Attached files
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EX-99.1 - EXHIBIT 99.1 - FEDERATED HERMES, INC. | exhibit991-hfml2017final.htm |
8-K - 8-K - FEDERATED HERMES, INC. | a201809178-k.htm |
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.)
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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.)
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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.)
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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.
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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. |
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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.
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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. |
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