Federated(FHI) - 2022 Q4 - Annual Report

Part I Item 1 Business Federated Hermes is a global investment manager with $668.9 billion AUM, focusing on active, responsible investing across diverse asset classes, driven by advisory fees, and operating in a highly competitive and regulated environment General Overview Federated Hermes is a global leader in active, responsible investing, managing $668.9 billion in assets under management (AUM) as of December 31, 2022, operating solely in investment management[14][15] - The company integrates proprietary insights from fundamental environmental, social, and governance (ESG) factors and engagement research into nearly all its investment strategies[14] - Principal revenue is investment advisory fees, primarily based on AUM of investment products and strategies, with domestic and foreign advisory subsidiaries registered under relevant regulations[15] Assets Under Management (AUM) This section details Federated Hermes' assets under management by asset class at period end and average over time Managed Assets at Period End (December 31, 2022 vs. 2021) | $ in millions | As of December 31, 2022 | As of December 31, 2021 | 2022 vs. 2021 Change (%) | | :-------------------- | :---------------------- | :---------------------- | :----------------------- | | Equity | $81,523 | $96,716 | (16)% | | Fixed-Income | $86,743 | $97,550 | (11)% | | Alternative / Private Markets | $20,802 | $22,920 | (9)% | | Multi-Asset | $2,989 | $3,780 | (21)% | | Total Long-Term Assets | $192,057 | $220,966 | (13)% | | Money Market | $476,844 | $447,907 | 6% | | Total Managed Assets | $668,901 | $668,873 | 0% | Average Managed Assets (2022 vs. 2021 vs. 2020) | $ in millions | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | 2022 vs. 2021 Change (%) | 2021 vs. 2020 Change (%) | | :-------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :----------------------- | :----------------------- | | Equity | $84,793 | $98,040 | $80,591 | (14)% | 22% | | Fixed-Income | $89,776 | $91,564 | $74,403 | (2)% | 23% | | Alternative / Private Markets | $21,799 | $20,754 | $18,206 | 5% | 14% | | Multi-Asset | $3,273 | $3,879 | $3,813 | (16)% | 2% | | Total Long-Term Assets | $199,641 | $214,237 | $177,013 | (7)% | 21% | | Money Market | $432,992 | $418,562 | $436,895 | 3% | (4)% | | Total Average Managed Assets | $632,633 | $632,799 | $613,908 | 0% | 3% | - Changes in average asset mix directly impact operating income, as advisory fees vary by asset class and product type, with multi-asset and equity products generally having higher fees than money market products[21] Revenue This section presents Federated Hermes' total revenue and its components over three years Revenue ($ in thousands) | $ in thousands | 2022 | 2021 | 2020 | 2022 vs. 2021 Change (%) | 2021 vs. 2020 Change (%) | | :-------------------- | :---------- | :---------- | :---------- | :----------------------- | :----------------------- | | Investment Advisory Fees, net | $1,011,631 | $915,984 | $1,011,467 | 10% | (9)% | | Administrative Service Fees, net | $294,557 | $306,639 | $318,152 | (4)% | (4)% | | Other Service Fees, net | $139,626 | $77,824 | $118,649 | 79% | (34)% | | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | 11% | (10)% | Investment Products and Strategies Federated Hermes offers a diverse range of investment products and strategies, integrating fundamental research and ESG factors - Federated Hermes offers a diverse range of products including money market ($476.8 billion AUM), equity ($81.5 billion AUM), fixed-income ($86.7 billion AUM), alternative/private markets ($20.8 billion AUM), and multi-asset ($3.0 billion AUM) as of December 31, 2022[24][25][26][27][28] - The investment process integrates fundamental research, credit analysis, ESG factors, quantitative models, and disciplined portfolio construction[29] Distribution Channels and Product Markets Federated Hermes distributes products globally through various channels, with a significant portion of managed assets in the U.S. financial intermediary market - Federated Hermes distributes products and services to over 11,000 institutions and intermediaries globally, utilizing a sales force of over 200 representatives[31] Market Segment Percentage of Managed Assets (as of Dec 31, 2022) | Market Segment | Percentage of Managed Assets (%) | | :-------------------------- | :------------------------------- | | U.S. financial intermediary | 63% | | U.S. institutional | 28% | | International | 9% | - Managed assets in the U.S. financial intermediary market primarily consist of money market ($317.9 billion) and equity ($55.1 billion) assets[33] - International managed assets include significant equity ($23.5 billion) and alternative/private markets ($19.4 billion) assets[35] Competition The investment management industry is highly competitive, with Federated Hermes competing against numerous funds and financial institutions based on performance, fees, and ESG commitments - The investment management business is highly competitive, with Federated Hermes competing against over 7,000 mutual funds and 2,800 ETFs, as well as other financial institutions[37] - Competition is driven by investment performance, fees, service quality, ESG commitments, and relationships with intermediaries[39] - Federated Hermes launched its first ETFs in December 2021 (fixed-income) and November 2022 (dividend income equity) to compete in this evolving market[38] Regulatory Matters This section outlines the extensive and evolving domestic and international regulatory landscape impacting Federated Hermes' operations Current Regulatory Environment - Domestic The domestic regulatory environment saw increased activity in 2022, with the SEC proposing and finalizing numerous rules impacting the investment management industry, including money market fund reform, climate change disclosure, and cybersecurity - The SEC's Fall 2022 Unified Agenda identified 52 rulemaking initiatives, with 21 final rules and 13 proposed rules expected by April 2023, covering areas like money market fund reform, climate change disclosure, and cybersecurity[41] - Federated Hermes opposes swing pricing for institutional prime money market funds, advocating for discretionary fees and gates, and supports a Reverse Distribution Mechanism (RDM) in negative interest rate environments for government money market funds[45][46] - The DOL issued a new rule on 'Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights' (New DOL ESG/Proxy Voting Rule) in November 2022, clarifying that fiduciaries can evaluate economic effects of climate change and other ESG factors[57][58] - New tax reforms from the Inflation Reduction Act of 2022 include a 15% minimum corporate tax and a 1% tax on corporate share repurchases, effective 2023[69] Current Regulatory Environment - International International regulatory activity, particularly in the EU and UK, also increased in 2022, with a focus on sustainable finance (SFDR, Taxonomy Regulation), ESG disclosures, and money market fund reforms - EU and UK regulators are actively addressing sustainable finance, with the SFDR and Taxonomy Regulation establishing frameworks for ESG disclosures and product classification (Article 6, 8, 9 funds)[81] - Brexit continues to cause regulatory divergence between the UK and EU, impacting product distribution and increasing compliance burdens, with the Brexit Freedoms Bill and FSM Bill aiming to establish a new UK-specific regulatory regime[73][75][77] - The transition from LIBOR is nearly complete, with USD LIBOR publication ceasing after June 30, 2023, requiring renegotiation or re-pricing of financial transactions to alternative rates like SOFR[99][101] - The Digital Operational Resilience Act (DORA) in the EU, effective January 17, 2025, sets uniform requirements for the security of network and information systems in the financial sector, with the UK also planning similar legislation[87] Human Capital Resource Management Federated Hermes prioritizes human capital management, with a global workforce, competitive compensation, and a commitment to diversity and inclusion - As of December 31, 2022, Federated Hermes had 1,961 employees globally, with a significant presence in Pittsburgh, London, and New York[111] - The company's compensation programs are designed to be competitive, rewarding individual contributions and aligning employee interests with business strategy, including a mix of salary, bonus, and long-term incentives[113][114][115][116] - Federated Hermes is committed to diversity and inclusion, with approximately 40% women employees globally and various programs to advance diversity in recruitment, onboarding, and training[124][125][126] Information about our Executive Officers This section lists the key executive officers of Federated Hermes, Inc. and their respective ages Executive Officers | Name | Position | Age | | :------------------- | :----------------------------------------------------------------------- | :-- | | J. Christopher Donahue | President, Chief Executive Officer, Chairman and Director of Federated Hermes, Inc. | 73 | | Gordon J. Ceresino | Vice Chairman of Federated Hermes, Inc. | 65 | | Thomas R. Donahue | Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc. | 64 | | Dolores D. Dudiak | Vice President, Director of Human Resources of Federated Hermes, Inc. | 64 | | John B. Fisher | Vice President and Director of Federated Hermes, Inc. and President and Chief Executive Officer of Federated Advisory Companies | 66 | | Peter J. Germain | Executive Vice President, Chief Legal Officer and Secretary of Federated Hermes, Inc. | 63 | | Richard A. Novak | Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes, Inc. | 59 | | Saker A. Nusseibeh | Chief Executive Officer, Federated Hermes Limited | 61 | | Paul A. Uhlman | Vice President of Federated Hermes, Inc. and President of Federated Securities Corp. | 56 | | Stephen P. Van Meter | Vice President and Chief Compliance Officer of Federated Hermes, Inc. | 47 | Available Information Federated Hermes provides public access to its SEC filings and reports on its corporate website - Federated Hermes makes its annual, quarterly, and current reports, along with other SEC filings, available free of charge on its website, www.FederatedHermes.com[143](index=143&type=chunk) Item 1A Risk Factors Federated Hermes faces a wide array of inherent risks in the investment management business, including specific risks related to its operations and general economic, market, regulatory, legal, and operational risks Specific Risk Factors This section outlines specific risks, including revenue concentration in money market assets, intense competition, AUM fluctuations, and the company's "controlled company" status - A significant portion of Federated Hermes' revenue (approximately 40% in 2022) is attributable to money market assets, making it vulnerable to declines in AUM or inability to maintain stable NAVs[146][148] - The investment management business is highly competitive, with factors like investment performance, fees, and ESG commitments influencing sales; competitive pressures can lead to fee reductions[150] - Declines in AUM or shifts in asset mix (e.g., from higher-fee equity to lower-fee money market products) can materially affect revenue and profitability[155] - The company's Class A common stock is held by a trust for the Donahue family, making Federated Hermes a 'controlled company' and exempting it from certain NYSE corporate governance requirements, which could affect its stock price[167] General Risk Factors This section covers general risks such as economic downturns, evolving regulations, operational vulnerabilities, and human capital management challenges - Economic and market downturns, including geopolitical tensions like the Russia-Ukraine conflict, can cause volatility, illiquidity, and adverse effects on asset values, investor confidence, and supply of investments[168][169] - Extensive and evolving domestic and foreign regulations, including potential designation as a systemically important financial institution, increase compliance costs and risks, potentially impacting product offerings and profitability[176][179][181] - Operational risks, including inadequate technology, human error, and cybersecurity incidents, can lead to business disruptions, data loss, financial losses, and reputational damage[190][193][195] - The ability to attract and retain key personnel is critical, with increased competition and remote work arrangements posing human capital resource management risks[200][201] Item 1B Unresolved Staff Comments There are no unresolved staff comments - No unresolved staff comments were reported[210] Item 2 Properties Federated Hermes' primary property consists of approximately 259,000 square feet of leased corporate headquarters space in Pittsburgh, Pennsylvania, used for its investment management business - Federated Hermes' material operating leases relate to its corporate headquarters in Pittsburgh, Pennsylvania, occupying approximately 259,000 square feet[211] Item 3 Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note (20) to the Consolidated Financial Statements - Information on legal proceedings is included in Note (20) to the Consolidated Financial Statements[212] Item 4 Mine Safety Disclosures This item is not applicable to Federated Hermes - Mine Safety Disclosures are not applicable to the registrant[213] Part II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Federated Hermes' Class B common stock trades on the NYSE under the symbol FHI, with 27,091 beneficial shareholders as of January 27, 2023, and the company actively repurchased shares under its program - Federated Hermes' Class B common stock is traded on the NYSE under the symbol FHI[215] - As of January 27, 2023, there were 27,091 beneficial shareholders of Class B common stock[216] Stock Repurchases (Q4 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :------- | :------------------------------- | :--------------------------- | :-------------------------------------------------------- | :----------------------------------------------------------------------------- | | October | 9,397 | $0.00 | 0 | 4,957,415 | | November | 115,735 | $10.75 | 35,000 | 4,922,415 | | December | 202,000 | $35.52 | 200,000 | 4,722,415 | | Total | 327,132 | $25.74 | 235,000 | 4,722,415 | - A share repurchase program authorized in June 2022 allows for the repurchase of up to 5.0 million shares of Class B common stock, with 4.7 million shares remaining available as of December 31, 2022[217][475] Item 6 [Reserved] This item is reserved and contains no information Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis provides an overview of Federated Hermes' financial performance and condition, highlighting key business developments, asset trends, and operational results General Federated Hermes' revenue is primarily derived from investment advisory, administrative, and other fund-related services, calculated as a percentage of average net assets - Federated Hermes' revenue is primarily derived from investment advisory, administrative, and other fund-related services, calculated as a percentage of average net assets[223][224] - Fee rates vary by asset and service type, with multi-asset and equity products generally yielding higher advisory fees than money market and fixed-income products[224] - Key financial performance indicators include AUM, gross and net product sales, total revenue, and net income[226] Business Developments This section highlights key business developments in 2022, including an intangible asset impairment, the CWH acquisition, issuance of senior notes, and the FHL equity acquisition - A $31.5 million non-cash impairment of an intangible asset related to the 2018 FHL acquisition was recorded as of December 31, 2022[227] - Federated Hermes acquired C.W. Henderson and Associates, Inc. (CWH) on October 1, 2022, specializing in tax-exempt municipal securities, for an upfront cash payment of $28.1 million and potential contingent payments[228][397] - On March 17, 2022, Federated Hermes issued $350 million in unsecured senior notes at a fixed interest rate of 3.29% per annum, due March 17, 2032[229][453] - The company acquired the remaining 10% noncontrolling interests in FHL on March 14, 2022, making FHL an indirect, wholly-owned subsidiary[230][400] - Voluntary Yield-related Fee Waivers, which totaled $85.3 million in 2022 (net negative pre-tax impact of $18.8 million), were eliminated in the second half of 2022 due to rising short-term interest rates[233][234] Asset Highlights This section provides a detailed overview of Federated Hermes' managed assets at period end and average managed assets over three years Managed Assets at Period End (December 31, 2022 vs. 2021) | $ in millions | 2022 | 2021 | 2022 vs. 2021 Change (%) | | :-------------------- | :-------- | :-------- | :----------------------- | | Equity | $81,523 | $96,716 | (16)% | | Fixed-Income | $86,743 | $97,550 | (11)% | | Alternative / Private Markets | $20,802 | $22,920 | (9)% | | Multi-Asset | $2,989 | $3,780 | (21)% | | Total Long-Term Assets | $192,057 | $220,966 | (13)% | | Money Market | $476,844 | $447,907 | 6% | | Total Managed Assets | $668,901 | $668,873 | 0% | Average Managed Assets (2022 vs. 2021 vs. 2020) | $ in millions | 2022 | 2021 | 2020 | 2022 vs. 2021 Change (%) | 2021 vs. 2020 Change (%) | | :-------------------- | :-------- | :-------- | :-------- | :----------------------- | :----------------------- | | Equity | $84,793 | $98,040 | $80,591 | (14)% | 22% | | Fixed-Income | $89,776 | $91,564 | $74,403 | (2)% | 23% | | Alternative / Private Markets | $21,799 | $20,754 | $18,206 | 5% | 14% | | Multi-Asset | $3,273 | $3,879 | $3,813 | (16)% | 2% | | Total Long-Term Assets | $199,641 | $214,237 | $177,013 | (7)% | 21% | | Money Market | $432,992 | $418,562 | $436,895 | 3% | (4)% | | Total Average Managed Assets | $632,633 | $632,799 | $613,908 | 0% | 3% | - Average managed assets remained flat in 2022 compared to 2021, with money market assets increasing by 3% while equity assets decreased by 14% and fixed-income assets by 2%[255] - Market depreciation significantly impacted equity and fixed-income assets in 2022, with the S&P 500 Index returning -19.4% and the Bloomberg US Aggregate Bond Index returning -13.0%[255][259] Results of Operations This section analyzes Federated Hermes' financial performance, highlighting changes in revenue, operating expenses, nonoperating income, and net income - Total revenue increased by $145.4 million in 2022 compared to 2021, primarily due to a $335.0 million decrease in Voluntary Yield-related Fee Waivers, partially offset by lower equity and fixed-income revenue[262] - Total operating expenses increased by $174.8 million in 2022, mainly driven by a $153.7 million increase in Distribution expense (due to reduced fee waivers) and a $30.2 million increase in Intangible Asset Related expense due to impairment[264] - Nonoperating Income (Expenses), net, decreased by $40.6 million, primarily due to a $38.2 million decrease in Gain (Loss) on Securities, net, and higher debt expense[265] - Net income attributable to Federated Hermes, Inc. decreased by $30.8 million in 2022, resulting in diluted EPS of $2.65, down from $2.75 in 2021[267][337] Liquidity and Capital Resources Federated Hermes maintained strong liquidity and capital resources in 2022, with increased operating cash flow, strategic acquisitions, and new debt issuance - Liquid assets, net of noncontrolling interests, totaled $559.5 million at December 31, 2022, up from $492.7 million at December 31, 2021[268] - Net cash provided by operating activities increased to $323.9 million in 2022 from $170.4 million in 2021, driven by decreased cash paid for trading securities and increased cash from revenue[270] - Net cash used by investing activities was $32.4 million in 2022, primarily for the CWH Acquisition and purchases of investments[271] - Net cash used by financing activities was $168.5 million in 2022, including debt payments, share repurchases, and dividends, partially offset by new borrowings[272] - Federated Hermes issued $350 million in unsecured senior notes in March 2022 and has a $350 million revolving credit facility, maintaining compliance with all debt covenants (interest coverage ratio of 42:1 and leverage ratio of 0.79:1)[273][274][276] Financial Position This section details changes in Federated Hermes' financial position, including goodwill, intangible assets, deferred tax liabilities, and treasury stock activity - Goodwill increased by $1.5 million to $800.4 million at December 31, 2022, primarily due to the CWH Acquisition, partially offset by foreign exchange fluctuations[288][336] - Intangible Assets, net, decreased by $62.1 million to $409.2 million, mainly due to a $31.5 million impairment charge and foreign exchange rate fluctuations[289][336] - Long-Term Deferred Tax Liability, net, decreased by $24.8 million, influenced by a reduction in foreign deferred tax liability from an intangible asset impairment and foreign exchange rate fluctuations[292][479] - In July 2022, Federated Hermes retired 10 million treasury shares, reducing Treasury Stock by $313.8 million and Class B common stock by $42.7 million, with no impact on total equity[293][476] Variable Interest Entities Federated Hermes consolidates certain Federated Hermes Fund VIEs where it is deemed the primary beneficiary, reflecting their assets, liabilities, and operations in its financial statements - Federated Hermes consolidates certain Federated Hermes Fund VIEs where it is deemed the primary beneficiary, reflecting their assets, liabilities, and operations in its financial statements[295] Critical Accounting Policies This section highlights critical accounting policies, particularly the valuation of indefinite-lived intangible assets, which involves significant management estimates and judgment - The valuation of indefinite-lived intangible assets, particularly the FHL right to manage public fund assets, involves significant management estimates and judgment, including projected AUM, revenue growth, profit margins, and discount rates[298][299] - A $31.5 million non-cash impairment charge was recorded for the FHL right to manage public fund assets as of December 31, 2022, driven by increased market interest rates and decreased near-term projected cash flows[300] - Sensitivity analysis indicates that a 10% change in projected revenue growth rates would result in an 8% change in estimated fair value, and a 25 basis point change in the discount rate would result in a 3% inverse change[300] Item 7A Quantitative and Qualitative Disclosures about Market Risk Federated Hermes is exposed to various market risks, including interest-rate, credit, price, and foreign exchange risks, which are continuously identified, assessed, and managed - Federated Hermes is exposed to interest-rate risk from debt securities and fixed-income funds, with a hypothetical 300-basis-point fluctuation in interest rates or credit spreads potentially impacting financial condition by approximately $10 million[304] - Price risk from equity Federated Hermes Funds and Separate Accounts ($55.4 million investment) could impact results by approximately $11 million with a hypothetical 20% fair value fluctuation[305] - Foreign exchange risk from non-USD securities and operating cash accounts could impact results by approximately $10-11 million with a hypothetical 20% fluctuation in exchange rates[306][307] - Nearly all revenue is based on AUM, meaning a 20% decline in average AUM would result in a corresponding 20% decline in revenue, with a potentially greater or lesser impact on net income due to varying expense proportionality[309] Item 8 Financial Statements and Supplementary Data This section presents Federated Hermes' audited consolidated financial statements for the years ended December 31, 2022, 2021, and 2020, along with management's assessment of internal controls and notes to the financial statements Management's Assessment of Internal Control Over Financial Reporting Management concluded that Federated Hermes' internal controls over financial reporting were effective as of December 31, 2022 - Management concluded that Federated Hermes' internal controls over financial reporting were effective as of December 31, 2022, based on the COSO 2013 framework[312] Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on Federated Hermes' consolidated financial statements and the effectiveness of internal control over financial reporting - Ernst & Young LLP issued an unqualified opinion on Federated Hermes' consolidated financial statements for the period ended December 31, 2022, and on the effectiveness of internal control over financial reporting[316][317] - A critical audit matter identified was the valuation of the indefinite-lived intangible asset related to the FHL acquisition, due to significant estimation uncertainty in determining fair value, particularly regarding the discount rate and projected cash flows[321] Consolidated Balance Sheets This section presents Federated Hermes' consolidated balance sheets for December 31, 2022, and 2021 Consolidated Balance Sheets (Selected Items, in thousands) | Item | December 31, 2022 | December 31, 2021 | | :------------------------------------ | :---------------- | :---------------- | | Total Current Assets | $651,031 | $559,447 | | Goodwill | $800,417 | $798,871 | | Intangible Assets, net | $409,157 | $471,209 | | Total Assets | $2,020,479 | $2,018,187 | | Total Current Liabilities | $257,413 | $270,707 | | Long-Term Debt | $347,581 | $223,350 | | Total Liabilities | $912,966 | $840,968 | | Total Permanent Equity | $1,045,692 | $1,114,017 | Consolidated Statements of Income This section presents Federated Hermes' consolidated statements of income for the years ended December 31, 2022, 2021, and 2020 Consolidated Statements of Income (Selected Items, in thousands) | Item | 2022 | 2021 | 2020 | | :------------------------------------ | :---------- | :---------- | :---------- | | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | | Total Operating Expenses | $1,109,018 | $934,175 | $1,030,117 | | Operating Income | $336,796 | $366,272 | $418,151 | | Income Before Income Taxes | $306,222 | $376,290 | $446,057 | | Net Income Attributable to Federated Hermes, Inc. | $239,496 | $270,293 | $326,364 | | Diluted Earnings Per Common Share | $2.65 | $2.75 | $3.23 | Consolidated Statements of Comprehensive Income This section presents Federated Hermes' consolidated statements of comprehensive income for the years ended December 31, 2022, 2021, and 2020 Consolidated Statements of Comprehensive Income (in thousands) | Item | 2022 | 2021 | 2020 | | :---------------------------------------------------------------- | :--------- | :--------- | :--------- | | Net Income Including the Noncontrolling Interests in Subsidiaries | $234,564 | $272,308 | $336,022 | | Other Comprehensive Income (Loss), net of tax | $(64,367) | $(6,252) | $22,013 | | Comprehensive Income Attributable to Federated Hermes, Inc. | $177,458 | $271,484 | $341,784 | Consolidated Statements of Changes in Equity This section outlines the changes in Federated Hermes' total permanent equity for the years ended December 31, 2022, 2021, and 2020 - Total Permanent Equity decreased from $1,114,017 thousand in 2021 to $1,045,692 thousand in 2022[339][341] - Key changes in equity for 2022 included net income of $239,496 thousand, other comprehensive loss of $62,038 thousand (primarily foreign currency translation), and significant treasury stock activity including repurchases and retirement of 10 million shares[339][341] Consolidated Statements of Cash Flows This section presents Federated Hermes' consolidated statements of cash flows for the years ended December 31, 2022, 2021, and 2020 Consolidated Statements of Cash Flows (Selected Items, in thousands) | Item | 2022 | 2021 | 2020 | | :---------------------------------------------------------------- | :--------- | :--------- | :--------- | | Net Cash Provided (Used) by Operating Activities | $323,948 | $170,383 | $373,241 | | Net Cash Provided (Used) by Investing Activities | $(32,357) | $10,816 | $(24,823) | | Net Cash Provided (Used) by Financing Activities | $(168,513) | $(249,472) | $(295,136) | | Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents | $102,904 | $(70,584) | $59,124 | | Cash and Cash Equivalents (End of Period) | $336,782 | $233,327 | $301,819 | Notes to the Consolidated Financial Statements This section provides detailed disclosures on Federated Hermes' significant accounting policies, business combinations, revenue recognition, concentration risks, investments, fair value measurements, derivatives, intangible assets, property and equipment, debt, employee benefits, share-based compensation, common stock, income taxes, earnings per share, leases, and commitments and contingencies (1) Summary of Significant Accounting Policies This note outlines Federated Hermes' significant accounting policies, including revenue recognition, consolidation principles, investment valuation, and accounting for goodwill and intangible assets - Revenue from investment advisory, administrative, and most other services is recognized over time as the customer simultaneously consumes the benefit, with variable consideration recognized as uncertainties are resolved[349] - Federated Hermes consolidates entities where it has a controlling financial interest, either as a primary beneficiary of a VIE or by holding a majority voting interest in a VRE[355][356][358] - Goodwill and indefinite-lived intangible assets are tested for impairment annually or when indicators exist, using qualitative or quantitative approaches, with fair value determined by methods like the excess earnings method[371][372] - Leases are classified as operating or financing, with a right-of-use (ROU) asset and lease liability recorded on the balance sheet, measured at the present value of unpaid lease payments[379] (2) Business Combination and Equity Acquisition This note details the CWH Acquisition on October 1, 2022, and the acquisition of the remaining 10% noncontrolling interests in FHL on March 14, 2022 - Federated Hermes acquired C.W. Henderson and Associates, Inc. (CWH) on October 1, 2022, for an upfront cash payment of $28.1 million, with potential contingent payments up to $17.6 million over five years[397] Preliminary Purchase Price Allocation for CWH Acquisition (in millions) | Item | Amount | | :--------------------------------- | :----- | | Right-of-Use Asset | $0.8 | | Intangible Assets | $15.4 | | Goodwill | $16.4 | | Less: Lease Liability Assumed | $0.8 | | Less: Fair Value of Contingent Consideration | $3.7 | | Total Upfront Purchase Price Consideration | $28.1 | - On March 14, 2022, Federated Hermes acquired the remaining 10% noncontrolling interests in FHL, making it a wholly-owned subsidiary, through an exchange of FHL shares for Federated Hermes Class B common stock valued at $47.5 million[400][401] (3) Revenue from Contracts with Customers This note disaggregates Federated Hermes' revenue by asset class, performance obligation, and product type for 2020-2022, and outlines expected future fixed revenue Revenue Disaggregated by Asset Class (in thousands) | Asset Class | 2022 | 2021 | 2020 | | :---------- | :---------- | :---------- | :---------- | | Money market | $575,261 | $239,318 | $570,815 | | Equity | $526,957 | $677,917 | $551,028 | | Fixed-income | $206,794 | $237,702 | $193,649 | | Other | $136,802 | $145,510 | $132,776 | | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | Revenue Disaggregated by Performance Obligation (in thousands) | Performance Obligation | 2022 | 2021 | 2020 | | :--------------------- | :---------- | :---------- | :---------- | | Asset Management | $1,011,631 | $915,984 | $1,011,467 | | Administrative Services | $294,557 | $306,639 | $318,152 | | Distribution | $112,356 | $49,600 | $92,922 | | Other | $27,270 | $28,224 | $25,727 | | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | Revenue Disaggregated by Product Type (in thousands) | Product Type | 2022 | 2021 | 2020 | | :------------------ | :---------- | :---------- | :---------- | | Federated Hermes Funds | $1,188,933 | $1,024,922 | $1,191,851 | | Separate Accounts | $238,638 | $259,026 | $241,631 | | Other | $18,243 | $16,499 | $14,786 |\ | Total Revenue | $1,445,814 | $1,300,447 | $1,448,268 | Expected Future Fixed Revenue from Unsatisfied Performance Obligations (in thousands) | Year | Amount | | :------------------ | :---------- | | 2023 | $9,566 | | 2024 | $3,258 | | 2025 | $1,131 | | 2026 and Thereafter | $307 | | Total | $14,262 | (4) Concentration Risk This note highlights Federated Hermes' significant revenue concentration in money market assets and specific fund strategies, as well as reliance on a single intermediary Revenue Concentration by Asset Class (%) | Asset Class | 2022 | 2021 | 2020 | | :------------------ | :--- | :--- | :--- | | Money Market Assets | 40% | 19% | 40% | | Equity Assets | 36% | 52% | 38% | | Fixed-Income Assets | 14% | 18% | 13% | - The increase in money market revenue concentration in 2022 was primarily due to a decrease in Voluntary Yield-related Fee Waivers[408] Revenue Concentration by Investment Fund Strategy (%) | Investment Fund Strategy | 2022 | 2021 | 2020 | | :---------------------------------------- | :--- | :--- | :--- | | Federated Government Obligations Fund | 12% | 5% | 13% | | Federated Strategic Value Dividend strategy | 10% | 9% | 8% | | Federated Hermes Kaufmann Fund and Federated Hermes Kaufmann Fund II | 7% | 11% | 9% | - Approximately 11% of Federated Hermes' total revenue in 2022 was derived from services provided to one intermediary, The Bank of New York Mellon Corporation[413] (5) Consolidation This note explains Federated Hermes' consolidation of certain funds and entities where it holds a controlling financial interest, and details fee waivers and maximum risk of loss from non-consolidated VIEs - Federated Hermes consolidates VREs and VIEs where it has a controlling financial interest, with assets of consolidated funds restricted for their own use[415][419] Federated Hermes' Net Interest in Consolidated VIEs (in millions) | Item | 2022 | 2021 | | :---------------------------------------- | :---- | :---- | | Cash and Cash Equivalents | $8.0 | $3.0 | | Investments—Consolidated Investment Companies | $50.1 | $35.9 | | Other Assets | $0.7 | $0.1 | | Other Long-Term Assets | $13.4 | $13.8 | | Less: Liabilities | $5.7 | $1.4 | | Less: Accumulated Other Comprehensive Income (Loss), net of tax | $1.2 | $0.0 | | Less: Redeemable Noncontrolling Interests in Subsidiaries | $49.5 | $33.3 | | Federated Hermes' Net Interest in VIEs | $15.8 | $18.1 | - Fee Waivers, including Voluntary Yield-related Fee Waivers, totaled $563.2 million in 2022, with $440.7 million related to money market funds[416] - The maximum risk of loss related to investments in non-consolidated VIEs was $101.7 million at December 31, 2022, primarily from Federated Hermes Funds[424] (6) Investments This note details Federated Hermes' investments in non-consolidated and consolidated funds, and reports net gains and losses on securities - As of December 31, 2022, Federated Hermes held $67.0 million in non-consolidated fluctuating-value Federated Hermes Funds and $9.5 million in Separate Accounts, primarily in domestic debt and equity securities[425] - Investments held by consolidated Federated Hermes Funds totaled $108.4 million at December 31, 2022, predominantly in domestic and foreign debt and equity securities[426][427] Gain (Loss) on Securities, net (in thousands) | Item | 2022 | 2021 | 2020 | | :---------------------------------------- | :---------- | :-------- | :-------- | | Net Gains (Losses) on Investments—Consolidated Investment Companies | $(15,229) | $2,251 | $12,510 | | Net Gains (Losses) on Investments—Affiliates and Other | $(13,467) | $7,281 | $5,557 | | Gain (Loss) on Securities, net | $(28,696) | $9,532 | $18,067 | (7) Fair Value Measurements This note provides fair value measurements for financial assets and liabilities, categorized into Level 1, Level 2, and Level 3, and details acquisition-related contingent consideration Fair Value Measurements of Financial Assets (in thousands) | Item | Level 1 | Level 2 | Level 3 | Total | | :------------------------------------ | :---------- | :--------- | :------ | :-------- | | Cash and Cash Equivalents | $336,782 | $0 | $0 | $336,782 | | Investments—Consolidated Investment Companies | $49,119 | $59,329 | $0 | $108,448 | | Investments—Affiliates and Other | $71,369 | $5,130 | $25 | $76,524 | | Other | $6,538 | $469 | $0 | $7,007 | | Total Financial Assets | $463,808 | $64,928 | $25 | $528,761 | Fair Value Measurements of Financial Liabilities (in thousands) | Item | Level 1 | Level 2 | Level 3 | Total | | :------------------------ | :------ | :------ | :-------- | :-------- | | Total Financial Liabilities | $27 | $4 | $8,439 | $8,470 | - Acquisition-related future contingent consideration liabilities, primarily from the CWH Acquisition and 2020 business combinations, totaled $8.4 million at December 31, 2022, and are classified as Level 3[439] - Investments valued using NAV as a practical expedient, excluded from the fair value hierarchy, totaled $18.3 million at December 31, 2022[441] (8) Derivatives This note describes FHL's use of foreign currency forward transactions to hedge foreign exchange rate fluctuations and the resulting realized losses - FHL uses foreign currency forward transactions to hedge foreign exchange rate fluctuations, with a combined notional amount of £67.3 million as of December 31, 2022[444] - Federated Hermes recorded $0.5 million in Other Current Assets for the fair value of these derivatives at December 31, 2022[444] - A $15.4 million realized loss from foreign currency forward transactions was recorded in 2022, compared to a $4.5 million realized gain in 2021[446] (9) Intangible Assets This note details changes in indefinite-lived and finite-lived intangible assets, including a $31.5 million impairment charge on the FHL right to manage public fund assets, and the increase in goodwill - Indefinite-lived intangible assets totaled $343.2 million at December 31, 2022, down from $400.9 million in 2021, primarily due to a $31.5 million impairment charge and $27.2 million from foreign exchange fluctuations[447][302] - The $31.5 million non-cash impairment charge on the FHL right to manage public fund assets was driven by increased market interest rates and decreased near-term projected cash flows[448] - Finite-lived intangible assets, primarily customer relationships, had a carrying value of $65.9 million at December 31, 2022, with amortization expense of $12.5 million in 2022[449][450] - Goodwill increased by $1.5 million to $800.4 million, mainly due to the CWH Acquisition, partially offset by foreign exchange rate fluctuations[451][336] (10) Property and Equipment This note provides a breakdown of Federated Hermes' property and equipment, net, and associated depreciation expense Property and Equipment, net (in thousands) | Item | 2022 | 2021 | | :-------------------------- | :---------- | :---------- | | Computer Software and Hardware | $89,367 | $94,230 | | Leasehold Improvements | $40,243 | $41,826 | | Transportation Equipment | $17,851 | $17,851 | | Office Furniture and Equipment | $7,922 | $6,682 | | Total Cost | $155,383 | $160,589 | | Accumulated Depreciation | $(119,640) | $(113,624) | | Property and Equipment, net | $35,743 | $46,965 | - Depreciation expense for property and equipment was $15.1 million in 2022[452] (11) Debt This note details Federated Hermes' debt, including the issuance of $350 million in unsecured senior notes and its revolving credit facility, confirming compliance with all debt covenants - On March 17, 2022, Federated Hermes issued $350 million in unsecured senior notes at a fixed interest rate of 3.29% per annum, due March 17, 2032, with an outstanding balance of $347.6 million at year-end[453] - The company has a $350 million revolving credit facility, expiring July 30, 2026, with no outstanding borrowings as of December 31, 2022[458][461] - Federated Hermes was in compliance with all debt covenants, including an interest coverage ratio of 42:1 (required 4:1) and a leverage ratio of 0.79:1 (required no more than 3:1)[455][462][276] (12) Employee Benefit Plans Federated Hermes offers defined contribution plans to its employees, with a total expense of $13.9 million recognized in 2022 - Total expense for employee defined contribution plans was $13.9 million in 2022[463] (13) Share-Based Compensation This note details Federated Hermes' share-based compensation plan, including restricted stock awards granted and the total compensation expense recognized - Share-based compensation expense was $34.8 million in 2022, with a maximum remaining unrecognized expense of approximately $95.2 million expected over six years[465] Non-Vested Restricted Stock Awards Activity (2022) | Item | Restricted Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :---------------- | :------------------------------------- | | Non-vested at January 1, 2022 | 3,940,510 | $27.24 | | Granted | 2,314,542 | $32.89 | | Vested | (1,604,254) | $28.56 | | Forfeited | (114,040) | $31.23 | | Non-vested at December 31, 2022 | 4,536,758 | $29.54 | - In 2022, 2,314,542 shares of restricted Class B common stock were awarded, including 1,345,999 under the UK Sub-Plan and 494,043 as bonus restricted stock[468] - The acquisition of FHL noncontrolling interests in March 2022 involved granting 1,183,066 restricted Federated Hermes Class B common stock shares to FHL employees[472] (14) Common Stock This note describes Federated Hermes' Class A and Class B common stock, cash dividends paid, share repurchase activity, and the retirement of treasury shares - Class A common stock holds entire voting rights, while Class B common stock is non-voting, but both have equal preferences for dividends and liquidation rights[473] - Cash dividends of $97.9 million were paid to common stockholders in 2022[474] - In 2022, Federated Hermes repurchased 6.5 million Class B common shares for $207.4 million, with 4.7 million shares remaining available under the current repurchase program[475] - 10 million treasury shares were retired in July 2022, resulting in a $313.8 million reduction to Treasury Stock and a $42.7 million reduction to Class B common stock, with no impact on total equity[476] (15) Income Taxes This note details Federated Hermes' income tax provision, effective tax rate reconciliation, and deferred tax assets and liabilities Income Tax Provision (in thousands) | Item | 2022 | 2021 | 2020 | | :------------ | :-------- | :-------- | :-------- | | Total Current | $90,376 | $84,949 | $91,866 | | Total Deferred | $(18,718) | $19,033 | $18,169 | | Total | $71,658 | $103,982 | $110,035 | Effective Tax Rate Reconciliation (%) | Item | 2022 | 2021 | 2020 | | :-------------------------------------- | :---- | :---- | :---- | | Expected Federal Statutory Income Tax Rate | 21.0% | 21.0% | 21.0% | | State and Local Income Taxes, net of Federal Benefit | 2.9% | 1.9% | 2.4% | | Foreign Income Taxes | (1.8)%| 3.6% | 0.8% | | Non-Deductible Executive Compensation | 1.2% | 1.2% | 0.8% | | Other | 0.1% | (0.1)%| (0.3)%| | Effective Tax Rate | 23.4% | 27.6% | 24.7% | - The effective tax rate decreased to 23.4% in 2022 from 27.6% in 2021, primarily due to an increase in foreign deferred tax expense in 2021 related to the UK corporate income tax rate change from 19% to 25% effective April 1, 2023[478] - At December 31, 2022, deferred tax assets, net of valuation allowance, totaled $66.7 million, primarily from state and foreign net operating loss carryforwards and lease liabilities[479][480][482] (16) Earnings Per Share Attributable to Federated Hermes, Inc. Shareholders This note presents the computation of basic and diluted earnings per share (EPS) using the two-class method for Federated Hermes, Inc. shareholders Earnings Per Share Computation (in thousands, except per share data) | Item | 2022 | 2021 | 2020 | | :---------------------------------------------------------------- | :-------- | :-------- | :-------- | | Net Income Attributable to Federated Hermes, Inc. | $239,496 | $270,293 | $326,364 | | Total Net Income Attributable to Federated Hermes Common Stock - Basic | $227,668 | $259,435 | $313,849 | | Total Net Income Attributable to Federated Hermes Common Stock - Diluted | $227,668 | $257,855 | $311,410 | | Basic Weighted-Average Federated Hermes Common Stock | 85,762 | 93,754 | 96,503 | | Diluted Weighted-Average Federated Hermes Common Stock | 85,766 | 93,771 | 96,503 | | Earnings Per Common Share—Basic | $2.65 | $2.77 | $3.25 | | Earnings Per Common Share—Diluted | $2.65 | $2.75 | $3.23 | (17) Leases This note details Federated Hermes' material operating leases, including costs, future minimum payments, weighted-average remaining lease term, and discount rate - Federated Hermes' material operating leases, primarily for its corporate headquarters, expire in 2030 with renewal options through 2040[486] - Operating lease costs totaled $19.0 million in 2022[487] Future Minimum Undiscounted Operating Lease Payments (in millions) | Year | Amount | | :------------------ | :----- | | 2023 | $21.4 | | 2024 | $19.5 | | 2025 | $14.8 | | 2026 | $13.2 | | 2027 | $12.9 | | 2028 and Thereafter | $35.3 | | Total | $117.1 | - The weighted-average remaining lease term is 6.9 years, and the weighted-average discount rate (IBR) is 3.1%[489] (18) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc. Shareholders This note details the changes in Accumulated Other Comprehensive Income (Loss), net of tax, attributable to Federated Hermes shareholders, primarily due to foreign currency translation Accumulated Other Comprehensive Income (Loss), net of tax (in thousands) | Item | Amount | | :------------------------------------ | :---------- | | Balance at December 31, 2019 | $(249) | | Other Comprehensive Income (Loss) 2020 | $15,420 | | Balance at December 31, 2020 | $15,171 | | Other Comprehensive Income (Loss) 2021 | $1,191 | | Balance at December 31, 2021 | $16,362 | | Other Comprehensive Income (Loss) 2022 | $(62,038) | | Balance at December 31, 2022 | $(45,676) | - The significant change in 2022 was a foreign currency translation loss of $62.0 million[490] (19) Redeemable Noncontrolling Interests in Subsidiaries This note details the changes in Redeemable Noncontrolling Interests in Subsidiaries, including net income, contributions, distributions, and the acquisition of additional equity in FHL Changes in Redeemable Noncontrolling Interests in Subsidiaries (in thousands) | Item | 2022 | 2021 | 2020 | | :---------------------------------------------------------------- | :--------- | :--------- | :--------- | | Balance at January 1 | $63,202 | $236,987 | $212,086 | | Net Income (Loss) | $(4,932) | $2,015 | $9,658 | | Other Comprehensive Income (Loss), net of tax | $(2,329) | $(7,443) | $6,593 | | Subscriptions—Redeemable Noncontrolling Interest Holders | $55,171 | $998,965 | $20,985 | | Consolidation/(Deconsolidation) | $(435) | $(985,248) | $(3,424) | | Stock Award Activity | $707 | $9,410 | $8,786 | | Distributions to Noncontrolling Interests in Subsidiaries | $(25,979) | $(4,926) | $(16,218) | | Acquisition of Additional Equity of FHL | $(37,805) | $(167,302) | $0 |\ | Change in Estimated Redemption Value of Redeemable Noncontrolling Interests in FHL | $14,221 | $(19,256) | $(1,479) | | Balance at December 31 | $61,821 | $63,202 | $236,987 | - The FHL Redeemable Noncontrolling Interests carrying value was adjusted by $14.2 million in 2022 to reflect its current redemption value[492] (20) Commitments and Contingencies This note outlines Federated Hermes' contractual obligations, intercompany guarantees, and indemnifications, with management assessing no material loss as reasonably possible - Federated Hermes has contractual obligations for future payments related to business combinations and asset acquisitions[493] - The company provides intercompany guarantees and indemnifications, but management does not believe a material loss is reasonably possible as of December 31, 2022[494] - No material loss related to legal proceedings is deemed reasonably possible as of December 31, 2022[495] (21) Segment and Geographic Information This note confirms Federated Hermes operates in a single operating segment (investment management) and provides revenue and asset breakdowns by geographic operation - Federated Hermes operates in one operating segment: the investment management business[496] Revenue by Geographic Operation (in thousands) | Region | 2022 | 2021 | 2020 | | :------- | :----------