EX-13.01 3 fii-1301fy2013.htm SELECTED PORTIONS OF 2013 ANNUAL REPORT TO SHAREHOLDERS FII - 13.01 FY 2013

EXHIBIT 13.01
  
Financial Review
  
 
 
 
 
 
  
Selected Consolidated Financial Data
  
 
 
 
 
  
Management’s Discussion and Analysis
  
 
 
 
 
  
Management’s Assessment of Internal Control Over Financial Reporting
  
 
 
 
 
  
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements
  
 
 
 
 
  
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Effectiveness of Internal Control Over Financial Reporting
  
 
 
 
 
  
Consolidated Balance Sheets
  
 
 
 
 
  
Consolidated Statements of Income
  
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
 
  
Consolidated Statements of Changes in Equity
  
 
 
 
 
  
Consolidated Statements of Cash Flows
  
 
 
 
 
  
Notes to the Consolidated Financial Statements
  
 
 
 
 
 
Performance Graph (Unaudited)
 
FORWARD-LOOKING STATEMENTS
Certain statements in this 2013 Annual Report to Shareholders and the Annual Report on Form 10-K,including those related to asset flows and levels; business mix; levels of revenues, expenses, losses and net income; 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 cash flows; management’s expectations, projections or estimates regarding fee rates and market conditions, as well as the level, degree and continuance of fee waivers and reimbursements or assumptions of expenses (fee waivers), the level, timing, degree and impact of changes in interest rates, yields or asset levels or mix, the impact of asset mix and levels, interest rates or yields on such fee waivers, and the impact of such fee waivers on revenues, expenses, net income and taxes; management’s expectations, estimates or projections regarding borrowing, taxes, tax assets, tax rates, interest rates, earnings, cash flows, credit spreads, recovery rates, dilution, product demand, investor preferences, performance, legal, compliance and other professional services expenses, interest payments or expenses, amortization expense, compensation expense, other expenses, the availability of investments, the impact and value of the interest rate swap and certain other investments, and liquidity; future principal uses of cash; performance indicators; the impact of accounting policies and new accounting pronouncements; interest rate, credit, price, sovereign debt, currency, technology, foreign exchange, concentration, market and other risks; guarantee and indemnification obligations; the timing and impact of increased regulation by governments and regulators including current and potential rule proposals by the Securities and Exchange Commission affecting money market funds or action taken by the Board of Governors of the Federal Reserve System, the Financial Stability Oversight Council or other U.S. or foreign government entities, and management’s beliefs regarding such proposals and actions; the level of and prospect for increased distribution-related expenses; levels of investment, potential losses associated with investments and the timing of redemption of certain investments; the ability to raise additional capital; impairment charges and other charges for losses and expenses; tax liability and the realization of deferred tax assets; plans for international growth; and certain 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, asset levels and business mix, which may cause a decline in revenues and net income, result in impairments and increase the amount of fee waivers incurred by Federated. The obligation to make contingent payments is based on net revenue levels and will be affected by the achievement of such levels, and the obligation to make additional payments pursuant to employment arrangements is based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and future uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated’s success in distributing its products, potential changes in assets under management and/or changes in the terms of distribution and shareholder services contracts with intermediaries who offer Federated’s products to customers, and potential increased legal, compliance and other professional services expenses stemming from additional regulation. Federated’s risks and uncertainties also include liquidity and credit risks in Federated’s money market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in fair values of assets under management, investor preferences and confidence, and the ability of Federated to collect fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of the increased scrutiny of the mutual fund industry by domestic or foreign regulators, and the recent and any 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 and additional risks that may impact the forward-looking statements, see the section entitled Risk Factors herein under Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 
2013 Annual Report
7

SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data and managed assets)

The selected consolidated financial data below should be read in conjunction with Federated Investors, Inc. and its consolidated subsidiaries’ (Federated) Consolidated Financial Statements and Notes. The selected consolidated financial data (except managed assets) of Federated for the five years ended December 31, 2013 have been derived from the audited Consolidated Financial Statements of Federated. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes which follow.
Years Ended December 31,
 
2013

 
2012

 
2011

 
2010

 
2009

Statement of Income Data1, 2
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
878,365

 
$
945,706

 
$
895,114

 
$
951,943

 
$
1,175,950

Operating income
 
251,743

 
312,593

 
257,455

 
309,791

 
329,227

Net income including noncontrolling
   interests in subsidiaries
 
166,355

 
197,628

 
155,083

 
189,163

 
208,540

Net income attributable to Federated Investors, Inc.
 
162,177

 
188,088

 
150,906

 
179,114

 
197,292

Share Data attributable to Federated Investors, Inc.
 
 
 
 
 
 
 
 
 
 
Earnings per share – Basic1, 2
 
$
1.55

 
$
1.79

 
$
1.45

 
$
1.73

 
$
1.93

Earnings per share – Diluted1, 2
 
$
1.55

 
$
1.79

 
$
1.45

 
$
1.73

 
$
1.92

Cash dividends per share3
 
$
0.98

 
$
2.47

 
$
0.96

 
$
2.22

 
$
0.96

Weighted-average shares outstanding – Basic
 
100,668

 
100,313

 
100,609

 
99,925

 
99,923

Weighted-average shares outstanding – Diluted
 
100,669

 
100,313

 
100,632

 
99,993

 
100,056

Balance Sheet Data at Period End
 
 
 
 
 
 
 
 
 
 
Intangible assets, net and Goodwill1, 4
 
$
735,345

 
$
727,857

 
$
720,926

 
$
720,825

 
$
662,996

Total assets1, 4
 
1,135,797

 
1,090,061

 
1,150,856

 
1,153,504

 
912,433

Long-term debt5
 
198,333

 
276,250

 
318,750

 
361,250

 
105,000

Federated Investors shareholders’ equity3
 
566,119

 
495,432

 
541,959

 
491,799

 
528,207

Impact of Minimum Yield Waivers6
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
(389,031
)
 
$
(290,966
)
 
$
(320,671
)
 
$
(241,576
)
 
$
(120,587
)
Less: Reduction in Distribution expense
 
277,168

 
218,479

 
232,336

 
186,573

 
86,357

Operating income
 
(111,863
)
 
(72,487
)
 
(88,335
)
 
(55,003
)
 
(34,230
)
Less: Reduction in Noncontrolling interest
 
6,800

 
1,243

 
6,473

 
1,023

 
0

Pre-tax impact
 
(105,063
)
 
(71,244
)
 
(81,862
)
 
(53,980
)
 
(34,230
)
Managed Assets (in millions)
 
 
 
 
 
 
 
 
 
 
As of period end
 
$
376,084

 
$
379,771

 
$
369,697

 
$
358,241

 
$
389,316

Average for the period
 
371,127

 
365,149

 
354,387

 
347,074

 
405,595

1
In 2010 and 2009, Federated recorded pretax impairments totaling $10.2 million and $21.7 million, respectively, primarily related to certain intangible and fixed assets.
2
In 2012 and 2010, results included pretax insurance recoveries totaling $20.2 million and $25.0 million, respectively, for claims submitted over the past several years related to various legal proceedings.
3
Federated paid a special dividend to shareholders of $1.51 per share or $156.9 million in 2012 and $1.26 per share or $129.8 million in 2010.
4
In connection with business acquisitions, Federated recorded Intangible assets, net and Goodwill in 2010 of $44.7 million and $24.1 million. See Note (18)(a) to the Consolidated Financial Statements.
5
In 2010, Federated amended and restated its term-loan facility which increased borrowings and extended the term of the loan. In 2011, Federated amended and restated the 2010 agreement to extend the term of the loan. See Note (10) to the Consolidated Financial Statements for additional information.
6
See Note (3) to the Consolidated Financial Statements for additional information regarding the impact of minimum yield waivers.

8
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements appearing elsewhere in this report.
General
Federated Investors, Inc. (together with its consolidated subsidiaries, Federated) is one of the largest investment managers in the United States with $376.1 billion in managed assets as of December 31, 2013. The majority of Federated’s revenue is derived from advising Federated-sponsored funds (Federated 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 administrative and other mutual fund-related services, including distribution, shareholder servicing and retirement plan recordkeeping services.
Federated’s investment products are primarily distributed in four markets. These markets and the relative percentage of managed assets at December 31, 2013 attributable to such markets are as follows: wealth management and trust (45%), broker/dealer (31%), institutional (15%) and international (6%).
Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder service fees, are contract-based fees that are generally calculated as a percentage of the net assets of managed investment portfolios. Federated’s revenue is primarily dependent upon factors that affect the value of managed assets including market conditions and the ability to attract and retain assets. Nearly all assets under management (AUM or managed assets) 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 and service type and may vary based on changes in asset levels. 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, which in turn, typically have a higher management-fee rate than liquidation portfolios. Accordingly, revenue is also dependent upon the relative composition of average AUM across both asset and product types. Federated may waive certain fees for competitive reasons such as to maintain certain mutual fund expense ratios, to maintain positive or zero net yields on money market funds, to meet regulatory requirements or to meet contractual requirements. Since Federated’s products are largely distributed and serviced through financial intermediaries, Federated pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products. These payments are generally calculated as a percentage of net assets attributable to the financial intermediary selling the product and represent the vast majority of Distribution expense on the Consolidated Statements of Income. Certain components of distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated generally pays out a larger portion of revenue earned from managed assets in money market funds than revenue earned from managed assets in equity or fixed-income funds.
Federated’s most significant operating expenses are Compensation and related expense and Distribution expense as described above. Compensation and related expense includes base salary and wages, incentive compensation and other employee expenses including payroll taxes and benefits. Incentive compensation, which includes stock-based compensation, can vary depending on various factors including, but not limited to, overall results of operations of Federated, investment management performance and sales performance.
The discussion and analysis of Federated’s financial condition and results of operations are based on Federated’s Consolidated Financial Statements. Federated operates in a single operating segment, the investment management business. Management evaluates Federated’s performance at the consolidated level. Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business. Federated’s growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability of those assets, which is impacted, in part, by management’s decisions regarding fee waivers in order for certain money market funds to maintain positive or zero net yields. Fees for fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds. Management believes the most meaningful indicators of Federated’s performance are AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.

 
2013 Annual Report
9

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

Business Developments
Money Market Fund Matters
For the year ended December 31, 2013, approximately 39% of Federated’s total revenue was attributable to money market assets as compared to 47% and 46% for 2012 and 2011, respectively. 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 business, results of operations, financial condition and/or cash flows.
(a) Current Regulatory Environment
Domestic
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 2010 and 2011, Federated dedicated internal resources to comply with these amendments including efforts to enhance our information systems and improve related reporting capabilities. These efforts were internally sourced and not material to Federated's results of operations, financial condition or cash flows for those years. 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 in connection with the U.S. debt ceiling debate and subsequent downgrade of the country's credit rating in 2011, the European debt crisis in 2011/2012 and its ongoing fallout as well as the U.S. debt ceiling debate in 2013.
Since January 2010, the SEC has been working to develop a proposal for additional reforms related to money market funds. On June 5, 2013, the SEC issued such a rule proposal for public comment. The SEC's proposal was lengthy (approximately 700 pages) and included two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value (NAV) for institutional prime money market funds and other money market funds (such as, for example, municipal money market funds) other than government and retail money market funds. The other alternative would allow a fund's board to use liquidity fees and redemption gates when the fund fails to maintain the prescribed liquidity threshold. In addition, in the case of either alternative, the proposal would eliminate the amortized cost method of valuation of securities maturing in more than 60 days while permitting the use of the penny rounding method to maintain a stable share price for money market funds not required to have a floating NAV. The proposal also included additional diversification and disclosure measures that would apply under either alternative.
Federated supports liquidity fees and redemption gates in certain contexts. Federated believes the floating NAV, if enacted, would significantly reduce the utility and attractiveness 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. The elimination of the amortized cost method of valuation of securities also could impact the usefulness of money market funds as a cash management product. If ultimately enacted, the floating NAV would be detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. The elimination of the amortized cost method of valuation of securities, if ultimately enacted, also could be detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows.
Management reviewed the SEC proposal and actively participated in the public comment process both individually through the filing of 13 comment letters and with industry groups. While the public comment period formally closed on September 17, 2013, comments on the SEC's proposal have continued to be submitted, including additional comment letters submitted on behalf of Federated. Comment letters are available on the SEC's website at http://www.sec.gov/comments/s7-03-13/s70313.shtml. Management does not expect final rules to be adopted prior to the second or third quarter of 2014 given, among other things, the number of industry comments and the complexity of the proposed rule amendments, as well as the SEC's regulatory agenda published in late 2013, which specifies an October 2014 timetable for final action on the SEC's proposal. Federated is unable to assess the degree of any potential impact the SEC proposed reforms may have on its business, results of operations, financial condition and/or cash flows until any rule amendments are finalized, as the final amendments could vary significantly from the form in which proposed. Moreover, the SEC's proposal also contemplates that, once the final

10
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

amendments become effective, there would be staggered compliance dates: (1) if the fluctuating NAV alternative is adopted, an additional two years after the effective date for any reforms relating to that alternative; (2) if the liquidity fee and redemption gate alternative is adopted, an additional one year after the effective date for any reforms relating to that alternative; and (3) any reforms not specifically related to either the fluctuating NAV nor liquidity fee and redemption gate alternatives would have a compliance date of nine months after the final amendments become effective.
The Financial Stability Oversight Council (FSOC) may recommend new or heightened regulation for "nonbank financial companies" under Section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). On April 3, 2013, the Board of Governors of the Federal Reserve System (the Governors) issued a final regulation, which became effective on May 6, 2013, that defines the term "predominantly engaged in financial activities" for purposes of identifying "nonbank financial companies" under the Dodd-Frank Act. In the adopting release for the regulation, the Governors stated that they believe "that it is clear that open-end investment companies, such as mutual funds including money market funds, ... engage in financial activities" for the purpose of asserting regulatory jurisdiction. Management respectfully disagrees with this position. Management believes that (1) the final regulation is inconsistent with the clear language and intent of the Dodd-Frank Act, (2) the conclusion that mutual funds, including money market mutual funds, fall within the scope of "financial activities" is without a valid statutory basis and (3) Congress intended the scope of "financial activities" for Dodd-Frank Act regulation to be strictly limited to specific lines of business previously defined under the Bank Holding Company Act, which historically have not been viewed as including mutual funds as a specific line of business.
In a Congressional Appropriations Committee conference report that accompanied the Consolidated Appropriations Act, 2014, which was signed into law by President Obama on January 17, 2014, Congress instructed the SEC to undertake a “rigorous economic analysis” before promulgating its final money market fund proposal, and indicated that the “Committee expects that the final rules will take into account the substantive concerns of stakeholders who use these products for short-term financing needs.” In the conference report, Congress also expressed that “[i]mpairing or restricting the use of money market funds could potentially result in a decrease in the ability of these products to provide liquidity, potentially resulting in hundreds of market participants issuing longer-term debt, significantly increasing their funding costs, slowing expansion rates, and depressing jobs and economic growth.” In addition to underscoring the importance to the capital markets of money market funds as currently structured, management believes that the conference report reflects Congress’ view that the regulation of money market funds is within the purview of the SEC, not FSOC.
On November 1, 2013, Federated also responded to the SEC’s request for comment on a September 2013 report of the U.S. Department of the Treasury's (Treasury Department) Office of Financial Research entitled “Asset Management and Financial Stability” (the OFR Report), which was prepared at the request of FSOC. Federated believes that the OFR Report is lacking in both substance and depth of analysis in its effort to justify FSOC’s and the Governors' role in fundamentally changing the structure and operation of investment managers, investors and the markets. While the SEC requested comments to be submitted by November 1, 2013, comments have continued to be submitted. Comment letters are available on the SEC's website at http://www.sec.gov/comments/am-1/am-1.shtml.
Federated is unable to assess whether, or the degree to which, any of the Federated Funds, including money market funds, could ultimately be designated a systematically important nonbank financial company by FSOC. In management's view, the issuance of final regulations is, and any reforms ultimately put into effect would be, detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact any reforms or other actions by the Governors, FSOC or other governmental entities may have on its business, results of operations, financial condition and/or cash flows at this time.
Europe
European-based money market funds face regulatory reform pressure in Europe similar to that faced in the U.S. The European Commission released its money market fund reform proposal on September 4, 2013. The proposal would permit either floating NAV money market funds or constant NAV money market funds subject to capital requirements. Under the proposal, a constant NAV money market fund generally must either build a capital buffer of 3% or convert to a floating NAV money market fund. The proposal is subject to the approval of the European Parliament and European Council and the final regulation could vary materially from that of the proposal. Management does not anticipate agreement on a final regulation before late fourth quarter 2014.
Eleven European countries continue to develop the financial transactions tax (FTT) proposal. Although a revised draft of this proposal may be presented during the second quarter of 2014, management does not expect the FTT to be effective in 2014. Notwithstanding challenges to its legality, the participating countries continue to consider whether the FTT should be introduced in stages, with perhaps stocks being taxed first. Debate also continues regarding whether certain types of

 
2013 Annual Report
11

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

transactions, such as certain derivatives and bonds, should be exempted, in which country the transaction should be taxed (country of issue, country of purchase, or both), the allocation of taxes collected and certain other fundamental principles. Once agreed upon, final terms of the proposed FTT also will be subject to additional government approval prior to enactment.
European money market reform and the imposition of the FTT, particularly with its initially proposed broad application, would each be detrimental to Federated's fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that European money market reform proposals or the FTT may have on its business, results of operations, financial condition and/or cash flows until such proposals are finalized and approved or the FTT is enacted.
On January 8, 2014, the Financial Stability Board (FSB) also published for comment as a consultative document “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions” (Consultation). The FSB is an international organization, of which the Governors, the SEC and the Treasury Department are members, that was established to coordinate, at the international level, the work of national authorities and bodies in developing and promoting the implementation of regulatory policies. The Consultation sets forth proposed methodologies for identifying systemically important non-bank, non-insurance company financial institutions, including, among others, “market intermediaries” which the Consultation appears to define as including investment advisers, brokers and certain other intermediaries, and “investment funds,” which the Consultation appears to define as including money market funds, other open-end or closed-end mutual funds, and hedge funds and other private funds. The proposed methodologies include consideration of size (U.S. $100 billion is a proposed materiality threshold), exposures, complexity, interconnectedness, leverage and other factors. The Consultation specifically notes that, in addition to individual funds, it may also be necessary to consider families of funds following the same or similar investment strategies. The deadline for the formal comment period on the Consultation is April 7, 2014. Federated is unable to assess whether, or the degree to which Federated, any of its investment management subsidiaries or any of the Federated Funds, including money market funds, could ultimately be determined to be a significantly important financial institution.
(b) Historically Low Short-Term Interest Rates
For several years, the Governors have kept the near-zero federal funds rate unchanged and short-term interest rates continued at all-time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the fund's operating expenses due to these historically low short-term interest rates. Since the fourth quarter 2008, Federated has voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the waivers.

These voluntary fee waivers are calculated as a percent of AUM in certain money market funds and thus will vary depending upon the asset levels in such funds. In addition, the level of waivers are dependent on several other factors including, but not limited to, yields on instruments available for purchase by the money market funds, changes in expenses of the money market funds and changes in the mix of money market assets. In any given period, a combination of these factors drives the amount of fee waivers necessary in order for certain funds to maintain positive or zero net yields. As an isolated variable, an increase in yields on instruments held by the money market funds will cause the pre-tax impact of fee waivers to decrease. Conversely, as an isolated variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.

With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market funds as well as the distribution among certain share classes that vary in pricing structure will impact the level of fee waivers. Generally, prime money market funds waive less than government money market funds as a result of higher gross yields on the underlying investments. As such, as an isolated variable, an increase in the relative proportion of average managed assets invested in prime money market funds as compared to total average money market fund assets should typically result in lower waivers to maintain positive or zero net yields. Conversely, the opposite would also be true.

12
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

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:
 
 
 
 
 
 
 
 
2013

 
2012

in millions
 
2013

 
2012

 
2011

 
vs. 2012

 
vs. 2011

Investment advisory fees
 
$
(255.9
)
 
$
(177.2
)
 
$
(201.6
)
 
(44
)%
 
12
 %
Other service fees
 
(133.1
)
 
(113.8
)
 
(119.1
)
 
(17
)%
 
4
 %
   Total Revenue
 
(389.0
)
 
(291.0
)
 
(320.7
)
 
(34
)%
 
9
 %
Less: Reduction in Distribution expense
 
277.1

 
218.5

 
232.3

 
27
 %
 
(6
)%
   Operating income
 
(111.9
)
 
(72.5
)
 
(88.4
)
 
(54
)%
 
18
 %
Less: Reduction in Noncontrolling interest
 
6.8

 
1.3

 
6.5

 
423
 %
 
(80
)%
Pre-tax impact
 
$
(105.1
)
 
$
(71.2
)
 
$
(81.9
)
 
(48
)%
 
13
 %
The negative pre-tax impact of fee waivers to maintain positive or zero net yields on certain money market funds increased in 2013 as compared to 2012 primarily as a result of lower yields on instruments held by the money market funds. During 2012, improved yields on instruments held by the money market funds caused a decline in these fee waivers as compared to 2011. (See Note (20) to the Consolidated Financial Statements for information regarding the quarterly pre-tax impact of these fee waivers.)

Based on recent commentary from the Governors in a January 29, 2014 press release, "a highly accommodative stance of monetary policy will remain appropriate for a considerable time...," Federated is unable to predict when the Governors will increase their target for the federal funds rate. As such, fee waivers to maintain positive or zero net yields on certain money market funds and the related reduction in distribution expense and net income attributable to noncontrolling interests could continue for the foreseeable future. Assuming asset levels and mix remain constant and based on recent market conditions, fee waivers for the first quarter 2014 may result in a negative pre-tax impact on income of approximately $30 million, which is consistent with the impact to both the third and fourth quarters 2013 (see Note (20) to the Consolidated Financial Statements for additional information on the quarterly impact of these fee waivers). While the level of fee waivers are impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money market fund portfolios would reduce the negative pre-tax impact of these waivers. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the negative pre-tax impact of these waivers by approximately 45% from the current levels and an increase of 25 basis points would reduce the impact by approximately 70% from the current levels. The actual amount of future fee waivers and the resulting negative impact of these 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 Governors, the Treasury Department, the SEC, FSOC and other governmental entities, changes in expenses of the money market funds, changes in the mix of money market customer assets, changes in the distribution fee arrangements with third parties, Federated’s willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by third parties. 
Asset Impairments
In 2012, Federated recorded a $3.0 million charge to write down the value of an equity-method investment. During 2013, Federated recorded additional impairments totaling $3.7 million to fully write off the value of this investment. See Note (5)(b) to the Consolidated Financial Statements for additional information regarding these impairments.
Global Expansion
Federated continues to explore opportunities to further expand its global footprint. In 2013, Federated enhanced its capabilities in trade finance investments by adding three experienced professionals and obtaining the right to use certain intellectual property from GML Capital LLP. Federated also enhanced its capabilities in emerging-market debt investments by adding two emerging-market specialists. These five professionals were added to Federated Investors (UK) LLP, Federated's London-based subsidiary. These enhancements built on Federated’s 2012 acquisition of Prime Rate Capital Management LLP (now Federated Investors (UK) LLP) and the expansion in 2012 of Federated’s European distribution capabilities through an agreement with Bury Street Capital, a European distribution firm based in London. In 2013, Federated also continued to seek acquisition candidates, including those capable of growing its Asia-Pacific business.

 
2013 Annual Report
13

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

Insurance Proceeds
In 2012, Federated obtained the final approval from various insurance carriers for claims submitted over the past several years related to various legal proceedings. Accordingly, in 2012 Federated recognized $20.2 million in the Consolidated Statements of Income as a reduction to Professional service fees. See Note (9) to the Consolidated Financial Statements for additional information regarding these proceeds.
Special Cash Dividend
In the fourth quarter 2012, Federated paid $1.51 per share, or $156.9 million, as a special cash dividend to shareholders. This payment was in addition to the aggregate $0.96 per share, or $99.9 million, regular quarterly cash dividends paid throughout the course of 2012. The fourth quarter 2012 special dividend of $1.51 per share negatively impacted diluted earnings per share for the fourth quarter 2012 by $0.04 per share and for the full-year 2012 by $0.02 per share due to the application of the two-class method of calculating earnings per share.
All dividends were considered ordinary dividends for tax purposes.



14
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

Asset Highlights
Managed Assets at Period End
in millions as of December 31,
 
2013

 
2012

 
Percent
Change

By Asset Class
 
 
 
 
 
 
Money market
 
$
275,952

 
$
284,704

 
(3
)%
Fixed-income
 
50,126

 
52,711

 
(5
)%
Equity
 
44,148

 
35,010

 
26
 %
Liquidation portfolio1
 
5,858

 
7,346

 
(20
)%
Total managed assets
 
$
376,084

 
$
379,771

 
(1
)%
By Product Type
 
 
 
 
 
 
Mutual Funds:
 
 
 
 
 
 
Money market
 
$
240,048

 
$
255,689

 
(6
)%
Fixed-income
 
39,606

 
42,478

 
(7
)%
Equity
 
28,097

 
23,152

 
21
 %
Total mutual fund assets
 
307,751

 
321,319

 
(4
)%
Separate Accounts:
 
 
 
 
 
 
Money market
 
$
35,904

 
$
29,015

 
24
 %
Fixed-income
 
10,520

 
10,233

 
3
 %
Equity
 
16,051

 
11,858

 
35
 %
Total separate account assets
 
62,475

 
51,106

 
22
 %
Liquidation Portfolio1
 
$
5,858

 
$
7,346

 
(20
)%
Total managed assets
 
$
376,084

 
$
379,771

 
(1
)%

Average Managed Assets
in millions for the years ended December 31,
 
2013

 
2012

 
2011

 
2013
vs. 2012

 
2012
vs. 2011

By Asset Class
 
 
 
 
 
 
 
 
 
 
Money market
 
$
273,680

 
$
274,206

 
$
271,501

 
0
 %
 
1
 %
Fixed-income
 
51,340

 
48,986

 
42,573

 
5
 %
 
15
 %
Equity
 
39,474

 
33,816

 
30,560

 
17
 %
 
11
 %
Liquidation portfolio1
 
6,633

 
8,141

 
9,753

 
(19
)%
 
(17
)%
Total average managed assets
 
$
371,127

 
$
365,149

 
$
354,387

 
2
 %
 
3
 %
By Product Type
 
 
 
 
 
 
 
 
 
 
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
Money market
 
$
239,440

 
$
246,731

 
$
242,187

 
(3
)%
 
2
 %
Fixed-income
 
41,177

 
39,941

 
34,455

 
3
 %
 
16
 %
Equity
 
25,512

 
23,015

 
22,071

 
11
 %
 
4
 %
Total average mutual fund assets
 
306,129

 
309,687

 
298,713

 
(1
)%
 
4
 %
Separate Accounts:
 
 
 
 
 
 
 
 
 
 
Money market
 
$
34,240

 
$
27,475

 
$
29,314

 
25
 %
 
(6
)%
Fixed-income
 
10,163

 
9,045

 
8,118

 
12
 %
 
11
 %
Equity
 
13,962

 
10,801

 
8,489

 
29
 %
 
27
 %
Total average separate account assets
 
58,365

 
47,321

 
45,921

 
23
 %
 
3
 %
Liquidation Portfolio1
 
$
6,633

 
$
8,141

 
$
9,753

 
(19
)%
 
(17
)%
Total average managed assets
 
$
371,127

 
$
365,149

 
$
354,387

 
2
 %
 
3
 %
1
Liquidation portfolio represents a portfolio of distressed bonds at cost. Federated has been retained by a third party to manage these assets through an orderly liquidation process that will generally occur over multiple years.


 
2013 Annual Report
15

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

Changes in Fixed-Income and Equity Fund and Separate Account Assets
in millions for the years ended December 31,
 
2013
 
2012
 
Percent Change
Fixed-income Funds
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
42,478

 
 
$
37,241

 
 
14
 %
      Sales
 
 
18,706

 
 
20,426

 
 
(8
)%
      Redemptions
 
 
(21,075
)
 
 
(15,664
)
 
 
35
 %
          Net (redemptions) sales
 
 
(2,369
)
 
 
4,762

 
 
(150
)%
      Net exchanges
 
 
(351
)
 
 
(1,520
)
 
 
(77
)%
      Acquisition-related
 
 
0

 
 
144

 
 
(100
)%
      Market gains and losses/reinvestments1
 
 
(152
)
 
 
1,851

 
 
(108
)%
  Ending assets
 
 
$
39,606

 
 
$
42,478

 
 
(7
)%
Fixed-income Separate Accounts3
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
10,233

 
 
$
7,573

 
 
35
 %
      Sales2
 
 
2,342

 
 
1,546

 
 
51
 %
      Redemptions2
 
 
(2,150
)
 
 
(1,128
)
 
 
91
 %
          Net sales2
 
 
192

 
 
418

 
 
(54
)%
      Net exchanges
 
 
4

 
 
1,593

 
 
(100
)%
      Market gains and losses/reinvestments1
 
 
91

 
 
649

 
 
(86
)%
  Ending assets
 
 
$
10,520

 
 
$
10,233

 
 
3
 %
Total Fixed-income Assets3
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
52,711

 
 
$
44,814

 
 
18
 %
      Sales2
 
 
21,048

 
 
21,972

 
 
(4
)%
      Redemptions2
 
 
(23,225
)
 
 
(16,792
)
 
 
38
 %
          Net (redemptions) sales2
 
 
(2,177
)
 
 
5,180

 
 
(142
)%
      Net exchanges
 
 
(347
)
 
 
73

 
 
(575
)%
      Acquisition-related
 
 
0

 
 
144

 
 
(100
)%
      Market gains and losses/reinvestments1
 
 
(61
)
 
 
2,500

 
 
(102
)%
  Ending assets
 
 
$
50,126

 
 
$
52,711

 
 
(5
)%
Equity Funds
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
23,152

 
 
$
21,930

 
 
6
 %
      Sales
 
 
7,439

 
 
6,221

 
 
20
 %
      Redemptions
 
 
(8,328
)
 
 
(7,377
)
 
 
13
 %
          Net redemptions
 
 
(889
)
 
 
(1,156
)
 
 
(23
)%
      Net exchanges
 
 
214

 
 
(70
)
 
 
406
 %
      Acquisition-related
 
 
0

 
 
190

 
 
(100
)%
      Market gains and losses/reinvestments1
 
 
5,620

 
 
2,258

 
 
149
 %
  Ending assets
 
 
$
28,097

 
 
$
23,152

 
 
21
 %
Equity Separate Accounts3
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
11,858

 
 
$
8,957

 
 
32
 %
      Sales2
 
 
4,445

 
 
4,252

 
 
5
 %
      Redemptions2
 
 
(3,004
)
 
 
(2,291
)
 
 
31
 %
          Net sales2
 
 
1,441

 
 
1,961

 
 
(27
)%
      Net exchanges
 
 
0

 
 
(8
)
 
 
100
 %
      Market gains and losses/reinvestments1
 
 
2,752

 
 
948

 
 
190
 %
  Ending assets
 
 
$
16,051

 
 
$
11,858

 
 
35
 %
Total Equity Assets3
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
35,010

 
 
$
30,887

 
 
13
 %
      Sales2
 
 
11,884

 
 
10,473

 
 
13
 %
      Redemptions2
 
 
(11,332
)
 
 
(9,668
)
 
 
17
 %
          Net sales2
 
 
552

 
 
805

 
 
(31
)%
      Net exchanges
 
 
214

 
 
(78
)
 
 
374
 %
      Acquisition-related
 
 
0

 
 
190

 
 
(100
)%
      Market gains and losses/reinvestments1
 
 
8,372

 
 
3,206

 
 
161
 %
  Ending assets
 
 
$
44,148

 
 
$
35,010

 
 
26
 %
1
Reflects approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.
2
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of Market gains and losses/reinvestments.
3
Includes separately managed accounts, institutional accounts and sub-advised funds and other managed products.

16
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations


Changes in Liquidation Portfolio
in millions for the years ended December 31,
 
2013
 
 
2012
 
 
Percent Change
Liquidation Portfolio1
 
 
 
 
 
 
 
 
 
  Beginning assets
 
 
$
7,346

 
 
$
8,856

 
 
(17
)%
      Liquidations2
 
 
(1,488
)
 
 
(1,510
)
 
 
(1
)%
  Ending assets
 
 
$
5,858

 
 
$
7,346

 
 
(20
)%
1
Liquidation portfolio represents a portfolio of distressed bonds at cost. Federated has been retained by a third party to manage these assets through an orderly liquidation process that will generally occur over multiple years. Management-fee rates earned from this portfolio are lower than those of traditional separate account mandates.
2
Liquidations reflect the cost of liquidated assets.

Changes in Federated’s average asset mix year-over-year across both asset class and product types have a direct impact on Federated’s operating income. Asset mix impacts Federated’s total revenue due to the difference in the fee rates earned on each asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship. The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset class and product type over the last three years:
 
 
Percent of Total Average Managed Assets
 
Percent of Total Revenue
 
 
2013

 
2012

 
2011

 
2013

 
2012

 
2011

By Asset Class
 
 
 
 
 
 
 
 
 
 
 
 
Money market assets
 
74
%
 
75
%
 
76
%
 
39
%
 
47
%
 
46
%
Fixed-income assets
 
14
%
 
14
%
 
12
%
 
23
%
 
21
%
 
20
%
Equity assets
 
10
%
 
9
%
 
9
%
 
37
%
 
31
%
 
33
%
Liquidation portfolio
 
2
%
 
2
%
 
3
%
 
0
%
 
0
%
 
0
%
Other activities
 
--

 
--

 
--

 
1
%
 
1
%
 
1
%
By Product Type
 
 
 
 
 
 
 
 
 
 
 
 
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
 
Money market assets
 
65
%
 
68
%
 
68
%
 
37
%
 
46
%
 
45
%
Fixed-income assets
 
11
%
 
11
%
 
10
%
 
21
%
 
19
%
 
19
%
Equity assets
 
7
%
 
6
%
 
6
%
 
31
%
 
26
%
 
28
%
Separate Accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Money market assets
 
9
%
 
7
%
 
8
%
 
2
%
 
1
%
 
1
%
Fixed-income assets
 
3
%
 
3
%
 
2
%
 
2
%
 
2
%
 
1
%
Equity assets
 
3
%
 
3
%
 
3
%
 
6
%
 
5
%
 
5
%
Liquidation Portfolio
 
2
%
 
2
%
 
3
%
 
0
%
 
0
%
 
0
%
Other Activities
 
--

 
--

 
--

 
1
%
 
1
%
 
1
%
Total managed assets represent the balance of AUM at a point in time. By contrast, average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.
As of December 31, 2013, total managed assets decreased 1% from December 31, 2012 primarily as a result of decreases in money market and fixed-income assets, partially offset by an increase in equity assets. Average managed assets increased 2% for the year ended December 31, 2013 compared to the year ended December 31, 2012. Period-end money market assets decreased 3% at December 31, 2013 as compared to December 31, 2012. Average money market assets remained flat for 2013 compared to 2012, following the industry trend in the accommodative monetary policy environment. Short-term interest rates remained low throughout 2013 as the Governors kept the near-zero federal funds rate unchanged in pursuit of a sustained economic recovery. In the bond market, anticipation of the beginning of the Governors’ tapering, impacting long-term bond rates, contributed to fund outflows industrywide in the second half of 2013. In this difficult year for the bond market overall, period-end fixed-income assets decreased 5% at December 31, 2013 as compared to December 31, 2012 primarily as a result of net redemptions, while average fixed-income assets increased 5% for 2013 as compared to 2012. In equities, the S&P 500 Index rose nearly 30%, as the market benefited from economic growth, rising corporate profits and the continuation of the Governors’ economic stimulus. Period-end equity assets increased 26% at December 31, 2013 as compared to December 31, 2012

 
2013 Annual Report
17

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

primarily due to market appreciation, and to a lesser extent, net sales. Average equity assets increased 17% for 2013 as compared to 2012 during a strong year for the equity market. Average assets in the liquidation portfolio decreased 19% for 2013 as compared to 2012 due to the gradual liquidation of the portfolio.
December 31, 2012 period-end and average managed assets for the year then ended increased 3% over December 31, 2011 period-end and average managed assets for the year then ended primarily as a result of increases in fixed-income and equity assets. Period-end money market assets remained flat for 2012 compared to 2011. Average money market assets increased 1% for 2012 compared to 2011. The financial markets posted a strong performance in 2012 despite the continued pressure of global macroeconomic events, including political uncertainty regarding U.S. election outcomes and fiscal policies on taxes and federal spending as well as the ongoing effects of the global financial crisis. Short-term interest rates remained low as 2012 proved to be another historic year for U.S. Federal Reserve quantitative easing. Federated generated net sales in both equity and fixed-income asset classes in 2012, once again led by income-oriented investment strategies. Average equity assets increased 11% for 2012 compared to 2011. Period-end equity assets increased 13% for 2012 compared to 2011 primarily due to market appreciation and, to a lesser extent, positive net sales. Average fixed-income assets increased 15% for 2012 as compared to 2011. Period-end fixed-income assets increased 18% for 2012 as compared to 2011 primarily due to positive net sales, and to a lesser extent, market appreciation. Average assets in the liquidation portfolio decreased 17% for 2012 as compared to 2011 due to the anticipated gradual liquidation of the portfolio.

Results of Operations
Revenue. The following table sets forth components of total revenue for the three years ended December 31:
in millions
 
2013

 
2012

 
2011

 
2013
vs. 2012

 
2012
vs. 2011

Revenue from managed assets
 
$
868.7

 
$
937.9

 
$
887.1

 
(7
)%
 
6
 %
Revenue from sources other than managed assets
 
9.7

 
7.8

 
8.0

 
24
 %
 
(3
)%
Total revenue
 
$
878.4

 
$
945.7

 
$
895.1

 
(7
)%
 
6
 %
Revenue from managed assets decreased $69.2 million in 2013 as compared to 2012 primarily due to an increase of $98.0 million in voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net yields and a decrease of $3.4 million due to lower average money market assets. This decrease in revenue was partially offset by an increase of $34.1 million resulting from higher average equity assets.
See Business Developments – Historically Low Short-Term Interest Rates for additional information on voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net yields, including the offsetting decreases in expense and net income attributable to noncontrolling interests and the net pre-tax impact on income.
Federated’s ratio of revenue from managed assets to average managed assets for 2013 was 0.23% as compared to 0.26% for 2012. The decrease in the rate was primarily due to the increase in voluntary fee waivers to maintain positive or zero net yields on certain money market funds for 2013 as compared to 2012, partially offset by the increase in average managed assets invested in higher fee-paying equity products for the same period of comparison.
Revenue from managed assets increased $50.8 million in 2012 as compared to 2011 primarily due to a decrease of $29.7 million in voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net yields and an increase of $19.2 million resulting from higher average fixed-income assets.
Federated’s ratio of revenue from managed assets to average managed assets for 2012 was 0.26% as compared to 0.25% for 2011. The increase in the rate was primarily due to the decrease in voluntary fee waivers to maintain positive or zero net yields for 2012 as compared to 2011.
 

18
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

Operating Expenses. The following table sets forth significant fluctuations in operating expenses for the three years ended December 31: 
in millions
 
2013

 
2012

 
2011

 
2013
vs. 2012

 
2012
vs. 2011

Compensation and related
 
$
269.1

 
$
257.6

 
$
245.4

 
4
 %
 
5
 %
Distribution
 
212.9

 
253.4

 
235.7

 
(16
)%
 
8
 %
Professional service fees
 
37.1

 
18.9

 
53.7

 
96
 %
 
(65
)%
All other
 
107.5

 
103.2

 
102.9

 
4
 %
 
0
 %
Total operating expenses
 
$
626.6

 
$
633.1

 
$
637.7

 
(1
)%
 
(1
)%
Total operating expenses for 2013 decreased $6.5 million compared to 2012. Distribution expense decreased $40.5 million in 2013 as compared to 2012 primarily due to a $58.6 million decrease resulting from higher fee waivers associated with maintaining positive or zero net yields on certain money market funds, partially offset by a $13.8 million increase related to the client mix of average money market assets and a $5.5 million increase related to higher average equity assets. Professional service fees increased $18.2 million in 2013 compared to 2012 primarily due to the aforementioned recognition of insurance proceeds in 2012 (See Business Developments – Insurance Proceeds for additional information). Compensation and related expense increased $11.5 million in 2013 as compared to 2012 reflecting a $5.3 million increase in base compensation primarily due to increased salary levels, a $4.2 million increase in incentive compensation primarily due to an increase in bonus expense driven primarily by investment management performance and a $1.7 million increase in other employee expenses, including payroll taxes and benefits.
Total operating expenses for 2012 decreased $4.6 million compared to 2011. Professional service fees decreased $34.8 million primarily due to a $20.2 million decrease related to the recognition of insurance proceeds in 2012 (See Business Developments – Insurance Proceeds for additional information) and a $17.2 million decrease in expenses related to non-recurring legal proceedings in 2011. Distribution expense increased $17.7 million in 2012 as compared to 2011 primarily due to a $13.8 million increase resulting from lower fee waivers associated with maintaining positive or zero net yields in certain money market funds and a $4.7 million increase related to higher average fixed-income assets. Compensation and related expense increased $12.2 million in 2012 as compared to 2011 reflecting a $5.9 million increase in base compensation primarily due to increased headcount and a $5.4 million increase in incentive compensation primarily due to an increase in bonus expense driven primarily by sales performance.
Nonoperating Income (Expenses). Nonoperating income (expenses), net, increased $11.4 million in 2013 as compared to 2012. The increase is primarily due to a $10.1 million increase in Gain on securities, net due primarily to increased gains on the sale of certain available-for-sale securities and a $2.0 million decrease in Debt expense primarily due to decreased average outstanding loan balances.
Nonoperating income (expenses), net increased $7.0 million in 2012 as compared to 2011. The increase reflects a $5.5 million increase in Gain on securities, net due primarily to increases in fair values of trading securities held ($3.1 million) and increased realized gains on Investments—affiliates ($1.4 million), a $2.6 million decrease in Debt expense primarily due to decreased average outstanding loan balances ($1.7 million) and a lower average interest rate ($1.2 million) due to Federated refinancing this debt in June 2011 (see Note (10) to the Consolidated Financial Statements for additional information) and a $1.9 million increase in Investment income, net primarily due to a higher average yield on Federated's investment portfolio. This increase was partially offset by a $3.0 million decrease in Other, net primarily due to an impairment charge recorded in 2012 to write down the value of an equity-method investment to fair value (see Note (5)(b) to the Consolidated Financial Statements for additional information).
Income Taxes. The income tax provision for 2013, 2012, and 2011 was $92.7 million, $110.9 million, and $91.3 million, respectively. The provision for 2013 decreased $18.2 million as compared to 2012 primarily due to lower Income before income taxes. The provision for 2012 increased $19.6 million as compared to 2011 primarily due to higher Income before income taxes. The effective tax rate was 35.8% for 2013, 35.9% for 2012 and 37.1% for 2011. See Note (15) to the Consolidated Financial Statements for additional information on the effective tax rate, as well as other tax disclosures.
For 2013, Federated's pretax book income was $71.0 million in excess of federal taxable income due primarily to temporary tax differences of $55.1 million associated with certain intangible assets and $10.5 million associated with capital gains recognized in the current year which, for tax purposes, were offset by capital losses reported in prior years for book purposes.

 
2013 Annual Report
19

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

For 2012, Federated’s pretax book income was $86.3 million in excess of federal taxable income due primarily to temporary tax differences of $56.4 million associated with certain intangible assets, $9.2 million associated with capital losses recognized in 2012 for tax purposes for which impairment charges had been recognized in a prior year for book purposes and $8.3 million related to the insurance proceeds recognized as income for book purposes in 2012 versus when received in a prior year for tax purposes. See Business Developments – Insurance Proceeds for additional information.
For 2011, Federated’s pretax book income was $55.1 million in excess of federal taxable income due primarily to $53.4 million in temporary tax differences associated with certain intangible assets.

Net Income attributable to the Noncontrolling Interests in Subsidiaries. Net income attributable to the noncontrolling interests in subsidiaries decreased $5.4 million for 2013 as compared to 2012 primarily due to the impact of higher fee waivers associated with maintaining positive or zero net yields in certain money market funds.

Net income attributable to the noncontrolling interests in subsidiaries increased $5.4 million for 2012 as compared to 2011 primarily due to the impact of lower fee waivers associated with maintaining positive or zero net yields in certain money market funds.
Net Income attributable to Federated Investors, Inc. Net income decreased $25.9 million in 2013 as compared to 2012 primarily as a result of the changes in revenues and expenses noted above. Diluted earnings per share for the year ended December 31, 2013 decreased $0.24 as compared to the same period of 2012 primarily due to decreased net income.
Net income increased $37.2 million in 2012 as compared to 2011 primarily as a result of the changes in revenues and expenses noted above. Diluted earnings per share for the year ended December 31, 2012 increased $0.34 as compared to the same period of 2011 primarily due to increased net income.
Liquidity and Capital Resources
Liquid Assets. At December 31, 2013, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents, investments and receivables, totaled $303.2 million as compared to $271.9 million at December 31, 2012. The increase of $31.3 million primarily reflects an increase of $36.9 million in Cash and cash equivalents, which is summarized in the discussion below, partially offset by a decrease of $6.6 million in Investments—affiliates due primarily to net redemptions of available-for-sale securities and a decrease of $5.1 million in Investments—consolidated investment companies due primarily to net redemptions of trading securities in 2013.
At December 31, 2013, Federated's liquid assets included investments in certain Federated-sponsored money market and fluctuating-value funds that may have direct and/or indirect exposures to international sovereign debt and currency risks. Federated has been actively monitoring its money market, fixed-income and equity portfolios to manage sovereign debt and currency risks. Federated's experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis. Further, for cash invested in certain money market funds (approximately $87 million), only indirect short-term exposures exist primarily to high-quality international bank names that are subject to Federated's credit analysis process and meet the requirements of Rule 2a-7.
Cash Provided by Operating Activities. Net cash provided by operating activities totaled $261.0 million for 2013 as compared to $316.3 million for 2012. The decrease of $55.3 million was primarily due to the $69.2 million decrease in revenue from managed assets previously discussed.
Cash Used by Investing Activities. In 2013, cash used by investing activities was $2.1 million and primarily reflected $91.9 million in cash paid for purchases of available-for-sale securities, $10.3 million in cash paid for property and equipment and $8.5 million in cash paid for contingent payments related to prior year acquisitions, partially offset by the receipt of $108.6 million in proceeds from redemptions of available-for-sale securities.
Cash Used by Financing Activities. In 2013, cash used by financing activities was $222.0 million. During 2013, Federated paid $102.5 million or $0.98 per share in dividends to holders of its common shares. Federated distributed $88.7 million to noncontrolling interests in subsidiaries primarily representing the proceeds surrounding the closing and related liquidation of a sponsored offshore money market fund that was a consolidated investment company in 2013 (see Note (4) to the Consolidated Financial Statements for additional information). In 2013, Federated also repaid $42.5 million of its long-term debt obligations (see Note (10) to the Consolidated Financial Statements for additional information).

20
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

Borrowings. In 2011, Federated entered into an Amended and Restated Credit Agreement with a syndicate of banks that included a $382.5 million term loan (Term Loan) and a $200 million revolving credit facility (collectively, as amended, Credit Agreement). Proceeds have been used for general corporate purposes including cash payments related to acquisitions, dividends, investments and share repurchases. During each of the years ended December 31, 2013, 2012 and 2011, Federated made principal payments of $42.5 million on the Term Loan. As of December 31, 2013, the entire $200 million revolving credit facility was available for borrowings. Federated is a party to an interest rate swap (the Swap) to hedge its interest rate risk associated with the Term Loan. The Swap converts the variable interest rate on the Term Loan to a fixed rate of 3.646%. See Note (10) to the Consolidated Financial Statements for additional information.
The Credit Agreement has an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions. Federated was in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the year ended December 31, 2013. An interest coverage ratio of at least 4 to 1 is required and as of December 31, 2013, the interest coverage ratio was 28 to 1. A leverage ratio of no more than 2.5 to 1 is required and as of December 31, 2013, the leverage ratio was 0.9 to 1. The Credit Agreement and the Swap also have certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of the debt or the Swap if not cured within the applicable grace periods. The events of default generally include breaches of 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.
Future Cash Needs. In addition to the contractual obligations and contingent liabilities described below, management expects that principal uses of cash will include paying incentive and base compensation, funding distribution expenditures, paying shareholder dividends, repaying debt obligations, funding business acquisitions and global expansion, paying taxes, repurchasing company stock, seeding new products and funding property and equipment acquisitions including computer-related software and hardware. As a result of the highly regulated nature of the investment management business, management anticipates that expenditures for compliance and investment management personnel, compliance systems and related professional and consulting fees may continue to increase.
On January 23, 2014, the board of directors declared a $0.25 per share dividend to shareholders of record as of February 7, 2014, which was paid on February 14, 2014.
After evaluating Federated’s existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under the revolving credit facility of the Credit Agreement and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have sufficient liquidity to meet its present and reasonably foreseeable cash needs. Although management currently is not projecting to draw on the availability under the revolving credit facility for the next twelve months, management may choose to borrow additional amounts up to the maximum available under the revolving credit facility which could cause total outstanding borrowings to total as much as $466 million.
Management estimates that of the $18.9 million of deferred tax assets (net of valuation allowances) at December 31, 2013, $10.3 million and $3.3 million will reverse in 2014 and 2015, respectively, as tax deductions are taken in those years for various expenses recorded in 2013 or prior years, primarily related to certain compensation-related expenses.
Financial Position
The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management’s Discussion and Analysis of Financial Condition and Results of Operations as well as the status of Federated's goodwill and equity-method investment as of December 31, 2013.
Long-term deferred tax liability, net at December 31, 2013 increased $21.8 million from December 31, 2012 primarily as a result of tax amortization deductions in excess of book amortization related to intangibles and indefinite lived assets.
There were no indicators of goodwill impairment as of December 31, 2013 as Federated's market capitalization exceeded the book value of equity by more than 400%.
Federated holds a 12% non-voting, noncontrolling interest in a privately-held investment management firm that is registered as an investment adviser and a commodity trading adviser. This investment is accounted for using the equity method of accounting. The excess carrying value of Federated's equity-method investment as compared to its proportionate share of the investee's underlying net assets reflects goodwill. During 2012, due to declines in the investee's AUM, their performance

 
2013 Annual Report
21

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

relative to indices and the uncertainty regarding each in the future, management evaluated the carrying value of this investment for other-than-temporary impairment. Management estimated the fair value of this investment at December 31, 2012 and determined that it was other-than-temporarily impaired. Accordingly, Federated recorded a $3.0 million impairment charge in Nonoperating Income (Expenses)Other, net to write down this equity-method investment to a fair value of $3.8 million as of December 31, 2012. The estimate of fair value was based primarily upon the present value of expected future cash flows using an income approach valuation methodology with unobservable data inputs (Level 3). Significant unobservable model inputs included: (1) projected AUM across product lines with a 10-year compounded annual growth rate of 15% and a terminal growth rate of 3%; and (2) a 17% discount rate based upon the current estimated market rate of return.
During the third quarter 2013, upon consideration of continued investment underperformance and a decrease in forecasted growth of AUM, management evaluated the carrying value of this investment. Accordingly, after recording its share of equity-related losses, Federated recorded a $3.1 million impairment charge in Nonoperating Income (Expenses)Other, net to write down this equity-method investment to a fair value of $0.6 million as of September 30, 2013. The estimate of fair value was based primarily upon the present value of expected future cash flows using probability-weighted scenarios in an income approach valuation methodology with unobservable data inputs (Level 3). Significant unobservable model inputs included: (1) projected scenario AUM across product lines with a 10-year compounded annual growth rate ranging from 0% - 9%; (2) a terminal growth rate of 3%; and (3) a 17% discount rate based upon the current estimated market rate of return. During the fourth quarter 2013, management made the decision to terminate a research agreement and sub-advisory agreement with this investment management firm, resulting in a significant decrease in forecasted AUM. Management estimated the fair value of this investment at December 31, 2013 and determined that it was fully impaired. Federated recorded a $0.6 million impairment charge in Nonoperating Income (Expenses)Other, net to write-off the remaining value of this equity-method investment as of December 31, 2013.
Off-Balance Sheet Arrangements
As of December 31, 2013 and 2012, Federated did not have any material off-balance sheet arrangements.
Contractual Obligations and Contingent Liabilities
Contractual. The following table presents as of December 31, 2013, Federated’s significant minimum noncancelable contractual obligations by payment date. The payment amounts represent amounts contractually due to the recipient and do not include any unamortized discounts or other similar carrying value adjustments. Further discussion of the nature of each obligation is included either in the referenced Note to the Consolidated Financial Statements or in a footnote to the table.
  
 
 
 
Payments due in
 
 
in millions
 
Note
Reference
 
2014

 
2015-2016

 
2017-2018

 
After 2018

 
Total

Long-term debt obligations1
 
(10)
 
$
86.9

 
$
204.4

 
$
0.0

 
$
0.0

 
$
291.3

Operating lease obligations
 
(14)
 
13.0

 
27.3

 
25.4

 
45.5

 
111.2

Purchase obligations2
 
 
 
12.9

 
3.7

 
0.5

 
0.0

 
17.1

Employment-related commitments3
 
 
 
18.5

 
1.7

 
0.0

 
0.0

 
20.2

Acquisition-related commitments4
 
(18)
 
10.2

 
0.0

 
0.0

 
0.0

 
10.2

Total
 
 
 
$
141.5

 
$
237.1

 
$
25.9

 
$
45.5

 
$
450.0

1
Amounts include principal and interest payments. Assuming the debt amortization schedule and the fixed interest rate in effect at December 31, 2013 as a result of the Swap (see Note (10) to the Consolidated Financial Statements), Federated’s minimum contractual interest payments would be approximately $8.9 million and $6.1 million for 2014 and 2015-2016, respectively.
2
Federated is a party to various contracts pursuant to which it receives certain services including services for legal, marketing and information technology, access to various fund-related information systems and research databases, trade order transmission and recovery services as well as other services. These contracts contain certain minimum noncancelable payments, cancellation provisions and renewal terms. The contracts expire on various dates through the year 2019. Costs for such services are expensed as incurred.
3
Federated has certain domestic and international employment arrangements pursuant to which Federated is obligated to make minimum compensation payments.
4
Amount represents Federated's obligation to make acquisition-related contingent purchase price payments in cases where the related contingencies are resolved as of December 31, 2013. For a full discussion of Federated's commitments regarding acquisition-related purchase price payments, see the discussion that follows herein under Contingent Payments.

22
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

Contingent Payments. Pursuant to various acquisition- and employee-related agreements, Federated is required to make certain periodic contingent payments. Details regarding these commitments are as follows:
In 2010, Federated acquired the money market management business of SunTrust Banks, Inc. (SunTrust Acquisition). As part of the SunTrust Acquisition, Federated is required to make annual contingent purchase price payments in the fourth quarters of each of the five years following the acquisition date. The contingent purchase price payments are calculated as a percentage of revenue less distribution expenses directly attributed to certain eligible assets. The first three contingent purchase price payments of $5.0 million, $4.2 million and $3.8 million were paid in the fourth quarters of 2011, 2012 and 2013, respectively. At December 31, 2013, management estimated remaining contingent payments could total $6 million over the two 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 respective AUM. As of December 31, 2013, a liability of $4.4 million representing the estimated fair value of future consideration payments was recorded in Other current liabilities ($2.3 million) and Other long-term liabilities ($2.1 million) (see Note (5)(a) to the Consolidated Financial Statements 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 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 was 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 were recorded as additional goodwill at the time the contingency was resolved. Contingent purchase price payments over the four-year period totaled $49.8 million, which included a payment of $44.7 million related to the second anniversary year in the first quarter 2011. The applicable growth targets were not met for the third or fourth anniversary years. As such, no amount was paid related to these anniversary years.
In 2008, Federated completed the acquisition of certain assets of Clover Capital Management, Inc., an investment manager that specializes in value investing (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 were recorded as additional goodwill at the time the contingency was resolved. The applicable growth targets were not met for the first two anniversary years and as such, no related payments were made. In the first quarter 2012 and 2013, $5.9 million and $3.4 million were paid with regard to the third and fourth anniversary years, respectively. As of December 31, 2013, $9.2 million was accrued in Other current liabilities for the fifth and final anniversary year and was paid in January 2014.
In 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 provided for two forms of contingent purchase price payments payable over the five-year period following the acquisition date based on certain revenue earned by Federated from the Federated InterContinental Fund and/or related asset growth and performance. Contingent purchase price payments over the five-year period totaled $8.0 million, which included payments totaling $1.1 million in 2011 and $2.8 million in 2012, the final year of payment. Contingent payments were recorded as additional goodwill at the time the related contingency was resolved.
Pursuant to other acquisition agreements, Federated may be required to make additional purchase price payments based on a percentage of revenue less certain direct expenses attributable to eligible AUM. The payments could occur annually through 2017. As of December 31, 2013, liabilities totaling $2.1 million, representing the estimated fair value of future consideration payments, were recorded in Other current liabilities ($0.9 million) and Other long-term liabilities ($1.2 million) (see Note (5)(a) to the Consolidated Financial Statements for a discussion regarding the valuation methodology). The liabilities are remeasured at each reporting date with changes in the fair value recognized in Intangible asset related expense and/or Other expense on the Consolidated Statements of Income.
Federated may be required to make certain incentive compensation-related payments through 2018 in connection with various significant employment arrangements. In addition to the $18.5 million of employment-related commitments to be paid in 2014 included in the table above, as of December 31, 2013, Federated may be required to pay up to an additional $33 million over the remaining terms of the arrangements based on the achievement of performance goals. In addition, certain employees have incentive compensation opportunities related to the Federated Kaufmann Large Cap Fund (the Fund Bonus). Based on asset levels at December 31, 2013, $1.7 million would be paid in 2014 as a Fund Bonus payment. Management is unable to

 
2013 Annual Report
23

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

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.
Legal Proceedings. Federated has claims asserted and threatened against it in the ordinary course of business. As of December 31, 2013, Federated does not have any material pending legal proceedings and, as such, does not believe that a material loss related to these claims is reasonably possible.
Variable Interest Entities
Federated is involved with various entities in the normal course of business that may be deemed to be variable interest entities (VIEs). Federated determined that it was the primary beneficiary of certain investment-fund VIEs and, as a result, consolidated the assets, liabilities and operations of these VIEs in its Consolidated Financial Statements. See Note (4) to the Consolidated Financial Statements for more information.
Recent Accounting Pronouncements
For a complete list of new accounting standards recently adopted by Federated and new accounting standards issued, but not yet adopted by Federated, see Note (2) to the Consolidated Financial Statements.
Critical Accounting Policies
Federated’s Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management continually evaluates the accounting policies and estimates it uses to prepare the Consolidated Financial Statements. In general, management’s estimates are based on historical experience, information from third-party professionals and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from those estimates made by management and those differences may be material.
Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that its policies regarding accounting for intangible assets and acquisition-related future consideration liabilities involve a higher degree of judgment and complexity.
Accounting for Intangible Assets. Three aspects of accounting for intangible assets require significant management estimates and judgment: (1) valuation in connection with the initial purchase price allocation; (2) ongoing evaluation for impairment; and (3) reconsideration of an asset's useful life. The process of determining the fair value of identifiable intangible assets at the date of acquisition requires significant management estimates and judgment as to expectations for earnings on the related managed assets acquired, redemption rates for such managed assets, growth from sales efforts and the effects of market conditions. Management often utilizes an independent valuation expert to help with this process. If actual changes in the related managed assets or the projected useful life of the intangible asset, among other assumptions, differ significantly from the estimates and judgments used in determining the initial fair value, the intangible asset amounts recorded in the financial statements could be subject to possible impairment or could require an acceleration in amortization expense that could have a material adverse effect on Federated’s results of operations and/or financial condition.
Indefinite-lived intangible assets are reviewed for impairment annually as of October 1 using a qualitative approach which requires the weighing of positive and negative evidence collected through the consideration of various factors to determine whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired. Management considers entity-specific and macroeconomic factors and their potential impact on significant inputs used to determine the fair value measurement for the indefinite-lived intangible assets including, primarily, changes in AUM, net revenue rates, operating margins, tax rates and discount rates. In addition, management reconsiders on a quarterly basis whether events or circumstances indicate that a change in the useful life may have occurred. Indicators of a possible change in useful life monitored by management generally include a significant decline in the level of managed assets, changes to legal, regulatory or contractual provisions of the renewable investment advisory contracts and reductions in underlying operating cash flows.
If actual changes in the underlying managed assets or other conditions indicate that it is more likely than not that the asset is impaired, or if the estimated useful life is reduced, management estimates the fair value of the intangible asset using an income approach where future cash flows are discounted. Impairment is indicated when the carrying value of the intangible asset exceeds its fair value.

24
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

At December 31, 2013, Federated had $70.5 million and $6.1 million in indefinite-lived and finite-lived intangible assets, respectively, recorded on its Consolidated Balance Sheets. No indicators of impairment existed as of December 31, 2013 or 2012 and no impairments were recorded during the years then ended.
Accounting for Acquisition-Related Future Consideration Liabilities. For acquisitions completed since January 1, 2009, Federated is required to carry its liability for future consideration payments at fair value each period end with changes in fair value recorded in earnings. As of December 31, 2013, the fair value of all acquisition-related future consideration liabilities was $6.5 million. Future consideration payments will be calculated as a percentage of revenue less certain distribution expenses directly attributed to eligible assets. The process of estimating the fair value of the related liabilities requires management estimates and judgment as to expectations for the amount of net revenue to be earned on the applicable AUM, net sales/redemptions for such AUM and the discount rate. Expected net revenue per managed asset is generally based on contract terms, historical experience and management's expectation regarding the impact of potential future fee waivers for certain money market funds to maintain positive or zero net yields. Net flow rates are estimated by evaluating historical net flow rates in similar funds and recent trends in the eligible AUM. The discount rate is estimated as the current market rate of return.
If actual amounts or management’s estimates and judgment regarding changes in the related managed assets, revenue earned from the managed assets or the discount rate, among other assumptions, differ significantly at a period-end date as compared to the estimates and judgments used in determining the fair value as of the prior period-end date, the adjustment to record the change in the fair value of the respective liability could result in a significant favorable or unfavorable adjustment to earnings which could have a material effect on Federated’s consolidated financial position and results of operations. See Note (5)(a) to the Consolidated Financial Statements for additional information regarding this liability.   
Risk Factors
Potential Adverse Effects of a Material Concentration in Revenue. For 2013, approximately 39% of Federated’s total revenue was attributable to money market assets as compared to 47% and 46% for 2012 and 2011, respectively. The change in the relative proportion of Federated's revenue attributable to money market assets from 2012 to 2013 was primarily the result of increases in fee waivers for certain money market funds to maintain positive or zero net yields. The change in the relative proportion of Federated's revenue attributable to money market assets from 2011 to 2012 was primarily the result of decreases in fee waivers for certain money market funds to maintain positive or zero net yields. 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 business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Historically Low Interest Rates. For several years, the Governors have kept the near-zero federal funds rate unchanged and short-term interest rates continued at all-time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the fund’s operating expenses due to these historically low short-term interest rates. Since the fourth quarter 2008, Federated has voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields. These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the waivers.
These voluntary fee waivers are calculated as a percent of AUM in certain money market funds and thus will vary depending upon the asset levels in such funds. In addition, the level of waivers are dependent on several other factors including, but not limited to, yields on instruments available for purchase by the money market funds, changes in expenses of the money market funds and changes in the mix of money market assets. In any given period, a combination of these factors drives the amount of fee waivers necessary in order for certain funds to maintain positive or zero net yields. As an isolated variable, an increase in yields on instruments held by the money market funds will cause the pre-tax impact of fee waivers to decrease. Conversely, as an isolated variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.
With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market funds as well as the distribution 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

 
2013 Annual Report
25

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

invested in prime money market funds as compared to total average money market fund assets should typically result in lower waivers to maintain positive or zero net yields. Conversely, the opposite would also be true.
The impact of such fee waivers on various components of Federated's Consolidated Statements of Income was as follows for the years ended December 31:
 
 
 
 
 
 
 
 
2013

 
2012

in millions
 
2013

 
2012

 
2011

 
vs. 2012

 
vs. 2011

Investment advisory fees
 
$
(255.9
)
 
$
(177.2
)
 
$
(201.6
)
 
(44
)%
 
12
 %
Other service fees
 
(133.1
)
 
(113.8
)
 
(119.1
)
 
(17
)%
 
4
 %
   Total Revenue
 
(389.0
)
 
(291.0
)
 
(320.7
)
 
(34
)%
 
9
 %
Less: Reduction in Distribution expense
 
277.1

 
218.5

 
232.3

 
27
 %
 
(6
)%
   Operating income
 
(111.9
)
 
(72.5
)
 
(88.4
)
 
(54
)%
 
18
 %
Less: Reduction in Noncontrolling interest
 
6.8

 
1.3

 
6.5

 
423
 %
 
(80
)%
Pre-tax impact
 
$
(105.1
)
 
$
(71.2
)
 
$
(81.9
)
 
(48
)%
 
13
 %
The negative pre-tax impact of fee waivers to maintain positive or zero net yields on certain money market funds increased in 2013 as compared to 2012 primarily as a result of lower yields on instruments held by the money market funds. During 2012, improved yields on instruments held by the money market funds caused a decline in these fee waivers as compared to 2011. (See Note (20) to the Consolidated Financial Statements for information regarding the quarterly pre-tax impact of these fee waivers.)
Based on recent commentary from the Governors in a January 29, 2014 press release, "a highly accommodative stance of monetary policy will remain appropriate for a considerable time...," Federated is unable to predict when the Governors will increase their target for the federal funds rate. As such, fee waivers to maintain positive or zero net yields on certain money market funds and the related reduction in distribution expense and net income attributable to noncontrolling interests could continue for the foreseeable future. Assuming asset levels and mix remain constant and based on recent market conditions, fee waivers for the first quarter 2014 may result in a negative pre-tax impact on income of approximately $30 million, which is consistent with the impact to both the third and fourth quarters 2013 (see Note (20) to the Consolidated Financial Statements for additional information on the quarterly impact of these fee waivers). While the level of fee waivers are impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money market fund portfolios would reduce the negative pre-tax impact of these waivers. Management estimates that an increase of 10 basis points in gross yields on securities purchased in money market fund portfolios will likely reduce the negative pre-tax impact of these waivers by approximately 45% from the current levels and an increase of 25 basis points would reduce the impact by approximately 70% from the current levels. The actual amount of future fee waivers and the resulting negative impact of these 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 Governors, the Treasury Department, the SEC, FSOC and other governmental entities, changes in expenses of the money market funds, changes in the mix of money market customer assets, changes in the distribution fee arrangements with third parties, Federated’s willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by third parties. 
Potential Adverse Effects of Rising Interest Rates. Despite the expectation that increases in short-term interest rates above the historically low rates of 0% - 0.25% will reduce the impact of fee waivers to maintain positive or zero net yields, increases in interest rates could also have an adverse effect on Federated’s revenue from money market and other fixed-income products. In a rising short-term interest rate environment, certain investors using money market products and other short-term duration fixed-income products for cash management purposes may shift these investments to direct investments in comparable instruments in order to realize higher yields than those available in money market and other fund products holding lower-yielding instruments. In addition, rising interest rates will tend to reduce the fair value of securities held in various investment portfolios and other products. Management cannot estimate the impact of rising interest rates on Federated’s revenue, but such impact could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of a Decline or Disruption in the Economy or Financial Markets. Economic or financial market downturns (domestic or international), including disruptions in securities and credit markets, may adversely affect the profitability and performance of, demand for and investor confidence in Federated’s investment products and services. In addition, Federated's products may be adversely affected by changes in U.S. markets, downgrades of U.S. credit ratings or the

26
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

U.S. debt ceiling as well as be adversely affected by potential deterioration in international sovereign or currency market conditions.
At December 31, 2013, Federated's liquid assets of $303.2 million included investments in certain Federated-sponsored money market and fluctuating-value funds that may have direct and/or indirect exposures to international sovereign debt and currency risks. Federated has been actively monitoring its money market, fixed-income and equity portfolios to manage sovereign debt and currency risks with respect to certain eurozone countries and the credit rating downgrade and debt ceiling debates in the United States. Federated's experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis. Further, regarding international exposure, for cash invested in certain money market funds (approximately $87 million), only indirect short-term exposures exist primarily to high-quality international bank names that are subject to Federated's credit analysis process and meet the requirements of Rule 2a-7. Federated and the money market and fluctuating NAV funds managed or distributed by Federated also interact with various other financial industry participants, such as counterparties, broker-dealers, banks, clearing organizations, other investment products and customers, as a result of operations, trading, distribution and other relationships. As a result, Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows could be adversely affected by the creditworthiness or financial soundness of other financial industry participants, particularly in times of economic or financial stress or disruption. Although investments held by sponsored money market and fluctuating-value funds are subject to Federated's proprietary investment research process, there can be no assurance that potential losses that may be realized as a result of these exposures will not have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
The ability of Federated to compete and sustain asset and revenue growth is dependent, in part, on the relative attractiveness of the types of investment products Federated offers and its investment performance and strategies under prevailing market conditions. Adverse market conditions or other events could also impact Federated's customers. In the event of extreme circumstances, including economic, political, or business crises, Federated’s products may suffer significant net redemptions in AUM causing severe liquidity issues in its short-term sponsored investment products and declines in the value of and returns on AUM, all of which could cause material adverse effects on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Custody and portfolio accounting services for all of Federated's mutual fund products are outsourced to one of three third-party financial institutions that are leading providers of such mutual fund services. Accounting records for Federated's mutual funds are maintained by these service providers. These service providers, or other vendors of Federated, could also be adversely affected by the adverse market conditions described above. It is not possible to predict with certainty the extent to which the services or products Federated receives from such service providers or vendors would be interrupted or affected by such situations. Accordingly, there can be no assurance that potential service interruption or Federated’s ability to find a suitable replacement would not have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Changes in Laws and Regulations on Federated’s Investment Management Business. Federated and its investment management business are subject to extensive regulation in the United States and abroad. Federated and the Federated Funds are subject to Federal securities laws, principally the Securities Act of 1933, the Investment Company Act of 1940 (Investment Company Act), the Investment Advisers Act of 1940 (Advisers Act), state laws regarding securities fraud and regulations promulgated by various regulatory authorities, including the SEC, the Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE). Federated, and certain Federated Funds, are also subject to regulation by the U.S. Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). Federated is also affected by certain regulations governing banks and other financial institutions. Federated's operations outside of the United States are subject to foreign laws and regulation by foreign regulatory authorities, such as the U.K. Financial Conduct Authority (FCA) for its London-based operations, the Central Bank of Ireland for its Dublin-based operations, the German Federal Financial Supervisory Authority for its Frankfurt-based operations and the Australian Securities and Investments Commission for its Melbourne-based operations. Changes in laws, regulations or governmental policies, both domestically and abroad, and the costs associated with compliance, could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows.
From time to time, the Federal securities laws have been augmented substantially. For example, among other measures, Federated has been impacted by the Sarbanes-Oxley Act of 2002, the Patriot Act of 2001, the Gramm-Leach-Bliley Act of 1999 and the Dodd-Frank Act. Federated and the domestic Federated Funds continue to be primarily regulated by the SEC. As a result of the Dodd-Frank Act and certain rule amendments by the CFTC, Federated and certain Federated Funds also are regulated by the CFTC and NFA due to these funds investing in futures, swaps or certain other commodity interests in more

 
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than de minimis amounts. In addition, the Dodd-Frank Act provides for a new systemic risk regulation regime under which it is possible that Federated, and/or any one or more of the Federated Funds, could be subject to designation as a systemically important financial institution by FSOC, thereby resulting in additional regulation by the Governors in addition to primary regulation by the SEC. Any such designation would subject the designated entity to enhanced banking-oriented measures, including capital and liquidity requirements, leverage limits, enhanced public disclosures and risk management requirements. Other provisions of the Dodd-Frank Act may affect intermediaries in their sale or use of Federated's products. Prior to complete implementation, it is difficult to assess the full impact of the Dodd-Frank Act on Federated, but the impact could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
In addition, during the past few years regulators such as the SEC, FINRA, CFTC and NYSE have adopted other regulations and amendments that have increased Federated's operating expenses and affected the conduct of its business, and may continue to do so. Additional regulations or interpretations have been, or may be, proposed by regulators such as the SEC, CFTC, FINRA and/or NYSE which, if adopted or issued, may also increase Federated's operating expenses and affect the conduct of its business. International regulators, such as the FCA, have also adopted and proposed regulations that could increase Federated's operating expenses and affect the conduct of its business.
Over the past few years, various service industries, including mutual fund service providers, have been the subject of changes in tax policy that impact their state and local tax liability. Changes that have been adopted or proposed include (1) an expansion of the nature of a service company's activities that subject it to tax in a jurisdiction, (2) a change in the methodology by which multi-state companies apportion their income between jurisdictions, and (3) a requirement that affiliated companies calculate their state tax as one combined entity. As adopted changes become effective and additional jurisdictions effect similar changes, there could be a material adverse effect on Federated's tax liability and effective tax rate and, as a result, net income. Various investment products, such as municipal and tax-free Federated Funds, also may be impacted by tax changes, which could have an adverse effect on the products and Federated’s business, results of operations, financial condition and/or cash flows.
Current Regulatory Environment - Domestic
In January 2010, the SEC adopted extensive amendments to 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 2010 and 2011, Federated dedicated internal resources to comply with these amendments including efforts to enhance our information systems and improve related reporting capabilities. These efforts were internally sourced and not material to Federated's results of operations, financial condition or cash flows for those years. 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 in connection with the U.S. debt ceiling debate and subsequent downgrade of the country's credit rating in 2011, the European debt crisis in 2011/2012 and its ongoing fallout as well as the U.S. debt ceiling debate in 2013.
Since January 2010, the SEC has been working to develop a proposal for additional reforms related to money market funds. On June 5, 2013, the SEC issued such a rule proposal for public comment. The SEC's proposal was lengthy (approximately 700 pages) and included two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating NAV for institutional prime money market funds and other money market funds (such as, for example, municipal money market funds) other than government and retail money market funds. The other alternative would allow a fund's board to use liquidity fees and redemption gates when the fund fails to maintain the prescribed liquidity threshold. In addition, in the case of either alternative, the proposal would eliminate the amortized cost method of valuation of securities maturing in more than 60 days while permitting the use of the penny rounding method to maintain a stable share price for money market funds not required to have a floating NAV. The proposal also included additional diversification and disclosure measures that would apply under either alternative.
Federated supports liquidity fees and redemption gates in certain contexts. Federated believes the floating NAV, if enacted, would significantly reduce the utility and attractiveness 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. The elimination of the amortized cost method of valuation of securities also could impact the usefulness of money market funds as a cash management product. If ultimately enacted, the floating NAV would be detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. The elimination of the amortized cost method of valuation of securities, if ultimately enacted, also could be detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows.

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Management reviewed the SEC proposal and actively participated in the public comment process both individually through the filing of 13 comment letters and with industry groups. While the public comment period formally closed on September 17, 2013, comments on the SEC's proposal have continued to be submitted, including additional comment letters submitted on behalf of Federated. Comment letters are available on the SEC's website at http://www.sec.gov/comments/s7-03-13/s70313.shtml. Management does not expect final rules to be adopted prior to the second or third quarter of 2014 given, among other things, the number of industry comments and the complexity of the proposed rule amendments, as well as the SEC's regulatory agenda published in late 2013, which specifies an October 2014 timetable for final action on the SEC's proposal. Federated is unable to assess the degree of any potential impact the SEC proposed reforms may have on its business, results of operations, financial condition and/or cash flows until any rule amendments are finalized, as the final amendments could vary significantly from the form in which proposed. Moreover, the SEC's proposal also contemplates that, once the final amendments become effective, there would be staggered compliance dates: (1) if the fluctuating NAV alternative is adopted, an additional two years after the effective date for any reforms relating to that alternative; (2) if the liquidity fee and redemption gate alternative is adopted, an additional one year after the effective date for any reforms relating to that alternative; and (3) any reforms not specifically related to either the fluctuating NAV nor liquidity fee and redemption gate alternatives would have a compliance date of nine months after the final amendments become effective.
FSOC may recommend new or heightened regulation for "nonbank financial companies" under Section 120 of the Dodd-Frank Act. On April 3, 2013, the Governors issued a final regulation, which became effective on May 6, 2013, that defines the term "predominantly engaged in financial activities" for purposes of identifying "nonbank financial companies" under the Dodd-Frank Act. In the adopting release for the regulation, the Governors stated that they believe "that it is clear that open-end investment companies, such as mutual funds including money market funds, ... engage in financial activities" for the purpose of asserting regulatory jurisdiction. Management respectfully disagrees with this position. Management believes that (1) the final regulation is inconsistent with the clear language and intent of the Dodd-Frank Act, (2) the conclusion that mutual funds, including money market mutual funds, fall within the scope of "financial activities" is without a valid statutory basis and (3) Congress intended the scope of "financial activities" for Dodd-Frank Act regulation to be strictly limited to specific lines of business previously defined under the Bank Holding Company Act, which historically have not been viewed as including mutual funds as a specific line of business.
In a Congressional Appropriations Committee conference report that accompanied the Consolidated Appropriations Act, 2014, which was signed into law by President Obama on January 17, 2014, Congress instructed the SEC to undertake a “rigorous economic analysis” before promulgating its final money market fund proposal, and indicated that the “Committee expects that the final rules will take into account the substantive concerns of stakeholders who use these products for short-term financing needs.” In the conference report, Congress also expressed that “[i]mpairing or restricting the use of money market funds could potentially result in a decrease in the ability of these products to provide liquidity, potentially resulting in hundreds of market participants issuing longer-term debt, significantly increasing their funding costs, slowing expansion rates, and depressing jobs and economic growth.” In addition to underscoring the importance to the capital markets of money market funds as currently structured, management believes that the conference report reflects Congress’ view that the regulation of money market funds is within the purview of the SEC, not FSOC.
On November 1, 2013, Federated also responded to the SEC’s request for comment on a September 2013 report of the Treasury Department’s Office of Financial Research entitled “Asset Management and Financial Stability” (the OFR Report), which was prepared at the request of FSOC. Federated believes that the OFR Report is lacking in both substance and depth of analysis in its effort to justify FSOC’s and the Governors' role in fundamentally changing the structure and operation of investment managers, investors and the markets. While the SEC requested comments to be submitted by November 1, 2013, comments have continued to be submitted. Comment letters are available on the SEC's website at http://www.sec.gov/comments/am-1/am-1.shtml.
Federated is unable to assess whether, or the degree to which, any of the Federated Funds, including money market funds, could ultimately be designated a systematically important nonbank financial company by FSOC. In management's view, the issuance of final regulations is, and any reforms ultimately put into effect would be, detrimental to Federated's money market fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact any reforms or other actions by the Governors, FSOC or other governmental entities may have on its business, results of operations, financial condition and/or cash flows at this time.
Current Regulatory Environment - Europe
European-based money market funds face regulatory reform pressure in Europe similar to that faced in the U.S. The European Commission released its money market fund reform proposal on September 4, 2013. The proposal would permit either floating NAV money market funds or constant NAV money market funds subject to capital requirements. Under the proposal, a constant

 
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NAV money market fund generally must either build a capital buffer of 3% or convert to a floating NAV money market fund. The proposal is subject to the approval of the European Parliament and European Council and the final regulation could vary materially from that of the proposal. Management does not anticipate agreement on a final regulation before late fourth quarter 2014.
Eleven European countries continue to develop the FTT proposal. Although a revised draft of this proposal may be presented during the second quarter of 2014, management does not expect the FTT to be effective in 2014. Notwithstanding challenges to its legality, the participating countries continue to consider whether the FTT should be introduced in stages, with perhaps stocks being taxed first. Debate also continues regarding whether certain types of transactions, such as certain derivatives and bonds, should be exempted, in which country the transaction should be taxed (country of issue, country of purchase, or both), the allocation of taxes collected and certain other fundamental principles. Once agreed upon, final terms of the proposed FTT also will be subject to additional government approval prior to enactment.
European money market reform and the imposition of the FTT, particularly with its initially proposed broad application, would each be detrimental to Federated's fund business and could materially and adversely affect Federated’s business, results of operations, financial condition and/or cash flows. Federated is unable to assess the degree of any potential impact that European money market reform proposals or the FTT may have on its business, results of operations, financial condition and/or cash flows until such proposals are finalized and approved or the FTT is enacted.
On January 8, 2014, the FSB also published for comment as a consultative document “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions” (Consultation). The FSB is an international organization, of which the Governors, the SEC and the Treasury Department are members, that was established to coordinate, at the international level, the work of national authorities and bodies in developing and promoting the implementation of regulatory policies. The Consultation sets forth proposed methodologies for identifying systemically important non-bank, non-insurance company financial institutions, including, among others, “market intermediaries” which the Consultation appears to define as including investment advisers, brokers and certain other intermediaries, and “investment funds,” which the Consultation appears to define as including money market funds, other open-end or closed-end mutual funds, and hedge funds and other private funds. The proposed methodologies include consideration of size (U.S. $100 billion is a proposed materiality threshold), exposures, complexity, interconnectedness, leverage and other factors. The Consultation specifically notes that, in addition to individual funds, it may also be necessary to consider families of funds following the same or similar investment strategies. The deadline for the formal comment period on the Consultation is April 7, 2014. Federated is unable to assess whether, or the degree to which Federated, any of its investment management subsidiaries or any of the Federated Funds, including money market funds, could ultimately be determined to be a significantly important financial institution.
Potential Adverse Effect of Providing Financial Support to Investment Products. Federated may, at its sole discretion, from time to time elect to provide financial support to its sponsored investment products. Providing such support utilizes capital that would otherwise be available for other corporate purposes. Losses on such support, or failure to have or devote sufficient capital to support products, could have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Risk of Federated’s Money Market Products’ Ability to Maintain a Stable $1.00 Net Asset Value. Approximately 39% of Federated’s total revenue for 2013 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the Federal Deposit Insurance Corporation. Although money market funds seek to preserve an NAV of $1.00 per share, it is possible for an investor to lose money by investing in these funds. Federated devotes substantial resources including significant credit analysis to the management of its products. Federated money market funds have always maintained a $1.00 NAV; however, there is no guarantee that such results will be achieved in the future. Market conditions could lead to a limited supply of money market fund securities and severe liquidity issues and/or further persistent declines in or additional prolonged periods of historically low yields in money market products which could impact their NAVs and performance. If the NAV of a Federated money market fund were to decline to less than $1.00 per share, Federated money market funds would likely experience significant redemptions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated’s business, results of operations, financial condition and/or cash flows.
No Assurance of Access to Sufficient Liquidity. From time to time, Federated’s operations may require more cash than is then available from operations. In these circumstances, it may be necessary to borrow from lending facilities or to raise capital by securing new debt or by selling shares of Federated equity or debt securities. Federated’s ability to raise additional capital in the future will be affected by several factors including Federated’s creditworthiness, the fair value of Federated’s common stock, as

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well as general market conditions. There can be no assurance that Federated will be able to obtain these funds and financing on acceptable terms, if at all, and if Federated cannot obtain such funds, it could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
Retaining and Recruiting Key Personnel. Federated’s ability to locate and retain quality personnel has contributed significantly to its growth and success and is important to attracting and retaining customers. The market for qualified executives, investment managers, analysts, traders, sales representatives and other key personnel is extremely competitive. There can be no assurance that Federated will be successful in its efforts to recruit and retain the required personnel. Federated has encouraged the continued retention of its executives and other key personnel through measures such as providing competitive compensation arrangements and, in certain cases, employment agreements. The loss of any such personnel could have an adverse effect on Federated. In certain circumstances, the departure of key employees could cause higher redemption rates for certain AUM or the loss of client accounts. Moreover, since certain of Federated’s products contribute significantly to its revenues and earnings, the loss of even a small number of key personnel associated with these products could have a disproportionate impact on Federated’s business.
Various executives, investment, sales and other key personnel own restricted stock subject to vesting periods of up to ten years from the date awarded and to provisions that require resale or forfeiture to Federated in certain circumstances upon termination of employment. In addition, certain of these employees are employed under contracts which require periodic review of compensation and contain restrictive covenants with regard to divulging confidential information and engaging in competitive activities.
Potential Adverse Effects of Increased Competition in the Investment Management Business. The investment management business is highly competitive. Federated competes in the management and distribution of mutual funds and Separate Accounts with other fund management companies, national and regional broker/dealers, commercial banks, insurance companies and other institutions. Many of these competitors have substantially greater resources and brand recognition than Federated. Competition is based on various factors, including business reputation, investment performance, quality of service, the strength and continuity of management and selling relationships, distribution services offered, the range of products offered and fees charged. As with any highly competitive market, competitive pricing structures are important. If competitors charge lower fees for similar products, Federated may decide to reduce the fees on its own products (either directly on a gross basis or on a net basis through fee waivers) in order to retain or attract customers. Such fee reductions could have a material adverse effect on Federated’s business, results of operations, financial condition and/or cash flows.
Many of Federated’s products are designed for use by institutions such as banks, insurance companies and other corporations. A large portion of Federated’s managed assets, particularly money market and fixed-income assets, are held by institutional investors. Because most institutional investment vehicles are sold without sales commissions at either the time of purchase or the time of redemption, institutional investors may be more inclined to transfer their assets among various institutional funds than investors in retail mutual funds.
 
A significant portion of Federated’s revenue is derived from providing mutual funds to the wealth management and trust market, comprising approximately 1,800 banks and other financial institutions. Future profitability of Federated will be adversely affected if it is unable to retain or grow its share of this market, and could also be adversely affected by consolidations in the banking industry, as well as regulatory changes.
Potential Adverse Effects of Changes in Federated’s Distribution Channels. Federated acts as a wholesaler of investment products to financial intermediaries including banks, broker/dealers, registered investment advisers and other financial planners. Federated also sells investment products directly to corporations and institutions. There can be no assurance that Federated will continue to have access to the financial intermediaries that currently distribute Federated products or that Federated’s relationship with such intermediaries will continue over time. In addition, exclusive of the impacts of minimum yield waivers and related reductions in distribution expense to maintain positive or zero net yields, Federated has experienced increases in the cost of distribution as a percentage of total revenue from 31% in 2007 to over 38% in 2013. Federated expects such costs to continue to increase in total due to asset growth and per dollar of revenue due to the competitive pressures of the mutual fund business. Higher distribution costs reduce Federated’s operating and net income.
Adverse Effects of Declines in the Amount of or Changes in the Mix of Assets Under Management. A significant portion of Federated’s revenue is derived from investment advisory fees, which are based on the value of managed assets and vary with the type of asset being managed, with higher fees generally earned on equity products than on fixed-income and money market products and a liquidation portfolio. Likewise, mutual fund products generally have a higher management-fee rate than Separate Accounts, which in turn typically have a higher management-fee rate than a liquidation portfolio. Additionally, certain

 
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components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship. Consequently, significant fluctuations in the fair value of securities held by, or the level of redemptions from, the funds or other products advised by Federated may materially affect the amount of managed assets and thus Federated’s revenue, profitability and ability to grow. Similarly, changes in Federated’s average asset mix across both asset and product types have a direct impact on Federated’s revenue and profitability. Federated generally pays out a larger portion of the revenue earned from managed assets in money market funds than the revenue earned from managed assets in equity or fixed-income funds. Substantially all of Federated’s managed assets are in investment products that permit investors to redeem their investment at any time. Additionally, changing market conditions may cause a shift in Federated’s asset mix towards money market and fixed-income products which may cause a decline in Federated’s revenue and net income.
Adverse Effects of Poor Investment Performance. Success in the investment management business is largely dependent on investment performance relative to market conditions and the performance of competing products. Good performance generally assists retention and growth of managed assets, resulting in additional revenues. Conversely, poor performance tends to result in decreased sales and increased redemptions with corresponding decreases in revenues to Federated. Poor performance could, therefore, have a material adverse effect on Federated’s business (including, but not limited to, business prospects), results of operations, financial condition and/or cash flows. The effects of poor performance on Federated could be magnified where assets or customers are concentrated in certain products, asset classes or sectors. In terms of revenue concentration by product, approximately 11% and 10% of Federated’s total revenue for 2013 were derived from services provided to two sponsored funds, the Federated Kaufmann Fund and the Federated Prime Obligations Fund, respectively. A significant and prolonged decline in the AUM in these funds could have a material adverse effect on Federated’s future revenues and, to a lesser extent, net income, due to related reductions to distribution expenses associated with these funds.
Operational Risks. Federated's business operations are supported internally and through management of relationships with various third party service providers. Operational risks include, but are not limited to, improper, inefficient, or unauthorized execution, processing, pricing and/or monitoring of transactions, deficiencies in operating systems, business disruptions, inadequacies or breaches in Federated’s or a service provider's internal control processes, unauthorized disclosure of confidential information and noncompliance with regulatory requirements. As Federated's business expands, operational risk increases both domestically and internationally. Management relies on its employees and systems, and those of Federated's service providers, to comply with established procedures, controls and regulatory requirements. Breakdown or improper use of systems, human error or improper action by employees or service providers, or noncompliance with regulatory rules, could cause material adverse effects on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
No Assurance of Successful Future Acquisitions. Federated’s business strategy contemplates the acquisition of other investment management companies as well as investment assets, both domestically and internationally. There can be no assurance that Federated will find suitable acquisition candidates at acceptable prices, have sufficient capital resources to realize its acquisition strategy, be successful in entering into definitive agreements for desired acquisitions, or successfully integrate acquired companies into Federated, or that any such acquisitions, if consummated, will prove to be advantageous to Federated.
Impairment Risk. At December 31, 2013, Federated had intangible assets including goodwill totaling $735.3 million on its Consolidated Balance Sheets, the vast majority of which represents assets capitalized in connection with Federated’s acquisitions and business combinations. Federated may not realize the value of these assets. Management performs an annual review of the carrying values of goodwill and indefinite-lived intangible assets and periodic reviews of the carrying values of all other assets to determine whether events and circumstances indicate that an impairment in value may have occurred. A variety of factors could cause the carrying value of an asset to become impaired. Should a review indicate impairment, a write-down of the carrying value of the asset would occur, resulting in a non-cash charge which would adversely affect Federated’s financial position and results of operations for the period.
Systems and Technology Risks. Federated utilizes software and related technologies throughout its business including both proprietary systems and those provided by outside vendors. Unanticipated issues could occur and it is not possible to predict with certainty all of the adverse effects that could result from a failure of Federated or a third party to address computer system problems. Data or model imprecision, software or other technology malfunctions, programming inaccuracies and similar or other circumstances or events may impair the performance of systems and technology. Accordingly, there can be no assurance that potential system interruptions, other technology-related issues or the cost necessary to rectify the problems would not have a material adverse effect on Federated’s business, financial condition, results of operations or business prospects. In addition, Federated's and its service providers' operating systems are dependent on the effectiveness of information security policies and procedures which help to ensure that its and its service providers' systems are protected from cyber-security incidents such as

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attacks by hackers, viruses, worms or other methods. Any such attacks could result in unauthorized access to Federated's or its service providers' systems which could cause a business interruption or the loss of proprietary information and/or sensitive or confidential client information. While Federated cannot predict the financial or reputational impact to its business resulting from any such situations, the occurrence of such a situation or similar incident could have a material adverse effect on Federated’s business (including, but not limited to, reputation), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Reputational Harm. Any material losses in client or shareholder confidence in Federated or in the mutual fund industry as a result of potential litigation, economic or financial market downturns or disruptions, material errors in public news reports, misconduct, rumors on the internet or other matters could increase redemptions from and/or reduce sales of Federated Funds and other investment management services, resulting in a decrease in future revenues.
Adverse Effects of Termination or Failure to Renew Fund Agreements. A substantial majority of Federated’s revenues are derived from investment management agreements with sponsored funds that, as required by law, are terminable upon 60 days notice. In addition, each such investment management agreement must be approved and renewed annually by each fund’s board of directors or trustees, including independent members of the board, or its shareholders, as required by law. Failure to renew, changes resulting in lower fees, or termination of a significant number of these agreements could have a material adverse impact on Federated. As required by the Investment Company Act, each investment advisory agreement with a mutual fund automatically terminates upon its assignment, although new investment advisory agreements may be approved by the mutual fund’s directors or trustees and shareholders. A sale or other transfer of a sufficient number of shares of Federated’s voting securities to transfer control of Federated could be deemed an assignment in certain circumstances. An assignment, actual or constructive, will trigger these termination provisions and may adversely affect Federated’s ability to realize the value of these agreements. As required by the Advisers Act, investment advisory agreements for Separate Accounts that are not investment companies also provide that consent is required from Federated's customers before the agreements may be assigned and an assignment, actual or constructive, also will trigger these consent requirements and may adversely affect Federated's ability to realize the value of these agreements.
Under the terms of a settlement agreement with the SEC and New York State Attorney General, a Federated investment advisory subsidiary may not serve as investment adviser to any registered investment company unless: (1) at least 75% of the fund’s directors are independent of Federated; (2) the chairman of each such fund is independent of Federated; (3) no action may be taken by the fund’s board of directors or trustees or any committee thereof unless approved by a majority of the independent board members of the fund or committee, respectively; and (4) the fund appoints a senior officer who reports to the independent directors or trustees and is responsible for monitoring compliance by the fund with applicable laws and fiduciary duties and for managing the process by which management fees charged to a fund are approved.
Potential Adverse Effects of Unpredictable Events. Unpredictable events, including natural disaster, pandemic, war and terrorist attack, could adversely impact Federated’s or Federated's service providers' or customers' ability to conduct business. Such events could cause disruptions in economic conditions and financial markets, system interruption, loss of life, unavailability of personnel or additional costs. As such, there can be no assurance that unpredictable events, or the costs to address such events, would not have a material adverse effect on Federated’s business (including, but not limited to, business prospects), results of operations, financial condition and/or cash flows.
Federated’s status as a "controlled company." Federated has two classes of common stock: Class A Common Stock, which has voting power, and Class B Common Stock, which is non-voting except in certain limited circumstances. All of the outstanding shares of Federated's Class A Common Stock are held by the Voting Shares Irrevocable Trust for the benefit of the members of the family of John F. Donahue. The three trustees of this trust are Mr. John F. Donahue, the Chairman of Federated's board of directors, his wife, and his son, Mr. J. Christopher Donahue, who is Federated's President, Chief Executive Officer and a director. Accordingly, Federated qualifies as a “controlled company” under Section 303A of the NYSE Listed Company Manual. As a controlled company, Federated qualifies for and relies upon exemptions from several NYSE corporate governance requirements, including requirements that: (1) a majority of the Board of Directors consists of independent directors; and (2) the entity maintains a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities. As a result, Federated's board does not have a majority of independent directors nor does it maintain a nominating/corporate governance committee. Federated is also exempt as a "controlled company" from certain additional independence requirements and responsibilities regarding compensation advisers applicable to Compensation Committee members, including those that became effective in 2013.


 
2013 Annual Report
33

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

Quantitative and Qualitative Disclosures About Market Risk
In the normal course of its business, Federated is exposed to fluctuations in the securities market and general economy. As an investment manager, Federated’s business requires that it continuously identify, assess, monitor and manage market and other risks including those risks affecting its own investment portfolio. Federated invests in sponsored investment companies for the primary purpose of generating returns from capital appreciation, investment income, or both, or in the case of newly launched sponsored investment companies or new separate account strategies, in order to provide the product with investable cash to establish a performance history. These investments expose Federated to various market risks. A single investment can expose Federated to multiple risks arising from changes in interest rates, credit ratings, equity prices and foreign currency exchange rates. Federated manages its exposure to market risk by diversifying its investments among different asset classes and by altering its investment holdings from time to time in response to changes in market risks and other factors. In addition, in certain cases, Federated enters into derivative instruments for purposes of hedging its market risks.
Interest-rate risk is the risk that unplanned fluctuations in earnings will result from interest-rate volatility while credit risk is the risk that an issuer of debt securities may default on its obligations. At December 31, 2013 and 2012, Federated was exposed to interest-rate risk as a result of holding investments in fixed-income sponsored funds ($102.3 million and $86.3 million, respectively) and investments in debt securities held by certain consolidated investment companies ($25.7 million and $33.8 million, respectively). At December 31, 2013 and 2012, management considered a hypothetical 150-basis-point fluctuation in interest rates, a 50-basis point increase over the rate used in the prior year based on an expectation that such an increase may be reasonably possible. Management determined that the impact of such a fluctuation on these investments would not have a material effect on Federated's financial condition or results of operations for investments held as of December 31, 2013, but could have impacted Federated's financial condition or results of operations by approximately $5 million for investments held as of December 31, 2012.
These investments also exposed Federated to credit risk at December 31, 2013 and 2012. At December 31, 2013 and 2012, management considered a hypothetical 100-basis-point fluctuation in credit spreads, a 50-basis point increase over the rate used in the prior year based on an expectation that such an increase may be reasonably possible. Management determined that the impact of such a fluctuation on these investments held at both December 31, 2013 and 2012 could impact Federated's financial condition and results of operations by approximately $5 million.
In 2011, Federated entered into the Credit Agreement which amended and restated its previous term-loan facility. The Swap associated with the previous term-loan facility remains in effect. Federated entered into the Swap to convert the variable rate on its term loan to a fixed rate thereby mitigating its exposure to interest-rate risk. As of December 31, 2013 and 2012, Federated’s fair value on the Swap was a liability of $5.1 million and $11.2 million, respectively, which is recognized in earnings as a component of Federated’s fixed interest rate of 3.646% over the term of the Swap. Near-term reductions in the fair value of the Swap are reasonably possible as a result of changes in projected interest rates. Management performed a sensitivity analysis of the fair value of the Swap and considered hypothetical six- and twelve-month forward shifts in the assumed yield curve. The analysis showed that a six- and twelve-month forward shift in the current yield curve would lead to a decrease in the fair value of the Swap of $0.1 million and $0.2 million, respectively, as of December 31, 2013 and $0.3 million and $0.4 million, respectively, as of December 31, 2012. Gains and losses in the fair value of the Swap are recorded in Accumulated other comprehensive loss, net of tax on the Consolidated Balance Sheets.
Price risk is the risk that the market price of an investment will decline and ultimately result in the recognition of a loss. Federated was exposed to price risk as a result of its $44.2 million and $62.8 million investment in sponsored equity products at December 31, 2013 and 2012, respectively. Federated’s investment in these products represents its maximum exposure to loss. At both December 31, 2013 and 2012, management considered a hypothetical 20% fluctuation in fair value and determined that the impact of such a fluctuation on these investments could impact Federated’s financial condition and results of operations by approximately $9 million and $13 million, respectively.
Foreign exchange risk is the risk that an investment’s value will change due to changes in currency exchange rates. As of December 31, 2013 and 2012, Federated was exposed to foreign exchange risk as a result of its investments in sponsored mutual funds holding non-U.S. dollar securities as well as non-U.S. dollar operating cash accounts held at certain foreign operating subsidiaries of Federated ($7.7 million and $13.6 million, respectively). These investments and cash accounts primarily exposed Federated to risk of changes in the Euro and the Japanese Yen at December 31, 2013 and the Euro and the British Pound at December 31, 2012. Of these investments and cash accounts held at both December 31, 2013 and 2012, management considered a hypothetical 20% fluctuation in these currency exchange rates and determined that the impact of such a fluctuation on these investments and cash accounts would not have a material effect on Federated's financial condition or results of operations. Federated also has certain investments in foreign operations, whose net assets and results of operations are

34
Federated Investors, Inc.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)
of Financial Condition and Results of Operations

exposed to foreign currency translation risk when translated into U.S. dollars upon consolidation. Federated does not hedge these exposures.
In addition to market risks attributable to Federated’s investments, substantially all of Federated's revenue is calculated based on AUM. Accordingly, changes in the market value of managed assets have a direct impact on Federated's revenue. Declines in the fair values of these assets as a result of changes in the market or other conditions will negatively impact revenue and net income. Assuming the ratio of revenue from managed assets to average AUM for 2013 or 2012 remained unchanged, a 20% decline in the average AUM for either period would result in a corresponding 20% decline in revenue. Certain expenses including distribution and compensation and related expenses may not vary in proportion with changes in the market value of managed assets. As such, the impact on net income of a decline in the market values of managed assets may be greater or less than the percentage decline in the market value of managed assets. For further discussion of managed assets and factors that impact Federated’s revenue, see the sections entitled General, Asset Highlights, Contractual Obligations and Contingent Liabilities and Risk Factors herein as well as the section entitled Regulatory Matters in Federated’s Annual Report on Form 10‑K for the year ended December 31, 2013 on file with the SEC.

 
2013 Annual Report
35

MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
 

Federated Investors, Inc.’s (Federated) management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements in this annual report. These consolidated financial statements and notes have been prepared in conformity with U.S. generally accepted accounting principles from accounting records which management believes fairly and accurately reflect Federated’s operations and financial position. The consolidated financial statements include amounts based on management’s best estimates and judgments considering currently available information and management’s view of current conditions and circumstances.
Management is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to provide reasonable assurance of the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the effectiveness of Federated’s internal control over financial reporting as of December 31, 2013, in relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based on this assessment, management concluded that, as of December 31, 2013, Federated’s internal controls over financial reporting were effective. Ernst & Young LLP, independent registered public accounting firm, has audited the consolidated financial statements included in this annual report and has issued an attestation report on Federated’s internal control over financial reporting.

Federated Investors, Inc.
        
    
/s/ J. Christopher Donahue
 
/s/ Thomas R. Donahue
J. Christopher Donahue
 
Thomas R. Donahue
President and Chief Executive Officer
 
Chief Financial Officer
 
 
 
February 21, 2014
 
 


36
Federated Investors, Inc.
 

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors and Shareholders
Federated Investors, Inc.
We have audited the accompanying consolidated balance sheets of Federated Investors, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federated Investors, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Federated Investors, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 21, 2014 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young
 

Pittsburgh, Pennsylvania
February 21, 2014

 
2013 Annual Report
37

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders
Federated Investors, Inc.
We have audited Federated Investors, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Federated Investors, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Federated Investors, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Federated Investors, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013 of Federated Investors, Inc. and our report dated February 21, 2014 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young
 

Pittsburgh, Pennsylvania
February 21, 2014
 

38
Federated Investors, Inc.
 

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

December 31,
 
2013

 
2012

ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
104,443

 
$
67,585

Investments—affiliates
 
129,413

 
136,023

Investments—consolidated investment companies
 
53,476

 
51,073

Investments—other
 
4,846

 
3,947

Receivables, net of reserve of $59 and $50, respectively
 
29,320

 
24,120

Prepaid expenses
 
12,860

 
12,986

Other current assets
 
4,960

 
4,328

Total current assets
 
339,318

 
300,062

Long-Term Assets
 

 

Goodwill
 
658,743

 
648,820

Renewable investment advisory contracts
 
68,595

 
68,455

Other intangible assets, net
 
8,007

 
10,582

Property and equipment, net
 
40,088

 
38,912

Other long-term assets
 
21,046

 
23,230

Total long-term assets
 
796,479

 
789,999

Total assets
 
$
1,135,797

 
$
1,090,061

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Short-term debt
 
$
77,917

 
$
42,500

Accounts payable and accrued expenses
 
36,364

 
45,255

Accrued compensation and benefits
 
70,272

 
68,172