Federated(FHI) - 2023 Q1 - Quarterly Report

Part I. Financial Information This section presents the unaudited consolidated financial statements and management's analysis for Q1 2023 Item 1. Financial Statements This section presents Federated Hermes' unaudited consolidated financial statements and detailed notes for Q1 2023 Consolidated Balance Sheets This section provides the consolidated balance sheets of Federated Hermes, Inc. as of March 31, 2023, and December 31, 2022 | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Assets | $1,998,979 | $2,020,479 | $(21,500) | | Total Liabilities | $852,768 | $912,966 | $(60,198) | | Total Permanent Equity | $1,106,703 | $1,045,692 | $61,011 | Consolidated Statements of Income This section presents the consolidated statements of income for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Total Revenue | $382,189 | $324,764 | $57,425 | | Operating Income | $85,166 | $83,949 | $1,217 | | Net Income | $69,601 | $55,863 | $13,738 | | Earnings Per Common Share—Basic and Diluted | $0.78 | $0.61 | $0.17 | Consolidated Statements of Comprehensive Income This section details the consolidated statements of comprehensive income for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | | :-------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------- | | Comprehensive Income Attributable to Federated Hermes, Inc. | $79,221 | $38,729 | $40,492 | Consolidated Statements of Changes in Equity This section outlines the consolidated statements of changes in equity as of March 31, 2023, and December 31, 2022 | Metric | Balance at March 31, 2023 (in thousands) | Balance at December 31, 2022 (in thousands) | | :----------------------------------- | :------------------------------------- | :-------------------------------------- | | Total Permanent Equity | $1,106,703 | $1,045,692 | | Redeemable Noncontrolling Interests in Subsidiaries | $39,508 | $61,821 | | Net Income (Loss) for Q1 2023 | $69,601 | N/A | | Dividends Declared for Q1 2023 | $(24,145) | N/A | Consolidated Statements of Cash Flows This section presents the consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Cash Provided (Used) by Operating Activities | $5,420 | $(19,247) | | Net Cash Provided (Used) by Investing Activities | $1,838 | $(2,540) | | Net Cash Provided (Used) by Financing Activities | $(22,016) | $54,861 | Notes to the Consolidated Financial Statements This section provides detailed explanatory notes supporting the consolidated financial statements for the quarter ended March 31, 2023 (1) Basis of Presentation This note describes the basis of presentation for the interim consolidated financial statements, prepared under U.S. GAAP - The interim consolidated financial statements are prepared in accordance with U.S. GAAP, reflecting all normal recurring adjustments necessary for a fair presentation of results[17] - Management is required to make estimates and assumptions that affect reported amounts, and actual results may differ materially[18] (2) Significant Accounting Policies This note refers to the annual report for a comprehensive listing of Federated Hermes' significant accounting policies - For a listing of significant accounting policies, refer to Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2022[20] (3) Business Combination This note details the acquisition of C.W. Henderson and Associates, Inc. and its preliminary purchase price allocation - Federated Hermes completed the acquisition of 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 based on net revenue growth[21] Preliminary Purchase Price Allocation (in millions) | Item | Amount | | :-------------------------------- | :----- | | Right-of-Use Asset | $0.8 | | Intangible Assets (customer relationships, trade name) | $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 | - The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities and the assembled workforce of CWH, and is deductible for tax purposes[23] (4) Revenue from Contracts with Customers This note disaggregates revenue by asset class and performance obligation, and outlines future fixed revenue from contracts Revenue Disaggregated by Asset Class (Three Months Ended March 31, in thousands) | Asset Class | 2023 | 2022 | | :------------------------ | :------- | :------- | | Money market | $179,536 | $86,290 | | Equity | $124,653 | $146,856 | | Fixed-income | $47,890 | $57,874 | | Other | $30,110 | $33,744 | | Total Revenue | $382,189 | $324,764 | Revenue Disaggregated by Performance Obligation (Three Months Ended March 31, in thousands) | Performance Obligation | 2023 | 2022 | | :----------------------- | :------- | :------- | | Asset Management | $263,982 | $232,994 | | Administrative Services | $79,180 | $73,507 | | Distribution | $32,877 | $11,077 | | Other | $6,150 | $7,186 | | Total Revenue | $382,189 | $324,764 | Future Fixed Revenue from Unsatisfied Performance Obligations (in thousands) | Period | Amount | | :-------------------------------- | :------- | | Remainder of 2023 | $7,791 | | 2024 | $3,823 | | 2025 | $1,236 | | 2026 and Thereafter | $372 | | Total Remaining Unsatisfied Performance Obligations | $13,222 | (5) Concentration Risk This note details revenue concentration by asset class and significant clients, highlighting changes in money market revenue Revenue Concentration by Asset Class (Three Months Ended March 31) | Asset Class | 2023 | 2022 | | :------------------ | :--- | :--- | | Money Market Assets | 47 % | 27 % | | Equity Assets | 33 % | 45 % | | Fixed-Income Assets | 13 % | 18 % | - The increase in money market revenue concentration in Q1 2023 was primarily due to a decrease in Voluntary Yield-related Fee Waivers[30][31] - There were no Voluntary Yield-related Fee Waivers during Q1 2023, compared to $75.8 million in Q1 2022 (net negative pre-tax impact of $18.3 million)[33] - Approximately 13% of total revenue for Q1 2023 (vs. 5% for Q1 2022) was derived from services provided to The Bank of New York Mellon Corporation[37] (6) Consolidation This note provides details on total fee waivers and the company's maximum risk of loss from non-consolidated VIEs - Total Fee Waivers for Q1 2023 were $125.2 million, with $96.1 million related to money market funds, compared to $198.5 million in Q1 2022, with $164.8 million related to money market funds[39] - Federated Hermes' maximum risk of loss related to investments in non-consolidated Variable Interest Entities (VIEs) was $68.7 million at March 31, 2023, down from $101.7 million at December 31, 2022[45] (7) Investments This note presents the net gain or loss on securities from consolidated investment companies and affiliates Gain (Loss) on Securities, net (Three Months Ended March 31, in thousands) | Category | 2023 | 2022 | | :--------------------------------------- | :------- | :-------- | | Investments—Consolidated Investment Companies | $2,980 | $(5,650) | | Investments—Affiliates and Other | $2,512 | $(6,045) | | Gain (Loss) on Securities, net | $5,492 | $(11,695) | (8) Fair Value Measurements This note details the fair value measurements of financial assets and liabilities, including contingent consideration Fair Value Measurements of Financial Assets (in thousands) | Category | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Total Financial Assets | $498,103 | $528,761 | | Total Financial Liabilities | $7,831 | $8,470 | - Acquisition-related future contingent consideration liabilities, primarily from the CWH Acquisition and 2020 business combinations, totaled $7.8 million at March 31, 2023, valued using an income approach with unobservable market data inputs (Level 3)[59] (9) Derivatives This note describes Federated Hermes Limited's use of foreign currency forward transactions to hedge exchange rate risk - Federated Hermes Limited (FHL) uses foreign currency forward transactions to hedge against foreign exchange rate fluctuations in USD[63] Foreign Currency Forwards | Metric | March 31, 2023 | December 31, 2022 | | :-------------------- | :------------- | :---------------- | | Fair Value (in millions) | $3.5 | $0.5 | | Notional Amount (in millions) | £74.2 | £67.3 | (10) Intangible Assets, including Goodwill This note explains changes in intangible assets and goodwill, primarily due to foreign exchange rate fluctuations and amortization - Intangible Assets, net increased by $1.8 million from December 31, 2022, primarily due to a $5.0 million increase from foreign exchange rate fluctuations, partially offset by $3.3 million in amortization expense[65] - Goodwill increased by $2.5 million from December 31, 2022, primarily due to foreign exchange rate fluctuations on foreign currency denominated goodwill[66] (11) Debt This note details Federated Hermes' outstanding unsecured senior notes and revolving credit facility, confirming covenant compliance - Federated Hermes has $347.6 million in unsecured senior notes outstanding as of March 31, 2023, with a fixed interest rate of 3.29% per annum, due March 17, 2032[67] - The company has a $350 million revolving credit facility with an additional $200 million accordion feature; no outstanding borrowings as of March 31, 2023[71][73] - Federated Hermes was in compliance with all debt covenants at and during the period ended March 31, 2023[69][74] (12) Share-Based Compensation This note describes the share-based compensation awarded during Q1 2023, primarily restricted Class B common stock - During Q1 2023, Federated Hermes awarded 375,796 shares of restricted Class B common stock, primarily as part of a bonus program, generally vesting over a three-year period[76] (13) Equity This note details share repurchase activity and changes in Class B shares and treasury shares during the period - Federated Hermes repurchased approximately 0.1 million shares of Class B common stock for $4.7 million during Q1 2023 under a program authorizing up to 5.0 million shares[78] - As of March 31, 2023, approximately 4.6 million shares remain available for repurchase under the program[78] Class B Shares and Treasury Shares Activity (Three Months Ended March 31) | Metric | 2023 | 2022 | | :-------------------- | :----------- | :----------- | | Class B Shares - Beginning Balance | 89,275,935 | 93,410,968 | | Class B Shares - Ending Balance | 89,519,139 | 92,063,593 | | Treasury Shares - Beginning Balance | 10,229,521 | 16,094,488 | | Treasury Shares - Ending Balance | 9,986,317 | 17,441,863 | (14) Earnings Per Share Attributable to Federated Hermes, Inc. Shareholders This note provides a breakdown of earnings per common share attributable to Federated Hermes, Inc. shareholders Earnings Per Common Share (Three Months Ended March 31, in thousands, except per share data) | Metric | 2023 | 2022 | | :-------------------------------------------------- | :------- | :------- | | Net Income Attributable to Federated Hermes, Inc. | $69,601 | $55,863 | | Total Net Income Attributable to Federated Hermes Common Stock - Basic and Diluted | $66,092 | $53,420 | | Basic and Diluted Weighted-Average Federated Hermes Common Stock | 84,875 | 88,270 | | Earnings Per Share | $0.78 | $0.61 | (15) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc. Shareholders This note details changes in accumulated other comprehensive income (loss), primarily due to foreign currency translation Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Balance | $(36,056) | $(45,676) | | Other Comprehensive Income (Loss) (Q1 2023) | $9,620 | N/A | - The change in Accumulated Other Comprehensive Income (Loss) was primarily due to foreign currency translation gain of $9.6 million in Q1 2023[84] (16) Redeemable Noncontrolling Interests in Subsidiaries This note outlines changes in redeemable noncontrolling interests in subsidiaries, primarily driven by deconsolidation activities Changes in Redeemable Noncontrolling Interests in Subsidiaries (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------------------------------- | :------------- | :---------------- | | Balance | $39,508 | $61,821 | | Net Income (Loss) | $1,865 | N/A | | Other Comprehensive Income (Loss), net of tax | $232 | N/A | | Subscriptions—Redeemable Noncontrolling Interest Holders | $12,776 | N/A | | Consolidation/(Deconsolidation) | $(33,962) | N/A | | Distributions to Noncontrolling Interests in Subsidiaries | $(3,224) | N/A | - The decrease in redeemable noncontrolling interests was primarily due to deconsolidation activities[85] (17) Commitments and Contingencies This note addresses an administrative error's financial impact and management's assessment of legal proceedings - An administrative error related to unregistered shares of a Federated Hermes tender fund resulted in a probable cost of $19.6 million, recorded in Accounts Payable and Accrued Expenses[89] - A corresponding insurance reimbursement of $17.1 million is expected, resulting in a net $2.5 million impact to Operating Expenses—Other[89] - Management does not believe a material loss related to legal proceedings, guarantees, or indemnifications is reasonably possible as of March 31, 2023[87][88] (18) Subsequent Events This note discloses a dividend declaration by Federated Hermes' board of directors subsequent to the reporting period - On April 27, 2023, Federated Hermes' board of directors declared a $0.28 per share dividend, payable on May 15, 2023[90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Federated Hermes' financial condition, operations, and business developments for Q1 2023 General This section provides an overview of Federated Hermes as a global leader in active, responsible investing and its revenue sources - Federated Hermes is a global leader in active, responsible investing with $701.0 billion in managed assets as of March 31, 2023[93] - Revenue is primarily derived from investment advisory, administrative, distribution, and other fund-related services, generally calculated as a percentage of average net assets[93][94] - Advisory fees for multi-asset and equity products are generally higher than those for alternative/private markets, fixed-income, and money market products[94] Business Developments This section discusses the impact of the Pandemic, interest rate changes, regulatory environment, and new tax reforms - The Pandemic has not materially affected Federated Hermes' financial condition during Q1 2023, but a prolonged period of economic distress could exacerbate risks[97] - There were no Voluntary Yield-related Fee Waivers in Q1 2023, compared to $75.8 million in Q1 2022, due to FOMC interest rate increases (currently 4.75% - 5.00%)[98][99] - The SEC's robust rulemaking initiatives are expected to increase in 2023, focusing on areas like money market fund reform, climate change disclosure, cybersecurity, and investment advisor custody rules[102][103][127] - Federated Hermes opposes swing pricing for money market funds, advocating for discretionary liquidity fees and the use of a reverse distribution mechanism (RDM) in negative rate environments[105][108] - UK and EU regulators are also increasing their pace of regulation, with the UK aiming to rationalize EU legislation post-Brexit and both regions focusing on sustainable finance (SFDR, greenwashing) and the LIBOR transition[135][137][145][160] - New tax reforms include a 15% minimum corporate tax and a 1% tax on corporate share repurchases, applicable from 2023[134] Asset Highlights This section provides an overview of managed assets at period-end and average managed assets, disaggregated by asset class Managed Assets at Period End (in millions) | Asset Class | March 31, 2023 | March 31, 2022 | Percent Change | | :-------------------------- | :------------- | :------------- | :------------- | | Equity | $83,629 | $91,676 | (9)% | | Fixed-Income | $87,461 | $92,146 | (5)% | | Alternative / Private Markets | $21,174 | $23,109 | (8)% | | Multi-Asset | $2,973 | $3,555 | (16)% | | Total Long-Term Assets | $195,237 | $210,486 | (7)% | | Money Market | $505,800 | $420,596 | 20% | | Total Managed Assets | $701,037 | $631,082 | 11% | Average Managed Assets (Three Months Ended March 31, in millions) | Asset Class | 2023 | 2022 | Percent Change | | :-------------------------- | :------- | :------- | :------------- | | Equity | $84,155 | $92,034 | (9)% | | Fixed-Income | $88,209 | $95,475 | (8)% | | Alternative / Private Markets | $20,938 | $22,848 | (8)% | | Multi-Asset | $3,012 | $3,621 | (17)% | | Total Long-Term Assets | $196,314 | $213,978 | (8)% | | Money Market | $483,083 | $433,254 | 12% | | Total Average Managed Assets | $679,397 | $647,232 | 5% | - Money market assets saw significant growth, increasing 20% YoY at period-end and 12% YoY on average, while long-term assets generally decreased[171][172][189] - Market performance in Q1 2023: S&P 500 Index returned 7.50%, and Bloomberg US Aggregate Bond Index returned 2.96%[191] Results of Operations This section analyzes the changes in revenue, operating expenses, nonoperating income, and net income for Q1 2023 - Revenue increased by $57.4 million in Q1 2023 YoY, primarily due to the elimination of $75.8 million in Voluntary Yield-related Fee Waivers and a $14.3 million increase from higher money market average assets, partially offset by a $37.0 million decrease from lower average long-term assets[192] - Total Operating Expenses increased by $56.2 million in Q1 2023 YoY, mainly driven by a $44.8 million increase in Distribution expense related to the elimination of Voluntary Yield-related Fee Waivers[194] - Nonoperating Income (Expenses), net, increased by $19.1 million in Q1 2023 YoY, primarily due to a $17.2 million increase in Gain (Loss) on Securities, net, reflecting improved market values[195] - Net Income Attributable to Federated Hermes, Inc. increased by $13.7 million in Q1 2023 YoY, leading to a $0.17 increase in diluted EPS, with $0.02 attributed to share repurchases[197] Liquidity and Capital Resources This section assesses Federated Hermes' liquid assets, cash flow activities, debt structure, and overall liquidity position - Liquid assets, net of noncontrolling interests, totaled $563.6 million at March 31, 2023, a slight increase from $559.5 million at December 31, 2022[198] - Net cash provided by operating activities was $5.4 million in Q1 2023, a significant improvement from net cash used of $19.2 million in Q1 2022[201] - Net cash used by financing activities was $22.0 million in Q1 2023, primarily due to $24.1 million in dividends paid and $6.6 million in treasury stock purchases, partially offset by $12.8 million in contributions from noncontrolling interests[203] - Federated Hermes maintains $347.6 million in unsecured senior notes and has a $350 million revolving credit facility with no outstanding borrowings, remaining in compliance with all debt covenants[204][205][206] - Management believes existing liquid assets, cash flow from operations, and borrowing capacity provide sufficient liquidity for short-term and long-term cash needs[211] Financial Position This section highlights key changes in Federated Hermes' financial position, including investments and accrued expenses - Investments—Consolidated Investment Companies decreased by $25.1 million, mainly due to the deconsolidation of a VIE[213] - Accounts Payable and Accrued Expenses increased by $21.5 million due to a $19.6 million accrual for an administrative error related to unregistered shares[215] - Accrued Compensation and Benefits decreased by $80.7 million, primarily due to the payment of 2022 annual incentive compensation[216] Legal Proceedings This section refers to Note (17) for details on legal proceedings, indicating no material loss is reasonably possible - Information regarding legal proceedings is contained in Note (17) to the Consolidated Financial Statements, indicating no material loss is reasonably possible[217][88] Critical Accounting Policies This section discusses critical accounting policies, particularly those involving significant judgment like intangible assets - The indefinite-lived intangible assets policy, including Goodwill and Intangible Assets, involves a high degree of judgment and complexity[219] - A discounted cash flow analysis for the FHL right to manage public fund assets showed the estimated fair value exceeding the carrying value by less than 5%, with risk of future impairment[221][222] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section confirms no material changes to Federated Hermes' market risk exposures as of March 31, 2023 - No material changes to market risk exposures were identified as of March 31, 2023, compared to the previous annual report[223] Item 4. Controls and Procedures Management concluded Federated Hermes' disclosure controls and procedures were effective with no material changes in Q1 2023 - Federated Hermes' disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023[226] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[226] Part II. Other Information This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note (17) for legal proceedings, confirming no material loss is reasonably possible - Information on legal proceedings is provided in Note (17) to the Consolidated Financial Statements[225] Item 1A. Risk Factors This section confirms no material changes to the risk factors disclosed in the previous annual report - No material changes to the risk factors included in Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2022[226] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase program, including Q1 2023 activity and remaining authorization Stock Repurchases (Q1 2023) | Month | Total Number of Shares Purchased | Average Price Paid per Share | | :------ | :------------------------------- | :--------------------------- | | January | 0 | $0.00 | | February | 50,000 | $38.80 | | March | 82,592 | $33.92 | | Total | 132,592 | $35.76 | - As of March 31, 2023, 4,602,415 shares remain available for repurchase under the program authorized in June 2022[228] Item 5. Other Information This section reports on the Annual Meeting of Shareholders and approved changes to independent director compensation - Six individuals were elected to the Board of Directors at the Annual Meeting of Shareholders on April 27, 2023[231] - The Board of Directors approved increasing the annual base fee for independent directors from $53,000 to $55,000 and the annual grant of unrestricted Class B Common Stock from 2,350 to 2,400 shares, effective July 2023[232] Item 6. Exhibits This section lists the required exhibits filed with the Form 10-Q, including certifications and interactive data files - The report includes various exhibits such as the Cover Page Interactive Data File, Federated Hermes Co-Investment Scheme Rules 2023, and certifications from the CEO and CFO[233] Signatures This section contains the certifying signatures of the President and CEO, and the CFO, dated May 2, 2023 - The report was signed by J. Christopher Donahue, President and Chief Executive Officer, and Thomas R. Donahue, Chief Financial Officer, on May 2, 2023[236]