EX-99.2 3 exhibit992-proformafinanci.htm EXHIBIT 99.2 Exhibit
Exhibit 99.2





Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2018
 
 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
Federated
 
Hermes
 
Pro Forma Adjustments
 
Note
 
Pro Forma Combined
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
$
375,172

 
$
92,625

 
$
(261,055
)
 
3 (a)
 
$
206,742

Other Current Assets
109,008

 
53,705

 
0

 
 
 
162,713

Total Current Assets
484,180

 
146,330

 
(261,055
)
 
 

369,455

Long-Term Assets
 
 
 
 
 
 
 
 
 
Goodwill
660,040

 
243

 
150,947

 
3 (b)
 
811,230

Intangible Assets, net
76,589

 
0

 
295,800

 
3 (c)
 
372,389

Other Long-Term Assets
55,506

 
40,551

 
19,693

 
3 (d)
 
115,750

Total Long-Term Assets
792,135

 
40,794

 
466,440

 
 
 
1,299,369

Total Assets
$
1,276,315

 
$
187,124

 
$
205,385

 
 
 
$
1,668,824

LIABILITIES
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
Accrued Compensation and Benefits
$
43,396

 
$
71,801

 
$
59,082

 
3 (e)
 
$
174,279

Other Current Liabilities
91,664

 
15,236

 
13,199

 
3 (f)
 
120,099

Total Current Liabilities
135,060

 
87,037

 
72,281

 
 
 
294,378

Long-Term Liabilities
 
 
 
 
 
 
 
 
 
Long-Term Debt
178,000

 
0

 
0

 
 
 
178,000

Long-Term Deferred Tax Liability, net
122,806

 
0

 
0

 
 
 
122,806

Other Long-Term Liabilities
20,340

 
37,648

 
(26,414
)
 
3 (g)
 
31,574

Total Long-Term Liabilities
321,146

 
37,648

 
(26,414
)
 
 
 
332,380

Total Liabilities
456,206

 
124,685

 
45,867

 
 
 
626,758

 
 
 
 
 
 
 
 
 
 
TEMPORARY EQUITY
 
 
 
 
 
 
 
 
 
Redeemable Noncontrolling Interest in Subsidiaries
20,984

 
0

 
229,600

 
3 (h)
 
250,584

PERMANENT EQUITY
 
 
 
 
 
 
 
 
 
Shareholders' Equity
 
 
 
 
 
 
 
 
 
Common Stock
356,138

 
95,695

 
(95,695
)
 
3 (i)
 
356,138

Retained Earnings
732,753

 
(32,870
)
 
25,227

 
3 (j)
 
725,110

Treasury Stock, at Cost
(288,277
)
 
0

 
0

 
 
 
(288,277
)
Other Shareholders' Equity
(1,489
)
 
(386
)
 
386

 
3 (i)
 
(1,489
)
Total Shareholders' Equity
799,125

 
62,439

 
(70,082
)
 
 
 
791,482

Total Liabilities, Temporary Equity and Permanent Equity
$
1,276,315

 
$
187,124

 
$
205,385

 
 
 
$
1,668,824


(See notes to unaudited pro forma condensed combined financial statements.)


1

Unaudited Pro Forma Condensed Combined Statements of Operations

Six Months Ended June 30, 2018
(in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
Federated
 
Hermes
 
Pro Forma Adjustments
 
Note
 
Pro Forma Combined
Revenue
 
 
 
 
 
 
 
 
 
Total Revenue
$
519,845

 
$
92,261

 
$
6,358

 
3 (k)
 
$
618,464

Operating Expenses
 
 
 
 
 
 
 
 
 
Compensation and Related
152,521

 
71,616

 
(5,412
)
 
3 (l)
 
218,725

Distribution
141,945

 
0

 
6,358

 
3 (k)
 
148,303

Other
64,951

 
26,117

 
3,794

 
3 (m)
 
94,862

Total Operating Expenses
359,417

 
97,733

 
4,740

 
 
 
461,890

Operating Income (Expenses)
160,428

 
(5,472
)
 
1,618

 
 
 
156,574

Nonoperating (Expenses) Income
 
 
 
 
 
 
 
 
 
Total Nonoperating (Expenses) Income, net
(29,783
)
 
1,623

 
28,978

 
3 (n)
 
818

Income (Loss) Before Income Taxes
130,645

 
(3,849
)
 
30,596

 
 
 
157,392

Income Tax Provision
31,972

 
209

 
7,496

 
3 (o)
 
39,677

Net Income (Loss) Including the Noncontrolling Interests in Subsidiaries
98,673

 
(4,058
)
 
23,100

 
 
 
117,715

Less: Net Loss Attributable to the Noncontrolling Interests in Subsidiaries
(480
)
 
0

 
(1,405
)
 
3 (p)
 
(1,885
)
Net Income (Loss)
$
99,153

 
$
(4,058
)
 
$
24,505

 
 
 
$
119,600

 
 
 
 
 
 
 
 
 
 
Earnings Per Common Share—Basic and Diluted
$
0.98

 
 
 
 
 
 
 
$
1.18

Weighted-Average Shares Outstanding
 
 
 
 
 
 
 
 
 
Basic
97,191

 
 
 
 
 
 
 
97,191

Diluted
97,192

 
 
 
 
 
 
 
97,192


(See notes to unaudited pro forma condensed combined financial statements.)



2

Unaudited Pro Forma Condensed Combined Statements of Operations

Year Ended December 31, 2017
(in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
Federated
 
Hermes
 
Pro Forma Adjustments
 
Note
 
Pro Forma Combined
Revenue
 
 
 
 
 
 
 
 
 
Total Revenue
$
1,102,924

 
$
170,409

 
$
8,871

 
3 (k)
 
$
1,282,204

Operating Expenses
 
 
 
 
 
 
 
 
 
Distribution
342,779

 
0

 
8,871

 
3 (k)
 
351,650

Compensation and Related
289,215

 
120,636

 
0

 
 
 
409,851

Other
129,422

 
38,152

 
8,110

 
3 (q)
 
175,684

Total Operating Expenses
761,416

 
158,788

 
16,981

 
 
 
937,185

Operating Income (Expenses)
341,508

 
11,621

 
(8,110
)
 
 
 
345,019

Nonoperating Income (Expenses)
 
 
 
 
 
 
 
 
 
Total Nonoperating Income, net
10,494

 
5,355

 
0

 
 
 
15,849

Income (Loss) Before Income Taxes
352,002

 
16,976

 
(8,110
)
 
 
 
360,868

Income Tax Provision (Benefit)
57,101

 
733

 
(2,952
)
 
3 (o)
 
54,882

Net Income (Loss) Including the Noncontrolling Interests in Subsidiaries
294,901

 
16,243

 
(5,158
)
 
 
 
305,986

Less: Net Income Attributable to the Noncontrolling Interests in Subsidiaries
3,560

 
54

 
2,534

 
3 (r)
 
6,148

Net Income (Loss)
$
291,341

 
$
16,189

 
$
(7,692
)
 
 
 
$
299,838

 
 
 
 
 
 
 
 
 
 
Earnings Per Common Share—Basic and Diluted
$
2.87

 
 
 
 
 
 
 
$
2.96

Weighted-Average Shares Outstanding
 
 
 
 
 
 
 
 
 
Basic
97,411

 
 
 
 
 
 
 
97,411

Diluted
97,412

 
 
 
 
 
 
 
97,412


(See notes to unaudited pro forma condensed combined financial statements.)



3
 
 
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information


(1) Basis of Presentation

On July 2, 2018, Federated Investors, Inc. (Federated) and its subsidiary, Federated Holdings (UK) II Limited, completed, effective as of July 1, 2018, the acquisition of a 60 percent majority interest in Hermes Fund Managers Limited (Hermes) from BT Pension Scheme (BTPS). BTPS retained a 29.5 percent interest in Hermes and contributed the remaining 10.5 percent interest into an employee benefit trust for the benefit of certain members of Hermes' management and other key employees under a new long-term incentive plan. Federated paid a total of £260.7 million ($344.3 million) which included £246 million for the previously announced cost of the acquisition and an additional £14.7 million primarily for Federated's 60 percent share of Hermes' estimated excess regulatory capital (£0.8 million of which was paid in September 2018).

The unaudited pro forma condensed combined financial statements are based on Federated's historical consolidated financial statements and Hermes historical consolidated financial information as adjusted to give effect to the July 2, 2018 acquisition of Hermes. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2018 and the year ended December 31, 2017 give effect to the acquisition of Hermes as if it had occurred as of January 1, 2017. The unaudited pro forma condensed combined balance sheet as of June 30, 2018 gives effect to the acquisition of Hermes as if it had occurred on June 30, 2018. The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the business combination, (2) factually supportable and (3) with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combination.

The historical consolidated financial information of Hermes was prepared in accordance with Financial Reporting Standard 102 (FRS 102). Pro forma adjustments to convert Hermes' historical consolidated financial information from FRS 102 to United States generally accepted accounting principles (U.S. GAAP) are included in Note 3 and were not deemed to be material to the unaudited pro forma condensed combined financial statements. The historical consolidated financial information was originally prepared in British pounds sterling but were translated to U.S. dollars using the following historical exchange rates for the unaudited pro forma condensed combined financial statements:
 
 
$ / £

Period end exchange rate as of June 30, 2018
 
1.3207

Average exchange rate for the six months ended June 30, 2018
 
1.3757

Average exchange rate for the year ended December 31, 2017
 
1.2889


Federated adopted Revenue from Contracts with Customers (Topic 606) effective January 1, 2018 using the modified retrospective method, which did not require the restatement of prior years. The unaudited pro forma condensed combined financial statements for 2018 reflects the new revenue guidance, while 2017 does not reflect the new revenue guidance. For additional information on Federated's adoption of Topic 606, see Federated's Quarterly Reports on Form 10-Q for the periods ended March 31, 2018 and June 30, 2018.

Federated's 2017 historical financial statements include a $70.4 million reduction to the income tax provision resulting from the revaluation of the net deferred tax liability due to the enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act), thereby increasing net income.

The unaudited pro forma condensed combined financial statements do not necessarily reflect what the combined company's financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial condition and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. The unaudited pro forma condensed combined financial statements do not reflect the realization of any cost savings or other synergies from the Hermes acquisition following the completion of the business combination.

These unaudited pro forma condensed combined financial statements should be read in conjunction with Federated's Annual Report on Form 10-K for the year ended December 31, 2017, Quarterly Reports on Form 10-Q for the periods ended March 31, 2018 and June 30, 2018 and Current Report on Form 8-K filed July 2, 2018, as well as the consolidated financial statements of Hermes Fund Managers Limited as of and for the year ended December 31, 2017, included in Exhibit 99.1.


4
 
 
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information


(2) Preliminary Purchase Price Allocation

Federated has performed a preliminary valuation of the fair market value of the Hermes' acquisition. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date:
(in millions)
 
 
Cash and Cash Equivalents
 
$
175.8

Other Current Assets
 
53.7

Goodwill
 
151.2

Intangible Assets
 
295.8

Other Long-Term Assets
 
60.2

Less: Liabilities Acquired
 
(162.8
)
Less: Fair Value of Minority Interest
 
(229.6
)
Total Purchase Price Consideration
 
$
344.3


The following table summarizes the additional information for the intangible assets acquired:
 
 
 
 
 
Pro Forma Amortization Expense
(dollars in millions)
Estimated Fair Value
 
Weighted-Average Estimated Useful Life in Years
 
Six Months Ended June 30, 2018
 
Twelve Months Ended December 31, 2017
Renewable Investment Advisory Contracts—Indefinite-Lived
$
145.0

 
Indefinite

 
N/A

 
N/A

Renewable Investment Advisory Contracts—Finite-Lived
96.3

 
8.4

 
5.8

 
11.6

Trade Name
54.5

 
Indefinite

 
N/A

 
N/A

Total Intangible Assets
$
295.8

 
 
 
$
5.8

 
$
11.6


This preliminary purchase price allocation has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined balance sheet and statements of operations. The final purchase price allocation will be determined when Federated has completed the detailed valuations and necessary calculations. The final purchase price allocation could differ materially from the preliminary purchase price allocation used in the pro forma adjustments and may include changes to intangible assets and goodwill.

(3) Pro Forma Adjustments

The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change. With the exception of Note 3 (o), pro forma adjustments have not been adjusted for any tax-related impact. Management believes that any tax-related impact is immaterial to the unaudited pro forma condensed combined financial statements. The following adjustments have been reflected in the unaudited pro forma condensed combined financial statements:

(a) Represents the following:
(in millions)
 
 
Cash paid to acquire 60% interest in Hermes1
 
$
(344.3
)
Cash received from BTPS for long-term incentive plan accelerated-vesting payouts as a result of the Hermes acquisition
 
83.2

Total pro forma adjustment to Cash and Cash Equivalents
 
$
(261.1
)
1
In June of 2018, Federated borrowed $18 million from its existing revolving credit facility to fund a portion of the Hermes acquisition and repaid the borrowings within three weeks. Due to the short-term borrowing period, for the purpose of this pro forma presentation, Federated presented the entire payment as cash.



5
 
 
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information


(b) Represents the fair value of the goodwill acquired based on the preliminary valuation results, offset by the elimination of Hermes' existing goodwill balance. See Note (2) for the preliminary purchase price allocation.

(c) Represents the fair value of the intangible assets acquired based on the preliminary valuation results. See Note (2) for the preliminary purchase price allocation.

(d) Represents the following:
(in millions)
 
 
Adjustment to fair value for long-term assets acquired1
 
$
13.9

Adjustment to Hermes' deferred tax asset, due largely to the accelerated amortization of the long-term incentive plan
 
5.8

Total pro forma adjustment to Other Long-Term Assets
 
$
19.7

1
See Note (2) for the preliminary purchase price allocation.

(e) Represents the accruals related to the accelerated vesting of certain Hermes' incentive compensation plans.

(f) Represents the following:
(in millions)
 
 
Acquisition-related costs accrued by Federated after balance sheet date
 
$
7.7

Acquisition-related costs accrued by Hermes after balance sheet date
 
5.7

Reversal of Hermes' income taxes payable
 
(0.2
)
Total pro forma adjustment to Other Current Liabilities
 
$
13.2


(g) Represents the payoff of the subordinated debt to BTPS that occurred in connection with the Hermes acquisition.

(h) Represents the fair value of the minority interest based on the preliminary valuation results. See Note (2) for the preliminary purchase price allocation.

(i) Represents the elimination of Hermes' historical equity balances. Hermes' historical Retained Earnings balance is eliminated in Note 3 (j).

(j) Represents the following:
(in millions)
 
 
Elimination of Hermes' historical Retained Earnings balance
 
$
32.9

Acquisition-related costs accrued by Federated after balance sheet date
 
(7.7
)
Total pro forma adjustment to Retained Earnings
 
$
25.2


(k) Represents the reclassification of distribution-related expenses to conform to Federated's U.S. GAAP accounting policies.

(l) Represents the reversal of expense related to a long-term incentive plan that would have accelerated as a result of an assumed January 1, 2017 closing of the Hermes acquisition.


6
 
 
 
Notes to Unaudited Pro Forma Condensed Combined Financial Information


(m) Represents the following:
(in millions)
 
 
Amortization of newly acquired intangible assets1
 
$
5.8

Elimination of acquisition-related costs incurred by Federated during the period
 
(2.8
)
Elimination of the foreign exchange gain recognized in the second quarter of 2018 as a result of holding British pound sterling at quarter end
 
1.7

Elimination of Hermes' amortization of goodwill to conform to U.S. GAAP
 
(0.9
)
Total pro forma adjustment to Other Operating Expenses
 
$
3.8

1
See Note (2) for additional information.

(n) Represents the elimination of the loss on foreign currency forward transactions entered into in order to hedge against foreign exchange rate fluctuations associated with the payment for the Hermes acquisition.

(o) Represents the income tax effect of pro forma adjustments based on the effective tax rate for the period presented, excluding the 2017 impact of the Tax Act.

(p) Represents the following:
(in millions)
 
 
40% of amortization of newly acquired intangible assets1
 
$
(2.4
)
40% of reversal of expense related to a long-term incentive plan (see Note 3 (l))
 
2.2

40% of Hermes' net loss
 
(1.6
)
40% of the reversal of Hermes amortization of goodwill (see Note 3 (m))
 
0.4

Total pro forma adjustment to Net Loss Attributable to the Noncontrolling Interests in Subsidiaries
 
$
(1.4
)
1
See Note (2) for additional information.    

(q) Represents the following:
(in millions)
 
 
Amortization of newly acquired intangible assets1
 
$
11.6

Elimination of acquisition-related costs incurred by Federated during the period
 
(1.8
)
Elimination of Hermes' amortization of goodwill to conform to U.S. GAAP
 
(1.7
)
Total pro forma adjustment to Other Operating Expenses
 
$
8.1

1
See Note (2) for additional information.

(r) Represents the following:
(in millions)
 
 
40% of Hermes' net income
 
$
6.5

40% of amortization of newly acquired intangible assets1
 
(4.7
)
40% of the reversal of Hermes amortization of goodwill (see Note 3 (q))
 
0.7

Total pro forma adjustment to Net Income Attributable to the Noncontrolling Interests in Subsidiaries
 
$
2.5

1
See Note (2) for additional information.




7