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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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(December 31, 2016, 2015, and 2014)
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(1)
Summary of Significant Accounting Policies
(a) Nature of Operations
Federated provides investment advisory, administrative, distribution and other services primarily to the
Federated Funds
and Separate Accounts in both domestic and international markets. For presentation purposes in the Consolidated Financial Statements, the
Federated 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 wholly owned subsidiaries and a third-party distribution firm which are registered under applicable jurisdictional law. Federated's investment products are distributed within the wealth management and trust, broker/dealer, institutional and international markets.
(b) Basis of Presentation
The Consolidated Financial Statements have been prepared in accordance with U.S. 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 entities (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.
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. As such, 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. All other noncontrolling interests in subsidiaries are classified as permanent equity in the Consolidated Balance Sheets. All intercompany accounts and transactions have been eliminated.
Consolidation of Variable Interest Entities
Prior to the adoption of ASU 2015-02, Federated considered either a qualitative or quantitative model for identifying whether its interest in a VIE was a controlling financial interest. Considerations of the qualitative model included whether Federated had (1) the ability to direct significant activities of the VIE and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. For the quantitative model, Federated evaluated the extent of its participation in the economic risks and rewards of the entity. In cases where the results indicated that Federated's interest in such an entity absorbed the majority of the variability in the entity's net assets, Federated was deemed to be the primary beneficiary and thus consolidated the entity.
Following the adoption of ASU 2015-02, 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) 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.
(f) 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.
(g) Investments
Federated's investments are categorized as
Investments—affiliates
,
Investments—consolidated investment companies
or
Investments—other
on the Consolidated Balance Sheets.
Investments—affiliates
represent Federated's available-for-sale investments in fluctuating-value
Federated Funds
. These investments are carried at fair value with unrealized gains or losses on these securities included in
Accumulated other comprehensive loss, net of tax
on the Consolidated Balance Sheets. Realized gains and losses on these securities are computed on a specific-identification basis and recognized in
Gain (loss) on securities, net
on the Consolidated Statements of Income.
Investments—consolidated investment companies
represent trading securities held by Federated as a result of consolidating certain
Federated Funds
.
Investments—other
represent other trading investments held in Separate Accounts for which Federated owns the underlying securities. Trading securities are carried at fair value with changes in fair value recognized in
Gain (loss) on securities, net
on the Consolidated Statements of Income. See
Note (6)
for additional information regarding investments held as of
December 31, 2016
and
2015
.
The fair value of Federated's investments is generally based on quoted market prices in active markets for identical instruments. If quoted market prices are not available, fair value is generally based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. In the absence of observable market data inputs and/or value drivers, internally generated valuation techniques may be utilized in which one or more significant inputs or significant value drivers are unobservable in the market place. See
Note (5)
for additional information regarding the fair value of investments held as of
December 31, 2016
and
2015
. On a periodic basis, management evaluates the carrying value of investments for impairment. With respect to its investments in fluctuating-value
Federated Funds
, management considers various criteria, including the duration and extent of a decline in fair value, the ability and intent of management to retain the investment for a period of time sufficient to allow the value to recover and the financial condition and near-term prospects of the fund and the underlying investments of the fund, to determine whether a decline in fair value is other than temporary. If, after considering these criteria, management believes that a decline is other than temporary, the carrying value of the security is written down to fair value through the Consolidated Statements of Income. There were no impairments to investments recognized during the year ended
December 31, 2014
. See
Note (6)
for information regarding impairments recognized during the years ended
December 31, 2016
and
2015
.
(h) Derivatives and Hedging Instruments
From time to time, Federated may consolidate an investment product that holds freestanding derivative financial instruments for trading purposes. Federated reports such derivative instruments at fair value and records the changes in fair value in
Gain (loss) on securities, net
on the Consolidated Statements of Income.
From time to time, Federated may also enter into and designate as accounting hedges derivative financial instruments to hedge interest-rate exposures with respect to variable-rate loan facilities (cash flow hedges) or to hedge foreign-currency exchange risk with respect to non-U.S. dollar trading investments in consolidated
Federated Funds
(net investment hedges). To qualify for hedge accounting, the derivative must be deemed to be highly effective in offsetting the designated changes in the hedged item. For cash flow hedges and net investment hedges, the effective portions of the change in the fair value of the derivative are reported as a component of
Accumulated other comprehensive loss, net of tax
on the Consolidated Balance Sheets and subsequently reclassified to earnings in the period or periods during which the hedged item affects earnings. The change in fair value of the ineffective portion of the derivative, if any, is recognized immediately in earnings. If it is determined that the derivative instrument is not highly effective, hedge accounting is discontinued. If hedge accounting is discontinued because it is no longer probable that a forecasted transaction will occur, the derivative will continue to be recorded on the Consolidated Balance Sheets at its fair value with changes in fair value included in current earnings, and any existing gains and losses included in
Accumulated other comprehensive loss, net of tax
would be recognized immediately into earnings. If hedge accounting is discontinued because the hedging instrument is sold, terminated or no longer designated, the amount reported in
Accumulated other comprehensive loss, net of tax
up to the date of sale, termination or de-designation continues to be reported in
Accumulated other comprehensive loss, net of tax
until the forecasted transaction or the hedged item affects earnings. Federated did not hold any net investment hedges at
December 31, 2016
or
2015
.
(i) Property and Equipment
Property and equipment are initially recorded at cost and are depreciated using the straight-line method over their estimated useful lives ranging from
1
to
12 years
. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or their respective lease terms. Depreciation and amortization expense is recorded in
Office and occupancy
on the Consolidated Statements of Income. As property and equipment are taken out of service, the cost and related accumulated depreciation and amortization are removed. During
2016
and
2015
,
$1.4 million
and
$10.4 million
, respectively, of fully depreciated assets were taken out of service. The write-off of any residual net book value is reflected as a loss in
Operating Expenses
–
Other
on the Consolidated Statements of Income.
Management reviews the remaining useful lives and carrying values of property and equipment to determine whether events and circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of impairment monitored by management include a decrease in the market price of the asset, an accumulation of costs significantly in excess of the amount originally expected in the acquisition or development of the asset, historical and projected cash flows associated with the asset and an expectation that the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Should there be an indication of a change in the useful life or an impairment in value, Federated compares the carrying value of the asset to the probability-weighted undiscounted cash flows expected to be generated from the underlying asset over its remaining useful life to determine whether an impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value which is determined based on prices of similar assets if available or discounted cash flows. Impairment adjustments are recognized in
Operating Expenses
–
Other
on the Consolidated Statements of Income. There were no impairment adjustments recognized during the years ended
December 31, 2016
,
2015
and
2014
.
(j) Costs of Computer Software Developed or Obtained for Internal Use
Certain internal and external costs incurred in connection with developing or obtaining software for internal use, 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 other categories of property and equipment described above.
(k) Intangible Assets, including Goodwill
Intangible assets, consisting primarily of goodwill and renewable investment advisory contracts acquired in connection with various acquisitions, are recorded at fair value determined using a discounted cash flow model as of the date of acquisition. The discounted cash flow model considers various factors to project future cash flows expected to be generated from the asset. 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 does not have multiple operating segments or business components for which discrete financial information is available. Federated uses a qualitative approach to test for potential impairment of goodwill. If, after considering various factors, management determines that it is more likely than not that goodwill is impaired, a two-step process to test for and measure impairment is performed which begins with an estimation of the fair value of its reporting unit by considering Federated's market capitalization. If Federated's market capitalization falls to a level below its recorded book value of equity, Federated's goodwill would be considered for possible impairment. There were no impairments to goodwill recognized during the years ended
December 31, 2016
,
2015
or
2014
.
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 contract that enable the renewal of the contract, the level of cost and effort required in renewing the investment advisory contract, and the effects of obsolescence, demand, competition and other economic factors that could impact the funds' projected performance and existence. The contracts generally renew annually and the value of these acquired assets assumes renewal. There were no impairments to indefinite-lived intangible assets recognized during the years ended
December 31, 2016
,
2015
or
2014
. See
Item 7
-
Management's Discussion and Analysis of Financial Condition and Results of Operations
under the caption
Critical Accounting Policies
for additional information on the:
(1) valuation in connection with the initial purchase price allocation; (2) ongoing evaluation for impairment; and (3) reconsideration of an asset's useful life
.
Federated generally 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, 2016
,
2015
or
2014
.
(l) Deferred Sales Commissions
Federated pays upfront commissions to broker/dealers to promote the sale of certain fund shares. Under various fund-related contracts, Federated is entitled to distribution and servicing fees from the fund over the life of such shares. Both of these fees are calculated as a percentage of average managed assets associated with the related classes of shares. For certain share classes, Federated is also entitled to receive a contingent deferred sales charge (CDSC), which is collected from certain redeeming shareholders.
For share classes that pay both a distribution fee and CDSC, Federated generally capitalizes a portion of the upfront commissions as deferred sales commissions, dependent upon expected recoverability rates. The deferred sales commission asset (included in
Other long-term assets
on the Consolidated Balance Sheets) is amortized over the estimated period of benefit of up to
eight years
. Deferred sales commission amortization expense was
$12.0 million
,
$15.1 million
and
$12.7 million
for
2016
,
2015
and
2014
, respectively, and was included in
Distribution
expense on the Consolidated Statements of Income.
Distribution and shareholder service fees are recognized in
Other service fees, net—affiliates
on the Consolidated Statements of Income over the life of the fund share class. CDSCs collected on these share classes are used to reduce the deferred sales commission asset. Federated reviews the carrying value of deferred sales commission assets on a periodic basis to determine whether a significant long-term decline in the equity or bond markets or other events or circumstances indicate that an impairment in value may have occurred. Should there be an indication of an impairment in value, Federated compares the carrying value of the asset to the probability-weighted undiscounted future cash flows of the underlying asset to determine
whether an impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the deferred sales commission asset is written down to its estimated fair value determined using discounted cash flows. There were no impairments to the deferred sales commission asset during the years ended
December 31, 2016
,
2015
or
2014
.
For share classes that do not pay both a distribution fee and CDSC, Federated expenses the cost of the upfront commission as incurred in
Distribution
expense on the Consolidated Statements of Income and credits
Distribution
expense for any CDSCs collected.
(m) Foreign Currency Translation
The balance sheets of certain wholly owned foreign subsidiaries of Federated, 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.
(n) 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.
(o) Revenue Recognition
Revenue from providing investment advisory, administrative and other services (including distribution and shareholder servicing) is recognized during the period in which the services are performed. Investment advisory, administrative and the majority of other service fees are generally calculated as a percentage of total net assets of the investment portfolios that are managed by Federated. The fair value of the investment portfolios is primarily determined using quoted market prices or independent third-party pricing services and broker/dealer price quotes. In limited circumstances, a quotation or price evaluation is not readily available from a pricing source. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the sponsored pro
ducts. For the periods presented, a de minimis amount of AUM were priced in this manner by Federated management. For Separate Accounts that are not registered investment companies under the 1940 Act, the fair value of portfolio investments is primarily determined as specified in applicable customer agreements, including in agreements between the customer and the customer's third-party custodian. Federated may waive certain fees for competitive reasons, such as to maintain positive or zero net yields on certain money market funds, to meet regulatory requirements or to meet contractual requirements. Federated wa
ived fees of
$413.7 million
,
$662.7 million
and
$764.3 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, nearly all of which was for competitive reasons. The decrease for the year ended
December 31, 2016
as compared to
2015
was primarily due to a
$245.8 million
decrease in
Voluntary Yield-related Fee Waivers
and a
$5.2 million
decrease in other competitive waivers. Fee waivers may increase as a result of continued
Voluntary Yield-related Fee Waivers
and for other competitive reasons.
Voluntary Yield-related Fee Waivers
are partially offset by a related reduction to distribution expense and net income attributable to noncontrolling interests (see
Note (3)
for additional information on the net impact of these waivers).
Federated has contractual arrangements with third parties to provide certain fund-related services. Management considers various factors to determine whether Federated's revenue should be recorded based on the gross amount payable by the funds or net of payments to third-party service providers. Management's analysis is based on whether Federated is acting as the principal service provider or as an agent. The primary factors considered include: (1) whether the customer holds Federated or the service provider responsible for the fulfillment and acceptability of the services to be provided; (2) whether Federated has any practical latitude in negotiating the price to pay a third-party provider; (3) whether Federated or the customer selects the ultimate service provider; and (4) whether Federated has credit risk in the arrangement. Generally, the less the customer is directly involved with or participates in making decisions regarding the ultimate third-party service provider, the more supportive the facts are that Federated is acting as the principal in these transactions and should therefore report gross revenues. As a result of considering these factors, investment advisory fees, distribution fees and certain other service fees are recorded gross of payments made to third parties.
(p) Share-Based Compensation
Federated 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 or modified 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 now recognized in the
Income tax provision
in the Consolidated Statements of Income, as a result of the adoption of ASU 2016-09 (see
Note (2)
).
(q) Leases
Federated classifies leases as operating in accordance with the provisions of lease accounting. Rent expense under noncancelable operating leases with scheduled rent increases or rent holidays is accounted for on a straight-line basis over the lease term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess of straight-line rent expense over scheduled payments is recorded as a deferred liability. The liability is then amortized when scheduled payments are in excess of the straight-line rent expense. Build-out allowances and other such lease incentives are recorded as deferred credits, and are amortized on a straight-line basis as a reduction of rent expense beginning in the period they are deemed to be earned, which generally coincides with the effective date of the lease. The current portion of unamortized deferred lease costs and build-out allowances is included in
Other current liabilities
and the long-term portion is included in
Other long-term liabilities
on the Consolidated Balance Sheets.
(r) Advertising Costs
Federated generally expenses the cost of all advertising and promotional activities as incurred. Certain printed matter, however, such as sales brochures, are accounted for as prepaid supplies and are included in
Other current assets
on the Consolidated Balance Sheets until they are distributed or are no longer expected to be used, at which time their costs are expensed. Federated expensed advertising costs of
$2.7 million
,
$2.6 million
and
$2.2 million
in
2016
,
2015
and
2014
, respectively, which were included in
Advertising and promotional
expense on the Consolidated Statements of Income.
(s) Income Taxes
Federated accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Federated recognizes a valuation allowance if, based on the weight of available evidence regarding future taxable income, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
(t) Earnings Per Share
Basic and diluted earnings per share are calculated under the two-class method. Pursuant to the two-class method, Federated's unvested restricted stock awards with nonforfeitable rights to dividends are considered participating securities and are required to be considered in the computation of earnings per share. Unvested restricted shares, as well as the related dividends paid and their proportionate share of undistributed earnings, if any, are excluded from the computation of earnings per share attributable to Federated Investors, Inc.
(u) Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax
is reported in the Consolidated Balance Sheets and the Consolidated Statements of Changes in Equity and includes unrealized gains and losses on securities available for sale, foreign currency translation adjustments and the unrealized gain or loss on the effective portion of derivative instruments designated and qualifying as a cash flow or net investment hedge.
(v) Loss Contingencies
Federated accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings, if any, when it is probable that a loss has been incurred and the costs can be reasonably estimated. Accruals are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Significant differences could exist between the actual cost required to investigate, litigate and/or settle a claim or the ultimate outcome of a lawsuit, 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.
(w) Business Segments
Business or operating segments are defined as a component of an enterprise that engages in activities from which it may earn revenue and incur expenses for which discrete financial information is available and is regularly evaluated by Federated's Chief Executive Officer (CEO), who is the chief operating decision maker, in deciding how to allocate resources and assess performance.
Federated does not have multiple operating segments or business components for which discrete financial information is available. Federated operates in one operating segment, the investment management business, nearly all of which is conducted within the U.S. Federated's CEO utilizes a consolidated approach to assess performance and allocate resources.
(2)
Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
(a) Consolidation
On February 18, 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which affects reporting organizations' evaluation of whether they should consolidate certain legal entities. This includes a scope exception for reporting entities with an interest in legal entities that are required to comply with or operate in accordance with the requirements similar to those in Rule 2a-7 for registered money market funds.
Effective January 1, 2016, Federated adopted ASU 2015-02 using the modified retrospective transition method, which did not require the restatement of prior years. In connection with the adoption of ASU 2015-02, Federated reevaluated all of the
Federated Funds
. As a result, certain
Federated Funds
previously accounted for as VIEs now meet the characteristics of VREs.
The adoption of ASU 2015-02 resulted in the consolidation of one
Federated Fund
that was not previously consolidated. Upon adoption, this entity was deemed to be a VIE and Federated was deemed to be the primary beneficiary. As a result of this consolidation, Federated recorded
$29.4 million
in assets, of which
$11.5 million
was included in
Investments—affiliates
at December 31, 2015,
$0.2 million
in liabilities and
$17.7 million
in
Redeemable noncontrolling interest in subsidiaries
. Federated also reclassified
$0.8 million
of unrealized losses from
Accumulated other comprehensive loss, net of tax
to
Retained earnings
. The adoption of ASU 2015-02 also resulted in the deconsolidation of one
Federated Fund
that was previously consolidated. Upon adoption, Federated was no longer deemed to be the primary beneficiary of this VIE. As a result, Federated deconsolidated
$5.5 million
in assets,
$2.7 million
in liabilities and
$2.8 million
in
Redeemable noncontrolling interest in subsidiaries
. There was no impact to the Consolidated Statements of Income upon adoption of ASU 2015-02.
(b) Accounting for Fees Paid in a Cloud Computing Arrangement
On January 1, 2016, Federated adopted ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance about whether a cloud computing arrangement includes a software license. Management elected the prospective transition method and the adoption did not have a material impact on Federated's Consolidated Financial Statements.
(c) Disclosure of Investments in Certain Entities that Calculate Net Asset Value per Share
On January 1, 2016, Federated adopted ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update modifies certain disclosure
requirements and requires that all investments for which fair value is measured using the NAV practical expedient be excluded from the fair value hierarchy. The ASU required the retrospective adoption approach, which required the restatement of the prior period fair value hierarchy table. As a result,
$31.8 million
of investments were recategorized into the
NAV practical expedient
column and are no longer included in Level 2 as of December 31, 2015 (see
Note (5)
). The adoption did not have a material impact on Federated's Consolidated Financial Statements.
(d) Share-based Compensation
During the second quarter 2016, Federated adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, effective January 1, 2016. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The adoption of ASU 2016-09 requires that all excess tax benefits and deficiencies (including tax benefits from dividends paid on unvested restricted stock awards) now be recognized in the Income tax provision in the Consolidated Statements of Income. Accordingly, upon adoption, Federated reduced its income tax provision by
$0.2 million
and
$0.4 million
for the three and six months ended June 30, 2016, respectively. Subsequent to adoption, Federated reduced its income tax provision by
$0.3 million
and
$2.1 million
for the third and fourth quarters of 2016, respectively. The ASU also requires excess tax benefits to be classified as operating activities along with other income tax cash flows within the Consolidated Statements of Cash Flows. These amendments were adopted on a prospective basis, which did not require the restatement of prior years.
ASU 2016-09 also allows entities to make an accounting policy election to either estimate the number of forfeitures expected to occur (as was previously required) or to account for actual forfeitures as they occur. Federated has elected to account for forfeitures as they occur. The ASU required the modified retrospective transition method through a cumulative-effect adjustment to retained earnings. Effective January 1, 2016, Federated recorded an adjustment of
$0.1 million
as a decrease to
Retained earnings
and an increase to Common stock to reflect this change in accounting policy.
Recently Issued Accounting Guidance Not Yet Adopted
(e) Revenue Recognition
On May 28, 2014, the FASB issued 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. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the update, and issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, on August 12, 2015. As a result of the deferral, the update is effective for Federated on January 1, 2018. While early adoption is permitted on January 1, 2017, Federated does not plan to early adopt. During 2016, the FASB issued ASU 2016-08, which clarifies principal versus agent considerations, ASU 2016-10, which clarifies identifying performance obligations and the licensing implementation guidance, ASU 2016-12, which addresses implementation issues and provides additional practical expedients and ASU 2016-20, which provides technical corrections to narrow aspects of the guidance (collectively, with ASU 2014-09, Topic 606). Topic 606 allows for the use of either the retrospective or modified retrospective adoption method. Federated's status of implementation has primarily focused on scoping activities, such as identifying the customer and evaluating revenue contracts. Management has preliminarily identified Federated's performance obligations and material revenue streams. Management continues to evaluate the available transition methods and the potential impact of adoption on Federated's Consolidated Financial Statements.
(f) Deferred Taxes
On November 20, 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The update is effective for Federated on January 1, 2017. The update allows for the use of either a prospective or retrospective adoption approach. Management has elected the prospective transition method and does not expect this update to have a material impact on Federated's Consolidated Financial Statements.
(g) Financial Instruments
On January 5, 2016, the FASB issued 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 and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The update is effective for Federated on January 1, 2018, and, except for certain provisions, does not permit early adoption. An entity should apply the amendments, with certain exceptions, by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Management is currently evaluating the potential impact of adoption on Federated's Consolidated Financial Statements.
(h) Leases
On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases on the balance sheet, but retains a distinction between finance and operating leases. The update is effective for Federated on January 1, 2019, with early adoption permitted. The update requires the modified retrospective adoption approach. Management is currently evaluating the potential impact of adoption on Federated's Consolidated Financial Statements.
(i) Clarifying the Definition of a Business
On January 5, 2017, the FASB issued 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), it is not 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, Revenue from Contracts with Customers. The ASU is effective for Federated on January 1, 2018, with early adoption permitted in specific circumstances, and should be applied prospectively. Management is currently evaluating the potential impact of adoption on Federated's Consolidated Financial Statements.
(3)
Concentration Risk
(a) Revenue Concentration by Asset Class
The following table summarizes the percentage of total revenue earned from Federated's asset classes over the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Money market assets
|
|
45
|
%
|
|
33
|
%
|
|
32
|
%
|
Equity assets
|
|
38
|
%
|
|
46
|
%
|
|
45
|
%
|
Fixed-income assets
|
|
17
|
%
|
|
21
|
%
|
|
22
|
%
|
The change in the relative proportion of Federated's revenue attributable to money market assets from
2015
to
2016
was primarily the result of a decrease in
Voluntary Yield-related Fee Waivers
.
The change in the relative proportion of Federated's revenue attributable to equity and fixed-income assets from
2015
to
2016
was primarily the result of the increase in the proportion of revenue from money market assets mentioned above.
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.
A significant change in Federated's investment management business (such as its money market business, equity business or separately managed account business)
or a significant reduction in AUM (such as money market assets, equity assets or separately managed account assets) 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
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.
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 information about the current regulatory environment and related risks.
Low Short-Term Interest Rates
In December 2015, the
FOMC
increased the federal funds target rate range by 25 basis points to 0.25%-0.50%, slightly raising short-term interest rates. Throughout 2016, the FOMC deferred making increases in this target rate, but in December raised the federal funds target rate range by an additional 25 basis points to 0.50%-0.75%. 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.
As a result of the long-term near-zero interest-rate environment,
the gross yield earned by certain money market funds is not sufficient to cover all of the fund's operating expenses.
Since the fourth quarter of 2008,
Federated has experienced
Voluntary Yield-related Fee Waivers
.
These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share
the impact of the Voluntary Yield-related Fee Waivers.
These Voluntary Yield-related Fee Waivers are calculated as a percentage of AUM in certain money market funds and thus will vary depending upon the asset levels and mix in such funds.
In addition,
the level of waivers are dependent on several other factors including,
but not limited to,
yields on instruments available for purchase by the money market funds 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 will cause the pre-tax impact of fee waivers to decrease.
Conversely,
as an isolated variable,
an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.
With regard to asset mix,
changes in the relative amount of money market fund assets in prime and government money market funds (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 will impact the level of fee waivers.
Generally,
prime money market funds waive less than government money market funds as a result of higher gross yields on the underlying investments.
As such,
as an isolated variable,
an increase in the relative proportion of average managed assets invested in prime money market funds as compared to total average money market fund assets should typically result in lower
Voluntary Yield-related Fee Waivers.
The opposite would also be true.
The impact of such fee waivers on various components of Federated's Consolidated Statements of Income was as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
|
$
|
(87.8
|
)
|
|
$
|
(333.6
|
)
|
|
$
|
(410.6
|
)
|
Less: Reduction in Distribution expense
|
|
65.8
|
|
|
240.6
|
|
|
280.9
|
|
Operating income
|
|
(22.0
|
)
|
|
(93.0
|
)
|
|
(129.7
|
)
|
Less: Reduction in Noncontrolling interest
|
|
0.0
|
|
|
7.1
|
|
|
10.7
|
|
Pre-tax impact
|
|
$
|
(22.0
|
)
|
|
$
|
(85.9
|
)
|
|
$
|
(119.0
|
)
|
The negative pre-tax impact of Voluntary Yield-related Fee Waivers decreased in
2016
as compared to
2015
primarily as a result of higher yields on instruments held by the money market funds.
During 2015, the negative pre-tax impact of Voluntary Yield-related Fee Waivers decreased compared to 2014 primarily as a result of higher yields on instruments held by the money market funds, and to a lesser extent, by a decrease in average money market assets.
(See
Note (19)
for information regarding the quarterly pre-tax impact of these fee waivers.)
As mentioned above, the
FOMC
increased the federal funds target rate range by 25 basis points in both December 2016 and 2015.
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 further increase their target for the federal funds rate.
As such
,
Voluntary Yield-related Fee Waivers
and the related reduction in distribution expense and net income attributable to noncontrolling interests could continue for the foreseeable future.
See Management's Discussion and Analysis under the caption
Business Developments
-
Low Short-Term Interest Rates
for additional information on management's expectations regarding fee waivers.
A listing of Federated's risk factors is included in
Item 1A
-
Risk Factors
.
(b) Revenue Concentration by Investment Strategy
Approximately
15%
,
14%
and
13%
of Federated's total revenue for
2016
,
2015
and
2014
, respectively, was derived from services provided to a specific strategy, the Federated Strategic Value Dividend strategy, which includes both Federated Funds and Separate Accounts. A significant and prolonged decline in the AUM of this strategy 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.
Approximately
8%
,
11%
and
12%
of Federated's total revenue for
2016
,
2015
and
2014
, respectively, was derived from services provided to the Federated Kaufmann Mid-Cap Growth strategy, which includes two
Federated Funds
. A significant and prolonged decline in the AUM of this strategy 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.
(c) Revenue Concentration by Customer
Approximately
15%
,
8%
and
6%
of Federated's total revenue for
2016
,
2015
and
2014
, respectively, was derived from services provided to one intermediary customer, The Bank of New York Mellon Corporation, including its Pershing subsidiary. Significant negative changes in Federated's relationship with this customer 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.
(4)
Consolidation
The Consolidated Financial Statements include the accounts of Federated,
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 these
Federated Funds
represents its maximum exposure to loss. The assets of the consolidated
Federated Funds
are restricted for use by the respective
Federated Funds
. 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
$27.1 million
and
$16.9 million
at
December 31, 2016
and
2015
, respectively.
In the ordinary course of business, Federated may choose to waive certain fees or assume operating expenses of various
Federated Funds
for competitive, regulatory or contractual reasons. For the year ended
December 31, 2016
, Federated waived fees, including
Voluntary Yield-related Fee Waivers
, totaling
$413.7 million
, of which
$309.6 million
related to waivers for money market funds which meet the scope exception of ASU 2015-02. 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 fund. In these instances, such capital contributions typically are intended to either cover realized losses or other permanent impairments to a fund's NAV or increase the market-based NAV per share of the investment company's portfolio that is being reorganized to equal the market-based NAV per share of the acquiring fund. There were
no
material contributions for the year ended
December 31, 2016
. Under current money fund regulations and SEC guidance, Federated is required to report these types of capital contributions to the SEC as financial support to the investment company that is being reorganized or liquidated.
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 pertaining to
December 31, 2016
and
2015
.
(a)
Consolidated Voting Rights Entities
Effective January 1, 2016, most of the
Federated Funds
now meet the definition of a VRE. Federated consolidates certain VREs when it is deemed to have control. As of
December 31, 2016
, consolidated VREs included on Federated's Consolidated Balance Sheets included
$14.9 million
in
Investments—consolidated investment companies
and
$3.1 million
in
Redeemable noncontrolling interest in subsidiaries
.
(b)
Consolidated Variable Interest Entities
As of
December 31, 2016
and
2015
, Federated was deemed to be the primary beneficiary of, and therefore consolidated, several
Federated Funds
as a result of its controlling financial interest. Certain of the VIEs consolidated as of December 31, 2015 were deemed to be VREs upon adoption of ASU 2015-02 and have been excluded from the
December 31, 2016
balances in the table below. See the
Consolidated Voting Rights Entities
section above for information on consolidated VREs as of
December 31, 2016
.
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
|
|
2016
|
|
|
2015
|
|
Cash and cash equivalents
|
|
|
$
|
0.0
|
|
|
|
$
|
3.1
|
|
Investments—consolidated investment companies
|
|
|
43.2
|
|
|
|
25.4
|
|
Receivables
|
|
|
0.7
|
|
|
|
0.2
|
|
Less: Liabilities
|
|
|
0.7
|
|
|
|
3.0
|
|
Less: Redeemable noncontrolling interest in subsidiaries
|
|
|
28.3
|
|
|
|
8.7
|
|
Federated's net interest in Federated Fund VIEs
|
|
|
$
|
14.9
|
|
|
|
$
|
17.0
|
|
Federated's net interest in the consolidated
Federated Fund
VIEs of
$14.9 million
and
$17.0 million
at
December 31, 2016
and
2015
, respectively, represents the value of Federated's economic ownership interest in these
Federated Funds
. The liabilities of the consolidated
Federated Fund
VIEs primarily represent investments sold short and operating liabilities of the entities. The liabilities as of
December 31, 2016
and
2015
are primarily classified as
Other current liabilities
and
Accounts payable and accrued expenses
, respectively, on Federated’s Consolidated Balance Sheets.
In addition to the table above, at
December 31, 2016
, Federated had a majority interest (
50.5%
) and acted as the general partner in Passport Research Ltd. (Passport), a limited partnership. Edward D. Jones & Co., L.P. was the limited partner with a
49.5%
interest. The partnership was an investment advisor to one sponsored fund as of
December 31, 2016
and was deemed to be a VIE upon adoption of ASU 2015-02. Assets totaling
$7.8 million
primarily representing Cash and cash equivalents, liabilities totaling
$5.9 million
primarily representing operating liabilities and
$1.0 million
included in
Nonredeemable noncontrolling interest in subsidiary
were included on the Consolidated Balance Sheets as of
December 31, 2016
. There was no change to the Consolidated Financial Statements as a result of the adoption of ASU 2015-02 as Passport had been consolidated as a VRE under the previous guidance. Federated transferred its partnership interest in Passport on January 27, 2017. See
Item 7
-
Management's Discussion and Analysis of Financial Condition and Results of Operations
under the caption
Business Developments
-
Change in Customer Relationship
for additional information.
Other than those consolidated or deconsolidated upon the adoption of ASU 2015-02 (see
Note (2)
), Federated did not newly consolidate any VIEs or deconsolidate any material VIEs during the year ended
December 31, 2016
.
(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, 2016
, Federated’s investment and maximum risk of loss related to non-consolidated VIEs was entirely related to
Federated Funds
and totaled
$2.3 million
, which was recorded in
Investments—affiliates
on the Consolidated Balance Sheets. AUM for these non-consolidated
Federated Funds
totaled
$76.3 million
at
December 31, 2016
.
At
December 31, 2015
, Federated’s investment and maximum risk of loss related to non-consolidated VIEs were entirely related to
Federated Funds
and totaled
$301.5 million
. Of this amount,
$159.7 million
represented investments in money market funds included in
Cash and cash equivalents
. The remaining
$141.8 million
is primarily recorded in
Investments—affiliates
on the Consolidated Balance Sheets as of
December 31, 2015
. AUM for these non-consolidated
Federated Funds
totaled
$268.0 billion
at
December 31, 2015
.
Upon adoption of ASU 2015-02 effective January 1, 2016, certain of the non-consolidated VIEs included in the balances as of
December 31, 2015
were deemed to be VREs or are money market funds which meet the scope exception and have been
excluded from the
December 31, 2016
balances above. See the
Consolidated Voting Rights Entities
section above for information on consolidated VREs as of
December 31, 2016
.
(5)
Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A 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.
(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
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
NAV Practical Expedient
3
|
|
Total
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,725
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
50,114
|
|
|
$
|
104,839
|
|
Available-for-sale equity securities
|
|
103,996
|
|
|
0
|
|
|
0
|
|
|
26,789
|
|
|
130,785
|
|
Trading securities – equity
|
|
13,866
|
|
|
0
|
|
|
0
|
|
|
6,193
|
|
|
20,059
|
|
Trading securities – debt
|
|
0
|
|
|
45,466
|
|
|
0
|
|
|
0
|
|
|
45,466
|
|
Other
1
|
|
19
|
|
|
0
|
|
|
840
|
|
|
0
|
|
|
859
|
|
Total financial assets
|
|
$
|
172,606
|
|
|
$
|
45,466
|
|
|
$
|
840
|
|
|
$
|
83,096
|
|
|
$
|
302,008
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
2
|
|
$
|
2
|
|
|
$
|
358
|
|
|
$
|
1,931
|
|
|
$
|
0
|
|
|
$
|
2,291
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
3
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
172,628
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
172,628
|
|
Available-for-sale equity securities
|
|
117,422
|
|
|
0
|
|
|
0
|
|
|
24,326
|
|
|
141,748
|
|
Trading securities – equity
|
|
15,900
|
|
|
65
|
|
|
0
|
|
|
7,433
|
|
|
23,398
|
|
Trading securities – debt
|
|
0
|
|
|
9,041
|
|
|
0
|
|
|
0
|
|
|
9,041
|
|
Other
1
|
|
4
|
|
|
17
|
|
|
910
|
|
|
0
|
|
|
931
|
|
Total financial assets
|
|
$
|
305,954
|
|
|
$
|
9,123
|
|
|
$
|
910
|
|
|
$
|
31,759
|
|
|
$
|
347,746
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
2
|
|
$
|
2,681
|
|
|
$
|
59
|
|
|
$
|
2,630
|
|
|
$
|
0
|
|
|
$
|
5,370
|
|
|
|
1
|
Amounts include structured trade finance loans held by Federated as well as futures contracts and/or foreign currency forward contracts held within certain consolidated
Federated Funds
.
|
|
|
2
|
Amounts include acquisition-related future consideration liabilities and may include investments sold short, foreign currency forward contracts and/or futures contracts held within certain consolidated
Federated Funds
, as well as certain liabilities attributable to structured trade finance loans held by Federated.
|
|
|
3
|
Investments that calculate NAV as a practical expedient were recategorized and are no longer included within Level 2 of the valuation hierarchy as of December 31, 2015 (see
Note (2)
for additional information).
|
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, 2016
or
2015
.
Cash and cash equivalents
Cash and cash equivalents
include investments in money market funds and deposits with banks. Investments in Federated money market funds totaled
$96.7 million
and
$162.2 million
at
December 31, 2016
and
2015
, 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 table above.
Available-for-sale equity securities
Available-for-sale equity securities include investments in fluctuating-value
Federated Funds
and are included in
Investments—affiliates
on the Consolidated Balance Sheets. 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. For certain investments in
Federated Funds
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.
Trading securities—equity
Trading securities - equity primarily represent the equity securities held by consolidated
Federated Funds
(included in
Investments—consolidated investment companies
on the Consolidated Balance Sheets) as well as certain equity investments held in Separate Accounts (included in
Investments—other
on the Consolidated Balance Sheets). 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 unadjusted 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). For certain investments in
Federated Funds
that are not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions, the investments 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.
Trading securities—debt
Trading securities - debt primarily represent domestic 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).
(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, 2016
.
(c) Fair Value Measurements of Other Financial Instruments
The fair value of Federated's debt is estimated by management based upon expected future cash flows utilizing a discounted cash flow methodology under the income approach. The fair value of the liability is estimated using observable market data (Level 2) in estimating inputs including the discount rate. Based on this fair value estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value.
(6)
Investments
Investments on the Consolidated Balance Sheets as of
December 31, 2016
and
2015
included available-for-sale and trading securities. At
December 31, 2016
and
2015
, Federated held investments totaling
$130.8 million
and
$141.7 million
, respectively, in fluctuating-value
Federated Funds
that were classified as available-for-sale securities and were included in
Investments—affiliates
on the Consolidated Balance Sheets. The decrease in
Investments—affiliates
primarily related to a newly consolidated VIE as a result of the adoption of ASU 2015-02 and is now recorded in
Investments—consolidated investment companies
. See
Note (2)
for additional information.
Available-for-sale securities were as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
Gross Unrealized
|
|
Estimated
Fair
Value
|
|
|
|
Gross Unrealized
|
|
Estimated
Fair
Value
|
in thousands
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Equity funds
|
|
$
|
23,883
|
|
|
$
|
2,112
|
|
|
$
|
(266
|
)
|
|
$
|
25,729
|
|
|
$
|
32,357
|
|
|
$
|
342
|
|
|
$
|
(2,416
|
)
|
|
$
|
30,283
|
|
Fixed-income funds
|
|
105,514
|
|
|
92
|
|
|
(550
|
)
|
|
105,056
|
|
|
115,396
|
|
|
109
|
|
|
(4,040
|
)
|
|
111,465
|
|
Total available-for-sale securities
|
|
$
|
129,397
|
|
|
$
|
2,204
|
|
|
$
|
(816
|
)
|
|
$
|
130,785
|
|
|
$
|
147,753
|
|
|
$
|
451
|
|
|
$
|
(6,456
|
)
|
|
$
|
141,748
|
|
During 2016 and 2015, the unrealized losses on certain investments were deemed to be other-than-temporarily impaired. As a result, Federated recorded
$1.6 million
and
$1.3 million
to
Gain (loss) on securities, net
to write down the carrying values of the investments for 2016 and 2015, respectively.
As of
December 31, 2015
, unrealized losses
of
$6.5 million
related to investments with a fair value of
$124.0 million
. Of these, investments with a fair value of
$92.6 million
with unrealized losses of
$5.5 million
have been in a continuous unrealized loss position for 12 months or longer. The remaining investments with a fair value of
$31.4 million
with unrealized losses of
$1.0 million
have been in a continuous unrealized loss position for less than 12 months.
Federated's trading securities totaled
$65.5 million
and
$32.4 million
at
December 31, 2016
and
2015
, respectively. The increase in trading securities primarily related to the aforementioned newly consolidated VIE which was previously recorded in
Investments—affiliates
on the Consolidated Balance Sheets. See
Note (2)
for additional information. Federated consolidates certain
Federated Funds
into its Consolidated Financial Statements as a result of Federated's controlling financial interest in the
Federated Fund
(see
Note (4)
). All investments held by these
Federated Funds
were included in
Investments—consolidated investment companies
on Federated's Consolidated Balance Sheets.
Investments—other
on the Consolidated Balance Sheets represented other trading investments held in Separate Accounts.
Federated's trading securities as of
December 31, 2016
and
2015
, were primarily composed of domestic debt securities (
$45.5 million
and
$9.0 million
, respectively), investments in
Federated Funds
(
$8.9 million
and
$11.0 million
, respectively) and stocks of large U.S. and international companies (
$7.2 million
and
$10.5 million
, respectively).
The following table presents gains and losses recognized in
Gain (loss) on securities, net
on the Consolidated Statements of Income in connection with Federated's investments as well as economic derivatives held by certain consolidated
Federated Funds
for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Unrealized gain (loss)
|
|
|
|
|
|
|
Trading securities
|
|
$
|
4,971
|
|
|
$
|
(1,359
|
)
|
|
$
|
(2,578
|
)
|
Derivatives
1
|
|
(348
|
)
|
|
119
|
|
|
(147
|
)
|
Realized gains
2
|
|
|
|
|
|
|
Available-for-sale securities
|
|
298
|
|
|
1,503
|
|
|
5,359
|
|
Trading securities
|
|
1,663
|
|
|
910
|
|
|
4,514
|
|
Derivatives
1
|
|
1,032
|
|
|
301
|
|
|
214
|
|
Realized losses
2
|
|
|
|
|
|
|
Available-for-sale securities
3
|
|
(1,647
|
)
|
|
(2,348
|
)
|
|
(91
|
)
|
Trading securities
|
|
(2,252
|
)
|
|
(2,760
|
)
|
|
(1,848
|
)
|
Derivatives
1
|
|
(1,609
|
)
|
|
(1,630
|
)
|
|
(451
|
)
|
Gain (loss) on securities, net
4
|
|
$
|
2,108
|
|
|
$
|
(5,264
|
)
|
|
$
|
4,972
|
|
|
|
1
|
Amounts related to the settlement of economic derivatives held by certain consolidated
Federated Funds
.
|
|
|
2
|
Realized gains and losses are computed on a specific-identification basis.
|
|
|
3
|
The losses for the years ended
December 31, 2016
and 2015 include impairments of certain available-for-sale securities.
|
|
|
4
|
Amounts related to consolidated entities, primarily
Federated Funds
, totaled
$2.9 million
,
$(4.0) million
and
$(0.6) million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
|
(7)
Intangible Assets, including Goodwill
(a) Goodwill
Federated's goodwill totaled
$659.2 million
and
$659.3 million
as of
December 31, 2016
and
December 31, 2015
, respectively.
(b) Indefinite-lived intangible assets
Indefinite-lived intangible assets include Renewable investment advisory contracts (
$70.4 million
and
$70.6 million
at
December 31, 2016
and
December 31, 2015
, respectively) and Trade names (
$1.9 million
at both
December 31, 2016
and
December 31, 2015
).
(c) Finite-lived intangible assets
Finite-lived intangible assets represented customer relationships and consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Cost
|
|
|
|
|
|
$
|
6,300
|
|
|
$
|
23,811
|
|
Accumulated amortization
|
|
|
|
|
|
(4,630
|
)
|
|
(21,116
|
)
|
Carrying value
|
|
|
|
|
|
$
|
1,670
|
|
|
$
|
2,695
|
|
The
decrease
of
$17.5 million
in the cost of the total finite-lived intangible assets at
December 31, 2016
as compared to
December 31, 2015
primarily relates to the write-off of fully amortized customer relationship intangible assets relating to prior year acquisitions.
Amortization expense for finite-lived intangible assets was
$1.0 million
,
$1.4 million
and
$2.0 million
in
2016
,
2015
and
2014
, respectively. This expense was included in
Operating Expenses
–
Other
on the Consolidated Statements of Income for each period.
Expected aggregate annual amortization expense over the remaining useful life of the finite-lived intangible assets for
2017
,
2018
, and
2019
is
$0.6 million
,
$0.6 million
, and
$0.5 million
, respectively, assuming no new acquisitions or impairments.
(8)
Property and Equipment
Property and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Estimated Useful Life
|
|
2016
|
|
|
2015
|
|
Computer software and hardware
|
|
1
|
to
|
7 years
|
|
$
|
57,277
|
|
|
$
|
46,207
|
|
Leasehold improvements
|
|
Up to term of lease
|
|
22,199
|
|
|
21,321
|
|
Transportation equipment
|
|
|
|
12 years
|
|
17,897
|
|
|
17,897
|
|
Office furniture and equipment
|
|
5
|
to
|
10 years
|
|
6,117
|
|
|
6,352
|
|
Total cost
|
|
|
|
|
|
103,490
|
|
|
91,777
|
|
Accumulated depreciation
|
|
|
|
|
|
(64,210
|
)
|
|
(56,034
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
39,280
|
|
|
$
|
35,743
|
|
Depreciation expense was
$9.7 million
,
$9.2 million
and
$10.0 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, and was recorded in
Office and occupancy
expense on the Consolidated Statements of Income.
(9)
Debt
Debt consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates
|
|
|
|
|
dollars in thousands
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Term Loan
|
|
1.745
|
%
|
|
1.555
|
%
|
|
$
|
191,250
|
|
|
$
|
216,750
|
|
Less: Short-term debt
|
|
|
|
|
|
25,500
|
|
|
25,500
|
|
Long-term debt
|
|
|
|
|
|
$
|
165,750
|
|
|
$
|
191,250
|
|
On June 24, 2014, Federated entered into an unsecured Second Amended and Restated Credit Agreement by and among Federated, certain of its subsidiaries as guarantors party thereto, a syndicate of 13 banks as Lenders party thereto led by PNC Bank, National Association as administrative agent, PNC Capital Markets LLC as sole bookrunner and joint lead arranger, Citigroup Global Markets, Inc. as joint lead arranger, Citibank, N.A. as syndication agent, and TD Bank, N.A. as documentation agent. The Credit Agreement amended and restated Federated's prior unsecured Amended and Restated Credit Agreement, which was dated June 10, 2011, and scheduled to mature on June 10, 2016 (Prior Credit Agreement). The borrowings under the Credit Agreement's term loan facility of
$255 million
equaled the remaining principal balance from the Prior Credit Agreement's term loan facility. The Term Loan facility bears interest based on LIBOR plus a spread, currently
112.5
basis points. The Credit Agreement qualified for modification accounting treatment.
The Credit Agreement also refinanced the
$200 million
re
volving credit facility under the Prior Credit Agreement. Federated had
no
borrowings outstanding on the previous revolving credit facility at the time of refinancing. As of
December 31, 2016
, the entire
$200 million
revolving credit facility was available for borrowings. Similar to the Prior Credit Agreement, certain subsidiaries entered into an Amended and Restated Continuing Agreement of Guaranty and Suretyship whereby these subsidiaries guarantee payment of all obligations incurred through the Credit Agreement. Federated pays an annual facility fee, currently
12.5
basis points. Borrowings under the Credit Agreement's revolving credit facility bear interest at LIBOR plus a spread, currently
100
basis points.
The Credit A
greement matures on June 24, 2019 and, with respect to the Term Loan, requires quarterly principal payments totaling
$25.5 million
in 2017,
$55.8 million
in 2018 and
$110.0 million
in 2019. During the year ended
December 31, 2016
, Federated repaid
$25.5 million
of its borrowings on the Term Loan.
The Credit Agreement includes representations and warranties, affirmative and negative financial covenants, including an interest coverage ratio covenant and a leverage ratio covenant, reporting requirements and other non-financial covenants. Federated was in compliance with all covenants at and during the year ended
December 31, 2016
(see the
Liquidity and Capital Resources
section of
Item 7
-
Management's Discussion and Analysis of Financial Condition and Results of Operations
for additional information).
The Credit Agreement also has certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of the debt if not cured within the applicable grace periods.
The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, deterioration in credit rating to below investment grade, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.
(10)
Employee Benefit Plans
(a) 401(k)/Profit Sharing Plan
Federated offers defined contribution plans to its employees. Its 401(k) plan covers substantially all employees. Under the 401(k) plan, employees can make salary deferral contributions at a rate of
1%
to
50%
of their annual compensation (as defined in the 401(k) plan), subject to Internal Revenue Code (IRC) limitations. Federated makes a matching contribution in an amount equal to
100%
of the first
2%
that each participant defers and
50%
of the next
4%
of deferral contributions for a total possible match of
4%
, subject to IRC compensation limits. Forfeitures of unvested matching contributions are used to offset future matching contributions.
Matching contributions to the 401(k) plan recognized in
Compensation and related
expense amounted to
$4.8 million
,
$3.9 million
and
$4.6 million
for
2016
,
2015
and
2014
, 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.
A Federated employee becomes eligible to participate in the profit sharing plan if the employee is employed on the last day of the year and has worked at least
500
hours for the year. The profit sharing plan is a defined contribution plan to which Federated may contribute amounts as authorized by its board of directors.
No
contributions were made to the profit sharing plan in
2016
,
2015
or
2014
. At
December 31, 2016
, the profit sharing plan held
0.4 million
shares of Federated Class B common stock.
(b) Employee Stock Purchase Plan
Federated offers an employee stock purchase plan that allows employees to purchase a maximum of
750,000
shares of Class B common stock. Employees may contribute up to
10%
of their salary to purchase shares of Federated's Class B common stock on a quarterly basis at the market price. The shares purchased under this plan may be newly issued shares, treasury shares or shares purchased on the open market. During
2016
,
9,012
shares were purchased by employees in this plan and, as of
December 31, 2016
, a total of
176,631
shares were purchased by employees in this plan on the open market since the plan's inception in 1998.
(11)
Share-Based Compensation Plans
Federated's long-term stock-incentive compensation has been provided for under the Stock Incentive Plan (the Plan), as amended and subsequently approved by shareholders from time to time. Share-based awards are granted to reward Federated's employees and non-management directors who have contributed to the success of Federated and to provide incentive to increase their efforts on behalf of Federated. Since the Plan's inception, a total of
27.1 million
shares of Class B common stock have been authorized for granting share-based awards in the form of restricted stock, stock options or other share-based awards. As of
December 31, 2016
,
2.5 million
shares are available under the Plan.
Share-based compensation expense
was
$22.4 million
,
$22.7 million
and
$21.7 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The associated tax benefits recorded in connection with share-based compensation expense were
$8.4 million
,
$8.5 million
and
$8.1 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. At
December 31, 2016
, the maximum remaining unrecognized compensation expense related to share-based awards approximated
$73 million
which is expected to be recognized over a weighted-average period of approximately
6 years
.
(a) Restricted Stock
Federated's restricted stock awards represent shares of Federated Class B common stock that may be sold by the awardee only once the restrictions lapse, as dictated by the terms of the award. The awards are generally subject to graded vesting schedules that vary in length from
three
to
ten years
with a portion of the award vesting each year, as dictated by the terms of the award. For an award with a
ten
-year vesting period, the restrictions on the vested portion of the award typically lapse on the award's fifth- and tenth-year anniversaries. Certain restricted stock awards granted pursuant to a key employee bonus program have a
three
-year graded vesting schedule with restrictions lapsing at each vesting date. During the period of restriction, the recipient receives dividends on all shares awarded, regardless of their vesting status.
The following table summarizes activity of non-vested restricted stock awards for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Shares
|
|
|
Weighted-
Average Grant-
Date Fair Value
|
|
Non-vested at January 1, 2016
|
|
4,197,652
|
|
|
|
$
|
24.27
|
|
Granted
1
|
|
943,160
|
|
|
|
26.56
|
|
Vested
|
|
(919,738
|
)
|
|
|
25.24
|
|
Forfeited
|
|
(195,504
|
)
|
|
|
24.24
|
|
Non-vested at December 31, 2016
|
|
4,025,570
|
|
|
|
$
|
24.58
|
|
|
|
1
|
During
2016
, Federated awarded
464,660
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
2016
, Federated awarded
478,500
shares of restricted Federated Class B common stock to certain key employees. The restricted stock awards generally vest over
ten
-year periods with restrictions on the vested portions of the awards lapsing on the awards' fifth- and tenth-year anniversaries.
|
Federated awarded
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
; awarded
863,137
shares of restricted Federated Class B common stock with a weighted-average grant-date fair value of
$31.07
to employees during
2015
; and awarded
1,057,981
shares of restricted Federated Class B common stock with a weighted-average grant-date fair value of
$27.43
to employees during
2014
.
The total fair value of restricted stock vested during
2016
,
2015
and
2014
was
$23.9 million
,
$28.8 million
and
$24.4 million
, respectively.
(b) Stock Options
The outstanding stock options as of
December 31, 2016
were granted to non-management directors with exercise prices that equaled the market price of Federated's Class B common stock on each grant date. All of these stock options were awarded with
no
requisite service requirement, were immediately exercisable and expire no later than
ten years
after the grant date. Each vested option may be exercised for the purchase of
one
share of Class B common stock at the exercise price.
The following table summarizes the status of and changes in Federated's stock option program for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual
Life (in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at January 1, 2016
|
|
33,000
|
|
|
|
$
|
34.38
|
|
|
|
|
|
|
|
Expired unexercised
|
|
(9,000
|
)
|
|
|
37.73
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
1
|
|
24,000
|
|
|
|
$
|
33.13
|
|
|
|
1.2
|
|
|
$
|
28.3
|
|
|
|
1
|
All stock options outstanding at
December 31, 2016
were vested and exercisable.
|
There were
no
stock options exercised during the year ended
December 31, 2016
. During the years ended
December 31, 2015
and
December 31, 2014
there were
3,000
and
6,000
options exercised, respectively.
There were
no
stock options granted in
2016
,
2015
or
2014
.
(c) Non-management Director Stock Awards
Federated awarded
5,700
,
5,700
and
5,100
shares of Federated Class B common stock to non-management directors in the second quarters of
2016
,
2015
and
2014
, respectively. There were
no
additional awards to non-management directors in
2016
,
2015
or
2014
.
(12)
Common Stock
The Class A common stockholder has the entire voting rights of Federated; however, without the consent of the majority of the holders of the Class B common stock, the Class A common stockholder cannot alter Federated's structure, dispose of all or substantially all of Federated's assets, amend the Articles of Incorporation or Bylaws of Federated to adversely affect the Class B common stockholders, or liquidate or dissolve Federated. With respect to dividends, distributions and liquidation rights, the Class A common stock and Class B common stock have equal preferences and rights.
(a) Dividends
Cash dividends of
$205.5 million
,
$104.6 million
and
$104.8 million
were paid in
2016
,
2015
and
2014
,
respectively, to holders of Federated common stock.
Of the amount paid in 2016,
$102.2 million
represented a
$1.00
special dividend paid in the fourth quarter.
All dividends were considered ordinary dividends for tax purposes.
(b) Treasury Stock
In February 2015, the board of directors authorized a share repurchase program that allows Federated to buy back up to
4 million
shares of Federated Class B common stock with no stated expiration date. This program was fulfilled in December 2016.
In October 2016, the board of directors authorized a share repurchase program that allows Federated to buy back up to
4 million
additional shares of Federated Class B common stock with no stated expiration date.
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, 2016
, Federated repurchased
3.1 million
shares of Class B common stock for
$83.6 million
, the majority of which were repurchased in the open market. The remaining repurchased shares represent restricted stock forfeited from employees and are not counted against the board-approved share repurchase program. At
December 31, 2016
,
3.9 million
shares remained available to be purchased under Federated's buyback program.
(13)
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
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
93,538
|
|
|
$
|
76,902
|
|
|
$
|
63,266
|
|
State
|
|
8,121
|
|
|
6,567
|
|
|
4,574
|
|
Foreign
|
|
265
|
|
|
188
|
|
|
76
|
|
Total Current
|
|
101,924
|
|
|
83,657
|
|
|
67,916
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
17,057
|
|
|
17,317
|
|
|
20,497
|
|
State
|
|
597
|
|
|
1,753
|
|
|
916
|
|
Foreign
|
|
(158
|
)
|
|
193
|
|
|
201
|
|
Total Deferred
|
|
17,496
|
|
|
19,263
|
|
|
21,614
|
|
Total
|
|
$
|
119,420
|
|
|
$
|
102,920
|
|
|
$
|
89,530
|
|
The reconciliation between the statutory income tax rate and the effective tax rate consisted of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected federal statutory income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Increase/(decrease):
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit
|
|
1.7
|
|
|
1.8
|
|
|
1.1
|
|
Other
|
|
(0.4
|
)
|
|
0.9
|
|
|
1.3
|
|
Effective tax rate (excluding noncontrolling interests)
|
|
36.3
|
|
|
37.7
|
|
|
37.4
|
|
Income attributable to noncontrolling interests
|
|
(1.3
|
)
|
|
(0.3
|
)
|
|
0.0
|
|
Effective tax rate per Consolidated Statements of Income
|
|
35.0
|
%
|
|
37.4
|
%
|
|
37.4
|
%
|
See
Item 7
-
Management's Discussion and Analysis of Financial Condition and Results of Operations
under the caption
Results of Operations
-
Income Taxes
for information about the decrease in the effective tax rate for 2016 as compared to 2015.
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
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
Tax net operating loss carryforwards
|
|
$
|
20,839
|
|
|
$
|
18,109
|
|
Compensation related
|
|
11,692
|
|
|
13,130
|
|
Other
|
|
2,810
|
|
|
6,920
|
|
Total deferred tax assets
|
|
35,341
|
|
|
38,159
|
|
Valuation allowance
|
|
(20,419
|
)
|
|
(17,791
|
)
|
Total deferred tax asset, net of valuation allowance
|
|
$
|
14,922
|
|
|
$
|
20,368
|
|
Deferred Tax Liabilities
|
|
|
|
|
Intangible assets
|
|
$
|
168,748
|
|
|
$
|
155,212
|
|
Property and equipment
|
|
8,975
|
|
|
7,882
|
|
Deferred sales commissions
|
|
4,439
|
|
|
5,270
|
|
State taxes
|
|
8,723
|
|
|
8,248
|
|
Other
|
|
515
|
|
|
714
|
|
Total gross deferred tax liability
|
|
$
|
191,400
|
|
|
$
|
177,326
|
|
Net deferred tax liability
|
|
$
|
176,478
|
|
|
$
|
156,958
|
|
At
December 31, 2016
, Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of
$20.8 million
, of which the state net operating losses will expire through
2036
. The foreign net operating losses have no expiration period. A valuation allowance has been recognized for
$18.4 million
(or
100%
) of the deferred tax asset for state tax net operating losses, and for
$2.0 million
(or
85%
) 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's remaining deferred tax assets as of
December 31, 2016
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, 2015
, Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in certain taxing jurisdictions in the aggregate of
$18.1 million
, of which the state net operating losses will expire through
2035
. The foreign net operating losses have no expiration period. A valuation allowance has been recognized for
$15.6 million
(or
99%
) of the deferred tax asset for state tax net operating losses, and for
$2.2 million
(or
92%
) 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, 2016
or
2015
. Therefore, there were no material changes during
2016
, and no reasonable possibility of a significant increase or decrease in unrecognized tax benefits within the next twelve months.
(14)
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
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator – Basic and Diluted
|
|
|
|
|
|
|
Net income attributable to Federated Investors, Inc.
|
|
$
|
208,919
|
|
|
$
|
169,807
|
|
|
$
|
149,236
|
|
Less: Total income available to participating unvested restricted shareholders
1
|
|
(7,632
|
)
|
|
(6,608
|
)
|
|
(5,823
|
)
|
Total net income attributable to Federated Common Stock
2
|
|
$
|
201,287
|
|
|
$
|
163,199
|
|
|
$
|
143,413
|
|
Denominator
|
|
|
|
|
|
|
Basic weighted-average Federated Common Stock
2
|
|
99,116
|
|
|
100,475
|
|
|
100,721
|
|
Dilutive potential shares from stock options
|
|
1
|
|
|
2
|
|
|
2
|
|
Diluted weighted-average Federated Common Stock
2
|
|
99,117
|
|
|
100,477
|
|
|
100,723
|
|
Earnings per share
|
|
|
|
|
|
|
Net income attributable to Federated Common Stock - Basic and Diluted
2
|
|
$
|
2.03
|
|
|
$
|
1.62
|
|
|
$
|
1.42
|
|
|
|
1
|
Income available to participating unvested restricted shareholders includes dividends paid on unvested restricted shares and their proportionate share of undistributed earnings.
|
|
|
2
|
Federated Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class method of computing earnings per share.
|
(15)
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, 2016
:
|
|
|
|
|
in millions
|
|
2017
|
$
|
13.6
|
|
2018
|
14.0
|
|
2019
|
13.9
|
|
2020
|
13.6
|
|
2021
|
13.4
|
|
2022 and thereafter
|
94.2
|
|
Total minimum lease payments
|
$
|
162.7
|
|
Federated holds a material operating lease for its corporate headquarters building in Pittsburgh, Pennsylvania. During the third quarter 2016, Federated extended the term through
2030
through an amendment which contains options to renew for additional periods through
2040
. The original lease and subsequent amendments include provisions for leasehold improvement incentives, rent escalation and certain penalties for early termination. In addition, at
December 31, 2016
, 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 leases, escalation clauses.
Rent expenses were
$12.9 million
,
$13.0 million
and
$14.8 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, and were recorded in
Office and occupancy
expense on the Consolidated Statements of Income.
(16)
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
|
|
Unrealized Loss
on Interest Rate Swap
1
|
|
|
Unrealized Gain (Loss) on Securities
Available for Sale
2
|
|
|
Foreign Currency
Translation
Loss
|
|
|
Total
|
|
Balance at December 31, 2013
|
|
|
|
$
|
(3,185
|
)
|
|
|
|
$
|
1,586
|
|
|
|
|
$
|
391
|
|
|
|
|
$
|
(1,208
|
)
|
Other comprehensive loss before reclassifications and tax
|
|
|
|
(107
|
)
|
|
|
|
(142
|
)
|
|
|
|
(1,013
|
)
|
|
|
|
(1,262
|
)
|
Tax impact
|
|
|
|
40
|
|
|
|
|
54
|
|
|
|
|
355
|
|
|
|
|
449
|
|
Reclassification adjustment, before tax
|
|
|
|
4,743
|
|
|
|
|
(4,240
|
)
|
|
|
|
0
|
|
|
|
|
503
|
|
Tax impact
|
|
|
|
(1,760
|
)
|
|
|
|
1,616
|
|
|
|
|
0
|
|
|
|
|
(144
|
)
|
Net current-period other comprehensive income (loss)
|
|
|
|
2,916
|
|
|
|
|
(2,712
|
)
|
|
|
|
(658
|
)
|
|
|
|
(454
|
)
|
Balance at December 31, 2014
|
|
|
|
$
|
(269
|
)
|
|
|
|
$
|
(1,126
|
)
|
|
|
|
$
|
(267
|
)
|
|
|
|
$
|
(1,662
|
)
|
Other comprehensive income (loss) before reclassifications and tax
|
|
|
|
67
|
|
|
|
|
(6,412
|
)
|
|
|
|
(842
|
)
|
|
|
|
(7,187
|
)
|
Tax impact
|
|
|
|
(25
|
)
|
|
|
|
2,363
|
|
|
|
|
295
|
|
|
|
|
2,633
|
|
Reclassification adjustment, before tax
|
|
|
|
358
|
|
|
|
|
2,185
|
|
|
|
|
0
|
|
|
|
|
2,543
|
|
Tax impact
|
|
|
|
(131
|
)
|
|
|
|
(805
|
)
|
|
|
|
0
|
|
|
|
|
(936
|
)
|
Net current-period other comprehensive income (loss)
|
|
|
|
269
|
|
|
|
|
(2,669
|
)
|
|
|
|
(547
|
)
|
|
|
|
(2,947
|
)
|
Balance at December 31, 2015
|
|
|
|
$
|
0
|
|
|
|
|
$
|
(3,795
|
)
|
|
|
|
$
|
(814
|
)
|
|
|
|
$
|
(4,609
|
)
|
Other comprehensive income (loss) before reclassifications and tax
|
|
|
|
0
|
|
|
|
|
4,761
|
|
|
|
|
(950
|
)
|
|
|
|
3,811
|
|
Tax impact
|
|
|
|
0
|
|
|
|
|
(1,732
|
)
|
|
|
|
333
|
|
|
|
|
(1,399
|
)
|
Reclassification adjustment, before tax
3
|
|
|
|
0
|
|
|
|
|
2,632
|
|
|
|
|
0
|
|
|
|
|
2,632
|
|
Tax impact
3
|
|
|
|
0
|
|
|
|
|
(958
|
)
|
|
|
|
0
|
|
|
|
|
(958
|
)
|
Net current-period other comprehensive income (loss)
|
|
|
|
0
|
|
|
|
|
4,703
|
|
|
|
|
(617
|
)
|
|
|
|
4,086
|
|
Balance at December 31, 2016
|
|
|
|
$
|
0
|
|
|
|
|
$
|
908
|
|
|
|
|
$
|
(1,431
|
)
|
|
|
|
$
|
(523
|
)
|
|
|
1
|
Federated entered into an interest rate swap in 2010 to hedge its interest rate risk associated with its original term facility. The interest rate swap expired on April 1, 2015. Amounts reclassified from
Accumulated other comprehensive loss, net of tax
were recorded in
Debt expense
on the Consolidated Statements of Income.
|
|
|
2
|
Other than described in note 3 below, amounts reclassified from
Accumulated other comprehensive loss, net of tax
were recorded in
Gain (loss) on securities, net
on the Consolidated Statements of Income.
|
|
|
3
|
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 adoption of ASU 2015-02 (see
Note (2)
for additional information).
|
(17)
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 (9)
and
Note (15)
, respectively). The following table summarizes minimum noncancelable payments contractually due under Federated's significant service contracts and employment arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in
|
|
|
|
|
|
|
|
|
|
|
|
|
in millions
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Total
|
|
Purchase obligations
1
|
|
$
|
14.2
|
|
|
$
|
4.4
|
|
|
$
|
2.4
|
|
|
$
|
2.2
|
|
|
$
|
23.2
|
|
Employment-related commitments
2
|
|
9.0
|
|
|
2.5
|
|
|
1.6
|
|
|
0.0
|
|
|
13.1
|
|
Other obligations
3
|
|
0.7
|
|
|
1.0
|
|
|
0.0
|
|
|
0.0
|
|
|
1.7
|
|
Total
|
|
$
|
23.9
|
|
|
$
|
7.9
|
|
|
$
|
4.0
|
|
|
$
|
2.2
|
|
|
$
|
38.0
|
|
|
|
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 2020. Costs for such services are expensed as incurred.
|
|
|
2
|
Federated has certain domestic and international employment arrangements pursuant to which Federated is obligated to make minimum compensation payments.
|
|
|
3
|
Amounts include acquisition-related contingent purchase price payments and other liabilities recorded on the Consolidated Balance Sheets.
|
Federated may be required to make certain compensation-related payments through 2019 in connection with various significant employment and incentive arrangements. In addition to the
$13.1 million
of employment-related commitments included in the table above, based on asset levels as of
December 31, 2016
and performance goals, incentive payments could total up to approximately
$11 million
over the remaining terms of these arrangements.
(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, 2016
, management does not believe that a material loss related to any of these matters is reasonably possible.
(c) Legal Proceedings
CCM Rochester, Inc. (CCM)
. On February 10, 2017, Judge Caproni, United States District Judge for the United States District Court for the Southern District of New York, issued an Opinion and Order granting Federated’s motion for summary judgment in its entirety and directed that CCM’s (f/k/a Clover Capital Management, Inc.) lawsuit against Federated be closed. In granting Federated's motion for summary judgment in its entirety, Judge Caproni determined based on the evidence that there existed no genuine dispute of any material fact in concluding that no rational juror could find in favor of CCM on its remaining claims of fraudulent inducement and breach of the implied covenant of good faith and fair dealing; accordingly, Federated was entitled to summary judgment as a matter of law. While CCM can appeal Judge Caproni's decision within 30 days (or by March 13, 2017), management believes Judge Caproni's Opinion and Order affirms Federated's position that CCM's claims were meritless and without factual support and that at all times Federated acted in good faith and complied with its contractual obligations contained in the Asset Purchase Agreement, dated September 12, 2008 (APA). If CCM appeals, Federated intends to continue to vigorously defend the lawsuit.
The CCM case stemmed from Federated's acquisition of certain assets of CCM in December 2008. CCM was an investment manager that specialized in value investing. The purchase was consummated in the midst of the U.S. financial markets crisis. The payment terms under the APA included an upfront payment of
$30 million
paid by Federated at closing and the opportunity for contingent payments over a five year earn-out period following the acquisition date based on the growth in revenue associated with the acquired assets. Under the APA, in order to reach the maximum contingent payments totaling approximately
$55 million
, the revenue associated with the acquired assets would have had to have grown at a
30%
compound annual growth rate. Under the APA, Federated paid CCM an additional
$18 million
, in the aggregate, in contingent payments for the last three years of the earn-out period.
On May 20, 2014, shortly after the final contingent payment was paid to CCM, Federated Investors, Inc. was named as the defendant in a case filed by CCM in the U.S. District Court for the Southern District of New York (CCM Rochester, Inc., f/k/a Clover Capital Management, Inc. v. Federated Investors, Inc., Case No. 14-cv-3600 (S.D.N.Y.)). In this lawsuit, CCM asserted claims against Federated Investors, Inc. for fraudulent inducement, breach of contract (including CCM's allegations relating to implied duties of best efforts and good faith and fair dealing) and indemnification based on Federated's alleged failure to effectively market and distribute the investment products associated with the acquired assets and to pay CCM the maximum contingent payments. CCM sought approximately
$37 million
in alleged damages plus attorneys' fees from Federated Investors, Inc.
Federated filed a motion to dismiss the lawsuit on the basis that, among other reasons, CCM's claims are implausible, have no factual support, and are contrary to the express terms of the APA and to settled law. On November 25, 2014, the Court issued an order granting Federated's motion to dismiss in part and denying Federated's motion to dismiss in part. The Court dismissed CCM's claim for breach of contract and for breach of an implied obligation to use best efforts. Under the strict standards applicable to motions to dismiss that require the Court to accept the allegations of the Complaint as true and draw all inferences
in CCM's favor, the Court concluded that CCM's "claim of fraud is at the edge of plausibility" but specifically noted that "[w]hether CCM can successfully prove facts necessary to support that artfully-pled theory remains to be seen."
On June 9, 2016, following oral argument, the Court granted
Federated's evidentiary motion
seeking to exclude CCM's expert testimony, ruling CCM's expert reports and testimony inadmissible. Federated filed its motion for summary judgment on July 15, 2016, seeking to have the Court rule in Federated's favor as a matter of law. As noted above, on February 10, 2017, Judge Caproni issued an Opinion and Order granting Federated's motion for summary judgment in its entirety and directed that CCM's lawsuit against Federated be closed.
Federated believes a material loss related to this lawsuit (even if CCM appeals) is remote and, as such, does not believe this lawsuit is material to Federated or its Consolidated Financial Statements. Based on this assessment and the current stage of the lawsuit, Federated currently estimates the loss from damages as a result of CCM's claims to be
zero
.
Other Litigation
. Federated also has claims asserted and threatened against it in the ordinary course of business. As of
December 31, 2016
, Federated does not believe that a material loss related to these claims is reasonably possible.
See
Item 1A
-
Risk Factors
under the caption
Potential Adverse Effects of Litigation, Investigations, Proceedings and Other Claims
for additional information regarding risks related to claims asserted or threatened against Federated.
(18)
Subsequent Events
On
January 26, 2017
, the board of directors declared a
$0.25
per share dividend. The dividend was payable to shareholders of record as of
February 8, 2017
, resulting in
$25.5 million
being paid on
February 15, 2017
.
(19)
Supplementary Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands, except per share data, for the quarters ended
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
272,109
|
|
|
$
|
286,738
|
|
|
$
|
294,620
|
|
|
$
|
289,904
|
|
Operating income
|
|
$
|
74,555
|
|
|
$
|
87,670
|
|
|
$
|
88,636
|
|
|
$
|
84,822
|
|
Net income including the noncontrolling interests in subsidiaries
1
|
|
$
|
48,959
|
|
|
$
|
56,418
|
|
|
$
|
58,908
|
|
|
$
|
57,229
|
|
Amounts attributable to Federated Investors, Inc.
|
|
|
|
|
|
|
|
|
Net income
1
|
|
$
|
45,443
|
|
|
$
|
52,709
|
|
|
$
|
54,925
|
|
|
$
|
55,842
|
|
Earnings per common share – Basic and Diluted
2
|
|
$
|
0.44
|
|
|
$
|
0.51
|
|
|
$
|
0.54
|
|
|
$
|
0.52
|
|
Impact of Voluntary Yield-related Fee Waivers
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
(37,482
|
)
|
|
$
|
(21,333
|
)
|
|
$
|
(18,030
|
)
|
|
$
|
(11,027
|
)
|
Less: Reduction in Distribution expense
|
|
27,896
|
|
|
16,528
|
|
|
13,797
|
|
|
7,627
|
|
Operating income
|
|
(9,586
|
)
|
|
(4,805
|
)
|
|
(4,233
|
)
|
|
(3,400
|
)
|
Less: Reduction in Noncontrolling interest
|
|
208
|
|
|
(208
|
)
|
|
0
|
|
|
0
|
|
Pre-tax impact
|
|
$
|
(9,378
|
)
|
|
$
|
(5,013
|
)
|
|
$
|
(4,233
|
)
|
|
$
|
(3,400
|
)
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
220,522
|
|
|
$
|
228,127
|
|
|
$
|
234,321
|
|
|
$
|
243,639
|
|
Operating income
|
|
$
|
59,038
|
|
|
$
|
69,279
|
|
|
$
|
74,244
|
|
|
$
|
76,885
|
|
Net income including the noncontrolling interests in subsidiaries
|
|
$
|
36,418
|
|
|
$
|
42,263
|
|
|
$
|
44,136
|
|
|
$
|
49,169
|
|
Amounts attributable to Federated Investors, Inc.
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
36,307
|
|
|
$
|
41,759
|
|
|
$
|
44,131
|
|
|
$
|
47,610
|
|
Earnings per common share – Basic and Diluted
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
$
|
0.42
|
|
|
$
|
0.46
|
|
Impact of Voluntary Yield-related Fee Waivers
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
(94,112
|
)
|
|
$
|
(84,245
|
)
|
|
$
|
(83,254
|
)
|
|
$
|
(71,995
|
)
|
Less: Reduction in Distribution expense
|
|
64,654
|
|
|
60,179
|
|
|
61,283
|
|
|
54,493
|
|
Operating income
|
|
(29,458
|
)
|
|
(24,066
|
)
|
|
(21,971
|
)
|
|
(17,502
|
)
|
Less: Reduction in Noncontrolling interest
|
|
2,454
|
|
|
1,851
|
|
|
1,716
|
|
|
1,093
|
|
Pre-tax impact
|
|
$
|
(27,004
|
)
|
|
$
|
(22,215
|
)
|
|
$
|
(20,255
|
)
|
|
$
|
(16,409
|
)
|
|
|
1
|
As a result of the adoption of ASU 2016-09, the income-tax provision for March 31, 2016 was reduced by
$0.2 million
from amounts previously reported (see
Note (2)
for additional information).
|
|
|
2
|
For the quarter ended December 31, 2016, Federated paid
$1.00
per share as a special cash dividend and a
$0.25
per share regular cash dividend. All dividends were considered ordinary dividends for tax purposes. The special dividend negatively impacted fourth quarter 2016 earnings per share by
$0.02
.
|