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2018 at a glance…
$459.9 billion
Record assets under management after acquisition
of London-based Hermes Fund Managers Limited
62%
Revenue driven by long-term assets
130
Equity, fi xed-income, alternative/private markets,
multi-asset and money market funds
84
Consecutive quarterly dividends paid
$36.6 billion
Increase in money market assets from 2017
Financial Overview
(as of and for the years ended Dec. 31, )
Summary of Operations (in thousands)
Total revenue
Operating income
Net income
Per Share Data
Basic and diluted earnings per share
Cash dividends per share
Managed Assets (in millions)
Money Market
Equity
Fixed-Income
Alternative/Private Markets
Multi-Asset
Total managed assets
$
$
$
$
$
$
2018
2017
1,135,677
330,280
220,297
2.18
1.06
$
$
$
$
$
1,102,924
341,508
291,341
2.87
1.00
301,794
$
265,214
72,497
63,158
18,318
4,093
62,816
64,160
366
5,014
$
459,860
$
397,570
Equity
Assets
in billions
Fixed-Income
Assets
in billions
Total Managed
Assets
in billions
16
17
18
$56.8
$62.8
$72.5
16
17
18
$51.3
$64.2
$63.2
16
17
18
$365.9
$397.6
$459.9
2018 Annual Report
1
Dear Fellow
Shareholders:
Federated Investors, Inc. delivered solid performance in 2018. It was a signifi cant
and transformative year for the business, in which our time-tested investment
products offered diverse solutions in volatile markets, and our acquisition of
a controlling interest in London-based Hermes Fund Managers Limited established
a foundation for future growth. Federated’s earnings results underscored our
position as one of the world’s foremost providers of equity, fi xed-income and
liquidity products that are backed by exceptional client service — a characteristic
of the fi rm through more than six decades of growth and innovation.
Earnings per diluted share were $2.18 on net income of $220.3 million.
Long-term asset categories — comprising equity, fi xed-income, alternative/private
markets and multi-asset products — reached $158.1 billion and drove 62 percent of
revenue. With the Hermes acquisition completed in July 2018, overall assets under
management at year end reached a record $459.9 billion.
Hermes brings to Federated additional world-class active management capabilities,
with premier environmental, social and governance (ESG) integration across its
strategies, as well as a leading stewardship and engagement business that has
board- and executive-level engagement as its hallmark. With more than 30 years
of experience and more than $40 billion in managed assets, Hermes’ investment
solutions include high active share equities, credit and private markets — including
real estate, infrastructure, private debt and private equity. Hermes has demonstrated
the value of integrating ESG analysis and engagement insights into investment
processes — manifesting as improved risk management and long-term returns.
This is a growth opportunity for both Federated and Hermes, with Hermes’ range
of investment strategies serving as eff ective complements to Federated’s existing
strategies in equity, fi xed income and liquidity management. The acquisition of
Hermes also has resulted in a complementary distribution network that meaningfully
expands our global footprint.
The Hermes acquisition was one way in which Federated continued to employ
capital to benefi t shareholders in 2018. In addition, the company has paid
quarterly dividends to shareholders for 21 straight years, or 84 consecutive quarters.
After increasing the dividend from $0.25 to $0.27 in the second quarter, dividends
Equity
$72.5 billion
■ Value and Income $32.5
■ International/Global $24.1
■ Growth $13.2
■ Blend $2.7
Fixed
Income
$63.2 billion
■ Multisector $37.0
■ High-Yield $10.1
■ Municipal $5.1
■ U.S. Corporate $4.9
■ U.S. Government $3.0
■ International/Global $2.2
■ Mortgage-Backed $0.9
2
Federated Investors, Inc.
totaled $1.06 per share in 2018. Federated also purchased 1,205,790 shares of
Class B Common Stock. Since the company’s initial public off ering in 1998,
Federated’s use of cash has included $2.2 billion for dividends, $1.3 billion for
share repurchases and $1.1 billion for acquisitions.
2018 Highlights
▪
Increased our market share among U.S. mutual fund managers.
▪ Reached $158.1 billion in long-term assets, which drove 62 percent
of Federated’s revenue.
▪ Managed $301.8 billion in liquidity assets.
▪ Maintained strong equity performance, with nearly half of our equity funds
(12 out of 25) earning top-quartile three-year performance and about
two-thirds (16 funds) fi nishing above the median.
▪ Expanded our fund off erings with the launch of the Federated Hermes
SDG Engagement Equity Fund.
Diverse investment solutions
Federated’s range of strong-performing investment solutions benefi ted our business
mix in 2018 and positioned our company for growth over the coming market
cycles, just as it has through the previous 12 bull markets and 11 bear markets
since Federated’s inception.
The equity side of our business primarily benefi ted from interest in a range of
strategies that invest in small-cap companies. The Federated Kaufmann Small Cap
Fund, a growth strategy, was among our equity fund net sales leaders, as were
Federated MDT Small Cap Core Fund and Federated MDT Small Cap Growth
Fund, two bottom-up, fundamentally driven strategies. The newly launched
Federated Hermes SDG Engagement Equity Fund, our fi rst Hermes strategy to be
off ered as a U.S. mutual fund, also invests in small- and mid-cap companies and
was among Federated’s net sales leaders in the fourth quarter of 2018. The new
fund pursues long-term capital appreciation alongside positive societal impact with
a focus on investment in companies believed to have the willingness and ability to
more closely align with the United Nations’ Sustainable Development Goals.
In fi xed income, Federated had a variety of well-performing strategies. Based on
Morningstar data for the trailing three-year period, eight Federated fi xed-income
Alternative/
Private Markets
and Multi-Asset
$22.4 billion
■ Real Estate $8.6
■ Infrastructure $4.1
■ Multi-Asset $4.1
■ Private Equity $4.1
■ Other Alternative $1.5
Money
Market
$301.8 billion
■ Government $203.5
■ Prime $87.6
■ Tax-Free $10.7
2018 Annual Report
3
IN MEMORIAM
Richard B. Fisher
Federated’s reputation as a global
investment leader refl ects the
strong work ethic, creative
marketing skills and dedication
of co-founder Richard B. (Dick)
Fisher, who passed away at age 95
on Oct. 23, 2018, after more than
six decades with Federated. Dick
most recently served as chairman
of Federated Securities Corp. and
vice chairman of Federated
Investors, Inc.
With exceptional sales skills,
Fisher was integral to growing
Federated’s broker/dealer
initiatives. His advertising
acumen and traveling sales eff orts
increased public awareness of
Federated and the mutual fund
industry in general.
Dick’s charm and sense of humor
made him a favorite with
employees. He was an infl uential
mentor and respected colleague.
Best-known for his kindness and
generosity, his legacy is found
across the many charities to which
he dedicated his time and eff orts.
Federated expresses deep
gratitude to Dick for his inspiring
leadership, distinguished service
and contributions as a husband,
father, colleague and friend.
4
Federated Investors, Inc.
funds earned top-quartile performance. They included Federated Total Return
Bond Fund, which pursues risk-adjusted returns by investing primarily in
diversifi ed portfolios of fi xed-income securities. Our top-selling fi xed-income
fund in 2018 was Federated Ultrashort Bond Fund, which provides the
opportunity for a greater income-producing alternative to money market funds.
For more than four decades, clients have turned to Federated for liquidity-
management solutions that provide diligent credit analysis, broad diversifi cation
and competitive yields. In 2018, with the Federal Reserve raising short-term
interest rates four times, higher yields helped cash continue its resurgence as
an attractive asset class. While assets in money market funds grew throughout
the industry, Federated’s total money market fund assets grew at a rate more
than double the industry average, thanks to growth across every product style.
Our prime money market funds grew at nearly four times the industry rate,
Federated’s muni funds grew at more than fi ve times the industry rate and our
government money market funds grew at nearly double the industry rate.1
A client focus
Providing dedicated, collaborative client service to grow business across sales
channels has long been a defi ning characteristic of Federated. In 2018, our
nearly 250 sales professionals continued to enhance Federated’s reputation as
a trusted provider of investment management solutions to more than 9,500
global clients, including banks, broker/dealers, registered investment advisors
and other fi nancial intermediaries. Our institutional sales division grew
gross sales of funds in long-term asset categories by 58.2 percent in 2018.
Our intermediary division increased gross sales of funds in long-term asset
categories by 13.1 percent, and the retirement division grew gross sales
of those funds by 2.3 percent. The sales force was able to leverage strong
performance, as the institutional share classes of seven Federated funds all had
stronger net sales than 90 percent of the peers in their respective Morningstar
categories. Those funds were Federated Kaufmann Small Cap Fund, Federated
MDT All Cap Core Fund, Federated MDT Mid Cap Growth Fund, Federated
MDT Small Cap Core Fund, Federated MDT Small Cap Growth Fund,
Federated Short-Term Income Fund and Federated Total Return Bond Fund.
Federated’s sales force continued to have success marketing SMA strategies
in 2018, where we saw gross sales of $4.3 billion. We ended the year with
$21.9 billion in total SMA managed assets, ranking Federated as a top 10 SMA
manager in 2018.2 We believe our SMA strategies — available in 16 equity, eight
fi xed-income and one multi-asset category — provide Federated with a competitive
advantage for clients seeking diversifi ed solutions with a high level of customization.
Internationally, our assets under management have reached $57.2 billion. Assets
in the U.K. and Europe, including Hermes, have increased to $54.9 billion. Assets
under management in Canada have reached $1.7 billion, comprised mostly of
Strategic Value Dividend strategies. In addition to U.S. opportunities, we continue
to seek additional options for international acquisitions and growth, particularly
in the Latin America and Asia-Pacifi c regions, and are actively working to establish
strategic relationships with select fi nancial institutions to add regional distribution
of Federated investment strategies.
Long-term outlook
Through the dedication of our nearly 1,900 employees, we have continued to
strengthen our position as a leading global investment manager. Our people put
their unique insights, expertise and capabilities to work for our clients every day.
On behalf of our board of directors, I thank them for their engagement and eff orts
over the past year.
Most importantly, we thank you, our shareholders. We understand the importance
of providing the industry’s fi nest talent, investment strategies and distribution
capabilities. Steadfast in our values, Federated continues to evolve in a changing
investment environment, seeking to develop resources, provide leadership and
create even more opportunities for investors to achieve their fi nancial goals.
J. Christopher Donahue
President, Chief Executive Offi cer and Chairman
1 iMoneyNet, Jan. 1, 2019.
2 Money Management Institute/Cerulli Associates, Q3 2018.
Dividend History
per share
■ Special Cash Dividend
■ Annual Per Share
$2.00
$1.00
$1.00
$1.00
$1.06
2016
2017
2018
Revenue by Source
$1.1 billion
■ Long-Term Assets 62%
■ Equity 41%
■ Fixed Income 16%
■ Alternative/Private Markets
and Multi-Asset 5%
■ Money Market 37%
■ Other 1%
2018 Annual Report
5
Directors
Executives
J. Christopher Donahue
President, Chief Executive Offi cer and Chairman,
Federated Investors, Inc.
Committee: Executive
Joseph C. Bartolacci
President and Chief Executive Offi cer,
Matthews International Corporation
Committees: Audit, Compensation, Compliance
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Offi cer,
Federated Investors, Inc.
President, FII Holdings, Inc.
Committee: Executive
John B. Fisher
Vice President, Federated Investors, Inc.
President and Chief Executive Offi cer,
Federated Advisory Companies
Committee: Executive
Michael J. Farrell
President, Farrell & Co.
Committees: Audit, Compensation, Compliance
Marie Milie Jones
Founding Partner, JonesPassodelis, PLLC
Committees: Audit, Compensation, Compliance
J. Christopher Donahue
President, Chief Executive Offi cer and Chairman,
Federated Investors, Inc.
Gordon J. Ceresino
Vice Chairman, Federated Investors, Inc.
President, Federated International Management Limited
and Federated International Securities Corp.
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Offi cer,
Federated Investors, Inc.
President, FII Holdings, Inc.
John B. Fisher
Vice President, Federated Investors, Inc.
President and Chief Executive Offi cer,
Federated Advisory Companies
Peter J. Germain
Executive Vice President, Chief Legal Offi cer,
General Counsel and Secretary, Federated Investors, Inc.
Eugene F. Maloney
Executive Vice President, Federated Investors, Inc.
Executive Vice President, Federated Investors
Management Company
Richard A. Novak
Vice President, Assistant Treasurer and
Principal Accounting Offi cer, Federated Investors, Inc.
Saker A. Nusseibeh
Chief Executive Offi cer,
Hermes Fund Managers Limited
Paul A. Uhlman
Vice President, Federated Investors, Inc.
President, Federated Securities Corp.
Stephen P. Van Meter
Vice President and Chief Compliance Offi cer,
Federated Investors, Inc.
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, 2018
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)
25-1111467
(I.R.S. Employer Identification No.)
Federated Investors Tower
Pittsburgh, Pennsylvania
(Address of principal executive offices)
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 every Interactive Data File required to be submitted 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 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, a smaller reporting
company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the Class B Common Stock held by non-affiliates of the registrant as of June 30, 2018 was approximately $2.2
billion, based on the New York Stock Exchange closing price. 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 15,
2019, was 9,000 and 100,792,549, respectively.
Documents incorporated by reference:
Part III of this Form 10-K incorporates by reference certain information from the registrant's 2019 Information Statement.
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
Exhibit Index
Page
4
18
31
31
31
31
31
33
34
50
52
89
89
89
90
90
90
90
90
91
95
96
2
FORWARD-LOOKING STATEMENTS
Certain statements in this 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, including Hermes Fund Managers Limited (Hermes) beginning
July 1, 2018 (collectively, 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. Forward-looking statements are
typically identified by words or phrases such as "trend," "potential," "opportunity," "believe," "expect," "anticipate," "current,"
"intention," "estimate," "position," "projection," "assume," "continue," "remain," "maintain," "sustain," "seek," "achieve," and
similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" and similar expressions.
Among other forward-looking statements, such statements include certain statements relating to, or, as applicable, statements
concerning management's assessments, beliefs, expectations, assumptions, judgments, projections or estimates regarding: asset
flows, levels and mix; business mix; the level, timing, degree and impact of changes in interest rates, yields or asset levels or
mix; fee rates and sources and levels of revenues, expenses, gains, losses, income and earnings; the level and impact of
reimbursements, rebates or assumptions of fund-related expenses (Consideration Payable to Customers) and fee waivers
(collectively, Fee Waivers); when revenue is recognized; whether performance fees or carried interest will be earned; the
components and level of, and prospect for, distribution-related expenses; guarantee and indemnification obligations; the timing
of, and direct or contingent payment obligations and costs relating to acquisitions; payment obligations pursuant to employment
or incentive arrangements; business and market expansion opportunities, including, anticipated, or acceleration of, growth
outside of the United States (U.S.); interest and principal payments or expenses; taxes, tax rates, deferred tax assets and the
impact of tax law changes; borrowing, debt, future cash needs and principal uses of cash, cash flows and liquidity; the ability to
raise additional capital; type, classification and consolidation of investments; uses of treasury stock; Federated, product and
market performance and Federated's performance indicators; investor preferences; product and strategy demand, distribution,
development and restructuring initiatives and related planning and timing; the effect, and degree of impact, of changes in
customer relationships; legal proceedings; the pace, timing, impact, effects and other consequences of Brexit, as well as
potential, proposed and final laws, regulations and other rules, continuing regulatory oversight, and possible deregulation by
U.S. and foreign regulators and other authorities; dedication of resources; the adoption and impact of accounting policies, new
accounting pronouncements and accounting treatment determinations; compliance, and related legal, compliance and other
professional services expenses; interest rate, concentration, market, currency and other risks; auditor independence matters; and
various other items set forth under Item 1A - Risk Factors. Among other risks and uncertainties, market conditions may change
significantly and impact Federated's business and results, including by changing Federated's asset flows, levels, and 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 purchase price payments in connection with acquisitions is subject to
certain adjustments and conditions, and the obligation to make contingent payments is based on net revenue levels and will be
affected by the achievement of such levels. The obligation to make additional payments pursuant to employment or incentive
arrangements is based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and
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 intermediaries who offer Federated's products to
customers, and potential increased legal, compliance and other professional services expenses stemming from additional or
modified regulation or the dedication 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 continued scrutiny of the mutual fund 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
ITEM 1 – BUSINESS
General
Part I
Federated Investors, Inc., a Pennsylvania corporation, together with its consolidated subsidiaries, including Hermes Fund
Managers Limited (Hermes) beginning July 1, 2018 (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 $459.9 billion in assets under management (AUM or managed
assets) at December 31, 2018.
Federated operates in 1 operating segment, the investment management business. Federated sponsors, markets and provides
investment-related services to various investment products, including sponsored investment companies and other funds
(Federated Funds) and Separate Accounts (which include separately managed accounts (SMAs), institutional accounts, sub-
advised funds and other managed products) in both domestic and international markets, as well as provides stewardship
services to various companies. Federated's principal source of revenue is investment advisory fee income earned by various
domestic and/or foreign subsidiaries pursuant to investment advisory contracts and based primarily upon the AUM of the
investment products. Domestic subsidiaries are registered as investment advisors under the Investment Advisers Act of 1940
(Advisers Act), while foreign subsidiaries are registered in the U.S and/or with foreign regulators.
Federated provides investment advisory services to 130 Federated Funds as of December 31, 2018. 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. As of December 31, 2018, the Federated
Funds are domiciled in the U.S., as well as Ireland, the United Kingdom (UK), the Cayman Islands and Canada. Most of
Federated's U.S.-domiciled funds are registered under the Investment Company Act of 1940 (1940 Act) and under other
applicable federal laws. Each U.S.-domiciled registered fund 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, as defined under the 1940
Act, of the funds or Federated. In general, material amendments to such advisory agreements must be approved by the funds'
shareholders. These advisory agreements are generally terminable upon 60 days' notice to the investment advisor. See Potential
Adverse Effects of Termination or Failure to Renew Advisory Agreements in Item 1A - Risk Factors for additional information
on Federated's advisory agreements.
Of the 130 Federated Funds as of December 31, 2018, Federated's investment advisory subsidiaries managed 28 money market
funds totaling $208.5 billion in AUM, 47 fixed-income funds with $40.5 billion in AUM, 38 equity funds with $36.6 billion
in AUM, 11 alternative/private markets funds with $11.4 billion in AUM and 6 multi-asset funds with $3.9 billion in AUM.
As of December 31, 2018, Federated provided investment advisory services to $159.0 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, sub-advised funds and other accounts or products owned or sponsored by
third parties. Fees for Separate Accounts are typically based on AUM pursuant to investment advisory agreements that are
generally terminable upon notice to Federated (or, in certain cases, after a 30 day, 60 day or similar notice period).
Certain Federated Funds have adopted distribution plans that, subject to applicable law, provide for payment to Federated for
distribution services. These distribution plans are implemented through distribution agreements between Federated and the
Federated Funds. 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 as required under applicable law.
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.
On July 2, 2018, Federated completed, effective as of July 1, 2018, the acquisition of a controlling interest in Hermes (Hermes
Acquisition). As a result of the Hermes Acquisition, Federated now also provides stewardship services and industry-leading
environmental, social and governance (ESG) integrated investment strategies. Through the stewardship services, Federated
offers clients a range of solutions for engagement, advocacy, active ownership and impact and delivers effective engagement
with the companies in which they invest. Federated integrates ESG factors into, or considers ESG factors in connection with,
certain of its investment strategies and processes to seek long-term performance for its customers and clients.
4
Assets Under Management
Total AUM are composed of Federated Funds and Separate Accounts and represent the balance of AUM at a point in time. Total
managed assets for the past two years were as follows:
dollars in millions
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Managed Assets
As of December 31,
2018
72,497
63,158
18,318
4,093
158,066
301,794
459,860
$
$
2017
62,816
64,160
366
5,014
132,356
265,214
397,570
$
$
2018
vs. 2017
15%
(2)
NM
(18)
19
14
16%
1 Alternative/Private Markets at December 31, 2018 includes $8.3 billion of fund assets managed by a non-consolidated entity, Hermes
GPE LLP, in which Hermes holds an equity method investment.
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
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Managed Assets
$
$
$
$
Year Ended December 31,
2018
70,680
63,454
9,397
4,764
148,295
267,093
415,388
2017
60,255
55,204
441
5,062
120,962
245,459
366,421
$
$
2016
53,492
51,161
650
5,289
110,592
252,346
362,938
2018
vs. 2017
17%
15
NM
(6)
23
9
13%
2017
vs. 2016
13%
8
(32)
(4)
9
(3)
1%
1
Alternative/Private Markets for the year ended December 31, 2018 includes $4.1 billion of average fund assets managed by a non-
consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.
Changes in Federated's average asset mix year-over-year across both asset classes 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. Generally, management-fee rates charged for advisory
services provided to equity and multi-asset products and strategies are higher than management-fee rates charged to fixed-
income and alternative/private markets products and strategies, which are higher than management-fee rates charged to money
market products and strategies. Likewise, Federated Funds typically have a higher management-fee rate than Separate
Accounts. Additionally, certain components of distribution expense can vary depending upon the asset class, distribution
channel and/or the size or structure of the customer relationship. Federated generally pays out a larger portion of the revenue
earned from managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity,
fixed-income and alternative/private markets funds.
Revenue
Federated's revenues from investment advisory, administrative and other service fees over the last three years were as follows:
dollars in thousands
Investment Advisory Fees, net
Administrative Service Fees, net
Other Service Fees, net
Total Revenue
$
Year Ended December 31,
2018
773,418
199,269
162,990
$ 1,135,677
2017
731,670
188,814
182,440
$ 1,102,924
2016
766,825
211,646
164,900
$ 1,143,371
$
$
2018
vs. 2017
6%
6
(11)
3%
2017
vs. 2016
(5)%
(11)
11
(4)%
5
Investment Products and Strategies
Federated offers a wide range of products and strategies, including money market, equity, fixed-income, alternative/private
markets and multi-asset investments. Federated's offerings include 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 suitable 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 $301.8 billion in AUM at December 31, 2018.
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, 2018, Federated managed money market assets across a wide range of categories: government ($203.5
billion); prime ($87.6 billion); and tax-free ($10.7 billion).
Federated's equity assets totaled $72.5 billion at December 31, 2018 and are managed across a wide range of categories
including: value and income ($32.5 billion); international/global ($24.1 billion); growth ($13.2 billion); and blend ($2.7
billion).
Federated's fixed-income assets totaled $63.2 billion at December 31, 2018 and are managed across a wide range of categories
including: multisector ($37.0 billion); high-yield ($10.1 billion); municipal ($5.1 billion); U.S. corporate ($4.9 billion); U.S.
government ($3.0 billion); international/global ($2.2 billion); and mortgage-backed ($0.9 billion).
Federated's alternative/private markets and multi-asset investments totaled $18.3 billion and $4.1 billion, respectively, at
December 31, 2018. Federated's alternative/private markets assets are managed across a wide range of categories including: real
estate ($8.6 billion); private equity ($4.1 billion); infrastructure ($4.1 billion); and other alternative ($1.5 billion).
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
disciplines including: fundamental research and credit analysis; ESG integrated investment strategies; quantitative research
models; style-consistent and disciplined portfolio construction and management; performance attribution; and trading.
See Note (5) to the Consolidated Financial Statements for information on revenue concentration risk.
Distribution Channels and Product Markets
Federated's distribution strategy is to provide investment management products and services to more than 9,500 institutions and
intermediaries including banks, broker/dealers, registered investment advisors, government entities, corporations, insurance
companies, foundations and endowments. Federated uses its trained sales force of nearly 250 representatives and managers
backed by an experienced support staff to offer its products and strategies, add new customer relationships and strengthen and
expand existing relationships.
Federated's investment products and strategies are distributed in three markets. These markets and the relative percentage of
managed assets at December 31, 2018 attributable to such markets are as follows: U.S. financial intermediary (64%);
U.S. institutional (23%); and international (13%).
U.S. Financial Intermediary. Federated distributes its products and strategies in this market through a large, diversified group of
over 2,500 national, regional and independent broker/dealers, banks and registered investment advisors. Financial
intermediaries use Federated's products to meet the needs of their customers, who are often retail investors. Federated offers a
full range of products to these customers, including mutual funds, separate accounts and private funds. As of December 31,
2018, managed assets in the U.S. financial intermediary market included $215.7 billion in money market assets, $45.1 billion in
equity assets, $32.2 billion in fixed-income assets, $3.2 billion in multi-asset and $0.3 billion in alternative/private markets
assets.
U.S. Institutional. Federated offers its products and strategies to a wide variety of domestic institutional customers including
government entities, not-for-profit entities, corporations, corporate and public pension funds, foundations, endowments and
non-Federated investment companies or other funds. As of December 31, 2018, managed assets in the U.S. institutional market
included $76.8 billion in money market assets, $25.3 billion in fixed-income assets, $3.2 billion in equity assets and $0.8 billion
in multi-asset.
International. Federated manages assets from institutional and financial intermediary customers outside the U.S. through
subsidiaries focused on gathering assets in Europe, the Middle East, Canada, Latin America and the Asia Pacific region. The
2018 Hermes Acquisition expanded the distribution footprint of Federated outside of the U.S. As of December 31, 2018,
6
managed assets in the international market included $24.2 billion in equity assets, $18.0 billion in alternative/private markets
assets, $9.3 billion in money market assets and $5.7 billion in fixed-income assets.
Competition
As of December 31, 2018, Federated had $300.8 billion of Federated Fund AUM and $159.0 billion of Separate Account AUM.
Of the Separate Account AUM, $21.9 billion related to SMAs.
The investment management business is highly competitive across all types of investment products and strategies, including
mutual funds, exchange traded funds (ETFs), SMAs, institutional accounts, sub-advised funds and other managed products and
strategies. Competition is particularly intense among mutual fund and ETF providers. According to the Investment Company
Institute, at the end of 2018, there were over 8,000 open-end mutual funds and nearly 2,000 ETFs of varying sizes and
investment objectives whose shares are currently being offered.
In addition to competition from other mutual fund managers, ETF providers and investment advisors, Federated competes with
investment alternatives offered by insurance companies, commercial banks, broker/dealers, deposit brokers, other financial
institutions, and hedge 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 preference, relationships with intermediaries and type and quality of services.
Regulatory Matters
Federated and its investment management business are subject to extensive regulation both in and outside the U.S. 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 registration; regulations or other rules, promulgated by various regulatory authorities, self-regulatory
organizations or exchanges; and foreign laws, regulations or other rules promulgated by foreign regulatory or other authorities.
See Item 1A - Risk Factors under the caption Potential Adverse Effects of Changes in Laws, Regulations and Other Rules on
Federated's Investment Management Business for additional information.
Current Regulatory Environment - Domestic
While the pace of new regulation slowed in 2018, and the possibility for a similar pace in 2019 exists, the regulatory
environment continues to evolve. While certain regulatory initiatives were abandoned or modified amidst calls for deregulation,
the Securities and Exchange Commission (SEC), among other regulatory authorities, self-regulatory organizations or
exchanges, continued to propose new rules and regulations in 2018 and will continue to do so going forward. Certain previously
adopted rules and regulations also became effective in 2018 or will become effective in 2019. The rules and regulations that
have or are expected to become effective, and any new proposed rules and regulations, continue to impact the investment
management industry (collectively, both domestically and abroad, as applicable, Regulatory Developments).
The calls for deregulation first began through a series of Executive Orders and Presidential Memoranda issued in the first
quarter of 2017. This was followed by a U.S. Department of the Treasury (Treasury Department) report on asset management
and insurance in October of 2017 (Treasury Asset Management Report), in which the Treasury Department made various
recommendations for deregulation of the asset management industry, including, among others, a recommendation to eliminate
Dodd-Frank Act-imposed stress testing requirements for investment advisors and investment companies in favor of stress
testing requirements under Rule 2a-7 under the 1940 Act (Rule 2a-7). Deregulation also is a focus of certain legislative efforts.
The House Financial Services Committee advanced a bill seeking to reverse certain aspects of money market fund reform and a
hearing on that bill was held in the Senate in June 2018, and efforts continue in Congress to get this legislation passed and
signed into law. The proposed law would permit the use of amortized cost valuation by, and override the floating NAV and
certain other requirements for, institutional and municipal (or tax-exempt) money market funds. These requirements were
imposed under the SEC's structural, operational and other money market fund reforms adopted through amendments to
Rule 2a-7, and certain other regulations, on July 23, 2014 (2014 Money Fund Rules) and related guidance (collectively, the
2014 Money Fund Rules and Guidance). Compliance with the 2014 Money Fund Rules and Guidance became effective on
October 14, 2016.
The current regulatory environment has affected, and is expected to continue to affect, to varying degrees, Federated's business,
results of operations, financial condition and/or cash flows. Increased regulation and Regulatory Developments have required,
and are expected to continue to require, additional internal and external resources to be devoted to technology, legal,
compliance, operations and other efforts to address regulatory-related matters, and have caused, and may continue to cause,
product structure, pricing, offering and development effort adjustments, as well as changes in asset flows and mix, customer
7
relationships, revenues and operating income. Given the slowed pace of regulation and calls for deregulation, the degree of
impact of Regulatory Developments can vary and is uncertain.
In the fourth quarter of 2018, the SEC proposed or adopted new rules that impact U.S. investment management industry
participants, including Federated. For example:
• On December 19, 2018, the SEC proposed rule 12d1-4, and amendments, under the 1940 Act, designed to streamline and
enhance the regulatory framework for funds that invest in other funds (or "fund of funds" arrangements), and rescinded rule
12d1-2 under the 1940 Act and most related exemptive orders granted by the SEC to provide relief from Sections 12(d)(1)
(A), (B), (C) and (G) of the 1940 Act. The SEC also proposed related amendments to rule 12d-1 under the 1940 Act and
Form N-CEN. The proposed rule would, under certain specified conditions, permit a fund to acquire shares of another fund
in excess of the limits of section 12(d)(1) of the 1940 Act without obtaining an exemptive order from the SEC. Specifically,
proposed rule 12d1-4 would: (1) prohibit an acquiring fund, except one that is part of the same group of investment
companies as the acquired fund or one that has a sub-advisor that acts as advisor to the acquired fund, from controlling an
acquired fund and requires an applicable acquiring fund that holds more than 3% of an acquired fund's outstanding voting
securities to vote those securities in a prescribed manner in order to minimize influence over the acquired fund; (2) prohibit
an acquiring fund that acquires more than 3% of an acquired fund's outstanding voting securities from redeeming more
than 3% of the acquired fund's total outstanding securities in any 30-day period; (3) impose conditions designed to prevent
duplicative and excessive fees in fund of funds arrangements by requiring an evaluation of aggregate fees associated with
the investment in the acquired fund and the complexity of the fund of funds arrangement; and (4) prohibit funds from
creating three-tier fund of fund structures, except in certain limited circumstances. Rule 12d1-2, which is proposed to be
rescinded, permits funds that primarily invest in funds within the same group of investment companies to invest in
unaffiliated funds and certain non-fund assets. The proposed amendments to rule 12d1-1 would allow funds that primarily
invest in funds within the same group of investment companies to continue to invest in unaffiliated money market funds.
Finally, the amendments to Form N-CEN would require funds to report whether they relied on rule 12d1-4 or the statutory
exception in Section 12(d)(1)(G) of the 1940 Act during the applicable reporting period. The public comment period on the
proposed rule ends 90 days after the proposed rule is published in the Federal Register. Federated is analyzing the potential
impact that the proposed rule, if adopted as proposed, would have on Federated's fund of fund arrangements and relevant
products and, as of December 31, 2018, Federated is unable to determine the impact on its business, results of operations,
financial condition and/or cash flows.
• On November 30, 2018, the SEC adopted a new rule under the 1933 Act to establish, subject to certain conditions, a non-
exclusive safe harbor for an unaffiliated broker or dealer participating in a securities offering of a covered investment fund
to publish or distribute a covered investment fund research report. The rule was first proposed by the SEC on May 23,
2018. Under the new rule, a broker-dealer's publication or distribution of research reports that satisfy the conditions in the
rule would be deemed, for purposes of Sections 2(a)(10) and 5(c) of the 1933 Act, not to constitute an offer for sale or offer
to sell a covered investment fund's securities. The new rule generally became effective on January 14, 2019.
Investment management industry participants, such as Federated, also continued, and will continue, to monitor, plan for and
implement certain changes in response to new proposed or adopted rules, such as the following, which Federated previously
described in greater detail in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2018:
• Three new SEC proposals were issued on April 18, 2018, including Regulation Best Interest, clarifications on an
investment advisor's fiduciary duty and a short client or customer relationship summary report (Form CRS). In a
December 6, 2018 speech, SEC Chairman Jay Clayton indicated that a key priority for the SEC in 2019 is to finalize
Regulation Best Interest, which, if adopted as proposed, would require broker-dealers to act in the best interest of a retail
customer when making a recommendation of any securities transaction or investment strategy involving securities and to
put the retail customer's interests ahead of the broker-dealer's interests when making recommendations. Moreover, until
Regulation Best Interest is finalized, it remains uncertain whether, and to what degree, broker-dealers or other
intermediaries will roll-back or continue changes made prior to the Department of Labor's rule imposing a modified
fiduciary standard for retirement plan advisors (DOL Fiduciary Rule) having been vacated in its entirety in mid-2018, such
as eliminating commission-based compensation arrangements, reducing the number of mutual funds offered on their
platforms or requiring "clean shares" or other product fee structure changes based on SEC guidance. It is also uncertain to
what degree a final Regulation Best Interest may impact the types of products that intermediaries, such as broker-dealers,
may offer to their customers, and to what degree, if any, such an impact may have on demand for Federated's products and
services or how they are offered and sold.
• An SEC request for comment was issued on June 5, 2018 seeking public input on enhancing mutual fund, ETF and other
investment fund disclosures to improve the investor experience and help investors to make informed investment decisions.
8
Among other matters, it also solicits feedback on investor preferences for means of delivery and how to make better use of
21st century technology, including how to make disclosures more interactive and personalized. The public comment period
ended on October 31, 2018.
• Rule 30e-3 under the 1940 Act (Rule 30e-3), adopted by the SEC on June 6, 2018, creates an optional "notice and access"
method for delivering shareholder reports through website posting in lieu of mailing. Subject to certain accessibility,
quarterly holdings availability, formatting, notice, print upon request, and paper copy election conditions in the rule, the
rule will allow funds to deliver their shareholder reports by making them publicly accessible on a website, free of charge,
and sending investors a paper notice of each report's availability by mail. Federated intends to rely on Rule 30e-3 and the
Federated Funds registered under the 1940 Act began including the required notice to shareholders in annual reports to
fund shareholders and fund prospectuses beginning January 1, 2019.
•
In light of the adoption of Rule 30e-3, the SEC also issued on June 5, 2018, a request for public comment and additional
data on the current processing fee framework intermediaries charge for forwarding fund materials, such as shareholder
reports and prospectuses, to beneficial shareholders under current rules of the New York Stock Exchange (NYSE) and
other self-regulatory organizations, to better understand the potential effects on funds and their investors. The public
comment period ended on October 31, 2018.
• The SEC adopted amendments on June 28, 2018 to the public liquidity-related disclosure requirements for open-end
mutual funds to assist in providing investors with accessible and useful information about the liquidity risk management
practices of the funds in which they invest. Under the amendments, funds will be required to discuss in their annual or
semi-annual shareholder reports the operation and effectiveness of their liquidity risk management program, replacing a
pending requirement that funds publicly provide the aggregate liquidity classification profile of their portfolios on Form N-
PORT. This rule became effective on September 10, 2018, with a compliance date for the Form N-PORT amendments
being June 1, 2019, and a compliance date for the shareholder report disclosure requirements of December 1, 2019, for
larger fund complexes.
• The SEC proposed rule 6c-11 under the 1940 Act (Rule 6c-11) on June 28, 2018, which would permit ETFs that satisfy
certain conditions to operate without the expense and delay of obtaining an exemptive order, impose certain enhanced
disclosure requirements regarding ETF trading costs, and amend Form N-CEN to require ETFs to report whether they rely
on Rule 6c-11 and to report additional information to allow the SEC to confirm compliance with Rule 6c-11. The public
comment period on the proposed rule ended on October 1, 2018.
• The SEC issued on June 28, 2018, a final rule that requires, among other things, the use of the Inline eXtensible Business
Reporting Language (iXBRL) format for the submission of operating company financial statement information and fund
risk/return summary information. The new rule became effective on September 17, 2018, and must be complied with by
large mutual fund complexes, such as the Federated Funds, beginning September 17, 2020, and for public companies, such
as Federated, with respect to fiscal periods ending on or after June 15, 2019.
• While the SEC's proposed derivatives rule, which was issued on December 11, 2015 and would increase the regulation of
the use of derivatives by investment companies, remains on the SEC's 2019 regulatory agenda, the SEC is considering
issuing a new proposed derivatives rule later in 2019, which signals that this proposed rule will be modified from the SEC's
original proposal. Among other recommendations on derivatives regulation, the Treasury Asset Management Report
recommended that the SEC consider a derivatives rule that would include a derivatives risk management program and an
asset segregation requirement, but reconsider what, if any, portfolio limits should be part of the rule.
• The SEC adopted rules on October 13, 2016 relating to the modernization of investment company reporting and disclosure,
the enhancement of liquidity risk management by open-end investment companies and the permitted use of "swing pricing"
by open-end investment companies. Under the reporting modernization rules, the Federated Funds that are registered under
the 1940 Act were required to report on Form N-CEN beginning in June 2018. For larger fund complexes, such as
Federated's, required information for Form N-PORT was required to be compiled, maintained and made available to the
SEC from and after June 1, 2018 and filing of Form N-PORT will be required beginning April 30, 2019. Regarding the
liquidity management rules, compliance with disclosure and certain other elements of the rules was required by June 1,
2017. Federated established its liquidity risk management program by December 1, 2018, as required for larger fund
complexes. The rules' limitation of illiquid investments to 15% of net assets also took effect on December 1, 2018. The
SEC postponed the requirement to report on Form N-LIQUID until April 1, 2019, in light of the cyber incident disclosed
by the SEC in September 2017, and the implementation of the liquidity bucketing requirement until June 1, 2019. Based on
comments from certain SEC Commissioners, industry participants, including Federated, requested that the SEC consider
eliminating the bucketing requirements because, among other reasons, they are highly burdensome, defective and costly,
9
and will not provide the SEC or fund managers with meaningful insights into fund liquidity during times of market stress
or other intended benefits. As of December 31, 2018, management does not believe there is interest in the U.S. fund
industry generally to adopt swing pricing.
In addition to the above Regulatory Developments, the SEC staff has been engaging in a series of investigations, enforcement
actions and/or examinations involving investment management industry participants, including investment management
companies and investment advisors. The number of SEC examinations increased in 2018 by 10% over 2017, and the number of
SEC enforcement actions against investment advisors and investment companies also increased in 2018 over 2017. The SEC
examinations have included certain sweep examinations of investment management companies and investment advisors
involving various topics, including, but not limited to, compliance with the 2014 Money Fund Rules and Guidance,
"distribution in guise," marketing support payments, intermediary and other payments and related disclosures, the impact of the
UK's vote to exit the European Union (EU) (known as "Brexit"), share class selection, fixed-income and high yield liquidity,
liquidity controls, liquid alternatives and cybersecurity. The SEC staff focused on cybersecurity, anti-money laundering, wrap
fee programs, mutual funds and ETFs, disclosure of costs of investing and retirement products as examination priorities in
2018, and has announced that it will focus on matters important to retail investors, compliance in registrants responsible for
critical market infrastructure, digital assets, cyber security and anti-money laundering, among other matters, as examination
priorities in 2019. Over the past three years, the SEC staff also issued various guidance statements on cyber-security,
investment company business continuity, mutual fund distribution, revising fund disclosures in light of changing market
conditions, inadvertent custody, and sales load variation disclosure, among other topics. On October 11, 2018, the SEC also
adopted a Strategic Plan for Fiscal Years 2018-2022 that describes using the SEC's examination resources to bolster regulatory
requirements and protect investors. These investigations, actions and examinations have led, and may lead, to further
regulation, guidance statements and scrutiny of the investment management industry. Given government regulatory policies, the
changes in SEC management, and the possibility of a continuing slower pace for new regulation in the U.S., the degree to
which regulatory investigations, actions and examinations will continue, as well as their frequency and scope, can vary and is
uncertain.
Regulation or potential regulation by regulators other than the SEC also continued, and may continue, to affect investment
management industry participants, including Federated. For example, the Financial Industry Regulatory Authority (FINRA)
also has undertaken examinations, including, for example, a cybersecurity sweep examination, and various state legislatures or
regulators have adopted or are beginning to adopt state-specific cybersecurity and/or privacy requirements that may apply, to
varying degrees, in addition to federal regulation.
The activities of the Financial Stability Oversight Council (FSOC) also continue to be monitored by the investment
management industry, including Federated. Since FSOC indicated in 2014 that it intended to monitor the effectiveness of the
2014 Money Fund Rules, concerns persisted that FSOC may recommend new or heightened regulation for "non-bank financial
companies," 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. The Treasury Asset Management Report, noting
that entity-based systemic risk evaluations of asset managers or their funds are generally not the best approach for mitigating
risk, recommended that, while the FSOC should maintain a risk identification and evaluation function, the FSOC should look to
the SEC to address systemic risks through regulation within and across the asset management industry in the U.S. While the
FSOC has since moved away from potential systemically important financial institution designations of asset managers or
investment products in favor of studying and evaluating the financial stability implications of the asset management sector, the
FSOC continues to focus on risks facing the investment management industry, and review and monitor SEC efforts on reporting
modernization, liquidity management and derivatives. In its 2018 Annual Report published on December 19, 2018, FSOC
recommended that the SEC monitor the implementation of these rules and evaluate the extent to which they address potential
risks in the asset management industry. While its focus appears to have shifted, and while legislative and other efforts continue
to improve its transparency and operation, the FSOC retains its authority to designate non-bank financial companies as
systemically important financial institutions. Based on the foregoing, the degree to which actions by the FSOC can impact the
investment management industry, including Federated, remains uncertain.
The current regulatory environment has impacted, and will continue to impact, Federated's business, results of operations,
financial condition and/or cash flows. For example, changes required under the 2014 Money Fund Rules and Guidance resulted
in a shift in asset mix from institutional prime and municipal (or tax-exempt) money market funds to stable NAV government
money market funds across the investment management industry, and at Federated, which impacted its AUM, revenues and
operating income. Management continues to believe that, if interest rates continue to rise, money market funds will benefit
generally from increased yields, particularly as compared to deposit account alternatives, and that, as spreads widen, investors
who exited prime money market funds will likely continue to reconsider their investment options over time, including
Federated's prime private money market fund and prime collective fund. While 2018 did see a shift in asset mix back toward
10
institutional prime and municipal (tax-exempt) money market funds, there is no guarantee such shift will continue and return
the asset mix between institutional prime, municipal (or tax-exempt) and government money market funds to pre-October 2016
levels; therefore, the degree of improvement to Federated's prime money market business can vary and is uncertain.
The changes made in response to the DOL Fiduciary Rule, and the proposed Regulation Best Interest, if adopted as proposed,
impacted, or likely may impact, Federated's AUM, revenues and operating income. For example, while the extent to which
broker-dealers and other intermediaries will roll-back actions taken to comply or to prepare to comply with the vacated DOL
Fiduciary Rule remains uncertain, if intermediaries continue to reduce the number of Federated Funds offered on their
platforms, mutual fund-related sales and distribution fees earned by Federated may decrease. In that case, similar to other
investment management industry participants, Federated could experience a further shift in asset mix and AUM, and a further
impact on revenues and operating income. On the other hand, management continues to believe that Federated's business may
be positively affected because separately managed account/wrap-fee strategies work well in level wrap fee account structures
and can provide transparency and potential tax advantages to clients, while Federated's experience with bank trust departments
and fiduciary experience and resources presents an opportunity to add value for clients.
Federated has dedicated, and continues to dedicate, significant internal and external resources to analyze and address
Regulatory Developments, and their effect on Federated's business, results of operations, financial condition and/or cash flows.
This effort includes considering and/or affecting legislative, regulatory, product structure and development, information system
development, reporting capability, business and other options that have been or may be available in an effort to minimize the
potential impact of any adverse consequences. Federated's efforts include having conversations with intermediary customers
regarding Regulatory Developments, and analyzing product offering and structure adjustments, regulatory alternatives and
other means to comply, and to assist its customers to comply, with new fiduciary rules, the 1940 Act and other applicable laws
and regulations. Among other actions, Federated developed an educational website to assist clients with compliance with the
DOL Fiduciary Rule (now vacated), increased the number of Federated Funds that offer clean shares, including R6 shares, and
added T Shares, which currently are not being offered, to 33 Federated Funds. As appropriate, Federated participated, and will
continue to participate, either individually or with industry groups, in the comment process for proposed regulations. Federated
also continues to expend legal and compliance resources to examine corporate governance and public company disclosure
proposals issued by the SEC and to adopt, revise and/or implement policies and procedures and to respond to examinations,
inquiries and other matters involving its regulators, including the SEC, customers or other third parties. Federated continues to
devote resources to technology and system investment, cybersecurity and information governance, and the development of
other investment management and compliance tools, to enable Federated to, among other things, be in a better position to
address new or modified regulatory requirements. The Regulatory Developments discussed above, and related regulatory
oversight, also impacted, and/or may impact, Federated's customers and vendors, their preferences and their businesses. For
example, these developments have caused, and/or may cause, certain product line-up, structure, pricing and product
development changes, as well as money market, equity, fixed-income, alternative/private markets or multi-asset fund products
to be less attractive to institutional and other investors, reductions in the number of Federated Funds offered by intermediaries,
changes in the fees Federated, retirement plan advisors and intermediaries will be able to earn on investment products and
services sold to retirement plan clients, and reductions in AUM, revenues and operating profits. In addition, these developments
have caused, and/or may cause changes in asset flows, levels and mix, as well as customer relationships.
Federated will continue to monitor Regulatory Developments as necessary, and may implement additional changes to its
business and practices as it deems necessary or appropriate. Further analysis and planning, or additional refinements to
Federated's product line and business practices, may be required in response to market, customer or regulatory changes and
developments, such as further money market fund regulation or potential deregulation, new fiduciary rules and other
Regulatory Developments, or any additional regulation or guidance issued by the SEC or other regulatory authorities.
Management believes that the floating NAV, and fees and gates, required by the 2014 Money Fund Rules, as well as other
Regulatory Developments, have been and will continue to be detrimental to Federated's fund business. In addition to the impact
on Federated's AUM, revenues, operating income and other aspects of Federated's business described above, on a cumulative
basis, Federated's regulatory, product development and restructuring, and other efforts in response to the Regulatory
Developments discussed above, including the internal and external resources dedicated to such efforts, have had, and may
continue to have, a material impact on Federated's expenses and, in turn, financial performance. As of December 31, 2018,
given the current regulatory environment, the possibility of future additional or modified regulation or oversight, and the
possibility for a continuing slower pace for new regulation in the U.S., Federated is unable to fully assess the impact of adopted
or proposed regulations, and other Regulatory Developments, and Federated's efforts related thereto, on its business, results of
operations, financial condition and/or cash flows. The regulatory changes and developments in the current regulatory
environment, and Federated's efforts in responding to them, could have a material and adverse effect on Federated's business,
results of operations, financial condition and/or cash flows. As of December 31, 2018, while the FSOC's change in focus and
11
continuing FSOC transparency efforts have reduced the possibility of any Federated products being designated a systemically
important non-bank financial company by the FSOC, in management's view any such designation, the issuance of final
regulations pertaining to systemically important non-bank financial companies, 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 also is unable to assess at this time whether, or
the degree to which, any continuing deregulation efforts or potential options being evaluated in connection with regulatory
changes and developments ultimately may be successful.
International
With UK Parliament rejecting Prime Minister Theresa May's proposed Brexit withdrawal agreement on January 15, 2019, the
Prime Minister is continuing negotiations with the EU Parliament to avoid the possibility of Brexit occurring on March 29,
2019, without a withdrawal agreement governing the UK's separation from the EU (a so called "hard Brexit"). As negotiations
continue, concerns continue regarding the value of the British Pound Sterling, the UK's credit rating, the impact on the financial
markets, and the legal and regulatory impact of a hard Brexit, including, among other potential impacts, on the ability of
investment management industry participants to offer and sell UK-based products in the EU and EU-based products in the UK.
Among other terms, the proposed withdrawal agreement rejected by the UK Parliament contained the following components:
(A) maintaining a common rule book for industrial goods and agricultural products, other than common agricultural and fishery
policies, but not services; (B) ensuring a fair trading environment through reciprocal commitments relating to state aid and
cooperative arrangements between regulators on competition and maintaining high regulatory standards for the environment,
climate change, social issues, employment, and consumer protection; (C) establishing a joint institutional framework to provide
for the consistent interpretation and application of UK-EU agreements in the UK and EU courts and appropriate resolution of
disputes, including through the establishment of a joint committee of representatives from the UK and EU; and (D) developing
a new business-friendly customs model and facilitated customs arrangement that operates as a combined customs territory and
removes the need for customs checks and controls between the UK and EU. Under this arrangement, the UK would have
applied UK tariffs and trade policy for goods intended for the UK and the EU's tariffs and trade policy for goods intended for
the EU. The proposed withdrawal agreement also included a backstop plan that would have kept the UK in a customs union
with the EU until a permanent trade deal could be agreed upon to avoid a hard border in Northern Ireland.
Since the January 15, 2019 rejection of the proposed withdrawal agreement, Prime Minister Theresa May narrowly escaped a
no confidence vote in UK Parliament on January 16, 2019. Debate has also continued in the UK Parliament. On January 21,
2019, the Prime Minister delivered a speech to UK Parliament in which she declined to support measures to avoid or delay
Brexit, including conducting a new Brexit referendum vote or revoking the UK's Article 50 notice, indicated she would be more
flexible in engaging UK Parliament on withdrawal agreement negotiations, and committed to seeking the strongest possible
protections on workers' rights and the environment and to ensuring no hard border in Northern Ireland. On January 28, 2019,
the UK Parliament voted on seven amendments to the proposed withdrawal agreement: (1) an amendment to avoid a no deal
Brexit and to seek a form of customs union (defeated); (2) an amendment that would extend Article 50 to the end of 2019 if a
deal was not secured by late February 2019 (defeated); (3) an amendment to allow UK Parliament to take control in creating a
series of indicative votes (defeated); (4) an amendment indicating that the UK would not leave the EU without a deal (passed,
but it is only advisory and does not have legislative force); (5) an amendment to seek a two year extension of Article 50 if there
is not a deal in place by February 26, 2019 (defeated); (6) an amendment to replace the backstop with alternative arrangements
to avoid a hard border in Northern Ireland (passed); and (7) an amendment calling for an extension of Article 50 and removing
a no deal Brexit as an option (defeated). With the passing of two amendments by the UK Parliament, Prime Minister Theresa
May indicated that she would return to Brussels to continue negotiations with the European Commission. Promptly after the
UK Parliament's vote on the amendments, a spokesman from the EU released a statement indicating that the withdrawal
agreement is not open for renegotiation. It is uncertain to what degree EU Parliament will change its position and be receptive
to renegotiating the proposed withdrawal agreement.
Given the uncertainty surrounding whether a withdrawal agreement can be reached, the process for agreeing and implementing
the UK's withdrawal from the EU may result in a hard Brexit or a compromised withdrawal agreement by March 29, 2019, or
may extend beyond that date. As time passes without a withdrawal agreement in place, significant political, economic, legal and
regulatory uncertainty is likely to continue to increase. See Item 1A - Risk Factors for further discussion of the risks of political
instability, currency abandonment and other market disruptions on Federated and its business. The UK's exit from the EU also
will likely affect the requirements and/or timing of implementation of legislation and regulation applicable to doing business in
the UK, including the laws and regulations applicable to Federated, as well as to the sponsoring, management, operation and
distribution of Federated's products and services, both in and outside the UK. For example, while EU Directives have been
approved by the UK Parliament, EU regulations generally are effective in the EU without local parliament action and will need
to be approved by the UK Parliament to remain in effect post-Brexit. If the UK does not remain part of the single European
12
market in connection with a hard Brexit, the ability to passport fund distribution and management services could be eliminated
between the UK and EU, increasing regulatory burdens and compliance and other costs for UK funds being distributed in the
EU and EU funds (such as Irish-domiciled funds) being distributed in the UK. The ability to engage investment managers for
EU funds and UK funds also could be impacted, resulting in structural and other changes for UK- and EU-domiciled funds. It
also remains unclear whether Brexit may impact various initiatives underway in the EU, such as money market fund reform and
the implementation of a financial transactions tax (FTT). Despite the disagreement on the withdrawal agreement, UK and EU
regulators are beginning to take steps to address the uncertainty created by a potential hard Brexit. For example, the UK
Financial Conduct Authority (FCA), the European Securities and Markets Authority (ESMA), and other EU regulators have
agreed to two Memoranda of Understanding (MoUs) that cover cooperation and exchange of information in the event the UK
leaves the EU without a withdrawal agreement and an implementation period. Specifically, the MoUs are multilateral MoUs,
one with the EU and European Economic Area (EEA) National Competent Authorities (NCAs) covering supervisory
cooperation, enforcement and information exchange; and one with ESMA covering supervision of Credit Rating Agencies and
Trade Repositories. The FCA also is implementing a temporary permissions regime that, if a hard Brexit occurs, will allow
EEA-domiciled investment funds that market in the UK under a passport to continue temporarily marketing in the UK, and will
allow EEA-based firms currently passporting into the UK to continue new and existing regulated business within the scope of
their current permissions in the UK for a limited period, while they seek full FCA authorization. EU governments, such as
France, the Netherlands and Italy, also are beginning to adopt similar temporary permission regimes or other laws to permit UK
products to be sold for a period of time in their countries in the event of a hard Brexit. Federated is monitoring the impact of
Brexit, and, while Brexit has not had a significant impact on Federated's business as of December 31, 2018, Federated remains
unable to assess the degree of any potential impact Brexit, and resulting changes, may have on Federated's business, results of
operations, financial condition and/or cash flows. Federated continues to expend internal and external resources on contingency
planning for Brexit, but the uncertainty around the terms of the UK's withdrawal from the EU make such planning difficult. For
example, Hermes organized a subsidiary based in Dublin, Ireland, and established offices in Germany and Denmark, as part of
Brexit contingency planning for its business. The Hermes Acquisition increases the potential impact Brexit, and resulting
changes, may have on Federated's business, results of operations, financial condition and/or cash flows.
The EU Securitization Regulation became applicable on January 1, 2019 for originators, sponsors, lenders, securitization
special purpose entities, and institutional investors, including, among others, UCITs funds, alternative investment fund
managers and investment firms. Among other requirements, this regulation establishes requirements for due diligence, risk
retention and transparency of disclosures for those involved in securitization transactions. For example, the regulation requires
investors to conduct due diligence, and to maintain written policies on due diligence and monitoring. The EU also will insist on
investors only investing in products where the originator, lender or sponsor maintains at least a 5% retention in the product,
even if another country (such as the U.S.) removes their requirement for a 5% risk retention. The regulation also requires the
performance of stress tests on cash flows and collateral values or, in the absence of stress testing, testing based on assumptions
having regard to the nature, scale and complexity of risk positions. The regulation also requires internal reporting to a relevant
management body so that such management body is aware of material risks and can ensure that they are appropriately
managed. Finally, under the regulation, the originators, sponsors or lenders involved with a securitized product have to agree
amongst themselves to publish information that will be publicly available via repositories that will enable investors to more
easily conduct due diligence when investing in securitized products.
The European Commission has issued four legislative proposals relating to its Action Plan on Sustainable Finance, and a further
Action Plan, including a timetable for all actions, is expected to be issued in the second quarter of 2019. The legislation
addresses, among other things, the establishment of a framework to facilitate sustainable investment, including a unified EU
classification system setting harmonized criteria to determine whether an economic activity is environmentally sustainable,
disclosures relating to sustainable investments and sustainability risks, amendments to the Benchmark Regulation to create a
new category of benchmarks comprising low-carbon and positive carbon impact benchmarks, and amendments to the Markets
in Financial Instruments Directive (MiFID II) to provide consistency and clarity for institutional investors integrating
environmental, social and governance (ESG) factors into their investment decision-making process. Federated is assessing the
potential impact that Sustainable Finance proposals may have on its non-U.S. business (including Hermes), results of
operations, financial condition and/or cash flows.
Investment management industry participants, such as Federated, also continued, and will continue, to monitor, plan for and
implement certain changes in response to new proposed or adopted rules, such as the following, which Federated previously
described in greater detail in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2018:
• On April 5, 2017, European Parliament passed EU money market fund reforms (Money Market Fund Regulation or
MMFR). The MMFR provides for the following types of money market funds in the EU: (1) Government constant NAV
(CNAV) funds; (2) Low volatility NAV (LVNAV) funds; (3) Short-term variable NAV (VNAV) funds; and (4) standard
13
VNAV funds. The reforms became effective (i.e., must be complied with) in regards to new funds on July 21, 2018 and
became effective in regards to certain existing funds (including the Federated Funds in Ireland and the UK) on January 21,
2019. Federated utilized both internal and external resources to complete the conversion of two non-U.S. money market
funds to LVNAV funds and two government non-U.S. money market funds to public debt CNAV funds, and otherwise
began to comply with the MMFR, on January 11, 2019. Federated also continues to engage with trade associations and
appropriate regulators in connection with the MMFR because the European Securities Market Authority and the European
Commission continue work on implementing the MMFR and government CNAV and LVNAV fund reforms will be subject
to a future review of their adequacy from a prudential and economic perspective by the European Commission in 2022.
• A European FTT also continues to be discussed without the FTT being adopted. Notwithstanding challenges to its legality,
these discussions continue to involve, among other topics, the scope, application and allocation of the FTT, although any
agreement on the FTT may be delayed until the Brexit negotiations are completed. Since the European Commission first
proposed a European FTT in 2011, proponents of the FTT have sought the widest possible application of the FTT with low
tax rates. On December 3, 2018, Germany and France discussed with other EU Member States, including Austria, Belgium,
Greece, Italy, Portugal, Slovakia, Slovenia and Spain, at a finance ministers' meeting in Brussels, a renewed proposal for a
European FTT based on an existing French FTT on stock trades involving domestically issued shares by companies with a
market capitalization over one billion euros. It has been reported that the Belgian Finance Minister indicated that the
German-French initiative is a positive evolution in the discussions, and that the Austrian Finance Minister indicated that
more information is needed to assess the proposal, that an FTT with the scope limited to domestically issued shares would
not be a real FTT, and that the finance ministers will consider it as a possible alternative. This new German-French
initiative is narrower than prior proposals for a European FTT, which involved a broader, more substantial FTT applicable
to securities transactions, including derivatives. For example, prior proposals would have imposed a 0.1% tax on equity
and bond trades and a 0.01% tax on derivative transactions. The exact time needed to reach resolution, implement any
agreement and enact legislation is not known at this time. As noted above, Brexit could delay agreement on, and
implementation of, the FTT in Europe. The Labour Party in the UK has also separately proposed a UK FTT, but with the
Brexit uncertainty, it is uncertain whether a UK FTT will be advanced in 2019.
• On July 4, 2018, the FCA released near final rules extending the Senior Managers and Certification Regime (SMCR) to
insurers and all other firms offering financial services in the UK, intended to increase accountability for senior personnel
and key staff. The FCA designates certain "senior management functions" and "certification functions." Under the SMCR,
personnel conducting senior management functions (called Senior Managers) will need to be approved by the FCA and,
those approved, will be listed in a Financial Services Register. Personnel that do not perform senior management functions
but whose role could cause significant harm to customers or the firm are considered to perform certification functions
(called Certification Staff). As such, firms are required to certify that such personnel are fit and proper to perform their
roles. Both Senior Managers and Certification Staff must be identified and trained by December 9, 2019. Firms will have
an additional twelve months to complete the certification process for Certification Staff. All staff (other than ancillary staff)
will be subject to certain conduct rules set forth by the FCA.
The activities of the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO)
also continue to be monitored by the investment management industry, including Federated. Building on consultations and
other reports published in 2015 through 2018 regarding methodologies for identifying non-bank non-insurer global systemically
important financial institutions, recommendations to address structural vulnerabilities from asset management activities, and
liquidity risk management, the FSB and IOSCO continued, and will continue, to assess, and recommend and implement
regulatory reforms affecting, money market funds, liquidity risk management, derivatives, leverage, and other aspects of the
investment management industry. For example, in its 4th Annual Report published on November 28, 2018, among other topics,
the FSB stated that it continues to monitor and assess the growth and risks in non-bank intermediation, including, for example,
liquidity, digitalization of finance (or financial technology), crypto-assets, and artificial intelligence, and that it will continue to
promote cross-border cooperation amongst regulators. In November of 2018, IOSCO published an update on its principles for
the regulation and supervision of commodity derivatives markets and a consultation paper on leverage. In the consultation
paper, IOSCO outlined a proposed framework that could be used by regulators to calculate and analyze leverage in investment
funds, and requested comments by February 1, 2019.
The FCA and the Bank of England (BoE) Prudential Regulation Authority continue efforts started in September 2018 regarding
the transition from LIBOR to the Sterling Overnight Index Average (SONIA) by the end of 2021. The BOE continues to
encourage firms to consider their actions and preparations in managing the transition from LIBOR to alternative interest rate
benchmarks, and to seek assurances that firms' senior managers and boards understand the risks associated with this transition.
Regulators in the U.S. and other countries also are working on the transition from LIBOR. For example, the SEC and other
regulators in the U.S. are undertaking efforts to identify risks and prepare for the transition from LIBOR to the Secured
14
Overnight Financing Rate (SOFR) by the end of 2021. The SOFR was selected as the preferred LIBOR replacement in the U.S.
by the Alternative Reference Rates Committee at the Federal Reserve Bank of New York. In a December 6, 2018 speech, SEC
Chairman Jay Clayton discussed the transition from LIBOR, noting that the SEC is working with other regulators to monitor
risks and work needs to be done to develop a SOFR term structure that will facilitate the transition. The phase-out of LIBOR
may cause the renegotiation or re-pricing of certain credit facilities, derivatives or other financial transactions to which
investment management industry participants, including Federated and its products, customers or service providers, are parties,
alter the accounting treatment of certain instruments or transactions, or have other unintended consequences, which, among
other effects, could require additional internal and external resources to address these effects and increase operating expenses.
Management believes that a UK FTT or EU FTT, particularly if enacted with broad application, would be detrimental to
Federated's business and could adversely affect, potentially in a material way, Federated's business, results of operations,
financial condition and/or cash flows. Management continues to monitor and evaluate the post-implementation impact of
European money market reforms on Federated's business, results of operations, financial condition and/or cash flows.
Regulatory reforms stemming from Brexit or FCA, FSB, IOSCO or other initiatives or Regulatory Developments, as well as the
potential political and economic uncertainty surrounding Brexit, also may adversely affect, potentially in a material way,
Federated's business, results of operations, financial condition and/or cash flows. Similar to Federated's efforts in the U.S.,
Federated has dedicated, and continues to dedicate, significant internal and external resources to analyze and address European
reforms that impact Federated's fund business. European Regulatory Developments, and Federated's efforts relating thereto,
have had, and may continue to have, an impact on Federated's expenses and, in turn, financial performance. As of December 31,
2018, Federated is unable to assess the potential impact that EU money market reforms, an FTT or other regulatory reforms or
initiatives 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 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 non-bank,
non-insurance company global systemically important financial institution. The Hermes Acquisition increases the potential
impact that the above matters may have on Federated's business, results of operations, financial condition and/or cash flows.
Employees
At December 31, 2018, Federated employed 1,878 persons.
15
Executive Officers of Federated Investors, Inc.
The following section sets forth certain information regarding the executive officers of Federated as of February 22, 2019:
Name
J. Christopher Donahue President, Chief Executive Officer, Chairman and Director of Federated Investors, Inc.
Position
Age
69
Gordon J. Ceresino
Vice Chairman of Federated Investors, Inc. and President of Federated International
Management Limited and Federated International Securities Corp.
Thomas R. Donahue
Vice President, Treasurer, Chief Financial Officer and Director of Federated Investors, Inc.
and President of FII Holdings, Inc.
John B. Fisher
Peter J. Germain
Vice President and Director of Federated Investors, Inc. and President and Chief Executive
Officer of Federated Advisory Companies*
Executive Vice President, Chief Legal Officer, General Counsel and Secretary of Federated
Investors, Inc.
Eugene F. Maloney
Executive Vice President of Federated Investors, Inc. and Executive Vice President of
Federated Investors Management Company
Richard A. Novak
Vice President, Assistant Treasurer and Principal Accounting Officer of Federated
Investors, Inc.
Saker A. Nusseibeh
Chief Executive Officer, Hermes Fund Managers Limited
Paul A. Uhlman
Vice President of Federated Investors, Inc. and President of Federated Securities Corp.
Stephen P. Van Meter
Vice President and Chief Compliance Officer of Federated Investors, Inc.
61
60
62
59
73
55
57
52
43
*
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.
Mr. J. Christopher Donahue has served as director, President and Chief Executive Officer of Federated since 1998 and was
elected as Chairman of Federated effective April 2016. He also serves as a director, trustee or officer of various Federated
subsidiaries. He is President of 29 investment companies managed by subsidiaries of Federated. He is also director or trustee of
32 investment companies managed by subsidiaries of Federated. Mr. Donahue is the brother of Thomas R. Donahue who serves
as Vice President, Treasurer, Chief Financial Officer and director of Federated.
Mr. Gordon J. Ceresino has served as Vice Chairman of Federated since 2007. He is President of Federated International
Management Limited and Federated International Securities Corp. and Vice Chairman of Federated MDTA LLC, each of which
are wholly owned subsidiaries of Federated. He serves as a director of Hermes Fund Managers Limited. Mr. Ceresino 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.
Mr. Thomas R. Donahue has served as Vice President, Treasurer and Chief Financial Officer of Federated since 1998. He
previously served as a member of the Board from May 1998 to April 2004 and was re-elected to the Board in April 2016. He
also serves as an Assistant Secretary of Federated and he is President of FII Holdings, Inc., a wholly owned subsidiary of
Federated. He serves as a director of Hermes Fund Managers Limited. He also serves as a director, trustee or officer of various
other Federated subsidiaries. He is also a director or trustee of six investment companies managed by subsidiaries of Federated.
Mr. Donahue is the brother of J. Christopher Donahue who serves as President, Chief Executive Officer, Chairman and director
of Federated.
Mr. John B. Fisher has served as Vice President of Federated since 1998. He previously served as a member of the Board from
May 1998 to April 2004 and was re-elected to the Board in April 2016. 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 serves as a director of Hermes Fund Managers Limited. He also serves as a director, trustee or officer
of certain other Federated subsidiaries. He is President of three investment companies managed by subsidiaries of Federated.
He is also director or trustee of 26 investment companies managed by subsidiaries of Federated. Prior to 2006, Mr. Fisher
served as President of the Institutional Sales Division of Federated Securities Corp., a wholly owned subsidiary of Federated.
Mr. Peter J. Germain has served as Executive Vice President, Chief Legal Officer and Secretary of Federated since October
2017, and as General Counsel and Vice President of Federated since January 2005. In his capacity as Chief Legal Officer, he
16
oversees the delivery of legal, compliance, internal audit and risk management services to Federated and its affiliates. He also
serves as a director, trustee or officer of various Federated subsidiaries. Mr. Germain also serves as Chief Legal Officer,
Executive Vice President and Secretary of 32 investment companies managed by subsidiaries of Federated.
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. 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,
Assistant Company Secretary, President or director for various other subsidiaries of Federated. Mr. Novak is a Certified Public
Accountant.
Mr. Saker A. Nusseibeh is Chief Executive Officer (CEO) of Hermes, a majority-owned subsidiary of Federated beginning
July 1, 2018. He joined Hermes in 2009 and was appointed CEO of Hermes in May 2012, having served as acting CEO since
November 2011. He formerly served as Global Head of Equities at Fortis Investments USA, having initially been appointed as
Head of Global Equities in 2005. He also serves as a director of Hermes and as a director or officer of certain subsidiaries of
Hermes.
Mr. Paul A. Uhlman has served as Vice President of Federated, and President and a director of Federated Securities Corp., a
wholly owned subsidiary of Federated, since June 2016. He is also a director, trustee or officer of certain subsidiaries of
Federated. As President of Federated Securities Corp., he is responsible for the marketing and sales efforts of Federated. He had
previously served as a Vice President of Federated Securities Corp. since 1995, and most recently served as Executive Vice
President of Federated Securities Corp. since 2010. Mr. Uhlman also held the position of National Sales Director, Institutional
Sales, from 2007 through June 2016.
Mr. Stephen P. Van Meter has served as Vice President and Chief Compliance Officer of Federated since July 2015. Between
October 2011 and July 2015, he served as Compliance Operating Officer at Federated. Between October 2007 and October
2011, he served as Senior Counsel in the Division of Investment Management, Office of Chief Counsel, at the SEC. Between
September 2003 and October 2007, Mr. Van Meter served as Senior Counsel in the SEC's Division of Enforcement.
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 its 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 Item 6 - Selected Financial Data and Note (5) 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.
17
ITEM 1A – RISK FACTORS
As an investment manager, risk is an inherent part of Federated's business. U.S., UK and other global financial markets, by their
nature, are prone to uncertainty and subject participants to a variety of risks. If any of the following risks actually occur,
Federated's 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. At any point in time, a meaningful or significant portion
of Federated's total AUM or revenue may be attributable to one or more products or strategies, or asset classes, offered by
Federated, or one or more clients or customer intermediaries with whom Federated has a relationship. See Note (5) to the
Consolidated Financial Statements for information on material concentrations in Federated's revenue. A significant and
prolonged decline in the AUM of a strategy, asset class or fund with a material concentration could have a material adverse
effect on Federated's future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses
associated with these funds or accounts. Likewise, significant negative changes in Federated's relationship with a customer with
a material concentration could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income
due to a related reduction in distribution expenses associated with this customer. A significant change in Federated's investment
management business or a significant reduction in AUM due to regulatory changes or developments, 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, non-competitive performance, the availability, supply and/or market interest in
repurchase agreements and other investments, significant deterioration in investor confidence, a return to declining or additional
prolonged periods of low short-term interest rates and resulting fee waivers, investor preferences for deposit products or other
Federal Deposit Insurance Corporation (FDIC)-insured products, or exchange-traded funds, index funds or other passive
investment products, changes in product fee structures, changes in relationships with financial intermediaries, 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 Low Short-Term Interest Rates. The Federal Open Market Committee of the Federal Reserve
Board (FOMC) raised the federal funds target rate by 0.25% four times during 2018 to its current target range of 2.25%-2.50%,
which was the ninth such interest rate increase since December 2015. The federal funds target rate, which drives short-term
interest rates, had been close to zero for nearly seven years prior to the December 2015 increase. The long-term low interest-
rate environment resulted in the gross yield earned by certain money market funds not being sufficient to cover all of the fund's
operating expenses. As a result, beginning in the fourth quarter of 2008, Federated implemented voluntary waivers (either
through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain
positive or zero net yields (Voluntary Yield-related Fee Waivers). These waivers were 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 Voluntary Yield-related Fee Waivers.
During periods of a low interest-rate environment, Voluntary Yield-related Fee Waivers are calculated as a percentage of AUM
in certain money market funds and thus can vary depending upon the asset levels and mix in such funds. While increases in
short-term interest rates generally have the effect of decreasing, and have decreased, these fee waivers for certain money market
funds, the corresponding increases in yields and the resulting decrease in fee waivers are neither certain nor directly
proportional. In addition, the level of waivers are dependent on several other factors including, but not limited to, yields on
instruments available for purchase by, and changes in expenses of, the money market funds. In any given period, a combination
of these factors impacts the amount of Voluntary Yield-related Fee Waivers. As an isolated variable, an increase in yields on
instruments held by the money market funds would 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 (or between such funds and other money market funds or other products) as well as the mix among certain share classes
that vary in pricing structure can impact the level of fee waivers. Generally, prime money market funds will 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 Voluntary Yield-related Fee Waivers. The opposite
would also be true.
18
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
2018
0.0
0.0
0.0
0.0
0.0
$
$
2017
(4.4) $
3.6
(0.8)
0.0
(0.8) $
2016
(87.8)
65.8
(22.0)
0.0
(22.0)
$
$
The negative pre-tax impact of Voluntary Yield-related Fee Waivers decreased in 2017 as compared to 2016 due primarily to
higher yields on instruments held by the money market funds. As previously mentioned, since late 2015, the FOMC increased
the federal funds target rate range by 0.25% nine times. The interest rate increase in December 2017 eliminated the need to
continue the Voluntary Yield-related Fee Waivers. See Potential Adverse Effects of Increased Competition in the Investment
Management Business in this section for information on competitive waivers currently being implemented by Federated, other
than the Voluntary Yield-related Fee Waivers discussed above.
The FOMC increased the federal funds target rate range by 0.25% in December 2015, December 2016, March, June and
December 2017 and March, June, September and December 2018. There is no guarantee that the FOMC will continue to
maintain the federal funds rate at its current level or continue to increase it. While the FOMC implied in its economic
projections that it would continue to raise the federal funds target rate in a measured and gradual way, Federated is unable to
predict when, or to what extent, the FOMC will maintain or further increase their target for the federal funds rate. Assuming
asset levels and mix remain constant and based on recent market conditions, management estimates that Voluntary Yield-related
Fee Waivers will remain at zero.
The actual amount of future fee waivers, if any, the resulting negative impact of any waivers and Federated's ability to recover
the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax impact going forward, not re-capture previously
waived amounts) could vary significantly from prior years as they are contingent on a number of variables including, but not
limited to, changes in asset levels and mix within the money market funds or among customer assets, yields on instruments
available for purchase by the money market funds, actions by the Governors, the FOMC, the Treasury Department, the SEC,
the DOL, the FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in
customer relationships, changes in money market product structures and offerings, demand for competing products, changes in
distribution models, 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 duration,
level and impact of any future Voluntary Yield-related Fee Waivers, if any, 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) 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. Increases in interest rates could also have an adverse effect on Federated's
revenue from money market, fixed-income, alternative/private markets and other products and strategies. The value of equity
securities (such as dividend paying equity securities) also may rise and fall in response to changes in interest rates. In a rising
short-term interest rate environment, certain investors using money market products and strategies or other short-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. Rising interest rates also may impact demand for and cost to finance real estate and impact
the value of real estate or returns on real estate and other alternative 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.
Potential Adverse Effects of a Decline or Disruption in the Economy or Financial Markets. Economic or financial market
(including securities, real estate, credit and other markets) downturns, disruptions or other conditions (domestic or
international) may cause volatility, illiquidity and other potential adverse effects in the financial markets and adversely affect,
potentially in a material way, the supply of investments, such as money market or municipal (tax-exempt) securities and the
profitability and performance of, demand for and investor confidence in Federated's investment products, strategies and
services. Such economic or financial market downturns, disruptions or other conditions may include, for example, disruptions
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in the securities, real estate and credit markets, defaults or poor performance in certain sectors of the economy, unemployment,
the commencement, continuation or ending of government policies and reforms (including those of new administrations or
otherwise), stimulus programs and other market-related actions, changes in monetary policy, central bank activism through
continued ownership, exchange, cancellation or issuance of debt or other means, increased regulation or a slower pace for new
regulation or deregulation, increases or decreases in interest rates, changes in oil prices or other changes in commodity markets
or prices, changes in currency values, changes in property values and financial costs, or exchange rates or currency
abandonment, inflation or deflation, index changes, widening bid/ask spreads, changes in the allocation of capital to market-
making, restructuring of government-sponsored entities, imposition of economic sanctions, increased trade tariffs and trade
wars, economic or political weakness or military escalation or other instability in certain countries or regions, technology-
related or cyber-attacks or incidents, terrorism, the prospects for or concerns about any of the foregoing factors or events, or
other factors or events that affect the financial markets. For example, regarding currency abandonment and political instability,
there is considerable and growing uncertainty as a result of Brexit, as to the arrangements that will apply to the UK's
relationship with the EU and other countries leading up to, and following, the UK's withdrawal from the EU. This long-term
uncertainty may affect other countries in the EU and elsewhere. The UK's departure from the EU also may cause volatility
within the EU, triggering prolonged economic downturns in certain European countries or sparking additional Member States to
depart, or contemplate departing, from the EU. In addition, Brexit creates the possibility of additional economic stresses for the
UK, including potential decreased trade, difficulty in, or increased expenses relating to, marketing and selling UK funds and
other financial products in the EU and EU funds and other financial products in the UK, capital outflows, devaluation of the
British pound sterling, wider corporate bond spreads due to uncertainty, worker dislocation or restrictions, and declines in
business and consumer spending as well as foreign direct investment. See Item 1- Business under the caption Regulatory
Matters for additional information on Brexit. Each of the above factors, among others, may cause or contribute to economic or
financial market downturns, disruptions or other conditions and their potentially adverse effects. In addition, Federated's
products and strategies may be adversely affected, potentially in a material way, by changes in U.S., UK, EU or other markets,
downgrades of U.S., UK or other countries' credit ratings, the U.S. debt ceiling or other developments in the U.S., UK and other
countries as well as by actual or potential deterioration in international sovereign, commodity or currency market conditions.
At December 31, 2018, Federated's liquid assets of $222.1 million included investments in certain money market and
fluctuating-value Federated Funds that may have direct and/or indirect exposures to international sovereign debt and currency
risks. Federated and the money market and other fluctuating 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, its 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, its
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, fixed-income or certain other 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, its reputation), results of operations, financial condition and/or cash flows.
Custody, depository and portfolio accounting services for the Federated Funds generally are outsourced to third-party financial
institutions that are leading providers of such fund services. Accounting records for the Federated Funds are maintained by
these service providers (or vendors). These service providers, or other service providers of Federated and its products or
customers, 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 a 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, its
reputation), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Changes in Laws, Regulations and Other Rules on Federated's Investment Management
Business. Federated and its investment management business are (and any new business line commenced or acquired by
Federated would be) subject to extensive regulation both in and outside the U.S. Federated and its products, such as the
Federated Funds, and strategies are subject to: federal securities laws, principally the 1933 Act, the 1934 Act, the 1940 Act and
the Advisers Act; state laws regarding securities fraud and registration; and regulations or other rules, promulgated by various
20
regulatory authorities, self-regulatory organizations or exchanges, both domestically and abroad, including, but not limited to,
the SEC, FINRA and the NYSE. From time to time, the federal securities laws have been or may be augmented or amended
substantially. For example, among other measures, Federated and its products and strategies have been impacted by the Dodd-
Frank Act, the Sarbanes-Oxley Act of 2002, the Patriot Act of 2001 and the Gramm-Leach-Bliley Act of 1999. Federated and its
domestic products (such as the Federated Funds) and strategies, and any non-U.S. products (such as non-U.S. 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), 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 several years, regulators, self-regulatory organizations or exchanges such
as the SEC, FINRA, CFTC, NFA, NYSE and state or local governments and regulators, have adopted other regulations, rules
and amendments that have increased Federated's operating expenses and affected the conduct of its business, as well as
Federated's AUM, revenues and operating income, and may continue to do so. Federated's business is affected by laws,
regulations, and regulatory authorities that impact the manner in which Federated's products are structured, distributed,
provided or sold. Federated and its products and strategies also are affected by certain other laws and regulations governing
banks and other financial institutions or intermediaries.
Federated's and its products' operations outside of the U.S. are subject to foreign laws and regulation, which are promulgated or
amended from time to time, by foreign regulatory or other authorities, such as the UK FCA for London-based operations, the
Central Bank of Ireland (CBI) for Dublin-based operations, the German Federal Financial Supervisory Authority for Frankfurt-
based operations, and Ontario (and certain other provincial) Securities Commission for Canadian operations. In addition to
existing and potential future regulation, an FTT, particularly if enacted with broad application in the European Union, would be
detrimental to Federated's business. Regulatory reforms stemming from Brexit, as well as the potential political and economic
uncertainty surrounding Brexit or other initiatives also may increase volatility in the UK and EU and could be detrimental to
Federated's business.
In addition, the Dodd-Frank Act provided for a 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 the FSOC. Similarly, it is possible that the FSB could designate Federated, and/or one of its products
(such as the non-U.S. Federated Funds), as a non-bank, non-insurance company global systemically important financial
institution. Among other potential impacts, any such designation would result in Federated and/or its products being subject to
additional banking regulation and bank-oriented measures, including, for example, capital and liquidity requirements, leverage
limitations, enhanced public disclosures and risk management requirements, as well as oversight by the Governors or FSB, in
addition to being subject to primary regulation by securities regulators such as the SEC, FCA and CBI.
As Federated's business grows (whether organically or through acquisition or whether through new products, strategies or
services being offered or through growth of existing products, strategies and services, or otherwise), Federated's products,
strategies and operations need to comply with applicable laws, rules, regulations, interpretations and government policies,
which increases compliance risk and operating expenses, including the costs associated with compliance. Compliance risk and
operating expenses also can increase when Federated expands its use of ESG, sustainability, stewardship or other data inputs or
investment techniques in providing its investment products, strategies and services, enters new countries or markets, and/or
financial products and other investments, as well as when markets and technology increase in complexity.
Regulators, such as the SEC, FCA and CBI, also have undertaken or may undertake examination, investigations, and/or
enforcement actions involving investment management industry participants, such as Federated and its products. Federated
expends internal and external resources to respond to examinations and investigations, and defend enforcement actions, which
increases operating expenses, including professional fees and costs associated with compliance.
Management continues to monitor and evaluate the impact of Regulatory Developments discussed above (and in Item 1-
Business under the caption Regulatory Matters) on Federated's business, results of operations, financial condition and/or cash
flows. Among other potential impacts, these Regulatory Developments have increased, and may continue to increase, in
addition to compliance risks and compliance costs, the costs associated with technology, legal, operations and other efforts to
address regulatory-related matters. These regulatory requirements and developments also have caused, and may continue to
cause, certain product line-up, structure, pricing and product development changes, changes in the ability to utilize "soft
dollars" to pay for certain research and brokerage services (rather than Federated paying for such services directly), money
market, equity, fixed-income, alternative/private markets and multi-asset products to be less attractive to institutional and other
investors, reductions in the number of Federated Funds offered by intermediaries, changes in the fees Federated, retirement plan
advisors and intermediaries will be able to earn on investment products and services sold to retirement plan clients, and
reductions in AUM, revenues and operating profits, as well as changes in asset flows, levels and mix and customer
relationships. As examples, it became necessary for Hermes to establish offices in Ireland, Germany and Denmark, as Brexit
may result in it becoming more difficult to passport products between the UK and EU Member States. In addition, certain
21
money market funds or other products or strategies may become less attractive to institutional or other investors, which could
result in changes in asset mix and reductions in AUM, revenues and operating income.
On a cumulative basis, Federated's regulatory, product development and restructuring, and other efforts in response to the
Regulatory Developments discussed above, including the internal and external resources dedicated to such efforts, have had,
and may continue to have, a material impact on Federated's expenses and, in turn, financial performance. The floating NAV for
institutional and municipal (or tax-exempt) money market funds, and redemption fees and liquidity gates, required by the 2014
Money Fund Rules and Guidance, effective October 14, 2016, resulted in a shift in asset mix from institutional prime and
municipal (or tax-exempt) money market funds to stable NAV government money market funds across the investment
management industry and at Federated, which impacted its AUM, revenues and operating income. While 2018 saw a shift in
asset mix back toward institutional prime and municipal (tax-exempt) money market funds, there is no guarantee such shift will
continue and return asset mix between institutional prime, municipal (or tax-exempt) and government money market funds to
pre-October 2016 levels. The regulatory changes and developments in the current regulatory environment, and Federated's
efforts in responding to them, could have a material and adverse effect on Federated's business, results of operations, financial
condition and/or cash flows. Management also believes that the designation of Federated and/or one or more products as a
systemically important financial institution or a non-bank, non-insurance company global systemically important financial
institution by the FSB, and/or the issuance of final regulations or reforms relating to such designations, 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. Given the current regulatory environment and the potential for a slower pace for new
regulation or future additional or modified regulation or guidance, Federated is unable to fully assess the degree of the impact
of adopted or proposed regulations and other Regulatory Developments, and Federated's efforts related thereto, on its business,
results of operations, financial condition and/or cash flows.
Changes in laws, regulations, rules, interpretations or governmental policies, domestically and abroad, also impact the financial
intermediaries, service providers (or vendors), 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 or the proposed Regulation Best
Interest, once finalized, may affect intermediaries' sale or use of Federated's products or strategies. Among other potential
impacts, these changes are affecting, and may continue to affect, Federated's arrangements with these intermediaries, and may
continue to increase fee pressure, reduce the number of Federated products and strategies offered by intermediaries, cause
certain clients or intermediaries to favor passive products over actively managed products, increase respective operating
expenses and distribution costs, result in lower AUM, change asset flows, levels and mix, and otherwise affect the conduct of
Federated's or such intermediaries' respective businesses. This resulted, and will likely continue to result, in Federated or one or
more of these third parties seeking to restructure or alter their compensation 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.
For a further discussion of U.S. and international Regulatory Developments that can impact Federated and its business,
products, strategies and services, see Item 1- Business under the caption Regulatory Matters.
Finally, Federated's business also has been, and will continue to be, impacted by the Tax Cuts and Jobs Act of 2017 (Tax Act),
signed into law on December 22, 2017. See Note (16) to the Consolidated Financial Statements for additional information. In
addition, various service industries, including, for example, mutual fund service providers, have been, and continue to be, 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
enact 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 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, 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 resulting from 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, its reputation), results of operations, financial condition and/or cash flows.
Risk of Federated's Money Market Products' Ability to Maintain a Stable Net Asset Value. Approximately 37% of
Federated's total revenue for 2018 was attributable to money market assets. An investment in money market funds is neither
insured nor guaranteed by the FDIC or any other government agency. Federated's retail and government/public debt money
market funds, as well as its private and collective money market funds, seek to maintain a stable or constant NAV. Federated
22
also offers non-U.S. low volatility money market funds that seek to maintain a constant NAV, but will move to a four-digit NAV
if such fund's net asset value falls outside of a twenty basis point collar. Although stable or constant NAV money market funds
seek to maintain an NAV of $1.00 per share, it is possible for an investor to lose money by investing in these funds. Federated
also offers institutional prime or municipal (or tax-exempt) money market funds which transact at a fluctuating NAV that uses
four-decimal-place precision ($1.0000). Federated also offers a short-term variable NAV non-U.S. money market fund. It is
possible for an investor to lose money by investing in these funds. Federated devotes substantial resources, such as significant
credit analysis and attention to security valuation in connection with the management of its products and strategies. However,
the NAV of an institutional prime or municipal (or tax-exempt) money market fund, or variable NAV fund or, if the above
described conditions are met, a low-volatility NAV fund, can fluctuate, and there is no guarantee that a government/public debt
or retail (i.e. stable or constant NAV) money market fund, or a low-volatility money market fund, will be able to preserve a
stable or constant NAV in the future. Market conditions could lead to a limited supply of money market securities and severe
liquidity issues and/or declines in interest rates or additional prolonged periods of low yields in money market products or
strategies, and regulatory changes or developments could lead to shifts in asset levels and mix, which could impact money
market fund NAVs and performance. If the NAV of a Federated stable or constant NAV 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. It is also possible that, if an institutional prime
or municipal (or tax-exempt) money market fund's, or variable NAV money market fund's or low-volatility money market
fund's fluctuating NAV consistently or significantly declines to less than $1.0000 per share, such Federated money market fund
could 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 market value of
Federated's common stock, as well as general market conditions. There can be no assurance that Federated will be able to
obtain these funds and financing on acceptable terms, if at all, 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. If a Federated Fund
requires liquidity to meet shareholder redemptions or for other reasons, there also can be no assurance that such Federated Fund
will be able to access any available line of credit, rely on inter-fund lending arrangements or access other sources of liquidity on
acceptable terms, if any at all, and, if such a Federated Fund cannot obtain sufficient liquidity, it could have a material adverse
effect on such Federated Fund, result in redemptions and a corresponding reduction in Federated's AUM and Federated's
revenue, and Federated may decide to provide credit support to such Federated Fund. These factors could have a material
adverse effect on Federated's business, results of operations, financial condition and/or cash flows.
Recruiting and Retaining Key Personnel. Federated's ability to attract or acquire, and motivate 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, portfolio 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 or acquire, and motivate and
retain, the required personnel. In addition to competing opportunities, personnel elect to pursue other interests for business,
personal and other reasons or retire from time to time. 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 or
relationships. Moreover, since certain of Federated's products and strategies, or customer relationships, contribute significantly
to its revenues and earnings, the loss of even a small number of key personnel associated with these products or strategies, or
customer relationships, could have a disproportionate adverse impact, potentially in a material way, on Federated's business,
results of operations, financial condition and/or cash flows.
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) and stewardship services with other fund management companies and investment
advisors, 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, technological innovation, the type (e.g., passive versus
actively managed, fund versus FDIC-insured deposits) and range of products and strategies offered and fees charged. As with
23
any highly competitive market, competitive pricing structures are important. If competitors charge lower fees for similar
products or strategies, Federated has reduced, or may decide to further reduce, the fees on its own products or strategies (either
directly on a gross basis or on a net basis through fee waivers) for competitive purposes in order to retain or attract customers.
Increased competition also may require changes in Federated's business model or strategies to respond to competition from
existing and new market innovations and competitors, which creates the risk that such changes will not be successful or
Federated will not achieve its long-term strategic objectives. Such fee reductions, changes in business models or strategies, or
other effects of competition, 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, fixed-income and alternative/private
markets assets, are held by institutional investors. If or when 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 effect on Federated's business, results of operations, financial condition and/or cash flows. Certain
of Federated's products and strategies also may be impact oriented and may not be suitable investments for certain fiduciary
customers without obtaining appropriate consent. This may limit Federated's ability to market or grow assets in such products
and this could adversely affect Federated's future profitability and affect, potentially in a material way, 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
U.S. Financial Intermediary market, comprising over 2,500 national, regional and independent broker/dealers, banks and
registered investment advisors. The 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 and securities industries, as well
as regulatory changes or developments 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 advisors
and other financial planners. Federated also sells investment products and strategies, and stewardship services, directly to
corporations, institutions and other customers. 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, that Federated's
relationship with any one or more financial intermediaries or other customers will continue over time or on existing economic
terms, or that Federated's sales or distribution efforts will achieve any particular level of success. The impact of Voluntary
Yield-related Fee Waivers, other waivers for competitive purposes, and related reductions in distribution expense can vary
depending upon, among other variables, changes in distribution models, changes in the distribution fee arrangements with one
or more financial intermediaries, changes in customer relationships 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 Voluntary Yield-related Fee
Waivers, other waivers for competitive purposes, and related reductions in distribution expense, Federated has experienced
increases in the cost of distribution as a percentage of total fund revenue from 34% in 2007 to 36% in 2017. Beginning in 2018,
certain costs are now being recorded as a reduction of revenue as a result of the adoption of new accounting guidance (see
Note (2) to the Consolidated Financial Statements). As a result, the cost of distribution as a percentage of total fund revenue
was 25% for 2018. Federated expects such costs to continue to increase in total due to asset growth, and per dollar of revenue
earned 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 typically based on the value of managed
assets and vary with the type of asset being managed, with higher fees generally earned on equity and multi-asset products and
strategies than on fixed-income, alternative/private markets and money market products and strategies. Federated also may earn
performance fees or carried interest on certain products and types of assets. Mutual fund and other fund products generally have
a higher management-fee rate than Separate Accounts. Additionally, certain components of distribution expense can vary
depending upon the asset class, distribution channel and/or the size or structure 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, and overall asset mix among products and strategies, 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 and multi-asset funds
than the revenue earned from managed assets in equity, fixed-income and alternative/private markets funds. A significant
portion of Federated's managed assets are in investment products or strategies that permit investors to redeem or withdraw their
24
investment at any time. Capacity constraints, where the size of AUM in a particular product, strategy or asset class make it
more difficult to trade efficiently in the market, can result in certain products, strategies, or asset classes being closed to new
investment, which may result in redemptions or a reallocation of assets to other products, strategies or asset classes.
Additionally, changing market conditions may cause a shift in Federated's asset mix towards money market and fixed-income
products or strategies, and regulatory changes or developments may cause a shift between money fund products or from money
market funds to other products. Each of the above factors may cause a decline in or otherwise affect, potentially in a material
way, 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. Good
performance can also result in performance fees or carried interest being earned on certain products. Conversely, poor
performance, or the failure to meet product or strategy investment objectives and policies, tends to result in decreased sales and
increased redemptions, and failure to earn performance fees, carried interest and/or other fees. A product or strategy being, or
becoming, an unsuitable product or strategy for a customer, whether due to changes in customer investment objectives or
otherwise, also tends to result in decreased sales and increased redemptions, and failure to earn performance fees, carried
interest and/or other fees. For certain products or strategies, failure to apply acceptable environmental, societal, or governance
standards, sustainability or responsible investment may be considered, or result in, poor performance, and result in decreased
sales and increased redemptions, and failure to earn performance fees, carried interest and/or other fees. The failure to earn
performance fees, carried interest and/or other fees results in a corresponding decrease in revenues and non-operating income 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. Market conditions, such as volatility,
illiquidity and rising interest rates, among other conditions, can adversely affect the performance of certain quantitative or other
investment strategies or certain products, asset classes or sectors. The effects of poor performance on Federated could be
magnified where assets or customers are concentrated in certain strategies, products, asset classes or sectors. Changes in foreign
currency exchange rates and poor performance of investments made by Federated, or derivatives (including, for examples,
hedges or forward contracts) or other financial transactions entered into by Federated, can result in investment or capital losses
and also can materially adversely affect Federated's business, results of operations, financial condition and/or cash flows.
Operational Risks. Federated's products, business and operations are supported internally and through management of
relationships, including, for example, outsourcing relationships with various third party service providers (or vendors), 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, inadequate, inefficient, inflexible, deficient or non-scalable technology, operating systems or other
infrastructure, poor performance by internal resources or third party service providers, failure to appropriately supervise internal
resources or third party service providers, business disruptions, inadequacies or breaches in Federated's, its products' or a
service provider's internal control processes, unauthorized disclosure or manipulation of, or access to, confidential, proprietary
or non-public personal information and noncompliance with regulatory requirements, investment mandates and related
investment parameters, or customer-imposed restrictions. As Federated's and its relevant service providers' businesses expand
and require additional scalability, operational risk increases both domestically and internationally. There is a risk that changes in
operational systems and business processes are not completed correctly, in a controlled manner, in a timely manner or in a
manner that achieves intended results. Management relies on its employees, systems and business continuity plans, and those of
relevant service providers, to comply with established procedures, controls, regulatory requirements, investment parameters or
customer-imposed restrictions. Breakdown or improper use of systems, human error or improper action by employees or service
providers, or noncompliance with regulations or other rules, investment parameters or customer-imposed restrictions, could
cause material adverse effects on Federated's business (including, but not limited to, its reputation), results of operations,
financial condition and/or cash flows.
No Assurance of Successful Acquisitions. Federated's business strategy contemplates seeking acquisition candidates,
including acquisitions of other investment management companies and investment assets, both domestically and internationally.
There can be no assurance that Federated will find suitable acquisition candidates at acceptable prices and with an aligned
business culture and vision, have sufficient capital resources to realize its acquisition strategy, be successful in entering into
definitive agreements for or consummating desired acquisitions, or successfully collaborating with acquired companies or
integrating acquired companies or assets into Federated, or its products or strategies. There also can be no assurance that any
such acquisitions, if consummated, will not increase organizational stress to unacceptable levels or cause process failures, or
that any such acquisition, if consummated, will increase value or otherwise prove to be advantageous to Federated. On the other
hand, successful collaboration with acquired companies or integration of acquired companies or assets may increase the value
of such acquired companies or assets and result in increased contingent deferred payment or other payment obligations for
Federated, which can affect Federated's business, results of operations, financial condition and/or cash flows.
25
Impairment Risk. At December 31, 2018, Federated had intangible assets including goodwill totaling $1.1 billion 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 (or vendors). 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. Federated continues to
increase its investment in systems and technology, including externally hosted systems and technology, for investment
management and trading operations, information and data management, disaster recovery, compliance and other areas of its
business, and is exploring innovative technological solutions and products involving artificial intelligence and financial
technology. Unanticipated issues could occur with any software, system or other technology 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 technology or
computer system problems. Along with cyber incidents described more fully below, data or model imprecision, software or
other technology malfunctions, human error, 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, its reputation and business prospects), results of operations, financial
condition and/or cash flows.
In addition, like other companies in the investment management industry and elsewhere, Federated's business relies on the
security and reliability of information and communications technology, systems and networks. Federated uses digital
technology, including, for example, networked systems, email and the Internet, to conduct business operations and engage
clients, customers, employees, products, accounts, shareholders and relevant service providers, among others. The use of the
Internet and other electronic media, computers and technology exposes Federated, its business, its products and strategies and
services, customers, and relevant service providers, and their respective operations, to potential risks from frequent
cybersecurity attacks, events or incidents (cyber incidents). For example, Federated and relevant service providers collect,
maintain and transmit confidential, proprietary and non-public personal customer and employee 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 targeted by cyber incidents. Federated, as well as its products and certain
service providers, also generate, compile and process information for purposes of preparing and making filings or reports to
governmental agencies, and a cyber incident that impacts that information, or the generation and filing processes, may prevent
required regulatory filings and reports from being made. Cyber incidents involving Federated's, or its products' or service
providers', regulators or exchanges to which confidential, personally identifiable or other information is reported or filed also
may result in unauthorized disclosure or compromise of, or access to, such information.
Cyber incidents can result from intentional (or deliberate) attacks or unintentional events by insiders or third parties, including
cybercriminals, competitors, nation-states and "hacktivists," among others. Cyber incidents may include, for example, phishing,
use of stolen access credentials, unauthorized access to systems, networks or devices (for example, through hacking activity),
structured query language attacks, infection from or spread of malware, ransomware, 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, impair or otherwise disrupt operations, business processes, technology, connectivity or website or internet
access, functionality or performance. In addition to intentional cyber incidents, unintentional cyber incidents can occur (for
example, the inadvertent release of confidential or non-public personal information).
Like other companies, Federated has experienced, and will continue to experience, cyber incidents on a daily basis. As of
December 31, 2018, cyber incidents have not had a material adverse effect on Federated's business, results of operations,
financial condition and/or cash flows. Cyber incidents can affect, potentially in a material way, Federated's relationships with its
customers, employees, products, accounts, shareholders and relevant service providers. A cyber incident may cause Federated,
its business, products or services, employees, customers, or relevant service providers, to lose proprietary, sensitive,
confidential or non-public business, customer, employee or personal information, or intellectual property, suffer data corruption
or business interruption, lose operational capacity (for example, the loss of the ability to process transactions, calculate NAVs,
or allow the transaction of business, or other disruptions to operations), 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
26
the physical infrastructure or operating systems. Any cyber incident could cause lost revenues, the occurrence of other financial
losses, diminished future cash flows, significant increases in compliance or other costs or expenses (such as costs associated
with compliance with cybersecurity laws and regulations and with protection, detection, remediation and corrective measures),
exposure to increased litigation and legal risks (such as regulatory actions and penalties, and breach of contract or other
litigation-related fees and expenses), reputational damage, damage to competitiveness, stock price and shareholder value, and
other negative or adverse impacts. 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 established a committee to oversee Federated's information
security and data governance efforts, and updates on cyber incidents and risks are reviewed with relevant committees, as well as
Federated's Board of Directors (or a committee thereof), on a periodic (generally quarterly) basis (and more frequently when
circumstances warrant) as part of risk management oversight responsibilities. 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. Federated employs various measures aimed at mitigating cyber risk, including, among others, use of
firewalls, system segmentation, system monitoring, virus scanning, periodic penetration testing, employee phishing training and
an employee cybersecurity awareness campaign. Among other vendor management efforts, Federated also conducts due
diligence on key service providers (or vendors) relating to cybersecurity. However, there is no guarantee that such efforts will
be successful, either entirely or partially, as there are limits on Federated's ability to prevent, detect or mitigate cyber incidents.
Among other reasons, the cybersecurity landscape is constantly evolving, 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 and practices of issuers, relevant service providers or other third parties. Federated's risk from cyber incidents also can
increase as a result of expansion into new markets, domestic or international acquisitions, new technology, or previously
unexploited vulnerabilities in software or related patches becoming activated (or "weaponized") by hackers. While Federated
cannot predict the financial or reputational impact to its business resulting from any cyber incident, depending upon the nature,
magnitude and severity of a 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, its reputation), results of operations, financial
condition and/or cash flows. The internal and external resources and efforts necessary to implement system and technology
upgrades, data governance and cybersecurity policies, procedures and measures, including, for example, technology, systems,
skilled personnel and service providers (or vendors), as well as vendor management, have, and will continue to, increase
Federated's operating expenses, and can adversely affect, potentially in a material way, Federated's business, 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 actual or potential regulatory proceedings or
litigation, economic or financial market downturns or disruptions, material errors in public news reports, misconduct or
unprofessional, unethical or illegal behavior, abuse of authority, a cyber incident, 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 and/or negatively impact Federated's brand, culture, trusted status, reputation
and/or stock price. 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. With increased focus from
shareholders on sustainability, environmental, social, and governance matters by shareholders, any perceived deficiency in
Federated's policies and practices on these matters may impact Federated's brand, reputation or stock price, as well as investor
preference for Federated's securities, products, strategies and services, and, accordingly, adversely affect, potentially in a
material way, Federated's stock price and 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 Advisory Agreements. A substantial majority of Federated's
revenues are derived from investment advisory agreements with Federated Funds (and to a lesser extent, sub-advised mutual
funds) registered under the 1940 Act that, as required by law, are terminable upon 60 days' notice. In addition, each such
investment advisory agreement must be approved and renewed annually by each mutual 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 under, or termination of, certain or a significant number of, these agreements could have a material adverse impact
on Federated's business, results of operations, financial condition and/or cash flows. 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
27
Federated's ability to realize the value of these agreements. Federated's investment advisory agreements for Separate Accounts
that are not investment companies subject to the 1940 Act are generally terminable 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. Regarding the
investment advisory agreements with non-U.S. registered Federated Funds, shareholder notice or consent can be required if,
after an investment advisory agreement is entered into, there are changes to fees, and such investment advisory agreements are
generally terminable for any reason, without cause, after a 30-day to 90-day notice period. Customer consent to amend
investment advisory agreements for non-U.S. Separate Accounts can be required for amendments to such agreements, and such
agreements also are generally terminable for any reason, without cause, after a 30-day to 90-day notice period.
Under the terms of a 2005 settlement agreement with the SEC and New York State Attorney General, as amended, a Federated
investment advisory subsidiary may not serve as investment advisor 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; and
(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.
Potential Adverse Effects of Unpredictable Events or Consequences. Unpredictable events, such as a natural disaster,
pandemic, war, terrorist attack or other business continuity event, or unexpected market, economic or political developments,
could adversely impact Federated's, its customer's and their respective service providers' (or vendors') ability to conduct
business. Unpredictable consequences, or side effects, of certain known or planned events, such as the planned phase-out of the
LIBOR to SOFR, SONIA or another alternative interest rate expected to occur in 2021, also could adversely impact Federated's,
its customer's, and their respective service provider's (or vendors') ability to conduct business. Such events or consequences
could cause disruptions in economic conditions and financial markets, governmental processes, system interruption, loss of life,
unavailability of personnel, an inability to provide information or services, either at all or in accordance with applicable
requirements, standards, or restrictions, and/or additional costs. Among other effects, market disruptions and the other events
can cause a decline in the value of investments and a decline in the value of Federated's AUM, which tends to result in lower
revenue for Federated. There also may be times when industry databases or other third parties publish or distribute information
regarding Federated, or its products or services (including Federated Fund asset levels), that may be inaccurate or incomplete,
and there can be no assurance that a third-party will interpret or report information accurately. The phase-out of LIBOR may
cause the renegotiation or re-pricing of certain credit facilities, derivatives or other financial transactions to which Federated, its
products, customers' or service providers' are parties, alter the accounting treatment of certain instruments or transactions, or
have other unintended consequences, which, among other effects, could require additional internal and external resources to
address these effects and increase operating expense. As such, there can be no assurance that unpredictable or unexpected
events, reports or consequences, or the costs to address such events, inaccurate reports or consequences, 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.
Risks Related to Auditor Independence. Public companies, such as Federated, utilize the audit services of a registered public
accounting firm (Accounting Firm) to audit or review their financial statements included in certain public filings, such as their
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. The Accounting Firm is required to make a determination
that such firm satisfies certain independence requirements under the federal securities laws. Like other public companies, there
is a risk that activities or relationships of the Accounting Firm engaged by Federated, or such firm's partners or employees, can
prevent a determination from being made that such firm satisfies such independence requirements with respect to Federated,
which could render such firm ineligible to serve as Federated's independent Accounting Firm. Since Federated's independent
Accounting Firm, like the Accounting Firms of many other public companies that sponsor and advise investment funds, acts in
a similar capacity to several Federated Funds sponsored and advised by Federated, if a determination cannot be made that the
Accounting Firm satisfies the independence requirements with respect to an applicable Federated Fund, the Accounting Firm
also could be prevented from making a determination that it satisfies the independence requirements with respect to Federated,
since Federated is an affiliate (i.e., the ultimate parent company) of the investment advisor to the relevant Federated Fund.
For example, Rule 2-01(c)(1)(ii)(A) of Regulation S-X (Loan Rule) prohibits Accounting Firms, or covered person
professionals within the firms, from having certain financial relationships with their audit clients and affiliated entities.
Federated's independent Accounting Firm, Ernst & Young LLP (EY), has advised Federated (and may in the future advise
Federated) that EY or covered person professionals within the firm have lending relationships with certain lenders where the
lenders, or their affiliates that control them, own beneficially or of record greater than 10% of the equity securities of certain
Federated Funds which could prevent a determination that the firm satisfies the independence requirements.
28
On June 20, 2016, the Division of Investment Management (Division) of the SEC issued a no-action letter under which an
Accounting Firm can continue to serve as an independent registered public accountant for an audit client if certain conditions
are met, including that a determination is made that the Accounting Firm's objectivity or judgment has not been impaired. In
each case involving EY noted above, the relief provided under the June 20, 2016 no-action letter has been relied upon. The no-
action letter states that the Division would not object to a relevant entity (such as an investment fund, its affiliates or its
investment advisor or such investment advisor's affiliates) continuing to satisfy (and would not recommend enforcement action
if such a relevant entity continues to satisfy) applicable regulatory requirements under the federal securities laws by using the
audit services provided by an Accounting Firm that may not be in compliance with the Loan Rule, so long as the requisite
conditions are satisfied. If a circumstance arises in which the relief provided by the no-action letter would not be available,
Federated and EY would explore other appropriate actions. The no-action letter was initially effective for 18 months (or until
December 20, 2017). On September 22, 2017, the Division extended the no-action letter past December 20, 2017 until
amendments to the Loan Rule that are designed to address the concerns of the no-action letter are promulgated and become
effective. As of December 31, 2018, the SEC proposed amendments to the Loan Rule, but final amendments to the Loan Rule
have not been promulgated.
There can be no assurance that the circumstances in any particular case will satisfy the conditions of the no-action letter and,
therefore, that the relief provided by the no-action letter will be able to be relied upon, or that the applicable independence
requirements under the federal securities laws will otherwise continue to be satisfied such that EY will remain eligible to serve
as the independent Accounting Firm to Federated.
Among other sources of potential violations of the auditor independence requirements, Rule 2-01(c)(1)(i)(A) of Regulation S-X
(Investment Rule) prohibits the Accounting Firm, or covered person professionals and their immediate family members, from
having certain direct investments in audit clients and affiliated entities. Due to acquisitions that result in inadvertent
investments in the auditing client or funds or other products that it or its affiliates manage, or other circumstances, an
Accounting Firm may violate the Investment Rule and be required to timely and appropriately remedy such violation such that
the audit client can make a determination that it continues to believe that the Accounting Firm has the ability to exercise
objective and impartial judgment on all issues encompassed within the Accounting Firm's audit and review services. There can
be no assurance that the circumstances of any particular case will allow Federated, as the Accounting Firm's audit client, to
make such determination or that the Accounting Firm will otherwise be able to remain eligible to serve as the independent
Accounting Firm to Federated.
If it were to be determined that the relief available under the no-action letter was improperly relied upon, or that the
independence requirements under the federal securities laws were not otherwise complied with regarding Federated, Federated's
previously filed Annual Reports on Form 10-K (including financial statements audited by EY) and Quarterly Reports on Form
10-Q (including financial statements reviewed by EY) may not be considered compliant with the applicable federal securities
laws. If it were to be determined that EY did not comply with the independence requirements, among other things, the financial
statements audited by EY and the interim financial statements reviewed by EY may have to be audited and reviewed,
respectively, by another independent Accounting Firm, Federated's eligibility to issue securities under its existing registration
statements may be impacted and certain financial reporting and/or other covenants with, and representations and warranties to,
Federated's lenders may be impacted. Similar issues would arise for a Federated Fund for which EY (or another Accounting
Firm) serves as such Federated Fund's independent Accounting Firm if it were to be determined that the no-action letter was
improperly relied upon, or EY (or such other Accounting Firm) otherwise was not in compliance with the independence
requirements under the federal securities laws, with respect to such Federated Fund. In either case, such events could have a
material adverse effect on Federated's business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Litigation, Investigations, Proceedings and Other Claims. Federated and the Federated Funds
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 and the Federated Funds 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 grows (whether organically or through acquisition or whether through new
products, strategies or services being offered or through growth of existing products, strategies and services, or otherwise), the
attention and resources devoted to compliance, and the possibility of noncompliance, also can increase. The attention and
resources devoted to compliance, and the possibility of noncompliance, also can increase when Federated expands its use of
ESG, sustainability, stewardship or other data inputs or investment techniques in providing its investment products, strategies
and services, enters new countries or markets, and financial products and other investments, as well as when markets and
technology increase in complexity. Federated has business-related claims asserted and threatened against it, and Federated and
the Federated Funds are subject to certain regulatory claims (such as routine and sweep examinations and other inquiries), in
the ordinary course of business. In addition, Federated and the Federated Funds 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
29
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, the Federated Funds or Separate
Accounts managed by 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.
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 Donahue family. The three trustees of this trust are Federated's President and Chief Executive Officer
and Chairman of the Board, J. Christopher Donahue, his brother, Thomas R. Donahue, Federated's Vice President, Treasurer
and Chief Financial Officer and a director, and their mother, Rhodora J. Donahue. 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 advisors applicable to Compensation
Committee members. While Federated believes its dual-class structure is appropriate and benefits Federated's shareholders, and
should be a factor taken into account by shareholders when investing in Federated, as a company with a dual-class structure,
Federated may be excluded from certain financial indexes, which may result in decreased investments in Federated's Class B
Common Stock and adversely affect Federated's stock price.
30
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 17,000 square feet at other locations in the Pittsburgh area. Federated also leases office space in
New York, New York, for Federated Global Investment Management Corp.; two locations in London, England for Hermes and
Federated Investors (UK) LLP; two locations in Boston, Massachusetts, for Federated MDTA LLC and Hermes Fund Managers
(North America) GP, Inc, a subsidiary of Hermes; in Rochester, New York, for Federated Clover Investment Advisors, a
division of Federated Global Investment Management Corp.; in Wilmette, Illinois, for Federated International Securities Corp;
and in Frankfurt, Germany, for Federated Asset Management GmbH and Hermes. Federated's leased office space is used for its
investment management business.
ITEM 3 – LEGAL PROCEEDINGS
The information required by this item is included in Note (20) 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
dividends per common share for 2018 and 2017.
2018
2017
March 31,
0.25
0.25
$
$
June 30,
0.27
0.25
$
$
September 30,
0.27
$
0.25
$
December 31,
0.27
$
0.25
$
The approximate number of beneficial shareholders of Federated's Class A and Class B common stock as of February 6, 2019,
was 1 and 38,476, respectively. See Item 1A - Risk Factors under the caption Federated's Status as a "Controlled Company" for
additional information on Federated's Class A common stock.
The following table summarizes stock repurchases under Federated's share repurchase program during the fourth quarter
of 2018.
October
November
December2
Total
Total Number
of Shares
Purchased
0
47,245
48,053
95,298
$
Average
Price Paid
Per Share
0.00
24.74
21.11
$ 22.91
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
0
47,245
40,253
87,498
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs1
1,106,899
1,059,654
1,019,401
1,019,401
1
2
In October 2016, the board of directors authorized a share repurchase program with no stated expiration date that allows Federated to
buy back up to 4.0 million shares of Federated Class B common stock. No other programs existed as of December 31, 2018. See
Note (15) to the Consolidated Financial Statements for additional information on this program.
In December 2018, 7,800 shares of Federated Class B restricted stock with weighted-average prices of $3.00 per share were
repurchased as certain employees forfeited restricted stock.
See Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for
information on Federated's securities authorized for issuance under equity compensation plans.
31
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, 2018.
The graph assumes that the value of the investment in Federated's Class B Common Stock and each index was $100 on
December 31, 2013. Total return includes reinvestment of all dividends. As a member of the S&P MidCap 400 Index as of
December 31, 2018, 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
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
$
$
$
118.29
109.77
109.58
$
$
$
106.12
107.38
98.88
$
$
$
112.28
129.65
109.72
$
$
$
148.36
150.71
141.98
$
$
$
113.68
134.01
106.29
32
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, 2018 have
been derived from Federated's audited Consolidated Financial Statements.
(in thousands, except per share data and managed assets)
Statement of Income Data1
Total Revenue
Operating Income
Net Income Including the Noncontrolling
Interests in Subsidiaries2,3
Net Income Attributable to Federated Investors, Inc.2,3
Share Data Attributable to Federated Investors, Inc.
Earnings Per Share – Basic and Diluted1,4
Cash Dividends Per Share5
Weighted-average Shares Outstanding – Basic
Weighted-average Shares Outstanding – Diluted
Balance Sheet Data at Period End1
Intangible Assets, net and Goodwill
Total Assets
Long-Term Debt6
Federated Investors, Inc. Shareholders' Equity5
Impact of Voluntary Yield-related Fee Waivers7
Revenue
Less: Reduction in Distribution Expense
Operating Income
Less: Reduction in Noncontrolling Interest
Pre-tax Impact
Managed Assets1 (in millions)
As of Period End
Average for the Period
2018
2017
2016
2015
2014
$1,135,677
$1,102,924
$1,143,371
$ 926,609
$ 859,250
330,280
341,508
335,683
279,446
237,949
222,299
220,297
294,901
291,341
221,514
208,919
171,986
169,807
149,822
149,236
$
$
$
$
2.18
1.06
96,949
96,949
$
$
2.87
1.00
97,411
97,412
2.03
2.00
99,116
99,117
$
$
1.62
1.00
100,475
100,477
$
$
1.42
1.00
100,721
100,723
$1,149,247
$ 736,915
$ 733,137
$ 734,492
$ 733,847
1,543,683
1,231,410
1,155,107
1,187,203
1,140,519
135,000
857,121
170,000
761,215
165,750
594,826
191,250
647,816
216,750
609,494
$
$
0
0
0
0
0
(4,417) $ (87,872) $ (333,605) $ (410,553)
280,851
3,587
(129,702)
(830)
10,699
0
(119,003)
(830)
240,610
(92,995)
7,114
(85,881)
65,848
(22,024)
0
(22,024)
$ 459,860
415,388
$ 397,570
366,421
$ 365,908
362,938
$ 361,112
353,493
$ 362,905
358,467
1 On July 2, 2018, Federated completed the Hermes Acquisition, effective as of July 1, 2018. See Note (3) to the Consolidated Financial
2
3
4
5
6
7
Statements for additional information.
2018 includes a $29.0 million loss related to two derivative financial instruments associated with the Hermes Acquisition. See Note (8) to
the Consolidated Financial Statements for additional information.
2017 includes a $70.4 million reduction to the income tax provision resulting from the revaluation of the net deferred tax liability due to
the enactment of the Tax Act, thereby increasing net income.
2017 includes a $0.69 increase to earnings per share resulting from the revaluation of the net deferred tax liability due to the enactment
of the Tax Act.
2016 includes a special dividend paid to shareholders of $1.00 per share or $102.2 million.
In 2014, Federated amended and restated the 2011 credit agreement to extend the term of the loan. In 2017, Federated amended and
restated the 2014 credit agreement to refinance the revolving credit facility and term loan facility, replacing both with a single revolving
credit facility. See Note (12) to the Consolidated Financial Statements for additional information.
See Item 1A - Risk Factors under the caption Potential Adverse Effects of Low Short-Term Interest Rates for additional information on
Voluntary Yield-related Fee Waivers.
33
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 1- Business, Item 1A - Risk Factors, Item 6 - Selected Financial Data and Item 8 - Financial Statements and
Supplementary Data.
General
Federated is one of the largest investment managers in the U.S. with $459.9 billion in managed assets as of December 31, 2018.
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 fund-related services (including
distribution and shareholder servicing) and stewardship services. For additional information on Federated's markets, see Item 1
- Business under the caption Distribution Channels and Product Markets.
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 average 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. Generally, 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 and multi-asset products and strategies are higher than management-fee rates
charged to fixed-income and alternative/private markets products and strategies, which are higher than management-fee rates
charged to money market products and strategies. Likewise, Federated Funds typically have a higher management-fee rate than
Separate Accounts. Similarly, revenue is also dependent upon the relative composition of average AUM across both asset and
product types. Federated may implement Fee Waivers for competitive reasons such as to maintain certain fund expense ratios,
to maintain positive or zero net yields on certain 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 and strategies. 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 the revenue earned from managed assets in money market and multi-asset funds
than the revenue earned from managed assets in equity, fixed-income and alternative/private markets 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, the 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. Management evaluates Federated's performance at the consolidated level. Therefore, Federated operates
in 1 operating segment, the investment management business. Management analyzes all expected revenue and expenses and
considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new
business. Federated's growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability
of those assets, which is impacted, in part, by Fee Waivers. Fees for mutual fund-related services are ultimately subject to the
approval of the independent directors or trustees of the mutual funds. Management believes that meaningful indicators of
Federated's financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per
diluted share.
34
Business Developments
Business Combination
On July 2, 2018, Federated completed the Hermes Acquisition, effective as of July 1, 2018. See Note (3) to the Consolidated
Financial Statements for additional information.
Current Regulatory Environment
Federated and its investment management business are subject to extensive regulation both in and outside the U.S. Federated
and its products, such as the Federated Funds, and strategies are subject to: federal securities laws, principally the 1933 Act, the
1934 Act, the 1940 Act, the Advisers Act; state laws regarding securities fraud and registration; regulations or other rules,
promulgated by various regulatory authorities, self-regulatory organizations or exchanges; and foreign laws, regulations or
other rules promulgated by foreign regulatory or other authorities. See Item 1 - Business under the caption Regulatory Matters
and Item 1A - Risk Factors under the caption Potential Adverse Effects of Changes in Laws, Regulations and Other Rules on
Federated's Investment Management Business for additional information.
35
Asset Highlights
Managed Assets at Period End
in millions as of December 31,
By Asset Class
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Managed Assets
By Product Type
Funds:
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Fund Assets
Separate Accounts:
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Separate Account Assets
Total Managed Assets
2018
2017
2018
vs. 2017
$
$
$
$
72,497
63,158
18,318
4,093
158,066
301,794
459,860
36,584
40,490
11,365
3,920
92,359
208,480
300,839
35,913
22,668
6,953
173
65,707
93,314
159,021
459,860
$
$
$
$
62,816
64,160
366
5,014
132,356
265,214
397,570
33,008
41,144
366
4,783
79,301
185,536
264,837
29,808
23,016
0
231
53,055
79,678
132,733
397,570
15%
(2)
NM
(18)
19
14
16%
11%
(2)
NM
(18)
16
12
14
20
(2)
0
(25)
24
17
20
16%
1 The balance at December 31, 2018 includes $8.3 billion of fund assets managed by a non-consolidated entity, Hermes GPE LLP, in which
Hermes holds an equity method investment.
36
$
$
$
Average Managed Assets
in millions for the years ended December 31,
By Asset Class
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Managed Assets
By Product Type
Funds:
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Fund Assets
Separate Accounts:
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Separate Account Assets
Total Average Managed Assets
$
2018
2017
2016
2018
vs. 2017
2017
vs. 2016
70,680
63,454
9,397
4,764
148,295
267,093
415,388
36,984
40,952
5,784
4,554
88,274
182,828
271,102
33,696
22,502
3,613
210
60,021
84,265
144,286
415,388
$
$
$
$
60,255
55,204
441
5,062
120,962
245,459
366,421
32,160
40,676
441
4,841
78,118
176,580
254,698
28,095
14,528
0
221
42,844
68,879
111,723
366,421
$
$
$
$
53,492
51,161
650
5,289
110,592
252,346
362,938
30,105
38,772
650
5,091
74,618
213,906
288,524
23,387
12,389
0
198
35,974
38,440
74,414
362,938
17%
15
NM
(6)
23
9
13%
15%
1
NM
(6)
13
4
6
20
55
0
(5)
40
22
29
13%
13%
8
(32)
(4)
9
(3)
1%
7%
5
(32)
(5)
5
(17)
(12)
20
17
0
12
19
79
50
1%
1
The average for the year ended December 31, 2018 includes $4.1 billion of average fund assets managed by a non-consolidated entity,
Hermes GPE LLP, in which Hermes holds an equity method investment.
37
Changes in Equity Fund and Separate Account Assets
in millions for the years ended December 31,
Equity Funds
Beginning Assets
Sales
Redemptions
Net Redemptions
Net Exchanges
Acquisition-Related
Market Gains and Losses1
Ending Assets
Equity Separate Accounts
Beginning Assets
Sales2
Redemptions2
Net Redemptions2
Net Exchanges
Acquisition-Related
Market Gains and Losses1
Ending Assets
Total Equity
Beginning Assets
Sales2
Redemptions2
Net Redemptions2
Net Exchanges
Acquisition-Related
Market Gains and Losses1
Ending Assets
2018
33,008
8,408
(12,192)
(3,784)
(115)
11,131
(3,656)
36,584
29,808
5,547
(10,209)
(4,662)
(1)
13,569
(2,801)
35,913
62,816
13,955
(22,401)
(8,446)
(116)
24,700
(6,457)
72,497
$
$
$
$
$
$
2017
30,816
5,169
(8,220)
(3,051)
(11)
287
4,967
33,008
25,943
6,445
(6,586)
(141)
0
0
4,006
29,808
56,759
11,614
(14,806)
(3,192)
(11)
287
8,973
62,816
$
$
$
$
$
$
1
2
Reflects the 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 total investment return.
38
Changes in Fixed-Income Fund and Separate Account Assets
in millions for the years ended December 31,
Fixed-Income Funds
Beginning Assets
Sales
Redemptions
Net (Redemptions) Sales
Net Exchanges
Acquisition-Related
Market Gains and Losses1
Ending Assets
Fixed-Income Separate Accounts
Beginning Assets
Sales2
Redemptions2
Net (Redemptions) Sales2
Net Exchanges
Acquisition-Related
Market Gains and Losses1
Ending Assets
Total Fixed-Income
Beginning Assets
Sales2
Redemptions2
Net (Redemptions) Sales2
Net Exchanges
Acquisition-Related
Market Gains and Losses1
Ending Assets
2018
2017
$
$
$
$
$
$
41,144
16,594
(18,366)
(1,772)
138
1,565
(585)
40,490
23,016
3,562
(5,004)
(1,442)
(2)
1,167
(71)
22,668
64,160
20,156
(23,370)
(3,214)
136
2,732
(656)
63,158
$
$
$
$
$
$
39,434
14,799
(14,655)
144
(67)
148
1,485
41,144
11,880
12,750
(2,377)
10,373
(56)
0
819
23,016
51,314
27,549
(17,032)
10,517
(123)
148
2,304
64,160
1
2
Reflects the 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 total investment return.
39
Changes in Alternative / Private Markets Fund and Separate Account Assets
in millions for the years ended December 31,
Alternative / Private Markets Funds1
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisition-Related
Market Gains and Losses2
Ending Assets
Alternative / Private Markets Separate Accounts
Beginning Assets
Sales3
Redemptions3
Net Redemptions3
Acquisition-Related
Market Gains and Losses2
Ending Assets
Total Alternative / Private Markets1
Beginning Assets
Sales3
Redemptions3
Net Redemptions3
Net Exchanges
Acquisition-Related
Market Gains and Losses2
Ending Assets
2018
366
1,127
(790)
337
(2)
10,823
(159)
11,365
0
123
(525)
(402)
7,686
(331)
6,953
366
1,250
(1,315)
(65)
(2)
18,509
(490)
18,318
$
$
$
$
$
$
$
$
$
$
$
$
2017
458
132
(251)
(119)
57
0
(30)
366
0
0
0
0
0
0
0
458
132
(251)
(119)
57
0
(30)
366
1
2
3
The balance at December 31, 2018 includes $8.3 billion of fund assets managed by a non-consolidated entity, Hermes GPE LLP, in
which Hermes holds an equity method investment.
Reflects the 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 total investment return.
40
Changes in Multi-Asset Fund and Separate Account Assets
in millions for the years ended December 31,
Multi-Asset Funds
Beginning Assets
Sales
Redemptions
Net Redemptions
Net Exchanges
Acquisition-Related
Market Gains and Losses1
Ending Assets
Multi-Asset Separate Accounts
Beginning Assets
Sales2
Redemptions2
Net Redemptions2
Market Gains and Losses1
Ending Assets
Total Multi-Asset
Beginning Assets
Sales2
Redemptions2
Net Redemptions2
Net Exchanges
Acquisition-Related
Market Gains and Losses1
Ending Assets
2018
4,783
472
(1,013)
(541)
(21)
45
(346)
3,920
231
21
(31)
(10)
(48)
173
5,014
493
(1,044)
(551)
(21)
45
(394)
4,093
$
$
$
$
$
$
2017
4,957
479
(1,135)
(656)
(28)
0
510
4,783
207
4
(31)
(27)
51
231
5,164
483
(1,166)
(683)
(28)
0
561
5,014
$
$
$
$
$
$
1
2
Reflects the 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 total investment return.
41
Changes in Total Long-Term Assets
in millions for the years ended December 31,
Total Long-Term Fund Assets1
Beginning Assets
Sales
Redemptions
Net Redemptions
Net Exchanges
Acquisition-Related
Market Gains and Losses2
Ending Assets
Total Long-Term Separate Accounts Assets
Beginning Assets
Sales3
Redemptions3
Net (Redemptions) Sales3
Net Exchanges
Acquisition-Related
Market Gains and Losses2
Ending Assets
Total Long-Term Assets1
Beginning Assets
Sales3
Redemptions3
Net (Redemptions) Sales3
Net Exchanges
Acquisition-Related
Market Gains and Losses2
Ending Assets
2018
2017
$
$
$
$
$
$
79,301
26,601
(32,361)
(5,760)
0
23,564
(4,746)
92,359
53,055
9,253
(15,769)
(6,516)
(3)
22,422
(3,251)
65,707
132,356
35,854
(48,130)
(12,276)
(3)
45,986
(7,997)
158,066
$
$
$
$
$
$
75,665
20,579
(24,261)
(3,682)
(49)
435
6,932
79,301
38,030
19,199
(8,994)
10,205
(56)
0
4,876
53,055
113,695
39,778
(33,255)
6,523
(105)
435
11,808
132,356
1
2
3
The balance at December 31, 2018 includes $8.3 billion of fund assets managed by a non-consolidated entity, Hermes GPE LLP, in
which Hermes holds an equity method investment.
Reflects the 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 total investment return.
42
Changes in Federated's average asset mix year-over-year across both asset classes 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
2018
2017
2016
2018
2017
2016
By Asset Class
Money Market
Equity
Fixed-Income
Alternative / Private
Markets
Multi-Asset
Other
By Product Type
Funds:
Money Market
Equity
Fixed-Income
Alternative / Private
Markets
Multi-Asset
Other
Separate Accounts:
Money Market
Equity
Fixed-Income
Alternative / Private
Markets
Multi-Asset
Other
64%
17%
16%
2%
1%
0%
44%
9%
10%
1%
1%
0%
20%
8%
6%
1%
0%
0%
67%
17%
15%
0%
1%
0%
48%
9%
11%
0%
1%
0%
19%
8%
4%
0%
0%
0%
70%
15%
14%
0%
1%
0%
59%
8%
11%
0%
1%
0%
11%
7%
3%
0%
0%
0%
37%
41%
16%
2%
3%
1%
34%
31%
14%
1%
3%
0%
3%
10%
2%
1%
0%
1%
41%
38%
17%
0%
4%
0%
38%
30%
15%
0%
4%
0%
3%
8%
2%
0%
0%
0%
45%
33%
17%
1%
4%
0%
44%
26%
15%
1%
4%
0%
1%
7%
2%
0%
0%
0%
Total managed assets represent the balance of AUM at a point in time. By contrast, total 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.
Period-end and average managed assets increased 16% and 13%, respectively, for the year ended December 31, 2018 compared
to the year ended December 31, 2017 primarily due to an increase in money market assets, and to a lesser extent, an increase in
alternative/private markets assets and equity assets primarily as a result of the Hermes Acquisition. Period-end money market
assets increased 14% at December 31, 2018 as compared to December 31, 2017. Average money market assets increased 9% for
2018 compared to 2017. Period-end equity assets increased 15% at December 31, 2018 as compared to December 31, 2017
primarily due to the Hermes Acquisition, partially offset by net redemptions and market losses. Average equity assets increased
17% for 2018 as compared to 2017. Period-end fixed-income assets decreased 2% at December 31, 2018 as compared to
December 31, 2017, primarily as a result of net redemptions, partially offset by acquisition-related assets. During 2018, worries
over trade tensions, Federal Reserve tightening and weakening Chinese and European economies elevated volatility for much of
the year, culminating with a steep sell-off of risk assets in the fourth quarter and strong rally in U.S. Treasury bonds. All of the
major U.S. equity indexes closed down on the year and well off their record highs reached during the third quarter. On the other
hand, bond market yields, as measured by the 10-year Treasury note, rose on the year but declined in the final quarter on the
strong risk-off trade, causing the yield curve to narrow further after the Federal Reserve hiked its benchmark target rate in
December for the fourth time in 2018.
43
Period-end and average managed assets increased 9% and 1%, respectively, for the year ended December 31, 2017 compared to
the year ended December 31, 2016. Period-end money market assets increased 5% at December 31, 2017 as compared to
December 31, 2016. Average money market assets decreased 3% for 2017 compared to 2016. After raising its target funds rate
three times in 2017, the FOMC also began its very modest plan to shrink the Federal Reserve's balance sheet. Period-end equity
assets increased 11% at December 31, 2017 as compared to December 31, 2016 primarily due to market appreciation, partially
offset by net redemptions. Average equity assets increased 13% for 2017 as compared to 2016. Period-end fixed-income assets
increased 25% at December 31, 2017 as compared to December 31, 2016 primarily as a result of net sales and, to a lesser
extent, market appreciation, while average fixed-income assets increased 8% for 2017 as compared to 2016. Equity markets, as
measured by the major indexes, continued to set a series of new highs in 2017's final quarter, driven by improved earnings,
accelerating economic growth and expectations for tax reform legislation that ultimately was approved and signed into law in
late December 2017. The bond market saw Treasury yields trend modestly higher over the same three-month period, driven by
stronger growth, hints of higher inflation and a general risk-on environment.
Results of Operations
Revenue. Revenue increased $32.8 million in 2018 as compared to 2017 primarily due to $100.8 million of Hermes activity
being included in the Consolidated Financial Statements beginning in the third quarter of 2018. This increase in revenue
included performance fees of $8.6 million, of which $7.6 million is included in the revenue from Hermes activity. This increase
in revenue was offset by (1) a decrease of $33.8 million due to Consideration Payable to Customers now being recorded as a
reduction of revenue effective January 1, 2018 as a result of the adoption of Topic 606 (under legacy guidance this amount
would have been recorded as Distribution expense ($24.6 million) and Other expense ($9.2 million)), (2) an increase in
voluntary waivers for certain money market funds for competitive reasons ($10.5 million), (3) a net decrease of $6.8 million
due to a previously disclosed January 2017 change in a customer relationship and (4) a decrease of $5.6 million due to lower
average equity assets (excluding the impact of the Hermes acquisition).
Federated's ratio of revenue to average managed assets for 2018 was 0.27% as compared to 0.30% for 2017. The decrease in the
rate was primarily related to a change in the mix of average money market assets (including the customer relationship change)
and the reduction in revenue as a result of the adoption of Topic 606.
Revenue decreased $40.4 million in 2017 as compared to 2016 primarily due to a decrease of $84.1 million from a change in
the mix of average money market assets and a net decrease of $58.6 million due to the aforementioned customer relationship
change (after taking into account the $19.5 million impact of Voluntary Yield-related Fee Waivers for this customer, which is
included in the change in waiver amount below). These decreases in revenue were partially offset by a decrease of $83.4
million in Voluntary Yield-related Fee Waivers and increases of $35.6 million and $6.7 million due to higher average equity
assets and fixed-income assets, respectively.
See Item 1A - Risk Factors under the caption Potential Adverse Effects of Low Short-Term Interest Rates for additional
information on Voluntary Yield-related Fee Waivers, including the offsetting decreases in Distribution expense and net income
attributable to noncontrolling interests and the net pre-tax impact on income.
Federated's ratio of revenue to average managed assets for 2017 was 0.30% as compared to 0.31% for 2016. The decrease in the
rate was primarily related to a change in the mix of average money market assets and the aforementioned customer relationship
change, partially offset by a decrease in Voluntary Yield-related Fee Waivers and an increase in revenue due to higher average
equity assets in 2017 as compared to 2016.
See Note (5) to the Consolidated Financial Statements for information on material concentrations in Federated's revenue.
Operating Expenses. Total operating expenses for 2018 increased $44.0 million compared to 2017. Compensation and Related
expense increased $65.6 million in 2018 as compared to 2017 primarily related to $56.1 million of Hermes activity being
included in the Consolidated Financial Statements beginning in the third quarter of 2018 and an increase in incentive
compensation of $9.5 million driven primarily by sales performance and acquisition-related compensation. Professional Service
Fees expense increased $13.8 million in 2018 as compared to 2017 primarily due to an increase of $5.8 million in acquisition-
related costs and $5.7 million of Hermes activity being included in the Consolidated Financial Statements beginning in the third
quarter of 2018. Distribution expense decreased $55.2 million in 2018 as compared to 2017 primarily due to a decrease of
$28.9 million due to the adoption of Topic 606 as noted above and a decrease of $22.6 million related to the mix of average
money market fund assets. The remaining operating expenses for 2018 increased $19.8 million compared to 2017 primarily due
to Hermes activity being included in the Consolidated Financial Statements beginning in the third quarter of 2018.
Total operating expenses for 2017 decreased $46.3 million compared to 2016. Distribution expense decreased $40.9 million in
2017 as compared to 2016 primarily due to a decrease of $59.2 million related to lower average money market fund assets and a
net decrease of $41.7 million due to the aforementioned customer relationship change (after taking into account the $6.2 million
44
impact of Voluntary Yield-related Fee Waivers for this customer, which is included in the change in waiver amount below).
These decreases in Distribution expense were partially offset by an increase of $62.3 million related to a decrease in Voluntary
Yield-related Fee Waivers. Compensation and Related expense decreased $7.3 million in 2017 as compared to 2016 primarily
due to decreased incentive compensation driven primarily by sales performance.
Nonoperating (Expenses) Income. Nonoperating (Expenses) Income, net, decreased $44.6 million in 2018 as compared to
2017. The decrease is primarily due to a $29.0 million loss, recorded in Other, net in the second quarter of 2018, related to two
derivative financial instruments associated with the Hermes Acquisition (see Note (8) to the Consolidated Financial Statements
for additional information). In addition, (Loss) Gain on Securities, net decreased $12.4 million due to (1) an $8.2 million
decrease in the market value of investments primarily held by consolidated investment companies and (2) a $4.3 million
decrease due to fewer gains realized from the redemption of investments in 2018 as compared to 2017.
Nonoperating (Expenses) Income, net, increased $5.2 million in 2017 as compared to 2016. The increase is primarily due to a
$6.0 million increase in (Loss) Gain on Securities, net primarily due to an increase in net gains realized from the redemption of
investments in 2017 ($4.2 million) and the impairments of certain investments in 2016 ($1.6 million).
Income Taxes. The income tax provisions for 2018, 2017, and 2016 were $73.9 million, $57.1 million, and $119.4 million,
respectively. The provision for 2018 increased $16.8 million as compared to 2017 primarily due to the 2017 recording of a
$70.4 million reduction in Federated's net deferred tax liability as a result of the Tax Act, partially offset by the reduction in the
federal corporate income tax rate from a maximum of 35% to a flat 21% effective January 1, 2018. The provision for 2017
decreased $62.3 million as compared to 2016 primarily due to the aforementioned revaluation of Federated's net deferred tax
liability resulting from the Tax Act.
The effective tax rate was 24.9% for 2018, 16.2% for 2017 and 35.0% for 2016. The increase in the effective tax rate for 2018
as compared to 2017 was primarily due to the 2017 revaluation of Federated's net deferred tax liability, partially offset by the
corresponding reduction in the federal corporate income tax rate from a maximum of 35% to a flat 21% effective January 1,
2018. The decrease in the effective tax rate for 2017 compared to 2016 was primarily due to the aforementioned revaluation of
Federated's net deferred tax liability. See Note (16) to the Consolidated Financial Statements for additional information on the
effective tax rate, as well as other tax disclosures.
For 2018, Federated's pre-tax book income exceeded federal taxable income by $27.6 million due primarily to tax differences
of $34.7 million associated with certain intangible assets and $7.8 million due to state income taxes, partially offset by $15.1
million of non-deductible compensation expense. For 2017, Federated's pre-tax book income exceeded federal taxable income
by $40.2 million due primarily to tax differences of $33.8 million associated with certain intangible assets and $9.4 million due
to state income taxes. For 2016, Federated's pre-tax book income exceeded federal taxable income by $70.6 million due
primarily to tax differences of $38.9 million associated with certain intangible assets, $12.6 million due to non-taxable net
income attributable to the noncontrolling interests in subsidiaries, $7.7 million due to state income taxes and $7.0 million due to
dividends paid on unvested restricted stock.
Net Income Attributable to Federated Investors, Inc. Net income decreased $71.0 million in 2018 as compared to 2017
primarily as a result of the changes in revenues, expenses, nonoperating (expenses) income and income taxes noted above.
Diluted earnings per share for 2018 decreased $0.69 as compared to 2017 primarily due to decreased net income.
Net income increased $82.4 million in 2017 as compared to 2016 primarily as a result of the changes in revenues, expenses,
nonoperating (expenses) income and income taxes noted above. Diluted earnings per share for 2017 increased $0.84 as
compared to 2016 primarily due to increased net income ($0.80, of which $0.69 related to the aforementioned revaluation of
Federated's net deferred tax liability) and lower weighted-average Federated Common Stock outstanding ($0.04).
45
Liquidity and Capital Resources
Liquid Assets. At December 31, 2018, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents,
investments and receivables, totaled $222.1 million as compared to $392.6 million at December 31, 2017. The change in liquid
assets is discussed below.
At December 31, 2018, Federated's liquid assets included investments in certain money market and fluctuating-value Federated
Funds that may have direct and/or indirect exposures to international sovereign debt and currency risks. Federated continues to
actively monitor its various types of investment portfolios to manage sovereign debt and currency risks with respect to certain
European countries (such as the UK in light of Brexit), China and certain other 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, certain money market funds (approximately $44 million), that meet the
requirement of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with
indirect short-term exposures invested primarily in high-quality international bank names that are subject to Federated's credit
analysis process.
Cash Provided by Operating Activities. Net cash provided by operating activities totaled $206.3 million for 2018 as
compared to $387.4 million for 2017. The decrease of $181.1 million was primarily due to (1) a decrease of $117.3 million in
cash received on the sale of investments, (2) an increase of $93.6 million in cash paid for incentive compensation (nearly all of
which was paid to Hermes employees and funded by cash acquired in connection with the Hermes Acquisition) and (3) $29.0
million in cash paid to settle foreign currency forward transactions (see Note (8) to the Consolidated Financial Statements for
additional information). These were partially offset by (1) a decrease of $56.8 million in cash paid for taxes primarily due to the
change in the tax rate enacted as part of the Tax Act and (2) a decrease in cash paid related to the $55.2 million decrease in
distribution related expenses previously discussed.
Cash Used by Investing Activities. In 2018, net cash used by investing activities was $174.4 million which primarily
represented $344.3 million in cash paid for the Hermes Acquisition, net of cash acquired totaling $175.8 million.
Cash Used by Financing Activities. In 2018, net cash used by financing activities was $186.1 million. Of this amount,
Federated paid $106.9 million or $1.06 per share in dividends to holders of its common shares and $29.2 million to repurchase
shares of Class B common stock primarily in connection with its stock repurchase program (see Note (15) to the Consolidated
Financial Statements for additional information). In addition, Federated paid $122.7 million in connection with its debt
obligations (see Note (12) to the Consolidated Financial Statements for additional information). These payments were offset by
$87.7 million borrowed from Federated's revolving credit facility used for general corporate purposes including cash payments
related to the Hermes Acquisition (see Note (3) to the Consolidated Financial Statements for additional information).
Borrowings. In 2017, Federated entered into an unsecured Third Amended and Restated Credit Agreement by and among
Federated, certain of its subsidiaries as guarantors party thereto, a syndicate of ten banks as Lenders party thereto, 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 Second Amended and Restated
Credit Agreement, which was dated June 24, 2014 and scheduled to mature on June 24, 2019 (Prior Credit Agreement). The
Credit Agreement refinanced $200 million available on the revolving credit facility and $178.5 million outstanding on the term
loan facility under the Prior Credit Agreement, replacing both with a $375 million revolving credit facility which has an
additional $200 million available via an optional increase (or accordion) feature. The original proceeds were used for general
corporate purposes including cash payments related to acquisitions, dividends, investments and share repurchases. As of
December 31, 2018, Federated has $240 million available to borrow under the Credit Agreement. See Note (12) 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, 2018. An interest coverage ratio of at least 4 to
1 is required and, as of December 31, 2018, Federated's interest coverage ratio was 67 to 1. A leverage ratio of no more than 3
to 1 is required and, as of December 31, 2018, Federated's leverage ratio was 0.4 to 1. The Credit Agreement also has certain
stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment
of debt outstanding if not cured within the applicable grace periods. The events of default generally include breaches of
contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment, and other
proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.
46
Dividends. Cash dividends of $106.9 million, $101.5 million and $205.5 million were paid in 2018, 2017 and 2016
respectively, to holders of Federated common stock. Of the amount paid in 2016, $102.2 million represented a $1.00 per share
special dividend paid in the fourth quarter. All dividends were considered ordinary dividends for tax purposes.
Future Cash Needs. In addition to the contractual obligations described below, management expects that principal uses of cash
will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base
compensation, paying shareholder dividends, repaying debt obligations, paying taxes, repurchasing company stock, developing
and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and
equipment (including technology). Any number of factors may cause Federated's future cash needs to increase. As a result of
the highly regulated nature of the investment management business, management anticipates that aggregate expenditures for
compliance and investment management personnel, compliance systems and technology and related professional and consulting
fees may continue to increase.
On January 24, 2019, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of
record as of February 8, 2019, resulting in $27.2 million being paid on February 15, 2019.
After evaluating Federated's existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under
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.
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 as of December 31, 2018. This discussion excludes certain material fluctuations primarily due to the Hermes
Acquisition (see Note (3) to the Consolidated Financial Statements) and Hermes activity being included in the Consolidated
Financial Statements beginning in the third quarter of 2018.
Investments—Consolidated Investment Companies at December 31, 2018 decreased $22.6 million from December 31, 2017
primarily due to redemptions by third-party investors in one consolidated Federated Fund.
Accrued Compensation and Benefits at December 31, 2018 increased $39.3 million from December 31, 2017 primarily due to
the Hermes Acquisition and Hermes activity being included in the Consolidated Financial Statements beginning in the third
quarter of 2018 ($40.0 million) as well as 2018 incentive compensation accruals recorded at December 31, 2018 ($65.0
million), partially offset by the 2017 accrued annual incentive compensation being paid in the first quarter of 2018 ($62.5
million).
There were no indicators of goodwill impairment as of December 31, 2018.
Off-Balance Sheet Arrangements
As of December 31, 2018 and 2017, Federated did not have any material off-balance sheet arrangements.
47
Contractual Obligations
The following table presents, as of December 31, 2018, 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
Other Obligations
Total
Payments Due in
2019
2020-2021
2022-2023 After 2023
0.0
$
0.0
$
135.0
$
0.0
$
17.1
26.9
2.1
35.4
7.8
0.7
36.5
0.0
0.0
72.2
0.0
0.0
Total
135.0
161.2
34.7
2.8
46.1
$
43.9
$
171.5
$
72.2
$
333.7
$
$
Long-Term Debt Obligations. Outstanding principal is to be paid no later than the expiration date of the Credit Agreement.
Amount includes principal only. The interest is variable, based on the London Interbank Offering Rate (LIBOR) plus a 112.5
basis point spread, in accordance with the Credit Agreement. Assuming management's current plan for repayment of the Credit
Agreement and LIBOR as of December 31, 2018, Federated's interest payments are estimated to be $4.5 million, $6.9 million
and $0.7 million for 2019, 2020-2021, and 2022-2023, respectively. Any changes in future cash needs can impact the projected
repayment schedule. As such, management's repayment plan is subject to change at management's discretion, which may
impact the estimated interest payments. See Note (12) to the Consolidated Financial Statements for additional information.
Operating Lease Obligations. See Note (18) 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 require payments through the year 2021. Costs for such
services are expensed as incurred.
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 Federated Fund VIEs and, as a result, consolidated
the assets, liabilities and operations of these VIEs in its Consolidated Financial Statements. See Note (6) to the Consolidated
Financial Statements for more information.
Recent Accounting Pronouncements
For a complete list of new accounting standards applicable to Federated, see Note (2) to the Consolidated Financial Statements.
Critical Accounting Policies
Federated's Consolidated Financial Statements have been prepared in accordance with U.S. 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 goodwill and intangible assets involves a higher degree of judgment and complexity.
Accounting for Goodwill and Intangible Assets. Three aspects of accounting for goodwill and 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) for intangible assets only, the determination of the useful life or whether the life
is indefinite. The process of determining the fair value of identifiable intangible assets at the date of acquisition requires
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 may
48
utilize an independent valuation expert to help with this process. Goodwill represents the cost of a business acquisition in
excess of the fair value of the assets acquired less liabilities assumed. 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 goodwill and/or intangible asset amounts recorded in the financial statements
could be subject to possible impairment or for finite-lived intangible assets, could require an acceleration in amortization
expense that could have a material adverse effect on Federated's business, results of operations and financial condition.
Goodwill is reviewed for impairment annually as of June 30, or when indicators of a potential impairment exist. Federated has a
single reporting unit, consistent with Federated's single operating segment, to which all goodwill has been assigned. Federated
first performs a qualitative analysis and considers various factors including macroeconomic and entity-specific considerations,
industry and market conditions, and overall financial performance, including Federated's book value and market capitalization.
A quantitative impairment test is performed if there are indications that it is more likely than not that the fair value of the
reporting unit is less than its carrying value. At December 31, 2018, Federated had $809.6 million in goodwill recorded on its
Consolidated Balance Sheets. No indicators of impairment existed as of December 31, 2018 or 2017 and no impairments were
recorded during the years ended December 31, 2018, 2017 or 2016.
Indefinite-lived intangible assets are reviewed for impairment annually as of October 1, or when indicators of a potential
impairment exist, 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 macroeconomic and entity-specific factors, including 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 changes in the expected use of the asset, a significant decline in the level of
managed assets, changes to legal, regulatory or contractual provisions of the renewable investment advisory contracts, the
effects of obsolescence, demand, competition and other economic factors that could impact the funds' projected performance
and existence, and significant reductions in underlying operating cash flows.
Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Finite-lived intangible
assets are reviewed for impairment at least annually, or when indicators of a potential impairment exist.
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, 2018, Federated had $339.6 million in intangible assets recorded on its Consolidated Balance Sheets. No
indicators of impairment existed as of December 31, 2018 or 2017 and no impairments were recorded during the years ended
December 31, 2018, 2017 or 2016.
49
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 Federated Funds for the primary purpose
of generating returns from capital appreciation, investment income, or both, or in the case of newly launched Federated Funds
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, 2018 and 2017, Federated was exposed to
interest-rate risk as a result of investments in debt securities held by certain consolidated investment companies and strategies
($13.6 million and $15.7 million, respectively) and holding investments in fixed-income Federated Funds ($0.5 million and
$1.4 million, respectively). At December 31, 2018 and 2017, management considered a hypothetical 200-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. At December 31, 2018 and 2017, these investments and
additional investments in money market accounts ($43.9 million and $309.1 million, respectively) exposed Federated to credit
risk. At December 31, 2018 and 2017, management considered a hypothetical 200-basis-point fluctuation in credit spreads.
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.
Federated was also exposed to interest-rate risk in connection with the Credit Agreement. The Credit Agreement bears interest
based on LIBOR plus a 112.5 basis point spread. At December 31, 2018 and 2017, the balance of the Credit Agreement was
$135.0 million and $170.0 million, respectively. Management considered a hypothetical 200-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 Credit Agreement exposed Federated to credit risk at December 31, 2018 and
2017. If Federated's credit rating were to be downgraded, Federated would be subject to an increase in both the interest rate
spread and commitment fee, 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 $7.9 million and $6.6 million investment in equity Federated Funds and
Separate Accounts at December 31, 2018 and 2017, respectively. Federated's investment in these products and strategies
represents its maximum exposure to loss. At both December 31, 2018 and 2017, management considered a hypothetical 20%
fluctuation in fair value and 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.
Foreign exchange risk is the risk that an investment's value will change due to changes in currency exchange rates. As of
December 31, 2018 and 2017, Federated was exposed to foreign exchange risk as a result of its investments in Federated Funds
holding non-U.S. dollar securities as well as non-U.S. dollar operating cash accounts and receivables held by certain foreign
operating subsidiaries of Federated ($8.2 million and $1.4 million, respectively). Of these investments and cash accounts held at
both December 31, 2018 and 2017, 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, during 2018, a British Pound Sterling denominated majority-owned subsidiary of Federated entered into foreign
currency forward transactions in order to hedge against foreign exchange rate fluctuations in the U.S. Dollar (combined face
amount of £46.0 million). This subsidiary is exposed to foreign exchange risk as a result of a portion of its revenue being
earned in U.S. Dollars. Management considered a hypothetical 20% fluctuation in the currency exchange rate and determined
that the impact of such a fluctuation would not have a material effect on Federated's financial condition or results of operations.
In addition to market risks attributable to Federated's investments, nearly 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 2018 or 2017 remained unchanged, a 20%
50
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 from 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.
51
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Federated Investors, Inc.'s (including its consolidated subsidiaries, 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, 2018, 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). The scope
of management's assessment of the effectiveness of its disclosure controls and procedures did not include the internal controls
over financial reporting at Hermes Fund Managers Limited (Hermes), which was acquired effective July 1, 2018. Hermes
represented approximately 13% and 12% of Federated's total and net assets, respectively, as of December 31, 2018 and
approximately 9% and 4% of Federated's total revenue and net income, respectively, for the year ended December 31, 2018.
This exclusion is consistent with the SEC Staff's guidance that an assessment of a recently acquired business may be omitted
from the scope of management's assessment of the effectiveness of disclosure controls and procedures that are also part of
internal control over financial reporting in the year of acquisition. Based on this assessment, management concluded that, as of
December 31, 2018, 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
audited the effectiveness of the internal control over financial reporting.
Federated Investors, Inc.
/s/ J. Christopher Donahue
J. Christopher Donahue
President and Chief Executive Officer
February 22, 2019
/s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer
52
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Federated Investors, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Federated Investors, Inc. (the Company) as of December 31,
2018 and 2017, 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, 2018, and the related notes (collectively referred to as the
"consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2018, 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)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, 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 22, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1996.
Pittsburgh, Pennsylvania
February 22, 2019
53
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Federated Investors, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Federated Investors, Inc.'s internal control over financial reporting as of December 31, 2018, 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). In our opinion, Federated Investors, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
As indicated in the accompanying Management's Assessment of Internal Control Over Financial Reporting, management's
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of Hermes Fund Managers Limited, which is included in the 2018 consolidated financial statements of the Company
and constituted 13% and 12% of total and net assets, respectively, as of December 31, 2018 and 9% and 4% of revenues and net
income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not
include an evaluation of the internal control over financial reporting of Hermes Fund Managers Limited.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, 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, 2018, and the related notes and our report dated February 22, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company'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 are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 22, 2019
54
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
ASSETS
Current Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Investments—Affiliates and Other
Receivables, net of reserve of $50 and $60, respectively
Receivables—Affiliates
Prepaid Expenses
Other Current Assets
Total Current Assets
Long-Term Assets
Goodwill
Intangible Assets, net
Property and Equipment, net
Other Long-Term Assets
Total Long-Term Assets
Total Assets
LIABILITIES
Current Liabilities
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 (20))
TEMPORARY EQUITY
Redeemable Noncontrolling Interest in Subsidiaries
PERMANENT EQUITY
Federated Investors, Inc. Shareholders' Equity
Common Stock:
2018
2017
$ 156,832
22,798
10,860
60,094
34,985
16,513
2,019
304,101
809,608
339,639
53,229
37,106
1,239,582
$1,543,683
$
56,110
113,865
11,205
181,180
135,000
148,164
39,705
322,869
504,049
$ 316,264
45,411
7,863
26,033
27,449
11,747
2,507
437,274
660,040
76,875
37,670
19,551
794,136
$1,231,410
$
47,595
74,572
6,682
128,849
170,000
117,620
23,563
311,183
440,032
182,513
30,163
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 Shares Issued
Retained Earnings
Treasury Stock, at Cost, 8,702,074 and 8,405,003 Shares Class B Common Stock, respectively
Accumulated Other Comprehensive Loss, net of tax
Total Permanent Equity
Total Liabilities, Temporary Equity and Permanent Equity
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
189
367,063
791,823
(287,337)
(14,617)
857,121
$1,543,683
189
343,189
697,359
(278,732)
(790)
761,215
$1,231,410
55
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
Total Revenue
Operating Expenses
Compensation and Related
Distribution
Professional Service Fees
Systems and Communications
Office and Occupancy
Advertising and Promotional
Travel and Related
Other
Total Operating Expenses
Operating Income
Nonoperating (Expenses) Income
Investment Income, net
(Loss) Gain on Securities, net
Debt Expense
Other, net
Total Nonoperating (Expenses) Income, 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 Common Share—Basic and Diluted
Cash Dividends Per Share
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
2018
2017
2016
$ 585,832
187,586
199,269
156,935
6,055
1,135,677
$ 591,112
140,558
188,814
176,397
6,043
1,102,924
$ 654,224
112,601
211,646
160,024
4,876
1,143,371
354,765
287,580
42,903
39,925
34,622
16,141
15,594
13,867
805,397
330,280
289,215
342,779
29,064
31,971
29,258
11,166
12,646
15,317
761,416
341,508
296,466
383,648
29,443
31,271
27,379
14,522
13,228
11,731
807,688
335,683
5,985
(4,357)
(5,885)
(29,849)
(34,106)
296,174
73,875
222,299
2,002
$ 220,297
7,236
8,072
(4,772)
(42)
10,494
352,002
57,101
294,901
3,560
$ 291,341
7,256
2,108
(4,173)
60
5,251
340,934
119,420
221,514
12,595
$ 208,919
$
$
2.18
1.06
$
$
2.87
1.00
$
$
2.03
2.00
56
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Years Ended December 31,
Net Income Including the Noncontrolling Interests in Subsidiaries
2018
$ 222,299
2017
$ 294,901
2016
$ 221,514
Other Comprehensive (Loss) Income, net of tax
Permanent Equity
Foreign Currency Translation (Loss) Gain
Reclassification Adjustment Related to Foreign Currency Items
Unrealized Gain on Equity Securities
Reclassification Adjustment Related to Equity Securities
Temporary Equity
Foreign Currency Translation Loss
Other Comprehensive (Loss) Income, net of tax
Comprehensive Income Including the Noncontrolling Interests in Subsidiaries
Less: Comprehensive (Loss) Income Attributable to Redeemable
Noncontrolling Interest in Subsidiaries
Less: Comprehensive 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.)
(13,607)
(191)
0
(29)
(6,009)
(19,836)
202,463
612
0
1,642
(2,521)
(617)
0
3,029
1,674
0
(267)
294,634
(13)
4,073
225,587
(4,007)
3,084
3,189
0
$ 206,470
476
$ 291,074
9,393
$ 213,005
57
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
Balance at January 1, 2016
Adoption of New Accounting Pronouncements
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
Balance at December 31, 2016
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
Balance at December 31, 2017
Adoption of new accounting pronouncements
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
Business Acquisition
Purchase of Treasury Stock
Balance at December 31, 2018
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
Class A
9,000
0
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
0
0
9,000
Shares
Class B
104,094,027
0
0
0
0
0
948,860
0
0
(3,053,204)
101,989,683
0
0
0
0
952,570
0
0
(1,841,800)
101,100,453
0
0
0
0
0
908,719
0
0
0
(1,205,790)
100,803,382
Treasury
5,411,429
0
0
0
0
0
(948,860)
0
0
3,053,204
7,515,773
0
0
0
0
(952,570)
0
0
1,841,800
8,405,003
0
0
0
0
0
(908,719)
0
0
0
1,205,790
8,702,074
58
Federated Investors, Inc. Shareholders' Equity
Common Stock
$ 298,579
123
0
0
0
0
22,280
0
0
0
320,982
0
0
0
0
22,396
0
0
0
343,378
0
0
0
0
0
23,874
0
0
0
0
$ 367,252
Retained
Earnings
$ 545,785
(911)
208,919
0
0
0
(18,715)
(205,329)
0
0
529,749
291,341
0
0
0
(22,308)
(101,423)
0
0
697,359
125
220,297
0
0
0
(19,051)
(106,907)
0
0
0
$ 791,823
Treasury Stock
$ (191,939)
0
0
0
0
0
20,150
0
0
(83,593)
(255,382)
0
0
0
0
23,607
0
0
(46,957)
(278,732)
0
0
0
0
0
20,495
0
0
0
(29,100)
$ (287,337)
Accumulated
Other
Comprehensive
Loss,
Net of Tax
$
$
(4,609)
831
0
3,255
0
0
0
0
0
0
(523)
0
(267)
0
0
0
0
0
0
(790)
(254)
0
(13,573)
0
0
0
0
0
0
0
(14,617)
Total
Shareholders'
Equity
$ 647,816
43
208,919
3,255
0
0
23,715
(205,329)
0
(83,593)
594,826
291,341
(267)
0
0
23,695
(101,423)
0
(46,957)
761,215
(129)
220,297
(13,573)
0
0
25,318
(106,907)
0
0
(29,100)
$ 857,121
Nonredeemable
Noncontrolling
Interest in
Subsidiary
$
$
1,156
0
9,393
0
0
0
0
0
(9,591)
0
958
476
0
0
0
0
0
(1,434)
0
0
0
0
0
0
0
0
0
0
0
0
0
Total
Permanent
Equity
$ 648,972
43
218,312
3,255
0
0
23,715
(205,329)
(9,591)
(83,593)
595,784
291,817
(267)
0
0
23,695
(101,423)
(1,434)
(46,957)
761,215
(129)
220,297
(13,573)
0
0
25,318
(106,907)
0
0
(29,100)
$ 857,121
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
$
8,734
14,850
3,202
(13)
17,868
(4,579)
0
0
(8,700)
0
31,362
3,084
0
4,687
(67)
0
0
(8,903)
0
30,163
0
2,002
(6,009)
7,040
(1,751)
0
0
(18,492)
169,560
0
$ 182,513
59
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) Loss on Disposal of Assets
Provision (Benefit) for Deferred Income Taxes
Net Unrealized Loss (Gain) on Investments
Net Sales of Investments—Consolidated Investment Companies
Adoption of New Accounting Pronouncement
Deferred Sales Commissions Paid
Contingent Deferred Sales Charges Received
Distributions from Equity Investments
Other Changes in Assets and Liabilities:
Increase in Receivables, net
(Increase) Decrease in Prepaid Expenses and Other Assets
(Decrease) Increase in Accounts Payable and Accrued Expenses
Increase (Decrease) in Other Liabilities
Net Cash Provided by Operating Activities
Investing Activities
Purchases of Investments—Affiliates and Other
Cash Paid for Business Acquisitions, net of Cash Acquired
Proceeds from Redemptions of Investments—Affiliates and Other
Cash Paid for Property and Equipment
Distribution from Equity Investment
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
Proceeds from Shareholders for Share-Based Compensation
Proceeds from New Borrowings
Payments on Debt
Other Financing Activities
Net Cash Used by Financing Activities
Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash, and Restricted
Cash Equivalents
Net (Decrease) Increase in Cash, Cash Equivalents, Restricted Cash and Restricted Cash
Equivalents
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of
Period
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period
Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term
Assets
Cash and Cash Equivalents
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Income taxes
Interest
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
60
2018
2017
2016
$ 222,299
$ 294,901
$ 221,514
2,967
17,087
23,893
298
12,257
4,322
16,696
0
(43)
0
1,173
(11,080)
4,029
(96,188)
8,572
206,282
(7,267)
(170,392)
20,283
(17,274)
211
(174,439)
(106,943)
(29,247)
(18,492)
2,801
1,444
87,650
(122,650)
(678)
(186,115)
8,025
10,637
22,508
(7,193)
(59,272)
(889)
133,992
0
(4,715)
1,785
0
(7,914)
(115)
(9,160)
4,785
387,375
(5,779)
(4,352)
20,930
(9,799)
0
1,000
(101,511)
(48,642)
(10,337)
4,687
1,299
0
(21,250)
(1,167)
(176,921)
11,980
9,578
22,445
1,070
17,496
(4,624)
4,746
(2,653)
(11,801)
2,195
0
(11,044)
1,114
6,001
(2,346)
265,671
(24,153)
0
15,953
(12,839)
0
(21,039)
(205,468)
(81,771)
(18,291)
17,868
1,436
0
(25,500)
(640)
(312,366)
(5,111)
0
0
(159,383)
211,454
(67,734)
316,809
157,426
105,355
316,809
173,089
105,355
594
$ 156,832
545
$ 316,264
516
$ 104,839
$
$
61,573
5,320
$ 118,412
4,109
$
$ 104,581
3,487
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(December 31, 2018, 2017 and 2016)
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Federated provides investment advisory, administrative, distribution and other services to the Federated Funds and Separate
Accounts in both domestic and international markets, as well as stewardship services to various companies. For presentation
purposes in the Consolidated Financial Statements, the Federated 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 advisors under the Advisers Act or operate in similar capacities under applicable jurisdictional law.
U.S.-domiciled Federated Funds are generally distributed by a wholly owned subsidiary registered as a broker/dealer under the
1934 Act and under applicable state laws. Non-U.S.-domiciled Federated Funds are generally distributed by subsidiaries and
third-party distribution firms which are registered under applicable jurisdictional law. Federated's investment products are
distributed within the U.S. financial intermediary, U.S. institutional and international markets.
(b) Basis of Presentation
The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. In preparing the financial
statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated
Financial Statements and accompanying notes. 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 to the current year's presentation.
(d) Principles of Consolidation
Federated performs an analysis for each Federated Fund or other entity in which Federated holds a financial interest to
determine if it is a VIE or voting rights entity (VRE). Factors considered in this analysis include, but are not limited to, whether
(1) it is a legal entity, (2) a scope exception applies, (3) a variable interest exists and (4) shareholders have the power to direct
the activities that most significantly impact the economic performance, as well as the equity ownership, and any related party or
de facto agent implications of Federated's involvement with the entity. Entities that are determined to be VIEs are consolidated
if Federated is deemed to be the primary beneficiary. Entities that are determined to be VREs are generally consolidated if
Federated holds the majority voting interest. Federated's conclusion to consolidate a Federated Fund may vary from period to
period, most commonly as a result of changes in its percentage interest in the entity. All intercompany accounts and transactions
have been eliminated.
Consolidation of Variable Interest Entities
Federated has a controlling financial interest in a VIE and is, therefore, deemed to be the primary beneficiary of a VIE if it has
(1) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (2) the
obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Consolidation of Voting Rights Entities
Federated has a controlling financial interest in a VRE if it can exert control over the financial and operating policies of the
VRE, which generally occurs when Federated holds the majority voting interest (i.e., greater than 50% of the voting equity
interest).
(e) Noncontrolling Interests
To the extent Federated's interest in a consolidated entity represents less than 100% of the entity's equity, Federated recognizes
noncontrolling interests in subsidiaries. In the case of consolidated Federated Funds, the noncontrolling interests represent
equity which is redeemable or convertible for cash at the option of the equity holder.
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In the case of Hermes, the current noncontrolling interest represents equity which is subject to the terms of the Put and Call
Option Deed and is redeemable at the option of either the noncontrolling party or Federated, at future predetermined dates, and
therefore, is not entirely within Federated's control. The subsidiary's net income or loss and related dividends are allocated to
Federated and the noncontrolling interest holder based on the relative ownership percentages. The noncontrolling interest
carrying value is adjusted on a quarterly basis to the current redemption value, as of the balance sheet date, through a
corresponding adjustment to retained earnings. See Note (3) for additional information.
These noncontrolling interests are deemed to represent temporary equity and are classified as Redeemable Noncontrolling
Interest in Subsidiaries in the mezzanine section of the Consolidated Balance Sheets.
(f) Equity Method Investments
The equity method of accounting is used to account for equity investments in which Federated does not control the investee and
is not the primary beneficiary of a VIE, but has the ability to exercise significant influence over the financial and operating
policies of the investee. Significant influence is generally considered to exist when Federated's ownership interest is between
20% and 50%. Equity method investments are initially recorded at cost in Other Long-Term Assets on the Consolidated
Balance Sheets. Federated's proportionate share of the investee's net income or loss is recorded in Other, net - Nonoperating
(Expenses) Income on the Consolidated Statements of Income.
(g) Business Combinations
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.
(h) Cash and Cash Equivalents
Cash and Cash Equivalents consist of investments in money market funds and deposits with banks. Cash equivalents are highly
liquid investments that are readily convertible to cash with original maturities of 90 days or less at the date of acquisition.
(i) Investments
Federated's investments are categorized as Investments—Consolidated Investment Companies or Investments—Affiliates and
Other on the Consolidated Balance Sheets. Investments—Consolidated Investment Companies represent securities held by
Federated as a result of consolidating certain Federated Funds. Investments—Affiliates and Other represent Federated's
investments in fluctuating-value Federated Funds and investments held in Separate Accounts for which Federated owns the
underlying debt and equity securities. All investments are carried at fair value with unrealized gains or losses on these securities
recognized in (Loss) Gain on Securities, net on the Consolidated Statements of Income. Realized gains and losses on these
securities are computed on a specific-identification basis and recognized in (Loss) Gain on Securities, net on the Consolidated
Statements of Income.
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 (7) for additional information regarding the fair value
of investments held as of December 31, 2018 and 2017. There were no impairments to investments recognized during the years
ended December 31, 2018 and 2017. There were no material impairments to investments recognized during the year ended
December 31, 2016.
(j) 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 (Loss)
Gain on Securities, net on the Consolidated Statements of Income.
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From time to time, Federated may also enter into derivative financial instruments to hedge against the risk of movement in
foreign exchange rates. Federated records all derivative financial instruments as either assets or liabilities on its Consolidated
Balance Sheets and measures these instruments at fair value. Federated has not designated any derivative financial instrument
as a hedging instrument for accounting purposes. The gain or loss on these derivative instruments is recognized as nonoperating
expense in Other, net on the Consolidated Statements of Income. See Note (8) for additional information on derivative
instrument activity.
(k) 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 15 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 2018 and 2017, $3.5 million and $4.8 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 impairments to property and equipment recognized
during the years ended December 31, 2018, 2017 or 2016.
(l) 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, including
software licenses in a cloud computing arrangement, 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 property and
equipment described above.
(m) Goodwill and Intangible Assets
Goodwill and intangible assets, consisting primarily of renewable investment advisory contracts and customer relationships,
acquired in connection with various acquisitions, are recorded at fair value determined using a discounted cash flow model as
of the date of acquisition. The discounted cash flow model considers various factors to project future cash flows expected to be
generated from the asset. Given the investment advisory nature of Federated's business and of the businesses acquired over the
years, these factors typically include: (1) an estimated rate of change for underlying managed assets; (2) expected revenue per
managed asset; (3) incremental operating expenses; 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 management of Federated's operations as a single business: investment management. Federated
uses a qualitative approach to test for potential impairment of goodwill. If, after considering various factors, management
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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, 2018, 2017 or 2016.
Federated has determined that certain acquired assets, primarily, 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 contracts 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. There were no impairments to indefinite-lived intangible assets recognized during the years ended
December 31, 2018, 2017 or 2016.
Federated amortizes finite-lived identifiable intangible assets on a straight-line basis over their estimated useful lives.
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 a
potential impairment monitored by management include a significant decline in the level of managed assets, changes to
contractual provisions underlying certain intangible assets and significant 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, 2018, 2017 or 2016.
(n) Deferred Sales Commissions
Federated pays upfront commissions to broker/dealers (Deferred Sales Commissions) to promote the sale of certain fund shares.
For share classes that previously paid both a distribution fee and contingent deferred sales charge (CDSC), Federated generally
capitalized the Deferred Sales Commissions. 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 six years. Deferred sales commission
amortization expense was $3.0 million, $8.0 million and $12.0 million for 2018, 2017 and 2016, respectively, and was included
in Distribution expense on the Consolidated Statements of Income.
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 future cash flows, the deferred sales commission asset is written
down to its estimated fair value determined using discounted future cash flows. There were no impairments to the deferred sales
commission asset during the years ended December 31, 2018, 2017 or 2016.
For share classes that do not pay both a distribution fee and CDSC, Federated may be entitled to receive an upfront
commission, which is collected from subscribing shareholders and recognized as revenue in Other Service Fees, net—Affiliates
on the Consolidated Statements of Income upon investor subscription. For Deferred Sales Commissions that are not capitalized,
the Deferred Sales Commissions paid are expensed as incurred and totaled $4.7 million, $1.4 million and $3.1 million for 2018,
2017 and 2016, respectively, and were included in Distribution expense on the Consolidated Statements of Income.
(o) Foreign Currency Translation
The balance sheets of certain foreign subsidiaries of Federated, certain consolidated foreign-denominated investment products
and all other foreign-denominated cash or investment balances 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.
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(p) Treasury Stock
Federated accounts for acquisitions of treasury stock at cost and reports total treasury stock held as a deduction from Federated
Investors, Inc. 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 and any
further required reductions are recorded to Retained Earnings on the Consolidated Balance Sheets.
(q) Revenue Recognition
All of Federated's revenue is earned from contracts with customers, which are generally terminable upon no more than 60 days'
notice. Revenue is measured in an amount that reflects the consideration to which Federated expects to be entitled in exchange
for providing those services. This amount may be reduced by Fee Waivers. See Note (6) for information about current period
Fee Waivers.
Revenue from providing investment advisory, administrative and the majority of other service fees is recognized when a
performance obligation is satisfied, which occurs when control of the services is transferred to customers. For these revenue
streams, control is transferred over time as the customer simultaneously consumes the benefit of the service as it is provided.
Federated utilizes a time-based measure of progress for which each day is a distinct service period over the life of the contract.
Investment advisory, administrative and certain other service fees are generally calculated as a percentage of average net assets
of the investment portfolios managed by Federated. Based on the nature of the calculation, the revenue for these services is
accounted for as variable consideration, and is subject to factors outside of Federated's control including investor activity and
market volatility and is recognized as these uncertainties are resolved. Certain other service fees are earned on fixed-rate
contracts which are recorded over the life of the contract as services are performed. See Note (4) for information about expected
future revenue.
For the distribution performance obligation, control is transferred to the customer at a point in time upon investor subscription
and/or redemption. Based on the nature of the calculation, the revenue for these services is accounted for as variable
consideration, and is subject to factors outside of Federated's control including investor activity and market volatility and is
recognized as these uncertainties are resolved. For certain revenue, primarily related to distribution and performance fees,
Federated may recognize revenue in the current period that pertains to performance obligations satisfied in prior periods, as it
represents variable consideration and is recognized as uncertainties are resolved.
The fair value of the investment portfolios managed by Federated is primarily determined using quoted market prices,
independent third-party pricing services and broker/dealer price quotes or the NAV Practical Expedient. 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
Federated Funds. For the periods presented, an immaterial amount of AUM was 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. For Separate Accounts that are registered investment companies under the
1940 Act (e.g., sub-advised mutual funds), the fair value of portfolio investments is determined based on a prescribed valuation
process approved by the board of directors/trustees of the sub-advised fund.
Federated has contractual arrangements with third parties to provide certain fund-related services. Management considers
whether Federated is acting as the principal service provider or as an agent to determine whether its revenue should be recorded
based on the gross amount payable by the funds or net of payments to third-party service providers, respectively. Federated
would be considered a principal service provider if it controls the service that is transferred to the customer. Alternatively,
Federated would be considered an agent when it does not control the service, but rather arranges for the service to be provided
by another party. 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 revenues on a gross basis. All of Federated's revenue is recorded gross of payments
made to third parties.
Management judgments are used when reviewing newly-created contracts and/or materially-modified contracts to determine
whether: (1) Federated is the principal or agent; (2) a contract has multiple performance obligations when Federated is paid a
single fee; and (3) two or more contracts should be combined. A change in the conclusion of whether Federated is the principal
or agent would result in a change in the revenue being recorded gross or net of payments made to third parties. Different
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conclusions for the remaining two judgments may change the line items to which revenue is being recorded. There are no
significant judgments that would impact the timing of revenue recognition.
(r) Share-Based Compensation
Federated issues shares for share-based awards from treasury stock. Federated recognizes compensation costs based on grant-
date fair value for all share-based awards. For restricted stock awards, the grant-date 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 recognized on a straight-line basis over the requisite service period of the award and is adjusted for actual forfeitures
as they occur. For 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
required age for retirement. Compensation and Related expense also includes dividends paid on forfeited awards. Excess tax
benefits and deficiencies (including tax benefits from dividends paid on unvested restricted stock awards) are recognized in the
Income Tax Provision in the Consolidated Statements of Income.
Effective July 2, 2018, Federated established a non-public subsidiary share-based compensation plan for certain employees of
that subsidiary. Federated recognizes compensation cost based on the grant-date fair value of the awards. Compensation and
Related expense is recognized on a straight-line basis over the requisite service period of the award and is adjusted for actual
forfeitures as they occur. See Note (3) for additional information.
(s) Leases
Federated classifies leases as either capital or operating in accordance with the provisions of lease accounting. All leases for the
periods presented are classified as operating leases. 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 reduced 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 remaining deferred lease costs and unamortized 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.
(t) 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 $5.2 million, $1.5 million and $2.7 million in 2018, 2017 and 2016, respectively, which were
included in Advertising and Promotional expense on the Consolidated Statements of Income.
(u) 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.
Federated has elected to account for taxes related to temporary basis differences expected to reverse as Global Intangible Low-
Taxed Income (GILTI) as tax expense in the period incurred, rather than factoring it into the measurement of deferred taxes.
(v) Earnings Per Share
Basic and diluted earnings per share are calculated under the two-class method. Pursuant to the two-class method, unvested
restricted shares of Federated's Class B common stock with nonforfeitable rights to dividends are considered participating
securities and are required to be considered in the computation of earnings per share. These unvested restricted shares, as well
as the related dividends paid and their proportionate share of undistributed earnings, if any, are excluded from the computation
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of basic earnings per share. In addition to the amounts excluded from the basic earnings per share calculation, net income
available to unvested shareholders of a nonpublic consolidated subsidiary is excluded from the computation of diluted earnings
per share.
(w) Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss, net of tax is reported on the Consolidated Balance Sheets and the Consolidated
Statements of Changes in Equity and includes unrealized gains and losses on foreign currency translation adjustments. Prior to
the adoption of ASU 2016-01, effective January 1, 2018, Accumulated Other Comprehensive Loss, net of tax included
unrealized gains and losses on equity securities available for sale. Following the adoption of ASU 2016-01, unrealized gains
and losses on these securities are recognized in (Loss) Gain on Securities, net on the Consolidated Statements of Income (see
Note (2) for additional information).
(x) 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, claim or proceeding 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.
(y) 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 and is regularly evaluated by Federated's CEO,
who is the chief operating decision maker, in deciding how to allocate resources and assess performance. Federated operates in
one operating segment, the investment management business, which is primarily conducted within the U.S. Federated's CEO
utilizes a consolidated approach to assess performance and allocate resources.
(2) Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
(a) Revenue Recognition
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. During 2016, the FASB issued ASU 2016-08, which clarified principal versus agent considerations,
ASU 2016-10, which clarified identifying performance obligations and the licensing implementation guidance, ASU 2016-12,
which addressed implementation issues and provided additional practical expedients and ASU 2016-20, which provided
technical corrections to narrow aspects of the guidance (collectively, with ASU 2014-09, Topic 606).
Effective January 1, 2018, Federated adopted Topic 606 using the modified retrospective method, which did not require the
restatement of prior years. In connection with the adoption of Topic 606, Federated has applied the guidance to all contracts that
were not completed on the effective date of adoption.
Management reevaluated the capitalization and amortization policies of deferred sales commission assets, which resulted in a
shorter amortization period. Upon adoption, Federated recorded a cumulative-effect adjustment of $8.1 million as a reduction to
Other Long-Term Assets and Retained Earnings. CDSCs received, which were previously recorded as a reduction of deferred
sales commission assets, are now being recorded as revenue. Upon adoption, Federated recorded a cumulative-effect adjustment
of $8.0 million as an increase to Other Long-Term Assets and Retained Earnings.
For the year ended December 31, 2018, $1.5 million of CDSCs received were recorded as revenue in Other Service Fees, net—
Affiliates on the Consolidated Statements of Income. Consideration Payable to Customers (which includes reimbursements or
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assumptions of fund-related expenses) of $34.3 million for the year ended December 31, 2018 was recorded as a reduction of
revenue in Investment Advisory Fees, net—Affiliates (previously recorded primarily as Distribution expense) on the
Consolidated Statements of Income. Additionally, certain revenue is now being recorded as a single asset management fee, as it
is part of a unitary fee arrangement with a single performance obligation. As such, $6.3 million for the year ended
December 31, 2018 was recorded in Investment Advisory Fees, net—Other (previously recorded in Other Service Fees, net—
Other) on the Consolidated Statements of Income.
(b) Financial Instruments
Effective January 1, 2018, Federated adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities. The ASU significantly revises an entity's accounting related to
(1) the classification and measurement of investments in equity securities, including investments in mutual funds and (2) the
presentation of certain fair value changes for financial liabilities. The ASU also amends certain disclosure requirements
associated with the fair value of financial instruments. Management elected the modified retrospective transition method which
was applied by means of a cumulative-effect adjustment to the Consolidated Balance Sheets. While the modified retrospective
transition method did not require the restatement of prior years, management elected to reclassify certain prior year
presentations and disclosures, primarily the investment and fair value measurement footnotes and the Consolidated Statements
of Cash Flows, to ensure comparability with current year investment classifications. The adoption did not have a material
impact to Federated's Consolidated Financial Statements.
(c) Statements of Cash Flows
On January 1, 2018, Federated adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments. The standard addresses eight specific cash flow issues to reduce diversity in practice in how
certain cash receipts and payments are presented on the Statement of Cash Flows. One relevant issue addressed contingent
consideration payments made after a business combination. However, Federated was already classifying these payments
appropriately. While the ASU required the retrospective adoption approach, the adoption did not have an impact to Federated's
Consolidated Financial Statements.
On January 1, 2018, Federated adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of
the FASB Emerging Issues Task Force. Under this ASU, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statements of cash flows. The ASU required the retrospective adoption approach, which required
the restatement of prior periods presented. The adoption did not have a material impact to Federated's Consolidated Financial
Statements.
(d) Clarifying the Definition of a Business
On January 1, 2018, Federated adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a
Business. The amendments in this update require that when substantially all of the fair value of the gross assets acquired (or
disposed of) is concentrated in a single identifiable asset (or a group of similar identifiable assets), the assets are not considered
to be a business. To be considered a business, an acquisition or disposal must include, at a minimum, an input and a substantive
process that together significantly contribute to the ability to create outputs. The amendments also narrow the definition of the
term "outputs" to be consistent with Topic 606. The ASU was required to be applied prospectively. The adoption did not have a
material impact to Federated's Consolidated Financial Statements.
(e) Reporting on Comprehensive Income
Effective January 1, 2018, Federated adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic
220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Due to the revaluation of
deferred taxes resulting from the Tax Cuts and Jobs Act of 2017 (Tax Act) being required to be included in income, regardless
of the source of income or loss to which the deferred item related, the tax effects of items within Accumulated Other
Comprehensive Loss, net of tax did not reflect the appropriate tax rate. The amendments in this update allow a reclassification
from Accumulated Other Comprehensive Loss, net of tax to Retained Earnings for these stranded tax effects resulting from the
Tax Act. Management elected to apply the guidance in the period of adoption, which did not require the restatement of prior
years, and was applied by means of a cumulative-effect adjustment to the Consolidated Balance Sheets. The adoption did not
have a material impact to Federated's Consolidated Financial Statements.
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Recently Issued Accounting Guidance Not Yet Adopted
(f) Leases
On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle is that a lessee should recognize
the assets and liabilities that arise from leases on the balance sheet, while retaining a distinction between finance and operating
leases. In the third quarter of 2018, the FASB issued ASU 2018-10, which provides improvements to narrow aspects of the
guidance and ASU 2018-11, which provides an optional alternative transition method to initially apply the new leases standard
at the adoption date (collectively, with ASU 2016-02, Topic 842). Topic 842 now allows for the use of either the modified
retrospective adoption method or the alternative transition method.
Management has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or
contain leases, (2) lease classification and (3) initial direct costs. Management has also elected the practical expedient to not
separate lease components from non-lease components, and will not be electing the hindsight practical expedient to determine
the lease term. Management has made an accounting policy election to apply the short-term lease exception, which does not
require the capitalization of leases with terms of 12 months or less. Management will adopt the standard effective January 1,
2019 and has elected the alternative transition method, which does not require the restatement of prior years. Effective
January 1, 2019, management will record approximately $112 million as a right-of-use asset and $134 million as a lease
liability on the Consolidated Balance Sheets, which consists primarily of Federated's operating real estate leases. The adoption
will not have a material impact on Federated's results of operations or cash flows.
(g) Goodwill Impairment
On January 26, 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. Under this ASU, an entity should perform its annual or interim goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. Additionally, the ASU retains the option to perform the qualitative assessment for a
reporting unit to determine if the quantitative impairment test is necessary. The update is effective for Federated on January 1,
2020, with early adoption permitted, and requires the prospective adoption method. Management is currently evaluating the
potential impact of adoption to Federated's Consolidated Financial Statements.
(h) Fair Value Measurement
On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to
the Disclosure Requirements for Fair Value Measurement. The amendments in this update remove, modify or add disclosure
requirements for fair value measurements to improve the effectiveness of disclosures. The update is effective for Federated on
January 1, 2020, with early adoption permitted, and allows for either the prospective or retrospective adoption method.
Management is currently evaluating the potential impact of adoption to Federated's Consolidated Financial Statements.
(i) Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
On August 29, 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a
consensus of the FASB Emerging Issues Task Force). The amendments in this update align the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use
software license). The update is effective for Federated on January 1, 2020, with early adoption permitted, and allows for either
the prospective or retrospective adoption method. Management plans to elect the prospective adoption approach, which does
not require the restatement of prior years. Management is currently evaluating the potential impact of adoption to Federated's
Consolidated Financial Statements.
69
(3) Business Combinations
On July 2, 2018, Federated completed, effective as of July 1, 2018, the acquisition of a controlling interest in Hermes (Hermes
Acquisition). The addition of London-based Hermes provides the opportunity to further accelerate Federated's growth in
markets outside of the U.S. BT Pension Scheme (BTPS) retained a 29.5 percent interest in Hermes and contributed the
remaining 10.5 percent interest into an Employee Benefit Trust (EBT) for the benefit of certain members of Hermes'
management and other key employees under a long-term incentive plan (LTIP). Federated paid a total of £260.7 million ($344.3
million). Federated funded the transaction through a combination of cash and an $18.0 million drawdown from its existing
revolving credit facility (see Note (12) for additional information).
Federated and BTPS entered into a Put and Call Option Deed pursuant to which Federated has a right to exercise a call option
to acquire BTPS' remaining 29.5 percent interest in Hermes at fair value and BTPS has a right to exercise a put option to sell its
remaining interest in Hermes to Federated at fair value, after the third, fourth or fifth anniversaries, and subject to certain
contingencies, the sixth anniversary, of the date of the purchase agreement. Federated does not consider BTPS's 29.5 percent
noncontrolling interest in Hermes to be permanent equity, due to it being redeemable at the option of either BTPS or Federated
and therefore, is not entirely within Federated's control.
Hermes granted equity awards from the EBT in the form of restricted nonpublic subsidiary stock pursuant to the LTIP to certain
members of Hermes' management and other key employees. These awards, which are subject to continued service vesting
requirements, vest over a period of three to five years. At various predetermined dates, but no earlier than 9 months after
vesting, award holders have a right to exercise a put option to sell shares to Federated at fair value and Federated has a right to
exercise a call option to acquire shares at fair value. The grant date fair value of the awards is recognized as Compensation and
Related expense in the Consolidated Statements of Income over the relevant vesting periods, with a corresponding adjustment
to Redeemable Noncontrolling Interest in Subsidiaries in the Consolidated Balance Sheets. As a result of the grant of the equity
awards in a nonpublic consolidated subsidiary under the terms of the LTIP and EBT, the shares are not included in the
attribution of the subsidiary's income and losses to noncontrolling interest holders until the awards vest. Therefore, Federated
initially recognized the fair value of 33 percent of Hermes as Redeemable Noncontrolling Interest in Subsidiaries on the
Consolidated Balance Sheets. The attribution of the subsidiary's income and loss is recognized in Net Income Attributable to the
Noncontrolling Interests in Subsidiaries on the Consolidated Statements of Income and is expected to fluctuate as the LTIP
awards vest and put/call options are exercised. Federated's diluted earnings per share calculation is adjusted for the
proportionate share of net income related to the unvested equity awards in a nonpublic consolidated subsidiary (see Note (17)
for additional information). As of December 31, 2018, Redeemable Noncontrolling Interest in Subsidiaries related to Hermes
was $170.9 million.
Federated has expensed $15.1 million in transaction costs directly attributable to the Hermes Acquisition. Of this amount, $13.3
million and $1.8 million has been expensed in 2018 and 2017, respectively, primarily recorded in Professional Service Fees on
the Consolidated Statements of Income. The transaction costs exclude a $29.0 million derivative loss (see Note (8) for
additional information) and a $1.7 million foreign exchange gain recognized in the second quarter of 2018 as a result of holding
British pound sterling immediately prior to the Hermes Acquisition.
Federated has performed a valuation of the fair market value of the Hermes Acquisition. Due to the timing of the acquisition
and status of the valuation work, the purchase price allocation for assets acquired (excluding Cash and Cash Equivalents, Other
Current Assets and Property and Equipment, net) and liabilities assumed (excluding amounts related to Accrued Compensation
and Benefits) is preliminary. Although preliminary results of the valuation are reflected in the Consolidated Financial
Statements as of December 31, 2018, the final purchase price allocation may reflect adjustments to this preliminary valuation
and such adjustments may be material.
70
The following table summarizes the allocation of the preliminary purchase price allocation, updated for valuation adjustments
made in the fourth quarter 2018:
(in millions)
Cash and Cash Equivalents
Other Current Assets1
Goodwill2
Intangible Assets3
Other Long-Term Assets4
Less: Long-Term Deferred Tax Liability, net
Less: Liabilities Assumed5
Less: Fair Value of Redeemable Noncontrolling Interest in Subsidiary6
Total Purchase Price Consideration
$
175.8
53.7
154.9
276.2
35.1
(19.5)
(162.3)
(169.6)
344.3
$
1
2
3
4
5
6
Includes $31.9 million of receivables, substantially all of which has been collected as of December 31, 2018.
The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled
workforce of Hermes. In this instance, goodwill is not deductible for tax purposes.
Includes $93.6 million for customer relationships with a weighted-average useful life of 8.4 years, $132.7 million for indefinite-lived
renewable investment advisory contracts and $49.9 million for an indefinite-lived trade name, all of which are recorded in Intangible
Assets, net on the Consolidated Balance Sheets.
Includes $11.2 million of Property and Equipment, net.
Includes $130.3 million related to Accrued Compensation and Benefits.
The fair value of the noncontrolling interest was determined utilizing the market approach and consideration of the overall business
enterprise value.
The financial results of Hermes have been included in Federated's Consolidated Financial Statements from the July 1, 2018
effective date of the acquisition. For the six months ended December 31, 2018, Hermes earned revenue of $100.8 million and
net income of $9.6 million (which excludes acquisition-related intangible amortization and amounts attributable to the
noncontrolling interests).
The following table summarizes unaudited pro forma financial information assuming the Hermes Acquisition occurred at the
beginning of the years presented. This pro forma financial information is for informational purposes only and is not indicative
of actual results that would have occurred had the Hermes Acquisition been completed on the assumed dates and it is not
indicative of future results. In addition, the following pro forma financial information does not reflect the realization of any cost
savings (nor does management expect to realize any cost savings) or other synergies from the Hermes Acquisition. The pro
forma results include adjustments for the effect of acquisition-related expenses (including the loss on foreign currency forward
transactions noted below, compensation and related expense, income tax expense and amortization related to newly acquired
intangibles) as well as adjustments to conform to Federated's U.S. GAAP accounting policies.
(in millions)
Revenue
Net Income1
1
The year ended December 31, 2018 excludes a $29.0 million loss on foreign currency forward transactions entered into in order to hedge
against foreign exchange rate fluctuations associated with the payment for the Hermes Acquisition.
2018
1,230.5
241.4
$
$
2017
1,268.6
306.1
$
$
71
(4) Revenue from Contracts with Customers
The following table presents Federated's revenue disaggregated by asset class:
(in thousands)
Equity
Money Market
Fixed-Income
Other1
Total Revenue
$
$
2018
470,436
414,746
180,152
70,343
1,135,677
1
Includes Alternative / Private Markets (including but not limited to private equity, real estate and infrastructure), Multi-Asset and
stewardship services revenue.
The following table presents Federated's revenue disaggregated by performance obligation:
(in thousands)
Asset Management1
Administrative Services
Distribution2
Other3
Total Revenue
$
$
2018
773,418
199,269
146,595
16,395
1,135,677
1
2
3
The performance obligation may include administrative, distribution and other services recorded as a single asset management fee
under Topic 606, as it is part of a unitary fee arrangement with a single performance obligation.
The performance obligation is satisfied at a point in time and may include CDSC's and upfront commissions. A portion of this revenue
relates to a performance obligation that has been satisfied in a prior period.
Includes shareholder service fees and stewardship services revenue.
The following table presents Federated's revenue disaggregated by product type:
(in thousands)
Federated Funds
Separate Accounts
Other1
Total Revenue
1
Includes stewardship services revenue.
$
$
2018
942,037
187,585
6,055
1,135,677
Federated is not required to disclose certain estimates of revenue expected to be recorded in future periods as a result of
applying the following exemptions: (1) contract terms are short-term in nature (i.e., expected duration of one year or less due to
termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods.
Federated expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services performance
obligations at December 31, 2018. Generally, contracts are billed in arrears on a quarterly basis and have a three year duration,
after which the customer can terminate the agreement with a three to twelve month notice. Based on existing contracts and the
exchange rates as of December 31, 2018, Federated may record future fixed revenue from stewardship services as presented in
the following table:
(in thousands)
2019
2020
2021
2022 and thereafter
Total Remaining Unsatisfied Performance Obligations
72
$
$
8,231
2,597
1,553
535
12,916
(5) Concentration Risk
The following information summarizes Federated's revenue concentrations. See additional information on the risks related to
such concentrations in Item 1A - Risk Factors.
(a) Revenue Concentration by Asset Class
The following table presents Federated's revenue concentration by asset class over the last three years:
Equity Assets
Money Market Assets
Fixed-Income Assets
2018
41%
37%
16%
2017
38%
41%
17%
2016
33%
45%
17%
The change in the relative proportion of Federated's revenue attributable to equity assets in 2018, as compared to the same
period in 2017, was primarily the result of higher average equity assets mostly as a result of the July 2018 Hermes Acquisition.
Because the Hermes Acquisition was primarily comprised of equity assets and alternative/private markets assets, the relative
proportion of Federated's revenue attributable to money market assets decreased in 2018 as compared to 2017. Furthermore,
Federated's revenue attributable to money market assets decreased as a result of a change in the mix of average money market
assets.
The change in the relative proportion of Federated's revenue attributable to money market assets in 2017 as compared to 2016
was primarily the result of a change in the mix of average money market assets and a decrease related to a change in a customer
relationship. This was partially offset by a decrease in Voluntary Yield-related Fee Waivers. The change in the relative
proportion of Federated's revenue attributable to equity assets in 2017 as compared to 2016 was primarily the result of higher
average equity assets primarily due to market appreciation, partially offset by net redemptions.
Low Short-Term Interest Rates
The FOMC raised the federal funds target rate by 0.25% four times during 2018 to its current target range of 2.25%-2.50%,
which was the ninth such interest rate increase since December 2015. The federal funds target rate, which drives short-term
interest rates, had been close to zero for nearly seven years prior to the December 2015 increase. The long-term low interest-
rate environment resulted in the gross yield earned by certain money market funds not being sufficient to cover all of the fund's
operating expenses. As a result, beginning in the fourth quarter of 2008, Federated implemented Voluntary Yield-related Fee
Waivers. These waivers were 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 Voluntary Yield-related Fee Waivers.
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
2018
0.0
0.0
0.0
0.0
0.0
$
$
2017
(4.4) $
3.6
(0.8)
0.0
(0.8) $
2016
(87.8)
65.8
(22.0)
0.0
(22.0)
$
$
The negative pre-tax impact of Voluntary Yield-related Fee Waivers decreased in 2017 as compared to 2016 due primarily to
higher yields on instruments held by the money market funds. As previously mentioned, since late 2015, the FOMC increased
the federal funds target rate range by 0.25% nine times. The interest rate increase in December 2017 eliminated the need to
continue the Voluntary Yield-related Fee Waivers.
73
(b) Revenue Concentration by Investment Strategy
The following table presents Federated's revenue concentration by investment strategy over the last three years:
Federated Strategic Value Dividend strategy1
Federated Kaufmann Mid-Cap Growth strategy2
1
2
Strategy includes Federated Funds and Separate Accounts.
Strategy includes Federated Funds.
2018
15%
10%
2017
18%
9%
2016
15%
8%
A significant and prolonged decline in the AUM in either of these strategies could have a material adverse effect on Federated's
future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with the
Federated Funds managed in accordance with these strategies.
(c) Revenue Concentration by Intermediary
Approximately 13%, 16% and 15% of Federated's total revenue for 2018, 2017 and 2016, respectively, was derived from
services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary.
Significant negative changes in Federated's relationship with this intermediary could have a material adverse effect on
Federated's future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated
with this intermediary.
(6) Consolidation
The Consolidated Financial Statements include the accounts of Federated, which include Hermes, Federated Funds and other
entities in which Federated holds a controlling financial interest. Federated is involved with various entities in the normal
course of business that may be deemed to be VREs or VIEs. From time to time, Federated invests in Federated Funds for
general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to
establish a performance history. Federated's investment in, and/or receivables from, these Federated Funds represents its
maximum exposure to loss. The assets of each consolidated Federated Fund are restricted for use by the respective Federated
Fund. Generally, neither creditors of, nor equity investors in, the Federated Funds have any recourse to Federated's general
credit. 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. Receivables from all Federated Funds for advisory and other services
totaled $35.0 million and $27.4 million at December 31, 2018 and 2017, respectively.
In the ordinary course of business, Federated may implement Fee Waivers for various Federated Funds for competitive,
regulatory or contractual reasons. For the years ended December 31, 2018 and 2017, Fee Waivers totaled $358.2 million and
$345.5 million, respectively, of which $242.9 million and $222.1 million, respectively, related to money market funds which
meet the scope exception of the consolidation guidance.
Like other sponsors of investment companies, Federated in the ordinary course of business may make capital contributions to
certain money market Federated Funds in connection with the reorganization of such funds into certain affiliated money market
Federated Funds or in connection with the liquidation of a money market Federated Fund. In these instances, such capital
contributions typically are intended to either offset realized losses or other permanent impairments to a fund's NAV, increase the
market-based NAV per share of the fund's portfolio that is being reorganized to equal the market-based NAV per share of the
acquiring fund or to bear a portion of expenses relating to a fund liquidation. Under current money fund regulations and SEC
guidance, Federated is required to report these types of capital contributions to U.S. money market mutual funds to the SEC as
financial support to the investment company that is being reorganized or liquidated. There were no contributions for the year
ended December 31, 2018 and no material contributions for the year ended December 31, 2017.
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 to consolidate the entity.
The disclosures below represent the results of such evaluations as of December 31, 2018 and 2017.
(a) Consolidated Voting Rights Entities
Most of the Federated Funds meet the definition of a VRE. Federated consolidates certain VREs when it is deemed to have
control. Consolidated VREs are reported on Federated's Consolidated Balance Sheets in Investments—Consolidated Investment
Companies and Redeemable Noncontrolling Interest in Subsidiaries.
74
(b) Consolidated Variable Interest Entities
As of December 31, 2018 and 2017, Federated was deemed to be the primary beneficiary of, and therefore consolidated, certain
Federated Funds as a result of its controlling financial interest. The following table presents the balances related to the
consolidated Federated Fund VIEs that were included on the Consolidated Balance Sheets as well as Federated's net interest in
the consolidated Federated Fund VIEs 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 Federated Fund VIEs
$
2018
0.0
21.2
0.4
0.3
11.2
$ 10.1
$
2017
0.1
39.7
1.0
0.4
27.7
$ 12.7
Federated's net interest in the consolidated Federated Fund VIEs represents the value of Federated's economic ownership
interest in these Federated Funds.
Federated did not newly consolidate or deconsolidate any VIEs during the year ended December 31, 2018.
(c) Non-Consolidated Variable Interest Entities
Federated's involvement with certain Federated Funds 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 losses or receive benefits
that could potentially be significant to the VIE. Therefore, Federated is not the primary beneficiary of these VIEs and has not
consolidated these entities.
At December 31, 2018, Federated did not have a variable interest in a non-consolidated VIE. Of the previously disclosed
receivables from all Federated Funds, $16.2 million related to non-consolidated VIEs at December 31, 2018 and represented
Federated's maximum risk of loss from non-consolidated VIE receivables.
At December 31, 2017, Federated's investment and maximum risk of loss related to a variable interest in a non-consolidated
VIE was $0.9 million (recorded in Investments—Affiliates and Other on the Consolidated Balance Sheets) and was entirely
related to one Federated Fund. AUM for this non-consolidated Federated Fund totaled $55.8 million at December 31, 2017. Of
the previously disclosed receivables from Federated Funds, $2.3 million related to non-consolidated VIEs at December 31,
2017 and represented Federated's maximum risk of loss from non-consolidated VIE receivables.
(7) Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price that would be paid to transfer a liability as of the
measurement date. A 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 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.
NAV Practical Expedient – Investments that calculate NAV per share (or its equivalent) as a practical expedient. These
investments have been excluded from the fair value hierarchy.
75
(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)
2018
Financial Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Equity Securities
Debt Securities
Investments—Affiliates and Other
Equity Securities
Debt Securities
Other
Total Financial Assets
Total Financial Liabilities1
2017
Financial Assets
Equity Securities
Debt Securities
Investments—Affiliates and Other
Equity Securities
Debt Securities
Other
Total Financial Assets
Total Financial Liabilities1
1
Level 1
Level 2
Level 3
NAV
Practical
Expedient
Total
$ 156,832
$
0
$
1,269
0
6,684
0
597
$ 165,382
$
53
$
$
633
20,896
403
3,456
0
25,388
3,852
$
$
5,424
0
4,564
0
123
$ 215,475
$
0
$
$
746
39,241
0
2,997
357
43,341
0
$
$
0
0
0
38
0
70
108
385
0
0
0
$
$
$
0
0
0
$ 156,832
1,902
20,896
279
0
0
279
7,404
3,456
667
$ 191,157
0
$
4,290
$ 110,900
$ 316,264
0
0
6,170
39,241
0
0
760
760
302
0
0
$ 111,202
4,866
2,997
1,240
$ 370,778
1,203
$
0
$
1,203
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
$ 205,364
$
0
$
Amounts primarily consist of derivative liabilities and acquisition-related future contingent consideration liabilities.
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, 2018 or 2017.
Cash and Cash Equivalents
Cash and Cash Equivalents include deposits with banks and investments in money market funds. Investments in money market
funds totaled $135.7 million and $311.0 million at December 31, 2018 and 2017, respectively. Cash investments in publicly
available 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. For an investment in a
money market 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 excluded from the fair value hierarchy.
This investment is included in the NAV Practical Expedient column in the December 31, 2017 table above.
Investments—Consolidated Investment Companies—Equity Securities
Investments—Consolidated Investment Companies—Equity Securities represent equity securities held by consolidated
Federated Funds. For publicly traded equity securities available in an active market, the fair value of these securities is
classified as Level 1 when the fair value is based on quoted market prices. The fair value of certain equity securities traded
principally in foreign markets and held by consolidated Federated Funds are determined by a third-party pricing service
(Level 2).
76
Investments—Consolidated Investment Companies—Debt Securities
Investments—Consolidated Investment Companies—Debt Securities primarily represent domestic and foreign bonds held by
consolidated Federated Funds. 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).
Investments—Affiliates and Other—Equity Securities
Investments—Affiliates and Other—Equity Securities primarily represent equity investments in fluctuating-value Federated
Funds as well as investments held in Separate Accounts. For publicly traded equity securities available in an active market, the
fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. For investments in
Federated 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. The fair value of certain equity securities traded principally in foreign markets and held in Separate Accounts are
determined by third–party pricing services (Level 2). For certain investments in Federated Funds and/or Separate Accounts that
are not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions, the
securities are valued using NAV as a practical expedient and are excluded from the fair value hierarchy. These investments are
included in the NAV Practical Expedient column in the table above.
Investments—Affiliates and Other—Debt Securities
Investments—Affiliates and Other—Debt Securities primarily represent domestic bonds held in Separate Accounts. 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).
(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, 2018.
(c) Fair Value Measurements of Other Financial Instruments
The fair value of Federated's debt is estimated by management using observable market data (Level 2). Based on this fair value
estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value.
(8) Derivatives
During the second quarter of 2018, Federated entered into two foreign currency forward transactions in order to hedge against
foreign exchange rate fluctuations associated with the payment for the Hermes Acquisition. Neither forward was designated as
a hedging instrument for accounting purposes. Federated recorded $29.0 million as nonoperating expense in Other, net on the
Consolidated Statements of Income as a result of the change in fair value of these derivatives during the second quarter of 2018.
During 2018, a British Pound Sterling denominated majority-owned subsidiary of Federated entered into foreign currency
forward transactions in order to hedge against foreign exchange rate fluctuations in the U.S. Dollar. None of the forwards have
been designated as hedging instruments for accounting purposes. As of December 31, 2018, this subsidiary held foreign
currency forward derivative instruments with a combined face amount of £46.0 million and expiration dates ranging from
March 2019 through September 2019. During the year ended December 31, 2018, Federated recorded $4.0 million as
nonoperating expense in Other, net on the Consolidated Statements of Income. As of December 31, 2018, Federated recorded
$3.8 million in Other Current Liabilities on the Consolidated Balance Sheets as a result of the change in fair value of these
derivative instruments.
77
(9) Investments
At December 31, 2018 and 2017, Federated held investments in Separate Accounts of $6.8 million and $6.3 million,
respectively, and investments in fluctuating-value Federated Funds of $4.1 million and $1.6 million, respectively, that were
included in Investments—Affiliates and Other on the Consolidated Balance Sheets.
Federated's investments held in Separate Accounts as of December 31, 2018 and 2017, were primarily composed of domestic
debt securities ($3.5 million and $3.0 million, respectively) and stocks of large U.S. and international companies ($2.7 million
and $2.6 million, respectively).
Federated consolidates certain Federated Funds into its Consolidated Financial Statements as a result of Federated's controlling
financial interest in these Federated Funds (see Note (6)). All investments held by these consolidated Federated Funds were
included in Investments—Consolidated Investment Companies on Federated's Consolidated Balance Sheets.
Federated's investments held by consolidated Federated Funds as of December 31, 2018 and 2017, were primarily composed of
domestic and foreign debt securities ($20.9 million and $39.2 million, respectively) and stocks of small and medium-sized
companies ($3.8 million at December 31, 2017).
The following table presents gains and losses recognized in (Loss) Gain on Securities, net on the Consolidated Statements of
Income in connection with Federated's investments:
(in thousands)
Investments—Consolidated Investment Companies
Unrealized (Losses) Gains
Realized Gains1
Realized Losses1
Net (Losses) Gains on Investments—Consolidated Investment Companies
Investments—Affiliates and Other
Unrealized (Losses) Gains Recognized on Securities Still Held
Net Realized Gains (Losses) Recognized on Securities Sold1
Net (Losses) Gains on Investments—Affiliates and Other
2018
2017
2016
771
$
4,232
$ (3,142) $
1,596
(1,970)
(3,516)
(1,180)
339
(841)
3,318
(1,073)
3,016
118
4,938
5,056
2,358
(3,678)
2,912
392
(1,196)
(804)
2,108
(Loss) Gain on Securities, net
$ (4,357) $
8,072
$
1 Realized gains and losses are computed on a specific-identification basis.
(10) Intangible Assets
(a) Indefinite-lived intangible assets
Indefinite-lived intangible assets are recorded in Intangible Assets, net on the Consolidated Balance Sheets and include
renewable investment advisory contracts ($204.1 million and $73.9 million at December 31, 2018 and December 31, 2017,
respectively) and trade names ($50.1 million and $1.9 million at December 31, 2018 and December 31, 2017, respectively).
(b) Finite-lived intangible assets
Finite-lived intangible assets represent customer relationships and consist of the following at December 31:
(in thousands)
Cost
Accumulated Amortization
Carrying Value
2018
$ 96,598
(11,203)
$ 85,395
2017
6,300
(5,202)
1,098
$
$
The increase of $90.3 million in the cost of the finite-lived intangible assets at December 31, 2018 as compared to
December 31, 2017 primarily relates to the Hermes Acquisition. See Note (3) for additional information regarding the Hermes
Acquisition.
78
Amortization expense for finite-lived intangible assets was $6.2 million, $0.6 million and $1.0 million in 2018, 2017 and 2016,
respectively, and was recorded as operating expense in Other expense on the Consolidated Statements of Income.
Expected aggregate annual amortization expense for finite-lived intangible assets in each of the five succeeding years assuming
no new acquisitions or impairments is $11.4 million for 2019 and $10.9 million for each of the years 2020, 2021, 2022 and
2023.
(11) 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
1
to
7 years
Up to term of lease
12 years
15 years
to
to
3
4
2018
$ 85,894
33,379
17,851
6,042
143,166
(89,937)
$ 53,229
2017
$ 62,303
21,975
17,851
6,102
108,231
(70,561)
$ 37,670
Depreciation expense was $12.9 million, $11.1 million and $9.7 million for the years ended December 31, 2018, 2017 and
2016, respectively, and was recorded in Office and Occupancy expense on the Consolidated Statements of Income.
(12) Debt
On June 5, 2017, Federated entered into the Credit Agreement, which amended and restated Federated's Prior Credit
Agreement. The Credit Agreement refinanced $200 million available on the revolving credit facility and $178.5 million
outstanding on the term loan facility under the Prior Credit Agreement, replacing both with a $375 million revolving credit
facility which has an additional $200 million available via an optional increase (or accordion) feature. The interest on the
revolving credit facility is calculated at the monthly LIBOR plus a spread. The borrowings under the revolving credit facility
may include up to $25 million for which interest is calculated at the daily LIBOR plus a spread (Swing Line). Federated had no
borrowings under the previous revolving credit facility. The Credit Agreement does not include a term loan facility. On July 1,
2018, Federated entered into an amendment to the Credit Agreement to add certain definitions and to amend certain negative
covenants relating to indebtedness, guarantees, and restrictions on dividends, related to the Hermes Acquisition. This
amendment contains other customary conditions, representations, warranties and covenants.
The Credit Agreement, which expires on June 5, 2022, has no principal payment schedule, but instead requires that any
outstanding principal be repaid by the expiration date. Federated, however, may elect to make discretionary principal payments
prior to the expiration date. As of December 31, 2018 and 2017, the amounts outstanding under the revolving credit facility
were $135 million and $170 million, respectively, and were recorded as Long-Term Debt on the Consolidated Balance Sheets.
The interest rate was 3.474% and 2.486% as of December 31, 2018 and 2017, respectively, which was calculated at LIBOR
plus a spread. The commitment fee under the Credit Agreement currently is 0.125% per annum on the daily unused portion of
each Lender's commitment. As of December 31, 2018, Federated has $240 million available for borrowings.
The Credit Agreement, similar to the Prior 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, 2018
(see the Liquidity and Capital Resources section of Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations). The Credit Agreement also has certain stated events of default and cross default provisions which would
permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace
periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency,
cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require
the repayment of amounts borrowed. The Credit Agreement also requires certain subsidiaries to enter into a Second Amended
and Restated Continuing Agreement of Guaranty and Suretyship to guarantee payment of all obligations incurred through the
Credit Agreement.
79
(13) Employee Benefit Plans
(a) 401(k) 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 (IRC) limitations. Prior to January 1, 2018, Federated's matching
contribution was 100% of the first 2% of compensation contributed by an employee and 50% of the next 4% for a total possible
match of 4%, subject to IRC compensation limits. For 2018, Federated's matching contribution was 100% of the first 3% of
compensation contributed by an employee and 50% of the next 3% for a total possible match of 4.5%, subject to IRC
compensation limits. Effective January 1, 2019, Federated's matching contribution is 100% of the first 4% of compensation
contributed by an employee and 50% of the next 2% for a total possible match of 5%, subject to IRC limitations. 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 $5.7 million, $5.0 million and $4.8 million for 2018, 2017 and
2016, respectively.
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.
(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 2018, 8,706 shares were purchased by employees in this plan and, as of
December 31, 2018, a total of 194,224 shares were purchased by employees in this plan on the open market since its inception
in 1998.
(14) Share-Based Compensation
(a) Restricted Stock
Federated's long-term stock-incentive compensation is provided 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 30.6 million shares of Class B common stock have been authorized for
granting share-based awards in the form of restricted stock, stock options or other share-based awards. As of December 31,
2018, 4.3 million shares are available under the Plan.
Share-Based Compensation Expense was $23.9 million, $22.5 million and $22.4 million for the years ended December 31,
2018, 2017 and 2016, respectively. The associated tax benefits recorded in connection with share-based compensation expense
were $5.6 million, $8.4 million and $8.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. At
December 31, 2018, the maximum remaining unrecognized compensation expense related to share-based awards approximated
$75 million which is expected to be recognized over a weighted-average period of approximately 6 years.
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 these restriction periods, the recipient
receives dividends on all shares awarded, regardless of their vesting status.
80
The following table summarizes activity of non-vested restricted stock awards for the year ended December 31, 2018:
Non-vested at January 1, 2018
Granted1
Vested
Forfeited
Non-vested at December 31, 2018
Restricted
Shares
3,978,433
899,269
(866,259)
(50,883)
3,960,560
$
Weighted-
Average Grant-
Date Fair Value
24.90
28.30
25.24
25.54
25.59
$
1 During 2018, Federated awarded 451,769 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 2018, Federated
awarded 447,500 shares of restricted Federated Class B common stock to certain key employees. These restricted stock awards generally
vest over a ten-year period.
Federated awarded 899,269 shares of restricted Federated Class B common stock with a weighted-average grant-date fair value
of $28.30 to employees during 2018; awarded 946,570 shares of restricted Federated Class B common stock with a weighted-
average grant-date fair value of $27.20 to employees during 2017; and awarded 943,160 shares of restricted Federated Class B
common stock with a weighted-average grant-date fair value of $26.56 to employees during 2016.
The total fair value of restricted stock vested during 2018, 2017 and 2016 was $24.0 million, $23.9 million and $23.9 million,
respectively.
(b) Subsidiary Stock Plan
Effective July 2, 2018, Federated established a non-public subsidiary share-based compensation plan for certain employees of
that subsidiary. See Note (3) for additional information. Federated recognized compensation expense for this plan of $4.2
million in Compensation and Related expense on the Consolidated Statements of Income for the six months ended
December 31, 2018. At December 31, 2018, the remaining unrecognized compensation expense related to these plan awards
approximated $36 million which is expected to be recognized over a weighted-average period of 4 years.
(15) 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 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 $106.9 million, $101.5 million and $205.5 million were paid in 2018, 2017 and 2016, respectively, to holders
of Federated common stock. Of the amount paid in 2016, $102.2 million represented a $1.00 per share special dividend paid in
the fourth quarter. All dividends were considered ordinary dividends for tax purposes.
(b) Treasury Stock
In October 2016, the board of directors authorized a share repurchase program with no stated expiration date that allows
Federated to buy back up to 4 million shares of Federated Class B common stock. No other programs existed as of
December 31, 2018. 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 the repurchased stock and
restore the shares to authorized but unissued status (rather than holding the shares in treasury). During the year ended
December 31, 2018, Federated repurchased 1.2 million shares of its Class B common stock for $29.1 million, nearly all of
which were repurchased in the open market. At December 31, 2018, 1.0 million shares remained available to be purchased
under Federated's buyback program.
81
(16) 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
2018
2017
2016
$
$
54,447
7,359
(188)
61,618
7,616
1,750
2,891
12,257
73,875
$ 106,710
9,446
217
116,373
(59,517)
638
(393)
(59,272)
57,101
$
$
93,538
8,121
265
101,924
17,057
597
(158)
17,496
$ 119,420
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):
2018
21.0%
2017
35.0%
2016
35.0%
State and Local Income Taxes, net of Federal Benefit
Non-Deductible Executive Compensation
Federal Rate Adjustment to Deferred Taxes1
Other
1.7
0.0
0.0
(1.7)
35.0%
Represents the impact of revaluing the net deferred tax liability due to the enactment of the Tax Act, and includes the federal tax benefit
of any state and local deferred taxes.
1.9
0.0
(20.2)
(0.5)
16.2%
2.4
1.1
0.0
0.4
24.9%
Effective Tax Rate
1
The effective tax rate for December 31, 2018 increased to 24.9% as compared to 2017's rate of 16.2% primarily due to the 2017
recording of a $70.4 million reduction in Federated's net deferred tax liability due to the Tax Act, partially offset by the
reduction of the federal statutory income tax rate to a flat 21.0% effective January 1, 2018. The effective tax rate for December
31, 2017 was lower than the rate for December 31, 2016 primarily due to the aforementioned impact due to the Tax Act.
82
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
Other
Total Gross Deferred Tax Liability
Net Deferred Tax Liability
2018
2017
$
$
74,213
12,514
2,553
89,280
(56,925)
32,355
$ 174,812
4,646
1,061
$ 180,519
$ 148,164
$
$
48,722
7,212
2,564
58,498
(47,955)
10,543
$ 119,885
5,601
1,926
$ 127,412
$ 116,869
Long-Term Deferred Tax Liability, net at December 31, 2018 increased $30.5 million from December 31, 2017 primarily due to
an increase in intangible assets acquired in connection with the Hermes Acquisition.
As a result of the revaluation of the net deferred tax liability due to the enactment of the Tax Act, Federated's 2017 results
include a $70.4 million reduction to the income tax provision. The Tax Act's international provisions regarding GILTI and the
Base Erosion Anti-Avoidance Tax (BEAT) did not have a material impact on Federated's financial statements. The accounting
for the income tax effects of the Tax Act is complete and there were no material adjustments.
At December 31, 2018, Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in
certain taxing jurisdictions in the aggregate of $74.2 million, of which the state net operating losses will expire through 2038.
Most foreign net operating losses have no expiration period. A valuation allowance has been recognized for $49.1 million
(or 100%) of the deferred tax asset for state tax net operating losses, and for $7.8 million (or 31%) 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. For the deferred tax asset, net of valuation
allowance related to foreign net operating losses, management believes that it is more likely than not that it will realize the
benefit of these net operating losses based on projections of future taxable income for the entity to which these relate.
Federated's remaining deferred tax assets as of December 31, 2018 primarily related to compensation-related expenses that have
been recognized for book purposes but are not yet deductible for tax purposes. Management believes that it is more likely than
not that Federated will receive the full benefit of these deferred tax assets due to the expectation that Federated will generate
taxable income well in excess of these amounts in the years they become deductible.
At December 31, 2017, Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in
certain taxing jurisdictions in the aggregate of $48.7 million, of which the state net operating losses will expire through 2037.
Most foreign net operating losses have no expiration period. A valuation allowance has been recognized for $46.4 million
(or 100%) of the deferred tax asset for state tax net operating losses, and for $1.6 million (or 68%) 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, 2018 or 2017. Therefore, there were no material changes during 2018, and no reasonable
possibility of a significant increase or decrease in unrecognized tax benefits within the next twelve months.
83
(17) 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 for the years ended December 31:
(in thousands, except per share data)
Numerator
Net Income Attributable to Federated Investors, Inc.1
Less: Total Net Income Available to Participating Unvested Restricted
Shareholders2
Total Net Income Attributable to Federated Common Stock - Basic1
Less: Total Net Income Available to Unvested Restricted Shareholders of a
Nonpublic Consolidated Subsidiary
Total Net Income Attributable to Federated Common Stock - Diluted1
Denominator
Basic Weighted-Average Federated Common Stock3
Dilutive Potential Shares from Stock Options
Diluted Weighted-Average Federated Common Stock3
Earnings Per Share
Net Income Attributable to Federated Common Stock - Basic and Diluted3,4
1
2018
2017
2016
$ 220,297
$ 291,341
$ 208,919
(8,555)
$ 211,742
(11,420)
$ 279,921
(7,632)
$ 201,287
(794)
$ 210,948
0
0
$ 279,921
$ 201,287
96,949
0
96,949
97,411
1
97,412
99,116
1
99,117
$
2.18
$
2.87
$
2.03
2017 includes a $70.4 million reduction to the income tax provision resulting from the revaluation of the net deferred tax liability due to
the enactment of the Tax Act, thereby increasing net income.
Includes dividends paid on unvested restricted Federated Class B common shares and their proportionate share of undistributed
earnings attributable to Federated shareholders.
Federated Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class
method of computing earnings per share.
2017 includes a $0.69 increase to earnings per share resulting from the revaluation of the net deferred tax liability due to the enactment
of the Tax Act.
2
3
4
(18) 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, 2018:
(in millions)
2019
2020
2021
2022
2023
2024 and Thereafter
Total Minimum Lease Payments
$
$
17.1
17.9
17.5
18.2
18.3
72.2
161.2
Federated held a material operating lease at December 31, 2018 for its corporate headquarters building in Pittsburgh,
Pennsylvania. This lease expires in 2030 and has renewal options for additional periods through 2040. This lease includes
provisions for leasehold improvement incentives, rent escalation and certain penalties for early termination. In addition, at
December 31, 2018, Federated had various other operating lease agreements primarily involving additional facilities. These
leases are noncancelable and expire on various dates through the year 2027. Most leases include renewal options and, in certain
cases, escalation clauses.
Rent expense was $14.7 million, $13.8 million and $12.9 million for the years ended December 31, 2018, 2017 and 2016,
respectively, and was recorded in Office and Occupancy expense on the Consolidated Statements of Income.
84
(19) Accumulated Other Comprehensive Loss 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, 2015
Other Comprehensive Income (Loss) Before Reclassifications and Tax
Tax Impact
Reclassification Adjustment, before tax2
Tax Impact2
Net Current-Period Other Comprehensive Income (Loss)
Balance at December 31, 2016
Other Comprehensive Income Before Reclassifications and Tax
Tax Impact
Reclassification Adjustment, before tax
Tax Impact
Net Current-Period Other Comprehensive (Loss) Income
Balance at December 31, 2017
Other Comprehensive Loss Before Reclassifications and Tax
Reclassification Adjustment, before tax3
Tax Impact3
Net Current-Period Other Comprehensive Loss
Balance at December 31, 2018
1 Other than described in notes two and three below, amounts reclassified from Accumulated Other Comprehensive Loss, net of tax were
Unrealized (Loss)
Gain on Equity
Securities1
(3,795)
4,761
(1,732)
2,632
(958)
4,703
908
2,546
(904)
(3,854)
1,333
(879)
29
0
(80)
51
(29)
0
Foreign Currency
Translation
(Loss) Gain
(814)
(950)
333
0
0
(617)
(1,431)
775
(163)
0
0
612
(819)
(13,607)
(242)
51
(13,798)
(14,617)
Total
(4,609)
3,811
(1,399)
2,632
(958)
4,086
(523)
3,321
(1,067)
(3,854)
1,333
(267)
(790)
(13,607)
(322)
102
(13,827)
(14,617)
$
$
$
$
$
$
$
$
$
2
3
recorded in (Loss) Gain on Securities, net on the Consolidated Statements of Income.
Amount includes reclassification of $0.8 million, net of tax from Accumulated Other Comprehensive Loss, net of tax to Retained Earnings on
the Consolidated Balance Sheets as a result of the 2016 adoption of consolidation guidance.
Amount represents the reclassification from Accumulated Other Comprehensive Loss, net of tax to Retained Earnings on the Consolidated
Balance Sheets as a result of the adoption of ASU 2016-01 and ASU 2018-02.
85
(20) 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 (12) and Note (18), respectively). The following table summarizes minimum noncancelable
payments contractually due under Federated's significant service contracts:
(in millions)
Purchase Obligations1
Other Obligations
Total
Payments due in
2019
$ 26.9
2.1
$ 29.0
2020
6.7
0.7
7.4
$
$
2021
1.1
0.0
1.1
$
$
2022
0.0
0.0
0.0
$
$
2023
0.0
0.0
0.0
$
$
After
2023
0.0
0.0
0.0
$
$
Total
$ 34.7
2.8
$ 37.5
1
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 require payments through the year 2021. Costs for such services are expensed as incurred.
(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. As of
December 31, 2018, management does not believe that a material loss related to any of these matters is reasonably possible.
(c) Legal Proceedings
Like other companies, Federated has claims asserted and threatened against it in the ordinary course of business. As of
December 31, 2018, Federated does not believe that a material loss related to these claims is reasonably possible.
86
(21) Segment and Geographic Information
Federated operates in one operating segment, the investment management business.
Federated's revenues from U.S. and non-U.S. operations were as follows for the years ended December 31:
(in thousands)
U.S.
Non-U.S.1
Total Revenue
2018
$1,005,948
129,729
$1,135,677
2017
$1,069,567
33,357
$1,102,924
2016
$1,116,136
27,235
$1,143,371
1
This represents revenue earned by non-U.S. domiciled subsidiaries, primarily in the UK.
Federated's net property and equipment for U.S. and non-U.S. operations was as follows at December 31:
(in thousands)
U.S.
Non-U.S.1
Property and Equipment, net
2018
42,666
10,563
53,229
$
$
2017
37,328
342
37,670
$
$
1
This represents net property and equipment held by non-U.S. domiciled subsidiaries, primarily in the UK.
(22) Subsequent Events
On January 15, 2019, a British Pound Sterling denominated majority-owned subsidiary of Federated entered into a foreign
currency forward transaction with a face amount of £15.0 million and an expiration date of December 2019 in order to hedge
against foreign exchange rate fluctuations in the U.S. Dollar.
On January 24, 2019, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of
record as of February 8, 2019, resulting in $27.2 million being paid on February 15, 2019.
87
(23) Supplementary Quarterly Financial Data (Unaudited)
(in thousands, except per share data, for the quarters ended)
20181
Revenue
Operating Income
Net Income Including the Noncontrolling Interests in
Subsidiaries2
Amounts Attributable to Federated Investors, Inc.
Net Income2
Earnings Per Common Share – Basic and Diluted
2017
Revenue
Operating Income
Net Income Including the Noncontrolling Interests in
Subsidiaries3
Amounts Attributable to Federated Investors, Inc.
March 31,
June 30,
September 30,
December 31,
$
$
$
$
$
$
$
$
263,852
79,671
60,006
60,331
0.60
273,501
77,773
51,027
$
$
$
$
$
$
$
$
255,993
80,757
38,667
38,822
0.38
272,796
84,211
54,659
$
$
$
$
$
$
$
$
308,616
81,898
61,994
59,608
0.59
278,315
88,690
57,241
$
$
$
$
$
$
$
$
307,216
87,954
61,632
61,536
0.61
278,312
90,834
131,974
$
$
49,641
0.49
Net Income3
Earnings Per Common Share – Basic and Diluted4
The financial results of Hermes have been included in Federated's Consolidated Financial Statements from the July 1, 2018 effective
date of the acquisition.
The quarter ended June 30, 2018 includes a $29.0 million loss related to two derivative financial instruments associated with the
Hermes Acquisition (see Note (8) for additional information).
The quarter ended December 31, 2017 includes a $70.4 million reduction to the income tax provision resulting from the revaluation of
the net deferred tax liability due to the enactment of the Tax Act, thereby increasing net income.
The quarter ended December 31, 2017 includes a $0.70 increase to earnings per share resulting from the revaluation of the net deferred
tax liability due to the enactment of the Tax Act.
131,810
1.31
53,451
0.53
56,439
0.56
$
$
$
$
$
$
1
2
3
4
88
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, 2018. 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, 2018.
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 Independent Registered Public
Accounting Firm 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, 2018 that has materially affected, or is reasonably likely to materially affect, Federated's internal control over
financial reporting.
ITEM 9B – OTHER INFORMATION
None.
89
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 2019 Annual Meeting of Shareholders 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
The information required by this Item with respect to Federated's executive officers is contained in Item 1 of Part I of this Form
10-K under the section Executive Officers of Federated Investors, Inc.
Code of Ethics
In October 2003, Federated adopted a code of ethics for its senior financial officers. This code, updated in July 2018, 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 14.02. 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 2019 Annual Meeting of
Shareholders under the captions Board of Directors and Election of Directors and Executive Compensation and is incorporated
herein by reference.
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, 2018:
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
6,000
0
6,000
$ 23.56
0
$ 23.56
4,312,833
0
4,312,833
1 Under the 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 2019 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 2019 Annual Meeting of
Shareholders under the captions Executive Compensation – Transactions with Related Persons, Executive Compensation –
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 2019 Annual Meeting of
Shareholders under the caption Independent Registered Public Accounting Firm and is incorporated herein by reference.
90
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
Description
2.01
2.02
2.03
2.09
2.10
3.01
3.02
3.03
4.01
4.02
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-4 (File No. 333-48361))
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))
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))
Share Sale Agreement, dated April 12, 2018, among BT Pension Scheme Trustees Limited, as trustee for and on
behalf of the BT Pension Scheme, and Federated Holdings (UK) II Limited and Federated Investors, Inc.
(incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated April 13, 2018 (File No.
001-14818))
Management Warranty Deed, dated April 12, 2018, among certain members of management of Hermes Fund
Managers Limited, Federated Holdings (UK) II Limited and Federated Investors, Inc. (incorporated by reference
to Exhibit 2.2 of the Current Report on Form 8-K dated April 13, 2018 (File No. 001-14818))
Restated Articles of Incorporation of Federated (incorporated by reference to Exhibit 3.01 to the Registration
Statement on Form S-4 (File No. 333-48361))
Restated By-Laws of Federated (incorporated by reference to Exhibit 3.02 to the Registration Statement on Form
S-4 (File No. 333-48361))
Restated Bylaws of Federated Investors, Inc.(incorporated by reference to Exhibit 3.1 to the June 30, 2018
Quarterly Report on Form 10-Q (File No. 001-14818))
Form of Class A Common Stock certificate (incorporated by reference to Exhibit 4.01 to the Registration
Statement on Form S-4 (File No. 333-48361))
Form of Class B Common Stock certificate (incorporated by reference to Exhibit 4.02 to the Registration
Statement on Form S-4 (File No. 333-48361))
91
4.05
9.01
10.15
10.16
10.19
10.34
10.41
10.58
10.65
10.67
10.68
10.69
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-4 (File No. 333-48361))
Voting Shares Irrevocable Trust dated May 31, 1989 (incorporated by reference to Exhibit 9.01 to the Registration
Statement on Form S-4 (File No. 333-48361))
Federated Investors Tower Lease dated January 1, 1993 (incorporated by reference to Exhibit 10.03 to the
Registration Statement on Form S-4 (File No. 333-48361))
Federated Investors Tower Lease dated February 1, 1994 (incorporated by reference to Exhibit 10.04 to the
Registration Statement on Form S-4 (File No. 333-48361))
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-4 (File No. 333-48361))
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))
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))
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))
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))
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))
10.70
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))
10.72
10.75
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))
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))
92
10.76
10.77
10.78
10.79
10.80
10.81
10.82
10.83
10.84
10.85
10.86
10.87
10.88
10.89
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))
Form of Bonus Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.77 to the
Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (File No. 001-14818))
Federated Investors, Inc. Employee Stock Purchase Plan, amended as of January 1, 2016 (incorporated by
reference to Exhibit 10.78 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (File
No. 001-14818))
Agreement by and among Federated Investment Management Company, Passport Research Ltd., The Jones
Financial Companies, L.L.L.P. for itself and on behalf of Edward D. Jones & Co., L.P., and Passport Holdings
LLC, dated as of April 27, 2016 (incorporated by reference to Exhibit 10.1 to the March 31, 2016 Quarterly
Report on Form 10-Q (File No. 001-14818))
Amendment No. 9 to Federated Investors Tower Lease dated as of September 9, 2016 (incorporated by reference
to Exhibit 10.1 to the September 30, 2016 Quarterly Report on Form 10-Q (File No. 001-14818))
Amendment No. 1 to Agreement by and among Federated Investment Management Company, Passport Research
Ltd., The Jones Financial Companies, L.L.L.P. for itself and on behalf of Edward D. Jones & Co., L.P., and
Passport Holdings LLC, dated January 27, 2017 (incorporated by reference to Exhibit 10.81 to the Annual Report
on Form 10-K for the fiscal year ended December 31, 2016 (File No. 001-14818))
Employment Agreement, dated October 22, 1990, between Federated Securities Corp. and an executive officer
(incorporated by reference to Exhibit 10.82 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2016 (File No. 001-14818))
2016 Restricted Stock Award Agreement, dated June 15, 2016, by and between Federated Investors, Inc. and an
executive officer (incorporated by reference to Exhibit 10.83 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 (File No. 001-14818))
Form of Bonus Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.84 to the
Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (File No. 001-14818))
The Third Amended and Restated Credit Agreement, dated as of June 5, 2017, by and among Federated Investors,
Inc. certain subsidiaries as guarantors party thereto, the banks as lenders party thereto, and PNC Bank, National
Association, PNC 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, 2017 Quarterly Report on Form 10-Q (File No.
001-14818))
Federated Investors, Inc. Stock Incentive Plan, as amended, as approved by shareholders on April 26, 2018
(incorporated by reference to Exhibit 10.1 to the March 31, 2018 Quarterly Report on Form 10-Q (File No.
001-14818))
Shareholders' Agreement, dated July 2, 2018, among Hermes Fund Managers Limited, BT Pension Scheme
Trustees Limited, in its capacity as trustee for and on behalf of the BT Pension Scheme, Federated Holdings (UK)
II Limited, and Federated Investors, Inc. (incorporated by reference to Exhibit 10.1 of the Current Report on
Form 8-K dated July 2, 2018 (File No. 001-14818))
Put and Call Option Deed, dated July 2, 2018, among BT Pension Scheme Trustees Limited, in its capacity as
trustee for and on behalf of the BT Pension Scheme, Federated Holdings (UK) II Limited, and Federated
Investors, Inc.(incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated July 2, 2018
(File No. 001-14818))
Amendment No. 1 to Third Amended and Restated Credit Agreement, dated July 1, 2018, by and among
Federated Investors, Inc., each of the guarantors (as defined in the Third Amended and Restated Credit
Agreement, the lenders (as defined in the Third Amended and Restated Credit Agreement, and PNC BANK,
NATIONAL ASSOCIATION, as administrative agent for the lenders. (incorporated by reference to Exhibit 10.3
of the Current Report on Form 8-K dated July 2, 2018 (File No. 001-14818))
93
10.90
10.91
10.92
10.93
14.01
UK Sub-Plan to the Federated Investors, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to
the September 30, 2018 Quarterly Report on Form 10-Q (File No. 001-14818))
Form of Restricted Stock Award Agreement for UK Sub-Plan (incorporated by reference to Exhibit 10.2 to the
September 30, 2018 Quarterly Report on Form 10-Q (File No. 001-14818))
Amendment No. 2 to Third Amended and Restated Credit Agreement, dated October 26, 2018, by and among
Federated Investors, Inc., each of the guarantors (as defined in the Third Amended and Restated Credit
Agreement), the lenders (as defined in the Third Amended and Restated Credit Agreement), and PNC BANK,
NATIONAL ASSOCIATION, as administrative agent for the lenders (incorporated by reference to Exhibit 10.3 to
the September 30, 2018 Quarterly Report on Form 10-Q (File No. 001-14818))
Form of Bonus Restricted Stock Program Award Agreement for Awards to Employees in the United Kingdom
(filed herewith)
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))
14.02
Federated Investors, Inc. Code of Ethics for Senior Financial Officers, as amended July 1, 2018 (filed herewith)
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)
101.INS
101.SH
101.CAL
101.DEF
101.LAB
101.PRE
The following XBRL documents are filed herewith:
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
94
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.
SIGNATURES
FEDERATED INVESTORS, INC.
By:
/s/ J. Christopher Donahue
J. Christopher Donahue
President and Chief Executive Officer
Date:
February 22, 2019
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/ J. Christopher Donahue
J. Christopher Donahue
President, Chief Executive Officer, Chairman
and Director (Principal Executive Officer)
/s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer and Director
(Principal Financial Officer)
February 22, 2019
February 22, 2019
/s/ Richard A. Novak
Richard A. Novak
/s/ Joseph C. Bartolacci
Joseph C. Bartolacci
/s/ Michael J. Farrell
Michael J. Farrell
/s/ John B. Fisher
John B. Fisher
/s/ Marie Milie Jones
Marie Milie Jones
Principal Accounting Officer
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
Director
Director
Director
Director
95
EXHIBIT INDEX
Exhibit
Number
10.93
14.02
21.01
23.01
31.01
31.02
32.01
Description
Form of Bonus Restricted Stock Program Award Agreement for Awards to Employees in the United Kingdom
Federated Investors, Inc. Code of Ethics for Senior Financial Officers, as amended July 1, 2018
Subsidiaries of the Registrant
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
96
Corporate Information
Corporate Offi ces
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Telephone: 412-288-1900
Email: investors@federatedinv.com
FederatedInvestors.com
Worldwide Operations
Boston, Mass.
Chicago, Ill.
Copenhagen, Denmark
Dublin, Ireland
Frankfurt, Germany
Houston, Texas
London, U.K.
New York, N.Y.
Rochester, N.Y.
Tokyo, Japan
Toronto, Canada
Warrendale, Pa.
Contact Information
Investor Relations: 412-288-1934
Analyst Inquiries: 412-288-1920
Corporate Communications: 412-288-6449
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 fi led with the Securities and
Exchange Commission or a recent earnings
press release, please contact Investor Relations
at 412-288-1934 or visit the About section of
FederatedInvestors.com.
Annual Meeting
Federated’s Annual Shareholder Meeting will be
held in the Liberty Center 5-Star Conference
Room, Suite 200, 1001 Liberty Avenue,
Pittsburgh, PA 15222 at 4 p.m. local time
on Thursday, April 25, 2019.
Transfer Agent
Shareholders of record with questions concerning
account information, certifi cates, transferring
securities, dividend payments, requesting direct
deposit information or processing a change of
address should contact:
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233-5000
Or by courier service:
Computershare Investor Services
462 South 4th Street Suite 1600
Louisville, KY 40202
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.
2018 Annual Report
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 (3/19)
Federated is a registered trademark of
Federated Investors, Inc.
2019 ©Federated Investors, Inc.