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Federated Investors 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________
FORM 10-Q
____________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-14818
___________________________________________________
Federated Investors, Inc.
(Exact name of registrant as specified in its charter)
____________________________________________________
Pennsylvania
 
25-1111467
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Federated Investors Tower
Pittsburgh, Pennsylvania
 
15222-3779
(Address of principal executive offices)
 
(Zip Code)
(Registrant’s telephone number, including area code) 412-288-1900
 ___________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of October 19, 2015, the Registrant had outstanding 9,000 shares of Class A Common Stock and 104,103,163 shares of Class B Common Stock.

 


Table of Contents
Special Note Regarding Forward-Looking Information
Certain statements in this report on Form 10-Q constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause the actual results, levels of activity, performance or achievements of Federated Investors, Inc. and its consolidated subsidiaries (Federated), or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such statements include certain statements relating to: asset flows, levels and mix; business mix; levels of revenues, expenses, gains, losses, income and earnings; obligations to make additional contingent or other payments pursuant to acquisition agreements or employment agreements; future cash needs and cash flows; legal proceedings; the timing and impact of increased laws and regulation, including potential, proposed and final rules by U.S. and foreign regulators and government entities; the components and level of, and prospect for, distribution-related expenses; classification and consolidation of investments; the ability to raise additional capital; management’s assessments, beliefs, expectations, assumptions, projections or estimates, including regarding fee rates, the level, degree, continuance, recovery and impact of fee waivers and reimbursements or assumptions of expenses (fee waivers), the level, timing, degree and impact of changes in interest rates, yields or asset levels or mix, legal proceedings, the timing, impact and other consequences of potential, proposed and final rules and other regulation, borrowing, taxes, product and strategy demand, investor preferences, performance, product development and restructuring options and initiatives, including the plans for and timing of such options and initiatives, compliance, and related legal, compliance and other professional services expenses, interest payments or expenses, dedication of resources, indebtedness and certain investments, and liquidity; future principal uses of cash; performance indicators; the adoption and impact of accounting policies and new accounting pronouncements; interest rate, concentration, market and other risks; guarantee and indemnification obligations; and various items set forth under Item 1A - Risk Factors included in Federated's Annual Report on Form 10-K for the year ended December 31, 2014. Among other risks and uncertainties, market conditions may change significantly resulting in changes to Federated’s asset flows, asset levels, asset mix and business mix, which may cause a decline in revenues and net income, result in impairments and increase the amount of fee waivers incurred by Federated. The obligation to make contingent payments is based on net revenue levels and will be affected by the achievement of such levels, and the obligation to make additional payments pursuant to employment arrangements is based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and future uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated’s success in developing, structuring and distributing its products and strategies, potential changes in assets under management and/or changes in the terms or structure of distribution and shareholder services contracts or relationships with intermediaries who offer Federated’s products to customers, and potential increased legal, compliance and other professional services expenses stemming from additional regulation or the dedication of such resources to other initiatives. Federated’s risks and uncertainties also include liquidity and credit risks in Federated’s money market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in fair values of assets under management, investor preferences and confidence, and the ability of Federated to collect fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of 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 Item 1A - Risk Factors included in Federated's Annual Report on Form 10-K for the year ended December 31, 2014.


Part I. Financial Information
Item 1. Financial Statements



 
Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
 
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
141,157

 
$
115,267

Investments—affiliates
 
148,408

 
143,190

Investments—consolidated investment companies
 
25,638

 
31,853

Investments—other
 
6,559

 
7,028

Receivables, net of reserve of $17 and $34, respectively
 
28,407

 
27,965

Prepaid expenses
 
9,309

 
12,931

Other current assets
 
3,416

 
3,821

Total current assets
 
362,894

 
342,055

Long-Term Assets
 
 
 
 
Goodwill
 
659,315

 
658,837

Renewable investment advisory contracts
 
70,582

 
68,970

Other intangible assets, net of accumulated amortization of $21,299 and $40,326, respectively
 
4,911

 
6,040

Property and equipment, net of accumulated depreciation of $53,922 and $57,430, respectively
 
36,458

 
38,638

Other long-term assets
 
22,540

 
25,979

Total long-term assets
 
793,806

 
798,464

Total assets
 
$
1,156,700

 
$
1,140,519

LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Short-term debt
 
$
25,500

 
$
25,500

Accounts payable and accrued expenses
 
39,511

 
34,930

Accrued compensation and benefits
 
60,805

 
75,661

Other current liabilities
 
15,845

 
13,230

Total current liabilities
 
141,661

 
149,321

Long-Term Liabilities
 
 
 
 
Long-term debt
 
197,625

 
216,750

Long-term deferred tax liability, net
 
152,207

 
140,849

Other long-term liabilities
 
19,052

 
20,250

Total long-term liabilities
 
368,884

 
377,849

Total liabilities
 
510,545

 
527,170

Commitments and contingencies (Note (12))
 

 

TEMPORARY EQUITY
 
 
 
 
Redeemable noncontrolling interest in subsidiaries
 
8,611

 
3,697

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

 
189

Class B, no par value, 900,000,000 shares authorized, 109,505,456 shares issued
 
291,968

 
270,831

Additional paid-in capital from treasury stock transactions
 
5

 
0

Retained earnings
 
536,607

 
505,394

Treasury stock, at cost, 5,362,293 and 4,586,809 shares Class B common stock, respectively
 
(189,613
)
 
(165,258
)
Accumulated other comprehensive loss, net of tax
 
(3,545
)
 
(1,662
)
Total Federated Investors, Inc. shareholders’ equity
 
635,611

 
609,494

Nonredeemable noncontrolling interest in subsidiary
 
1,933

 
158

Total permanent equity
 
637,544

 
609,652

Total liabilities, temporary equity and permanent equity
 
$
1,156,700

 
$
1,140,519


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

3


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

Nine Months Ended
 
 
September 30,

September 30,
 
 
2015


2014


2015


2014

Revenue
 
 
 
 
 
 
 
 
Investment advisory fees, net—affiliates
 
$
133,569

 
$
116,122

 
$
385,067

 
$
342,752

Investment advisory fees, net—other
 
25,329

 
24,964

 
74,818

 
70,980

Administrative service fees, net—affiliates
 
53,275

 
52,244

 
157,897

 
159,708

Other service fees, net—affiliates
 
20,295

 
19,082

 
59,010

 
54,695

Other service fees, net—other
 
903

 
3,167

 
3,004

 
9,783

Other, net
 
950

 
1,336

 
3,174

 
3,474

Total revenue
 
234,321

 
216,915

 
682,970

 
641,392

Operating Expenses
 
 
 
 
 
 
 
 
Compensation and related
 
70,624

 
70,724

 
218,062

 
213,176

Distribution
 
58,823

 
53,487

 
166,376

 
156,877

Professional service fees
 
7,823

 
7,944

 
22,990

 
24,502

Systems and communications
 
6,684

 
6,392

 
20,533

 
19,021

Office and occupancy
 
6,552

 
8,241

 
20,115

 
22,442

Advertising and promotional
 
3,310

 
3,271

 
10,285

 
9,668

Travel and related
 
3,183


3,028

 
9,474

 
9,427

Other
 
3,078

 
3,000

 
12,574

 
9,964

Total operating expenses
 
160,077

 
156,087

 
480,409

 
465,077

Operating income
 
74,244

 
60,828

 
202,561

 
176,315

Nonoperating (Expenses) Income
 
 
 
 
 
 
 
 
Investment income, net
 
1,243

 
1,233

 
3,777

 
4,736

(Loss) gain on securities, net
 
(4,292
)
 
(439
)
 
(5,526
)
 
3,983

Debt expense
 
(979
)
 
(2,162
)
 
(3,325
)
 
(7,824
)
Other, net
 
(8
)
 
(4
)
 
(37
)
 
(14
)
Total nonoperating (expenses) income, net
 
(4,036
)
 
(1,372
)
 
(5,111
)
 
881

Income before income taxes
 
70,208

 
59,456

 
197,450

 
177,196

Income tax provision
 
26,072

 
22,197

 
74,633

 
66,978

Net income including the noncontrolling interests in subsidiaries
 
44,136

 
37,259

 
122,817

 
110,218

Less: Net income (loss) attributable to the noncontrolling interests in subsidiaries
 
5

 
(301
)
 
620

 
595

Net income
 
$
44,131

 
$
37,560

 
$
122,197

 
$
109,623

Amounts Attributable to Federated Investors, Inc.
 
 
 
 
 
 
 
Earnings per common share—Basic and Diluted
 
$
0.42

 
$
0.36

 
$
1.17

 
$
1.05

Cash dividends per share
 
$
0.25

 
$
0.25

 
$
0.75

 
$
0.75

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


4


 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015

 
2014

 
2015

 
2014

Net income including the noncontrolling interests in subsidiaries
 
$
44,136

 
$
37,259

 
$
122,817

 
$
110,218

 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
Permanent equity
 
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate swap
 
0

 
14

 
42

 
(85
)
  Reclassification adjustment related to interest rate swap
 
0

 
691

 
227

 
2,524

Unrealized (loss) gain on securities available for sale
 
(2,999
)
 
(842
)
 
(2,611
)
 
466

  Reclassification adjustment related to securities available for sale
 
847

 
(780
)
 
847

 
(2,654
)
Foreign currency items
 
(210
)
 
(530
)
 
(388
)
 
(368
)
Other comprehensive loss
 
(2,362
)
 
(1,447
)
 
(1,883
)
 
(117
)
Comprehensive income including the noncontrolling interests in subsidiaries
 
41,774

 
35,812

 
120,934

 
110,101

Less: Comprehensive (loss) income attributable to redeemable noncontrolling interest in subsidiaries
 
(905
)
 
(195
)
 
(1,288
)
 
599

Less: Comprehensive income (loss) attributable to nonredeemable noncontrolling interest in subsidiary
 
910

 
(106
)
 
1,908

 
(4
)
Comprehensive income attributable to Federated Investors, Inc.
 
$
41,769

 
$
36,113

 
$
120,314

 
$
109,506

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



5


 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Changes in Equity
(dollars in thousands)
(unaudited)
 
 
Federated Investors, Inc. Shareholders' Equity
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-in
Capital from
Treasury
Stock
Transactions
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss, Net of
Tax
 
Total
Shareholders’
Equity
 
Nonredeemable
Noncontrolling
Interest in
Subsidiary
 
Total
Permanent
Equity
 
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
Balance at December 31, 2013
 
$
295,958

 
$
0

 
$
1,022,608

 
$
(751,239
)
 
$
(1,208
)
 
$
566,119

 
$
225

 
$
566,344

 
$
15,517

Net income (loss)
 
0

 
0

 
109,623

 
0

 
0

 
109,623

 
(4
)
 
109,619

 
599

Other comprehensive loss, net of tax
 
0

 
0

 
0

 
0

 
(117
)
 
(117
)
 
0

 
(117
)
 
0

Subscriptions—redeemable noncontrolling interest holders
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
11,092

Consolidation/(deconsolidation)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
54,690

Stock award activity
 
18,219

 
4

 
(13,192
)
 
13,766

 
0

 
18,797

 
0

 
18,797

 
0

Dividends declared
 
0

 
0

 
(78,685
)
 
0

 
0

 
(78,685
)
 
0

 
(78,685
)
 
0

Distributions to noncontrolling interest in subsidiaries
 
0

 
0

 
0

 
0

 
0

 
0

 
(44
)
 
(44
)
 
(3,103
)
Purchase of treasury stock
 
0

 
0

 
0

 
(20,665
)
 
0

 
(20,665
)
 
0

 
(20,665
)
 
0

Balance at September 30, 2014
 
$
314,177

 
$
4

 
$
1,040,354

 
$
(758,138
)
 
$
(1,325
)
 
$
595,072

 
$
177

 
$
595,249

 
$
78,795

Balance at December 31, 2014
 
$
271,020

 
$
0

 
$
505,394

 
$
(165,258
)
 
$
(1,662
)
 
$
609,494

 
$
158

 
$
609,652

 
$
3,697

Net income (loss)
 
0

 
0

 
122,197

 
0

 
0

 
122,197

 
1,908

 
124,105

 
(1,288
)
Other comprehensive loss, net of tax
 
0

 
0

 
0

 
0

 
(1,883
)
 
(1,883
)
 
0

 
(1,883
)
 
0

Subscriptions—redeemable noncontrolling interest holders
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
16,209

Consolidation/(deconsolidation)
 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
(7,105
)
Stock award activity
 
21,137

 
5

 
(12,396
)
 
12,490

 
0

 
21,236

 
0

 
21,236

 
0

Dividends declared
 
0

 
0

 
(78,588
)
 
0

 
0

 
(78,588
)
 
0

 
(78,588
)
 
0

Distributions to noncontrolling interest in subsidiaries
 
0

 
0

 
0

 
0

 
0

 
0

 
(133
)
 
(133
)
 
(2,902
)
Purchase of treasury stock
 
0

 
0

 
0

 
(36,845
)
 
0

 
(36,845
)
 
0

 
(36,845
)
 
0

Balance at September 30, 2015
 
$
292,157

 
$
5

 
$
536,607

 
$
(189,613
)
 
$
(3,545
)
 
$
635,611

 
$
1,933

 
$
637,544

 
$
8,611

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




6


 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
 
Nine Months Ended
 
 
September 30,
 
 
2015

 
2014

Operating Activities
 
 
 
 
Net income including the noncontrolling interests in subsidiaries
 
$
122,817

 
$
110,218

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
 
 
 
 
Amortization of deferred sales commissions
 
11,774

 
8,915

Depreciation and other amortization
 
7,184

 
8,011

Share-based compensation expense
 
17,355

 
16,620

Loss (gain) on disposal of assets
 
2,196

 
(6,754
)
Provision for deferred income taxes
 
13,035

 
14,850

Fair-value adjustments for contingent liabilities
 
377

 
(1,196
)
Impairment of assets
 
1,342

 
0

Consolidation/deconsolidation of investment companies
 
(227
)
 
(21,484
)
Net purchases of trading securities
 
(11,547
)
 
(1,410
)
Deferred sales commissions paid
 
(11,091
)
 
(12,577
)
Contingent deferred sales charges received
 
1,826

 
1,306

Other changes in assets and liabilities:
 
 
 
 
(Increase) decrease in receivables, net
 
(764
)
 
1,152

Decrease in prepaid expenses and other assets
 
6,120

 
4,592

Decrease in accounts payable and accrued expenses
 
(13,354
)
 
(13,919
)
Increase in other liabilities
 
5,180

 
3,366

Net cash provided by operating activities
 
152,223

 
111,690

Investing Activities
 
 
 
 
Purchases of securities available for sale
 
(2,692
)
 
(82,948
)
Cash paid for business acquisitions
 
0

 
(9,697
)
Proceeds from redemptions of securities available for sale
 
1

 
87,117

Cash paid for property and equipment
 
(4,618
)
 
(4,251
)
Net cash used by investing activities
 
(7,309
)
 
(9,779
)
Financing Activities
 
 
 
 
Dividends paid
 
(78,607
)
 
(78,691
)
Purchases of treasury stock
 
(37,106
)
 
(19,198
)
Distributions to noncontrolling interest in subsidiaries
 
(3,035
)
 
(3,147
)
Contributions from noncontrolling interest in subsidiaries
 
16,209

 
11,092

Proceeds from shareholders for share-based compensation
 
99

 
577

Excess tax benefits from share-based compensation
 
2,541

 
1,712

Payments on debt
 
(19,125
)
 
(27,625
)
Other financing activities
 
0

 
(609
)
Net cash used by financing activities
 
(119,024
)
 
(115,889
)
Net increase (decrease) in cash and cash equivalents
 
25,890

 
(13,978
)
Cash and cash equivalents, beginning of period
 
115,267

 
104,443

Cash and cash equivalents, end of period
 
$
141,157

 
$
90,465

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

7

Notes to the Consolidated Financial Statements
(unaudited)



(1) Basis of Presentation

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

In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates, and such differences may be material to the Consolidated Financial Statements.

These financial statements should be read in conjunction with Federated’s Annual Report on Form 10-K for the year ended December 31, 2014. Certain items previously reported have been reclassified to conform with the current period’s presentation.

(2) Significant Accounting Policies

For a listing of Federated’s significant accounting policies, please refer to Federated’s Annual Report on Form 10-K for the year ended December 31, 2014.

(3) Recent Accounting Pronouncements

(a) Revenue Recognition

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued as final, Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) which supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB approved a one-year deferral of the effective date of the update, and issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, on August 12, 2015. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. Early adoption is now permitted as of the original effective date (interim and annual reporting periods in fiscal years beginning after December 15, 2016). The update allows for the use of either the retrospective or modified retrospective approach of adoption. Management is currently evaluating the available transition methods and the potential impact of adoption on Federated's Consolidated Financial Statements.

(b) Consolidation

On February 18, 2015, the FASB issued as final, ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which affects reporting organizations' evaluation of whether they should consolidate certain legal entities. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The update allows for the use of either a full retrospective or a modified retrospective adoption approach. Management is currently evaluating the available transition methods and the potential impact of adoption on Federated's Consolidated Financial Statements.

(c) Accounting for Fees Paid in a Cloud Computing Arrangement

On April 15, 2015, the FASB issued as final, ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance about whether a cloud computing arrangement includes a software license. The update is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The update allows for the use of either a prospective or retrospective adoption approach. Management anticipates electing the prospective method of adoption and is currently evaluating the potential impact of adoption on Federated's Consolidated Financial Statements.


8

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

(d) Disclosure of Investments in Certain Entities that Calculate Net Asset Value per Share

On May 1, 2015, the FASB issued as final, ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value (NAV) per Share (or Its Equivalent). This update requires that all investments for which fair value is measured using the net asset value per share practical expedient be excluded from the fair value hierarchy and modifies certain disclosure requirements. The update is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015, and early adoption is permitted. The update requires the retrospective adoption approach. Management does not expect this update to have a material impact on Federated's Consolidated Financial Statements.

(4) Concentration Risk

(a) Revenue Concentration by Asset Class

The following table summarizes the percentage of total revenue earned from Federated's asset classes for the periods presented:
 
 
Nine Months Ended
 
 
September 30,
 
 
2015

 
2014

Money market assets
 
32
%
 
32
%
Equity assets
 
47
%
 
44
%
Fixed-income assets
 
21
%
 
23
%

The change in the relative proportion of Federated's revenue attributable to equity assets for the first nine months of 2015 as compared to the same period in 2014 was primarily the result of higher average equity assets due to net sales.

Current Regulatory Environment
Federated and its investment management business are subject to extensive regulation in the U.S. and abroad. Federated and its products, such as the Federated sponsored funds (Federated Funds), and strategies are subject to federal securities laws, principally the Securities Act of 1933, the Securities Exchange Act of 1934 (1934 Act), the Investment Company Act of 1940 (1940 Act), the Investment Advisers Act of 1940, state laws regarding securities fraud and regulations promulgated by various regulatory authorities, as well as foreign laws and regulations promulgated by foreign regulatory authorities. In 2014, among other developments, the Securities and Exchange Commission (SEC) promulgated new money market reform rules (the 2014 Money Fund Rules). On April 22, 2015, the SEC published additional guidance regarding the 2014 Money Fund Rules in the form of 2014 Money Market Fund Reform Frequently Asked Questions and Valuation Guidance Frequently Asked Questions (the Money Fund Rules Guidance). On May 20, 2015, the SEC proposed rules seeking to modernize investment company reporting requirements and to require investment advisers to maintain additional performance records and provide to clients additional borrowing and derivative information relating to separate accounts. On September, 22, 2015, the SEC proposed certain rule amendments under the 1940 Act that, if finally adopted as proposed, would require open-end mutual funds (other than money market funds) and exchange traded funds to have a liquidity risk management program that contains certain required elements. Federated is analyzing the potential impact of these reforms. Federated also continues to evaluate the 2014 Money Fund Rules and Money Fund Rules Guidance, on its money market products and strategies, product structuring and development initiatives and business. Internationally, among other developments, European money market fund reforms, similar in some respects to the U.S. reforms, continued to be considered in 2015, but have not been finalized. Federated continues to dedicate internal and external resources to analyze the potential impact of the 2014 Money Fund Rules and Money Fund Rules Guidance, and other regulatory initiatives, on Federated’s business, results of operations, financial condition and/or cash flows. Federated also continues to dedicate resources to planning and implementing product development and restructuring initiatives in response to the 2014 Money Fund Rules and Money Fund Rules Guidance. See Management's Discussion and Analysis for additional information.

Historically Low Short-Term Interest Rates
For several years, the Federal Open Market Committee of the Federal Reserve Board (FOMC) has kept the near-zero federal funds rate unchanged and short-term interest rates continued to be at all-time low levels. In certain money market funds, the gross yield earned by the fund is not sufficient to cover all of the fund's operating expenses due to these historically low short-term interest rates. Since the fourth quarter of 2008, Federated has voluntarily waived fees (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields

9

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

(Voluntary Yield-related Fee Waivers). These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the waivers.

These Voluntary Yield-related Fee Waivers are calculated as a percentage of assets under management (AUM or managed assets) 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 Voluntary Yield-related Fee Waivers. As an isolated variable, an increase in yields on instruments held by the money market funds will cause the pre-tax impact of fee waivers to decrease. Conversely, as an isolated variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.

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

The impact of such fee waivers on various components of Federated's Consolidated Statements of Income was as follows for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(in millions)
 
2015

 
2014

 
2015

 
2014

Revenue
 
$
(83.3
)
 
$
(101.7
)
 
$
(261.6
)
 
$
(310.7
)
Less: Reduction in Distribution expense
 
61.3

 
68.7

 
186.1

 
213.2

Operating income
 
(22.0
)
 
(33.0
)
 
(75.5
)
 
(97.5
)
Less: Reduction in Noncontrolling interests
 
1.7

 
2.8

 
6.0

 
8.0

Pre-tax impact
 
$
(20.3
)
 
$
(30.2
)
 
$
(69.5
)
 
$
(89.5
)

The negative pre-tax impact of Voluntary Yield-related Fee Waivers decreased for the nine-month period ended September 30, 2015 as compared to the same period in 2014 due primarily to higher yields on instruments held by the money market funds and a decrease in average money market assets.
Based on commentary from the FOMC in a September 17, 2015 press release, (i.e. "the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,") Federated is unable to predict when the FOMC will increase their target for the federal funds rate. As such, Voluntary Yield-related Fee Waivers and the related reduction in distribution expense and net income attributable to noncontrolling interests could continue for the foreseeable future. Assuming asset levels and mix remain constant and based on recent market conditions, Voluntary Yield-related Fee Waivers for the fourth quarter of 2015 may result in a negative pre-tax impact on income of approximately the same amount as the third quarter of 2015. See Management's Discussion and Analysis for additional information on management's expectations regarding fee waivers. While the level of these fee waivers are impacted by various factors, increases in short-term interest rates that result in higher yields on securities purchased in money market fund portfolios would likely reduce the negative pre-tax impact of these waivers. The actual amount of future fee waivers, the resulting negative impact of these waivers and Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax impact going forward, not re-capture previously waived amounts) could vary significantly from management's estimates as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, yields on instruments available for purchase by the money market funds, actions by the Board of Governors of the Federal Reserve System (Governors), the FOMC, the U.S. Treasury Department (Treasury Department), the SEC, the Financial Stability Oversight Council (FSOC) and other governmental entities, changes in fees and expenses of the money market funds, changes in relationships with financial intermediary customers (including the structure of such relationships), changes in the mix of money market customer assets, changes in money market product structures and offerings, demand for competing products, changes in the distribution fee arrangements with third parties, including those resulting in higher distribution expenses as a percentage of money market fund revenues

10

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

when interest rates and yields increase, Federated's willingness to continue these fee waivers and changes in the extent to which the impact of such waivers is shared by third parties.

A listing of Federated’s risk factors is included in Federated’s Annual Report on Form 10-K for the year ended December 31, 2014 under Item 1A - Risk Factors.

(b) Revenue Concentration by Investment Fund

A significant portion of Federated's total revenue for the three- and nine-month periods ended September 30, 2015 was derived from services provided to a sponsored fund, the Federated Kaufmann Fund (11% for both the three- and nine-month periods ended September 30, 2015, respectively). A significant and prolonged decline in the AUM in this fund could have a material adverse effect on Federated’s future revenues and net income.

(5) Variable Interest Entities

Federated is involved with various entities in the normal course of business that may be deemed to be voting rights entities (VREs) or variable interest entities (VIEs). In accordance with Federated’s consolidation accounting policy, Federated first determines whether the entity being evaluated is a VRE or a VIE. Once this determination is made, Federated proceeds with its evaluation of whether to consolidate the entity. The disclosures below represent the results of such evaluations pertaining to September 30, 2015 and December 31, 2014.

(a) Consolidated Variable Interest Entities

From time to time, Federated invests (for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history) in investment companies that meet the definition of a VIE. Most of Federated’s sponsored investment companies meet the definition of a VIE primarily due to their typical series fund structure in which the shareholders of each participating portfolio underlying the series fund generally lack the ability as an individual group to make decisions through voting rights regarding the board of directors/trustees of the fund. Federated’s investment in investment companies represents its maximum exposure to loss. Federated’s conclusion to consolidate an investment company may vary from period to period, most commonly as a result of changes in its percentage ownership interest resulting from changes in the number of shares held by either Federated or third parties. Given that the entities follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or losses for Federated.

The following table presents the balances related to the consolidated investment companies that were included on the Consolidated Balance Sheets as well as Federated's net interest in the investment companies for each period presented:
(in millions)
 
September 30, 2015
 
December 31, 2014
Cash and cash equivalents
 
$
2.8

 
$
1.9

Investments—consolidated investment companies
 
25.6

 
31.9

Receivables
 
1.6

 
0.3

Less: Liabilities
 
4.2

 
2.7

Less: Redeemable noncontrolling interest in subsidiaries
 
8.6

 
3.7

Federated's net interest in consolidated investment companies
 
$
17.2

 
$
27.7


Federated's net interest in the consolidated investment companies of $17.2 million and $27.7 million at September 30, 2015 and December 31, 2014, respectively, represents the value of Federated's economic ownership interest in these sponsored investment companies. The assets of the consolidated investment companies are restricted for use by the respective investment company. The liabilities of the consolidated investment companies primarily represent investments sold short and operating liabilities of the entities. The liabilities are primarily classified as Other current liabilities on Federated’s Consolidated Balance Sheets.

Federated did not newly consolidate any investment companies during the nine months ended September 30, 2015. During the third quarter of 2015, Federated deconsolidated an investment company. The decision to deconsolidate was based on a determination that Federated was no longer the primary beneficiary of the investment company as a result of new subscriptions

11

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

in fund shares by unrelated third parties. Accordingly, Federated deconsolidated $13.8 million of Investments—consolidated investment companies, $0.2 million of Cash and cash equivalents and $7.1 million of Redeemable noncontrolling interest in subsidiaries on the Consolidated Balance Sheets as of the date of deconsolidation. There was no impact to the Consolidated Statements of Income in 2015 as a result of this deconsolidation.

Neither creditors nor equity investors in the investment companies have any recourse to Federated’s general credit. In the ordinary course of business, from time to time, Federated may choose to waive certain fees or assume operating expenses of sponsored investment companies for competitive, regulatory or contractual reasons (see Note (1)(o) of Federated’s Annual Report on Form 10-K for the year ended December 31, 2014 for information regarding fee waivers). Federated has not provided financial support to any of these entities outside the ordinary course of business.

(b) Non-Consolidated Variable Interest Entities

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

At September 30, 2015 and December 31, 2014, Federated’s investment and maximum risk of loss related to unconsolidated VIEs were entirely related to investment companies and totaled $276.7 million and $252.1 million, respectively. Of these amounts, $126.7 million and $107.3 million, respectively, represented investments in money market funds included in Cash and cash equivalents. The remaining $150.0 million and $144.8 million are primarily recorded in Investments—affiliates on the Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, respectively. AUM for these unconsolidated investment companies totaled $262.8 billion and $273.5 billion at September 30, 2015 and December 31, 2014, respectively. Receivables from sponsored investment companies for advisory and other services totaled $13.1 million and $12.4 million at September 30, 2015 and December 31, 2014, respectively.

In the ordinary course of business, from time to time, Federated may choose to waive certain fees or assume operating expenses of these sponsored investment companies for competitive, regulatory or contractual reasons (see Note (1)(o) of Federated’s Annual Report on Form 10-K for the year ended December 31, 2014 for information regarding fee waivers). Federated has not provided financial support to any of these entities outside the ordinary course of business.

(6) Investments

Investments on the Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 included available-for-sale and trading securities. At September 30, 2015 and December 31, 2014, Federated held investments totaling $148.4 million and $143.2 million, respectively, in fluctuating-value sponsored mutual funds that were classified as available-for-sale securities and were included in Investments—affiliates on the Consolidated Balance Sheets.

Available-for-sale securities were as follows:
 
 
September 30, 2015
 
December 31, 2014
 
 
 
 
Gross Unrealized
 
Estimated
Fair
 
 
 
Gross Unrealized
 
Estimated
Fair
(in thousands)
 
Cost
 
Gains
 
(Losses)
 
Value
 
Cost
 
Gains
 
(Losses)
 
Value
Equity mutual funds
 
$
34,080

 
$
102

 
$
(2,277
)
 
$
31,905

 
$
26,887

 
$
1,216

 
$
(737
)
 
$
27,366

Fixed-income mutual funds
 
118,904

 
100

 
(2,501
)
 
116,503

 
118,081

 
110

 
(2,367
)
 
115,824

Total fluctuating-value mutual funds
 
$
152,984

 
$
202

 
$
(4,778
)
 
$
148,408

 
$
144,968

 
$
1,326

 
$
(3,104
)
 
$
143,190


The increase in available-for-sale securities at September 30, 2015 as compared to December 31, 2014, was primarily due to a $6.9 million increase from the deconsolidation of an investment company during the quarter ended September 30, 2015 which resulted in the reclassification of Federated's investment from trading securities to available-for-sale securities (see Note (5)(a) for additional information).


12

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

Federated’s trading securities totaled $32.2 million and $38.9 million at September 30, 2015 and December 31, 2014, respectively. Federated consolidates certain investment companies into its Consolidated Financial Statements as a result of Federated’s controlling financial interest in the companies (see Note (5)). All investments held by these investment companies, which primarily represented sponsored investment companies, were included in Investments—consolidated investment companies on Federated’s Consolidated Balance Sheets. Investments—other on the Consolidated Balance Sheets represented other trading investments held in Separate Accounts (which include separately managed accounts, institutional accounts, sub-advised funds and other managed products) for which Federated is the beneficiary.

Federated’s trading securities as of September 30, 2015 and December 31, 2014, were primarily composed of investments in sponsored mutual funds ($10.8 million and $8.1 million, respectively), stocks of large international and U.S. companies ($10.5 million and $21.3 million, respectively) and domestic debt securities ($7.3 million and $7.5 million, respectively).

The following table presents gains and losses recognized in (Loss) gain on securities, net on the Consolidated Statements of Income in connection with investments and economic derivatives held by certain consolidated investment companies:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(in thousands)
 
2015

 
2014

 
2015

 
2014

Unrealized (loss) gain
 
 
 
 
 
 
 
 
Trading securities
 
$
(903
)
 
$
(1,115
)
 
$
(1,485
)
 
$
(2,634
)
Derivatives1
 
148

 
(217
)
 
122

 
(290
)
Realized gains2
 
 
 
 
 
 
 
 
Available-for-sale securities3
 
0

 
1,325

 
0

 
4,330

Trading securities
 
224

 
348

 
739

 
4,046

Derivatives1
 
17

 
14

 
313

 
176

Realized losses2
 
 
 
 
 
 
 
 
Available-for-sale securities3
 
(1,342
)
 
(91
)
 
(1,342
)
 
(91
)
Trading securities
 
(1,547
)
 
(610
)
 
(2,371
)
 
(1,353
)
Derivatives1
 
(889
)
 
(93
)
 
(1,502
)
 
(201
)
(Loss) gain on securities, net4
 
$
(4,292
)
 
$
(439
)
 
$
(5,526
)
 
$
3,983

Amounts related to the settlement of economic derivatives held by certain consolidated investment companies.
Realized gains and losses are computed on a specific-identification basis.
3
Amounts related to redemptions of available-for-sale securities resulting in proceeds of $45.4 million and $87.1 million for the three and nine months ended September 30, 2014, respectively. The loss for the three and nine months ended September 30, 2015 relates to an impairment of an available-for-sale security.
4
Amounts related to consolidated investment companies totaled $(2.6) million and $(3.7) million for the three and nine months ended September 30, 2015, respectively, and $(1.5) million and $(0.4) million for the three and nine months ended September 30, 2014, respectively.

(7) Fair Value Measurements

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

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

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

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

13

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


(a) Fair Value Measurements on a Recurring Basis

The following table presents fair value measurements for classes of Federated’s financial assets and liabilities measured at fair value on a recurring basis:
 
 
September 30, 2015
 
December 31, 2014
 
 
Fair Value Measurements Using
 
Fair Value Measurements Using
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
141,157

 
$
0

 
$
0

 
$
141,157

 
$
115,267

 
$
0

 
$
0

 
$
115,267

Available-for-sale equity securities
 
123,709

 
24,699

 
0

 
148,408

 
119,435

 
23,755

 
0

 
143,190

Trading securities—equity
 
15,556

 
9,351

 
0

 
24,907

 
17,553

 
13,840

 
0

 
31,393

Trading securities—debt
 
0

 
7,290

 
0

 
7,290

 
0

 
7,488

 
0

 
7,488

Other1
 
7

 
52

 
0

 
59

 
31

 
14

 
0

 
45

Total financial assets
 
$
280,429

 
$
41,392

 
$
0

 
$
321,821

 
$
252,286

 
$
45,097

 
$
0

 
$
297,383

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related future consideration liabilities
 
$
0

 
$
0

 
$
4,376

 
$
4,376

 
$
0

 
$
0

 
$
1,909

 
$
1,909

Other2
 
2,778

 
0

 
0

 
2,778

 
1,979

 
425

 
0

 
2,404

Total financial liabilities
 
$
2,778

 
$
0

 
$
4,376

 
$
7,154

 
$
1,979

 
$
425

 
$
1,909

 
$
4,313

1
Amounts include futures contracts and/or foreign currency forward contracts held within certain consolidated sponsored investment companies.
2
Amounts include investments sold short, futures contracts and/or foreign currency forward contracts held within certain consolidated sponsored investment companies and Federated's interest rate swap.

The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis. Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at September 30, 2015 or December 31, 2014.

Cash and cash equivalents
Cash and cash equivalents include investments in money market funds and deposits with banks. Investments in Federated money market funds totaled $130.6 million and $107.6 million at September 30, 2015 and December 31, 2014, respectively. Cash investments in money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.

Available-for-sale equity securities
Available-for-sale equity securities include investments in sponsored fluctuating-value mutual funds and are included in Investments—affiliates on the Consolidated Balance Sheets. For investments in mutual funds that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For certain investments in mutual funds that are not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions, the securities are valued using NAV as a practical expedient and are classified as Level 2. There is no modeling or additional information needed to arrive at the fair values of any of these investments.
Trading securities—equity
Trading securities - equity primarily represent the equity securities held by consolidated sponsored investment companies (included in Investments—consolidated investment companies on the Consolidated Balance Sheets) as well as certain equity investments held in separate accounts for which Federated is the beneficiary (included in Investments—other on the Consolidated Balance Sheets). For publicly traded equity securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on unadjusted quoted market prices. The fair value of certain equity securities traded principally in foreign markets and held by consolidated investment companies is determined by a third-party pricing service to account for changes to the fair value between the time the foreign market closes and the pricing time of the consolidated investment company (Level 2). For the period between December 31, 2014 and September 30, 2015, there

14

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

were $32 thousand of investments transferred from Level 1 to Level 2. For the period between December 31, 2013 and September 30, 2014, there were $153 thousand of investments transferred from Level 1 to Level 2. Transfers among levels of the fair value hierarchy are reported at fair value as of the beginning of the period in which the transfers occur.

Trading securities—debt
Trading securities - debt primarily represent domestic bonds held by consolidated sponsored investment companies. The fair value of these securities may include observable market data such as valuations provided by independent pricing services after considering factors such as the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions (Level 2).
Foreign currency forward contracts
The fair value of foreign currency forward contracts is primarily included in Receivables, net or Other current liabilities on the Consolidated Balance Sheets, representing contracts held by certain consolidated sponsored investment companies as part of their investment strategy. Pricing is determined by interpolating a value by utilizing the spot foreign exchange rate and forward points (based on the spot rate and currency interest rate differentials), which are all inputs that are observable in active markets (Level 2).

Futures contracts
The fair value of futures contracts is primarily included in Receivables, net or Other current liabilities on the Consolidated Balance Sheets, representing contracts held by certain consolidated sponsored investment companies as part of their investment strategy. Pricing is determined by using the value reported at settlement or closing price (Level 1).
Interest rate swap
The fair value of Federated's interest rate swap (the Swap), which expired on April 1, 2015, was included in Other current liabilities on the Consolidated Balance Sheets as of December 31, 2014. Pricing was determined based on a third-party, model-derived valuation in which all significant inputs are observable in active markets (Level 2), including the Eurodollar future rate and yields for three- and thirty-year Treasury securities. See Note (8) for additional information.

Acquisition-related future consideration liabilities
From time to time, pursuant to purchase and sale agreements entered into in connection with certain business combinations, Federated may be required to make future consideration payments if certain contingencies are met. See Note (12) for additional information regarding the nature and timing of these payments. In connection with these arrangements entered into after January 1, 2009, Federated records a liability as of the acquisition date representing the estimated fair value of future consideration payments. The liability is subsequently re-measured at fair value on a recurring basis with changes in fair value recorded in earnings. As of September 30, 2015, acquisition-related future consideration liabilities were recorded in Other current liabilities ($2.3 million) and Other long-term liabilities ($2.1 million) on the Consolidated Balance Sheets. Management estimated the fair value of future consideration payments based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3).

The following table presents a reconciliation of the beginning and ending balances for Federated's liability for future consideration payments related to these acquisitions for each period presented:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2015

 
2014

 
2015

 
2014

Beginning balance
$
3,986

 
$
5,910

 
$
1,909

 
$
6,489

New acquisitions1
390

 
0

 
2,090

 
0

Changes in fair value2
0

 
(617
)
 
377

 
(1,196
)
Ending balance
$
4,376

 
$
5,293

 
$
4,376

 
$
5,293

1
Amounts include the preliminary fair value estimate of the contingent payment liability recorded in connection with new acquisitions.
2
For all periods presented, the amounts were included as Operating Expenses - Other on the Consolidated Statements of Income.

Investments sold short
The fair value of investments sold short within a consolidated sponsored investment company is included in Other current liabilities on the Consolidated Balance Sheets. The investments sold short primarily relate to domestic equity securities that are

15

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

available in an active exchange market. The fair value of these investments sold short is based on unadjusted quoted market prices and is classified within Level 1 of the valuation hierarchy.

(b) Fair Value Measurements on a Nonrecurring Basis

Federated did not hold any assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2015.

(c) Fair Value Measurements of Other Financial Instruments

The fair value of Federated’s debt is estimated by management based upon expected future cash flows utilizing a discounted cash flow methodology under the income approach. The fair value of the liability is estimated using observable market data (Level 2) in estimating inputs including the discount rate. Based on this fair value estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value.

(8) Debt and Interest Rate Swap

Debt consisted of the following:
 
 
Interest Rates
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
(dollars in thousands)
 
2015
 
20141
 
September 30, 2015

 
December 31, 2014

Term Loan
 
1.325%
 
2.462%
 
$
223,125

 
$
242,250