XNYS:FII Federated Investors, Inc. Class B Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________
FORM 10-Q
____________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-14818
___________________________________________________
Federated Investors, Inc.
(Exact name of registrant as specified in its charter)
____________________________________________________
Pennsylvania
 
25-1111467
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Federated Investors Tower
Pittsburgh, Pennsylvania
 
15222-3779
(Address of principal executive offices)
 
(Zip Code)
(Registrant’s telephone number, including area code) 412-288-1900
 ___________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of April 24, 2012, the Registrant had outstanding 9,000 shares of Class A Common Stock and 104,168,913 shares of Class B Common Stock.

 


Table of Contents
 

Special Note Regarding Forward-Looking Information
Certain statements in this report on Form 10-Q including those related to asset flows and business mix; obligations to make additional contingent payments pursuant to acquisition agreements; obligations to make additional payments pursuant to employment arrangements; legal proceedings; future cash needs and management's expectations regarding borrowing; future principal uses of cash; performance indicators; impact of accounting policies and new accounting pronouncements; concentration risk; indemnification obligations; the impact of increased regulation including potential rule proposals by the Securities and Exchange Commission affecting money market funds or possible regulatory action by the Financial Stability Oversight Council; the prospect of increased distribution-related expenses; management’s expectations regarding fee waivers and the impact of such waivers on revenues and net income; the ability to raise additional capital; the rising costs of risk management; possible impairment charges; tax liability and the realization of deferred tax assets; capital losses; the impact of the interest rate swap and the various items set forth under the section entitled Risk Factors constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause the actual results, levels of activity, performance or achievements of Federated or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Among other risks and uncertainties, market conditions may change significantly resulting in changes to Federated’s asset flows and business mix, which may cause a decline in revenues and net income, result in impairments and increase the amount of fee waivers incurred by Federated. The obligation to make contingent payments is based on certain growth and fund performance targets and will be affected by the achievement of such targets, and the obligation to make additional payments pursuant to employment arrangements is based on satisfaction of certain conditions set forth in those arrangements. Future cash needs and future uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated’s success in distributing its products, the resolution of pending litigation, potential increases in costs relating to risk management, as well as potential changes in assets under management and/or changes in the terms of distribution and shareholder services contracts with intermediaries who offer Federated’s products to customers. Federated’s risks and uncertainties also include liquidity and credit risks in Federated’s money market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in market values of assets under management and the ability of Federated to collect fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of the increased scrutiny of the mutual fund industry by federal and state regulators, and the recent and ongoing disruption in global financial markets. As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither Federated nor any other person assumes responsibility for the accuracy and completeness of such statements in the future. For more information on these items, see the section entitled Risk Factors herein under Item 2 of Part I, Management’s Discussion and Analysis of Financial Condition and Results of Operations.



Part I. Financial Information

Item 1. Financial Statements
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
 
 
March 31,
2012
 
December 31,
2011
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
51,525

 
$
49,273

Investments—affiliates
 
140,814

 
159,539

Investments—other
 
118,245

 
113,505

Receivables, net of reserve of $129 and $121, respectively
 
40,551

 
21,526

Prepaid expenses
 
11,455

 
17,420

Other current assets
 
5,833

 
5,248

Total current assets
 
368,423

 
366,511

Long-Term Assets
 
 
 
 
Goodwill
 
642,679

 
642,329

Renewable investment advisory rights
 
64,600

 
64,600

Other intangible assets, net of accumulated amortization of $52,510 and $56,537, respectively
 
12,976

 
13,997

Property and equipment, net of accumulated depreciation of $48,883 and $47,249, respectively
 
38,183

 
38,228

Other long-term assets
 
25,843

 
25,191

Total long-term assets
 
784,281

 
784,345

Total assets
 
$
1,152,704

 
$
1,150,856

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Short-term debt—recourse
 
$
42,500

 
$
42,500

Accounts payable and accrued expenses
 
53,071

 
41,691

Accrued compensation and benefits
 
24,121

 
59,971

Other current liabilities
 
44,255

 
43,194

Total current liabilities
 
163,947

 
187,356

Long-Term Liabilities
 
 
 
 
Long-term debt—recourse
 
308,125

 
318,750

Long-term deferred tax liability, net
 
86,812

 
73,246

Other long-term liabilities
 
23,565

 
28,321

Total long-term liabilities
 
418,502

 
420,317

Total liabilities
 
582,449

 
607,673

Commitments and contingencies (Note (13))
 

 

TEMPORARY EQUITY
 
 
 
 
Redeemable noncontrolling interest in subsidiaries
 
882

 
506

PERMANENT EQUITY
 
 
 
 
Federated Investors shareholders’ equity
 
 
 
 
Common stock:
 
 
 
 
Class A, no par value, 20,000 shares authorized, 9,000 shares issued and outstanding
 
189

 
189

Class B, no par value, 900,000,000 shares authorized, 129,505,456 shares issued
 
258,466

 
252,950

Retained earnings
 
1,079,698

 
1,069,913

Treasury stock, at cost, 25,331,593 and 25,762,366 shares Class B common stock, respectively
 
(765,905
)
 
(772,481
)
Accumulated other comprehensive loss, net of tax
 
(4,180
)
 
(8,612
)
Total Federated Investors, Inc. shareholders’ equity
 
568,268

 
541,959

Nonredeemable noncontrolling interest in subsidiary
 
1,105

 
718

Total permanent equity
 
569,373

 
542,677

Total liabilities, temporary equity and permanent equity
 
$
1,152,704

 
$
1,150,856

(The accompanying notes are an integral part of these Consolidated Financial Statements.)

3


Consolidated Statements of Income
(dollars in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2012

 
2011

Revenue
 
 
 
 
Investment advisory fees, net—affiliates
 
$
133,519

 
$
144,350

Investment advisory fees, net—other
 
15,829

 
15,239

Administrative service fees, net—affiliates
 
57,292

 
54,048

Other service fees, net—affiliates
 
19,642

 
21,434

Other service fees, net—other
 
3,013

 
3,229

Other, net
 
986

 
582

Total revenue
 
230,281

 
238,882

Operating Expenses
 
 
 
 
Compensation and related
 
64,065

 
64,396

Distribution
 
61,693

 
64,692

Professional service fees
 
10,308

 
26,185

Systems and communications
 
6,310

 
5,579

Office and occupancy
 
6,253

 
6,201

Advertising and promotional
 
2,928

 
3,162

Travel and related
 
2,751

 
2,438

Intangible asset related
 
21

 
3,780

Other
 
5,605

 
5,949

Total operating expenses
 
159,934

 
182,382

Operating income
 
70,347

 
56,500

Nonoperating Income (Expenses)
 
 
 
 
Investment income, net
 
1,296

 
1,036

Gain on securities, net
 
2,050

 
2,776

Debt expense—recourse
 
(3,711
)
 
(4,636
)
Other, net
 
(37
)
 
(24
)
Total nonoperating expenses, net
 
(402
)
 
(848
)
Income before income taxes
 
69,945

 
55,652

Income tax provision
 
25,538

 
20,598

Net income including noncontrolling interest in subsidiaries
 
$
44,407

 
$
35,054

Less: Net income attributable to the noncontrolling interest in subsidiaries
 
2,082

 
1,823

Net income
 
$
42,325

 
$
33,231

Amounts attributable to Federated Investors, Inc.
 
 
 
Earnings per common share—Basic and Diluted
 
$
0.41

 
$
0.32

Cash dividends per share
 
$
0.24

 
$
0.24

(The accompanying notes are an integral part of these Consolidated Financial Statements.)


4


Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2012

 
2011

Net income including noncontrolling interest in subsidiaries
 
$
44,407

 
$
35,054

 
 
 
 
 
Other comprehensive income, net of tax
 
 
 
 
Unrealized gain (loss) on securities available for sale, net of reclassification adjustment1
 
3,971

 
(62
)
Unrealized (loss) gain on hedging instruments, net of reclassification adjustment2
 
(1,226
)
 
1,858

Foreign currency translation gain3
 
1,711

 
412

Other comprehensive income
 
4,456

 
2,208

Comprehensive income including noncontrolling interest in subsidiaries
 
$
48,863

 
$
37,262

Less: Comprehensive income attributable to redeemable noncontrolling interest in subsidiaries
 
38

 
84

Less: Comprehensive income attributable to nonredeemable noncontrolling interest in subsidiary
 
2,068

 
1,782

Comprehensive income attributable to Federated Investors, Inc.
 
$
46,757

 
$
35,396


1 
The tax expense (benefit) related to this line item was $2,915 and $(41) for the three months ended March 31, 2012 and 2011, respectively.
2 
The tax (benefit) expense related to this line item was $(439) and $712 for the three months ended March 31, 2012 and 2011, respectively.
3 
The tax expense related to this line item was $908 and $199 for the three months ended March 31, 2012 and 2011, respectively.

(The accompanying notes are an integral part of these Consolidated Financial Statements.)



5


Consolidated Statements of Changes in Equity
(dollars in thousands)
(unaudited)
 
 
Federated Investors, Inc. Shareholders
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital from
Treasury
Stock
Transactions
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss, Net of
Tax
 
Total
Shareholders’
Equity
 
Nonredeemable
Noncontrolling
Interest in
Subsidiary
 
Total
Permanent
Equity
 
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
Balance at December 31, 2010
 
$
237,397

 
$
135

 
$
1,036,571

 
$
(778,609
)
 
$
(3,695
)
 
$
491,799

 
$
373

 
$
492,172

 
$
1,543

Net income
 
0

 
0

 
33,231

 
0

 
0

 
33,231

 
1,782

 
35,013

 
41

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification adjustment net of unrealized gain on securities available for sale
 
0

 
0

 
(2
)
 
0

 
(60
)
 
(62
)
 
0

 
(62
)
 
0

Reclassification adjustment and unrealized gain on hedging instruments
 
0

 
0

 
0

 
0

 
1,858

 
1,858

 
0

 
1,858

 
0

Foreign currency translation gain
 
0

 
0

 
0

 
0

 
369

 
369

 
0

 
369

 
43

Subscriptions—redeemable noncontrolling interest holders
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
5,943

Deconsolidation
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
(3,335
)
Stock award activity
 
5,880

 
(455
)
 
(10,839
)
 
11,293

 
0

 
5,879

 
0

 
5,879

 
0

Dividends declared/Distributions to noncontrolling interest in subsidiaries
 
0

 
0

 
(24,950
)
 
0

 
0

 
(24,950
)
 
(1,503
)
 
(26,453
)
 
(27
)
Exercise of stock options
 
(206
)
 
322

 
(498
)
 
14,093

 
0

 
13,711

 
0

 
13,711

 
0

Purchase of treasury stock
 
0

 
0

 
0

 
(2,890
)
 
0

 
(2,890
)
 
0

 
(2,890
)
 
0

Balance at March 31, 2011
 
$
243,071

 
$
2

 
$
1,033,513

 
$
(756,113
)
 
$
(1,528
)
 
$
518,945

 
$
652

 
$
519,597

 
$
4,208

Balance at December 31, 2011
 
$
253,139

 
$
0

 
$
1,069,913

 
$
(772,481
)
 
$
(8,612
)
 
$
541,959

 
$
718

 
$
542,677

 
$
506

Net income
 
0

 
0

 
42,325

 
0

 
0

 
42,325

 
2,068

 
44,393

 
14

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on securities available for sale, net of reclassification adjustment
 
0

 
0

 
0

 
0

 
3,971

 
3,971

 
0

 
3,971

 
0

Unrealized loss on hedging instruments, net of reclassification adjustment
 
0

 
0

 
0

 
0

 
(1,226
)
 
(1,226
)
 
0

 
(1,226
)
 
0

Foreign currency translation gain
 
0

 
0

 
0

 
0

 
1,687

 
1,687

 
0

 
1,687

 
24

Subscriptions—redeemable noncontrolling interest holders
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
347

Stock award activity
 
5,516

 
0

 
(7,640
)
 
7,640

 
0

 
5,516

 
0

 
5,516

 
0

Dividends declared/Distributions to noncontrolling interest in subsidiaries
 
0

 
0

 
(24,900
)
 
0

 
0

 
(24,900
)
 
(1,681
)
 
(26,581
)
 
(9
)
Purchase of treasury stock
 
0

 
0

 
0

 
(1,064
)
 
0

 
(1,064
)
 
0

 
(1,064
)
 
0

Balance at March 31, 2012
 
$
258,655

 
$
0

 
$
1,079,698

 
$
(765,905
)
 
$
(4,180
)
 
$
568,268

 
$
1,105

 
$
569,373

 
$
882

(The accompanying notes are an integral part of these Consolidated Financial Statements.)




6


Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2012

 
2011

Operating Activities
 
 
 
 
Net income including noncontrolling interest in subsidiaries
 
$
44,407

 
$
35,054

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
 
 
 
 
Amortization of deferred sales commissions
 
1,625

 
2,782

Depreciation and other amortization
 
2,767

 
4,603

Share-based compensation expense
 
5,583

 
5,458

Gain on disposal of assets
 
(683
)
 
(2,454
)
Provision for deferred income taxes
 
10,716

 
4,071

Fair-value adjustments for contingent liabilities
 
(1,000
)
 
900

Tax (detriment) benefit from share-based compensation
 
(67
)
 
217

Excess tax benefits from share-based compensation
 
(463
)
 
(920
)
Net purchases of trading securities
 
(753
)
 
(6,487
)
Deferred sales commissions paid
 
(3,090
)
 
(2,254
)
Contingent deferred sales charges received
 
352

 
506

Other changes in assets and liabilities:
 
 
 
 
(Increase) decrease in receivables, net
 
(1,925
)
 
916

Decrease in prepaid expenses and other assets
 
4,501

 
6,619

Decrease in accounts payable and accrued expenses
 
(36,449
)
 
(19,515
)
Increase in other liabilities
 
4,735

 
17,004

Net cash provided by operating activities
 
30,256

 
46,500

Investing Activities
 
 
 
 
Purchases of securities available for sale
 
(766
)
 
(10,697
)
Cash paid for business acquisitions
 
(5,868
)
 
(44,732
)
Proceeds from redemptions of securities available for sale
 
17,949

 
10,912

Cash paid for property and equipment
 
(1,656
)
 
(1,857
)
Net cash provided (used) by investing activities
 
9,659

 
(46,374
)
Financing Activities
 
 
 
 
Dividends paid
 
(24,900
)
 
(24,950
)
Purchases of treasury stock
 
(1,133
)
 
(3,677
)
Distributions to noncontrolling interest in subsidiaries
 
(1,690
)
 
(1,530
)
Contributions from noncontrolling interest in subsidiaries
 
347

 
5,943

Proceeds from shareholders for share-based compensation
 
0

 
13,917

Excess tax benefits from share-based compensation
 
463

 
920

Payments on debt—recourse
 
(10,625
)
 
(10,625
)
Payments on debt—nonrecourse
 
(125
)
 
(2,055
)
Net cash used by financing activities
 
(37,663
)
 
(22,057
)
Net increase (decrease) in cash and cash equivalents
 
2,252

 
(21,931
)
Cash and cash equivalents, beginning of period
 
49,273

 
198,756

Cash and cash equivalents, end of period
 
$
51,525

 
$
176,825

(The accompanying notes are an integral part of these Consolidated Financial Statements.)

7


Notes to the Consolidated Financial Statements
(Unaudited)
 
 
 
 

(1) Basis of Presentation

The interim consolidated financial statements of Federated Investors, Inc. and its subsidiaries (collectively, Federated) included herein have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). In the opinion of management, the financial statements reflect all adjustments that are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods presented.

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 such estimates, and such differences may be material to the Consolidated Financial Statements.

These financial statements should be read in conjunction with Federated’s Annual Report on Form 10-K for the year ended December 31, 2011. Certain items previously reported have been reclassified to conform to the current period’s presentation.

(2) Significant Accounting Policies

For a listing of Federated’s significant accounting policies, please refer to Federated’s Annual Report on Form 10-K for the year ended December 31, 2011.

(3) Recent Accounting Pronouncements

On January 1, 2012, Federated adopted updated requirements for expanded fair-value disclosures as issued by the Financial Accounting Standards Board (FASB). The update amends certain fair value measurement guidance and expands disclosure requirements primarily for fair value measurements utilizing significant unobservable inputs (Level 3) and items not measured at fair value but for which fair value must be disclosed. As the updates affect disclosure only, the adoption of the update did not impact Federated’s Consolidated Financial Statements.

On January 1, 2012, Federated adopted FASB updates to the accounting standard on the presentation of comprehensive income that requires presentation of the components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The updates affect disclosure only and are reflected in Federated’s Consolidated Financial Statements.

On January 1, 2012, Federated adopted a FASB update to the accounting standard on intangibles that amends guidance on testing goodwill for impairment to permit a qualitative assessment prior to performance of the two-step impairment test. If the result of the qualitative assessment reveals that there are no indicators of impairment, a quantitative calculation would not be required. This update did not impact Federated's Consolidated Financial Statements.


8

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

(4) Concentration Risk

(a) Revenue Concentration by Asset Class

The following table summarizes revenue from Federated's asset classes for the periods presented:
 
 
Three Months Ended
 
 
March 31,
 
 
2012

 
2011

Money market assets
 
46
%
 
49
%
Equity assets
 
32
%
 
32
%
Fixed-income assets
 
21
%
 
18
%

A significant change in Federated’s money market business or a significant reduction in money market assets due to regulatory changes, changes in the financial markets including significant and rapid increases in interest rates over a short period of time causing certain investors to prefer direct investments in interest-bearing securities, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on Federated’s results of operations.

Current Regulatory Environment
In January 2010, the Securities and Exchange Commission (SEC) adopted extensive amendments to Rule 2a-7 of the Investment Company Act of 1940 (Rule 2a-7) aimed at enhancing the resiliency of money market funds. These amendments included a series of enhancements including rules that require all money market funds to meet specific portfolio liquidity standards and rules that significantly enhance the public disclosure and regulatory reporting obligations of these funds. In Federated's view, the amendments of 2010 meaningfully and sufficiently strengthened money market funds. Recent experience demonstrated that the amendments of 2010 were effective in meeting heightened requests for redemptions occurring at various times throughout 2011 in connection with the U.S. credit rating downgrade and the ongoing European debt crisis.
The SEC staff is considering additional changes to Rule 2a-7 that could adversely impact the viability of money market funds, including requiring a floating net asset value, imposing capital requirements, and creating redemption restrictions. Federated believes the changes currently under consideration, if enacted, would significantly reduce the utility and attractiveness of money market funds to investors. Thus, rather than enhance the resiliency of money market funds, the contemplated changes would potentially severely harm the utility of money market funds for investors who, in Federated's view, value money market funds in their current form as an efficient and effective cash management investment product offering daily liquidity at par. It has been reported that the SEC may propose amendments to Rule 2a-7 in 2012. It has also been reported that the Financial Stability Oversight Council, which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, may take action to regulate the money market fund industry should the SEC decide to take no further action with respect to money market fund regulation.
If ultimately enacted, some or all of these changes would be detrimental to Federated's money market fund business and could materially and adversely affect Federated's operations. The very proposal of such amendments could have an adverse impact on Federated's money market fund business and operations and could also negatively impact the short-term credit markets. Management is carefully monitoring developments in this area and plans to actively participate both individually and with industry groups in the public comment process that would accompany any rule change proposal. Federated is unable to assess the degree of any potential impact such additional reforms may have on its business and operations until such proposals are issued. Even when issued, the final version of any SEC rule amendment could vary significantly from the form in which it is proposed.


9

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

Historically Low Short-Term Interest Rates
In certain money market funds, the gross yield is not sufficient to cover all of the fund’s normal operating expenses due to historically low short-term interest rates. Since the fourth quarter 2008, Federated has voluntarily waived fees in order for certain funds to maintain positive or zero net yields. These fee waivers were partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's ability to share the impact of the waivers with third-party intermediaries.

The impact of such fee waivers on various components of Federated's Consolidated Statements of Income was as follows for the periods presented:
 
 
Three Months Ended
 
 
March 31,
(in millions)
 
2012

 
2011

Revenue
 
$
(80.4
)
 
$
(63.4
)
Distribution expense
 
(57.5
)
 
(49.5
)
Operating income
 
(22.9
)
 
(13.9
)
Noncontrolling interest
 
(0.6
)
 
(0.8
)
Pre-tax impact
 
$
(22.3
)
 
$
(13.1
)

Fee waivers to maintain positive or zero net yields increased for the first quarter 2012 as compared to the same quarter of 2011 primarily as a result of lower interest rates for certain money market investments as well as increased average managed money market fund assets. In terms of recent trends, the net negative pre-tax impact of these fee waivers on income for the quarter ended March 31, 2012 was less than the impact in the fourth and third quarters of 2011, but was more than the impact in the second and first quarters of 2011. Based on recent Federal Reserve Bank commentary on their outlook for interest rates, management expects the fee waivers and the related reduction in distribution expense and net income attributable to noncontrolling interests will continue at least until late 2014. Based on recent market conditions and assuming asset levels remain constant, fee waivers for the second quarter 2012 may result in a net negative pre-tax impact on income of approximately $20 million. While the level of fee waivers are impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money market fund portfolios would reduce the net pre-tax impact of these waivers. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the net pre-tax impact of these waivers by approximately forty percent from the current levels and an increase of 25 basis points would reduce the impact by approximately seventy percent from the current levels. The actual amount of future fee waivers could vary significantly from management’s estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, available yields on instruments held by the money market funds, actions by the Federal Reserve, the U.S. Department of the Treasury and other governmental entities, changes in expenses of the money market funds, changes in the mix of money market customer assets, Federated’s willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by third parties.

(b) Revenue Concentration by Investment Fund

Approximately 11% and 10% of Federated’s total revenue for the three months ended March 31, 2012 were derived from services provided to two sponsored funds, the Federated Prime Obligations Fund and the Federated Kaufmann Fund, respectively. A significant and prolonged decline in the assets under management in these funds could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income, due to a related reduction to distribution expenses associated with these funds.


10

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

(c) Revenue Concentration by Customer

Approximately 11% of Federated’s total revenue for the three months ended March 31, 2012 was derived from services provided to one intermediary customer, the Bank of New York Mellon Corporation. Significant 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 related material reductions to distribution expenses associated with this intermediary.

A listing of Federated’s risk factors is included herein under the section entitled Risk Factors under Item 2 of Part I, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(5) Variable Interest Entities

Federated is involved with various entities in the normal course of business that may be deemed to be voting rights entities or variable interest entities (VIEs). In accordance with Federated’s consolidation accounting policy, Federated first determines whether the entity being evaluated is a voting rights entity or a VIE. Once this determination is made, Federated proceeds with its evaluation of whether or not to consolidate the entity. The disclosures below represent the results of such evaluations pertaining to March 31, 2012 and December 31, 2011.

(a) Consolidated Variable Interest Entities

From time to time, Federated invests in investment companies that meet the definition of a VIE for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history. Most of Federated’s sponsored mutual funds meet the definition of a VIE primarily due to the funds’ typical series fund structure in which the shareholders of each participating portfolio underlying the series fund generally lack the ability as an individual group to make decisions through voting rights regarding the board of directors/trustees of the fund. Federated’s investment in investment companies represents its maximum exposure to loss. As of March 31, 2012 and December 31, 2011, Federated was the sole or majority investor in certain investment companies and was deemed to be the primary beneficiary since Federated’s majority interest would absorb the majority of the variability of the net assets of the VIE. At March 31, 2012, the aggregate assets and liabilities of such entities that Federated consolidated were $116.0 million and $1.2 million, respectively, and Federated recorded $0.9 million to Redeemable noncontrolling interest in subsidiaries on Federated’s Consolidated Balance Sheets. At December 31, 2011, the aggregate assets and liabilities of such entities that Federated consolidated were $111.1 million and $0.5 million, respectively, and Federated recorded $0.5 million to Redeemable noncontrolling interest in subsidiaries on Federated’s Consolidated Balance Sheets. The assets of the consolidated investment companies are primarily classified as Investments—other on Federated’s Consolidated Balance Sheets and are restricted for use by the investment company. The liabilities of the consolidated investment companies are primarily classified as Accounts payable and accrued expenses on Federated’s Consolidated Balance Sheets and primarily represent unsettled trades and operating liabilities of the entities.

Federated’s conclusion to consolidate an investment company may vary from period to period based on changes in its percentage interest in the entity resulting from changes in the number of fund shares held by either Federated or third parties. Given that the entities follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or losses for Federated. During the three months ended March 31, 2012, Federated did not deconsolidate any mutual funds. During 2011, Federated deconsolidated two mutual funds based on a determination that it no longer was the primary beneficiary of the funds as a result of new subscriptions in fund shares by unrelated third parties. Accordingly, Federated deconsolidated $17.7 million in Investments—other and $7.6 million in Redeemable noncontrolling interest in subsidiaries on the Consolidated Balance Sheet as of the dates of deconsolidation. There was no impact to the Consolidated Statements of Income in 2011 as a result of deconsolidation.



11

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

Neither creditors nor equity investors in the investment companies have any recourse to Federated’s general credit. In the ordinary course of business, from time to time, Federated may choose to waive certain fees or assume operating expenses of sponsored investment companies for competitive, regulatory or contractual reasons (see Note (1)(o) of Federated’s Annual Report on Form 10-K for the year ended December 31, 2011 for information regarding fee waivers). Federated has not provided financial support to any of these entities outside the ordinary course of business.

(b) Non-Consolidated Variable Interest Entities

At March 31, 2012 and December 31, 2011, Federated was involved with certain VIEs in which it held a variable interest but for which it was not the primary beneficiary. The assets and liabilities of these unconsolidated VIEs and Federated’s maximum risk of loss related thereto were as follows:
 
 
 
March 31, 2012
 
December 31, 2011
(in millions)
 
Unconsolidated
VIE assets
 
Unconsolidated
VIE Liabilities
 
Total
remaining
carrying value
of investment
and maximum
risk of loss
 
Unconsolidated
VIE assets
 
Unconsolidated
VIE Liabilities
 
Total
remaining
carrying value
of investment
and maximum
risk of loss
Investment companies1
 
$
283,154.5

 
$

 
$
205.7

 
$
290,517.7

 
$

 
$
221.5

Collateralized debt obligation2
 
$
0.1

 
$
12.0

 
$
0

 
$
2.1

 
$
12.0

 
$
0

Equity investment
 
$
4.2

 
$
0.5

 
$
7.1

 
$
4.5

 
$
0.7

 
$
7.1

 
1 
The unconsolidated VIE assets for the investment companies represent total net assets under management for the related investment companies. Of Federated’s $205.7 million invested in these entities at March 31, 2012, $46.9 million represents investments in money market funds included in Cash and cash equivalents, with the remaining $158.8 million included in Investments—affiliates and Investments—other on the Consolidated Balance Sheets. Of Federated’s $221.5 million invested in these entities at December 31, 2011, $44.0 million represents investments in money market funds included in Cash and cash equivalents, with the remaining $177.5 million included in Investments—affiliates and Investments—other on the Consolidated Balance Sheets.
2 
The risk of loss does not include the potential loss associated with related deferred tax assets expiring unutilized.

Investment Companies – Federated's involvement with certain investment companies that are deemed to be VIEs includes serving as the investment manager, or at times, holding a minority interest or both. Federated’s variable interest is not deemed to absorb the majority of the variability of the entity’s net assets. Therefore Federated is not the primary beneficiary of these VIEs and has not consolidated these entities.

In the ordinary course of business, from time to time, Federated may choose to waive certain fees or assume operating expenses of these sponsored investment companies for competitive, regulatory or contractual reasons (see Note (1)(o) of Federated’s Annual Report on Form 10-K for the year ended December 31, 2011 for information regarding fee waivers). Federated has not provided financial support to any of these entities outside the ordinary course of business.

Collateralized Debt Obligation (CDO) – Federated acted as the investment manager for a CDO that is expected to terminate in the third quarter of 2012. Federated was not the primary beneficiary of the CDO at March 31, 2012 or at December 31, 2011. Upon consideration of the qualitative power and benefits model, Federated determined that as of March 31, 2012 and December 31, 2011, neither its 25% pro-rata equity interest nor its management fee potential could result in Federated receiving benefits or absorbing losses that could potentially be significant to the CDO; therefore, Federated has not consolidated this entity.

Equity Investment – Federated holds a 12% non-voting, noncontrolling interest in both Dix Hills Partners, LLC, a registered investment adviser and commodity trading adviser, and its affiliate, Dix Hills Associates, LLC (collectively, Dix Hills). Dix Hills is based in Jericho, New York and as of March 31, 2012, managed over $500

12

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

million in both absolute return and enhanced fixed-income mandates, including a hedge fund strategy and an enhanced cash strategy. Due primarily to the nature of the voting rights of the equity holders, Dix Hills meets the definition of a VIE, however, with its non-voting 12% interest, Federated is not deemed to have power to direct the activities of Dix Hills and therefore is not the primary beneficiary. Federated has not provided financial support to Dix Hills. Federated’s investment in Dix Hills is included in Other long-term assets on the Consolidated Balance Sheets.

(6) Fair Value Measurements

Fair value is the price that would be received to sell an asset or the price paid to transfer a liability as of the measurement date. A three-tier, fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The three levels are:

Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets may include equity and debt securities that are traded in an active exchange market, including shares of mutual funds.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active exchange markets.


13

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

(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:
 
 
 
March 31, 2012
 
December 31, 2011
 
 
Fair Value Measurements Using
 
Fair Value Measurements Using
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
51,525

 
$
0

 
$
0

 
$
51,525

 
$
49,273

 
$
0

 
$
0

 
$
49,273

Available-for-sale equity securities1
 
108,811

 
32,003

 
0

 
140,814

 
128,611

 
30,928

 
0

 
159,539

Trading securities—equity
 
8,731

 
22,561

 
0

 
31,292

 
10,805

 
18,653

 
0

 
29,458

Trading securities—debt
 
237

 
86,716

 
0

 
86,953

 
216

 
83,831

 
0

 
84,047

Foreign currency forward contract
 
0

 
2

 
0

 
2

 
0

 
55

 
0

 
55

Total financial assets
 
$
169,304

 
$
141,282

 
$
0

 
$
310,586

 
$
188,905

 
$
133,467

 
$
0

 
$
322,372

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
 
$
0

 
$
14,538

 
$
0

 
$
14,538

 
$
0

 
$
15,241

 
$
0

 
$
15,241

SunTrust Acquisition future consideration payments liability
 
0

 
0

 
12,404

 
12,404

 
0

 
0

 
13,404

 
13,404

Foreign currency forward contract
 
0

 
888

 
0

 
888

 
0

 
245

 
0

 
245

Total financial liabilities
 
$
0

 
$
15,426

 
$
12,404

 
$
27,830

 
$
0

 
$
15,486

 
$
13,404

 
$
28,890

 1 Previously reported fair value measurements as of December 31, 2011 have been restated herein to reflect as Level 2 the fair value measurement of an investment in a mutual fund that is not traded in an active exchange market but for which net asset value was used as a practical expedient to estimate fair value. This fair value measurement had previously been listed as Level 1.

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 March 31, 2012 or December 31, 2011.

Cash and cash equivalents
Cash and cash equivalents include investments in money market funds and deposits with banks. Cash and cash equivalents invested in Federated money market funds totaled $49.3 million and $45.8 million at March 31, 2012 and December 31, 2011, respectively. Cash investments in money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the net asset value of the underlying funds, and are classified within Level 1 of the valuation hierarchy.

Available-for-sale equity securities
Available-for-sale equity securities include investments in sponsored fluctuating-value mutual funds and are included in Investments—affiliates on the Consolidated Balance Sheets. For investments in mutual funds that are listed on an active exchange, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the net asset value of the underlying funds, and are classified within Level 1 of the valuation hierarchy. For one investment in a mutual fund that is not listed on an active exchange but for which the net asset value is calculated daily and for which there are no redemption restrictions, the security is valued using net asset value as a practical expedient and is classified as Level 2. There is no modeling or additional information needed to arrive at the fair values of any of these investments.

14

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

Trading securitiesequity
These trading securities primarily represent the equity securities held by consolidated investment funds and are included in Investments—other on the Consolidated Balance Sheets. For the publicly traded equity securities available in an active exchange market, whether domestic or foreign, the fair value of these securities is often classified as Level 1 and is based on unadjusted quoted market prices. From time to time, however, the fair value of certain equity securities traded principally in foreign markets may be determined by third-party pricing services when it has been determined that there has been a significant trend in the U.S. equity markets or in index futures trading. The determination to use the third-party pricing service versus the unadjusted quoted market price is the cause for transfers between Level 1 and Level 2 for these securities. For the period between December 31, 2011 and March 31, 2012, approximately $2.7 million of investments transferred from Level 1 to Level 2 as a result of a determination by management to use adjusted quoted market prices because there had been a significant trend to do so in the U.S. equity markets or in index futures trading after the foreign markets closed at the end of the first quarter 2012, as compared to using unadjusted quoted market prices to determine fair values of these equity securities at the end of 2011. Transfers into and out of Levels 1 and 2 of the fair value hierarchy are reported at fair values as of the beginning of the period in which the transfers occur.

At March 31, 2012 and December 31, 2011, equity trading securities also included shares of certain non-publicly traded mutual funds that were valued using net asset value as a practical expedient (Level 2). Most significantly, Federated held shares of an offshore master investment fund as a result of consolidating a feeder fund as of March 31, 2012 and December 31, 2011. The offshore master investment fund, which is not publicly traded in an active exchange market, makes investments in global project and trade finance transactions. The $18.0 million and $17.9 million fair value at March 31, 2012 and December 31, 2011, respectively, of the feeder fund's investment in the master fund was determined using the net asset value of the master fund, as a practical expedient, and was classified as Level 2 in the valuation hierarchy at March 31, 2012 and December 31, 2011. Certain near-term, lock-up restrictions surrounding the holding period of the feeder fund's investment in the master fund existed at March 31, 2012 and December 31, 2011, but did not materially impact the measurement of fair value.

Trading securitiesdebt
These trading securities primarily represent high-quality short-term debt securities held by a consolidated, non-U.S. dollar-denominated money market fund ($80.0 million and $77.1 million at March 31, 2012 and December 31, 2011, respectively). Such assets had a maximum weighted-average maturity of 15 days at March 31, 2012 and December 31, 2011 and were valued based on amortized cost, which approximates fair value given the high-quality, short-term nature of these securities. The remaining amount of trading debt securities primarily represents U.S. and foreign investment-grade bonds held by consolidated sponsored investment funds. The fair value of these securities may include observable market data such as closing market prices 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. The entire amount of these securities is included in Investments—other on the Consolidated Balance Sheets.
Foreign currency forward contracts
The fair value of foreign currency forward contracts is primarily included in Receivables or Other current liabilities on the Consolidated Balance Sheets. These contracts are entered into by Federated to hedge foreign exchange risk related to investments denominated in foreign currencies. Additionally, certain consolidated sponsored investment funds may hold foreign currency forward contracts as part of their investment strategy. Pricing is determined by interpolating a value by utilizing the spot foreign exchange rate and forward points (based on the spot rate and currency interest rate differentials), which are all inputs that are observable in active markets.
Interest rate swap
The fair value of Federated's interest rate swap is included in Other current liabilities on the Consolidated Balance Sheets. Pricing is determined based on a third-party, model-derived valuation in which all significant inputs are observable in active markets including the Eurodollar future rate and yields for three- and thirty-year Treasury securities. See Note (9) for more information regarding the swap.

15

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 


SunTrust Acquisition future consideration payments liability
In the third quarter 2010, Federated acquired the money market management business of SunTrust Banks, Inc. (SunTrust Acquisition). In connection with this acquisition, Federated recognized a liability to record the estimated fair value of future consideration payments. As of March 31, 2012, this liability is recorded at fair value on a recurring basis in Other current liabilities ($3.8 million) and Other long-term liabilities ($8.6 million) on the Consolidated Balance Sheets. Management estimated the fair value of future consideration payments related to the SunTrust Acquisition based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3). Significant inputs involving unobservable market data included (1) an estimated rate of change for underlying assets under management based on estimated net sales ranging from 0% - 3% per year; (2) an estimate ranging from 0% - 0.02% per year of the impact of fee waivers to maintain positive or zero net yields on the contractually-derived net revenue per managed asset assumptions; and (3) a 16% discount rate based on the current estimated market rate of return. Assuming no other changes in model inputs, the fair value of the future consideration payments liability will increase, resulting in additional Intangible asset related expense in the period of change if: (1) the underlying assets under management grow at a rate that is greater than the assumed rate, (2) the actual impact of fee waivers to maintain positive or zero net yields on the net revenue is less than the assumed amount, or (3) the discount rate decreases. Conversely, the fair value of the future consideration payments liability will decrease if the inverse occurs for any of these inputs, assuming no other changes.

The following table presents a reconciliation of the beginning and ending fair value measurements from the period December 31 to March 31 for each year presented of Federated’s liability for future consideration payments related to the SunTrust Acquisition:
(in thousands)
2012

 
2011

Beginning balance
$
13,404

 
$
20,058

Adjustment to reflect final valuation1
0

 
(2,600
)
Changes in fair value2
(1,000
)
 
900

Ending balance
$
12,404

 
$
18,358

1 
As a result of finalizing the valuation relating to the SunTrust Acquisition in the first quarter 2011, this adjustment was required in order to revise the preliminary estimate of fair value.
2 
Amounts included as an increase (decrease) to Intangible asset related expense on the Consolidated Statements of Income.

(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 March 31, 2012.
 
(c) Fair Value Measurements of Other Financial Instruments

The fair value of Federated’s recourse 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 recourse debt appearing on the Consolidated Balance Sheets approximates fair value.

(7) Investments

Investments on the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 included available-for-sale and trading securities. At March 31, 2012 and December 31, 2011, Federated held investments totaling $140.8 million and $159.5 million, respectively, in fluctuating-value Federated-sponsored mutual funds that were classified as available-for-sale securities and were included in Investments—affiliates on the Consolidated Balance Sheets. Federated’s trading securities totaled $118.2 million and $113.5 million at March 31, 2012 and December 31, 2011, respectively, and were included in Investments—other on the Consolidated Balance Sheets. Federated consolidates certain investment companies into its Consolidated Financial Statements as a result of

16

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

Federated’s controlling financial interest in the products (see Note (5)). All investments held by these investment companies, which primarily represented Federated-sponsored investment companies, were included in Federated’s Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 as trading securities.

Federated’s trading securities as of March 31, 2012 were primarily comprised of high quality short-term debt securities held by a consolidated, non-US dollar-denominated sponsored money market fund ($80.0 million), as well as shares of an offshore master fund invested in global project and trade finance transactions ($18.0 million) and stocks of large-cap U.S. and international companies ($12.5 million) held by various other consolidated investment companies.

Available-for-sale securities were as follows:
 
 
March 31, 2012
 
December 31, 2011
 
 
 
 
Gross Unrealized
 
Estimated
Market
 
 
 
Gross Unrealized
 
Estimated
Market
(in thousands)
 
Cost
 
Gains
 
(Losses)
 
Value
 
Cost
 
Gains
 
(Losses)
 
Value
Equity mutual funds
 
$
41,312

 
$
6,613

 
$
0

 
$
47,925

 
$
43,217

 
$
2,037

 
$
(925
)
 
$
44,329

Fixed-income mutual funds
 
91,992

 
979

 
(82
)
 
92,889

 
115,699

 
461

 
(950
)
 
115,210

Total fluctuating-value mutual funds
 
$
133,304

 
$
7,592

 
$
(82
)
 
$
140,814

 
$
158,916

 
$
2,498

 
$
(1,875
)
 
$
159,539


The decrease in available-for-sale securities at March 31, 2012 as compared to December 31, 2011, was primarily due to $35.0 million in redemptions of fixed-income and equity mutual funds during the first three months of 2012 partially offset by purchases of $8.0 million of fixed-income mutual funds in the first quarter 2012.

The following table presents gains and losses recognized in Gain on securities, net on the Consolidated Statements of Income in connection with investments and economic derivatives held by certain consolidated investment companies:
 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2012

 
2011

Unrealized gain
 
 
 
 
Trading securities
 
$
1,259

 
$
311

Derivatives1
 
75

 
16

Realized gains2
 
 
 
 
Available-for-sale securities
 
503

 
2,086

Trading securities
 
354

 
397

Derivatives1
 
226

 
232

Realized losses2
 
 
 
 
Trading securities
 
(200
)
 
(196
)
Derivatives1
 
(167
)
 
(70
)
Gain on securities, net3
 
$
2,050

 
$
2,776

1 
These items relate to the settlement of economic derivatives held by certain consolidated sponsored products.
2 
Realized gains and losses are computed on a specific-identification basis.
3  Amounts related to consolidated investment companies totaled $1.4 million and $0.6 million for the three months ended March 31, 2012 and 2011, respectively.

(8) Other Current Liabilities

Federated's Other current liabilities at March 31, 2012 included an accrual of $14.5 million related to an interest rate swap (see Note (9) for additional information), $7.6 million related to the current portion of its federal income tax liability and $3.8 million for the short-term portion of the SunTrust Acquisition future consideration payments

17

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

liability (see Note (13)(a) for additional information). Also included in Other current liabilities at March 31, 2012 was $10.0 million related to insurance proceeds for claims submitted to cover costs associated with various legal proceedings. Federated is involved in legal proceedings with certain insurance carriers to, among other things, retain these insurance reimbursements. In the event that Federated does not prevail, it will be required to repay all or a portion of these advance payments. Because the outcome of this claim is uncertain at this time, Federated recorded the advance payments as a liability and will continue to evaluate the contingency until it is resolved.

Federated’s Other current liabilities at December 31, 2011 included an accrual of $15.2 million related to the aforementioned interest rate swap, $5.9 million contingent purchase price payment accrual related to the Clover Capital Acquisition and $4.0 million for the short-term portion of the SunTrust Acquisition future consideration payments liability (see Note (13)(a) for additional information on these contingent payments). Also included in Other current liabilities at December 31, 2011 was $10.0 million related to the aforementioned insurance proceeds.

(9) Recourse Debt and Interest Rate Swap

Recourse debt consisted of the following:
(dollars in thousands)
 
Weighted-Average Interest Rate1
 
March 31, 2012
 
December 31, 2011
Term Loan2
 
3.646%
$
350,625

 
$
361,250

Less: Short-term debt—recourse
 
 
 
 
 
42,500

 
42,500

Long-term debt—recourse
 
 
 
 
 
$
308,125

 
$
318,750

1 
See additional information below regarding the interest rate fixed at 3.646% in connection with an interest rate swap, which expires on April 1, 2015.
2 
The term loan borrowings under the Credit Agreement expire on June 10, 2016.

In the second quarter 2011, Federated entered into an Amended and Restated Credit Agreement by and among Federated, certain of its subsidiaries, PNC Bank, National Association as administrative agent, a syndicate of 19 banks led by PNC Capital Markets LLC as sole bookrunner and joint lead arranger and Citigroup Global Markets, Inc. as joint lead arranger (Credit Agreement). The Credit Agreement amended and restated Federated’s prior $425 million term loan facility dated April 9, 2010. The borrowings of $382.5 million under the Credit Agreement represented the remaining principal balance from the prior $425 million term loan. The Credit Agreement expires on June 10, 2016 and requires principal payments of $10.6 million per quarter for the first three years and $28.3 million per quarter for the fourth and fifth years and a final payment of $28.3 million due upon its expiration.

The interest rate swap (the Swap) that Federated entered into with PNC Bank, National Association and certain other banks during 2010 to hedge its interest rate risk associated with the prior $425 million term loan remains in effect. Under the Swap, which expires on April 1, 2015, Federated will receive payments based on LIBOR plus a spread and will make payments based on an annual fixed rate of 3.646%. The Swap requires monthly cash settlements of interest paid or received. The differential between the interest paid or interest received from the monthly settlements will be recorded as adjustments to Debt expense—recourse on the Consolidated Statements of Income. The Swap is accounted for as a cash flow hedge and has been determined to be highly effective. Federated evaluates effectiveness using the long-haul method. Changes in the fair value of the Swap will likely be offset by an equal and opposite change in the fair value of the hedged item, therefore very little, if any, net impact on reported earnings is expected. The fair value of the Swap agreement at March 31, 2012 was a liability of $14.5 million which was recorded in Other current liabilities on the Consolidated Balance Sheet. The entire amount of this loss in fair value was recorded in Accumulated other comprehensive loss, net of tax on the Consolidated Balance Sheet at March 31, 2012. During the next twelve months management expects to charge $6.7 million of this loss to Debt expense—recourse on the Consolidated Statements of Income as a component of Federated’s fixed interest rate of 3.646%. This amount could differ from amounts actually recognized due to changes in interest rates subsequent to March 31, 2012 and will not affect the amount of interest expense recognized in total on the Credit Agreement for any period presented. During the three-month periods ended March 31, 2012 and 2011, $1.9 million and $2.1 million, respectively, were charged to Debt expense—recourse on the Consolidated Statements of Income as a component of Federated’s fixed interest rate associated with the Swap.

18

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 


The Credit Agreement also contains a $200 million revolving credit facility. As of March 31, 2012, the entire $200 million revolving credit facility was available for borrowings.


(10) Share-Based Compensation Plans

(a) Restricted Stock

During the first three months of 2012, Federated awarded 480,773 shares of restricted Federated Class B common stock, all of which was awarded in connection with a bonus program in which certain key employees received a portion of their bonus in the form of restricted stock under Federated’s Stock Incentive Plan. This restricted stock, which was granted on the bonus payment date and issued out of treasury, will generally vest over a three-year period.

Federated awarded 1,011,876 shares of restricted Federated Class B common stock under its Stock Incentive Plan to certain key employees during 2011.

(b) Stock Options

During the first three months of 2012, there were no employee stock options exercised. Options exercised during 2011 totaled 603,418.

(11) Equity

During 2008, the board of directors authorized a share repurchase program with no stated expiration date that allows Federated to buy back as many as 5 million shares of Class B common stock. The program authorizes executive management to determine the timing and the amount of shares for each purchase. The repurchased stock is held in treasury for employee share-based compensation plans, potential acquisitions and other corporate activities.

During the first three months of 2012, Federated repurchased 50,000 shares of common stock for $1.1 million, which were repurchased in the open market. At March 31, 2012, 2.1 million shares remain available to be purchased under the current buyback program.


19

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 


(12) Earnings Per Share Attributable to Federated Investors, Inc. Shareholders

The following table sets forth the computation of basic and diluted earnings per share for amounts attributable to Federated Investors, Inc. using the two-class method:
 
 
Three Months Ended
 
 
March 31,
(in thousands, except per share data)
 
2012

 
2011

Numerator – Basic and Diluted
 
 
 
 
Net income attributable to Federated Investors, Inc.
 
$
42,325

 
$
33,231

Less: Total income available to participating unvested restricted shareholders1
 
(1,540
)
 
(1,122
)
Total net income attributable to Federated Common Stock2
 
$
40,785

 
$
32,109

Denominator
 
 
 
 
Basic weighted-average common shares outstanding
 
100,112

 
100,586

Dilutive potential shares from stock options
 
0

 
81

Diluted weighted-average common shares outstanding
 
100,112

 
100,667

Earnings per Share
 
 
 
 
Net income attributable to Federated Common Stock – Basic and Diluted2
 
$
0.41

 
$
0.32

 1 
Income available to participating restricted shareholders includes dividends paid to unvested restricted shareholders, net of forfeited dividends, and their proportionate share of undistributed earnings, if any.
2 
Federated Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class method of computing earnings per share.

For the three-month periods ended March 31, 2012 and 2011, 0.3 million and 1.9 million stock option awards, respectively, were outstanding but not included in the computation of diluted earnings per share for each period because the exercise price was greater than the average market price of Federated Class B common stock for each respective period. In the event the awards become dilutive, these shares would be included in the calculation of diluted earnings per share and would result in additional dilution.

(13) Commitments and Contingencies

(a) Contractual

As part of the SunTrust Acquisition, Federated is required to make annual contingent purchase price payments in the fourth quarters of each of the five years following the acquisition date. The contingent purchase price payments are calculated as a percentage of revenue less operating expenses directly attributed to certain eligible assets. The first contingent purchase price payment of $5.0 million was paid in the fourth quarter of 2011. At March 31, 2012, management estimated remaining contingent payments could total $17 million over the four years that remain; however, the actual amount of the contingent payments will vary based on asset levels and related net revenues and is not limited by any maximum amount. A wide range of outcomes for actual payments is possible due to the extent of reasonably possible flow-rate volatility for the assets under management. As of March 31, 2012, a liability of $12.4 million representing the estimated fair value of future consideration payments was recorded in Other current liabilities ($3.8 million) and Other long-term liabilities ($8.6 million) (see Note (6)(a) for a discussion regarding the valuation methodology). This liability is remeasured at each reporting date with changes in the fair value recognized in Intangible asset related expense on the Consolidated Statements of Income.

In the fourth quarter 2008, Federated completed the acquisition of certain assets of David W. Tice & Associates LLC that relate to the management of the Prudent Bear Fund and the Prudent DollarBear Fund (Prudent Bear Acquisition). As part of the Prudent Bear Acquisition, Federated is required to make contingent purchase price payments based upon certain revenue growth targets over the four-year period following the acquisition date. The contingent purchase price payments are recorded as additional goodwill at the time the contingency is resolved. The

20

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

first two contingent purchase price payments of $5.1 million and $44.7 million were paid in the first quarters of 2010 and 2011, respectively. The applicable growth targets were not met for the third anniversary year and as such, no amount was accrued or paid related to the third anniversary year. The remaining contingent purchase price payments could total as much as $49 million. As of March 31, 2012, no amounts were accrued for the fourth anniversary year ending in December 2012.

In the fourth quarter 2008, Federated acquired certain assets of Clover Capital Management, Inc. (Clover Capital Acquisition). As part of the Clover Capital Acquisition, Federated is required to make contingent purchase price payments based upon growth in revenues over the five-year period following the acquisition date. The contingent purchase price payments, which could total as much as $56 million, will be recorded as additional goodwill at the time the contingency is resolved. The applicable growth targets were not met for the first two anniversary years and as such, no amounts were accrued or paid related to the first and second anniversary years. In the first quarter 2012, $5.9 million was paid with regard to the third anniversary year ended in December 2011. As of March 31, 2012, no amounts were accrued for the fourth anniversary year ending in December 2012.

In the third quarter 2007, Federated completed a transaction with Rochdale Investment Management LLC to acquire certain assets relating to its business of providing investment advisory and investment management services to the Rochdale Atlas Portfolio (Rochdale Acquisition). The Rochdale Acquisition agreement provides for two forms of contingent purchase price payments. The first form of contingent payment is based on Federated InterContinental Fund asset growth and performance through 2012. This form of payment was payable in 2010, will be payable again in 2012 and could aggregate to as much as $20 million. In the fourth quarter of 2010, $1.1 million was paid with respect to this first form of contingent payment and was recorded as goodwill. As of March 31, 2012, no amounts were accrued related to the potential payment in 2012. The second form of contingent payment is payable on a semi-annual basis over the five-year period following the acquisition closing date and is based on certain revenue earned by Federated from the Federated InterContinental Fund as well as fund performance. As of March 31, 2012, $4.1 million was paid in semi-annual contingent purchase price payments and, related to future semi-annual contingent purchase price payments, $0.7 million was accrued in Other current liabilities (of which $0.5 million was paid in April 2012) and recorded as goodwill. Contingent payments are recorded as additional goodwill at the time the related contingency is resolved.

Pursuant to various significant employment arrangements, Federated may be required to make certain incentive compensation-related payments. The employment contracts expire on various dates through the year 2014 with payments possible through 2018. As of March 31, 2012, the maximum bonus payable over the remaining terms of the contracts approximates $56 million, none of which would be payable in the remainder of 2012. In addition, certain employees have incentive compensation opportunities related to the Federated Kaufmann Large Cap Fund (the Fund Bonus). Based on asset levels at March 31, 2012, $0.7 million would be paid in 2013 as a Fund Bonus payment. Management is unable to reasonably estimate a range of possible bonus payments for the Fund Bonus for subsequent years due to the wide range of possible growth-rate scenarios.

(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

21

Notes to the Consolidated Financial Statements (continued)
(Unaudited)
 
 

agreement. Management believes that if Federated were to incur a loss in any of these matters, such loss should not have a material effect on its business, financial position or results of operations.

(c) Other Legal Proceedings

Federated has claims asserted and threatened against it in the ordinary course of business. As of March 31, 2012, Federated does not believe that a material loss related to these claims is reasonably possible.

(14) Subsequent Events

On April 26, 2012, the board of directors declared a $0.24 per share dividend to shareholders of record as of May 8, 2012 to be paid on May 15, 2012.



22


Part I, Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (Unaudited)

The discussion and analysis below should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. Management has presumed that the readers of this interim financial information have read or have access to Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Federated’s Annual Report on Form 10-K for the year ended December 31, 2011.

General

Federated Investors, Inc. (together with its subsidiaries, Federated) is one of the largest investment managers in the United States with $363.6 billion in managed assets as of March 31, 2012. The majority of Federated’s revenue is derived from advising and administering Federated mutual funds and Separate Accounts (which include separately managed accounts, institutional accounts, sub-advised funds and other managed products) in both domestic and international markets. Federated also derives revenue from providing various other mutual fund-related services, including distribution, shareholder servicing and retirement plan recordkeeping services (collectively, Other Services).

Federated’s investment products are primarily distributed in three markets. These markets and the relative percentage of managed assets at March 31, 2012 attributable to such markets are as follows: wealth management and trust (50%), broker/dealer (30%) and global institutional (18%).

Investment advisory fees, administrative fees and certain fees for Other Services, such as distribution and shareholder service fees, are contract-based fees that are generally calculated as a percentage of the net assets of the investment portfolios that are managed by Federated. As such, Federated’s revenue is primarily dependent upon factors that affect the value of managed assets including market conditions and the ability to attract and retain assets. Nearly all assets under management in Federated’s investment products can be redeemed at any time with no advance notice requirement. Fee rates for Federated’s services generally vary by asset type and investment objective and, in certain instances, decline as the average net assets of the individual portfolios exceed certain thresholds. Generally, management-fee rates charged for advisory services provided to equity products are higher than management-fee rates charged on money market and fixed-income products. Likewise, mutual funds typically have a higher management-fee rate than Separate Accounts. Similarly, traditional separate accounts typically have a higher management-fee rate than liquidation portfolios. Accordingly, revenue is also dependent upon the relative composition of average assets under management across both asset and product types. Federated may waive certain fees for competitive reasons such as to maintain positive or zero net yields, to meet regulatory requirements or to meet contractual requirements. Since Federated’s products are largely distributed and serviced through financial intermediaries, Federated pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products. These payments are generally calculated as a percentage of net assets attributable to the financial intermediary selling the product and comprise the vast majority of Distribution expense on the Consolidated Statements of Income. Certain components of distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated generally pays out a larger portion of revenue earned from managed assets in money market funds than revenue earned from managed assets in equity or fixed-income funds.

Federated’s remaining Other Services fees are primarily based on fixed rates per retirement plan participant. Revenue relating to these services generally depends upon the number of plan participants which may vary as a result of sales and marketing efforts, competitive fund performance, introduction and market reception of new product features and acquisitions.

Federated’s most significant operating expenses include compensation and related costs, which include fixed and variable compensation and related employee benefits, and distribution expenses. Certain of these expenses are

23

Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (Unaudited)
 

dependent upon sales, product performance, levels of assets and asset mix and the willingness to continue fee waivers in order for certain money market funds to maintain positive or zero net yields.

The discussion and analysis of Federated’s financial condition and results of operations are based on Federated’s Consolidated Financial Statements. Federated operates in a single operating segment, the investment management business. Management evaluates Federated's performance at the consolidated level. Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business. Federated’s growth and profitability are dependent upon its ability to attract and retain assets under management and, in light of the continuing adverse market conditions, are also dependent upon the profitability of those assets, which is impacted, in part, by management’s decisions regarding fee waivers in order for certain money market funds to maintain positive or zero net yields. Fees for fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds. Management believes the most meaningful indicators of Federated’s performance are assets under management, total revenue and net income, both in total and per diluted share.

Business Developments

Money Market Fund Matters
For the three months ended March 31, 2012, approximately 46% of Federated’s total revenue was attributable to money market assets as compared to 49% for the same period of 2011. A significant change in Federated’s money market business or a significant reduction in money market assets due to regulatory changes, changes in the financial markets including significant and rapid increases in interest rates over a short period of time causing certain investors to prefer direct investments in interest-bearing securities, significant deterioration in investor confidence, further persistent declines in or additional prolonged periods of historically low short-term interest rates and resulting fee waivers or other circumstances, could have a material adverse effect on Federated’s results of operations.

(a) Current Regulatory Environment
In January 2010, the Securities and Exchange Commission (SEC) adopted extensive amendments to Rule 2a-7 of the Investment Company Act of 1940 (Rule 2a-7) aimed at enhancing the resiliency of money market funds. These amendments included a series of enhancements including rules that require all money market funds to meet specific portfolio liquidity standards and rules that significantly enhance the public disclosure and regulatory reporting obligations of these funds. In Federated's view, the amendments of 2010 meaningfully and sufficiently strengthened money market funds. Recent experience demonstrated that the amendments of 2010 were effective in meeting heightened requests for redemptions occurring at various times throughout 2011 in connection with the U.S. credit rating downgrade and the ongoing European debt crisis.
The SEC staff is considering additional changes to Rule 2a-7 that could adversely impact the viability of money market funds, including requiring a floating net asset value, imposing capital requirements, and creating redemption restrictions. Federated believes the changes currently under consideration, if enacted, would significantly reduce the utility and attractiveness of money market funds to investors. Thus, rather than enhance the resiliency of money market funds, the contemplated changes would potentially severely harm the utility of money market funds for investors who, in Federated's view, value money market funds in their current form as an efficient and effective cash management investment product offering daily liquidity at par. It has been reported that the SEC may propose amendments to Rule 2a-7 in 2012. It has also been reported that the Financial Stability Oversight Council (FSOC), which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), may take action to regulate the money market fund industry should the SEC decide to take no further action with respect to money market fund regulation.
If ultimately enacted, some or all of these changes would be detrimental to Federated's money market fund business and could materially and adversely affect Federated's operations. The very proposal of such amendments could have

24

Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (Unaudited)
 

an adverse impact on Federated's money market fund business and operations and could also negatively impact the short-term credit markets. Management is carefully monitoring developments in this area and plans to actively participate both individually and with industry groups in the public comment process that would accompany any rule change proposal. Federated is unable to assess the degree of any potential impact such additional reforms may have on its business and operations until such proposals are issued. Even when issued, the final version of any SEC rule amendment could vary significantly from the form in which it is proposed.

(b) Historically Low Short-Term Interest Rates
Throughout 2011 and the first quarter 2012, the Federal Reserve left the near-zero federal funds rate unchanged and short-term interest rates continued at all-time low levels. Since the fourth quarter 2008, Federated has voluntarily waived fees in order for certain funds to maintain positive or zero net yields. These fee waivers were partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's ability to share the impact of the waivers with third-party intermediaries. The impact of such fee waivers on various components of Federated's Consolidated Statements of Income was as follows for the periods presented:
 
 
Three Months Ended
 
 
March 31,
 
December 31,
 
September 30,
 
June 30,
 
March 31,
(in millions)
 
2012
 
2011
 
2011
 
2011
 
2011
Investment advisory fees
 
$
(52.9
)
 
$
(58.8
)
 
$
(57.2
)
 
$
(49.6
)
 
$
(36.0
)
Other service fees
 
$
(27.5
)
 
$
(30.2
)
 
$
(31.7
)
 
$
(29.8
)
 
$
(27.4
)
   Total Revenue
 
$
(80.4
)
 
$
(89.0
)
 
$
(88.9
)
 
$
(79.4
)
 
$
(63.4
)
Distribution expense
 
$
(57.5
)
 
$
(61.9
)
 
$
(63.2
)
 
$
(57.8
)
 
$
(49.5
)
   Operating income
 
$
(22.9
)
 
$
(27.1
)
 
$
(25.7
)
 
$
(21.6
)
 
$
(13.9
)
Noncontrolling interest
 
$
(0.6
)
 
$
(1.0
)
 
$
(2.5
)
 
$
(2.2
)
 
$
(0.8
)
Pre-tax impact
 
$
(22.3
)
 
$
(26.1
)
 
$
(23.2
)
 
$
(19.4
)
 
$
(13.1
)

Fee waivers to maintain positive or zero net yields increased for the first quarter 2012 as compared to the same quarter of 2011 primarily as a result of lower interest rates for certain money market investments as well as increased average managed money market fund assets. In terms of recent trends, the net negative pre-tax impact of these fee waivers on income for the quarter ended March 31, 2012 was less than the impact in the fourth and third quarters of 2011, but was more than the impact in the second and first quarters of 2011. Based on recent Federal Reserve Bank commentary on their outlook for interest rates, management expects the fee waivers and the related reduction in distribution expense and net income attributable to noncontrolling interests will continue at least until late 2014. Based on recent market conditions and assuming asset levels remain constant, fee waivers for the second quarter 2012 may result in a net negative pre-tax impact on income of approximately $20 million. While the level of fee waivers are impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money market fund portfolios would reduce the net pre-tax impact of these waivers. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the net pre-tax impact of these waivers by approximately forty percent from the current levels and an increase of 25 basis points would reduce the impact by approximately seventy percent from the current levels. The actual amount of future fee waivers could vary significantly from management’s estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, available yields on instruments held by the money market funds, actions by the Federal Reserve, the U.S. Department of the Treasury and other governmental entities, changes in expenses of the money market funds, changes in the mix of money market customer assets, Federated’s willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by third parties.

Amended and Restated Credit Agreement

In the second quarter 2011, Federated entered into an Amended and Restated Credit Agreement by and among Federated, certain of its subsidiaries, PNC Bank, National Association as administrative agent, a syndicate of 19

25

Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (Unaudited)
 

banks led by PNC Capital Markets LLC as sole bookrunner and joint lead arranger and Citigroup Global Markets, Inc. as joint lead arranger (Credit Agreement). The Credit Agreement amended and restated Federated’s prior $425 million term loan facility dated April 9, 2010. The borrowings of $382.5 million under the Credit Agreement represented the remaining principal balance from the prior $425 million term loan. The Credit Agreement expires on June 10, 2016 and requires principal payments of $10.6 million per quarter for the first three years and $28.3 million per quarter for the fourth and fifth years and a final payment of $28.3 million due upon its expiration. The interest rate swap (the Swap) that Federated entered into with PNC Bank, National Association and certain other banks during 2010 to hedge its interest rate risk associated with the prior $425 million term loan remains in effect.

Under the Swap, which expires on April 1, 2015, Federated will receive payments based on LIBOR plus a spread and will make payments based on an annual fixed rate of 3.646%. See Note (9) to the Consolidated Financial Statements for additional information regarding the Credit Agreement and Swap.

26

Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (Unaudited)
 


Asset Highlights
Managed Assets at Period End
 
 
March 31,
 
Percent Change
(in millions)
 
2012

 
2011

 
By Asset Class
 
 
 
 
 
 
Money market
 
$
274,704

 
$
271,141

 
1
 %
Fixed-income
 
46,221

 
41,756

 
11
 %
Equity
 
34,117

 
31,641

 
8
 %
Liquidation portfolios1
 
8,583

 
10,384

 
(17
)%
Total managed assets
 
$
363,625

 
$
354,922

 
2
 %
By Product Type
 
 
 
 
 
 
Funds:
 
 
 
 
 
 
Money market
 
$
245,232

 
$
238,990

 
3
 %
Fixed-income
 
38,526

 
32,689

 
18
 %
Equity
 
23,612

 
22,848

 
3
 %
Total mutual fund assets
 
$
307,370

 
$
294,527

 
4
 %
Separate Accounts:
 
 
 
 
 
 
Money market
 
$
29,472

 
$
32,151

 
(8
)%
Fixed-income
 
7,695

 
9,067

 
(15
)%
Equity
 
10,505

 
8,793

 
19
 %
Total separate account assets
 
$
47,672

 
$
50,011

 
(5
)%
Liquidation Portfolios1
 
$
8,583

 
$
10,384

 
(17
)%
Total managed assets
 
$
363,625

 
$
354,922

 
2
 %


Average Managed Assets
 
 
Three Months Ended
 
 
 
 
March 31,
 
Percent Change
(in millions)
 
2012

 
2011

 
By Asset Class
 
 
 
 
 
 
Money market
 
$
282,801

 
$
273,542

 
3
 %
Fixed-income
 
45,792

 
41,187

 
11
 %
Equity
 
32,827

 
31,056

 
6
 %
Liquidation portfolios1
 
8,703

 
10,534

 
(17
)%
Total average managed assets
 
$
370,123

 
$
356,319

 
4
 %
By Product Type
 
 
 
 
 
 
Funds:
 
 
 
 
 
 
Money market
 
$
251,825

 
$
240,375

 
5
 %
Fixed-income
 
38,128

 
32,265

 
18
 %
Equity
 
23,075

 
22,599

 
2
 %
Total average mutual fund assets
 
$
313,028

 
$
295,239

 
6
 %
Separate Accounts:
 
 
 
 
 
 
Money market
 
$
30,976

 
$
33,167

 
(7
)%
Fixed-income
 
7,664

 
8,922

 
(14
)%
Equity
 
9,752

 
8,457

 
15
 %
Total average separate account assets
 
$
48,392

 
$
50,546

 
(4
)%
Liquidation Portfolios1
 
$
8,703

 
$
10,534

 
(17
)%
Total average managed assets
 
$
370,123

 
$
356,319

 
4
 %

1 
Liquidation portfolios include portfolios of distressed fixed-income securities. Federated has been retained by a third party to manage these assets through an orderly liquidation process that will generally occur over a multi-year period.


27

Management's Discussion and Analysis (continued)
of Financial Condition and Results of Operations (Unaudited)
 

Changes in Fixed-Income and Equity Fund Assets
 
 
Three Months Ended
 
 
March 31,
(in millions)
 
2012

 
2011

Fixed-Income Funds