UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ____________________________________________________

FORM 10-Q

____________________________________________________

(Mark One)

For the quarterly period ended March 31, 2019

OR

For the transition period from              to             

Commission File Number 001-14818

___________________________________________________

(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   x     No   o .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   o     No   x .

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: As of April 24, 2019 , the Registrant had outstanding 9,000 shares of Class A Common Stock and 101,217,123 shares of Class B Common Stock.

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. Forward-looking statements are typically identified by words or phrases such as "trend," "potential," "opportunity," "believe," "expect," "anticipate," "current," "intention," "estimate," "position," "projection," "assume," "continue," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" and similar expressions. Among other forward-looking statements, such statements include certain statements relating to, or, as applicable, statements concerning management's assessments, beliefs, expectations, assumptions, judgments, projections or estimates regarding: asset flows, levels and mix; business mix; the level, timing, degree and impact of changes in interest rates, yields or asset levels or mix; fee rates and sources and levels of revenues, expenses, gains, losses, income and earnings; the level and impact of reimbursements, rebates or assumptions of fund-related expenses ( Consideration Payable to Customers ) and fee waivers (collectively, Fee Waivers ); when revenue is recognized; whether performance fees or carried interest will be earned; the components and level of, and prospect for, distribution-related expenses; guarantee and indemnification obligations; the timing of, and direct or contingent payment obligations and costs relating to acquisitions; payment obligations pursuant to employment or incentive arrangements; business and market expansion opportunities, including, anticipated, or acceleration of, growth outside of the United States ( U.S. ); interest and principal payments or expenses; taxes, tax rates, deferred tax assets and the impact of tax law changes; borrowing, debt, future cash needs and principal uses of cash, cash flows and liquidity; the ability to raise additional capital; type, classification and consolidation of investments; uses of treasury stock; Federated, product and market performance and Federated's performance indicators; investor preferences; product and strategy demand, distribution, development and restructuring initiatives and related planning and timing; the effect, and degree of impact, of changes in customer relationships; legal proceedings; the pace, timing, impact, effects and other consequences of Brexit, as well as potential, proposed and final laws, regulations and other rules, continuing regulatory oversight, and possible deregulation by U.S. and foreign regulators and other authorities; dedication of resources; the adoption and impact of accounting policies, new accounting pronouncements and accounting treatment determinations; compliance, and related legal, compliance and other professional services expenses; interest rate, concentration, market, currency and other risks; auditor independence matters; and various items set forth under Item 1A - Risk Factors included in Federated's Annual Report on Form 10-K for the year ended December 31, 2018 . 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. The obligation to make purchase price payments in connection with acquisitions is subject to certain adjustments and conditions and the obligation to make additional payments pursuant to employment or incentive arrangements is based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and 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 of distribution and shareholder services contracts with intermediaries who offer Federated's products to customers, and potential increased legal, compliance and other professional services expenses stemming from additional or modified regulation or the dedication of such resources to other initiatives. Federated's risks and uncertainties also include liquidity and credit risks in Federated's money market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in fair values of assets under management, investor preferences and confidence, and the ability of Federated to collect fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of continued scrutiny of the mutual fund industry by domestic or foreign regulators, and any disruption in global financial markets. As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither Federated nor any other person assumes responsibility for the accuracy and completeness of such statements in the future. For more information on these items and additional risks that may impact the forward-looking statements, see Item 1A - Risk Factors included in Federated's Annual Report on Form 10-K for the year ended December 31, 2018 .

Part I. Financial Information

Item 1. Financial Statements

 

 

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

Consolidated Statements of Income
(dollars in thousands, except per share data)
(unaudited)
			Three Months Ended
			March 31,
			2019				2018
Revenue
Investment Advisory Fees, net—Affiliates			$	155,607			$	135,231
Investment Advisory Fees, net—Other			55,592				39,035
Administrative Service Fees, net—Affiliates			54,135				49,023
Other Service Fees, net—Affiliates			38,610				40,563
Other Service Fees, net—Other			3,106				0
Total Revenue			307,050				263,852
Operating Expenses
Compensation and Related			111,216				78,374
Distribution			77,632				72,498
Systems and Communications			12,794				8,433
Office and Occupancy			11,362				7,541
Professional Service Fees			10,486				9,631
Advertising and Promotional			4,190				3,228
Travel and Related			3,848				2,821
Other			4,633				1,655
Total Operating Expenses			236,161				184,181
Operating Income			70,889				79,671
Nonoperating Income (Expenses)
Investment Income, net			1,030				1,900
Gain (Loss) on Securities, net			1,679				(1,182		)
Debt Expense			(1,400		)		(1,330		)
Other, net			324				(143		)
Total Nonoperating Income (Expenses), net			1,633				(755		)
Income Before Income Taxes			72,522				78,916
Income Tax Provision			17,911				18,910
Net Income Including the Noncontrolling Interests in Subsidiaries			54,611				60,006
Less: Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries			65				(325		)
Net Income			$	54,546			$	60,331
Amounts Attributable to Federated Investors, Inc.
Earnings Per Common Share—Basic and Diluted			$	0.54			$	0.60
Cash Dividends Per Share			$	0.27			$	0.25

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

Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)
			Three Months Ended
			March 31,
			2019				2018
Net Income Including the Noncontrolling Interests in Subsidiaries			$	54,611			$	60,006
Other Comprehensive Income (Loss), net of tax
Permanent Equity
Foreign Currency Translation Gain (Loss)			7,664				243
Reclassification Adjustment Related to Foreign Currency Items			0				(191		)
Reclassification Adjustment Related to Equity Securities			0				(29		)
Temporary Equity
Foreign Currency Translation Gain (Loss)			3,714				0
Other Comprehensive Income (Loss), net of tax			11,378				23
Comprehensive Income Including the Noncontrolling Interests in Subsidiaries			65,989				60,029
Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interest in Subsidiaries			3,779				(325		)
Comprehensive Income Attributable to Federated Investors, Inc.			$	62,210			$	60,354

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

Consolidated Statements of Changes in Equity
(dollars in thousands)
(unaudited)
		Federated Investors, Inc. Shareholders' Equity
		Common Stock				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss), net of tax				Total Permanent Equity				Redeemable Noncontrolling Interest in Subsidiaries/ Temporary Equity
Balance at December 31, 2017		$	343,378			$	697,359			$	(278,732	)		$	(790	)		$	761,215			$	30,163
Adoption of New Accounting Pronouncements		0				125				0				(254		)		(129		)		0
Net Income		0				60,331				0				0				60,331				(325		)
Other Comprehensive Income (Loss), net of tax		0				0				0				277				277				0
Subscriptions—Redeemable Noncontrolling Interest Holders		0				0				0				0				0				500
Stock Award Activity		6,966				(10,721		)		10,822				0				7,067				0
Dividends Declared		0				(25,265		)		0				0				(25,265		)		0
Distributions to Noncontrolling Interest in Subsidiaries		0				0				0				0				0				(1,684		)
Purchase of Treasury Stock		0				0				(3,876		)		0				(3,876		)		0
Balance at March 31, 2018		$	350,344			$	721,829			$	(271,786	)		$	(767	)		$	799,620			$	28,654
Balance at December 31, 2018		$	367,252			$	791,823			$	(287,337	)		$	(14,617	)		$	857,121			$	182,513
Net Income		0				54,546				0				0				54,546				65
Other Comprehensive Income (Loss), net of tax		0				0				0				7,664				7,664				3,714
Subscriptions—Redeemable Noncontrolling Interest Holders		0				0				0				0				0				2,168
Stock Award Activity		7,110				(11,830		)		11,830				0				7,110				0
Dividends Declared		0				(27,217		)		0				0				(27,217		)		0
Distributions to Noncontrolling Interest in Subsidiaries		0				0				0				0				0				(2,260		)
Purchase of Treasury Stock		0				0				(1,485		)		0				(1,485		)		0
Balance at March 31, 2019		$	374,362			$	807,322			$	(276,992	)		$	(6,953	)		$	897,739			$	186,200

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

Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
		Three Months Ended
		March 31,
		2019				2018
Operating Activities
Net Income Including the Noncontrolling Interests in Subsidiaries		$	54,611			$	60,006
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities
Amortization of Deferred Sales Commissions		592				839
Depreciation and Other Amortization		7,221				2,638
Share-Based Compensation Expense		7,110				6,967
(Gain) Loss on Disposal of Assets		492				(723		)
Provision (Benefit) for Deferred Income Taxes		4,696				4,318
Net Unrealized (Gain) Loss on Investments		(2,162		)		1,905
Net Sales of Investments—Consolidated Investment Companies		8,136				500
Other Changes in Assets and Liabilities:
(Increase) Decrease in Receivables, net		(575		)		3,424
(Increase) Decrease in Prepaid Expenses and Other Assets		2,693				818
Increase (Decrease) in Accounts Payable and Accrued Expenses		(72,337		)		(43,666		)
Increase (Decrease) in Other Liabilities		6,281				11,070
Net Cash Provided (Used) by Operating Activities		16,758				48,096
Investing Activities
Purchases of Investments—Affiliates and Other		(1,566		)		(1,555		)
Proceeds from Redemptions of Investments—Affiliates and Other		1,185				1,572
Cash Paid for Property and Equipment		(5,060		)		(3,106		)
Net Cash Provided (Used) by Investing Activities		(5,441		)		(3,089		)
Financing Activities
Dividends Paid		(27,217		)		(25,265		)
Purchases of Treasury Stock		(1,485		)		(4,024		)
Distributions to Noncontrolling Interest in Subsidiaries		(2,260		)		(1,684		)
Contributions from Noncontrolling Interest in Subsidiaries		43				500
Proceeds from Shareholders for Share-Based Compensation		0				101
Proceeds from New Borrowings		8,800				0
Payments on Debt		(13,800		)		(5,000		)
Other Financing Activities		0				(228		)
Net Cash Provided (Used) by Financing Activities		(35,919		)		(35,600		)
Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents		2,264				0
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents		(22,338		)		9,407
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of Period		157,426				316,809
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period		135,088				326,216
Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets		603				607
Cash and Cash Equivalents		$	134,485			$	325,609

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

Notes to the Consolidated Financial Statements
(unaudited)

 

(1) Basis of Presentation

Federated Investors, Inc. and its consolidated subsidiaries, including Hermes Fund Managers Limited ( Hermes ) beginning July 1, 2018 , (collectively, Federated ) provides investment advisory, administrative, distribution and other services to various investment products, including sponsored investment companies and other 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, as well as stewardship services to various companies. The interim Consolidated Financial Statements of 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, 2018 . Certain items previously reported have been reclassified to conform to the current period's presentation.

(2) Recent Accounting Pronouncements

(a) Recently Adopted Accounting Guidance

 

Leases

On February 25, 2016, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) 2016-02, Leases (Topic 842). The core principle is that a lessee should recognize the assets and liabilities that arise from leases on the balance sheet, while retaining a distinction between financing and operating leases. In the third quarter of 2018, the FASB issued ASU 2018-10, which provides improvements to narrow aspects of the guidance and ASU 2018-11, which provides an optional alternative transition method to initially apply the new leases standard at the adoption date (collectively, with ASU 2016-02, Topic 842).

Effective January 1, 2019, Federated adopted Topic 842 using the alternative transition method, which did not require the restatement of prior years. In connection with the adoption of Topic 842, management has elected the package of practical expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. Management did not elect the hindsight practical expedient to determine the lease term. Upon adoption, Federated recorded $112.2 million as a right-of-use (ROU) asset and $133.7 million as a lease liability on the Consolidated Balance Sheets, which consists primarily of Federated's operating real estate leases. The adoption did not have a material impact on Federated's results of operations or cash flows.

(b) Recently Issued Accounting Guidance Not Yet Adopted

 

Goodwill Impairment

On January 26, 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under this ASU, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, the ASU retains the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update is effective for Federated on January 1, 2020, with early adoption permitted, and requires the prospective adoption method. Management is currently evaluating the potential impact of adoption to Federated's Consolidated Financial Statements.

Fair Value Measurement

On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update remove, modify or add disclosure requirements for fair value measurements to improve the effectiveness of disclosures. The update is effective for Federated on

January 1, 2020, with early adoption permitted, and allows for either the prospective or retrospective adoption method. Management is currently evaluating the potential impact of adoption to Federated's Consolidated Financial Statements.

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

On August 29, 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The update is effective for Federated on January 1, 2020, with early adoption permitted, and allows for either the prospective or retrospective adoption method. Management plans to elect the prospective adoption approach, which does not require the restatement of prior years. Management is currently evaluating the potential impact of adoption to Federated's Consolidated Financial Statements.

(3) Significant Accounting Policies

As a result of the adoption of Topic 842 , the following accounting policy has been updated to reflect the new guidance. For a complete listing of Federated's significant accounting policies, please refer to Federated's Annual Report on Form 10-K for the year ended December 31, 2018 .

Leases

Prior to the adoption of Topic 842, Federated classified leases as either capital or operating in accordance with the provisions of Topic 840. All leases for the periods presented prior to January 1, 2019 were classified as operating leases. Rent expense under noncancelable operating leases with scheduled rent increases or rent holidays was accounted for on a straight-line basis over the lease term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess of straight-line rent expense over scheduled payments was recorded as a deferred liability. The liability was then reduced when scheduled payments were in excess of the straight-line rent expense. Build-out allowances and other such lease incentives were recorded as deferred credits, and were amortized on a straight-line basis as a reduction of rent expense beginning in the period they were deemed to have been earned, which generally coincided with the effective date of the lease. The current portion of remaining deferred lease costs and unamortized build-out allowances was included in Other Current Liabilities and the long-term portion was included in Other Long-Term Liabilities on the Consolidated Balance Sheets as of and prior to December 31, 2018.

Following the adoption of Topic 842, Federated classifies leases as either operating or financing in accordance with the provisions of Topic 842, and records a ROU asset and a lease liability on the Consolidated Balance Sheets. The lease liability is initially measured at the present value of the unpaid lease payments remaining at the lease commencement date. The ROU asset is initially measured as the lease liability, adjusted for lease payments made prior to the lease commencement date and lease incentives received. In determining the present value of the lease liability, Topic 842 requires a lessee to use the interest rate implicit in the lease or, if that rate is not readily determinable, its incremental borrowing rate (IBR). All leases for the periods presented are classified as operating leases. Management has made the following accounting policy elections: (1) not to separate lease components from non-lease components for all asset classes and (2) to apply the short-term lease exception, which does not require the capitalization of leases with terms of 12 months or less. Rent expense is recorded on a straight-line basis over the lease term, beginning on the earlier of the effective date of the lease or the date Federated obtains control of the asset. The lease term may include options to extend the lease when they are reasonably certain of being exercised.

Management judgments are used when reviewing new and/or materially-modified contracts to determine (1) whether the contract is or contains a lease, and (2) the IBR. Management was unable to determine the rates implicit in Federated's leases based on the information available at the commencement date, therefore, management calculated an IBR for each lease. In order to calculate the IBR, management began with readily observable unsecured rates, and adjusted for the following assumptions: (1) collateralization, (2) length remaining in the lease and (3) the type of ROU asset.

(4) Business Combinations

On July 2, 2018, Federated completed, effective as of July 1, 2018 , the acquisition of a controlling interest in Hermes ( Hermes Acquisition ). The addition of London-based Hermes provides the opportunity to further accelerate Federated's growth in markets outside of the U.S. BT Pension Scheme ( BTPS ) retained a 29.5 percent interest in Hermes and contributed the remaining 10.5 percent interest into an Employee Benefit Trust ( EBT ) for the benefit of certain members of Hermes' management and other key employees under a long-term incentive plan ( LTIP ). Federated paid a total of £260.7 million ( $344.3 million ). Federated funded the transaction through a combination of cash and an $18.0 million drawdown from its existing revolving credit facility (see Note (11) for additional information).

Federated and BTPS entered into a Put and Call Option Deed pursuant to which Federated has a right to exercise a call option to acquire BTPS 's remaining 29.5 percent interest in Hermes at fair value and BTPS has a right to exercise a put option to sell its remaining interest in Hermes to Federated at fair value, after the third, fourth or fifth anniversaries, and subject to certain contingencies, the sixth anniversary, of the date of the purchase agreement. Federated does not consider BTPS 's 29.5 percent noncontrolling interest in Hermes to be permanent equity, due to it being redeemable at the option of either BTPS or Federated and, therefore, is not entirely within Federated's control.

Hermes granted equity awards from the EBT in the form of restricted nonpublic subsidiary stock pursuant to the LTIP to certain members of Hermes management and other key employees. These awards, which are subject to continued service vesting requirements, vest over a period of three to five years. At various predetermined dates, but no earlier than 9 months after vesting, award holders have a right to exercise a put option to sell shares to Federated at fair value and Federated has a right to exercise a call option to acquire shares at fair value. The grant date fair value of the awards is recognized as Compensation and Related expense in the Consolidated Statements of Income over the relevant vesting periods, with a corresponding adjustment to Redeemable Noncontrolling Interest in Subsidiaries in the Consolidated Balance Sheets . As a result of the grant of the equity awards in a nonpublic consolidated subsidiary under the terms of the LTIP and EBT , the shares are not included in the attribution of the subsidiary's income and losses to noncontrolling interest holders until the awards vest. Therefore, Federated initially recognized the fair value of 33 percent of Hermes as Redeemable Noncontrolling Interest in Subsidiaries on the Consolidated Balance Sheets . The attribution of the subsidiary's income and loss is recognized in Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries on the Consolidated Statements of Income and is expected to fluctuate as the LTIP awards vest and put/call options are exercised. Federated's diluted earnings per share calculation is adjusted for the proportionate share of net income related to the unvested equity awards in a nonpublic consolidated subsidiary (see Note (14) for additional information). As of March 31, 2019 , Redeemable Noncontrolling Interest in Subsidiaries related to Hermes was $176.1 million .

Federated has performed a valuation of the fair market value of the Hermes Acquisition . Due to the timing of the acquisition and status of the valuation work, the purchase price allocation for assets acquired (excluding Cash and Cash Equivalents, Other Current Assets and Property and Equipment, net) and liabilities assumed (excluding amounts related to Accrued Compensation and Benefits) is preliminary. Although preliminary results of the valuation are reflected in the Consolidated Financial Statements as of March 31, 2019 , the final purchase price allocation may reflect adjustments to this preliminary valuation and such adjustments may be material.

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

The following table summarizes the allocation of the preliminary purchase price allocation, updated for valuation adjustments made in the first quarter 2019:

The financial results of Hermes have been included in Federated's Consolidated Financial Statements from the July 1, 2018 effective date of the acquisition. For the three months ended March 31, 2019 , Hermes earned revenue of $48.3 million and net income of $0.4 million (which excludes acquisition-related intangible amortization and amounts attributable to the noncontrolling interests).

The following table summarizes unaudited pro forma financial information assuming the Hermes Acquisition occurred at the beginning of the period presented. This pro forma financial information is for informational purposes only and is not indicative of actual results that would have occurred had the Hermes Acquisition been completed on the assumed date and it is not indicative of future results. In addition, the following pro forma financial information does not reflect the realization of any cost savings (nor does management expect to realize any cost savings) or other synergies from the Hermes Acquisition . The pro forma results include adjustments for the effect of acquisition-related expenses (including compensation and related expense, income tax expense and amortization related to newly acquired intangibles) as well as adjustments to conform to Federated's U.S. GAAP accounting policies.

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

(5) Revenue from Contracts with Customers

The following table presents Federated's revenue disaggregated by asset class:

The following table presents Federated's revenue disaggregated by performance obligation:

The following table presents Federated's revenue disaggregated by geographical market:

The following table presents Federated's revenue disaggregated by product type:

Federated is not required to disclose certain estimates of revenue expected to be recorded in future periods as a result of applying the following exemptions: (1) contract terms are short-term in nature (i.e., expected duration of one year or less due to termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods.

Federated expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services performance obligations at March 31, 2019 . Generally, contracts are billed in arrears on a quarterly basis and have a three year duration, after which the customer can terminate the agreement with a three to twelve month notice. Based on existing contracts and the exchange rates as of March 31, 2019 , Federated may recognize future fixed revenue from stewardship services as presented in the following table:

(6) Concentration Risk

(a) Revenue Concentration by Asset Class

The following table presents Federated's revenue concentration by asset class:

The change in the relative proportion of Federated's revenue attributable to equity assets for the three months ended March 31, 2019 , as compared to the same period in 2018 , was primarily the result of higher average equity assets mostly as a result of the July 2018 Hermes Acquisition . Because the Hermes Acquisition was primarily comprised of equity assets and alternative/private markets assets, the relative proportion of Federated's revenue attributable to money market and fixed-income assets decreased for the three months ended March 31, 2019 as compared to the same period in 2018 .

(b) Revenue Concentration by Investment Strategy/Fund

The following table presents Federated's revenue concentration by investment strategy/fund:

1      Strategy includes Federated Funds and Separate Accounts .

2    Strategy includes Federated Funds .

A significant and prolonged decline in the AUM in these strategies/fund could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with the Federated Funds managed in accordance with these strategies/fund.

(c) Revenue Concentration by Intermediary

Approximately 12% and 14% of Federated's total revenue for the three months ended March 31, 2019 and 2018 , respectively, was derived from services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary. Significant negative changes in Federated's relationship with this intermediary could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income due to a related reduction in distribution expenses associated with this intermediary.

(7) Consolidation

The Consolidated Financial Statements include the accounts of Federated, which include Hermes, Federated Funds and other entities in which Federated holds a controlling financial interest. Federated is involved with various entities in the normal course of business that may be deemed to be voting rights entities ( VRE s) or variable interest entities ( VIE s). From time to time, Federated invests in Federated Funds for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history. Federated's investment in, and/or receivables from, these Federated Funds represents its maximum exposure to loss. The assets of each consolidated Federated Fund are restricted for use by the respective Federated Fund . Generally, neither creditors of, nor equity investors in, the Federated Funds have any recourse to Federated's general credit. Given that the entities follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or losses for Federated.

 

In the ordinary course of business, Federated may implement Fee Waivers for various Federated Funds for competitive, regulatory or contractual reasons. For the three months ended March 31, 2019 and 2018 , Fee Waivers totaled $98.8 million and $87.4 million , respectively, of which $68.1 million and $57.9 million , respectively, related to money market funds which meet the scope exception of the consolidation guidance.

Like other sponsors of investment companies, Federated in the ordinary course of business may make capital contributions to certain money market Federated Funds in connection with the reorganization of such funds into certain affiliated money market Federated Funds or in connection with the liquidation of a money market Federated Fund . In these instances, such capital contributions typically are intended to either offset realized losses or other permanent impairments to a fund's net asset value ( NAV ), increase the market-based NAV per share of the fund's portfolio that is being reorganized to equal the market-based NAV per share of the acquiring fund or to bear a portion of expenses relating to a fund liquidation. Under current money fund regulations and Securities and Exchange Commission ( SEC ) guidance, Federated is required to report these types of capital contributions to U.S. money market mutual funds to the SEC as financial support to the investment company that is being reorganized or liquidated. There were no contributions for the three months ended March 31, 2019 or March 31, 2018 .

In accordance with Federated's consolidation accounting policy, Federated first determines whether the entity being evaluated is a VRE or a VIE. Once this determination is made, Federated proceeds with its evaluation of whether to consolidate the entity. The disclosures below represent the results of such evaluations as of March 31, 2019 and December 31, 2018 .

(a) Consolidated Voting Rights Entities

Most of the Federated Funds meet the definition of a VRE. Federated consolidates certain VREs when it is deemed to have control. Consolidated VREs are reported on Federated's Consolidated Balance Sheets in Investments—Consolidated Investment Companies and Redeemable Noncontrolling Interest in Subsidiaries .

(b) Consolidated Variable Interest Entities

As of March 31, 2019 and December 31, 2018 , Federated was deemed to be the primary beneficiary of, and therefore consolidated, certain Federated Funds as a result of its controlling financial interest. The following table presents the balances related to the consolidated Federated Fund VIEs that were included on the Consolidated Balance Sheets as well as Federated's net interest in the consolidated Federated Fund VIEs for each period presented:

(in millions)		March 31, 2019				December 31, 2018
Investments—Consolidated Investment Companies		$	13.9			$	21.2
Receivables		0.3				0.4
Less: Liabilities		0.4				0.3
Less: Redeemable Noncontrolling Interest in Subsidiaries		9.6				11.2
Federated's Net Interest in Federated Fund VIEs		$	4.2			$	10.1

Federated's net interest in the consolidated Federated Fund VIEs represents the value of Federated's economic ownership interest in these Federated Funds .

During the three months ended March 31, 2019 , Federated liquidated its investment in one consolidated VIE in which it was the only remaining shareholder. Accordingly, Federated redeemed $6.2 million from Investments—Consolidated Investment Companies on the Consolidated Balance Sheets as of the date of the liquidation. There was no impact to the Consolidated Statements of Income as a result of this liquidation. There were no other consolidations or deconsolidations during the three months ended March 31, 2019 .

(c) Non-Consolidated Variable Interest Entities

Federated's involvement with certain Federated Funds that are deemed to be VIEs includes serving as the investment manager, or at times, holding a minority interest or both. Federated's variable interest is not deemed to absorb losses or receive benefits that could potentially be significant to the VIE. Therefore, Federated is not the primary beneficiary of these VIEs and has not consolidated these entities.

At March 31, 2019 , Federated's variable interest in a non-consolidated VIE was $68.3 million (recorded in Cash and Cash Equivalents on the Consolidated Balance Sheets) and was entirely related to one Federated Fund . AUM for this non-consolidated Federated Fund totaled $5.2 billion at March 31, 2019 . At December 31, 2018 , Federated did not have a variable interest in a non-consolidated VIE. Of the Receivables—Affiliates at March 31, 2019 and December 31, 2018 , $24.3 million and $16.2 million , respectively, related to non-consolidated VIEs and represented Federated's maximum risk of loss from non-consolidated VIE receivables.

(8) Investments

At March 31, 2019 and December 31, 2018 , Federated held investments in Separate Accounts of $7.2 million and $6.8 million , respectively, and investments in fluctuating-value Federated Funds of $4.8 million and $4.1 million , respectively, that were included in Investments—Affiliates and Other on the Consolidated Balance Sheets .

Federated's investments held in Separate Accounts as of March 31, 2019 and December 31, 2018 , were primarily composed of domestic debt securities ( $3.5 million at both period ends) and stocks of large U.S. and international companies ( $3.0 million and $2.7 million , respectively).

Federated consolidates certain Federated Funds into its Consolidated Financial Statements as a result of Federated's controlling financial interest in these Federated Funds (see Note (7) ). All investments held by these consolidated Federated Funds were included in Investments—Consolidated Investment Companies on Federated's Consolidated Balance Sheets .

Federated's investments held by consolidated Federated Funds as of March 31, 2019 and December 31, 2018 , were primarily composed of domestic and foreign debt securities ( $13.9 million and $20.9 million , respectively).

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