets
With 60 years in the investment business, Federated has offered a variety of
investment solutions and provided strong performance that have positioned
the company for growth over multiple market cycles—be they bull or bear.
In 2014, Federated’s business mix benefited from the range of strong-performing
equity and bond strategies sought by our clients. Both equity funds and separate
accounts had net positive sales for the year. Federated Capital Income Fund,
a balanced product seeking income, had $1.6 billion in net sales and topped
our net sales list. In addition, Federated Strategic Value Dividend Fund—and
its strategy of investing primarily in high dividend yielding stocks of companies
with dividend growth potential—had strong sales. Fixed-income assets under
management grew to $52.7 billion, with strong sales in Federated Total Return
Bond Fund, several high-yield strategies and short-term bond products.
1989 – Federated bought
itself back from Aetna
Life & Casualty Co., after
being sold to Aetna
7 years earlier.
1991 – Established
Federated International
Management Limited,
in Dublin, Ireland,
becoming the first
U.S. company whose
registered money market
funds were approved for
distribution in Europe.
1998 – Federated
Investors, Inc. emerged
as a publicly traded
company on the New York
Stock Exchange. The
opening price was $19 per
share. A 3 for 2 stock split
followed in June 2000.
4
Federated Investors, Inc.
Client relationships: A key focus
Federated’s sales force successfully capitalized on strong product performance and
further strengthened the company’s market position as a trusted wholesaler to more
than 7,700 global clients, including broker/dealers, registered investment advisers,
institutions and other financial intermediaries. In our broker/dealer division—where
in the last few years Federated increased sales staff and invested in technology and
marketing—gross equity fund sales increased 36 percent over the previous year and
redemptions decreased, resulting in higher net sales. In the wealth management and
trust area, gross equity fund sales grew by 27 percent and redemptions decreased.
In addition, the division saw considerable interest in our total return bond strategy,
and we added a $500 million active cash separate account in the fourth quarter.
In the institutional division, we added a $700 million high-yield separate account.
Federated managed more than $63 billion in separate accounts at year-end and
ranked among the top 10 SMA managers based on total assets2.
Sixty years ago, Federated was founded on the principle that doing business the
right way over time would build a durable franchise that could weather a variety
of market conditions while offering the opportunity for future growth. Today,
Federated’s 1,435 employees are an essential part of fulfilling that mission. We thank
each employee, as Federated’s success is, in large part, a testament to their dedication
and efforts.
We close by offering our appreciation to you, our shareholders, for your continued
support of our efforts to deliver growth and shareholder value as we innovate and
seek to grow the company. Federated believes our combination of quality
investment management, strong sales and outstanding service position the firm
on a strong foundation for the future.
John F. Donahue
Chairman
J. Christopher Donahue
President and Chief Executive Officer
1998 – Launched venture
with German insurer
LVM-Versicherungen to
offer Federated funds in
Germany and other
German-speaking countries.
2001 – Federated
began management
of the well-known
$3.2 billion Kaufmann
Fund by acquiring most
of the business of its
adviser, Edgemont
Asset Management.
2012 – Expanded
global footprint through
the acquisition of
London-based Prime Rate
Capital Management.
Enhanced the office’s
trade-finance and
emerging-market
debt capabilities the
following year.
2Source: Cerulli Associates; data is from Q3 2014.
2014 Annual Report
5
Directors
John F. Donahue
Chairman and Co-founder,
Federated Investors, Inc.
J. Christopher Donahue
President and Chief Executive Officer,
Federated Investors, Inc.
Committee: Executive
Executives
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.
Michael J. Farrell
President, Farrell & Co.
Committees: Audit, Compensation, Compliance
Gordon J. Ceresino
President, Federated International Management Limited
Vice Chairman, Federated Investors, Inc.
Marie Milie Jones
Founding Partner, JonesPassodelis, PLLC
Committees: Audit, Compensation, Compliance
Thomas R. Donahue
President, FII Holdings, Inc.
Chief Financial Officer and Treasurer, Federated Investors, Inc.
David M. Kelly
Chairman, Chief Executive Officer and President (retired),
Matthews International Corporation
Committees: Audit, Compensation, Compliance
John W. McGonigle
Vice Chairman, Executive Vice President,
Chief Legal Officer and Secretary,
Federated Investors, Inc.
Committee: Executive
John B. Fisher
President and Chief Executive Officer,
Federated Advisory Companies
Richard B. Fisher
Chairman, Federated Securities Corp.
Vice Chairman and Co-founder, Federated Investors, Inc.
Eugene F. Maloney
Executive Vice President, Federated Investors, Inc.
John W. McGonigle
Vice Chairman, Executive Vice President,
Chief Legal Officer and Secretary,
Federated Investors, Inc.
Richard A. Novak
Vice President and Principal Accounting Officer,
Federated Investors, Inc.
Thomas E. Territ
President, Federated Securities Corp.
6
Federated Investors, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14818
FEDERATED INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
Federated Investors Tower
Pittsburgh, Pennsylvania
(Address of principal executive offices)
25-1111467
(I.R.S. Employer
Identification No.)
15222-3779
(zip code)
412-288-1900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class B Common Stock, no par value
(Title of each class)
New York Stock Exchange
(Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer (do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the Class B Common Stock held by non-affiliates of the registrant as of June 30, 2014 was approximately $2.9
billion, based on the last reported sales price of $30.92 as reported by the New York Stock Exchange as of such date. For purposes of this
calculation, the registrant has deemed all of its executive officers and directors to be affiliates, but has made no determination as to whether
any other persons are affiliates within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934. The number of shares of
Class A and Class B Common Stock outstanding on February 17, 2015, was 9,000 and 104,795,024, respectively.
Documents incorporated by reference:
Part III of this Form 10-K incorporates by reference certain information from the registrant's 2015 Information Statement.
9950_Fin.pdf 1
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Part I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Part II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Signatures
Page
4
12
20
20
21
21
21
23
24
36
38
73
73
73
74
75
76
76
76
76
80
2
9950_Fin.pdf 2
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, 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 Investors, Inc. and its consolidated subsidiaries (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. Such statements include certain statements relating to: asset flows, levels and mix; business mix; levels of revenues,
expenses, gains, losses, income and earnings; obligations to make additional contingent payments pursuant to acquisition
agreements or employment arrangements; future cash needs and cash flows; legal proceedings; the timing and impact of
increased laws and regulation, including potential, proposed and final rules by U.S. and foreign regulators and government
entities; distribution channels and markets; the components and level of, and prospect for increased, distribution-related
expenses; levels of investment, potential losses associated with investments and the timing of redemption of certain
investments; the ability to raise additional capital; impact of consolidations; useful life of property and equipment, impairments
and other charges for losses and expenses; tax liability and the realization or reversal of deferred tax assets; plans for
international growth; management’s assessments, beliefs, expectations, assumptions, projections or estimates, including
regarding fee rates, market conditions, the level, degree, continuance, recovery and financial impact of fee waivers and
reimbursements or assumptions of expenses (fee waivers), the level, timing, degree and impact of changes in interest rates,
yields or asset levels or mix, legal proceedings, the timing, impact and other consequences of potential, proposed and final rules
and other regulation, borrowing, taxes, tax assets, tax rates, interest rates, earnings, cash flows, credit spreads, recovery rates,
dilution, product and strategy demand, investor preferences, market availability and supply of, and interest in, certain
investments, performance, product development and restructuring options and initiatives, including the plans for and timing of
such options and initiatives, compliance, and related legal, compliance and other professional services expenses, interest
payments or expenses, amortization expense, compensation expense, and other expenses, reallocation of resources, repayment
and amortization schedules for indebtedness and interest rate swaps, loan balances, the impact and value of the interest rate
swap, indebtedness and certain other investments, volatility, and liquidity; dilution and diluted earnings; future principal uses of
cash; performance indicators; the impact of accounting policies and new accounting pronouncements; interest rate, credit, price,
sovereign debt, currency, technology, cybersecurity, litigation, foreign exchange, concentration, market and other risks;
guarantee and indemnification obligations; and certain items set forth under Item 1A - Risk Factors. Among other risks and
uncertainties, market conditions may change significantly resulting in changes to Federated’s asset flows, asset levels, asset mix
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 net revenue levels and will be affected
by the achievement of such levels, and the obligation to make additional payments pursuant to employment arrangements is
based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows 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 developing,
structuring and distributing its products and strategies, potential changes in assets under management and/or changes in the
terms of distribution and shareholder services contracts with one or more intermediaries who offer Federated’s products to
customers, and potential increased legal, compliance and other professional services expenses stemming from additional
regulation or the reallocation of such resources to other initiatives. 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 fair values of assets under management, investor preferences and confidence, and the ability of Federated
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 increased scrutiny of the investment management industry by domestic or foreign regulators, and any 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 and additional risks that may impact the forward-looking
statements, see Item 1A - Risk Factors.
3
9950_Fin.pdf 3
ITEM 1 – BUSINESS
General
Part I
Federated Investors, Inc., a Pennsylvania corporation, together with its consolidated subsidiaries (collectively, Federated), is a
leading provider of investment management products and related financial services. Federated has been in the investment
management business since 1955 and is one of the largest investment managers in the United States (U.S.) with $362.9 billion
in assets under management (AUM or managed assets) at December 31, 2014.
Federated operates in one operating segment, the investment management business. Federated sponsors, markets and provides
investment-related services to various investment products, including 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’s principal source of revenue is investment advisory fee income earned by various domestic
subsidiaries of Federated pursuant to investment advisory contracts with the investment products. These subsidiaries are
registered as investment advisers under the Investment Advisers Act of 1940 (Advisers Act). Investment advisers are
compensated for their services in the form of investment advisory fees based primarily upon the AUM of the
investment products.
Federated provided investment advisory services to 131 Federated-sponsored funds (the Federated Funds) as of December 31,
2014. Federated markets these funds to banks, broker/dealers and other financial intermediaries who use them to meet the needs
of customers and/or clients (collectively, customers), including retail investors, corporations and retirement plans. The
Federated Funds are domiciled in the U.S., with the exception of Federated International Funds Plc and Federated Unit Trust,
both of which are domiciled in Dublin, Ireland, and the Federated Cash Management Funds, which are domiciled in the United
Kingdom. Most of Federated’s U.S.-domiciled funds are registered under the Investment Company Act of 1940 (1940 Act) and
under applicable federal laws. Each of the U.S.-domiciled registered funds enters into an advisory agreement that is subject to
annual approval by the fund’s board of directors or trustees, a majority of whom are not interested persons of the funds or
Federated as defined under the 1940 Act. In general, material amendments to such advisory agreements must be approved by
the funds’ shareholders. A significant portion of Federated’s revenue is derived from these advisory agreements, which are
generally terminable upon 60 days notice to the investment adviser.
Of the 131 Federated Funds as of December 31, 2014, Federated’s investment advisory subsidiaries managed 44 money market
funds totaling $225.5 billion in AUM, 51 fixed-income funds with $40.5 billion in AUM and 36 equity funds with $33.1 billion
in AUM.
As of December 31, 2014, Federated provided investment advisory services to $63.8 billion in Separate Account assets. These
Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit
plans, corporations, trusts, foundations, endowments, mutual funds and other products sponsored by third parties. Fees for
Separate Accounts are typically based on AUM pursuant to investment advisory agreements that may be terminated at any time.
In addition, Federated had been retained by a third party to manage a liquidation portfolio of distressed fixed-income securities
through an orderly liquidation process that occurred over multiple years. The assets in this liquidation portfolio were fully
liquidated in the fourth quarter of 2014.
Certain Federated Funds have adopted distribution plans that, subject to applicable law, provide for payment to Federated for
distribution expenses, including sales commissions paid to broker/dealers. These distribution plans are implemented through a
distribution agreement between Federated and each respective fund. Although the specific terms of each such agreement vary,
the basic terms of the agreements are similar. Pursuant to these agreements, Federated acts as underwriter for the funds and
distributes shares of the funds primarily through unaffiliated dealers. Each distribution plan and agreement is initially approved
by the directors or trustees of the respective fund and is reviewed for approval by such directors or trustees annually.
Federated also provides a broad range of services to support the operation and administration of the Federated Funds. These
services, for which Federated receives fees pursuant to agreements with the Federated Funds, include administrative services
and shareholder servicing.
4
9950_Fin.pdf 4
Assets Under Management
Total assets under management are composed of Federated Funds, Separate Accounts and, prior to its complete liquidation in
the fourth quarter of 2014, a liquidation portfolio and represent the balance of AUM at a point in time. Total managed assets for
the past three years were as follows:
dollars in millions
Money market
Fixed-income
Equity
Liquidation portfolio
Total managed assets
As of December 31,
2014
258,772
52,707
51,426
0
362,905
$
$
$
$
2013
275,952
50,126
44,148
5,858
376,084
$
$
2012
284,704
52,711
35,010
7,346
379,771
2014
vs. 2013
(6)%
5
16
(100)
(4)%
2013
vs. 2012
(3)%
(5)
26
(20)
(1)%
Average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and
certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets
are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period. Average
managed assets for the past three years were as follows:
dollars in millions
Money market
Fixed-income
Equity
Liquidation portfolio
Total average managed assets
$
$
$
Year ended December 31,
2014
254,260
51,333
48,317
4,557
358,467
2013
273,680
51,340
39,474
6,633
371,127
$
$
$
2012
274,206
48,986
33,816
8,141
365,149
2014
vs. 2013
(7)%
0
22
(31)
(3)%
2013
vs. 2012
0 %
5
17
(19)
2 %
Changes in Federated’s average asset mix year-over-year across both asset and product/strategy 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 earned on each
asset class and product/strategy type per invested dollar. Equity products and strategies generally have a higher management-fee
rate than fixed-income and money market products and strategies or a liquidation portfolio. Likewise, mutual fund products
typically have a higher management-fee rate than Separate Accounts or a liquidation portfolio. Additionally, certain components
of distribution expense can vary depending upon the asset class, distribution channel and/or size of the customer relationship.
Federated generally pays out a larger portion of the revenue earned from managed assets in money market funds than the
revenue earned from managed assets in equity or fixed-income funds.
Revenue
Federated’s revenues from investment advisory, administrative and other service fees provided under agreements with the
Federated Funds and other entities over the last three years were as follows:
dollars in thousands
Investment advisory fees, net
Administrative service fees, net
Other service fees, net
Other, net
Total revenue
$
$
$
Year ended December 31,
2014
557,318
213,136
84,039
4,757
859,250
2013
570,952
222,487
79,608
5,318
878,365
$
$
$
2012
630,834
225,529
85,902
3,441
945,706
2014
vs. 2013
(2)%
(4)
6
(11)
(2)%
2013
vs. 2012
(9)%
(1)
(7)
55
(7)%
5
9950_Fin.pdf 5
Federated’s revenues from domestic and foreign operations over the last three years were as follows:
dollars in thousands
Domestic
Foreign
Total revenue
$
$
Year ended December 31,
2014
841,429
17,821
859,250
2013
857,480
20,885
878,365
$
$
$
$
2012
923,208
22,498
945,706
2014
vs. 2013
(2)%
(15)
(2)%
2013
vs. 2012
(7)%
(7)
(7)%
Historically Low Short-Term Interest Rates
For several years, the Federal Open Market Committee of the Federal Reserve Board (FOMC) has kept the near-zero federal
funds rate unchanged and short-term interest rates continued to be at all-time low levels. In certain money market funds, the
gross yield earned by the fund is not sufficient to cover all of the fund's operating expenses due to these historically low short-
term interest rates. Since the fourth quarter of 2008, Federated has voluntarily waived fees (either through fee waivers or
reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields.
These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to
noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share
the impact of the waivers.
These voluntary fee waivers are calculated as a percentage of AUM in certain money market funds and thus will vary
depending upon the asset levels in such funds. In addition, the level of waivers are dependent on several other factors including,
but not limited to, yields on instruments available for purchase by the money market funds, changes in expenses of the money
market funds and changes in the mix of money market assets. In any given period, a combination of these factors drives the
amount of fee waivers necessary in order for certain funds to maintain positive or zero net yields. As an isolated variable, an
increase in yields on instruments held by the money market funds will cause the pre-tax impact of fee waivers to decrease.
Conversely, as an isolated variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee
waivers to increase.
With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market
funds as well as the mix among certain share classes that vary in pricing structure will impact the level of fee waivers.
Generally, prime money market funds waive less than government money market funds as a result of higher gross yields on the
underlying investments. As such, as an isolated variable, an increase in the relative proportion of average managed assets
invested in prime money market funds as compared to total average money market fund assets should typically result in lower
waivers to maintain positive or zero net yields. Conversely, the opposite would also be true.
These fee waivers impact various components of Federated’s Consolidated Statements of Income, including revenue and
operating income. See Item 1A - Risk Factors under the caption Potential Adverse Effects of Historically Low Short-Term
Interest Rates and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations under the
caption Business Developments - Historically Low Short-Term Interest Rates for additional information.
Investment Products
Federated offers a wide range of products and strategies, including money market, equity and fixed-income investments.
Federated’s mix includes products and strategies that Federated expects to be in demand under a variety of economic and
market conditions. Federated has structured its investment process to meet the requirements of fiduciaries and others who use
Federated’s products and strategies to meet the needs of their customers. Fiduciaries typically have stringent demands regarding
portfolio composition, risk and investment performance.
Federated is one of the largest U.S. managers of money market assets, with $258.8 billion in such AUM at December 31, 2014.
Federated has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory
compliance, relative safety, liquidity and competitive yields. Federated began selling money market fund products to
institutions in 1974. Federated also manages retail money market products that are typically distributed through broker/dealers.
At December 31, 2014, Federated managed money market assets in the following asset classes: government ($126.0 billion);
prime ($105.1 billion); tax-free ($18.4 billion); and non-U.S. domiciled ($9.3 billion).
Federated’s fixed-income assets totaled $52.7 billion at December 31, 2014 and are managed in a wide range of categories
including multisector ($23.3 billion); municipal ($7.4 billion); high-yield ($7.2 billion); U.S. corporate ($5.8 billion); U.S.
government ($5.1 billion); mortgage-backed ($2.1 billion); and international/global ($1.8 billion). Federated’s fixed-income
products and strategies offer fiduciaries and others a broad range of products designed to meet their investment needs.
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Federated's equity assets totaled $51.4 billion at December 31, 2014 and are managed across a wide range of styles including
value ($29.1 billion); growth ($9.1 billion); international/global ($4.2 billion); blend ($3.2 billion); and alternative ($0.5
billion). Federated also manages assets in balanced and asset allocation funds ($5.3 billion). These asset allocation funds may
also invest in fixed-income securities.
Investment products are generally managed by a team of portfolio managers supported by fundamental and quantitative
research analysts. Federated’s proprietary, independent investment research process is centered on the integration of several
fundamentals: fundamental research and credit analysis, quantitative research models, style-consistent and disciplined portfolio
construction and management, performance attribution and trading.
Distribution Channels
Federated’s distribution strategy is to provide products and strategies geared toward financial intermediaries, primarily banks,
broker/dealers and investment advisers and directly to institutions such as corporations and government entities. Federated
provides comprehensive investment management to approximately 7,700 institutions and intermediaries including corporations,
government entities, insurance companies, foundations, endowments, banks and broker/dealers. Federated uses its trained sales
force of approximately 200 representatives and managers to add new customer relationships and strengthen and expand existing
relationships.
Product Markets
Federated’s investment products and strategies are primarily distributed in four markets. These markets and the relative
percentage of managed assets at December 31, 2014 attributable to such markets are as follows: wealth management and trust
(44%), broker/dealer (34%), institutional (19%) and international (3%).
Wealth Management & Trust. Federated pioneered the concept of providing liquidity management to bank trust departments
through money market mutual funds in 1974, and has since expanded its services nationwide to institutional cash management
and treasury professionals, as well as financial professionals. Today, wealth management professionals across all of these types
of firms use a broad range of Federated’s equity, fixed-income and money market funds, and Separate Accounts, to invest the
assets over which they have discretion.
The majority of Federated’s managed assets from the wealth management channel are invested in money market funds. In
allocating investments across various asset classes, investors typically maintain a portion of their portfolios in cash or cash
equivalents, including money market funds, irrespective of trends in bond or stock prices. In addition, Federated offers an
extensive menu of equity and fixed-income mutual funds and Separate Accounts structured for this market. In addition to bank
trust departments and registered investment advisory firms, Federated provides products and services to capital markets
customers (institutional brokerages generally within banks) and directly to cash management and treasury departments at major
corporations and government entities.
Federated employs a dedicated sales force backed by an experienced support staff to offer products and services to the wealth
management and trust market. As of December 31, 2014, managed assets in this market included $135.0 billion in money
market assets, $15.4 billion in fixed-income assets and $8.2 billion in equity assets.
Broker/Dealer. Federated distributes its products and strategies in this market through a large, diversified group of
approximately 1,400 national, regional and independent broker/dealers and bank broker/dealers. Federated maintains sales staff
dedicated to calling on broker/dealers, bank broker/dealers and insurance interests. Broker/dealers use Federated’s products to
meet the needs of their customers, who are typically retail investors. Federated also offers money market mutual funds as cash
management products designed for use by its broker/dealer customers. As of December 31, 2014, managed assets in the broker/
dealer market included $67.2 billion in money market assets, $37.1 billion in equity assets and $19.2 billion in fixed-income
assets.
Institutional. Federated maintains a dedicated sales staff to focus on the distribution of its products and strategies to a wide
variety of domestic institutional customers including corporations, corporate and public pension funds, government entities,
foundations, endowments, hospitals, and non-Federated investment companies. As of December 31, 2014, managed assets in
the institutional market included $49.7 billion in money market assets, $15.8 billion in fixed-income assets and $4.1 billion in
equity assets.
International. Federated manages assets from customers outside the U.S. through subsidiaries focused on gathering assets in
Europe, Canada, Latin America and the Middle East. See Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations under the caption Business Developments - Global Expansion for additional information.
As of December 31, 2014, managed assets in the international market included $6.9 billion in money market assets, $2.3 billion
in fixed-income assets and $2.0 billion in equity assets.
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Competition
The investment management business is highly competitive. Competition is particularly intense among mutual fund providers.
According to the Investment Company Institute, at the end of 2014, there were approximately 7,900 open-end mutual funds of
varying sizes and investment objectives whose shares are currently being offered to the public both on a sales-load and no-
sales-load basis. In addition to competition from other mutual fund managers and investment advisers, Federated and the
mutual fund industry compete with investment alternatives offered by insurance companies, commercial banks, broker/dealers,
deposit brokers, other financial institutions, hedge funds and exchange traded funds.
Competition for sales of investment products and strategies is influenced by various factors, including investment performance,
attainment of stated objectives, yields and total returns, fees and expenses, advertising and sales promotional efforts, investor
confidence and type and quality of services.
Regulatory Matters
Federated and its investment management business are subject to extensive regulation in the U.S. and abroad. Federated and its
products (such as the Federated Funds) and strategies are subject to federal securities laws, principally the Securities Act of
1933 (1933 Act), the Securities Exchange Act of 1934 (1934 Act), the 1940 Act, the Advisers Act, state laws regarding
securities fraud and regulations promulgated by various regulatory authorities, as well as foreign laws and regulations
promulgated by foreign regulatory authorities. See Item 1A - Risk Factors under the caption Potential Adverse Effects of
Changes in Laws and Regulations on Federated’s Investment Management Business for additional information.
Current Regulatory Environment - Domestic
On July 23, 2014, the Securities and Exchange Commission (SEC) adopted final rules on money market fund reform (2014
Rules), which among other regulations, amends Rule 2a-7 under the 1940 Act (Rule 2a-7). The 2014 Rules impose reforms that
will require any institutional prime money market fund and any institutional municipal (or tax-exempt) money market fund that
is registered under the 1940 Act to utilize market-based valuations to calculate a floating NAV rather than using the amortized
cost method for valuing securities maturing in more than 60 days to seek to maintain a stable NAV. Using so-called market-
based valuations and calculating the NAV to four decimal places, as the amendments to Rule 2a-7 require, could cause the NAV
of such funds to fluctuate. A government money market fund, which includes any money market fund that invests 99.5% or
more of its total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government
securities or cash, or a retail money market fund, which includes any money market fund that has policies and procedures
reasonably designed to limit all beneficial owners of the money market fund to natural persons, will be allowed to continue
using the amortized cost method (and/or the penny rounding method of pricing) in calculating its NAV.
In times in which a money market fund is below certain liquidity thresholds, the 2014 Rules also will permit, or in certain
circumstances require, a money market fund (other than a government money market fund), to impose liquidity fees of up to
two percent on all redemptions, and permit a money market fund to limit (or gate) redemptions for up to 10 business days in
any 90-day period (absent a finding by the fund board that the imposition of a liquidity fee or redemption gate would not be in
the best interests of shareholders). While a government or Treasury money market fund could voluntarily adopt liquidity fees
and/or limits on redemptions under the 2014 Rules as long as such funds’ ability to do so is disclosed to shareholders, Federated
has recommended, and reviewed with the Board of Directors/Trustees of the Federated Funds, that Federated’s government or
Treasury money market funds not reserve the right to employ liquidity fees nor the ability to impose redemption limits (or
gates); consequently, these funds will not adopt the ability to impose either liquidity fees or redemption limits (or gates).
The 2014 Rules also will impose certain current event disclosure requirements on a new Form N-CR and certain other enhanced
disclosure and reporting (such as on Form N-MFP and Form PF), diversification, and stress-testing requirements on a money
market fund. The 2014 Rules became effective on October 14, 2014. The mandatory compliance dates for the 2014 Rules are:
(1) October 14, 2016 for the floating NAV requirements, liquidity fees and gates requirements and related disclosure
requirements; (2) July 14, 2015 for the current event disclosure requirements on new Form N-CR and related website disclosure
requirements; and (3) April 14, 2016 for other requirements not related to the floating NAV, fees, gates or disclosure
requirements.
Along with the 2014 Rules, the SEC also issued on July 23, 2014, a Notice of Proposed Rule 10b-10 Exemptive Relief, in
which the SEC solicited comment on a proposal to exempt broker-dealers from the immediate confirmation delivery
requirements under the 1934 Act for transactions effected in shares of floating NAV institutional prime money market funds and
institutional municipal (or tax-exempt) money market funds. The SEC also issued separate proposals re-proposing amendments
to Rule 2a-7 and Form N-MFP to remove any references to or requirement of reliance on credit ratings and to establish
alternative standards of creditworthiness in place of credit ratings and proposing amendments to Rule 2a-7 to eliminate an
exclusion from the issuer diversification provisions for securities with certain guarantees.
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In response to the SEC’s adoption of the 2014 Rules, the U.S. Treasury Department (Treasury Department) and the Internal
Revenue Service (IRS) also issued on July 23, 2014 proposed rules, which money market fund shareholders may immediately
rely upon, aimed at relieving tax burdens for shareholders that frequently purchase or redeem shares of a money market fund
(such as through a broker-dealer or bank “sweep arrangement”) and that may experience a high volume of small capital gains
and losses if they invest in an institutional prime money market fund or an institutional municipal (or tax-exempt) money
market fund with a floating NAV. The IRS also issued final guidance in the form of Revenue Procedure 2014-45 addressing
applicable wash sale rules and describing the circumstances in which the IRS will not treat a redemption of shares in a money
market fund as creating a wash sale.
Management believes that the floating NAV will be detrimental to Federated's money market fund business and could
materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Federated is
reallocating certain resources from regulatory efforts and continues to dedicate internal and external resources to analyze the
potential impact of the 2014 Rules, and related Treasury Department and IRS guidance, on Federated’s business, results of
operations, financial condition and/or cash flows. Federated also is reallocating resources to plan and begin implementation of
product development and restructuring initiatives in response to the 2014 Rules. Federated's analysis, planning and
implementation efforts include consideration of Federated’s legislative, regulatory, product structure and development,
information system development, reporting capability, business and other options that may be available to seek to minimize the
potential impact of any adverse consequences. While Federated’s plans are not finalized and continue to evolve, and remain
subject to fund board, and in certain cases, fund shareholder and other, review and approvals, Federated anticipates taking steps
to adjust its product line to address the liquidity management needs of a broad array of customers. Such steps will include, for
example, conducting shareholder votes to seek approval of changes to the organizational or governing documents of certain
Federated Funds, such as Money Market Obligations Trust, the registrant for the majority of Federated’s money market funds,
proposing to modify, add share classes to or reorganize certain existing Federated Funds, and developing new products and
strategies.
Federated anticipates that the adjustments to Federated’s product line will offer investors a full menu of product choices for
liquidity management. For example, Federated will continue to offer Treasury and government money market funds, and will
designate existing prime and municipal money market funds as either institutional or retail funds. Federated’s Treasury and
government money market funds will continue to seek a $1.00 NAV per share.
Regarding retail money market funds, Federated plans to offer prime money market funds, national municipal money market
funds, state-specific municipal money market funds, and variable annuity money market funds. Federated's retail money market
funds will continue to seek to maintain an NAV of $1.00 per share.
Regarding institutional money market funds, Federated plans to offer prime money market funds and national municipal money
market funds. Regarding institutional prime and municipal money market funds, Federated anticipates converting certain
existing Federated Funds to 60-day maximum maturity funds while other existing funds will remain 397-day maximum
maturity funds. Federated anticipates that institutional prime and municipal funds selected to be 60-day maximum funds will
begin to gradually limit their investments in late 2015 to securities maturing on or before December 14, 2016, which is 60 days
post implementation, so that the funds can be restructured appropriately by the final mandatory compliance date for the 2014
Rules in October 2016. Each time a 60-day maximum fund calculates its NAV per share, it will use amortized cost to value its
portfolio securities as long as there are no market quotations available and each such security's amortized cost approximates the
security’s fair value. Beginning on or about the final mandatory compliance date for the 2014 Rules in October 2016, the 60-
day maximum funds will attempt to maintain an NAV of $1.0000 per share and, under ordinary circumstances, the funds' per
share price would be expected to experience little or no fluctuations. However, these funds’ NAV may fluctuate if the amortized
cost value of their portfolio securities no longer approximates the market value or if the funds are required to dispose of
securities for a price other than amortized cost. Federated believes that the short maturity of the securities held by these funds
should help to limit the instances when these events may cause a fund’s $1.0000 NAV per share to change.
Federated also anticipates that on or about the final compliance date for the 2014 Rules in October 2016 Federated will convert
at least one Federated Fund to a floating NAV money market fund for customers seeking an institutional prime money market
fund with potentially higher yields than the 60-day maximum money market funds. Federated also continues to explore
investment strategies as investment options for certain customers and the feasibility of private funds that mirror existing
Federated money market funds as investment options for qualified investors.
Federated expects to announce its plans relating to the adjustments to its product line periodically in advance of the mandatory
compliance date of October 2016 to give customers the opportunity to plan for their liquidity management needs. Subject to
Federated Fund board and, in certain cases, shareholder and other approvals and disclosure, Federated expects to implement the
adjustments to its product line prior to the final mandatory compliance date for the 2014 Rules in October 2016. Further
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analysis and planning, or additional adjustments to Federated’s product line, may be required if additional regulation or
guidance is issued by the SEC or other regulators.
The SEC also initiated in 2014, and continues in 2015, a series of sweep examinations of certain investment management
industry participants on various topics, such as fixed-income liquidity, liquid alternatives, separately managed or wrap-fee
accounts, and intermediary and other payments, and is giving attention to liquidity and redemption risks, leverage, operational
risks, and the failure/closing of investment industry participants, which may lead to further regulation of the investment
management industry.
Given the recent adoption of the SEC’s 2014 Rules, their extended compliance dates, the recent issuance of Treasury
Department and IRS guidance on certain related tax matters and the potential for future additional regulation, Federated is
unable at this time to assess the degree of impact the SEC's 2014 Rules or potential future regulation may have on its business,
results of operations, financial condition and/or cash flows. Federated also is unable to assess at this time whether, or the degree
to which, any potential options being evaluated in connection with the SEC's 2014 Rules ultimately may be pursued or be
successful.
On July 31, 2014, the Federal Reserve Oversight Council (FSOC) indicated that it intends to monitor the effectiveness of the
2014 Rules. FSOC may recommend new or heightened regulation for "nonbank financial companies" under Section 120 of the
Dodd-Frank Act, which the Board of Governors of the Federal Reserve System (Governors) have indicated can include open-
end investment companies, such as money market funds and other mutual funds. Management respectfully disagrees with this
position. On December 18, 2014, FSOC published a Notice Seeking Comment on Asset Management Products and Activities
seeking public comment on aspects of the asset management industry, including whether asset management products and
activities may pose potential risks to the U.S. financial system in the areas of liquidity and redemptions, leverage, operational
functions and the failure or closure of an asset manager or investment vehicle. Comments are due by March 25, 2015 and are
available at http://www.regulations.gov/#!docketDetail;D=FSOC-2014-0001. Federated, individually and together with mutual
fund industry groups, is participating in the public comment process. Management does not believe that asset managers and
management products, such as money market funds, create systemic risk requiring regulation by the Governors and/or FSOC.
Management also believes that statements by Congress in a Congressional Appropriations Committee conference report that
accompanied the Consolidated Appropriations Act, 2014, and in a House of Representatives’ Appropriations Committee
conference report accompanying the Financial Services and General Government Appropriations Bill, 2015, reflect Congress’
view that the regulation of money market funds is within the purview of the SEC, not FSOC.
Federated is unable to assess whether, or the degree to which, any of the Federated Funds, including money market funds or any
of its other products, could ultimately be designated a systemically important nonbank financial company by FSOC. In
management's view, the issuance of final regulations is, and any reforms ultimately put into effect would be, detrimental to
Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations,
financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that any reforms or other
actions by the Governors, FSOC or other governmental entities may have on its business, results of operations, financial
condition and/or cash flows at this time.
International
European-based money market funds face regulatory reform pressure in Europe similar to that faced in the U.S. The European
Commission released its money market fund reform proposal on September 4, 2013. The proposal would have permitted either
floating NAV money market funds or constant NAV money market funds subject to capital requirements. Under the proposal, a
constant NAV money market fund generally would have had to either build a capital buffer of 3% or convert to a floating NAV
money market fund. The European Council under the Italian Presidency advanced numerous money market fund reform
proposals during the second half of 2014 and on January 1, 2015 turned the money fund matter over to the Latvian presidency.
The Latvian Presidency is not expected to consider money market fund reform until the second half of their term. The European
Parliament’s Committee on Economic and Monetary Affairs has picked up the debate and members of parliament have tabled
numerous differing amendments to the proposal, such as maintaining the proposed capital buffer, developing a system based on
liquidity fees and redemption gates, carving-out various definitions of retail and government money market funds (including,
for example, definitions which limit government money market funds to European sovereign debt as well as a definition
inclusive of all eligible sovereign debt) and developing a system of low-volatility NAV funds or money market funds with
variable share classes. Negotiations are expected to continue through 2015. Any proposal must be approved by the European
Parliament and European Council and any final regulation could vary materially from that of any proposal. Management does
not anticipate agreement on a final regulation until late 2015 or early 2016.
A proposal to implement a European Financial Transactions Tax (FTT) continues to develop. Notwithstanding challenges to its
legality, discussions have continued regarding the scope, application and allocation of the FTT. On May 6, 2014, a Declaration
was signed by 10 of the 11 original participating countries confirming their support for the FTT, clarifying that the FTT would
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be introduced on a step-by-step basis, and indicating that the initial phase of the FTT should be implemented by no later than
January 1, 2016. Discussions regarding the adoption of the FTT between participating European countries continue. While it
has been tentatively agreed that transactions in listed company shares would be subject to the FTT once implemented,
discussions continue to focus on, among other topics, the other types of products or transactions that will be subject to the FTT,
the jurisdiction in which the FTT should be levied (i.e., place of establishment of the participating financial institutions or
where an instrument was issued), the volume of transactions covered and the potential revenue generated versus costs to the
industry. At the end of October 2014, the European Union presidency announced that intensified work was required to enable
agreement on open issues in order for the first phase of the FTT to be implemented by January 1, 2016. As the European Union
Presidency recently shifted to Latvia, not one of the 11 original participating countries, further uncertainty exists as to the fate
of this FTT. Management does not expect the FTT to be effective until early 2016.
European money market reform and the imposition of the FTT, particularly if enacted with broad application, would each be
detrimental to Federated's fund business and could materially and adversely affect Federated’s business, results of operations,
financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that European money
market reform proposals or the FTT may have on its business, results of operations, financial condition and/or cash flows until
such proposals are finalized and approved or the FTT is enacted.
On January 8, 2014, the Financial Stability Board (FSB) published for comment as a consultative document “Assessment
Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions” (Consultation).
The Consultation sets forth proposed methodologies for identifying systemically important non-bank, non-insurance company
financial institutions, including, among others, "market intermediaries" which the Consultation appears to define as including
investment advisers, brokers and certain other intermediaries, and "investment funds," which the Consultation appears to define
as including individual money market funds, other open-end or closed-end mutual funds, and hedge funds and other private
funds, or families of such funds following similar investment strategies. Management generally agrees with the Consultation’s
approach of developing specific, measurable, published criteria for designating systemically important non-bank, non-insurance
company financial institutions, but does not believe that money market funds should be so designated under the Consultation.
Federated is unable to assess whether, or the degree to which Federated, any of its investment management subsidiaries or any
of the Federated Funds, including money market funds, or any of its other products, could ultimately be determined to be a
systemically important non-bank, non-insurance company financial institution.
Employees
At December 31, 2014, Federated employed 1,435 persons.
Available Information
Federated makes available, free of charge on its website, www.FederatedInvestors.com, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, annual information statements and amendments to those reports,
including those filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Act, as soon as reasonably practicable after
such information is electronically filed with or furnished to the SEC.
Federated will also provide, free of charge, a copy of the company's most recent annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, annual information statements and amendments to those reports upon written
request. Send requests to: Corporate Communications, Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA
15222-3779.
Other Information
All references to the Notes to the Consolidated Financial Statements in this Form 10-K refer to those in Item 8 - Financial
Statements and Supplementary Data (Consolidated Financial Statements). All other information required by this Item is
contained in Note (3) to the Consolidated Financial Statements.
All cross-references between Items in this 10-K are considered to be incorporated into the Item containing the cross-reference.
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ITEM 1A – RISK FACTORS
As an investment manager, risk is an inherent part of Federated's business. U.S. and global markets, by their nature, are prone to
uncertainty and subject participants to a variety of risks. If any of the following risks actually occur, our business, results of
operations, financial condition and/or cash flows could be materially adversely affected. The risks described below are not the
only risks involved in Federated's business. Additional risks not presently known to Federated or that Federated currently
considers to be immaterial may also adversely affect its business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of a Material Concentration in Revenue. For 2014, approximately 32% of Federated’s total
revenue was attributable to money market assets as compared to 39% and 47% for 2013 and 2012, respectively. The change in
the relative proportion of Federated's revenue attributable to money market assets from 2013 to 2014 was primarily the result of
lower average money market assets and increases in fee waivers for certain money market funds to maintain positive or zero net
yields. The change in the relative proportion of Federated's revenue attributable to money market assets from 2012 to 2013 was
primarily the result of increases in fee waivers for certain money market funds to maintain positive or zero net yields. A
significant change in Federated’s investment management business (such as its money market business) or a significant
reduction in AUM (such as money market assets) due to regulatory changes, changes in the financial markets, such as
significant and rapid increases in interest rates over a short period of time causing certain investors to prefer direct investments
in interest-bearing securities, the availability, supply and/or market interest in repurchase agreements and other investments,
significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low
short-term interest rates and resulting fee waivers, investor preferences for deposit products or other FDIC-insured products or
other circumstances, could have a material adverse effect on Federated’s business, results of operations, financial condition and/
or cash flows.
Potential Adverse Effects of Historically Low Short-Term Interest Rates. For several years, the FOMC has kept the near-
zero federal funds rate unchanged and short-term interest rates continued to be at all-time low levels. In certain money market
funds, the gross yield earned by the fund is not sufficient to cover all of the fund's operating expenses due to these historically
low short-term interest rates. Since the fourth quarter of 2008, Federated has voluntarily waived fees (either through fee waivers
or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields.
These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to
noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share
the impact of the waivers.
These voluntary fee waivers are calculated as a percentage of AUM in certain money market funds and thus will vary depending
upon the asset levels in such funds. In addition, the level of waivers are dependent on several other factors including, but not
limited to, yields on instruments available for purchase by the money market funds, changes in expenses of the money market
funds and changes in the mix of money market assets. In any given period, a combination of these factors drives the amount of
fee waivers necessary in order for certain funds to maintain positive or zero net yields. As an isolated variable, an increase in yields
on instruments held by the money market funds will cause the pre-tax impact of fee waivers to decrease. Conversely, as an isolated
variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.
With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market
funds as well as the mix among certain share classes that vary in pricing structure will impact the level of fee waivers. Generally,
prime money market funds waive less than government money market funds as a result of higher gross yields on the underlying
investments. As such, as an isolated variable, an increase in the relative proportion of average managed assets invested in prime
money market funds as compared to total average money market fund assets should typically result in lower waivers to maintain
positive or zero net yields. Conversely, the opposite would also be true.
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The impact of such fee waivers on various components of Federated's Consolidated Statements of Income was as follows for
the years ended December 31:
in millions
Investment advisory fees
Other service fees
Total Revenue
Less: Reduction in Distribution expense
Operating income
Less: Reduction in Noncontrolling interest
Pre-tax impact
2014
(279.5) $
(131.1)
(410.6)
280.9
(129.7)
10.7
(119.0) $
2013
(255.9) $
(133.1)
(389.0)
277.1
(111.9)
6.8
(105.1) $
2012
(177.2)
(113.8)
(291.0)
218.5
(72.5)
1.3
(71.2)
$
$
2014
vs. 2013
(9)%
2013
vs. 2012
(44)%
2
(6)
1
(16)
57
(17)
(34)
27
(54)
423
(13)%
(48)%
The negative pre-tax impact of fee waivers to maintain positive or zero net yields on certain money market funds increased in
2014 as compared to 2013 primarily as a result of lower yields on instruments held by the money market funds partially offset
by lower average money market assets. During 2013, the negative pre-tax impact of fee waivers to maintain positive or zero net
yields on certain money market funds increased compared to 2012 primarily as a result of lower yields on instruments held by
the money market funds. See Note (20) to the Consolidated Financial Statements for information regarding the quarterly pre-tax
impact of these fee waivers.
Based on recent commentary from the FOMC in a January 28, 2015 press release, (i.e. "the current 0 to 1/4 percent target range
for the federal funds rate remains appropriate,") Federated is unable to predict when the FOMC will increase their target for the
federal funds rate. As such, fee waivers to maintain positive or zero net yields on certain money market funds and the related
reduction in distribution expense and net income attributable to noncontrolling interests could continue for the foreseeable
future. Assuming asset levels and mix remain constant and based on recent market conditions, fee waivers for the first quarter
of 2015 may result in a negative pre-tax impact on income of approximately $28 million, which is slightly less than the impact
to each quarter included in 2014 (see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations under the caption Business Developments - Historically Low Short-Term Interest Rates for additional information
on management's expectations regarding fee waivers and Note (20) to the Consolidated Financial Statements for additional
information on the quarterly impact of these fee waivers). The actual amount of future fee waivers, the resulting negative
impact of these waivers and Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture
the pre-tax income going forward, not re-capture previously waived amounts) could vary significantly from management's
estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money
market funds, yields on instruments available for purchase by the money market funds, actions by the Governors, the FOMC,
the Treasury Department, the SEC, FSOC and other governmental entities, changes in fees and expenses of the money market
funds, changes in the mix of money market customer assets, changes in money market product structures and offerings, changes
in the distribution fee arrangements with third parties, Federated's willingness to continue the fee waivers and changes in the
extent to which the impact of the waivers is shared by any one or more third parties. The continuation, duration, level and
impact of these fee waivers, as well as Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to
capture the pre-tax income going forward, not re-capture previously waived amounts) when money market yields increase to
the point of eliminating the waivers, could have a material adverse effect on Federated's business, results of operations,
financial condition and/or cash flows.
Potential Adverse Effects of Rising Interest Rates. Despite the expectation that increases in short-term interest rates above
the historically low rates of 0% - 0.25% will reduce the impact of fee waivers to maintain positive or zero net yields, increases
in interest rates could also have an adverse effect on Federated’s revenue from money market and other fixed-income products
and strategies. In a rising short-term interest rate environment, certain investors using money market products and strategies and
other short-term duration fixed-income products and strategies 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
products or strategies holding lower-yielding instruments. In addition, rising interest rates will tend to reduce the fair value of
securities held in various investment products and strategies. Among other potential adverse effects, rising interest rates may
result in decreased liquidity and increased volatility in financial markets and could negatively impact the performance of
Federated's products and strategies and Federated's revenue. Management cannot estimate the impact of rising interest rates
(including, for example on Federated's revenue), but such impact could have a material adverse effect on Federated's business,
results of operations, financial condition and/or cash flows.
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Potential Adverse Effects of a Decline or Disruption in the Economy or Financial Markets. Economic or financial market
downturns or other conditions (domestic or international) may cause volatility, illiquidity and other potential adverse effects in
the financial markets and adversely affect the supply of investments, such as money market securities and the profitability and
performance of, demand for and investor confidence in Federated’s investment products and strategies, disruptions in the
securities and credit markets, the commencement, continuation or ending of government policies and reforms, stimulus
programs and other market-related actions, changes in monetary policy, increased regulation, increases or decreases in interest
rates, changes in oil prices, changes in currency exchange rates, inflation or deflation, widening bid/ask spreads, restructuring
of government-sponsored entities, imposition of economic sanctions, economic or political instability in certain countries or
regions, technology-related or cyber-attacks or incidents, terrorism or other factors or events that affect the financial markets
may cause or contribute to these potentially adverse effects. In addition, Federated's products and strategies may be adversely
affected by changes in U.S. markets, downgrades of U.S. credit ratings, the U.S. debt ceiling or other developments in the U.S.
as well as be adversely affected by potential deterioration in international sovereign or currency market conditions.
At December 31, 2014, Federated's liquid assets of $318.7 million included investments in certain Federated-sponsored money
market and fluctuating-value funds that may have direct and/or indirect exposures to international sovereign debt and currency
risks. Federated and the money market and fluctuating net asset value (NAV) funds managed or distributed by Federated also
interact with various other financial industry participants, such as counterparties, broker-dealers, banks, clearing organizations,
other investment products and customers, as a result of operations, trading, distribution and other relationships. As a result,
Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows
could be adversely affected by the creditworthiness or financial soundness of other financial industry participants, particularly
in times of economic or financial stress or disruption. There can be no assurance that potential losses that may be realized as a
result of these exposures will not have a material adverse effect on Federated’s business (including, but not limited to,
reputation), results of operations, financial condition and/or cash flows.
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 and strategies Federated offers and its investment performance under prevailing market
conditions. Adverse market conditions or other events also could impact Federated's customers. In the event of extreme
circumstances, such as economic, political, or business crises, Federated’s products and strategies may suffer significant net
redemptions in AUM causing severe liquidity issues in its short-term sponsored investment products and strategies and declines
in the value of and returns on AUM, all of which could cause material adverse effects on Federated’s business (including, but
not limited to, reputation), results of operations, financial condition and/or cash flows.
Custody and portfolio accounting services for all of Federated's mutual fund products are outsourced to one of three third-party
financial institutions that are leading providers of such mutual fund services. Accounting records for Federated's mutual funds
are maintained by these service providers. These service providers, or other service providers and/or vendors of Federated,
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 providers 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 business (including, but not limited to, reputation), results
of operations, financial condition and/or cash flows.
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 U.S. and abroad. Federated and its
products (such as the Federated Funds) and strategies are subject to federal securities laws, principally the 1933 Act, 1934 Act,
the 1940 Act, the Advisers Act, state laws regarding securities fraud and regulations promulgated by various regulatory
authorities, including, but not limited to, the SEC, the Financial Industry Regulatory Authority (FINRA) and the New York
Stock Exchange (NYSE). From time to time, the federal securities laws have been augmented substantially. For example,
among other measures, Federated and its products and strategies have been impacted by the Sarbanes-Oxley Act of 2002, the
Patriot Act of 2001, the Gramm-Leach-Bliley Act of 1999 and the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act). Federated and its domestic products (such as the Federated Funds) and strategies, and any offshore
products (such as offshore Federated Funds) and strategies to the extent offered in the U.S., continue to be primarily regulated
by the SEC. Federated, and certain Federated Funds, are also subject to regulation by the U.S. Commodity Futures Trading
Commission (CFTC) and the National Futures Association (NFA), including due to certain Federated Funds investing in
futures, swaps or certain other commodity interests in more than de minimis amounts. In addition, during the past few years
regulators such as the SEC, FINRA, CFTC and NYSE have adopted other regulations and amendments that have increased
Federated's operating expenses and affected the conduct of its business, and may continue to do so. Federated and its products
and strategies also are affected by certain regulations governing banks and other financial institutions. Federated's and its
products' operations outside of the U.S. are subject to foreign laws and regulation by foreign regulatory authorities, such as the
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U.K. Financial Conduct Authority (FCA) for London-based operations, the Central Bank of Ireland for Dublin-based
operations, and the German Federal Financial Supervisory Authority for Frankfurt-based operations. Additional, or changes in,
laws, regulations, interpretations or governmental policies, both domestically and abroad, may increase compliance risk and
operating expenses, including the costs associated with compliance, and could materially and adversely affect Federated’s
business, results of operations, financial condition and/or cash flows. As Federated's business expands, the potential impact of
such changes in laws, regulations, interpretations or governmental policies, compliance and the risks and costs associated with
compliance may increase.
Domestically, in addition to other potential future regulation, in 2014, the SEC adopted additional money market fund reforms
in the form of the 2014 Rules, and the Treasury Department and IRS issued new regulations and guidance on certain related tax
matters (see Item 1 - Business under the caption Regulatory Matters for additional information on the 2014 Rules and related
tax guidance). Management believes that these regulatory developments, including the floating NAV for institutional and
municipal money market funds, will be detrimental to Federated's money market fund business and could materially and
adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Among other potential
impacts, these new reforms could increase compliance risks and the costs associated with compliance, make certain money
market fund products less attractive to institutional and other investors and result in reductions in assets under management and
revenues, and increase operational costs. Given the recent adoption of the SEC’s 2014 Rules, their extended compliance dates,
the recent issuance of Treasury Department and IRS guidance on certain related tax matters and the potential for future
additional regulation, Federated is unable at this time to assess the degree of impact the SEC's 2014 Rules or potential future
regulation may have on its business, results of operations, financial condition and/or cash flows.
In addition, the Dodd-Frank Act provides for a new systemic risk regulation regime under which it is possible that Federated,
and/or any one or more of its products (such as the Federated Funds), could be subject to designation as a systemically
important financial institution by FSOC, thereby resulting in additional regulation by the Governors in addition to primary
regulation by the SEC (see Item 1 - Business under the caption Regulatory Matters for additional information regarding the
potential for heightened regulation by the Governors and FSOC). Among other potential impacts, any such designation would
subject the designated entity to enhanced banking-oriented measures, including, for example, capital and liquidity requirements,
leverage limits, enhanced public disclosures and risk management requirements, thereby increasing compliance risk and
compliance costs. Federated is unable to assess whether, or the degree to which, any of the Federated Funds, including money
market funds or any of its other products, could ultimately be designated a systemically important nonbank financial company
by FSOC. In management's view, the issuance of final regulations is, and any reforms ultimately put into effect would be,
detrimental to Federated's money market fund business and could materially and adversely affect Federated's business, results
of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that any
reforms or other actions by the Governors, FSOC, or other governmental entities may have on its business, results of
operations, financial condition and/or cash flows.
Outside of the U.S., international regulators, such as the FCA, also have adopted and proposed regulations that could increase
Federated's operating expenses and adversely affect Federated's business, results of operations, financial condition and/or cash
flows. In addition to other potential future regulation, European money market reform and the imposition of the FTT,
particularly if enacted with broad application, would each be detrimental to Federated's fund business (see Item 1 - Business
under the caption Regulatory Matters for additional information regarding European money market reform and the FTT).
Among other potential impacts, compliance risks, the cost of compliance and other operational expenses could increase, and
certain money market fund products may become less attractive to institutional or other investors, which could result in
reductions in assets under management, revenues and operating income. These affects could materially and adversely affect
Federated's business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any
potential impact that European money market reform proposals or the FTT may have on its business, results of operations,
financial condition and/or cash flows until such proposals are finalized and approved or the FTT is enacted.
The designation as a systemically important non-bank, non-insurance company by the FSB also could have a material adverse
effect on Federated’s business, results of operations, financial condition and/or cash flows (see Item 1 - Business under the
caption Regulatory Matters for additional information regarding systemically important non-bank, non-insurance company
designation). Among other potential impacts, any such designation would subject the designated entity to enhanced banking-
oriented measures, including, for example, capital and liquidity requirements, leverage limits, enhanced public disclosures and
risk management requirements, thereby increasing compliance risk and compliance costs. Federated is unable to assess whether,
or the degree to which, Federated, any of its investment management subsidiaries or any of the Federated Funds, including
money market funds, or any of its other products, could ultimately be determined to be a systemically important non-bank, non-
insurance company financial institution.
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9950_FinC1.pdf March 3, 2015 pg 15
Changes in laws, regulations, interpretations or governmental policies, domestically and abroad, also impact the financial
intermediaries, service providers, customers and other third-parties with whom Federated, and its products (such as the
Federated Funds), conduct business. For example, provisions of the Dodd-Frank Act may affect intermediaries in their sale or
use of Federated's products or strategies. Among other potential impacts, this could affect Federated's arrangements with these
intermediaries, increase respective operating expenses and distribution costs, result in fewer assets under management and
otherwise affect the conduct of their respective businesses. This also could result in Federated or one or more of these third
parties seeking to restructure or alter the payment or other terms of the business arrangements between Federated or its products
(including the Federated Funds) and one or more of these third parties. The above factors could have a material adverse impact
on Federated’s business, results of operations, financial condition and/or cash flows.
Over the past few years, various service industries, including, for example, 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, among other potential impacts, there could be a material adverse effect on Federated's tax liability and effective tax
rate and, as a result, net income. Various investment products, such as municipal and tax-free Federated Funds, also may be
impacted by tax changes, which could have an adverse effect on the products and Federated’s business, results of operations,
financial condition and/or cash flows.
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 (such as the Federated Funds).
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 business
(including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Risk of Federated’s Money Market Products’ Ability to Maintain a Stable $1.00 Net Asset Value. Approximately 32% of
Federated’s total revenue for 2014 was attributable to money market assets. An investment in money market funds is neither
insured nor guaranteed by the FDIC. Until any changes resulting from the SEC’s 2014 Final Rules (discussed above) are
implemented, Federated’s money market funds will seek to maintain a stable NAV. Although stable-value 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, such as significant credit analysis to the management of its products and strategies. 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 a limited supply of money market fund securities and severe liquidity issues and/or
further persistent declines in or additional prolonged periods of historically low yields in money market products or strategies
which could impact their NAVs and performance. If the NAV of a Federated stable-value money market fund were to decline to
less than $1.00 per share, such Federated money market fund would likely experience significant redemptions, resulting in
reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on
Federated’s business, results of operations, financial condition and/or cash flows.
No Assurance of Access to Sufficient Liquidity. From time to time, Federated’s operations may require more cash than is
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, for example, Federated’s creditworthiness and the fair 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, and, if Federated cannot obtain such funds, it could have a material adverse
effect on Federated’s business, results of operations, financial condition and/or cash flows.
Retaining and Recruiting Key Personnel. Federated’s ability to attract 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 AUM or the loss of customer accounts. Moreover, since certain of Federated’s products and strategies
contribute significantly to its revenues and earnings, the loss of even a small number of key personnel associated with these
products or strategies could have a disproportionate impact on Federated’s business.
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Various executives, investment, sales and other key personnel own restricted stock subject to vesting periods of up to ten years
from the date 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 investment products and strategies
(such as mutual funds and Separate Accounts) with other fund management companies and investment advisers, 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, among
others, business reputation, investment performance, quality of service, the strength and continuity of management and selling
relationships, distribution services offered, the type (passive versus actively managed) and range of products and strategies
offered and fees charged. As with any highly competitive market, competitive pricing structures are important. If competitors
charge lower fees for similar products or strategies, Federated may decide to reduce the fees on its own products or strategies
(either directly on a gross basis or on a net basis through fee waivers) in order to retain or attract customers. Such fee reductions
could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
Many of Federated’s products and strategies 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 assets, are held by
institutional investors. If the structure of institutional investment products, such as money market funds, changes or becomes
disfavored by institutions, whether due to regulatory or market changes or otherwise, Federated may be unable to retain or grow
its share of this market and this could adversely affect Federated’s future profitability and have a material adverse affect on
Federated’s business, results of operations, financial condition and/or cash flows.
A significant portion of Federated’s revenue is derived from providing products (such as mutual funds) and strategies to the
wealth management and trust market, comprising approximately 2,300 banks and other financial institutions. Future
profitability of Federated will be adversely affected if it is unable to retain or grow its share of this market, and could also be
adversely affected by consolidations in the banking industry, as well as regulatory changes impacting its customers.
Potential Adverse Effects of Changes in Federated’s Distribution Channels. Federated acts as a wholesaler of investment
products and strategies to financial intermediaries including, for example, banks, broker/dealers, registered investment advisers
and other financial planners. Federated also sells investment products and strategies directly to corporations and institutions.
There can be no assurance that Federated will continue to have access to any financial intermediary or financial intermediaries
that currently distribute Federated products and strategies or that Federated’s relationship with any one or more financial
intermediaries will continue over time or on existing economic terms. The impact of minimum yield waivers and related
reductions in distribution expense can vary depending upon, among other variables, changes in the distribution fee
arrangements with one or more financial intermediaries and changes in the extent to which the impact of the waivers is shared
by one or more financial intermediaries. In addition, exclusive of the impacts of minimum yield waivers and related reductions
in distribution expense to maintain positive or zero net yields, Federated has experienced increases in the cost of distribution as
a percentage of total revenue from 31% in 2007 to over 38% in 2014. Federated expects such costs to continue to increase in
total due to asset growth and per dollar of revenue due to the competitive pressures of the investment management business.
Higher distribution costs reduce Federated’s operating and net income.
Potential 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 and strategies than on fixed-
income and money market products and strategies. Likewise, mutual fund and other fund products generally have a higher
management-fee rate than Separate Accounts or a liquidation portfolio. Additionally, certain components of distribution
expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship.
Consequently, significant fluctuations in the value of securities held by, or the level of redemptions from, the products (such as
the Federated Funds) or strategies advised by Federated may materially affect the amount of managed assets and thus
Federated’s revenue, profitability and growth. Similarly, changes in Federated’s average asset mix across both asset and product
or strategy 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 the revenue earned from managed assets in equity or
fixed-income funds. Substantially all of Federated’s managed assets are in investment products or strategies that permit
investors to redeem or withdraw their investment at any time. Additionally, changing market conditions may cause a shift in
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Federated’s asset mix towards money market and fixed-income products or strategies which may cause a decline in Federated’s
revenue and net income.
Potential 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 and strategies.
Good performance generally assists retention and growth of managed 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 (including, but not limited
to, business prospects), results of operations, financial condition and/or cash flows. The effects of poor performance on
Federated could be magnified where assets or customers are concentrated in certain strategies, products, asset classes or sectors.
In terms of revenue concentration by product, approximately 11% of Federated’s total revenue for 2014 was derived from
services provided to a sponsored fund, the Federated Kaufmann Fund. A significant and prolonged decline in the AUM 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 distribution expenses associated with this fund.
Operational Risks. Federated's and its products/business operations are supported internally and through management of
relationships with various third party service providers, both domestically and internationally. In turn, service providers'
operations rely on additional relationships with other third parties. Operational risks include, but are not limited to, improper,
inefficient, or unauthorized execution, processing, pricing and/or monitoring of transactions, deficiencies in operating systems,
business disruptions, inadequacies or breaches in Federated’s, its products' or a service provider's internal control processes,
unauthorized disclosure of confidential information and noncompliance with regulatory requirements. As Federated's and it's
relevant service provider's businesses expand, operational risk increases both domestically and internationally. Management
relies on its employees and systems, and those of relevant service providers, to comply with established procedures, controls
and regulatory requirements. Breakdown or improper use of systems, human error or improper action by employees or service
providers, or noncompliance with regulatory rules, could cause material adverse effects on Federated’s business (including, but
not limited to, reputation), results of operations, financial condition and/or cash flows.
No Assurance of Successful Acquisitions. Federated’s business strategy contemplates the acquisition of other investment
management companies, as well as investment assets, both domestically and internationally. 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 or consummating 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, 2014, Federated had intangible assets including goodwill totaling $733.8 million on its
Consolidated Balance Sheets, the vast majority of which represents assets capitalized in connection with Federated’s
acquisitions and business combinations. Federated may not realize the value of these 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 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 asset to become impaired. Should a review indicate impairment, a write-
down of the carrying value of the asset would occur, resulting in a noncash charge which would adversely affect Federated’s
financial position and results of operations for the period.
Systems, Technology and Cybersecurity Risks. Federated utilizes software and related technologies throughout its business
(both domestically and internationally) including, for example, both proprietary systems and those provided by outside service
providers. Service providers to, and customers of, Federated and its products, and third parties on which such service providers
and customers rely, also utilize software and related technologies in their businesses. 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 Federated or a third party to
address computer system problems. Data or model imprecision, software or other technology malfunctions, programming
inaccuracies and similar or other circumstances or events may impair the performance of systems and technology. Accordingly,
there can be no assurance that potential system interruptions, other technology-related issues or the cost necessary to rectify the
problems would not have a material adverse effect on Federated’s business (including, but not limited to, business prospects),
results of operations, financial condition and/or cash flows.
In addition, the use of the Internet and other electronic media and technology exposes Federated, its business, its products and
services, customers, and relevant service providers, and their respective operations, to potential risks from cybersecurity
attacks, events or incidents (cyber incidents). For example, Federated and relevant service providers collect, maintain and
transmit confidential, proprietary and personal customer information (such as in connection with online account access and
performing investment, reconciliation, transfer agent, custodian and other recordkeeping and related functions) that can be
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targeted by cyber incidents. Cyber incidents may include, for example, unauthorized access to systems, networks or devices (for
example, through hacking activity), infection from computer viruses or other malicious software code, corruption of data, and
attacks (including, but not limited to, denial-of-service attacks on websites) which shut down, disable, slow or otherwise disrupt
operations, business processes or website access or functionality. In addition to intentional cyber incidents, unintentional cyber
incidents can occur, (for example, the inadvertent release of confidential or non-public personal information). A cyber incident
may cause Federated, its business, products or services, its customers, or relevant service providers, to lose proprietary,
sensitive, confidential or non-public business or customer information, suffer data corruption or business interruption, lose
operational capacity (for example, the loss of the ability to process transactions, calculate NAV, or allow the transaction of
business), and/or fail to comply with applicable privacy and other laws. Among other potentially harmful effects, cyber
incidents also may result in theft, unauthorized monitoring and failures in the physical infrastructure or operating systems. Any
cyber incident could cause adverse impacts, the occurrence of financial losses, expenses and exposure related to regulatory
penalties, litigation, reputational damage, and additional compliance costs associated with protection, detection, remediation
and corrective measures. Cyber incidents affecting issuers in which Federated’s or its customers’ assets are invested also could
cause such investments to lose value. Any of these cyber incidents may become incrementally worse if they were to remain
undetected for an extended period of time.
The operating systems of Federated, its products, its customers and relevant service providers are dependent on the
effectiveness of information security policies and procedures which seek to ensure that such systems are protected from cyber
incidents. Federated has, and believes its products and its service providers have, established risk management systems that are
reasonably designed to seek to reduce the risks associated with cyber incidents, however, there is no guarantee that such efforts
will be successful, either entirely or partially. Among other reasons, the nature of malicious cyber incidents is becoming
increasingly sophisticated and Federated, and its relevant affiliates and products, cannot control the systems and cybersecurity
systems of issuers, relevant service providers or other third parties. While Federated cannot predict the financial or reputational
impact to its business resulting from any cyber incident, the occurrence of a cyber incident, or a similar situation or incident,
could have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations,
financial condition and/or cash flows.
Potential Adverse Effects of Reputational Harm. Any material losses in customer (including shareholder) confidence in
Federated, its products or strategies or in the mutual fund industry as a result of potential litigation, 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/or reduce sales of Federated's products (such as the Federated Funds) and strategies and
other investment management products and services. If such losses were to occur, it could have a material adverse effect on
Federated's business (including, but not limited to, business prospects), results of operations, financial condition and/or cash
flows.
Potential 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 (and to a lesser extent, sub-advised 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 independent members of the board, or
its shareholders, as required by law. Failure to renew, changes resulting in lower fees, or termination of certain, or a significant
number of these agreements could have a material adverse impact on Federated. As required by the 1940 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 shareholders. A sale or other transfer 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. Federated investment advisory contracts for Separate Accounts that
are not investment companies subject to the 1940 Act generally are terminable by Federated’s customers upon notice to
Federated (or, in certain cases, after a 30 day, 60 day or similar notice period). As required by the Advisers Act, investment
advisory agreements for Separate Accounts that are not investment companies subject to the 1940 Act also provide that consent
is required from Federated's customers before the agreements may be assigned and an assignment, actual or constructive, also
will trigger these consent requirements and may adversely affect Federated's ability to realize the value of these agreements.
Under the terms of a settlement agreement with the SEC and New York State Attorney General, 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
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9950_Fin.pdf 19
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, such as natural disaster, pandemic, war and
terrorist attack, could adversely impact Federated’s, its customer's and their respective service providers' ability to conduct
business. Such events could cause disruptions in economic conditions and financial markets, system interruption, loss of life,
unavailability of personnel or additional costs. 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 (including, but not limited to, business
prospects), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Litigation, Investigations, Proceedings and Other Claims. Federated can be subject to routine,
sweep and other examinations, inquiries, investigations, proceedings (administrative, regulatory, civil or otherwise) and other
claims by its regulators (regulatory claims). Federated also can be subject to customer, and other third-party complaints,
proceedings (such as civil litigation) and other claims (business-related claims). Among other factors, as Federated’s business,
products and strategies expand, and financial products and other investments, markets and technology increase in complexity,
the attention and resources that Federated devotes to compliance increases and the possibility and occurrences of non-
compliance may increase. Federated has business-related claims asserted and threatened against it, and is subject to certain
regulatory claims (such as routine and sweep examinations and other inquiries), in the ordinary course of business. In addition,
Federated may be subject to business-related claims, and administrative, regulatory or civil investigations and proceedings or
other regulatory claims, outside of the ordinary course of business. Federated cannot assess or predict whether, when or what
types of business-related claims or regulatory claims (collectively, claims) may be threatened or asserted, the types or amounts
of damages or other remedies that may be sought (which may be material when threatened or asserted), whether claims that
have been threatened will become formal asserted pending investigations, proceedings or litigation, or whether claims
ultimately may be successful (whether through settlement or adjudication), entirely or in part, whether or not any such claims
are threatened or asserted in or outside the ordinary course of business. Federated may be initially unable to accurately assess a
claim's impact. Given that the outcome of any claim is inherently unpredictable and uncertain, a result may arise from time to
time that adversely impacts, potentially in a material way, Federated’s business, results of operations, financial condition and/or
cash flows. In certain circumstances, insurance coverage may not be available or deductible amounts may not be exceeded, and
Federated may have to bear the costs related to claims or any losses or other liabilities resulting from any such matters, or from
the operation of Federated’s business, products and services generally.
Federated’s Status as a "Controlled Company." Federated has two classes of common stock: Class A Common Stock, which
has voting power, and Class B Common Stock, which is non-voting except in certain limited circumstances. All of the
outstanding shares of Federated's Class A Common Stock are held by the Voting Shares Irrevocable Trust for the benefit of
certain members of the family of John F. Donahue. The three trustees of this trust are Mr. John F. Donahue, the Chairman of
Federated's board of directors, his wife, and his son, Mr. J. Christopher Donahue, who is Federated's President and Chief
Executive Officer, as well as a director. Accordingly, Federated qualifies as a “controlled company” under Section 303A of the
NYSE Listed Company Manual. As a controlled company, Federated qualifies for and relies upon exemptions from several
NYSE corporate governance requirements, including requirements that: (1) a majority of the board of directors consists of
independent directors; and (2) the entity maintains a nominating/corporate governance committee that is composed entirely of
independent directors with a written charter addressing the committee's purpose and responsibilities. As a result, Federated's
board does not have a majority of independent directors nor does it maintain a nominating/corporate governance committee.
Federated is also exempt as a "controlled company" from certain additional independence requirements and responsibilities
regarding compensation advisers applicable to Compensation Committee members, including those that became effective
in 2013.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 – PROPERTIES
Federated leases space sufficient to meet its operating needs. Federated’s operations are headquartered in Pittsburgh,
Pennsylvania where it occupies approximately 259,000 square feet in the Federated Investors Tower. Federated leases
approximately 94,000 square feet at the Keystone Summit Corporate Park location in Warrendale, Pennsylvania and an
aggregate of approximately 25,000 square feet at other locations in the Pittsburgh area. Federated also leases office space in
New York, New York, for the operations of Federated Global Investment Management Corp.; in Boston, Massachusetts, for the
operations of Federated MDTA LLC; in Rochester, New York, for the operations of Federated Clover Investment Advisors, a
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9950_Fin.pdf 20
division of Federated Global Investment Management Corp.; in Frankfurt, Germany, for the operations of Federated Asset
Management GmbH; and in London, England for the operations of Federated Investors (UK) LLP.
ITEM 3 – LEGAL PROCEEDINGS
The information required by this item is included in Note (18) to the Consolidated Financial Statements.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
Part II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Federated's Class B common stock is traded on the NYSE under the symbol FII. The following table summarizes quarterly high
and low trading stock prices and quarterly dividends per common share for 2014 and 2013.
March 31,
June 30,
September 30,
December 31,
2014
Stock price per share
High
Low
Cash dividends per share
2013
Stock price per share
High
Low
Cash dividends per share
$
$
$
$
31.20
25.63
0.25
25.32
20.68
0.24
$
$
31.48
26.82
0.25
29.08
21.92
0.24
$
$
31.50
27.80
0.25
30.87
26.71
0.25
33.96
26.99
0.25
28.98
25.50
0.25
The approximate number of beneficial shareholders of Federated’s Class A and Class B common stock as of February 10, 2015,
was 1 and 26,522, respectively.
The following table summarizes stock repurchases under Federated’s share repurchase program during the fourth quarter
of 2014.
October
November
December
Total
Total Number
of Shares
Purchased
60,000
40,000
100,000
200,000
Average
Price Paid
per Share
$ 28.86
30.65
32.59
$ 31.08
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Program1
60,000
40,000
100,000
200,000
554,734
514,734
414,734
414,734
1
Federated’s share repurchase program was authorized in August 2008 by the board of directors and permits the purchase of up to 5.0
million shares of Federated Class B common stock with no stated expiration date. No other plans existed as of December 31, 2014.
See Note (19) to the Consolidated Financial Statements for information on a new program approved in 2015.
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9950_Fin.pdf 21
Stock Performance Graph
The following performance graph compares the total shareholder return of an investment in Federated’s Class B Common Stock
to that of the Standard and Poor’s MidCap 400® Index (S&P MidCap 400 Index) and to the S&P 1500 Asset Management &
Custody Banks Index for the five-year period ended on December 31, 2014.
The graph assumes that the value of the investment in Federated’s Class B Common Stock and each index was $100 on
December 31, 2009. Total return includes reinvestment of all dividends. As a member of the S&P MidCap 400 Index as of
December 31, 2014, Federated is required to include this comparison. The historical information set forth below is not
necessarily indicative of future performance. Federated does not make or endorse any predictions as to future stock
performance.
Federated
S&P MidCap 400 Index
S&P 1500 Asset Management & Custody Banks Index
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
$
$
$
104.18
126.64
114.09
$
$
$
63.18
124.45
92.73
$
$
$
95.05
146.69
118.73
$
$
$
140.44
195.84
177.22
$
$
$
166.12
214.97
194.20
22
9950_Fin.pdf 22
ITEM 6 – SELECTED FINANCIAL DATA
The selected consolidated financial data in this item should be read in conjunction with Item 7 - Management’s Discussion and
Analysis of Financial Condition and Results of Operations and Item 8 - Financial Statements and Supplementary Data. The
selected consolidated financial data (except managed assets) of Federated for the five years ended December 31, 2014 have
been derived from Federated's audited Consolidated Financial Statements.
in thousands, except per share data and managed assets
Years Ended December 31,
Statement of Income Data1
Total revenue
Operating income
Net income including noncontrolling
interests in subsidiaries
Net income attributable to Federated Investors, Inc.
Share Data Attributable to Federated Investors, Inc.
Earnings per share – Basic and Diluted1
Cash dividends per share2
Weighted-average shares outstanding – Basic
Weighted-average shares outstanding – Diluted
Balance Sheet Data at Period End
Intangible assets, net and Goodwill
Total assets
Long-term debt3
Federated Investors shareholders’ equity2
Impact of Minimum Yield Waivers4
Revenue
Less: Reduction in Distribution expense
Operating income
Less: Reduction in Noncontrolling interest
Pre-tax impact
Managed Assets (in millions)
As of period end
Average for the period
2014
2013
2012
2011
2010
$ 859,250
$ 878,365
$ 945,706
$ 895,114
$ 951,943
237,949
251,743
312,593
257,455
309,791
149,822
149,236
166,355
162,177
197,628
188,088
155,083
150,906
189,163
179,114
$
$
1.42
1.00
$
$
1.55
0.98
$
$
1.79
2.47
$
$
1.45
0.96
$
$
100,721
100,723
100,668
100,669
100,313
100,313
100,609
100,632
1.73
2.22
99,925
99,993
$ 733,847
$ 735,345
$ 727,857
$ 720,926
$ 720,825
1,140,519
1,135,797
1,090,061
1,150,856
1,153,504
216,750
609,494
198,333
566,119
276,250
495,432
318,750
541,959
361,250
491,799
$ (410,553) $ (389,031) $ (290,966) $ (320,671) $ (241,576)
186,573
218,479
(55,003)
(72,487)
1,023
1,243
(53,980)
(71,244)
277,168
(111,863)
6,800
(105,063)
280,851
(129,702)
10,699
(119,003)
232,336
(88,335)
6,473
(81,862)
$ 362,905
358,467
$ 376,084
371,127
$ 379,771
365,149
$ 369,697
354,387
$ 358,241
347,074
1
2
3
4
In 2012 and 2010, results included pretax insurance recoveries totaling $20.2 million and $25.0 million, respectively, for claims
related to various legal proceedings.
Federated paid a special dividend to shareholders of $1.51 per share or $156.9 million in 2012 and $1.26 per share or $129.8 million
in 2010.
In 2011, Federated amended and restated the 2010 agreement to extend the term of the loan. In 2014, Federated amended and
restated the 2011 agreement to extend the term of the loan. See Note (10) to the Consolidated Financial Statements for additional
information.
See Note (3) to the Consolidated Financial Statements for additional information regarding the impact of minimum yield waivers.
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ITEM 7 – 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
Item 1A - Risk Factors, Item 6 - Selected Financial Data and Item 8 - Financial Statements and Supplementary Data, including
Federated's audited Consolidated Financial Statements.
General
Federated is one of the largest investment managers in the U.S. with $362.9 billion in managed assets as of December 31, 2014.
The majority of Federated’s revenue is derived from advising the Federated Funds and Separate Accounts in both domestic and
international markets. Federated also derives revenue from providing administrative and other mutual fund-related services,
including distribution and shareholder servicing.
Federated’s investment products and strategies are distributed in four markets. These markets and the relative percentage of
managed assets at December 31, 2014 attributable to such markets are as follows: wealth management and trust (44%), broker/
dealer (34%), institutional (19%) and international (3%).
Investment advisory fees, administrative service 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 managed investment
portfolios. 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 managed assets in Federated’s investment products and
strategies can be redeemed or withdrawn at any time with no advance notice requirement. Fee rates for Federated's services
generally vary by asset and service type and may vary based on changes in asset levels. Generally, management-fee rates
charged for advisory services provided to equity products and strategies are higher than management-fee rates charged on
money market and fixed-income products and strategies. Likewise, mutual funds typically have a higher management-fee rate
than Separate Accounts or a liquidation portfolio. Accordingly, revenue is also dependent upon the relative composition of
average AUM across both asset and product types. Federated may waive certain fees for competitive reasons such as to
maintain certain mutual fund expense ratios, to maintain positive or zero net yields on money market funds, to meet regulatory
requirements or to meet contractual requirements. Since Federated’s products are largely distributed and serviced through
financial intermediaries, Federated pays a portion of 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 applicable financial
intermediary and represent the vast majority of Distribution expense on the Consolidated Statements of Income. Certain
components of 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 revenue earned from managed assets in money market
funds than revenue earned from managed assets in equity or fixed-income funds.
Federated’s most significant operating expenses are Compensation and related expense and Distribution expense as described
above. Compensation and related expense includes base salary and wages, incentive compensation and other employee
expenses including payroll taxes and benefits. Incentive compensation, which includes stock-based compensation, can vary
depending on various factors including, but not limited to, overall results of operations of Federated, investment management
performance and sales performance.
The discussion and analysis of Federated’s financial condition and results of operations are based on Federated’s Consolidated
Financial Statements. Federated operates in a single operating segment, the investment management business. Management
evaluates Federated’s performance at the consolidated level. 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 AUM and upon the
profitability of those assets, which is impacted, in part, by management’s decisions regarding fee waivers in order for certain
money market funds to maintain positive or zero net yields. 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 AUM, gross and net product sales, total revenue and net income, both in total and per
diluted share.
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9950_Fin.pdf 24
Business Developments
Money Market Fund Matters
For the year ended December 31, 2014, approximately 32% of Federated’s total revenue was attributable to money market
assets as compared to 39% and 47% for 2013 and 2012, respectively. The change in the relative proportion of Federated's
revenue attributable to money market assets from 2013 to 2014 was primarily the result of lower average money market assets
and increases in fee waivers for certain money market funds to maintain positive or zero net yields. The change in the relative
proportion of Federated's revenue attributable to money market assets from 2012 to 2013 was primarily the result of increases
in fee waivers for certain money market funds to maintain positive or zero net yields. A significant change in Federated’s
investment management business (such as its money market business) or a significant reduction in AUM (such as money
market assets) due to regulatory changes, changes in the financial markets, such as significant and rapid increases in interest
rates over a short period of time causing certain investors to prefer direct investments in interest-bearing securities, the
availability, supply and/or market interest in repurchase agreements and other investments, significant deterioration in investor
confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and
resulting fee waivers, investor preferences for deposit products or other FDIC-insured products or other circumstances, could
have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
(a) Current Regulatory Environment
Federated and its investment management business are subject to extensive regulation in the U.S. and abroad. Federated and its
products (such as the Federated Funds) and strategies are subject to federal securities laws, principally the 1933 Act, 1934 Act,
the 1940 Act, the Advisers Act, state laws regarding securities fraud and regulations promulgated by various regulatory
authorities, as well as foreign laws and regulations promulgated by foreign regulatory authorities. In 2014, among other
developments, the SEC promulgated new money market reform in the form of the 2014 Rules. Federated is analyzing the
potential impact of these reforms. Internationally, among other developments, European money market fund reforms, similar in
some respects to the U.S. reforms, continued to be considered in 2014, but have not yet been finalized. Federated is reallocating
certain resources from regulatory efforts and continues to dedicate internal and external resources to analyze the potential
impact of the 2014 Rules, and certain related regulations, on Federated’s business, results of operations, financial condition and/
or cash flows. Federated also is reallocating resources to plan and begin the implementation of product development and
restructuring initiatives in response to the 2014 Rules. See Item 1 - Business under the caption Regulatory Matters and Item 1A
- Risk Factors under the caption Potential Adverse Effects of Changes in Laws and Regulations on Federated’s Investment
Management Business for additional information.
(b) Historically Low Short-Term Interest Rates
For several years, the FOMC has kept the near-zero federal funds rate unchanged and short-term interest rates continued to be
at all-time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the
fund's operating expenses due to these historically low short-term interest rates. Since the fourth quarter of 2008, Federated has
voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money
market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in
distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and
agreement with third-party intermediaries to share the impact of the waivers. See Item 1 - Business under the caption
Historically Low Short-Term Interest Rates and Item 1A - Risk Factors under the caption Potential Adverse Effects of
Historically Low Short-Term Interest Rates for additional information.
Assuming asset levels and mix remain constant and based on recent market conditions, fee waivers for the first quarter of 2015
may result in a negative pre-tax impact on income of approximately $28 million, which is slightly less than the impact to each
quarter included in 2014 (see Note (20) to the Consolidated Financial Statements for additional information on the quarterly
impact of these fee waivers).While the level of fee waivers are impacted by various factors, increases in short-term interest rates
that result in higher yields on securities purchased in money market fund portfolios would likely reduce the negative pre-tax
impact of these waivers. Management estimates that an increase of 10 basis points in gross yields on securities purchased in
money market fund portfolios will likely reduce the negative pre-tax impact of these waivers by approximately 40% from the
current levels and an increase of 25 basis points would reduce the impact by approximately 65% from the current levels. Based
on management’s assessment of competitive market conditions, including, for example, an expectation of higher distribution
expenses as a percentage of money market fund revenues when interest rates and yields increase, management estimates that
Federated will recover approximately 75% of the pre-tax impact of minimum yield waivers (that is, capture approximately 75%
of the pre-tax income going forward, not re-capture previously waived amounts) when money market fund yields increase to
the point of eliminating the waivers. The actual amount of future fee waivers, the resulting negative impact of these waivers and
Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax income going
25
9950_Fin.pdf 25
forward, not re-capture previously waived amounts) could vary significantly from management's estimates as they are
contingent on a number of variables including, but not limited to, changes in assets within the money market funds, yields on
instruments available for purchase by the money market funds, actions by the Governors, the FOMC, Treasury Department, the
SEC, FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of
money market customer assets, changes in money market product structures and offerings, changes in the distribution fee
arrangements with third parties, Federated's willingness to continue the fee waivers and changes in the extent to which the
impact of the waivers is shared by any one or more third parties.
Second Amended and Restated Credit Agreement
During the second quarter of 2014, Federated entered into an unsecured Second Amended and Restated Credit Agreement
(Credit Agreement). The Credit Agreement amended and restated Federated's prior unsecured Amended and Restated Credit
Agreement, which was dated June 10, 2011, and scheduled to mature on June 10, 2016 (Prior Credit Agreement). The
borrowings under the Credit Agreement's term loan facility of $255 million (Term Loan) equaled the remaining principal
balance from the Prior Credit Agreement's term loan facility. See Note (10) to the Consolidated Financial Statements for
additional information.
Global Expansion
Federated continues to explore opportunities to further expand its global footprint. In 2014, among other initiatives, Federated
focused on growing distribution opportunities for its products and services in Canada and Latin America. In 2013, Federated
enhanced its capabilities in trade finance investments by adding three experienced professionals and obtaining the right to use
certain intellectual property from GML Capital LLP and in emerging-market debt investments by adding two emerging-market
specialists. In 2014, Federated also continued to seek acquisition candidates, both internationally and domestically.
26
9950_Fin.pdf 26
Asset Highlights
Managed Assets at Period End
in millions as of December 31,
By Asset Class
Money market
Fixed-income
Equity
Liquidation portfolio1
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 Portfolio1
Total managed assets
Average Managed Assets
in millions for the years ended December 31,
By Asset Class
Money market
Fixed-income
Equity
Liquidation portfolio1
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 Portfolio1
Total average managed assets
2014
2013
258,772
52,707
51,426
0
362,905
225,471
40,456
33,141
299,068
33,301
12,251
18,285
63,837
0
362,905
$
$
$
$
$
$
275,952
50,126
44,148
5,858
376,084
240,048
39,606
28,097
307,751
35,904
10,520
16,051
62,475
5,858
376,084
Percent
Change
(6)%
5
16
(100)
(4)%
(6)%
2
18
(3)
(7)%
16
14
2
(100)%
(4)%
2012
2014
vs. 2013
2013
vs. 2012
274,206
48,986
33,816
8,141
365,149
246,731
39,941
23,015
309,687
27,475
9,045
10,801
47,321
8,141
365,149
(7)%
0
22
(31)
(3)%
(8)%
(2)
21
(5)
(2)%
8
25
6
(31)%
(3)%
0 %
5
17
(19)
2 %
(3)%
3
11
(1)
25 %
12
29
23
(19)%
2 %
$
$
$
$
$
$
$
$
$
$
$
$
2014
2013
$
$
$
$
$
$
254,260
51,333
48,317
4,557
358,467
220,742
40,366
30,859
291,967
33,518
10,967
17,458
61,943
4,557
358,467
$
$
$
$
$
$
273,680
51,340
39,474
6,633
371,127
239,440
41,177
25,512
306,129
34,240
10,163
13,962
58,365
6,633
371,127
1
Liquidation portfolio represents a portfolio of distressed bonds at cost. Federated had been retained by a third party to manage these
assets through an orderly liquidation process that was completed during the fourth quarter of 2014. Management-fee rates earned from
this portfolio were lower than those of traditional Separate Account mandates.
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9950_Fin.pdf 27
Changes in Equity and Fixed-Income Fund and Separate Account Assets
in millions for the years ended December 31,
Equity Funds
Beginning assets
Sales
Redemptions
Net sales (redemptions)
Net exchanges
Market gains and losses/reinvestments1
Ending assets
Equity Separate Accounts
Beginning assets
Sales2
Redemptions2
Net sales2
Market gains and losses3
Ending assets
Total Equity Assets
Beginning assets
Sales2
Redemptions2
Net sales2
Net exchanges
Market gains and losses/reinvestments1
Ending assets
Fixed-income Funds
Beginning assets
Sales
Redemptions
Net sales (redemptions)
Net exchanges
Acquisition-related
Market gains and losses/reinvestments1
Ending assets
Fixed-income Separate Accounts
Beginning assets
Sales2
Redemptions2
Net sales2
Net exchanges
Market gains and losses3
Ending assets
Total Fixed-income Assets
Beginning assets
Sales2
Redemptions2
Net sales (redemptions)2
Net exchanges
Acquisition-related
Market gains and losses/reinvestments1
Ending assets
1
2014
2013
Percent Change
$ 28,097
10,140
(6,530)
3,610
42
1,392
$ 33,141
$ 16,051
4,536
(3,883)
653
1,581
$ 18,285
$ 44,148
14,676
(10,413)
4,263
42
2,973
$ 51,426
$ 39,606
16,186
(16,120)
66
(354)
301
837
$ 40,456
$ 10,520
2,393
(1,343)
1,050
230
451
$ 12,251
$ 50,126
18,579
(17,463)
1,116
(124)
301
1,288
$ 52,707
$ 23,152
7,439
(8,328)
(889)
214
5,620
$ 28,097
$ 11,858
4,445
(3,004)
1,441
2,752
$ 16,051
$ 35,010
11,884
(11,332)
552
214
8,372
$ 44,148
$ 42,478
18,706
(21,075)
(2,369)
(351)
0
(152)
$ 39,606
$ 10,233
2,342
(2,150)
192
4
91
$ 10,520
$ 52,711
21,048
(23,225)
(2,177)
(347)
0
(61)
$ 50,126
21 %
36
(22)
506
(80)
(75)
18 %
35 %
2
29
(55)
(43)
14 %
26 %
23
(8)
672
(80)
(64)
16 %
(7)%
(13)
(24)
103
1
N/A
651
2 %
3 %
2
(38)
447
5,650
396
16 %
(5)%
(12)
(25)
151
(64)
N/A
2,211
5 %
Reflects approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends,
distributions, net investment income and the impact of changes in foreign exchange rates.
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the
calculation of Market gains and losses.
Reflects the approximate changes in the fair value of the securities held by the portfolios.
2
3
28
9950_Fin.pdf 28
Total Changes in Equity and Fixed-Income Assets
in millions for the years ended December 31,
Funds
Beginning assets
Sales
Redemptions
Net sales (redemptions)
Net exchanges
Acquisition-related
Market gains and losses/reinvestments1
Ending assets
Separate Accounts
Beginning assets
Sales2
Redemptions2
Net sales2
Net exchanges
Market gains and losses3
Ending assets
Total Assets
Beginning assets
Sales2
Redemptions2
Net sales (redemptions)2
Net exchanges
Acquisition-related
Market gains and losses/reinvestments1
Ending assets
2014
2013
Percent Change
$
67,703
$ 65,630
$
$
$
$
26,326
(22,650)
3,676
(312)
301
2,229
26,145
(29,403)
(3,258)
(137)
0
5,468
73,597
$ 67,703
26,571
$ 22,091
6,929
(5,226)
1,703
230
2,032
6,787
(5,154)
1,633
4
2,843
30,536
$ 26,571
94,274
$ 87,721
33,255
(27,876)
5,379
(82)
301
4,261
32,932
(34,557)
(1,625)
(133)
0
8,311
$ 104,133
$ 94,274
3%
1
(23)
213
128
N/A
(59)
9%
20%
2
1
4
5,650
(29)
15%
7%
1
(19)
431
(38)
N/A
(49)
10%
1
2
3
Reflects approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends,
distributions, net investment income and the impact of changes in foreign exchange rates.
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the
calculation of Market gains and losses.
Reflects the approximate changes in the fair value of the securities held by the portfolios.
29
9950_Fin.pdf 29
Changes in Federated’s average asset mix year-over-year across both asset class 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 earned on each
asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the
asset class, distribution channel and/or the size of the customer relationship. The following table presents the relative
composition of average managed assets and the percent of total revenue derived from each asset class and product type over the
last three years:
Percent of Total Average Managed Assets
Percent of Total Revenue
2014
2013
2012
2014
2013
2012
By Asset Class
Money market assets
Fixed-income assets
Equity assets
Liquidation portfolio
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 Portfolio
Other Activities
71%
14%
14%
1%
--
62%
11%
9%
9%
3%
5%
1%
--
74%
14%
10%
2%
--
65%
11%
7%
9%
3%
3%
2%
--
75%
14%
9%
2%
--
68%
11%
6%
7%
3%
3%
2%
--
32%
22%
45%
0%
1%
30%
20%
37%
2%
2%
8%
0%
1%
39%
23%
37%
0%
1%
37%
21%
31%
2%
2%
6%
0%
1%
47%
21%
31%
0%
1%
46%
19%
26%
1%
2%
5%
0%
1%
Total managed assets represent the balance of AUM at a point in time. By contrast, average managed assets represent the
average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution
expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of
changes in revenue earned and asset-based expenses incurred during the same period.
As of December 31, 2014, total managed assets decreased 4% from December 31, 2013 primarily as a result of decreases in
money market assets and assets in the liquidation portfolio, partially offset by increases in equity and fixed-income assets.
Average managed assets decreased 3% for the year ended December 31, 2014 compared to the year ended December 31, 2013.
Period-end money market assets decreased 6% at December 31, 2014 as compared to December 31, 2013. Average money
market assets decreased 7% for 2014 compared to 2013, following the industry trend resulting from the accommodative
monetary policy environment. Short-term interest rates remained low throughout 2014 as the FOMC kept the near-zero federal
funds rate unchanged in the continuous pursuit of a sustained economic recovery. In the bond market, Treasury yields moved
measuredly, with the yield curve flattening as intermediate rates increased slightly while long-term rates dipped, resulting from
the U.S. economy continuing to improve and spread-sector yields responding appropriately. Period-end fixed-income assets
increased 5% at December 31, 2014 as compared to December 31, 2013 primarily as a result of market appreciation, and to a
lesser extent, net sales, while average fixed-income assets remained flat for 2014 as compared to 2013. Period-end equity assets
increased 16% at December 31, 2014 as compared to December 31, 2013 primarily due to net sales, and to a lesser extent,
market appreciation. Average equity assets increased 22% for 2014 as compared to 2013. Despite greater equity-market
volatility late in the third quarter and into the fourth quarter of 2014, both the S&P 500 and Dow Jones Industrial Average, key
indicators of broad equity-market performance, reached record highs in late December. Assets in the liquidation portfolio were
fully liquidated in the fourth quarter of 2014.
As of December 31, 2013, total managed assets decreased 1% from December 31, 2012 primarily as a result of decreases in
money market and fixed-income assets, partially offset by an increase in equity assets. Average managed assets increased 2%
for the year ended December 31, 2013 compared to the year ended December 31, 2012. Period-end money market assets
decreased 3% at December 31, 2013 as compared to December 31, 2012. Average money market assets remained flat for 2013
compared to 2012, following the industry trend in the accommodative monetary policy environment. Short-term interest rates
remained low throughout 2013 as the FOMC kept the near-zero federal funds rate unchanged in pursuit of a sustained economic
recovery. In the bond market, anticipation of the beginning of the Governors' tapering, impacting long-term bond rates,
contributed to fund outflows industrywide in the second half of 2013. In this difficult year for the bond market overall, period-
end fixed-income assets decreased 5% at December 31, 2013 as compared to December 31, 2012 primarily as a result of net
30
9950_Fin.pdf 30
redemptions, while average fixed-income assets increased 5% for 2013 as compared to 2012. In equities, the S&P 500 Index
rose nearly 30%, as the market benefited from economic growth, rising corporate profits and the continuation of the Governors'
economic stimulus. Period-end equity assets increased 26% at December 31, 2013 as compared to December 31, 2012
primarily due to market appreciation, and to a lesser extent, net sales. Average equity assets increased 17% for 2013 compared
to 2012 during a strong year for the equity market. Average assets in the liquidation portfolio decreased 19% for 2013 compared
to 2012 due to the continued gradual liquidation of the portfolio during 2013.
Results of Operations
Revenue. The following table sets forth components of total revenue for the three years ended December 31:
in millions
Revenue from managed assets
Revenue from sources other than managed assets
Total revenue
2014
852.1
7.2
859.3
$
$
2013
868.7
9.7
878.4
$
$
2012
937.9
7.8
945.7
$
$
2014
vs. 2013
2013
vs. 2012
(2)%
(26)
(2)%
(7)%
24
(7)%
Revenue from managed assets decreased $16.6 million in 2014 as compared to 2013 primarily due to (1) a decrease of $46.2
million from lower average money market assets, (2) a decrease of $21.6 million resulting from an increase in voluntary fee
waivers related to certain money market funds in order for these funds to maintain positive or zero net yields and (3) a decrease
of $7.5 million resulting from a change in the mix of average fixed-income assets. These decreases in revenue were partially
offset by an increase of $64.1 million from higher average equity assets.
See Note (3) to the Consolidated Financial Statements for additional information on voluntary fee waivers related to certain
money market funds in order for these funds to maintain positive or zero net yields, including the offsetting decreases in
expense and net income attributable to noncontrolling interests and the net pre-tax impact on income.
Federated’s ratio of revenue from managed assets to average managed assets for 2014 was 0.24% as compared to 0.23% for
2013. The increase in the rate was primarily due to the increase in average managed assets invested in higher fee-paying equity
products for 2014 as compared to 2013, partially offset by the increase in voluntary fee waivers to maintain positive or zero net
yields on certain money market funds for the same period of comparison.
Revenue from managed assets decreased $69.2 million in 2013 as compared to 2012 primarily due to an increase of $98.0
million in voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net
yields and a decrease of $3.4 million due to lower average money market assets. This decrease in revenue was partially offset
by an increase of $34.1 million resulting from higher average equity assets.
Federated’s ratio of revenue from managed assets to average managed assets for 2013 was 0.23% as compared to 0.26% for
2012. The decrease in the rate was primarily due to the increase in voluntary fee waivers to maintain positive or zero net yields
on certain money market funds for 2013 as compared to 2012, partially offset by the increase in average managed assets
invested in higher fee-paying equity products for the same period of comparison.
Operating Expenses. The following table sets forth significant fluctuations in operating expenses for the three years ended
December 31:
in millions
Compensation and related
Distribution
Professional service fees
All other
Total operating expenses
2014
285.3
197.9
30.2
107.9
621.3
$
$
2013
269.1
212.9
37.1
107.5
626.6
$
$
2012
257.6
253.4
18.9
103.2
633.1
$
$
2014
vs. 2013
6 %
(7)
(19)
0
(1)%
2013
vs. 2012
4 %
(16)
96
4
(1)%
Total operating expenses for 2014 decreased $5.3 million compared to 2013. Distribution expense decreased $15.0 million in
2014 as compared to 2013 primarily due to $20.6 million related to lower average money market assets, a $3.9 million decrease
related to the customer mix of average fixed-income assets and a $3.7 million decrease resulting from higher fee waivers
associated with maintaining positive or zero net yields on certain money market funds, partially offset by a $13.7 million
increase related to higher average equity assets. Compensation and related expense increased $16.2 million in 2014 as
31
9950_Fin.pdf 31
compared to 2013 reflecting an $8.5 million increase in incentive compensation primarily driven by sales and investment
management performance, a $3.8 million increase related to increased salary levels, a $2.2 million increase in other employee
expenses including payroll taxes and benefits and a $1.7 million increase in incentive compensation as a result of the
finalization of prior-year estimates during the first quarter of each year. Professional service fees decreased $6.9 million in 2014
as compared to 2013 primarily due to a decrease in legal fees and outsourced technology-related consultants.
Total operating expenses for 2013 decreased $6.5 million compared to 2012. Distribution expense decreased $40.5 million in
2013 as compared to 2012 primarily due to a $58.6 million decrease resulting from higher fee waivers associated with
maintaining positive or zero net yields on certain money market funds, partially offset by a $13.8 million increase related to the
customer mix of average money market assets and a $5.5 million increase related to higher average equity assets. Professional
service fees increased $18.2 million in 2013 compared to 2012 primarily due to the recognition of insurance proceeds in 2012
related to claims submitted over the past several years related to various legal proceedings. Compensation and related expense
increased $11.5 million in 2013 as compared to 2012 reflecting a $5.3 million increase in base compensation primarily due to
increased salary levels, a $4.2 million increase in incentive compensation primarily due to an increase in bonus expense driven
primarily by investment management performance and a $2.0 million increase in other employee expenses, including payroll
taxes and benefits.
Nonoperating Income (Expenses). Nonoperating income (expenses), net, decreased $5.9 million in 2014 as compared to 2013.
The decrease is primarily due to a $12.0 million decrease in Gain on securities, net primarily due to the decrease in gains on the
sale of available-for-sale securities ($8.6 million) and a decrease in net gains from trading securities primarily due to the
minimal change in their fair value in 2014 as compared to an increase in 2013 ($3.5 million). These decreases were partially
offset by a $3.8 million decrease in Other, net primarily due to impairment charges of an equity-method investment recorded in
2013 and a $2.9 million decrease in Debt expense primarily due to a lower average outstanding loan balance ($1.5 million) and
a lower average interest rate ($1.1 million) resulting primarily from a portion of the Term Loan no longer being covered by an
interest rate swap as the swap approaches maturity (see Note (10) to the Consolidated Financial Statements for additional
information).
Nonoperating income (expenses), net, increased $11.4 million in 2013 as compared to 2012. The increase is primarily due to a
$10.1 million increase in Gain on securities, net primarily due to increased gains on the sale of certain available-for-sale
securities and a $2.0 million decrease in Debt expense primarily due to a lower average outstanding loan balance.
Income Taxes. The income tax provision for 2014, 2013, and 2012 was $89.5 million, $92.7 million, and $110.9 million,
respectively. The provision for 2014 decreased $3.2 million as compared to 2013 primarily due to lower Income before income
taxes. The provision for 2013 decreased $18.2 million as compared to 2012 primarily due to lower Income before income taxes.
The effective tax rate was 37.4% for 2014, 35.8% for 2013 and 35.9% for 2012. The lower effective tax rate in 2013 primarily
relates to reversals of valuation allowances related to prior year capital losses. See Note (14) to the Consolidated Financial
Statements for additional information on the effective tax rate, as well as other tax disclosures.
For 2014, Federated's pretax book income was $69.7 million in excess of federal taxable income due primarily to temporary tax
differences of $60.1 million associated with certain intangible assets.
For 2013, Federated's pretax book income was $71.0 million in excess of federal taxable income due primarily to temporary tax
differences of $55.1 million associated with certain intangible assets and $10.5 million associated with capital gains recognized
in the current year which, for tax purposes, were offset by capital losses reported in prior years for book purposes.
For 2012, Federated’s pretax book income was $86.3 million in excess of federal taxable income due primarily to temporary tax
differences of $56.4 million associated with certain intangible assets, $9.2 million associated with capital losses recognized in
2012 for tax purposes for which impairment charges had been recognized in a prior year for book purposes and $8.3 million
related to the insurance proceeds recognized as income for book purposes in 2012 versus when received in a prior year for tax
purposes. See Note (9) to the Consolidated Financial Statements for additional information.
Net Income Attributable to the Noncontrolling Interests in Subsidiaries. Net income attributable to the noncontrolling
interests in subsidiaries decreased $3.6 million for 2014 as compared to 2013 primarily due to the impact of higher fee waivers
associated with maintaining positive or zero net yields in certain money market funds.
Net income attributable to the noncontrolling interests in subsidiaries decreased $5.4 million for 2013 as compared to 2012
primarily due to the impact of higher fee waivers associated with maintaining positive or zero net yields in certain money
market funds.
Net Income Attributable to Federated Investors, Inc. Net income decreased $12.9 million in 2014 as compared to 2013
primarily as a result of the changes in revenues and expenses noted above. Diluted earnings per share for 2014 decreased $0.13
as compared to 2013 primarily due to decreased net income.
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9950_Fin.pdf 32
Net income decreased $25.9 million in 2013 as compared to 2012 primarily as a result of the changes in revenues and expenses
noted above. Diluted earnings per share for 2013 decreased $0.24 as compared to 2012 primarily due to decreased net income.
Liquidity and Capital Resources
Liquid Assets. At December 31, 2014, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents,
investments and receivables, totaled $318.7 million as compared to $303.2 million at December 31, 2013. The change in liquid
assets is summarized in the discussion below in the sections Cash Provided by Operating Activities, Cash Used by Investing
Activities and Cash Used by Financing Activities.
At December 31, 2014, Federated's liquid assets included investments in certain Federated-sponsored money market and
fluctuating-value funds that may have direct and/or indirect exposures to international sovereign debt and currency risks.
Federated has been actively monitoring its money market, fixed-income and equity portfolios to manage sovereign debt and
currency risks with respect to certain eurozone countries and countries subject to economic sanctions. Federated's experienced
portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis. Further, regarding
international exposure, for cash invested in certain money market funds (approximately $108 million), only indirect short-term
exposures exist primarily to high-quality international bank names that are subject to Federated's credit analysis process and, as
required, meet the requirements of Rule 2a-7.
Cash Provided by Operating Activities. Net cash provided by operating activities totaled $192.5 million for 2014 as
compared to $261.0 million for 2013. The decrease of $68.5 million was primarily due to (1) a $68.8 million decrease in trading
securities activity primarily related to a consolidated sponsored investment company, which was liquidated in the fourth quarter
of 2013, and no longer reported as trading securities in 2014, (2) the $19.1 million decrease in revenue primarily from managed
assets previously discussed and (3) a $10.5 million decrease related to cash held by previously consolidated investment
companies (see Note (4) to the Consolidated Financial Statements for additional information). These decreases were partially
offset by a $5.5 million reduction in cash paid for taxes for 2014 as compared to 2013 due primarily to a $5.0 million federal
income tax extension payment paid in the first quarter of 2013 while no payment was required in the first quarter of 2014. The
remaining difference is primarily related to cash paid to service providers for operating activities.
Cash Used by Investing Activities. In 2014, cash used by investing activities was $16.4 million and primarily reflected $85.0
million in purchases of available-for-sale securities, $9.7 million primarily for a contingent payment related to a prior year
acquisition and $8.9 million for property and equipment, partially offset by the receipt of $87.1 million in proceeds from
redemptions of available-for-sale securities.
Cash Used by Financing Activities. In 2014, cash used by financing activities was $165.2 million. Of this amount, Federated
(1) paid $104.8 million or $1.00 per share in dividends to holders of its common shares, (2) repaid $34.0 million of its long-
term debt obligations (see Note (10) to the Consolidated Financial Statements for additional information), (3) paid $27.2
million to repurchase shares of Class B common stock primarily in connection with its stock repurchase program (see Note (13)
to the Consolidated Financial Statements for additional information) and (4) paid $3.0 million for contingent payments related
to prior year acquisitions for which the acquisition-date fair value of the contingent liabilities was recorded upon initial
acquisition.
Borrowings. In 2014, Federated entered into an unsecured Second Amended and Restated Credit Agreement with a syndicate
of banks that refinanced both a $255 million Term Loan and a $200 million revolving credit facility (collectively, as amended,
Credit Agreement). The original proceeds were used for general corporate purposes including cash payments related to
acquisitions, dividends, investments and share repurchases. Federated made principal payments on the Term Loan of $34.0
million in 2014, and $42.5 million in both 2013 and 2012. As of December 31, 2014, the entire $200 million revolving credit
facility was available for borrowings. The interest rate swap that Federated entered into to hedge interest rate risk associated
with Federated's original term loan facility (Swap) remains in effect. The Swap converts the variable interest rate on the Term
Loan to a fixed rate of 3.521% for the amount of the Term Loan covered by the Swap until the Swap's expiration on April 1,
2015. See Note (10) to the Consolidated Financial Statements for additional information.
The Credit Agreement includes an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation
and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated
EBITDA) as well as other customary terms and conditions. Federated was in compliance with all of its covenants, including its
interest coverage and leverage ratios at and during the year ended December 31, 2014. An interest coverage ratio of at least 4 to
1 is required and as of December 31, 2014, the interest coverage ratio was 34.5 to 1. A leverage ratio of no more than 3 to 1 is
required and as of December 31, 2014, the leverage ratio was 0.8 to 1. The Credit Agreement and the Swap also have certain
stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment
of the debt or the Swap if not cured within the applicable grace periods. The events of default generally include breaches of
33
9950_Fin.pdf 33
contract, failure to make required loan payments, insolvency, cessation of business, deterioration in credit rating to below
investment grade, notice of lien or assessment and other proceedings, whether voluntary or involuntary, that would require the
repayment of amounts borrowed or any liabilities related to the Swap.
Dividends. Cash dividends of $104.8 million, $102.5 million and $256.8 million were paid in 2014, 2013 and 2012,
respectively, to holders of Federated common stock. Of the amount paid in 2012, $156.9 million represented a $1.51 per share
special dividend paid in the fourth quarter. All dividends are considered ordinary dividends for tax purposes.
Future Cash Needs. In addition to the contractual obligations and contingent liabilities described below, management expects
that principal uses of cash will include paying incentive and base compensation, funding distribution expenditures, paying
shareholder dividends, repaying debt obligations, funding business acquisitions and global expansion, paying taxes,
repurchasing company stock, developing and seeding new products, restructuring existing money market products and funding
property, equipment and technology. As a result of the highly regulated nature of the investment management business,
management anticipates that expenditures for compliance and investment management personnel, compliance systems and
related professional and consulting fees may continue to increase.
On January 22, 2015, the board of directors declared a $0.25 per share dividend to shareholders of record as of February 6,
2015, resulting in $26.2 million being paid on February 13, 2015.
On February 19, 2015, the board of directors authorized management to purchase up to 4 million additional shares of Federated
Class B common stock with no stated expiration date for the buy back program. The program authorizes executive management
to determine the timing and the amount of shares for each purchase. The repurchased stock is to be held in treasury for
employee share-based compensation plans, potential acquisitions and other corporate activities, unless Federated's board of
directors subsequently determines to retire and restore to authorized but unissued status the repurchased stock (rather than
holding it in treasury). See Note (13) to the Consolidated Financial Statements for additional information.
Management estimates that of the $19.1 million of deferred tax assets (net of valuation allowances) at December 31, 2014,
$10.2 million and $3.8 million will reverse in 2015 and 2016, respectively, as tax deductions are taken in those years for various
expenses recorded in 2014 or prior years, primarily related to certain compensation-related expenses.
After evaluating Federated’s existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under
the revolving credit facility of the Credit Agreement 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. Although
management currently is not projecting to draw on the availability under the revolving credit facility for the next twelve
months, management may choose to borrow additional amounts up to the maximum available under the revolving credit facility
which could cause total outstanding borrowings to total as much as $436 million.
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 as well as the status of Federated's
goodwill and treasury stock as of December 31, 2014.
Other current liabilities at December 31, 2014 decreased $16.4 million from December 31, 2013 primarily due to $12.1 million
in contingent payments relating to prior year business acquisitions (see Note (18) to the Consolidated Financial Statements for
additional information) and payments of $4.1 million relating to the Swap (see Note (10) to the Consolidated Financial
Statements for additional information).
Long-term deferred tax liability, net at December 31, 2014 increased $19.6 million from December 31, 2013 primarily as a
result of tax amortization deductions related to indefinite lived assets, which are not amortized for book purposes, but rather
assessed for impairment each reporting period.
During the fourth quarter 2014, the board of directors authorized the retirement of 20 million treasury shares which restored
these shares to authorized but unissued status. Federated recorded a $587.3 million reduction to Treasury stock, at cost using the
specific-identification method and a $49.2 million reduction to Class B Common stock, at cost using the average cost method.
The difference of $538.1 million was recorded as a reduction to Retained earnings. There was no impact to total equity as a
result of this transaction. See Note (13) to the Consolidated Financial Statements for additional information on Treasury stock.
There were no indicators of goodwill impairment as of December 31, 2014 as Federated's market capitalization exceeded the
book value of equity by more than 400%.
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9950_Fin.pdf 34
Off-Balance Sheet Arrangements
As of December 31, 2014 and 2013, Federated did not have any material off-balance sheet arrangements.
Contractual Obligations and Contingent Liabilities
Contractual. The following table presents, as of December 31, 2014, Federated’s significant minimum noncancelable
contractual obligations by payment date. The payments represent amounts contractually due to the recipient and do not include
any carrying value adjustments. Further discussion of the nature of each obligation is included below the table.
in millions
Long-term debt obligations
Operating lease obligations
Purchase obligations
Employment-related commitments
Acquisition-related commitments
Total
Payments due in
2015
2016-2017
2018-2019 After 2019
$
$
29.1
12.2
8.8
17.0
0.6
56.0
25.9
3.0
11.9
0.0
$
168.2
$
0.0
$
25.5
0.1
0.0
0.0
48.7
0.0
0.0
0.0
Total
253.3
112.3
11.9
28.9
0.6
$
67.7
$
96.8
$
193.8
$
48.7
$
407.0
Long-term debt obligations. Amounts include principal and interest payments. Assuming the current repayment and
amortization schedules on the Term Loan and Swap as of December 31, 2014, Federated’s minimum contractual interest
payments are estimated to be $3.6 million, $5.0 million and $2.4 million for 2015, 2016-2017 and 2018-2019, respectively. A
portion of the interest is fixed as a result of the Swap, which matures April 1, 2015. The variable portion of interest is based on
the London Interbank Offering Rate (LIBOR) interest rate in effect at December 31, 2014, plus a 112.5 basis point spread, in
accordance with the Credit Agreement. See Note (10) to the Consolidated Financial Statements for additional information.
Operating lease obligations. See Note (16) to the Consolidated Financial Statements for additional information.
Purchase obligations. Federated is a party to various contracts pursuant to which it receives certain services including services
for marketing and information technology, access to various fund-related information systems and research databases, trade
order transmission and recovery services as well as other 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.
Employment-related commitments. Federated has certain domestic and international employment arrangements pursuant to
which Federated is obligated to make minimum compensation payments.
Acquisition-related commitments. Amount represents Federated's obligation to make acquisition-related contingent purchase
price payments in cases where the related contingencies are resolved as of December 31, 2014. For a full discussion of
Federated's commitments regarding acquisition-related purchase price payments, see Note (18) to the Consolidated Financial
Statements.
Legal Proceedings. Federated has claims asserted and threatened against it from time to time. See Note (18) to the
Consolidated Financial Statements.
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 (4) to the Consolidated
Financial Statements for more information.
Recent Accounting Pronouncements
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.
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9950_Fin.pdf 35
Critical Accounting Policies
Federated’s 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. 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 material.
Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that
its policy regarding accounting for intangible assets involves a higher degree of judgment and complexity.
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) reconsideration of an asset's useful life. The process of determining the fair value of identifiable intangible assets at the date
of acquisition requires significant 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 results of operations and/or financial condition.
Indefinite-lived intangible assets are reviewed for impairment annually as of October 1 using a qualitative approach which
requires the weighing of positive and negative evidence collected through the consideration of various factors to determine
whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired. Management considers
entity-specific and macroeconomic factors and their potential impact on significant inputs used to determine the fair value
measurement for the indefinite-lived intangible assets including, primarily, changes in AUM, net revenue rates, operating
margins, tax rates and discount rates. In addition, management reconsiders on a quarterly basis whether events or circumstances
indicate that a change in the useful life may have occurred. Indicators of a possible change in useful life monitored by
management generally include a significant decline in the level of managed assets, changes to legal, regulatory or contractual
provisions of the renewable investment advisory contracts and reductions in underlying operating cash flows.
If actual changes in the underlying managed assets or other conditions indicate that it is more likely than not that the asset is
impaired, or if the estimated useful life is reduced, management estimates the fair value of the intangible asset using an income
approach where future cash flows are discounted. Impairment is indicated when the carrying value of the intangible asset
exceeds its fair value.
At December 31, 2014, Federated had $70.9 million and $4.1 million in indefinite-lived and finite-lived intangible assets,
respectively, recorded on its Consolidated Balance Sheets. No indicators of impairment existed as of December 31, 2014 or
2013 and no impairments were recorded during the years then ended.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of its business, Federated is exposed to fluctuations in the securities market and general economy. As an
investment manager, Federated’s business requires that it continuously identify, assess, monitor and manage market and other
risks including those risks affecting its own investment portfolio. Federated invests in sponsored investment companies for the
primary purpose of generating returns from capital appreciation, investment income, or both, or in the case of newly launched
sponsored investment companies or new Separate Account strategies, to provide the product or strategy with investable cash to
establish a performance history. These investments expose Federated to various market risks. A single investment can expose
Federated to multiple risks arising from changes in interest rates, credit ratings, equity prices and foreign currency exchange
rates. Federated manages its exposure to market risk by diversifying its investments among different asset classes and by
altering its investment holdings from time to time in response to changes in market risks and other factors. In addition, in
certain cases, Federated enters into derivative instruments for purposes of hedging certain market 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, 2014 and 2013, Federated was exposed to
interest-rate risk as a result of holding investments in fixed-income sponsored funds ($115.5 million and $102.3 million,
respectively) and investments in debt securities held by certain consolidated investment companies ($12.9 million and $25.7
36
9950_Fin.pdf 36
million, respectively). At December 31, 2014 and 2013, management considered a hypothetical 150-basis-point fluctuation in
interest rates. Management determined that the impact of such a fluctuation on these investments would not have a material
effect on Federated's financial condition or results of operations. These investments also exposed Federated to credit risk at
December 31, 2014 and 2013. At December 31, 2014 and 2013, management considered a hypothetical 100-basis-point
fluctuation in credit spreads. Management determined that the impact of such a fluctuation on these investments held at both
December 31, 2014 and 2013 could impact Federated's financial condition and results of operations by approximately $4
million and $5 million, respectively.
Federated was also exposed to interest-rate risk as a portion of the Term Loan was not covered by the Swap at December 31,
2014. This portion of the Term Loan, or $114.8 million, bears interest based on LIBOR plus a 112.5 basis point spread, in
accordance with the Credit Agreement. Upon the maturity of the Swap on April 1, 2015, the projected outstanding Term Loan
balance at that time ($229.5 million) will be exposed to variable interest rates and, as a result, interest-rate risk. Management
considered a hypothetical 150-basis-point fluctuation in LIBOR interest rates. Management determined that the impact of such
a fluctuation would not have a material effect on Federated's financial condition or results of operations. The outstanding debt
balance at December 31, 2013 ($276.3 million) was not exposed to interest-rate risk as all interest was fixed as a result of the
Swap. The Term Loan also exposed Federated to credit risk at December 31, 2014 and 2013. If Federated’s credit rating were to
be downgraded, Federated would be subject to an increase in both the annual facility fee and the interest rate spread, in
accordance with the Credit Agreement. Management determined that the impact of such a downgrade 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.
Federated was exposed to price risk as a result of its $49.1 million and $44.2 million investment in sponsored equity products
and strategies at December 31, 2014 and 2013, respectively. Federated’s investment in these products represents its maximum
exposure to loss. At both December 31, 2014 and 2013, management considered a hypothetical 20% fluctuation in fair value
and determined that the impact of such a fluctuation on these investments could impact Federated’s financial condition and
results of operations by approximately $10 million and $9 million, respectively.
Foreign exchange risk is the risk that an investment’s value will change due to changes in currency exchange rates. As of
December 31, 2014 and 2013, Federated was exposed to foreign exchange risk as a result of its investments in sponsored
mutual funds holding non-U.S. dollar securities as well as non-U.S. dollar operating cash accounts held by certain foreign
operating subsidiaries of Federated ($8.4 million and $7.7 million, respectively). Of these investments and cash accounts held at
both December 31, 2014 and 2013, management considered a hypothetical 20% fluctuation in all applicable currency exchange
rates and determined that the impact of such a fluctuation on these investments and cash accounts would not have a material
effect on Federated's financial condition or results of operations. Federated also has certain investments in foreign operations,
whose net assets and results of operations are exposed to foreign currency translation risk when translated into U.S. dollars
upon consolidation. Federated does not hedge these exposures.
In addition to market risks attributable to Federated’s investments, substantially all of Federated's revenue is calculated based
on AUM. Accordingly, changes in the market value of managed assets have a direct impact on Federated's revenue. Declines in
the fair values of these assets as a result of changes in the market or other conditions will negatively impact revenue and net
income. Assuming the ratio of revenue from managed assets to average AUM for 2014 or 2013 remained unchanged, a 20%
decline in the average AUM for either period would result in a corresponding 20% decline in revenue. Certain expenses
including distribution and compensation and related expenses may not vary in proportion with changes in the market value of
managed assets. As such, the impact on net income of a decline in the market values of managed assets may be greater or less
than the percentage decline in the market value of managed assets. For further discussion of managed assets and factors that
impact Federated’s revenue, see Item 1A - Risk Factors and sections included in Item 7 - Management’s Discussion and
Analysis of Financial Condition and Results of Operations under the captions General and Asset Highlights.
37
9950_Fin.pdf 37
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 2014, 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 (2013 framework). Based on
this assessment, management concluded that, as of December 31, 2014, Federated’s internal controls over financial reporting
were effective. 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.
/s/ J. Christopher Donahue
J. Christopher Donahue
President and Chief Executive Officer
February 20, 2015
/s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer
38
9950_Fin.pdf 38
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. as of December 31, 2014 and 2013,
and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the
three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company'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. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted
accounting principles.
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, 2014, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 20, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 20, 2015
39
9950_Fin.pdf 39
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, 2014, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (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, 2014, 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, 2014 and 2013, and the related consolidated
statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended
December 31, 2014 of Federated Investors, Inc. and our report dated February 20, 2015 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 20, 2015
40
9950_Fin.pdf 40
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
ASSETS
Current Assets
Cash and cash equivalents
Investments—affiliates
Investments—consolidated investment companies
Investments—other
Receivables, net of reserve of $34 and $59, respectively
Prepaid expenses
Other current assets
Total current assets
Long-Term Assets
Goodwill
Renewable investment advisory contracts
Other intangible assets, net
Property and equipment, net
Other long-term assets
Total long-term assets
Total assets
LIABILITIES
Current Liabilities
Short-term debt
Accounts payable and accrued expenses
Accrued compensation and benefits
Other current liabilities
Total current liabilities
Long-Term Liabilities
Long-term debt
Long-term deferred tax liability, net
Other long-term liabilities
Total long-term liabilities
Total liabilities
Commitments and contingencies (Note (18))
TEMPORARY EQUITY
Redeemable noncontrolling interest in subsidiaries
PERMANENT EQUITY
Federated Investors, Inc. 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, 109,505,456 and 129,505,456 shares
issued, respectively
Retained earnings
Treasury stock, at cost, 4,586,809 and 24,715,473 shares Class B common stock, respectively
Accumulated other comprehensive loss, net of tax
Total Federated Investors, Inc. 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.)
41
9950_Fin.pdf 41
2014
2013
$ 115,267
143,190
31,853
7,028
27,965
12,931
3,821
342,055
658,837
68,970
6,040
38,638
25,979
798,464
$1,140,519
$
25,500
34,930
75,661
13,230
149,321
216,750
140,849
20,250
377,849
527,170
$ 104,443
129,413
53,476
4,846
29,320
12,860
4,960
339,318
658,743
68,595
8,007
40,088
21,046
796,479
$1,135,797
$
77,917
36,364
70,272
29,652
214,205
198,333
121,203
20,195
339,731
553,936
3,697
15,517
189
189
270,831
505,394
(165,258)
(1,662)
609,494
158
609,652
$1,140,519
295,769
1,022,608
(751,239)
(1,208)
566,119
225
566,344
$1,135,797
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
Compensation and related
Distribution
Professional service fees
Office and occupancy
Systems and communications
Advertising and promotional
Travel and related
Other
Total operating expenses
Operating income
Nonoperating Income (Expenses)
Investment income, net
Gain on securities, net
Debt expense
Other, net
Total nonoperating income (expenses), net
Income before income taxes
Income tax provision
Net income including the noncontrolling interests in subsidiaries
Less: Net income attributable to the noncontrolling interests in subsidiaries
Net income
Amounts Attributable to Federated Investors, Inc.
Earnings per share—Basic and Diluted
Cash dividends per share
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
2014
2013
2012
$ 461,919
95,399
213,136
73,137
10,902
4,757
859,250
$ 486,798
84,154
222,487
66,998
12,610
5,318
878,365
$ 560,978
69,856
225,529
74,103
11,799
3,441
945,706
285,337
197,943
30,216
29,968
25,794
13,330
13,219
25,494
621,301
237,949
269,138
212,901
37,082
26,301
25,801
15,094
13,671
26,634
626,622
251,743
257,622
253,445
18,925
24,828
25,716
13,413
12,838
26,326
633,113
312,593
6,071
4,972
(9,611)
(29)
1,403
239,352
89,530
149,822
586
$ 149,236
6,590
16,986
(12,464)
(3,840)
7,272
259,015
92,660
166,355
4,178
$ 162,177
6,756
6,911
(14,441)
(3,308)
(4,082)
308,511
110,883
197,628
9,540
$ 188,088
$
$
1.42
1.00
$
$
1.55
0.98
$
$
1.79
2.47
42
9950_Fin.pdf 42
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Years Ended December 31,
Net income including the noncontrolling interests in subsidiaries
2014
$ 149,822
2013
$ 166,355
2012
$ 197,628
Other comprehensive (loss) income, net of tax
Permanent equity
Unrealized loss on interest rate swap
Reclassification adjustment related to interest rate swap
Unrealized (loss) gain on securities available for sale
Reclassification adjustment related to securities available for sale
Foreign currency items
Reclassification adjustment related to foreign currency items
Temporary equity
Foreign currency translation gain (loss)
Other comprehensive (loss) income, net of tax
Comprehensive income including noncontrolling interest in subsidiaries
Less: Comprehensive income (loss) attributable to redeemable noncontrolling
interest in subsidiaries
Less: Comprehensive (loss) income attributable to nonredeemable
noncontrolling interest in subsidiary
Comprehensive income attributable to Federated Investors, Inc.
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
(67)
2,983
(88)
(2,624)
(658)
0
(254)
4,140
4,179
(6,237)
(99)
0
(2,052)
4,615
5,339
(2,020)
(334)
127
0
(454)
149,368
5,771
7,500
173,855
(215)
5,460
203,088
609
6,829
(147)
(23)
$ 148,782
3,120
$ 163,906
9,472
$ 193,763
43
9950_Fin.pdf 43
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
Balance at January 1, 2012
Net income
Other comprehensive income (loss), net of tax
Subscriptions – redeemable noncontrolling interest holders
Consolidation/(deconsolidation)
Stock award activity
Dividends declared/Distributions to noncontrolling interest in subsidiaries
Purchase of treasury stock
Other
Balance at December 31, 2012
Net income
Other comprehensive income, net of tax
Subscriptions – redeemable noncontrolling interest holders
Consolidation/(deconsolidation)
Stock award activity
Dividends declared/Distributions to noncontrolling interest in subsidiaries
Purchase of treasury stock
Other
Balance at December 31, 2013
Net income
Other comprehensive loss, net of tax
Subscriptions – redeemable noncontrolling interest holders
Consolidation/(deconsolidation)
Stock award activity
Dividends declared/Distributions to noncontrolling interest in subsidiaries
Purchase of treasury stock
Retirement of treasury stock
Balance at December 31, 2014
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
Class A
9,000
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
9,000
Shares
Class B
103,743,090
0
0
0
0
1,019,773
0
(321,687)
0
104,441,176
0
0
0
0
994,150
0
(645,343)
0
104,789,983
0
0
0
0
1,069,081
0
(940,417)
0
104,918,647
Treasury
25,762,366
0
0
0
0
(1,019,773)
0
321,687
0
25,064,280
0
0
0
0
(994,150)
0
645,343
0
24,715,473
0
0
0
0
(1,069,081)
0
940,417
(20,000,000)
4,586,809
44
9950_Fin.pdf 44
Federated Investors, Inc. Shareholders' Equity
Common Stock
253,139
$
0
0
0
0
20,747
0
0
0
273,886
0
0
0
0
22,072
0
0
0
295,958
0
0
0
0
24,262
0
0
(49,200)
271,020
$
Retained
Earnings
$ 1,069,913
188,088
0
0
0
(17,189)
(256,319)
0
12
984,505
162,177
0
0
0
(21,424)
(102,455)
0
(195)
1,022,608
149,236
0
0
0
(23,548)
(104,834)
0
(538,068)
$ 505,394
Treasury Stock
$ (772,481) $
0
0
0
0
18,793
0
(6,334)
0
(760,022)
0
0
0
0
22,969
0
(14,186)
0
(751,239)
0
0
0
0
25,594
0
(26,881)
587,268
$ (165,258) $
Accumulated
Other
Comprehensive
(Loss) Income,
Net of Tax
Total
Shareholders'
Equity
Nonredeemable
Noncontrolling
Interest in
Subsidiary
(8,612) $ 541,959
188,088
5,675
0
0
22,351
(256,319)
(6,334)
12
495,432
162,177
1,729
0
0
23,617
(102,455)
(14,186)
(195)
566,119
149,236
(454)
0
0
26,308
(104,834)
(26,881)
0
(1,662) $ 609,494
0
5,675
0
0
0
0
0
0
(2,937)
0
1,729
0
0
0
0
0
0
(1,208)
0
(454)
0
0
0
0
0
0
$
$
718
9,472
0
0
0
0
(8,946)
0
0
1,244
3,120
0
0
0
0
(4,139)
0
0
225
(23)
0
0
0
0
(44)
0
0
158
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
$
$
506
68
(215)
14,070
5,353
0
(12,514)
0
0
7,268
1,058
5,771
21,671
64,292
0
(84,543)
0
0
15,517
609
0
12,129
(12,200)
0
(12,358)
0
0
3,697
Total
Permanent
Equity
$ 542,677
197,560
5,675
0
0
22,351
(265,265)
(6,334)
12
496,676
165,297
1,729
0
0
23,617
(106,594)
(14,186)
(195)
566,344
149,213
(454)
0
0
26,308
(104,878)
(26,881)
0
$ 609,652
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9950_Fin.pdf 45
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31,
Operating Activities
Net income including the noncontrolling interests in subsidiaries
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities
Amortization of deferred sales commissions
Depreciation and other amortization
Share-based compensation expense
Gain on disposal of assets
Provision for deferred income taxes
Fair-value adjustments for contingent liabilities
Impairment of assets
Net (purchases) sales of trading securities
Consolidation/deconsolidation of investment companies
Deferred sales commissions paid
Contingent deferred sales charges received
Other changes in assets and liabilities:
Decrease (increase) in receivables, net
Decrease (increase) in prepaid expenses and other assets
Increase (decrease) in accounts payable and accrued expenses
Increase (decrease) in other liabilities
Net cash provided by operating activities
Investing Activities
Purchases of securities available for sale
Cash paid for business acquisitions
Proceeds from redemptions of securities available for sale
Cash paid for property and equipment
Net cash (used) provided by investing activities
Financing Activities
Dividends paid
Purchases of treasury stock
Distributions to noncontrolling interests in subsidiaries
Contributions from noncontrolling interests in subsidiaries
Cash paid for contingent liabilities
Proceeds from shareholders for share-based compensation
Excess tax benefits from share-based compensation
Payments on debt
Other financing activities
Net cash used by financing activities
Net increase 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
2014
2013
2012
$ 149,822
$ 166,355
$ 197,628
12,699
10,704
21,711
(6,514)
21,614
(1,589)
0
(2,580)
(6,777)
(17,316)
1,792
1,821
136
709
6,250
192,482
(84,988)
(9,697)
87,117
(8,850)
(16,418)
9,153
10,435
20,560
(14,950)
19,213
(941)
3,731
66,246
3,718
(12,650)
1,838
(4,906)
(1,675)
(9,698)
4,543
260,972
(91,866)
(8,524)
108,595
(10,316)
(2,111)
(104,840)
(27,239)
(12,402)
12,129
(2,991)
2,046
2,666
(34,000)
(609)
(165,240)
10,824
104,443
$ 115,267
(102,515)
(12,995)
(88,682)
21,671
0
1,545
1,973
(42,500)
(500)
(222,003)
36,858
67,585
$ 104,443
$
$
66,733
8,758
$
$
72,196
11,288
$
$
$
7,465
10,445
20,135
(5,093)
25,025
(793)
3,000
66,403
947
(12,102)
1,383
(2,552)
3,578
7,727
(6,853)
316,343
(58,284)
(14,064)
92,398
(8,675)
11,375
(256,750)
(6,633)
(21,460)
14,070
0
1,604
2,974
(42,500)
(711)
(309,406)
18,312
49,273
67,585
79,817
13,091
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(December 31, 2014, 2013 and 2012)
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Federated Investors, Inc. and its consolidated subsidiaries (collectively, Federated) provides investment advisory,
administrative, distribution and other services primarily to the Federated Funds and Separate Accounts 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 the Federated Funds and Separate
Accounts through various subsidiaries pursuant to investment advisory contracts. These subsidiaries are registered as
investment advisers under the Advisers Act or operate in similar capacities under applicable jurisdictional law.
Federated's U.S.-domiciled mutual funds are distributed by a wholly owned subsidiary registered as a broker/dealer under the
1934 Act and under applicable state laws. Federated's non-U.S.-domiciled products are distributed by wholly owned
subsidiaries and a third-party distribution firm which are registered under applicable jurisdictional law. Federated’s investment
products are primarily distributed within the wealth management and trust, broker/dealer, institutional and international
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.
(d) Principles of Consolidation
The Consolidated Financial Statements include the accounts of Federated and entities or sponsored products in which Federated
holds a controlling financial interest. A controlling financial interest is determined by the extent of Federated’s (1) decision-
making ability through voting interests, (2) decision-making ability and rights/obligations to benefits/losses through variable
interest or (3) 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. In the case of consolidated sponsored products (see Note (4)), the
noncontrolling interests represent equity which is redeemable or convertible for cash or other assets at the option of the equity
holder. As such, these noncontrolling interests are deemed to represent temporary equity and are classified as redeemable
noncontrolling interests in subsidiaries 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.
Federated applies the provisions of the Financial Accounting Standards Board’s (FASB) consolidation model for variable
interest entities (VIEs). As a result, Federated applies two different approaches to consider VIEs for possible consolidation. For
non-investment fund entities, Federated considers a qualitative model for identifying whether its interest in a VIE is a
controlling financial interest. The qualitative model considers whether Federated has: (1) the ability to direct significant
activities of the VIE, and (2) the obligation to absorb losses of and/or to provide rights to receive benefits from the VIE that
could potentially be significant to the VIE. Federated reevaluates the need for consolidation under this qualitative approach on
an ongoing basis.
For Federated’s interests in certain investment funds that meet the definition of VIEs, Federated evaluates the extent of its
participation in the economic risks and rewards of the entity based on a quantitative model to determine whether consolidation
is necessary. In cases where the results of the quantitative model indicate that Federated’s interest in such an entity absorbs the
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majority of the variability in the entity’s net assets, Federated is deemed to be the primary beneficiary and thus consolidates the
entity.
The equity method of accounting was used to account for an investment in an entity in which Federated’s noncontrolling equity
investment was deemed to give it the ability to exercise significant influence over the operating and financial policies of the
investee. This equity-method investment was included in Other long-term assets on the Consolidated Balance Sheets. The
proportionate share of income or loss was included in Nonoperating Income (Expenses) – Other, net on the Consolidated
Statements of Income. The investment was subject to review for other-than-temporary impairments as indicators arose. The
carrying value of the investment was deemed to be other-than-temporarily impaired in 2013 and 2012 and impairment charges
of $3.7 million and $3.0 million, respectively, were recorded in Nonoperating Income (Expenses) – Other, net to write the asset
down to zero carrying value as of December 31, 2013.
(e) Business Combinations
Beginning in 2009, business combinations are accounted for under the acquisition method of accounting. Results of operations
of an acquired business are included from the date of acquisition. Management estimates the fair value of the acquired assets,
including identifiable intangible assets, and assumed liabilities based on their estimated fair values as of the date of acquisition.
Goodwill on the Consolidated Balance Sheets represents the cost of a business acquisition in excess of the fair value of the
acquired net assets. The fair value of contingent consideration is recorded as a liability in Other current liabilities and Other
long-term liabilities on the Consolidated Balance Sheets as of the acquisition date. This liability is re-measured at fair value
each quarter end with changes in fair value recognized in Operating Expenses – Other on the Consolidated Statements of
Income. For a discussion regarding the approach used to estimate the fair value of such liabilities, see Note (5).
(f) Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments with original maturities of 90 days or less at the date of
acquisition, which includes money market accounts and deposits with banks.
(g) Investments
Federated's investments are categorized as Investments—affiliates, Investments—consolidated investment companies or
Investments—other on the Consolidated Balance Sheets. Investments—affiliates represent Federated’s available-for-sale
investments in Federated-sponsored fluctuating-value mutual funds. These investments are carried at fair value with unrealized
gains or losses on these securities included in Accumulated other comprehensive loss, 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 on
securities, net on the Consolidated Statements of Income. Investments—consolidated investment companies represent trading
securities held by Federated as a result of consolidating certain Federated-sponsored investment companies. Investments—other
represent other trading investments held in Separate Accounts for which Federated is the beneficiary. Trading securities are
carried at fair value with changes in fair value recognized in Gain on securities, net on the Consolidated Statements of Income.
See Note (6) for additional information regarding investments held as of December 31, 2014 and 2013.
The fair value of Federated's investments is generally 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. See Note (5) for additional information regarding the fair value
of investments held as of December 31, 2014 and 2013. 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. There were no impairments to investments
recognized during the years ended December 31, 2014, 2013, and 2012.
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(h) Derivatives and Hedging Instruments
From time to time, Federated may consolidate an investment product that holds freestanding derivative financial instruments for
trading purposes. Federated reports such derivative instruments at fair value and records the changes in fair value in Gain on
securities, net on the Consolidated Statements of Income.
From time to time, Federated may also enter into and designate as accounting hedges derivative financial instruments to hedge
interest-rate exposures with respect to variable-rate loan facilities (cash flow hedges) or to hedge foreign-currency exchange
risk with respect to non-U.S. dollar trading investments in consolidated investment companies (net investment hedges). To
qualify for hedge accounting, the derivative must be deemed to be highly effective in offsetting the designated changes in the
hedged item. For cash flow hedges and net investment hedges, the effective portions of the change in the fair value of the
derivative are reported as a component of Accumulated other comprehensive loss, net of tax on the Consolidated Balance
Sheets and subsequently reclassified to earnings in the period or periods during which the hedged item affects earnings. The
change in fair value of the ineffective portion of the derivative, if any, is recognized immediately in earnings. If it is determined
that the derivative instrument is not highly effective, hedge accounting is discontinued. If hedge accounting is discontinued
because it is no longer probable that a forecasted transaction will occur, the derivative will continue to be recorded on the
Consolidated Balance Sheets at its fair value with changes in fair value included in current earnings, and the gains and losses in
Accumulated other comprehensive loss, net of tax will be recognized immediately into earnings. If hedge accounting is
discontinued because the hedging instrument is sold, terminated or no longer designated, the amount reported in Accumulated
other comprehensive loss, net of tax up to the date of sale, termination or de-designation continues to be reported in
Accumulated other comprehensive loss, net of tax until the forecasted transaction or the hedged item affects earnings. See
Note (5) and Note (10) for additional information on the fair value of the cash flow hedge held at December 31, 2014.
Federated did not hold any net investment hedges at December 31, 2014 or 2013.
(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. Depreciation and amortization expense is recorded in Office and
occupancy on the Consolidated Statements of Income. As property and equipment are taken out of service, the cost and related
accumulated depreciation and amortization are removed. During 2014 and 2013, $7.4 million and $5.1 million, respectively, of
fully depreciated assets were taken out of service. The write-off of any residual net book value is reflected as a loss in
Operating Expenses – Other on 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 on the Consolidated Statements of Income. There were no impairment adjustments recognized during the
years ended December 31, 2014, 2013 and 2012.
(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
in accordance with the applicable accounting guidance relating to intangibles—goodwill and other—internal-use software.
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 and Goodwill
Intangible assets, consisting primarily of goodwill and renewable investment advisory contracts 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.
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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; and (4) 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 and incremental operating expenses 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 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
available. Federated uses a qualitative approach to test for potential impairment of goodwill. If after considering various factors,
management determines that it is more likely than not that goodwill is impaired, a two-step process to test for and measure
impairment is performed 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 equity, Federated’s
goodwill would be considered for possible impairment. There were no impairments to goodwill recognized during the years
ended December 31, 2014, 2013 or 2012.
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. The contracts generally renew annually and the value of these acquired
assets assumes renewal. These indefinite-lived intangible assets are reviewed for impairment annually using a qualitative
approach which requires that positive and negative evidence collected as a result of considering various factors be weighed in
order to determine whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired. In
addition, on a quarterly basis management reconsiders whether events or circumstances indicate that a change in the useful life
may have occurred. Indicators of a possible change in useful life monitored by management include a significant decline in the
level of managed assets, changes to legal, regulatory or contractual provisions of the renewable investment advisory contracts
and reductions in underlying operating cash flows. Federated estimates the fair value of the indefinite-lived intangible asset and
compares it to the book value of the asset to determine whether an impairment charge is necessary. Impairment is indicated
when the carrying value of the intangible asset exceeds its fair value. There were no impairments to indefinite-lived intangible
assets recognized during the years ended December 31, 2014, 2013 or 2012.
Federated generally amortizes finite-lived identifiable intangible assets on a straight-line basis over their estimated useful lives,
which range from 7 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 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. There were no impairments to
finite-lived intangible assets recognized during the years ended December 31, 2014, 2013 or 2012.
(l) Deferred Sales Commissions
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.
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For share classes that pay both a distribution fee and CDSC, Federated generally capitalizes a portion of the upfront
commissions as deferred sales commissions, dependent upon expected recoverability rates. The deferred sales commission asset
(included in Other long-term assets on the Consolidated Balance Sheets) is amortized over the estimated period of benefit of up
to eight years. Deferred sales commission amortization expense was $12.7 million, $9.2 million and $7.5 million for 2014,
2013 and 2012, respectively, and was included in Operating Expenses – Other on the Consolidated Statements of Income.
Distribution and shareholder service fees are recognized in Other service fees, net—affiliates on 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. Federated reviews the carrying value of 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 future cash flows of the underlying asset to determine
whether an impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the deferred sales
commission asset is written down to its estimated fair value determined using discounted cash flows. There were no
impairments to the deferred sales commission asset during the years ended December 31, 2014, 2013 or 2012.
For share classes that do not pay both a distribution fee and CDSC, Federated expenses the cost of the upfront commission as
incurred in Distribution expense on the Consolidated Statements of Income and credits Distribution expense for any
CDSCs collected.
(m) Foreign Currency Translation
The balance sheets of certain wholly owned foreign subsidiaries of Federated and certain consolidated foreign-denominated
investment products are translated at the current exchange rate as of the end of the reporting 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 loss, net of tax on the
Consolidated Balance Sheets. Foreign currency transaction gains and losses are reflected in Operating Expenses – Other on 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.
(o) Revenue Recognition
Revenue from providing investment advisory, administrative and other services (including distribution and shareholder
servicing) 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 pricing services and 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 AUM were priced in this manner by Federated management. For Separate Accounts that are
not registered investment companies under the 1940 Act, the fair value of portfolio investments is primarily determined as
specified in applicable customer agreements, including in agreements between the customer and the customer's third-party
custodian. Federated may waive certain fees for competitive reasons, such as to maintain positive or zero net yields on certain
money market funds, to meet regulatory requirements or to meet contractual requirements. Federated waived fees of $764.3
million, $802.5 million and $709.3 million for the years ended December 31, 2014, 2013 and 2012, respectively, nearly all of
which was for competitive reasons. The decrease for the year ended December 31, 2014 as compared to the same period of
2013 was primarily due to a $57.2 million decrease in competitive waivers, partially offset by a $21.6 million increase in fee
waivers to maintain positive or zero net yields. Fee waivers may increase as a result of continued waivers to maintain positive
or zero net yields and for other competitive reasons. Fee waivers to maintain positive or zero net yields are partially offset by a
related reduction to distribution expense and net income attributable to noncontrolling interests (see Note (3) for additional
information on the net impact of these waivers).
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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 as an agent. The primary factors considered include: (1) whether the customer holds Federated or the service
provider 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 fair value of Federated’s Class B common stock on the date of grant and the
purchase price paid by the employee, if any. Federated’s awards are generally subject to graded vesting schedules.
Compensation and related 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 and related expense also includes dividends paid on
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. The liability is then amortized when
scheduled payments are in excess of the straight-line rent expense. 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 are distributed or are no longer expected to be used, at which time their costs are expensed. Federated
expensed advertising costs of $2.2 million, $2.9 million and $2.7 million in 2014, 2013 and 2012, respectively, which were
included in Advertising and promotional expense on the Consolidated Statements of Income.
(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.
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(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 required
to be considered in the computation of earnings per share. Dividends paid on unvested restricted shares and their proportionate
share of undistributed earnings, if any, are excluded from the computation of earnings per share attributable to Federated
Investors, Inc.
(u) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax 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, foreign currency
translation adjustments and unrealized gain or loss on the effective portion of derivative instruments designated and qualifying
as a cash flow or net investment hedge.
(v) Loss Contingencies
Federated accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings, if any, 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 lawsuit 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 on the Consolidated Statements
of Income when receipt is deemed probable, or when final approval is received by the insurance carrier.
(w) Business Segments
Business or operating segments are defined as a component of an enterprise that engages in activities from which it may earn
revenue and incur expenses for which discrete 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
available. Federated operates in one operating segment, the investment management business, nearly all of which is conducted
within the U.S. 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) Investment Companies
Effective, January 1, 2014, Federated adopted FASB Accounting Standards Update (ASU) 2013-08, Financial Services-
Investment Companies (Topic 946) amending the criteria for an entity to qualify as an investment company under GAAP. Any
entity regulated under the 1940 Act is automatically an investment company under the new definition. The update also amends
certain disclosure requirements and measurement criteria. The adoption of the update did not have a material impact on
Federated's Consolidated Financial Statements as the consolidated sponsored products continue to meet the investment
company criteria.
(b) Revenue Recognition
On May 28, 2014, the FASB issued as final, ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which
supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The update is effective for interim and annual
reporting periods in fiscal years beginning after December 15, 2016 and prohibits early adoption. The update allows for the use
of either the retrospective or modified retrospective approach of adoption. Management is currently evaluating the available
transition methods and the potential impact of adoption on Federated's Consolidated Financial Statements.
(c) Consolidation
On February 18, 2015, the FASB issued as final, ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation
Analysis, which affects reporting organizations that are required to evaluate whether they should consolidate certain legal
entities. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015.
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Early adoption is permitted, including adoption in an interim period. The update allows for the use of either a full retrospective
or a modified retrospective adoption approach. Management is currently evaluating the available transition methods and the
potential impact of adoption on Federated's Consolidated Financial Statements.
(3) Concentration Risk
(a) Revenue Concentration by Asset Class
The following table summarizes the percentage of total revenue earned from Federated's asset classes over the last three years:
Money market assets
Equity assets
Fixed-income assets
2014
32%
45%
22%
2013
39%
37%
23%
2012
47%
31%
21%
The change in the relative proportion of Federated's revenue attributable to money market assets from 2013 to 2014 was
primarily the result of lower average money market assets and increases in fee waivers for certain money market funds to
maintain positive or zero net yields. The change in the relative proportion of Federated's revenue attributable to money market
assets from 2012 to 2013 was primarily the result of increases in fee waivers for certain money market funds to maintain
positive or zero net yields. The change in the relative proportion of Federated's revenue attributable to equity assets from 2013
to 2014 was primarily the result of higher average equity assets due to net sales, and to a lesser extent, market appreciation. The
change in the relative proportion of Federated's revenue attributable to equity assets from 2012 to 2013 was primarily the result
of higher average equity assets due to market appreciation, and to a lesser extent, net sales. A significant change in Federated’s
investment management business (such as its money market business) or a significant reduction in AUM (such as money
market assets) due to regulatory changes, changes in the financial markets, such as significant and rapid increases in interest
rates over a short period of time causing certain investors to prefer direct investments in interest-bearing securities, the
availability, supply and/or market interest in repurchase agreements and other investments, significant deterioration in investor
confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and
resulting fee waivers, investor preferences for deposit products or other FDIC-insured products or other circumstances, could
have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
Current Regulatory Environment
Federated and its investment management business are subject to extensive regulation in the U.S. and abroad. Federated and its
products (such as the Federated Funds) and strategies are subject to federal securities laws, principally the 1933 Act, 1934 Act,
the 1940 Act, the Advisers Act, state laws regarding securities fraud and regulations promulgated by various regulatory
authorities, as well as foreign laws and regulations promulgated by foreign regulatory authorities. In 2014, among other
developments, the SEC promulgated new money market reform in the form of the 2014 Rules. Federated is analyzing the
potential impact of these reforms. Internationally, among other developments, European money market fund reforms, similar in
some respects to the U.S. reforms, continued to be considered in 2014, but have not yet been finalized. Federated is reallocating
certain resources from regulatory efforts and continues to dedicate internal and external resources to analyze the potential
impact of the 2014 Rules, and certain related regulations, on Federated’s business, results of operations, financial condition and/
or cash flows. Federated also is reallocating resources to plan and begin the implementation of product development and
restructuring initiatives in response to the 2014 Rules. See Item 1 - Business under the caption Regulatory Matters and Item 1A
- Risk Factors under the caption Potential Adverse Effects of Changes in Laws and Regulations on Federated’s Investment
Management Business for additional information.
Historically Low Short-Term Interest Rates
For several years, the FOMC has kept the near-zero federal funds rate unchanged and short-term interest rates continued to be
at all-time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the
fund's operating expenses due to these historically low short-term interest rates. Since the fourth quarter of 2008, Federated has
voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money
market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in
distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and
agreement with third-party intermediaries to share the impact of the waivers.
These voluntary fee waivers are calculated as a percentage of AUM in certain money market funds and thus will vary depending
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upon the asset levels in such funds. In addition, the level of waivers are dependent on several other factors including, but not
limited to, yields on instruments available for purchase by the money market funds, changes in expenses of the money market
funds and changes in the mix of money market assets. In any given period, a combination of these factors drives the amount of
fee waivers necessary in order for certain funds to maintain positive or zero net yields. As an isolated variable, an increase in yields
on instruments held by the money market funds will cause the pre-tax impact of fee waivers to decrease. Conversely, as an isolated
variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.
With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market
funds as well as the mix among certain share classes that vary in pricing structure will impact the level of fee waivers.
Generally, prime money market funds waive less than government money market funds as a result of higher gross yields on the
underlying investments. As such, as an isolated variable, an increase in the relative proportion of average managed assets
invested in prime money market funds as compared to total average money market fund assets should typically result in lower
waivers to maintain positive or zero net yields. Conversely, the opposite would also be true.
The impact of such fee waivers on various components of Federated's Consolidated Statements of Income was as follows for
the years ended December 31:
in millions
Revenue
Less: Reduction in Distribution expense
Operating income
Less: Reduction in Noncontrolling interest
Pre-tax impact
2014
(410.6) $
280.9
(129.7)
10.7
(119.0) $
2013
(389.0) $
277.1
(111.9)
6.8
(105.1) $
$
$
2012
(291.0)
218.5
(72.5)
1.3
(71.2)
The negative pre-tax impact of fee waivers to maintain positive or zero net yields on certain money market funds increased in
2014 as compared to 2013 primarily as a result of lower yields on instruments held by the money market funds partially offset
by lower average money market assets. During 2013, the negative pre-tax impact of fee waivers to maintain positive or zero net
yields on certain money market funds increased compared to 2012 primarily as a result of lower yields on instruments held by
the money market funds. (See Note (20) for information regarding the quarterly pre-tax impact of these fee waivers.)
Based on recent commentary from the FOMC in a January 28, 2015 press release, (i.e. "the current 0 to 1/4 percent target range
for the federal funds rate remains appropriate,") Federated is unable to predict when the FOMC will increase their target for the
federal funds rate. As such, fee waivers to maintain positive or zero net yields on certain money market funds and the related
reduction in distribution expense and net income attributable to noncontrolling interests could continue for the foreseeable
future. Assuming asset levels and mix remain constant and based on recent market conditions, fee waivers for the first quarter
of 2015 may result in a negative pre-tax impact on income of approximately $28 million, which is slightly less than the impact
to each quarter included in 2014 (see Note (20) for additional information on the quarterly impact of these fee waivers). See
Management's Discussion and Analysis for additional information on management's expectations regarding fee waivers. While
the level of fee waivers are impacted by various factors, increases in short-term interest rates that result in higher yields on
securities purchased in money market fund portfolios would likely reduce the negative pre-tax impact of these waivers. The
actual amount of future fee waivers, the resulting negative impact of these waivers and Federated's ability to recover the net
pre-tax impact of such waivers (that is, the ability to capture the pre-tax income going forward, not re-capture previously
waived amounts) could vary significantly from management's estimates as they are contingent on a number of variables
including, but not limited to, changes in assets within the money market funds, yields on instruments available for purchase by
the money market funds, actions by the Governors, the FOMC, Treasury Department, the SEC, FSOC and other governmental
entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets,
changes in money market product structures and offerings, changes in the distribution fee arrangements with third parties,
Federated's willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by
any one or more third parties.
A listing of Federated’s risk factors is included in Item 1A - Risk Factors.
(b) Revenue Concentration by Investment Fund
A significant portion of Federated's total revenue for 2014 was derived from services provided to a sponsored fund, the
Federated Kaufmann Fund (11%). A significant and prolonged decline in the AUM in this fund could have a material adverse
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effect on Federated’s future revenues and, to a lesser extent, net income, due to a related reduction to distribution expenses
associated with this fund.
(4) Consolidation
Federated is involved with various entities in the normal course of business that may be deemed to be voting rights entities
(VREs) or VIEs. In accordance with Federated’s consolidation accounting policy, Federated first determines whether the entity
being evaluated is a VRE 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 2014 and 2013.
(a) Consolidated Voting Rights Entities
Federated has a majority interest (50.5%) and acts as the general partner in Passport Research Ltd., a limited partnership.
Edward D. Jones & Co., L.P. is the limited partner with a 49.5% interest. The partnership is an 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 Variable Interest Entities
From time to time, Federated invests in investment companies that meet the definition of a VIE for general corporate
investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance
history. Most of Federated’s sponsored investment companies meet the definition of a VIE primarily due to their typical series
fund structure in which 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. Federated’s
investment in investment companies represents its maximum exposure to loss. Federated's conclusion to consolidate an
investment company may vary from period to period, most commonly as a result of changes in its percentage interest in the
entity resulting from changes in the number of shares held by either Federated or third parties. Given that the entities follow
investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or
losses for Federated.
As of December 31, 2014 and 2013, Federated was deemed to be the primary beneficiary of and therefore consolidated several
investment companies as a result of its majority ownership interest in the investment companies. The following table presents
the balances related to the consolidated investment companies that were included on the Consolidated Balance Sheets as well as
Federated's net interest in the investment companies at December 31:
in millions
Cash and cash equivalents
Investments—consolidated investment companies
Receivables
Less: Liabilities
Less: Redeemable noncontrolling interest in subsidiaries
Federated's net interest in consolidated investment companies
2014
$
1.9
31.9
0.3
2.7
3.7
2013
$
1.1
53.5
0.9
1.6
15.5
$ 27.7
$ 38.4
Federated's net interest in the consolidated investment companies of $27.7 million and $38.4 million at December 31, 2014 and
2013, respectively, represents the value of Federated's economic ownership interest in these sponsored investment companies.
The assets of the consolidated investment companies are restricted for use by the respective investment company. The liabilities
of the consolidated investment companies primarily represent investments sold short for one fund, and otherwise represent
operating liabilities of the entities. The liabilities are primarily classified as Other current liabilities on Federated's Consolidated
Balance Sheets.
During the fourth quarter of 2014, Federated consolidated two newly launched investment companies for which Federated
provided the initial seed capital. Accordingly, Federated consolidated $7.3 million in Investments—consolidated investment
companies on the Consolidated Balance Sheets as of the date of consolidation.
During the third quarter of 2014, Federated consolidated an investment company, in this case a sponsored money market fund,
for which it was deemed to be the primary beneficiary following a September 30, 2014 vote by the fund shareholders approving
the merger of the fund into another sponsored money market fund and Federated absorbing the majority of the remaining net
operating expenses of the fund through the merger date. Accordingly, Federated consolidated $90.5 million in Investments—
consolidated investment companies (of which $14.7 million represented Federated's investment previously recorded as Cash
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and cash equivalents) and $75.7 million in Redeemable noncontrolling interest in subsidiaries on the Consolidated Balance
Sheets as of the date of consolidation. During the period of consolidation, approximately $8.8 million was redeemed by
noncontrolling interests. During the fourth quarter of 2014, this fund was deconsolidated due to it merging into another
sponsored money market fund. As a result, Federated deconsolidated $81.7 million in Investments—consolidated investment
companies (of which $14.7 million represented Federated's investment subsequently recorded as Cash and cash equivalents)
and $66.9 million in Redeemable noncontrolling interest in subsidiaries on the Consolidated Balance Sheets as of the date of
deconsolidation. There was no impact to the Consolidated Statements of Income in 2014 as a result of deconsolidation.
Also, during the third quarter of 2014, Federated deconsolidated an additional investment company. The decision to
deconsolidate was based on a determination that Federated was no longer the primary beneficiary of the investment company as
a result of new subscriptions in fund shares by unrelated third parties. Accordingly, Federated deconsolidated $30.6 million in
Investments—consolidated investment companies, $6.8 million in Cash and cash equivalents and $21.0 million in Redeemable
noncontrolling interest in subsidiaries on the Consolidated Balance Sheets as of the date of deconsolidation. There was no
impact to the Consolidated Statements of Income in 2014 as a result of deconsolidation.
Neither creditors nor equity investors in the investment companies have any recourse to Federated’s general credit. In the
ordinary course of business, from time to time, Federated may choose to waive certain fees or assume operating expenses of
sponsored investment companies for competitive, regulatory or contractual reasons (see Note (1)(o) for information regarding
fee waivers). Federated has not provided financial support to any of these entities outside the ordinary course of business.
(c) Non-Consolidated Variable Interest Entities
Federated's involvement with certain investment companies that are deemed to be VIEs includes serving as the investment
manager, or at times, holding a minority interest or both. Federated’s variable interest is not deemed to absorb the majority of
the entity's expected losses or receive the majority of the entity's expected residual returns. Therefore, Federated is not the
primary beneficiary of these VIEs and has not consolidated these entities.
At December 31, 2014 and 2013, Federated's investment and maximum risk of loss related to unconsolidated VIEs were
entirely related to investment companies and totaled $252.1 million and $220.5 million, respectively. Of the $252.1 million and
$220.5 million invested in these entities at December 31, 2014 and 2013, respectively, $107.3 million and $92.2 million,
respectively, represents investments in money market funds included in Cash and cash equivalents. The remaining $144.8
million and $128.3 million are primarily recorded in Investments—affiliates on the Consolidated Balance Sheets as of
December 31, 2014 and 2013, respectively. AUM for these unconsolidated investment companies totaled $273.5 billion and
$280.3 billion at December 31, 2014 and 2013, respectively. Receivables from sponsored investment companies for advisory
and other services totaled $12.4 million and $13.5 million at December 31, 2014 and 2013, respectively.
In the ordinary course of business, from time to time, Federated may choose to waive certain fees or assume operating expenses
of these sponsored investment companies for competitive, regulatory or contractual reasons (see Note (1)(o) for information
regarding fee waivers). Federated has not provided financial support to any of these entities outside the ordinary course
of business.
(5) Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date.
A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the
inputs to the valuation of financial assets and liabilities. The three levels are:
Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets may include equity and debt securities
that are traded in an active exchange market, including shares of mutual funds.
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. Level 2 assets and liabilities may include debt and equity securities, purchased loans and
over-the-counter derivative contracts whose fair value is determined using a pricing model without significant
unobservable market data inputs.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers
are unobservable in active markets.
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(a) Fair Value Measurements on a Recurring Basis
The following table presents fair value measurements for classes of Federated’s financial assets and liabilities measured at fair
value on a recurring basis at December 31:
in thousands
Financial Assets
2014
Fair Value Measurements Using
2013
Fair Value Measurements Using
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Cash and cash equivalents
Available-for-sale equity
securities
Trading securities – equity
Trading securities – debt
Other1
$ 115,267
$
0
$
119,435
17,553
0
31
23,755
13,840
7,488
14
Total financial assets
$ 252,286
$ 45,097
$ 115,267
$ 104,443
$
0
$
143,190
31,393
7,488
45
81,550
11,925
0
0
47,863
9,906
36,491
159
$ 297,383
$ 197,918
$ 94,419
0
0
0
0
0
0
0
$
$
0
0
0
0
0
0
0
$ 104,443
129,413
21,831
36,491
159
$ 292,337
$
5,061
$
$
Financial Liabilities
Interest rate swap
Acquisition-related future
consideration liabilities
Other2
$
0
0
1,979
$
425
$
425
$
$
5,061
0
0
1,909
0
1,909
1,979
0
2
6,489
0
6,489
1,120
0
0
1,118
Total financial liabilities
$
1,979
$
425
$ 1,909
$
4,313
$
1,118
$
5,063
$ 6,489
$ 12,670
1
2
Amounts include futures contracts and/or foreign currency forward contracts held within certain consolidated sponsored investment
companies.
Amounts include investments sold short, futures contracts and/or foreign currency forward contracts held within certain consolidated
sponsored investment companies.
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a
recurring basis. Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at
December 31, 2014 or 2013.
Cash and cash equivalents
Cash and cash equivalents include investments in money market funds and deposits with banks. Investments in Federated
money market funds totaled $107.6 million and $94.4 million at December 31, 2014 and 2013, respectively. Cash investments
in money market funds are valued under the market approach through the use of quoted market prices in an active market,
which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.
Available-for-sale equity securities
Available-for-sale equity securities include investments in sponsored fluctuating-value mutual funds and are included in
Investments—affiliates on the Consolidated Balance Sheets. For investments in mutual funds that are publicly available, the
securities are valued under the market approach through the use of quoted market prices available in an active market, which is
the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For one investment in a mutual fund that is
not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions, the security
is valued using NAV as a practical expedient and is classified as Level 2. There is no modeling or additional information needed
to arrive at the fair values of any of these investments.
Trading securities—equity
These equity trading securities primarily represent the equity securities held by consolidated sponsored investment companies
(included in Investments—consolidated investment companies on the Consolidated Balance Sheets) as well as certain equity
investments held in separate accounts for which Federated is the beneficiary (included in Investments—other on the
Consolidated Balance Sheets). For the publicly traded equity securities available in an active market, whether domestic or
foreign, the fair value of these securities is often classified as Level 1 when the fair value is based on unadjusted quoted market
prices. From time to time, however, the fair value of certain equity securities traded principally in foreign markets and held by
consolidated investment companies may be determined by third-party pricing services when a country's exchange is closed due
to a holiday or when there has been a significant trend in the U.S. equity markets or in index futures trading between the time
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the foreign market closes and the pricing time of the consolidated investment company. The determination to use a third-party
pricing service versus the unadjusted quoted market price is the cause for transfers between Level 1 and Level 2 for these
securities. For the period between December 31, 2013 and December 31, 2014, $35 thousand of investments transferred from
Level 1 to Level 2. During the same period, $0.1 million of investments transferred from Level 2 to Level 1. For the period
between December 31, 2012 and December 31, 2013, $0.1 million of investments transferred from Level 1 to Level 2. During
the same period, $0.3 million of investments transferred from Level 2 to Level 1. Transfers into and out of Level 1 and Level 2
of the fair value hierarchy are reported at fair value as of the beginning of the period in which the transfers occur.
Trading securities—debt
At December 31, 2014 debt trading securities primarily represent U.S. bonds held by consolidated sponsored investment
companies. At December 31, 2013, debt trading securities primarily represent foreign bonds held by consolidated sponsored
investment companies. The fair value of these securities may include observable market data such as valuations provided by
independent pricing services after considering factors such as the yields or prices of investments of comparable quality, coupon,
maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers
and general market conditions (Level 2).
Foreign currency forward contracts
The fair value of foreign currency forward contracts is primarily included in Receivables, net or Other current liabilities on the
Consolidated Balance Sheets, representing contracts held by certain consolidated sponsored investment companies as part of
their investment strategy. Pricing is determined by interpolating a value by utilizing the spot foreign exchange rate and forward
points (based on the spot rate and currency interest rate differentials), which are all inputs that are observable in active markets
(Level 2).
Futures contracts
The fair value of futures contracts is primarily included in Receivables, net or Other current liabilities on the Consolidated
Balance Sheets, representing contracts held by certain consolidated sponsored investment companies as part of their investment
strategy. Pricing is determined by using the value reported at settlement or closing price (Level 1).
Interest rate swap
The fair value of Federated's Swap at December 31, 2014 is included in Other current liabilities on the Consolidated Balance
Sheets. Pricing is determined based on a third-party, model-derived valuation in which all significant inputs are observable in
active markets (Level 2) including the Eurodollar future rate and yields for three- and thirty-year Treasury securities. See
Note (10) for additional information.
Acquisition-related future consideration liabilities
From time to time, pursuant to purchase and sale agreements entered into in connection with certain business combinations,
Federated may be required to make future consideration payments if certain contingencies are met. See Note (18) for additional
information regarding the nature and timing of these payments. In connection with these arrangements entered into after
January 1, 2009, Federated records a liability representing the estimated fair value of future consideration payments as of the
acquisition date. The liability is subsequently re-measured at fair value on a recurring basis with changes in fair value recorded
in earnings. As of December 31, 2014, acquisition-related future consideration liabilities were primarily recorded in Other
current liabilities ($1.9 million) on the Consolidated Balance Sheets. Management estimated the fair value of future
consideration payments based primarily upon expected future cash flows using an income approach valuation methodology
with unobservable data inputs (Level 3). As of December 31, 2014, significant inputs involving unobservable market data
included (1) an estimated rate of change for underlying AUM ranging from 0% - 8% per year (weighted average of 4%); (2) an
estimate of 0.03% of the impact of fee waivers to maintain positive or zero net yields on the contractually-derived net revenue
per managed asset assumptions; and (3) an estimated discount rate of 16% based on the current estimated market rate of return.
Assuming no other changes in model inputs, the fair value of the future consideration liability will increase, resulting in
additional Operating Expenses – Other in the period of change if: (1) the underlying AUM grow at a rate that is greater than the
assumed rate, (2) the actual impact of fee waivers to maintain positive or zero net yields on the net revenue is less than the
assumed amount, or (3) the discount rate decreases. Conversely, the fair value of the future consideration liability will decrease
if the inverse occurs for any of these inputs, assuming no other changes.
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The following table presents a reconciliation of the beginning and ending balances for Federated’s liability for future
consideration payments related to these acquisitions for each year presented:
in thousands
Beginning balance
New acquisition adjustment1
Changes in fair value2
Contingent consideration payments
Ending balance
1
2014
$ 6,489
0
(1,589)
(2,991)
$ 1,909
2013
$ 11,759
330
(941)
(4,659)
$ 6,489
2012
$ 13,404
3,361
(793)
(4,213)
$ 11,759
Amounts include the preliminary fair value estimate of the contingent payment liability recorded in connection with a new acquisition
or the revision thereof upon finalization of the valuation process related to initial purchase accounting.
Amounts were included as a decrease to Operating Expenses – Other on the Consolidated Statements of Income.
2
Investments sold short
The fair value of investments sold short within a consolidated sponsored investment company is included in Other current
liabilities on the Consolidated Balance Sheets. The investments sold short primarily relate to domestic equity securities that are
available in an active exchange market. The fair value of these investments sold short is based on unadjusted quoted market
prices and is classified as Level 1.
(b) Fair Value Measurements on a Nonrecurring Basis
Federated did not hold any assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2014.
(c) Fair Value Measurements of Other Financial Instruments
The fair value of Federated’s debt is estimated by management based upon expected future cash flows utilizing a discounted
cash flow methodology under the income approach. The fair value of the liability is estimated using observable market data
(Level 2) in estimating inputs including the discount rate. Based on this fair value estimate, the carrying value of debt appearing
on the Consolidated Balance Sheets approximates fair value.
(6) Investments
Investments on the Consolidated Balance Sheets as of December 31, 2014 and 2013 included available-for-sale and trading
securities. At December 31, 2014 and 2013, Federated held investments totaling $143.2 million and $129.4 million,
respectively, in fluctuating-value sponsored mutual funds that were classified as available-for-sale securities and were included
in Investments—affiliates on the Consolidated Balance Sheets.
Available-for-sale securities (see Note (1)(g)) were as follows:
2014
Gross Unrealized
in thousands
Equity mutual funds
Fixed-income mutual funds
Total fluctuating-value
mutual funds
Cost
$ 26,887
118,081
Gains
$
1,216
110
(Losses)
$
(737) $ 27,366
115,824
(2,367)
Estimated
Fair
Value
2013
Gross Unrealized
Cost
Gains
(Losses)
$ 24,737
102,072
$
2,423
786
$
0
(605)
Estimated
Fair
Value
$ 27,160
102,253
$ 144,968
$
1,326
$ (3,104) $ 143,190
$ 126,809
$
3,209
$
(605) $ 129,413
The increase in available-for-sale securities at December 31, 2014 as compared to December 31, 2013, was primarily due to an
increase of $16.1 million as a result of the deconsolidation of a sponsored investment company which resulted in the
reclassification of Federated's investment from trading into available-for-sale securities during the same period, partially offset
by net redemptions of available-for-sale securities of $2.1 million.
Federated’s trading securities totaled $38.9 million and $58.3 million at December 31, 2014 and 2013, respectively. Federated
consolidates certain investment companies into its Consolidated Financial Statements as a result of Federated’s controlling
financial interest in the companies (see Note (4)). All investments held by these investment companies, which primarily
represented sponsored investment companies, were included in Investments—consolidated investment companies on
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Federated’s Consolidated Balance Sheets as of December 31, 2014 and 2013. Investments—other on the Consolidated Balance
Sheets represented other trading investments held in Separate Accounts for which Federated is the beneficiary.
Federated’s trading securities as of December 31, 2014 were primarily composed of stocks of large U.S. and international
companies ($21.3 million) and domestic debt securities ($7.5 million). Federated’s trading securities as of December 31, 2013
were primarily composed of domestic and foreign debt securities ($36.5 million) and stocks of large U.S. and international
companies ($17.0 million).
The following table presents gains and losses recognized in Gain on securities, net on the Consolidated Statements of Income in
connection with investments and economic derivatives held by certain consolidated investment companies for the years ended
December 31:
in thousands
Unrealized (loss) gain
Trading securities
Derivatives1
Realized gains2
Available-for-sale securities
Trading securities
Derivatives1
Realized losses2
Available-for-sale securities
Trading securities
Derivatives1
Gain on securities, net3
2014
2013
2012
$ (2,578) $ 2,036
(49)
(147)
$ 1,614
72
5,359
4,514
214
15,390
1,306
1,083
4,439
1,200
310
(91)
(1,848)
(451)
$ 4,972
(1,561)
(870)
(349)
$ 16,986
0
(627)
(97)
$ 6,911
1
2
3
Amounts related to the settlement of economic derivatives held by certain consolidated sponsored products.
Realized gains and losses are computed on a specific-identification basis.
Amounts related to consolidated investment companies totaled $(0.6) million, $2.6 million and $2.0 million for 2014, 2013 and
2012, respectively.
(7) Intangible Assets and Goodwill
Federated’s identifiable intangible assets and goodwill consisted of the following at December 31:
in thousands
Finite-lived intangible assets:
Customer relationships
Noncompete agreements
Total finite-lived intangible assets
Indefinite-lived intangible assets:
Renewable investment advisory contracts
Trade names
Total indefinite-lived intangible assets
Cost
$ 43,966
500
44,466
68,970
1,900
70,870
2014
Accumulated
Amortization
Carrying
Value
Cost
2013
Accumulated
Amortization
Carrying
Value
$ (39,891) $
(435)
(40,326)
4,075
65
4,140
$ 43,966
4,594
48,560
$ (38,110) $
(4,343)
(42,453)
5,856
251
6,107
N/A
N/A
N/A
68,970
1,900
70,870
68,595
1,900
70,495
N/A
N/A
N/A
68,595
1,900
70,495
Goodwill
658,837
Total identifiable intangible assets and goodwill $ 774,173
N/A
658,837
$ (40,326) $ 733,847
658,743
$ 777,798
N/A
658,743
$ (42,453) $ 735,345
The decrease of $4.1 million in the cost of the total finite-lived intangible assets at December 31, 2014 as compared to
December 31, 2013 relates to the write-off of a fully amortized noncompete agreement relating to a prior year acquisition.
Amortization expense for finite-lived intangible assets was $2.0 million, $2.6 million and $3.4 million in 2014, 2013 and 2012,
respectively. This expense was included in Operating Expenses – Other on the Consolidated Statements of Income for each
period.
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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
2015
2016
2017
2018
2019
$
1.4
1.0
0.6
0.6
0.5
(8) Property and Equipment
Property and equipment consisted of the following at December 31:
in thousands
Computer software and hardware
Leasehold improvements
Transportation equipment
Office furniture and equipment
Total cost
Accumulated depreciation
Property and equipment, net
Estimated Useful Life
2 to 7 years
Up to term of lease
3 to 12 years
5 to 10 years
2014
$ 49,069
22,558
17,897
6,544
96,068
(57,430)
$ 38,638
2013
$ 52,206
18,355
17,897
6,421
94,879
(54,791)
$ 40,088
Depreciation expense was $10.0 million, $9.1 million and $8.1 million for the years ended December 31, 2014, 2013 and
2012, respectively, and was recorded in Office and occupancy expense on the Consolidated Statements of Income.
(9) Insurance Proceeds
As Federated received payments on insurance claims submitted to cover costs primarily associated with various legal
proceedings, the amounts were recorded as a liability. The retention of these advance insurance payments was contingent upon
final approval of the claim by the insurance carrier. In the event that all or a portion of the claim had been denied, Federated
would have been required to repay all or a portion of these advance payments. During the third and fourth quarters of 2012,
Federated received final approvals from various insurance carriers related to $20.2 million of claims. Accordingly, Federated
recognized $20.2 million on the Consolidated Statements of Income as a reduction to Professional service fees. Federated
removed $10.0 million in Other current liabilities in the third quarter 2012 and the remaining $10.2 million in insurance
proceeds was received in the fourth quarter 2012.
(10) Debt and Interest Rate Swap
Debt consisted of the following at December 31:
dollars in thousands
Term Loan
Less: Short-term debt
Long-term debt
Weighted-Average Interest Rate
20132
20141
2.462%
2014
3.646% $ 242,250
25,500
$ 216,750
2013
$ 276,250
77,917
$ 198,333
1
2
As of December 31, 2014, the weighted-average interest rate was calculated based on a fixed-rate in connection with the interest rate
Swap and a variable rate for the amount of the Term Loan not covered by the Swap. See below for additional information.
As of December 31, 2013, the weighted-average interest rate was calculated based on a fixed-rate in connection with the interest rate
Swap in effect at that time.
On June 24, 2014, Federated entered into an unsecured Second Amended and Restated Credit Agreement by and among
Federated, certain of its subsidiaries as guarantors party thereto, a syndicate of 13 banks as Lenders party thereto led by PNC
Bank, National Association as administrative agent, PNC Capital Markets LLC as sole bookrunner and joint lead arranger,
Citigroup Global Markets, Inc. as joint lead arranger, Citibank, N.A. as syndication agent, and TD Bank, N.A. as
documentation agent (Credit Agreement). The Credit Agreement amended and restated Federated's prior unsecured Amended
and Restated Credit Agreement, which was dated June 10, 2011, and scheduled to mature on June 10, 2016 (Prior Credit
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Agreement). The borrowings under the Credit Agreement's term loan facility of $255 million equaled the remaining principal
balance from the Prior Credit Agreement's term loan facility. The Term Loan bears interest based on LIBOR plus a spread,
currently 112.5 basis points. The Credit Agreement qualified for modification accounting treatment.
The Credit Agreement also refinanced the $200 million revolving credit facility under the Prior Credit Agreement. Federated
had no borrowings outstanding on the previous revolving credit facility at the time of refinancing. As of December 31, 2014,
the entire $200 million revolving credit facility was available for borrowings. Similar to the Prior Credit Agreement, certain
subsidiaries entered into an Amended and Restated Continuing Agreement of Guaranty and Suretyship whereby these
subsidiaries guarantee payment of all obligations incurred through the Credit Agreement. Federated pays an annual facility fee,
currently 12.5 basis points. Borrowings under the Credit Agreement's revolving credit facility bear interest at LIBOR plus a
spread, currently 100 basis points.
The Credit Agreement matures on June 24, 2019 and, with respect to the Term Loan, requires quarterly principal payments
totaling $25.5 million in each of the years 2015, 2016 and 2017, $55.8 million in 2018 and $110.0 million in 2019. During
2014, Federated repaid $34.0 million of its borrowings on the Term Loan.
The Swap that Federated entered into with PNC Bank, National Association and certain other banks during 2010 to hedge its
interest rate risk associated with Federated's original term loan facility remains in effect. Under the Swap, Federated will
receive payments based on LIBOR plus a spread and will make payments based on an annual fixed rate of 3.521% for the
amount of the term loan covered by the Swap. As of December 31, 2014, the Swap covered $127.5 million of the term loan and
will be reduced by $63.8 million per quarter, through the expiration of the Swap on April 1, 2015. The remaining amount of the
term loan not covered by the Swap will bear interest at a spread, as previously noted, over LIBOR.
The Swap requires monthly cash settlements of interest paid or received. The differential between the interest paid or interest
received from the monthly settlements is recorded as adjustments to Debt expense on the Consolidated Statements of Income.
The Swap is accounted for as a cash flow hedge and has been determined to be highly effective. Federated evaluates
effectiveness using the long-haul method. Changes in the fair value of the Swap will likely be offset by an equal and opposite
change in the fair value of the hedged item, therefore very little, if any, net impact on reported earnings is expected. The fair
value of the Swap agreement at December 31, 2014, was a liability of $0.4 million which was recorded in Other current
liabilities on the Consolidated Balance Sheets. The entire amount of this loss in fair value, net of tax, was recorded in
Accumulated other comprehensive loss, net of tax on the Consolidated Balance Sheets. During the next three months,
management expects to charge the entire $0.4 million loss to Debt expense on the Consolidated Statements of Income. This
amount could differ from amounts actually recognized due to changes in interest rates subsequent to December 31, 2014.
During the years ended December 31, 2014, 2013 and 2012, $4.7 million, $6.5 million and $7.3 million, respectively, were
charged to Debt expense on the Consolidated Statements of Income as a component of Federated’s fixed interest rate associated
with the Swap.
The Credit Agreement includes representations and warranties, affirmative and negative financial covenants, including an
interest coverage ratio covenant and a leverage ratio covenant, reporting requirements and other non-financial covenants.
Federated was in compliance with all covenants at and during the year ended December 31, 2014 (see the Liquidity and Capital
Resources section of Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for
additional information). The Credit Agreement and the Swap also have certain stated events of default and cross default
provisions which would permit the lenders/counterparties to accelerate the repayment of the debt or to terminate the Swap 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, deterioration in credit rating to below investment grade, notice of lien or
assessment and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.
(11) Employee Benefit Plans
(a) 401(k)/Profit Sharing Plan
Federated offers defined contribution plans to its employees. Its 401(k) plan covers 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 for a total possible match
of 4%. 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 $4.6 million, $4.4
million and $4.2 million for 2014, 2013 and 2012, respectively.
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Vesting in Federated’s matching contributions commences once a participant in the 401(k) plan has worked at least 1,000 hours
per year for two years. Upon completion of this initial 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 the employee is 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 were made to the profit sharing plan
in 2014, 2013 or 2012. At December 31, 2014, the profit sharing plan held 0.5 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. During 2014, 8,804 shares were purchased by employees in this plan and, as of
December 31, 2014, a total of 159,255 shares were purchased by employees in this plan on the open market since the plan’s
inception in 1998.
(12) 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 from time to time. Share-based awards are granted to reward Federated’s
employees and non-management 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 27.1 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, 2014, 4.1 million shares are available under the Plan.
Share-based compensation expense was $21.7 million, $20.6 million and $20.1 million for the years ended December 31, 2014,
2013 and 2012, respectively. The associated tax benefits recorded in connection with share-based compensation expense were
$8.1 million, $7.7 million and $7.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. At
December 31, 2014, the maximum remaining unrecognized compensation expense related to share-based awards approximated
$72 million which is expected to be recognized over a weighted-average period of approximately 6 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 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.
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The following table summarizes activity of non-vested restricted stock awards for the year ended December 31, 2014:
Non-vested at January 1, 2014
Granted1
Vested
Forfeited
Non-vested at December 31, 2014
Restricted
Shares
4,132,374
1,057,981
(879,010)
(20,417)
4,290,928
$
Weighted-
Average Grant-
Date Fair Value
21.67
27.43
23.40
22.19
22.74
$
1
During 2014, Federated awarded 426,931 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. Also during 2014,
Federated awarded 631,050 shares of restricted Federated Class B common stock to certain key employees. The restricted stock
awards generally vest over ten-year periods with restrictions on the vested portions of the awards lapsing on the awards' fifth- and
tenth-year anniversaries.
Federated awarded 1,057,981 shares of restricted Federated Class B common stock with a weighted-average grant-date fair
value of $27.43 to employees during 2014; awarded 989,050 shares of restricted Federated Class B common stock with a
weighted-average grant-date fair value of $24.25 to employees during 2013; and awarded 1,015,273 shares of restricted
Federated Class B common stock with a weighted-average grant-date fair value of $18.06 to employees during 2012.
The total fair value of restricted stock vested during December 31, 2014, 2013 and 2012 was $24.4 million, $18.5 million and
$14.1 million, respectively.
(b) Stock Options
The outstanding stock options as of December 31, 2014 were granted to non-management directors with exercise prices that
equaled the market price of Federated’s Class B common stock on each grant date. All of these stock options were awarded
with no requisite service requirement, were immediately exercisable and expire no later than ten years after the grant date. Each
vested option may be exercised for the purchase of one share of Class B common stock at the exercise price.
The following table summarizes the status of and changes in Federated’s stock option program for the year ended
December 31, 2014:
Outstanding at January 1, 2014
Options exercised
Expired unexercised
Outstanding at December 31, 20141
1
All stock options outstanding at December 31, 2014 were vested and exercisable.
Options
52,500
(6,000)
(10,500)
36,000
Weighted-
Average
Exercise Price
$ 32.18
25.50
30.42
$ 33.81
Weighted-
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic Value
(in millions)
2.5
$
0.1
There were 6,000 options exercised during the year ended December 31, 2014 with an intrinsic value of $30 thousand. During
the years ended December 31, 2013 and 2012, there were no stock options exercised.
There were no stock options granted in 2014, 2013 or 2012.
(c) Non-management Director Stock Award
Federated awarded 5,100, 5,100 and 4,500 shares of Federated Class B common stock to non-management directors in the
second quarters of 2014, 2013 and 2012, respectively. There were no additional awards to non-management directors in 2014,
2013 or 2012.
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(13) 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 $104.8 million, $102.5 million and $256.8 million were paid in 2014, 2013 and 2012, respectively, to holders
of Federated common stock. Of the amount paid in 2012, $156.9 million represented a $1.51 per share special dividend paid in
the fourth quarter. All dividends are considered ordinary dividends for tax purposes.
(b) Treasury Stock
During 2008, the board of directors authorized a share repurchase program that allows Federated to buy back up to 5 million
shares of Class B common stock. The program has no stated expiration date and no other programs existed as of December 31,
2014. The program authorizes executive management to determine the timing and the amount of shares for each purchase. The
repurchased stock is held in treasury for employee share-based compensation plans, potential acquisitions and other corporate
activities. During the year ended December 31, 2014, Federated repurchased 0.9 million shares of common stock for $26.9
million, the majority of which were repurchased in the open market. The remaining shares were repurchased in connection with
employee separations and are not counted against the board-approved share repurchase program. At December 31, 2014,
approximately 0.4 million shares remained available to be purchased under the current buyback program, which remains in
effect. See Note (19) for information regarding a new share repurchase program approved on February 19, 2015.
During the fourth quarter 2014, the board of directors authorized the retirement of 20 million treasury shares which restored
these shares to authorized but unissued status. Federated recorded a $587.3 million reduction to Treasury stock, at cost using the
specific-identification method and a $49.2 million reduction to Class B Common stock, at cost using the average cost method.
The difference of $538.1 million was recorded as a reduction to Retained earnings. There was no impact to total equity as a
result of this transaction.
(14) Income Taxes
Federated files a consolidated federal income tax return. Financial statement tax expense is determined under the liability
method.
Income tax provision consisted of the following expense/(benefit) components for the years ended December 31:
in thousands
Current:
Federal
State
Foreign
Total Current
Deferred:
Federal
State
Foreign
Total Deferred
Total
2014
2013
2012
$
$
63,266
4,574
76
67,916
20,497
916
201
21,614
89,530
$
$
66,408
6,849
190
73,447
18,220
1,347
(354)
19,213
92,660
$
78,422
7,430
6
85,858
23,143
1,878
4
25,025
$ 110,883
The federal net tax effects of timing differences exceeding 5% of the respective year’s pretax income at the statutory federal
income tax rate included in Income tax provision on the Consolidated Statements of Income were as follows: $(21.0) million,
$(19.3) million and $(19.7) million related to intangible assets in 2014, 2013 and 2012, respectively.
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The reconciliation between the statutory income tax rate and the effective tax rate consisted of the following for the years ended
December 31:
Expected federal statutory income tax rate
Increase/(decrease):
State and local income taxes, net of federal benefit
Other
Effective tax rate (excluding noncontrolling interests)
Income attributable to noncontrolling interests
Effective tax rate per Consolidated Statements of Income
2014
35.0%
1.1
1.3
37.4
0.0
37.4%
2013
35.0%
2.2
(1.0)
36.2
(0.4)
35.8%
2012
35.0%
2.1
0.0
37.1
(1.2)
35.9%
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities consisted of
the following at December 31:
in thousands
Deferred Tax Assets
Tax net operating loss carryforwards
Compensation related
Other
Total deferred tax assets
Valuation allowance
Total deferred tax asset, net of valuation allowance
Deferred Tax Liabilities
Intangible assets
Property and equipment
Deferred sales commissions
State taxes
Other
Total gross deferred tax liability
Net deferred tax liability
2014
2013
$
$
17,620
13,499
5,206
36,325
(17,224)
19,101
$ 134,841
8,319
6,499
6,463
1,604
$ 157,726
$ 138,625
$
$
17,017
12,840
5,729
35,586
(16,729)
18,857
$ 112,923
8,770
5,508
6,316
3,755
$ 137,272
$ 118,415
At December 31, 2014, Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in
certain taxing jurisdictions in the aggregate of $17.6 million, of which the state net operating losses will expire through 2034.
The foreign net operating losses have no expiration period. A valuation allowance has been recognized for $15.6 million
(or 99%) of the deferred tax asset for state tax net operating losses, and for $1.6 million (or 88%) of the deferred tax asset for
foreign tax net operating losses. 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.
At December 31, 2013, Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in
certain taxing jurisdictions in the aggregate of $17.0 million, of which the state net operating losses will expire through 2033.
The foreign net operating losses have no expiration period. A valuation allowance has been recognized for $15.1 million
(or 99%) of the deferred tax asset for state tax net operating losses, and for $1.6 million (or 91%) of the deferred tax asset for
foreign tax net operating losses. 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.
Federated and its subsidiaries file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local
jurisdictions, and in certain foreign jurisdictions. Based upon its review of these filings, there were no material unrecognized
tax benefits as of December 31, 2014 or 2013. Therefore, there were no material changes during 2014, and no reasonable
possibility of a significant increase or decrease in unrecognized tax benefits within the next twelve months.
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(15) 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 and Diluted
2014
2013
2012
Net income attributable to Federated Investors, Inc.
Less: Total income available to participating unvested restricted shareholders1
Total net income attributable to Federated Common Stock2
$ 149,236
(5,823)
$ 143,413
$ 162,177
(6,065)
$ 156,112
$ 188,088
(8,400)
$ 179,688
Denominator
Basic weighted-average common shares outstanding
Dilutive potential shares from stock options
Diluted weighted-average common shares outstanding
100,721
100,668
100,313
2
1
0
100,723
100,669
100,313
$
1.42
$
1.55
$
1.79
Earnings per share
Net income attributable to Federated Common Stock - Basic and Diluted2
1
Income available to participating unvested restricted shareholders includes dividends paid on unvested restricted shares and their
proportionate share of undistributed earnings.
Federated Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-
class method of computing earnings per share.
2
For the years ended December 31, 2014, 2013 and 2012, 27 thousand, 43 thousand and 247 thousand awarded stock options
were not included in the computation of diluted earnings per share. In all cases, these options were antidilutive because the
exercise price was greater 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 a proportional amount of dilution.
(16) 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, 2014:
in millions
2015
2016
2017
2018
2019
2020 and thereafter
Total minimum lease payments
$
$
12.2
13.2
12.7
12.7
12.8
48.7
112.3
Federated held a material operating lease at December 31, 2014 for its corporate headquarters building in Pittsburgh,
Pennsylvania. This lease expires in 2021 and has renewal options for 2 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, 2014, Federated had various other operating lease agreements primarily involving additional facilities. These
leases are noncancelable and expire on various dates through the year 2026. Most leases include renewal options and, in certain
leases, escalation clauses.
Rental expenses were $14.8 million, $11.8 million and $11.5 million for the years ended December 31, 2014, 2013 and 2012,
respectively, and were recorded in Office and occupancy expense on the Consolidated Statements of Income.
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(17) Accumulated Other Comprehensive (Loss) Income Attributable to Federated Investors, Inc. Shareholders
The components of Accumulated other comprehensive loss, net of tax attributable to Federated shareholders are as follows:
in thousands
Balance at December 31, 2011
Other comprehensive (loss) income before
reclassifications and tax
Tax impact
Reclassification adjustment, before tax
Tax impact
Net current-period other comprehensive
income (loss)
Balance at December 31, 2012
Other comprehensive (loss) income before
reclassifications and tax
Tax impact
Reclassification adjustment, before tax
Tax impact
Net current-period other comprehensive
income (loss)
Balance at December 31, 2013
Other comprehensive loss before
reclassifications and tax
Tax impact
Reclassification adjustment, before tax
Tax impact
Net current-period other comprehensive
income (loss)
Unrealized Loss
on Interest Rate
Swap1
$ (9,634)
Unrealized
Gain (Loss) on
Securities
Available for Sale2
325
$
Unrealized
(Loss) Gain on
Foreign
Currency
Hedge3
368
$
Foreign Currency
Translation
(Loss) Gain3
329
$
(3,253)
1,201
7,316
(2,701)
9,009
(3,670)
(3,408)
1,388
(1,631)
332
1,169
(238)
1,484
(519)
(1,237)
433
Total
$ (8,612)
5,609
(2,656)
3,840
(1,118)
2,563
$ (7,071)
3,319
$ 3,644
(368)
0
$
(400)
146
6,518
(2,378)
7,346
(3,167)
(10,966)
4,729
3,886
$ (3,185)
(2,058)
$ 1,586
$
(107)
40
4,743
(1,760)
2,916
(142)
54
(4,240)
1,616
(2,712)
0
0
0
0
0
0
0
0
0
0
0
0
161
490
5,675
$ (2,937)
(149)
50
0
0
6,797
(2,971)
(4,448)
2,351
(99)
391
1,729
$ (1,208)
(1,013)
355
0
0
(1,262)
449
503
(144)
(658)
(267)
(454)
$ (1,662)
$
$
$
Balance at December 31, 2014
$
(269)
$ (1,126)
$
1
2
3
Amounts reclassified from Accumulated other comprehensive loss, net of tax were recorded in Debt expense on the Consolidated Statements
of Income.
Amounts reclassified from Accumulated other comprehensive loss, net of tax were recorded in Gain on securities, net on the Consolidated
Statements of Income.
Amounts reclassified from Accumulated other comprehensive loss, net of tax were recorded in Nonoperating Income (Expenses) - Other, net
on the Consolidated Statements of Income.
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(18) Commitments and Contingencies
(a) Contractual
Federated is obligated to make certain future payments under various agreements to which it is a party, including debt and
operating leases (see Note (10) and Note (16), respectively). The following table summarizes minimum noncancelable
payments contractually due under Federated’s significant service contracts and employment arrangements:
Payments due in
in millions
Purchase obligations1
Employment-related commitments2
Total
2015
$
8.8
17.0
$ 25.8
2016
2017
2018
2019
$
$
2.4
6.5
8.9
$
$
0.6
5.4
6.0
$
$
0.1
0.0
0.1
$
$
0.0
0.0
0.0
After
2019
$
$
0.0
0.0
0.0
Total
$ 11.9
28.9
$ 40.8
1
2
Federated is a party to various contracts pursuant to which it receives certain services including services for marketing and
information technology, access to various fund-related information systems and research databases, trade order transmission and
recovery services as well as other 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.
Federated has certain domestic and international employment arrangements pursuant to which Federated is obligated to make
minimum compensation payments.
In 2010, Federated acquired the money market management business of SunTrust Banks, Inc. (SunTrust Acquisition). As part of
the SunTrust Acquisition, Federated is required to make annual contingent purchase price payments in the fourth quarters of
each of the five years following the acquisition date. The contingent purchase price payments are calculated as a percentage of
revenue less distribution expenses directly attributed to certain eligible assets. The first four contingent purchase price payments
of $5.0 million, $4.2 million, $3.8 million and $2.1 million, were paid in the fourth quarters of 2011, 2012, 2013 and 2014,
respectively. At December 31, 2014, management estimated remaining contingent payments could total $1 million over the one
year that remains; however, the actual amount of the contingent payments will vary based on asset levels and related net
revenues and is not limited by any maximum amount. A wide range of outcomes for actual payments is possible due to the
extent of reasonably possible flow-rate volatility for the respective AUM. As of December 31, 2014, a liability of $1.2
million representing the estimated fair value of future consideration payments, which could be paid through 2016, was recorded
in Other current liabilities (see Note (5) for a discussion regarding the valuation methodology). This liability is re-measured at
each reporting date with changes in the fair value recognized in Operating Expenses – Other on the Consolidated Statements of
Income.
As part of the 2008 Clover Capital Acquisition, Federated was required to make contingent purchase price payments based
upon growth in revenues over the five-year period following the acquisition date. The contingent purchase price payments were
recorded as additional goodwill at the time the contingency was resolved. The applicable growth targets were not met for the
first two anniversary years and as such, no related payments were made. In the first quarters of 2012, 2013 and 2014, $5.9
million, $3.4 million and $9.2 million were paid with regard to the third, fourth and final anniversary years, respectively.
Pursuant to other acquisition agreements, Federated has made and may be required to make additional purchase price payments
based on a percentage of revenue less certain direct expenses attributable to eligible AUM. The payments could occur annually
through 2015. As of December 31, 2014, liabilities totaling $0.7 million, representing the estimated fair value of future
consideration payments, were recorded in Other current liabilities (see Note (5) for a discussion regarding the valuation
methodology). The liabilities are re-measured at each reporting date with changes in the fair value recognized in Operating
Expenses – Other on the Consolidated Statements of Income.
Federated may be required to make certain incentive compensation-related payments through 2018 in connection with various
significant employment arrangements. In addition to the $17.0 million of employment-related commitments to be paid in 2015
included in the table above, as of December 31, 2014, Federated may be required to pay up to an additional $28 million over
the remaining terms of the arrangements based on the achievement of performance goals. In addition, certain employees have
incentive compensation opportunities related to the Federated Kaufmann Large Cap Fund (the Fund Bonus). Based on asset
levels at December 31, 2014, $2.3 million would be paid in 2015 as a 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.
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(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 would not have a material effect on its business,
financial position, results of operations or cash flows.
(c) Legal Proceedings
CCM Rochester, Inc. (CCM). In December, 2008, Federated completed the acquisition of certain assets of CCM (f/k/a Clover
Capital Management, Inc.), an investment manager that specialized in value investing. The purchase was consummated in the
midst of the financial crisis. The payment terms under the Asset Purchase Agreement, dated September 12, 2008 (APA),
included an upfront payment of $30 million paid by Federated Investors, Inc. at closing and the opportunity for contingent
payments over a five year earn-out period following the acquisition date based on the growth in revenue associated with the
acquired assets. Under the APA, in order to reach the maximum contingent payments totaling approximately $55 million, the
revenue associated with the acquired assets would have had to have grown at a 30% compound annual growth rate. Under the
APA, Federated Investors, Inc. paid CCM an additional $18 million, in the aggregate, in contingent payments for the last three
years of the earn-out period.
Shortly after the final contingent payment was paid to CCM, Federated Investors, Inc. was named as the defendant in a case
filed on May 20, 2014 by CCM in the U.S. District Court for the Southern District of New York (CCM Rochester, Inc., f/k/a
Clover Capital Management, Inc. v. Federated Investors, Inc., Case No. 14-cv-3600 (S.D.N.Y.)). In this lawsuit, CCM has
asserted claims against Federated Investors, Inc. for fraudulent inducement, breach of contract (including CCM’s allegations
relating to implied duties of best efforts and good faith and fair dealing) and indemnification based on Federated’s alleged
failure to effectively market and distribute the investment products associated with the acquired assets and to pay CCM the
maximum contingent payments. CCM seeks approximately $37 million in alleged damages plus attorneys’ fees from Federated
Investors, Inc.
Federated filed a Motion to Dismiss the lawsuit on the basis that, among other reasons, CCM’s claims are implausible, contrary
to the express terms of the APA and contrary to settled law. On November 25, 2014, the Court issued an order granting
Federated's Motion to Dismiss in part and denying Federated's Motion to Dismiss in part. The Court dismissed CCM's claim for
breach of contract and for breach of an implied obligation to use best efforts. Under the strict standards applicable to Motions to
Dismiss that require the Court to accept the allegations of the Complaint as true and draw all inferences in CCM's favor, the
Court concluded that CCM's "claim of fraud is at the edge of plausibility" but specifically noted that "[w]hether CCM can
successfully prove facts necessary to support that artfully-pled theory remains to be seen."
Federated continues to believe that CCM’s claims are meritless and intends to continue to vigorously defend this lawsuit as it
proceeds through discovery and summary judgment. Federated continues to believe that at all times it acted in good faith and
complied with its contractual obligations contained in the APA.
As of December 31, 2014, Federated believes a material loss related to this lawsuit is remote, and as such, does not believe this
pending lawsuit is material to Federated or its consolidated financial statements. Based on this assessment of the status and
nature of CCM's claims, and the current stage of the lawsuit, no loss is estimable.
Other Litigation. Federated also has claims asserted and threatened against it in the ordinary course of business. As of
December 31, 2014, Federated does not believe that a material loss related to these claims is reasonably possible.
See Item 1A - Risk Factors under the caption Potential Adverse Effects of Litigation, Investigations, Proceedings and Other
Claims for additional information regarding risks related to claims asserted or threatened against Federated.
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(19) Subsequent Events
On January 22, 2015, the board of directors declared a $0.25 per share dividend to shareholders of record as of February 6,
2015, resulting in $26.2 million being paid on February 13, 2015.
On February 19, 2015, the board of directors authorized management to purchase up to 4 million additional shares of Federated
Class B common stock with no stated expiration date for the buy back program. The program authorizes executive management
to determine the timing and the amount of shares for each purchase. The repurchased stock is to be held in treasury for
employee share-based compensation plans, potential acquisitions and other corporate activities, unless Federated's board of
directors subsequently determines to retire and restore to authorized but unissued status the repurchased stock (rather than
holding it in treasury). See Note (13) for additional information.
(20) Supplementary Quarterly Financial Data (Unaudited)
in thousands, except per share data, for the quarters ended
2014
Revenue
Operating income
Net income including the noncontrolling interests in
subsidiaries
Amounts attributable to Federated Investors, Inc.
Net income
Earnings per share – Basic and Diluted
Impact of Minimum Yield Waivers
Revenue
Less: Reduction in Distribution expense
Operating income
Less: Reduction in Noncontrolling interest
Pre-tax impact
2013
Revenue
Operating income
Net income including the noncontrolling interests in
subsidiaries1
Amounts attributable to Federated Investors, Inc.
Net income1
Earnings per share – Basic and Diluted1
Impact of Minimum Yield Waivers
Revenue
Less: Reduction in Distribution expense
Operating income
Less: Reduction in Noncontrolling interest
Pre-tax impact
March 31,
June 30, September 30, December 31,
$
211,496
56,645
$
212,981
58,842
$
216,915
60,828
$
217,858
61,634
35,645
37,314
37,259
39,605
35,194
0.34
36,869
0.35
37,560
0.36
(106,722)
74,288
(32,434)
2,729
(29,705)
(102,287)
70,149
(32,138)
2,501
(29,637)
(101,727)
68,748
(32,979)
2,772
(30,207)
39,613
0.38
(99,815)
67,665
(32,150)
2,696
(29,454)
$
227,972
68,199
$
223,806
66,028
$
211,866
57,758
$
214,722
59,758
44,688
41,861
37,629
42,176
42,994
0.41
(87,342)
64,751
(22,591)
844
(21,747)
40,408
0.39
(91,946)
66,938
(25,008)
1,267
(23,741)
37,704
0.36
41,071
0.39
(105,081)
72,140
(32,941)
2,665
(30,276)
(104,661)
73,338
(31,323)
2,024
(29,299)
1
Federated recorded impairment charges of $3.1 million and $0.6 million related to an equity-method investment in the third and
fourth quarters of 2013, respectively.
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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A – CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Federated carried out an evaluation, under the supervision and with the participation of management, including Federated’s
President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of Federated’s disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2014. Based upon that evaluation,
the President and Chief Executive Officer and the Chief Financial Officer concluded that Federated’s disclosure controls and
procedures were effective at December 31, 2014.
Management's Report on Internal Control Over Financial Reporting
See Item 8 – Financial Statements and Supplementary Data – under the caption Management’s Assessment of Internal Control
Over Financial Reporting for information required by this item, which is incorporated herein.
Attestation Report of Independent Registered Public Accounting Firm
See Item 8 – Financial Statements and Supplementary Data – under the caption Report of Ernst & Young LLP, Independent
Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting for information required by
this item, which is incorporated herein.
Changes in Internal Control Over Financial Reporting
There has been no change in Federated’s internal control over financial reporting that occurred during the fourth quarter ended
December 31, 2014 that has materially affected, or is reasonably likely to materially affect, Federated’s internal control over
financial reporting.
ITEM 9B – OTHER INFORMATION
None.
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PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item (other than the information set forth below) is contained in Federated’s Information
Statement for the 2015 Annual Meeting of Shareholders including under the captions Board of Directors and Election of
Directors and Security Ownership – Section 16(a) Beneficial Ownership Reporting Compliance, and is incorporated herein by
reference.
Executive Officers of Federated Investors, Inc.
The following section sets forth certain information regarding the executive officers of Federated as of February 20, 2015:
Name
John F. Donahue
Position
Chairman and Director
J. Christopher Donahue President, Chief Executive Officer and Director
Brian P. Bouda
Vice President and Chief Compliance Officer
Gordon J. Ceresino
Vice Chairman and President, Federated International Management Limited
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Officer and President, FII Holdings, Inc.
John B. Fisher
Eugene F. Maloney
Vice President and President and Chief Executive Officer of Federated Advisory
Companies*
Executive Vice President and Executive Vice President, Federated Investors Management
Company
John W. McGonigle
Vice Chairman, Executive Vice President, Chief Legal Officer, Secretary and Director
Richard A. Novak
Vice President, Assistant Treasurer and Principal Accounting Officer
Thomas E. Territ
Vice President and President, Federated Securities Corp.
Age
90
65
67
57
56
58
69
76
51
55
*
Federated Advisory Companies include the following: Federated Advisory Services Company, Federated Equity
Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment
Counseling, Federated Investment Management Company and Federated MDTA LLC, each wholly owned by
Federated, and Passport Research Ltd., a limited partnership.
Mr. John F. Donahue is a co-founder of Federated. He has served as director and Chairman of Federated since Federated's initial
public offering in May 1998. He is a director or trustee of 33 investment companies managed by subsidiaries of Federated.
Mr. Donahue is the father of J. Christopher Donahue who serves as President, Chief Executive Officer and director of Federated
and Thomas R. Donahue who serves as Vice President, Treasurer and Chief Financial Officer of Federated.
Mr. J. Christopher Donahue has served as director, President and Chief Executive Officer of Federated since 1998. He also
serves as a director, trustee or officer of various Federated subsidiaries. He is President of 33 investment companies managed
by subsidiaries of Federated. He is also director or trustee of 36 investment companies managed by subsidiaries of Federated.
Mr. Donahue is the son of John F. Donahue who serves as Chairman and director of Federated and the brother of Thomas R.
Donahue who serves as Vice President, Treasurer and Chief Financial Officer of Federated.
Mr. Brian P. Bouda has been Vice President of Federated and has served as Chief Compliance Officer of Federated and for each
of Federated’s subsidiaries since 2004. Mr. Bouda was a Vice President of Federated Services Company since 1999, and he has
been a Vice President of Federated Investors Management Company, a wholly owned subsidiary of Federated, since 2013. He is
also Chief Compliance Officer (since 2004) and Senior Vice President (since 2005) of the investment companies managed by
subsidiaries of Federated.
Mr. Gordon J. Ceresino has served as Vice Chairman of Federated since 2007. He is President of Federated International
Management Limited and Vice Chairman of Federated MDTA LLC, both of which are wholly owned subsidiaries of Federated.
He also serves as a director, trustee or President or Chief Executive Officer of certain other wholly owned subsidiaries of
Federated involved in Federated’s non-U.S. operations.
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Mr. Thomas R. Donahue has served as Vice President, Treasurer and Chief Financial Officer of Federated since 1998. He also
serves as an Assistant Secretary of Federated and he is President of FII Holdings, Inc., a wholly owned subsidiary of Federated.
Mr. Donahue also serves as a director, trustee or officer of various other Federated subsidiaries. Mr. Donahue is the son of
John F. Donahue who serves as Chairman and director of Federated and the brother of J. Christopher Donahue who serves as
director, President and Chief Executive Officer of Federated.
Mr. John B. Fisher has served as Vice President of Federated since 1998. He has also been President and Chief Executive
Officer of Federated Advisory Companies since 2006 and serves as a board member for each of these subsidiaries that are
wholly owned by Federated. He also serves as a director, trustee or officer of certain other Federated subsidiaries. Prior to 2006,
he served as President of the Institutional Sales Division of Federated Securities Corp., a wholly owned subsidiary of Federated.
Mr. Fisher is President of three investment companies managed by subsidiaries of Federated since 2004.
Mr. Eugene F. Maloney has served as Executive Vice President of Federated since March 2009. Prior to that time, he served as
Vice President of Federated since 1998. He is also Executive Vice President of Federated Investors Management Company, a
wholly owned subsidiary of Federated. Mr. Maloney provides certain legal, technical and management expertise to Federated’s
sales divisions, including regulatory and legal requirements relating to a bank’s use of mutual funds in both trust and
commercial environments.
Mr. John W. McGonigle has been a director of Federated since 1998. He has served as Executive Vice President, Chief Legal
Officer and Secretary of Federated since 1998 and as Vice Chairman since 2003. Mr. McGonigle is also Chairman of Federated
International Management Limited, a wholly owned subsidiary of Federated. He is also a director or trustee of certain other
subsidiaries of Federated. Mr. McGonigle is a trustee of three investment companies managed by a subsidiary of Federated.
Mr. McGonigle is also Secretary of 36 registered investment companies managed by subsidiaries of Federated and Executive
Vice President of 36 of those registered investment companies.
Mr. Richard A. Novak has served as Vice President, Assistant Treasurer and Principal Accounting Officer of Federated since
2013. Prior to that time, he served as Fund Treasurer of Federated’s domestic mutual funds beginning in 2006 and served as the
Controller of Federated from 1997 through 2005. He also serves as Senior Vice President, Treasurer, Assistant Treasurer or
Assistant Company Secretary for various other subsidiaries of Federated. Mr. Novak is a Certified Public Accountant.
Mr. Thomas E. Territ has served as Vice President of Federated since 2006. He is President of Federated Securities Corp., a
wholly owned subsidiary of Federated. He is also a director, trustee or officer of certain subsidiaries of Federated. As President
of Federated Securities Corp., Mr. Territ is responsible for the marketing and sales efforts of Federated. Mr. Territ had
previously served as Senior Vice President of Federated Securities Corp. since 1995, and held the position of National Sales
Director for several of Federated’s sales divisions during that time.
Code of Ethics
In October 2003, Federated adopted a code of ethics for its senior financial officers. This code meets the requirements provided
by Item 406 of Regulation S-K and is incorporated by reference in Part IV, Item 15(a)(3) of this Form 10-K as Exhibit 14.01.
The code of ethics is available at www.FederatedInvestors.com. In the event that Federated amends or waives a provision of
this code and such amendment or waiver relates to any element of the code of ethics definition enumerated in paragraph (b) of
Item 406 of Regulation S-K, Federated would post such information on its website.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by this Item is contained in Federated’s Information Statement for the 2015 Annual Meeting of
Shareholders under the captions Board of Directors and Election of Directors and Executive Compensation and is incorporated
herein by reference.
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ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding Federated’s share-based compensation plans as of December 31, 2014:
Category of share-based compensation plan
Equity compensation plans approved by
shareholders
Equity compensation plans not approved by
shareholders
Total
Number of securities to
be issued upon exercise
of outstanding options
Weighted-average
exercise price of
outstanding options
Number of securities
remaining available for
future issuance under
equity compensation plans1
36,000
0
36,000
$ 33.81
0
$ 33.81
4,062,901
0
4,062,901
1 Under Federated’s Stock Incentive Plan, as amended, grants of other share-based awards, such as restricted stock to Federated employees
and shares of Federated Class B common stock to non-management directors, may be authorized in addition to the stock options listed above.
All other information required by this Item is contained in Federated’s Information Statement for the 2015 Annual Meeting of
Shareholders under the caption Security Ownership and is incorporated herein by reference.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is contained in Federated’s Information Statement for the 2015 Annual Meeting of
Shareholders under the captions Transactions with Related Persons, Conflict of Interest Policies and Procedures and Board of
Directors and Election of Directors and is incorporated herein by reference.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is contained in Federated’s Information Statement for the 2015 Annual Meeting of
Shareholders under the caption Independent Registered Public Accounting Firm and is incorporated herein by reference.
PART IV
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
(1) Financial Statements
The information required by this item is included in Item 8 – Financial Statements and Supplementary Data,
which is incorporated herein.
(2) Financial Statement Schedules
All schedules for which provisions are made in the applicable accounting regulations of the SEC have been
omitted because such schedules are not required under the related instructions, are inapplicable, or the required
information is included in the financial statements or notes thereto included in this Form 10-K.
(b) Exhibits:
The following exhibits are filed or incorporated as part of this Form 10-K:
Exhibit
Number
2.01
2.02
Description
Agreement and Plan of Merger, dated as of February 20, 1998, between Federated Investors and Federated
(incorporated by reference to Exhibit 2.01 to the Registration Statement on Form S-1 (File No. 333-48405))
Asset Purchase Agreement dated as of October 20, 2000, by and among Federated Investors, Inc., Edgemont Asset
Management Corporation, Lawrence Auriana and Hans P. Utsch (incorporated by reference to Exhibit 2.1 of
Amendment No. 2 to the Current Report on Form 8-K dated April 20, 2001, filed with the Securities and Exchange
Commission on July 3, 2001 (File No. 001-14818))
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9950_Fin.pdf 76
2.03
2.04
2.05
2.06
2.07
2.08
3.01
3.02
4.01
4.02
4.05
Amendment No. 1, dated April 11, 2001, to the Asset Purchase Agreement dated as of October 20, 2000, by and
among Federated Investors, Inc., Edgemont Asset Management Corporation, Lawrence Auriana and Hans P. Utsch
(incorporated by reference to Exhibit 2.2 of Amendment No. 2 to the Current Report on Form 8-K dated April 20,
2001, filed with the Securities and Exchange Commission on July 3, 2001 (File No. 001-14818))
Sale, Purchase and Put/Call Agreement dated as of May 11, 2006, among Federated Investors, Inc., MDTA LLC,
HBSS Acquisition Co. and the Selling Parties (incorporated by reference to Exhibit 2.1 to the June 30, 2006
Quarterly Report on Form 10-Q (File No. 001-14818))
Definitive Agreement between Federated Investors, Inc. and David W. Tice & Associates, LLC dated as of July 14,
2008 (incorporated by reference to Exhibit 2.1 to the September 30, 2008 Quarterly Report on Form 10-Q (File
No. 001-14818))
Definitive Agreement between Federated Investors, Inc. and Clover Capital Management, Inc. dated as of
September 12, 2008 (incorporated by reference to Exhibit 2.2 to the September 30, 2008 Quarterly Report on Form
10-Q (File No. 001-14818))
Amendment No. 1 dated as of December 1, 2008 to the Asset Purchase Agreement dated as of September 12, 2008,
among Federated Investors, Inc. and Clover Capital Management Inc. (incorporated by reference to Exhibit 2.07 to
the Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 001-14818))
Definitive Agreement between Federated Investors, Inc. and SunTrust Banks, Inc. dated July 16, 2010
(incorporated by reference to Exhibit 2.1 to the September 30, 2010 Quarterly Report on Form 10-Q (File No.
001-14818))
Restated Articles of Incorporation of Federated (incorporated by reference to Exhibit 3.01 to the Registration
Statement on Form S-1 (File No. 333-48405))
Restated By-Laws of Federated (incorporated by reference to Exhibit 3.02 to the Registration Statement on Form
S-1 (File No. 333-48405))
Form of Class A Common Stock certificate (incorporated by reference to Exhibit 4.01 to the Registration
Statement on Form S-1 (File No. 333-48405))
Form of Class B Common Stock certificate (incorporated by reference to Exhibit 4.02 to the Registration
Statement on Form S-1 (File No. 333-48405))
Shareholder Rights Agreement, dated August 1, 1989, between Federated and The Standard Fire Insurance
Company, as amended January 31, 1996 (incorporated by reference to Exhibit 4.06 to the Registration Statement
on Form S-1 (File No. 333-48405))
9.01
Voting Shares Irrevocable Trust dated May 31, 1989 (incorporated by reference to Exhibit 9.01 to the Registration
Statement on Form S-1 (File No. 333-48405))
10.15
10.16
10.19
10.26
10.27
Federated Investors Tower Lease dated January 1, 1993 (incorporated by reference to Exhibit 10.03 to the
Registration Statement on Form S-1 (File No. 333-48405))
Federated Investors Tower Lease dated February 1, 1994 (incorporated by reference to Exhibit 10.04 to the
Registration Statement on Form S-1 (File No. 333-48405))
Employment Agreement, dated December 28, 1990, between Federated Investors and an executive officer
(incorporated by reference to Exhibit 10.08 to the Registration Statement on Form S-1 (File No. 333-48405))
Purchase and Sale Agreement, dated as of December 21, 2000, among Federated Investors Management Company,
Federated Securities Corp., Federated Funding 1997-1, Inc., Federated Investors, Inc., Citibank, N.A., and Citicorp
North America, Inc. Company (incorporated by reference to Exhibit 10.26 of the Annual Report on Form 10-K for
the year ended December 31, 2000 (File No. 001-14818))
Amendment No. 2 to the Federated Investors Program Documents dated as of December 21, 2000, among
Federated Investors, Inc., Federated Funding 1997-1, Inc., Federated Investors Management Company, Federated
Securities Corp., Wilmington Trust Company, Putnam Lovell Finance L.P., Putnam Lovell Securities Inc., and
Bankers Trust Company (incorporated by reference to Exhibit 10.27 of the Annual Report on Form 10-K for the
year ended December 31, 2000 (File No. 001-14818))
10.34
Annual Stock Option Agreement dated April 24, 2002, between Federated Investors, Inc. and the independent
directors (incorporated by reference to Exhibit 10.1 to the June 30, 2002 Quarterly Report on Form 10-Q (File No.
001-14818))
77
9950_Fin.pdf 77
10.40
10.41
10.46
10.47
10.49
10.50
10.51
10.52
10.58
10.60
10.61
10.62
10.65
10.67
Amendment to Purchase and Sale Agreement, dated as of December 31, 2003, among Federated Investors
Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc., Federated Investors, Inc.,
Citibank, N.A., and Citicorp North America, Inc. Company (incorporated by reference to Exhibit 10.40 to the
Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 001-14818))
Amendments No. 6, 5, 4, 3 and 2 to Federated Investors Tower Lease dated as of December 31, 2003;
November 10, 2000; June 30, 2000; February 10, 1999; and September 19, 1996 (incorporated by reference to
Exhibit 10.41 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No.
001-14818))
Agreement with Alliance Capital Management L.P., dated as of October 28, 2004 (incorporated by reference to
Exhibit 10.46 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No.
001-14818))
Amendment dated December 31, 2004 to the Federated Investors Program Documents dated as of December 21,
2000, among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1,
Inc., Federated Investors, Inc., Citibank, N.A. and Citicorp North America, Inc. (incorporated by reference to
Exhibit 10.47 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No.
001-14818))
Form of Bonus Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.1 to the
March 31, 2005 Quarterly Report on Form 10-Q (File No. 001-14818))
Amendment dated June 29, 2005 to the definitive agreement between Federated Investors and Alliance Capital
Management L.P. dated October 28, 2004 and filed as Exhibit 10.46 to Federated’s Annual Report on Form 10-K
for the year ended December 31, 2004 (incorporated by reference to Exhibit 10.1 to the June 30, 2005 Quarterly
Report on Form 10-Q (File No. 001-14818))
Amendment dated June 30, 2005 to the Federated Investors Program Documents dated as of December 21, 2000,
among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc.,
Federated Investors, Inc., Citibank, N.A. and Citicorp North America, Inc. (incorporated by reference to Exhibit
10.2 to the June 30, 2005 Quarterly Report on Form 10-Q (File No. 001-14818))
Amendment dated June 30, 2005 to the Federated Program Master Agreement, dated as of October 24, 1997,
among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1, Inc.,
Federated Investors Inc., Wilmington Trust Company, Putnam Lovell Finance, L.P., Putnam, Lovell NBF
Securities Inc. and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.3 to the
June 30, 2005 Quarterly Report on Form 10-Q (File No. 001-14818))
Federated Investors, Inc. Employee Stock Purchase Plan, amended as of October 26, 2006 (incorporated by
reference to Exhibit 10.2 to the September 30, 2006 Quarterly Report on Form 10-Q (File No. 001-14818))
Amendment dated December 29, 2006 to the Federated Investors Program Documents dated as of December 21,
2000, among Federated Investors Management Company, Federated Securities Corp., Federated Funding 1997-1,
Inc., Federated Investors, Inc., Citibank, N.A. and Citicorp North America, Inc. (incorporated by reference to
Exhibit 10.60 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (File No.
001-14818))
Agreement, effective March 1, 2007, by and among Federated, Federated Investors Management Company, as
transferor, Federated Securities Corp., as distributor, principal shareholder servicer and servicer, Federated
Funding 1997-1, Inc., as Seller, Citibank, N.A., as purchaser, and Citicorp North America, Inc., as Program Agent
(incorporated by reference to Exhibit 10.1 to the March 7, 2007 Report on Form 8-K (File No. 001-14818))
Definitive Agreement between Federated Investors, Inc. and Rochdale Investment Management, LLC dated as of
April 20, 2007 (incorporated by reference to Exhibit 10.1 to the June 30, 2007 Quarterly Report on Form 10-Q
(File No. 001-14818))
Form of Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.65 to the Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 001-14818))
ISDA Master Agreement and schedule between Federated Investors, Inc. and PNC Bank National Association
related to the $425,000,000 forward-starting interest rate swap, entered into on March 30, 2010 and effective
April 9, 2010 (incorporated by reference to Exhibit 10.2 to the June 30, 2010 Quarterly Report on Form 10-Q
(File No. 001-14818))
78
9950_Fin.pdf 78
10.68
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76
14.01
ISDA Master Agreement and schedule between Federated Investors, Inc. and Citibank, N.A. related to the
$425,000,000 forward-starting interest rate swap, entered into on March 30, 2010 and effective April 9, 2010
(incorporated by reference to Exhibit 10.3 to the June 30, 2010 Quarterly Report on Form 10-Q (File No.
001-14818))
Employment Agreement, dated July 6, 1983, between Federated Investors and an executive officer (incorporated
by reference to Exhibit 10.69 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2010
(File No. 001-14818))
Federated Investors, Inc. Stock Incentive Plan, amended as of April 28, 2011 (incorporated by reference to Exhibit
10.1 to the March 31, 2011 Quarterly Report on Form 10-Q (File No. 001-14818))
The Amended and Restated Credit Agreement, dated as of June 10, 2011, by and among Federated Investors, Inc.
and PNC Bank, National Association, PNC Bank Capital Markets LLC, Citigroup Global Markets, Inc. and
Citibank, N.A. (incorporated by reference to Exhibit 10.1 to the June 30, 2011 Quarterly Report on Form 10-Q
(File No. 001-14818))
Amendments No. 8 and 7 to Federated Investors Tower Lease dated as of September 9, 2011 and August 15, 2007
(incorporated by reference to Exhibit 10.1 to the September 30, 2011 Quarterly Report on Form 10-Q (File No.
001-14818))
Federated Investors, Inc. Annual Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to the
March 31, 2012 Quarterly Report on Form 10-Q (File No. 001-14818))
First Amendment to the Amended and Restated Credit Agreement, dated as of December 31, 2013 (incorporated
by reference to Exhibit 10.74 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2013
(File No. 001-14818))
The Second Amended and Restated Credit Agreement, dated as of June 24, 2014, by and among Federated
Investors, Inc. certain subsidiaries as guarantors party thereto, the banks as lenders party thereto, and PNC Bank,
National Association, PNC Bank Capital Markets LLC, Citigroup Global Markets, Inc., Citibank, N.A. and TD
Bank, N.A. (incorporated by reference to Exhibit 10.1 to the June 30, 2014 Quarterly Report on Form 10-Q (File
No. 001-14818))
Form of Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.1 to the
September 30, 2014 Quarterly Report on Form 10-Q (File No. 001-14818))
Federated Investors, Inc. Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.01
to the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 001-14818))
21.01
Subsidiaries of the Registrant (Filed herewith)
23.01
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (Filed herewith)
31.01
31.02
32.01
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed
herewith)
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed
herewith)
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (Filed herewith)
The following XBRL documents are filed herewith:
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
79
9950_Fin.pdf 79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
FEDERATED INVESTORS, INC.
By:
/s/ J. Christopher Donahue
J. Christopher Donahue
President and Chief Executive Officer
Date:
February 20, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John F. Donahue
John F. Donahue
Chairman and Director
February 20, 2015
/s/ J. Christopher Donahue
J. Christopher Donahue
President, Chief Executive Officer
and Director (Principal Executive Officer)
February 20, 2015
/s/ Thomas R. Donahue
Thomas R. Donahue
/s/ Richard A. Novak
Richard A. Novak
/s/ Michael J. Farrell
Michael J. Farrell
/s/ Marie Milie Jones
Marie Milie Jones
/s/ David M. Kelly
David M. Kelly
/s/ John W. McGonigle
John W. McGonigle
9950_Fin.pdf 80
Chief Financial Officer (Principal Financial Officer)
February 20, 2015
Principal Accounting Officer
February 20, 2015
February 20, 2015
February 20, 2015
February 20, 2015
February 20, 2015
Director
Director
Director
Director
80
Corporate Information
Corporate Offices
Federated Investors Tower
1001 Liberty Ave.
Pittsburgh, PA 15222-3779
Telephone: 412-288-1900
Email: investors@federatedinv.com
FederatedInvestors.com
Worldwide Operations
Dublin, Ireland
Boston, Mass.
Frankfurt, Germany
Houston, Texas
London, United Kingdom
New York, N.Y.
Rochester, N.Y.
Tokyo, Japan
Warrendale, Pa.
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 press release, please contact
Investor Relations at 412-288-1934 or visit the
About Federated section of FederatedInvestors.com.
Annual Meeting
Federated’s Annual Shareholder Meeting will
be held in the Fayette Room of the Westin
Convention Center Hotel, 1000 Penn Ave.,
Pittsburgh, PA 15222 at 4 p.m. local time
on Thursday, April 23, 2015.
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
P.O. Box 30170
College Station, TX 77842-3170
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.
d
e e
erat
d
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
1-800-341-7400
FederatedInvestors.com
0030705 (3/15)
Federated is a registered trademark of
Federated Investors, Inc.
2015 ©Federated Investors, Inc.