Federated(FHI) - 2021 Q4 - Annual Report

FORM 10-K FILING INFORMATION Form 10-K Filing Details Federated Hermes, Inc.'s 2021 Form 10-K filing details, including registrant information and SEC issuer classifications - Federated Hermes, Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021[2] - The company is registered under the trading symbol FHI on the New York Stock Exchange[2] - Federated Hermes, Inc. is classified as a well-known seasoned issuer and a large accelerated filer[2] - The aggregate market value of Class B common stock held by non-affiliates as of June 30, 2021, was approximately $3.1 billion[2] Documents Incorporated by Reference Part III of this Form 10-K incorporates information by reference from the registrant's 2022 Information Statement - Part III of the Form 10-K incorporates information from the registrant's 2022 Information Statement[4] Table of Contents Table of Contents Overview This section outlines the Form 10-K's structure, covering business, risk factors, financial condition, and corporate governance - The table of contents lists key sections including 'Item 1 Business', 'Item 1A Risk Factors', and 'Item 8 Financial Statements and Supplementary Data'[6] FORWARD-LOOKING STATEMENTS Forward-Looking Statements Disclaimer This section cautions that forward-looking statements in the Form 10-K involve risks and uncertainties, potentially causing material differences in actual results - Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially[7] - Key areas include management's assessments on asset flows, revenue, expenses, fee waivers, ESG integration, and regulatory developments[7] - Market conditions, including changes in asset flows and business mix, may significantly impact Federated Hermes' business, potentially leading to revenue decline and increased fee waivers[7] - No assurance can be given as to future results, with further details in Item 1A - Risk Factors[7] Part I ITEM 1 – BUSINESS General Business Overview Federated Hermes, Inc. is a leading U.S. investment manager, managing $668.9 billion in assets as of December 31, 2021, primarily through investment advisory fees - Federated Hermes, Inc. is a leading U.S. investment manager, with operations dating back to 1955[11] Assets Under Management (AUM) as of December 31, 2021 | Metric | Amount (Billions) | | :----- | :---------------- | | Total AUM | $668.9 | - The company operates in one segment: investment management, serving 168 Federated Hermes Funds and Separate Accounts[12][13] - Principal revenue source is investment advisory fees, primarily based on Assets Under Management (AUM)[12] Assets Under Management (AUM) Total managed assets grew 8% to $668.9 billion by December 31, 2021, with average managed assets up 3%, impacting operating income due to asset mix Total Managed Assets by Asset Class (in millions) | dollars in millions | As of 2021 December 31 | 2020 | 2021 vs. 2020 | | :------------------ | :--------------------- | :--- | :------------ | | Equity | $96,716 | $91,788 | 5 % | | Fixed-Income | 97,550 | 84,277 | 16 | | Alternative / Private Markets | 22,920 | 19,084 | 20 | | Multi-Asset | 3,780 | 3,948 | (4) | | Total Long-Term Assets | 220,966 | 199,097 | 11 | | Money Market | 447,907 | 420,333 | 7 | | Total Managed Assets | $668,873 | $619,430 | 8 % | Average Managed Assets by Asset Class (in millions) | dollars in millions | Year Ended December 31, 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | | :------------------ | :--------------------------- | :--- | :--- | :------------ | :------------ | | Equity | $98,040 | $80,591 | $81,212 | 22 % | (1)% | | Fixed-Income | 91,564 | 74,403 | 65,375 | 23 | 14 | | Alternative / Private Markets | 20,754 | 18,206 | 17,896 | 14 | 2 | | Multi-Asset | 3,879 | 3,813 | 4,192 | 2 | (9) | | Total Long-Term Assets | 214,237 | 177,013 | 168,675 | 21 | 5 | | Money Market | 418,562 | 436,895 | 340,505 | (4) | 28 | | Total Average Managed Assets | $632,799 | $613,908 | $509,180 | 3 % | 21 % | - Advisory fees are generally higher for equity and multi-asset products compared to fixed-income and money market products, with Federated Hermes Funds typically earning more than Separate Accounts[23] Revenue Total revenue decreased 10% in 2021, primarily due to increased Voluntary Yield-related Fee Waivers and lower money market revenue Revenue from Investment Advisory, Administrative, and Other Service Fees (in thousands) | dollars in thousands | Year 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | | :------------------- | :-------- | :--- | :--- | :------------ | :------------ | | Investment Advisory Fees, net | $915,984 | $1,011,467 | $907,605 | (9)% | 11 % | | Administrative Service Fees, net | 306,639 | 318,152 | 245,887 | (4) | 29 | | Other Service Fees, net | 77,824 | 118,649 | 173,402 | (34) | (32) | | Total Revenue | $1,300,447 | $1,448,268 | $1,326,894 | (10)% | 9 % | - The decrease in total revenue in 2021 was primarily driven by a $307.3 million increase in Voluntary Yield-related Fee Waivers and a $38.1 million decrease in money market revenue[356] - Increases in equity and fixed-income revenue, by $127.6 million and $46.6 million respectively, partially offset the overall revenue decline[356] Investment Products and Strategies Federated Hermes offers diverse investment products across multiple asset classes, managing $447.9 billion in money market assets and integrating ESG factors - Federated Hermes offers a wide range of products: money market, equity, fixed-income, alternative/private markets, and multi-asset investments[25] - As of December 31, 2021, Federated Hermes managed $447.9 billion in money market assets, making it one of the largest U.S. managers[26] - The company's investment process integrates fundamental research, credit analysis, ESG strategies, quantitative models, and disciplined portfolio construction[30] AUM by Investment Product Category (as of December 31, 2021) | Category | AUM (Billions) | | :------- | :------------- | | Money Market | $447.9 | | Equity | $96.7 | | Fixed-Income | $97.6 | | Alternative/Private Markets | $22.9 | | Multi-Asset | $3.8 | Distribution Channels and Product Markets Federated Hermes distributes products to over 11,000 institutions via a sales force, with 62% of managed assets in the U.S. financial intermediary market - Federated Hermes' distribution strategy targets over 11,000 institutions and intermediaries, utilizing a sales force of over 230 representatives[33] Managed Assets by Market (as of December 31, 2021) | Market | Percentage of Managed Assets | | :----- | :--------------------------- | | U.S. financial intermediary | 62% | | U.S. institutional | 26% | | International | 12% | - The U.S. financial intermediary market includes over 7,500 broker/dealers, banks, and RIAs, serving retail investors[35] - International distribution focuses on Europe, the Middle East, Canada, Latin America, and Asia Pacific regions[37] Competition The investment management industry is highly competitive across product types, driven by performance and fees, with Federated Hermes launching its first ETFs in late 2021 - The investment management business is highly competitive across all product types, including mutual funds, ETFs, SMAs, and institutional accounts[39] - Competition is influenced by investment performance, objectives, yields, total returns, fees, advertising, investor confidence, and relationships with intermediaries[41] - Federated Hermes launched its first two fixed-income ETFs in mid-December 2021[40] Regulatory Matters Federated Hermes operates in a highly regulated environment, facing evolving domestic and international laws, money market fund reforms, and ESG disclosures - Federated Hermes and its business are subject to extensive regulation by federal securities laws (1933 Act, 1934 Act, 1940 Act, Advisers Act), state laws, and foreign regulations[42] - Regulatory developments can lead to shifts in product structures, asset flows and mix, customer relationships, and increased operating expenses[95] - The company dedicates significant internal and external resources to monitor, analyze, and address regulatory responses and developments[96][97] Current Regulatory Environment - Domestic The U.S. regulatory environment in 2021-2022 saw increased SEC rulemaking and enforcement, focusing on money market fund reforms and ESG disclosures - The SEC advanced rulemaking initiatives in 2021, including proposed rules on money market fund reforms, share repurchase disclosure, securities lending, and insider trading[44] - The SEC's proposed money market fund reforms include increasing minimum liquidity requirements (25% daily, 50% weekly), removing liquidity fees and redemption gates, requiring swing pricing for institutional prime and municipal funds, and enhancing reporting[53] - Federated Hermes opposes swing pricing and increased liquidity requirements for money market funds, believing they create uncertainty and negatively impact yields[56] - U.S. regulators, including the SEC and DOL, are increasing focus on ESG-related disclosures, climate change risks, and human capital management[59][61][62] - The DOL proposed a new ESG/Proxy Voting Rule, which Federated Hermes generally supported but suggested modifications[67][69] - Other proposed rules include cybersecurity risk management, enhanced regulation of private fund advisors, shortened securities settlement cycles (T+1), and amendments to share repurchase disclosures[73][74][75][81] Current Regulatory Environment - International International regulations are shaped by Brexit and global financial stability efforts, focusing on UK post-Brexit framework, EU sustainable finance, and money market fund reforms - The UK's post-Brexit regulatory framework is evolving, with HM Treasury and the FCA proposing reforms to adapt financial services regulation and introduce an Overseas Fund Regime (OFR)[108][111] - EU regulators are advancing sustainable finance initiatives, including the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation, requiring enhanced ESG disclosures[116][117] - Global bodies like IOSCO and FSB are proposing money market fund reforms, including swing pricing, capital buffers, and revised liquidity requirements, in response to March 2020 market turmoil[131][139] - Federated Hermes opposes swing pricing and increased liquidity requirements for money market funds in international markets, advocating for jurisdiction-specific approaches and retaining stable-NAV funds[141][144] - The phase-out of LIBOR and transition to alternative reference rates (e.g., SOFR, SONIA) is a significant international regulatory focus, requiring renegotiation of financial agreements[168][169] - The potential for a Financial Transactions Tax (FTT) in the EU or UK remains a concern, which management believes would be detrimental to Federated Hermes' business[162][173] Human Capital Resource Management Federated Hermes employs 1,968 globally, focusing on attracting and retaining talent through competitive compensation, benefits, development, and diversity initiatives - As of December 31, 2021, Federated Hermes had 1,968 employees globally, with major concentrations in Pittsburgh (1,185) and London (527)[176] - The company's ability to attract, retain, and motivate skilled professionals is critical for its competitive position and future success[178] - Diversity and inclusion are key strategic pillars, with initiatives focused on driving diversity, creating inclusion, expanding outreach, and ensuring program sustainability[195] - Approximately 40% of Federated Hermes' employees are women, and in the U.S., 7% are minorities[193] Competitive Compensation Compensation programs attract and incentivize talent through competitive cash, equity, and long-term incentives, with pay mix varying by employee category - Compensation programs aim to reward individual contribution and align employee interests with business strategy, values, and objectives[179] - U.S. compensation includes salary, bonus, and long-term incentives, while UK compensation is based on fixed and variable components[180][181] - Sales employees have a variable compensation heavy pay mix, Investment Management employees' bonuses consider 1-5 year investment product performance, and Administrative employees are more fixed-pay weighted[183][184][185] - Total compensation expense for 2021 was $532.5 million, including salary, bonus, and stock-based compensation[190] Benefits Federated Hermes offers comprehensive benefits supporting employee health, work-life balance, and career development, including flexible work and parental leave - Benefit offerings include medical/dental, employee assistance, disability, paid time off, retirement programs, flexible work, education assistance, and paid parental leave[191] - Resources were introduced to support employees' physical and emotional health during the Pandemic[191] Employee Development The company supports professional development through training and mentoring, covering technical, leadership, and management skills for succession planning - Employee development is supported through training programs and mentoring initiatives, covering technical, professional, leadership, and management skills[192] - Training curriculums include courses on securities markets, compliance, sales skills, customer service, well-being, remote working, and diversity[192] Diversity and Inclusion Federated Hermes is committed to enhancing workforce diversity and inclusion through Employee Resource Business Groups and internship programs - The diversity and inclusion strategy is built on four pillars: driving diversity, creating inclusion, expanding outreach, and ensuring program sustainability[195] - Initiatives include a Women in Investing Employee Resource Business Group, an internship program for underrepresented students, and a University Ambassador Program[196] - The Board and executive management sponsor diversity and inclusion initiatives, with the Compensation Committee receiving regular updates[197] Information about our Executive Officers This section lists Federated Hermes, Inc.'s executive officers, their positions, ages, and brief biographies Executive Officers of Federated Hermes, Inc. | Name | Position | Age | | :-------------------- | :------------------------------------------------------------------------------------------------------------------- | :-- | | J. Christopher Donahue | President, Chief Executive Officer, Chairman and Director of Federated Hermes, Inc. | 72 | | Gordon J. Ceresino | Vice Chairman of Federated Hermes, Inc., Chairman, Director and President of Federated International Securities Corp. and Vice Chairman of Federated MDTA, LLC | 64 | | Thomas R. Donahue | Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc. and President of FII Holdings, Inc. | 63 | | Dolores D. Dudiak | Vice President, Director of Human Resources of Federated Hermes, Inc. | 63 | | John B. Fisher | Vice President and Director of Federated Hermes, Inc. and President and Chief Executive Officer of Federated Advisory Companies* | 65 | | Peter J. Germain | Executive Vice President, Chief Legal Officer and Secretary of Federated Hermes, Inc. | 62 | | Richard A. Novak | Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes, Inc. | 58 | | Saker A. Nusseibeh | Chief Executive Officer, Hermes Fund Managers Limited | 60 | | Paul A. Uhlman | Vice President of Federated Hermes, Inc. and President of Federated Securities Corp. | 55 | | Stephen P. Van Meter | Vice President and Chief Compliance Officer of Federated Hermes, Inc. | 46 | - J. Christopher Donahue serves as President, CEO, Chairman, and Director, with Thomas R. Donahue as Vice President, Treasurer, CFO, and Director[202][204] - Saker A. Nusseibeh is the CEO of Hermes Fund Managers Limited, a majority-owned subsidiary[210] Available Information Federated Hermes provides its annual, quarterly, and current reports, along with other SEC filings, free on its website - Federated Hermes provides its annual, quarterly, and current reports (10-K, 10-Q, 8-K) and other SEC filings on its website, www.FederatedHermes.com, free of charge[213] Other Information This section clarifies that all references to Notes to the Consolidated Financial Statements refer to Item 8, and cross-references are incorporated - References to Notes to the Consolidated Financial Statements in this 10-K refer to those in Item 8[214] - All cross-references between Items in this 10-K are considered incorporated into the Item containing the cross-reference[215] ITEM 1A – RISK FACTORS Specific Risk Factors This section details risks specific to Federated Hermes' investment management business, including revenue concentration, money market NAV stability, and corporate structure - A significant portion of Federated Hermes' total AUM or revenue can be concentrated in specific products, strategies, asset classes, or customers, posing a risk if these decline[218] - The company may provide financial support to its sponsored investment products, which could impact its capital and financial condition[219] - Money market funds, which contribute approximately 19% of total revenue, face risks in maintaining a stable NAV, especially institutional prime or municipal funds with fluctuating NAVs[220][221] - The investment management business is highly competitive, with factors like investment performance, fees, and service quality influencing sales, and increased competition potentially leading to fee reductions[223] - Changes in distribution channels, such as intermediary relationships or fee arrangements, can adversely affect profitability[226] - Federated Hermes' dual-class common stock structure (Class A with voting power, Class B non-voting) allows the Donahue family to control the company, potentially leading to exclusion from certain financial indexes[243][245] Risks Related to Federated Hermes' Investment Management Business Risks include revenue concentration, financial support for products, money market NAV stability, intense competition, and impacts from poor investment performance - A significant portion of Federated Hermes' total AUM or revenue can be attributable to one or more products, strategies, asset classes, or customers, posing a risk if these decline[218] - Federated Hermes may provide financial support to its sponsored investment products, utilizing capital and potentially incurring losses[219] - Money market funds, representing approximately 19% of 2021 revenue, face risks in maintaining a stable NAV, with potential for significant redemptions and reputational harm if NAV declines[220] - The investment management business is highly competitive, with competition based on performance, fees, and service quality, potentially requiring fee reductions[223] - A substantial majority of revenues are from investment advisory agreements terminable on 60 days' notice or requiring annual renewal, posing a risk if not renewed or terminated[231] - Impairment risk exists for intangible assets (goodwill, rights to manage fund assets) totaling $1.3 billion, which could be affected by reduced revenue streams or lower managed assets[230] Risks Related to Interest Rates and Investment Performance Federated Hermes faces significant risks from interest rate fluctuations and investment performance, impacting net income through fee waivers and potential AUM declines - Low short-term interest rates (near 0% in March 2020) led to Voluntary Yield-related Fee Waivers to maintain positive or zero net yields in money market funds[235] Voluntary Yield-related Fee Waivers and Net Pre-Tax Impact | Year | Voluntary Yield-related Fee Waivers | Related Reductions in Distribution Expenses | Net Negative Pre-Tax Impact | | :--- | :---------------------------------- | :------------------------------------------ | :-------------------------- | | 2021 | $420.3 million | $277.1 million | $143.2 million | - Rising interest rates could adversely affect revenue by causing investors to shift from money market products to direct investments and reducing the fair value of securities[241] - Poor investment performance, or failure to meet objectives, can lead to decreased AUM, increased redemptions, and failure to earn performance fees, materially impacting financial condition[242] - Performance can be affected by climate, social, environmental, governance, and geopolitical changes, as well as market conditions like volatility and illiquidity[242] Risk Related to Federated Hermes' Corporate Structure Federated Hermes' 'controlled company' status, due to Donahue family's Class A stock ownership, exempts it from certain NYSE governance rules and may affect its stock price - Federated Hermes is a 'controlled company' under NYSE rules, with all Class A common stock (voting power) held by the Donahue family's trust[243] - This status exempts the company from NYSE requirements for a majority of independent directors and an independent nominating/corporate governance committee[245] - The dual-class structure could lead to exclusion from certain financial indexes, potentially decreasing investments in Class B common stock and adversely affecting its stock price[245] General Risk Factors This section outlines broader risks including economic downturns, regulatory changes, operational failures, cybersecurity threats, and human capital management challenges - Economic or market downturns (domestic or international) can cause volatility, illiquidity, and adversely affect investment supply, product profitability, and investor confidence[246] - Federated Hermes is subject to extensive and evolving regulation, with non-compliance or changes in laws potentially leading to lost business, fines, and increased operating expenses[251][256] - Operational risks include improper transaction execution, inadequate technology, poor performance by service providers, and business disruptions, which can materially affect financial condition[267][269] - Cybersecurity risks are significant, with daily incidents potentially leading to data loss, operational disruption, increased costs, litigation, and reputational damage[271][275] - The ability to recruit and retain key personnel is critical, with increased competition and employee turnover posing a risk to growth and success[280] - Unpredictable events like the Pandemic, natural disasters, or geopolitical tensions can cause business disruptions, market volatility, and negatively impact AUM, revenue, and earnings[285][289] Economic and Market Risks Economic and market downturns, driven by interest rates and geopolitical tensions, pose risks to investment supply, profitability, and investor confidence - Economic or market downturns, disruptions, or other conditions (domestic or international) can cause volatility, illiquidity, and adversely affect investment supply, product profitability, demand, and investor confidence[246] - Factors contributing to these conditions include changes in interest rates, commodity markets, currency values, inflation/deflation, and geopolitical tensions[246] - Federated Hermes' liquid assets have exposure to international sovereign debt and currency risks, and its financial condition can be adversely affected by the creditworthiness of other financial industry participants[247] - Extreme circumstances like crises can lead to significant net redemptions, severe liquidity issues, and declines in AUM value and returns[248] - Reliance on third-party service providers for custody, depository, and accounting services introduces risk of service interruption or failure[250] - The company's ability to raise additional capital or obtain necessary liquidity for its funds is subject to market conditions and creditworthiness, with potential material adverse effects if unsuccessful[251] Regulatory and Legal Risks Federated Hermes faces extensive regulatory and legal risks from evolving laws, potentially increasing operating expenses and impacting product structures - Federated Hermes is subject to extensive regulation by federal securities laws, state laws, and foreign regulatory authorities, with frequent amendments and new rules[251][252] - Potential designation as a 'systemically important financial institution' by FSOC or FSB could subject Federated Hermes or its products to additional banking regulation and oversight[255] - Increased compliance risk and operating expenses arise from business growth, expansion into new markets, and increased use of ESG data and investment techniques[256] - Failure to comply with legal and regulatory requirements can result in lost business, fines, penalties, reputational damage, and changes in regulator relationships[256] - Regulatory developments can lead to product line-up changes, reduced intermediary offerings, changes in fees, asset flows, and operating profits[256] - Changes in tax laws, such as the UK corporate tax rate increase or proposed financial transactions taxes, can adversely impact financial condition and net income[260] - Litigation, investigations, and other claims, both regulatory and business-related, are inherent risks, with unpredictable outcomes that could materially affect financial condition and reputation[261] - Risks related to auditor independence exist, where activities of the Accounting Firm could render it ineligible, potentially requiring re-audits and impacting SEC filings and registration statements[264][266] Operations-Related Risks Operational risks include improper transaction execution, inadequate technology, and human error, exacerbated by cybersecurity threats and remote work environments - Operational risks include improper execution of transactions, inadequate technology, poor performance by internal or third-party resources, and failures in governance or internal controls[267] - Systems and technology risks arise from software malfunctions, business changes, data imprecision, and obsolescence, potentially impairing performance or causing non-availability[270] - Cybersecurity risks are significant, with daily incidents (phishing, malware, unauthorized access) threatening confidential information, operational capacity, and compliance[271][272] - Remote and hybrid work environments, necessitated by the Pandemic, have increased the risk of cyber incidents due to expanded attack surfaces[271] - Cyber incidents can lead to lost revenues, financial losses, increased costs (compliance, remediation), litigation, reputational damage, and impact stock price[275] - Despite mitigation efforts like firewalls, system monitoring, and employee training, there's no guarantee of full success against evolving cyber threats[276] Other General Risks Other general risks include human capital management, acquisition uncertainties, reputational harm, unpredictable events, and the LIBOR transition - Recruiting and retaining key personnel is highly competitive, with the Pandemic and remote work increasing employee stress, turnover, and competition for talent[280] - The company's acquisition strategy faces risks in finding suitable candidates, securing capital, and successfully integrating acquired businesses[281] - Reputational harm can arise from regulatory proceedings, litigation, economic downturns, errors in public reports, misconduct allegations, cyber incidents, or failure to meet ESG commitments[282][284] - Unpredictable events (natural disasters, pandemics, war, climate change) can cause business disruptions, supply chain issues, market volatility, and increased costs[285] - The COVID-19 Pandemic has caused travel bans, supply chain disruptions, economic uncertainty, market volatility, and increased fee waivers due to low interest rates[289][290] - The phase-out of LIBOR and transition to alternative rates (SOFR, SONIA) can cause renegotiation of financial transactions, alter accounting, and lead to increased volatility and illiquidity[287] ITEM 1B – UNRESOLVED STAFF COMMENTS Unresolved Staff Comments This section confirms no unresolved comments from the SEC staff regarding the company's previous filings - There are no unresolved staff comments[292] ITEM 2 – PROPERTIES Properties Overview Federated Hermes' primary property is approximately 259,000 square feet of leased corporate headquarters in Pittsburgh, Pennsylvania - Federated Hermes has material operating leases for its corporate headquarters in Pittsburgh, Pennsylvania[293] - The leased space is approximately 259,000 square feet and is used for its investment management business[293] ITEM 3 – LEGAL PROCEEDINGS Legal Proceedings Overview 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[294] ITEM 4 – MINE SAFETY DISCLOSURES Mine Safety Disclosures This item is not applicable to Federated Hermes, Inc - This item is not applicable[295] Part II ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Common Stock Market and Shareholder Matters Federated Hermes' Class B common stock trades on the NYSE under FHI, with 22,021 Class B shareholders and 4,054,119 shares repurchased in Q4 2021 - Federated Hermes' Class B common stock is traded on the NYSE under the symbol FHI[297] - As of February 11, 2022, there was 1 beneficial shareholder of Class A common stock and 22,021 of Class B common stock[298] Stock Repurchases in Q4 2021 | Month | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Shares that May Yet Be Purchased Under the Plans or Programs | | :-------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :----------------------------------------------------------- | | October | 130,700 | $31.39 | 125,000 | 2,486,755 | | November | 1,246,784 | $34.84 | 1,245,720 | 1,241,035 | | December | 2,676,635 | $36.48 | 2,676,035 | 6,065,000 | | Total | 4,054,119 | $35.81 | 4,046,755 | 6,065,000 | - In April and December 2021, the board authorized share repurchase programs for up to 4.0 million and 7.5 million shares, respectively[299] Stock Performance Graph This section presents a five-year stock performance graph comparing Class B common stock against the S&P MidCap 400 and S&P 1500 Asset Management indexes - The performance graph compares Federated Hermes' Class B common stock total shareholder return to the S&P MidCap 400 Index and the S&P 1500 Asset Management & Custody Banks Index[302] - The comparison is for the five-year period ended December 31, 2021, assuming a $100 investment on December 31, 2016[302] Five-Year Total Shareholder Return (Indexed to $100) | Index | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | | :------------------------------------ | :--------- | :--------- | :--------- | :--------- | :--------- | | Federated Hermes | $132.26 | $101.39 | $128.83 | $123.95 | $166.94 | | S&P MidCap 400 Index | $116.24 | $103.36 | $130.44 | $148.26 | $184.97 | | S&P 1500 Asset Management & Custody Banks Index | $129.40 | $96.88 | $122.30 | $142.12 | $191.61 | ITEM 6 – [RESERVED] Reserved This item is reserved and contains no information ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Discussion This section overviews Federated Hermes' financial condition, highlighting its $668.9 billion managed assets, revenue from advisory fees, and key operating expenses - Federated Hermes is a major U.S. investment manager with $668.9 billion in managed assets as of December 31, 2021[306] - Revenue is primarily from investment advisory, administrative, and other fund-related services, calculated as a percentage of average net assets[307] - Advisory fees are generally higher for equity and multi-asset products compared to fixed-income and money market products[307] - Significant operating expenses include Compensation and Related expense and Distribution expense[308] - Management's key performance indicators include AUM, gross and net product sales, total revenue, and net income[309] Business Developments Key 2021 business developments included the HFML acquisition and the ongoing COVID-19 Pandemic impact, leading to economic uncertainty and fee waivers - Federated Hermes completed the acquisition of the remaining 29.5% noncontrolling interests in Hermes Fund Managers Limited (HFML) on August 31, 2021[311] - The COVID-19 Pandemic continued to cause economic uncertainty and market volatility in 2022, despite global vaccination efforts and economic reopening[312][314] - Federated Hermes implemented remote and hybrid working arrangements, with a structured return-to-office plan for U.S. employees beginning in April 2021[316] - Low short-term interest rates led to Voluntary Yield-related Fee Waivers totaling $420.3 million in 2021, with a net negative pre-tax impact of $143.2 million[331] - Management expects the net negative pre-tax impact from fee waivers to be approximately $22 million in Q1 2022, reducing by approximately 90% in Q2 2022 assuming a 25 basis point interest rate increase in March 2022[332] Asset Highlights This section details Federated Hermes' managed assets, with total AUM up 8% and average AUM up 3% in 2021, impacting revenue due to asset mix Managed Assets at Period End (in millions) as of December 31 | in millions as of December 31, | 2021 | 2020 | 2021 vs. 2020 | | :----------------------------- | :--- | :--- | :------------ | | By Asset Class | | | | | Equity | $96,716 | $91,788 | 5 % | | Fixed-Income | 97,550 | 84,277 | 16 | | Alternative / Private Markets | 22,920 | 19,084 | 20 | | Multi-Asset | 3,780 | 3,948 | (4) | | Total Long-Term Assets | 220,966 | 199,097 | 11 | | Money Market | 447,907 | 420,333 | 7 | | Total Managed Assets | $668,873 | $619,430 | 8 % | | By Product Type | | | | | Funds: | | | | | Equity | $57,036 | $54,312 | 5 % | | Fixed-Income | 59,862 | 53,557 | 12 | | Alternative / Private Markets | 14,788 | 12,100 | 22 | | Multi-Asset | 3,608 | 3,744 | (4) | | Total Long-Term Assets | 135,294 | 123,713 | 9 | | Money Market | 312,834 | 301,855 | 4 | | Total Fund Assets | 448,128 | 425,568 | 5 | | Separate Accounts: | | | | | Equity | 39,680 | 37,476 | 6 | | Fixed-Income | 37,688 | 30,720 | 23 | | Alternative / Private Markets | 8,132 | 6,984 | 16 | | Multi-Asset | 172 | 204 | (16) | | Total Long-Term Assets | 85,672 | 75,384 | 14 | | Money Market | 135,073 | 118,478 | 14 | | Total Separate Account Assets | 220,745 | 193,862 | 14 | | Total Managed Assets | $668,873 | $619,430 | 8 % | Average Managed Assets (in millions) for the years ended December 31 | in millions for the years ended December 31, | 2021 | 2020 | 2019 | 2021 vs. 2020 | 2020 vs. 2019 | | :------------------------------------------- | :--- | :--- | :--- | :------------ | :------------ | | By Asset Class | | | | | | | Equity | $98,040 | $80,591 | $81,212 | 22 % | (1)% | | Fixed-Income | 91,564 | 74,403 | 65,375 | 23 | 14 | | Alternative / Private Markets | 20,754 | 18,206 | 17,896 | 14 | 2 | | Multi-Asset | 3,879 | 3,813 | 4,192 | 2 | (9) | | Total Long-Term Assets | 214,237 | 177,013 | 168,675 | 21 | 5 | | Money Market | 418,562 | 436,895 | 340,505 | (4) | 28 | | Total Average Managed Assets | $632,799 | $613,908 | $509,180 | 3 % | 21 % | | By Product Type | | | | | | | Funds: | | | | | | | Equity | $58,426 | $45,585 | $42,712 | 28 % | 7 % | | Fixed-Income | 58,095 | 46,899 | 41,938 | 24 | 12 | | Alternative / Private Markets | 13,266 | 11,424 | 11,317 | 16 | 1 | | Multi-Asset | 3,696 | 3,622 | 4,003 | 2 | (10) | | Total Long-Term Assets | 133,483 | 107,530 | 99,970 | 24 | 8 | | Money Market | 293,644 | 324,490 | 238,876 | (10) | 36 | | Total Average Fund Assets | 427,127 | 432,020 | 338,846 | (1) | 27 | | Separate Accounts: | | | | | | | Equity | 39,614 | 35,006 | 38,500 | 13 | (9) | | Fixed-Income | 33,469 | 27,504 | 23,437 | 22 | 17 | | Alternative / Private Markets | 7,488 | 6,782 | 6,579 | 10 | 3 | | Multi-Asset | 183 | 191 | 189 | (4) | 1 | | Total Long-Term Assets | 80,754 | 69,483 | 68,705 | 16 | 1 | | Money Market | 124,918 | 112,405 | 101,629 | 11 | 11 | | Total Average Separate Account Assets | 205,672 | 181,888 | 170,334 | 13 | 7 | | Total Average Managed Assets | $632,799 | $613,908 | $509,180 | 3 % | 21 % | - Average managed assets increased 3% in 2021 compared to 2020, while period-end managed assets increased 8% primarily due to money market and fixed-income assets[350] - The U.S. economy and equity markets saw significant growth in 2021, with the S&P 500 rising 26.9%, Dow Jones 18.7%, and Nasdaq Composite 21.4% respectively[351] Changes in Equity Fund and Separate Account Assets Equity Fund assets increased 5% to $57,036 million in 2021 due to market gains, while Separate Account assets grew 6% to $39,680 million Changes in Equity Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $54,312 | $48,112 | | Sales | 14,265 | 14,457 | | Redemptions | (15,915) | (15,675) | | Net Sales (Redemptions) | (1,650) | (1,218) | | Market Gains and (Losses) | 4,850 | 6,973 | | Ending Assets | $57,036 | $54,312 | Changes in Equity Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $37,476 | $40,899 | | Sales | 7,564 | 6,006 | | Redemptions | (10,846) | (11,046) | | Net Sales (Redemptions) | (3,282) | (5,040) | | Market Gains and (Losses) | 5,657 | 1,008 | | Ending Assets | $39,680 | $37,476 | - Total Equity assets increased to $96,716 million in 2021 from $91,788 million in 2020, primarily due to $10,507 million in market gains, despite $4,932 million in net redemptions[339] Changes in Fixed-Income Fund and Separate Account Assets Fixed-Income Fund assets increased 12% to $59,862 million in 2021 due to $5,960 million in net sales, with Separate Accounts up 23% to $37,688 million Changes in Fixed-Income Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $53,557 | $44,223 | | Sales | 30,862 | 29,453 | | Redemptions | (24,902) | (22,564) | | Net Sales (Redemptions) | 5,960 | 6,889 | | Market Gains and (Losses) | 451 | 2,332 | | Ending Assets | $59,862 | $53,557 | Changes in Fixed-Income Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $30,720 | $24,800 | | Sales | 11,764 | 7,830 | | Redemptions | (4,842) | (3,574) | | Net Sales (Redemptions) | 6,922 | 4,256 | | Market Gains and (Losses) | 137 | 1,603 | | Ending Assets | $37,688 | $30,720 | - Total Fixed-Income assets increased to $97,550 million in 2021 from $84,277 million in 2020, primarily due to $12,882 million in net sales[341] Changes in Alternative / Private Markets Fund and Separate Account Assets Alternative / Private Markets Fund assets increased 22% to $14,788 million in 2021, driven by net sales and market gains, with Separate Accounts up 16% to $8,132 million Changes in Alternative / Private Markets Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $12,100 | $11,389 | | Sales | 3,699 | 2,277 | | Redemptions | (2,657) | (2,047) | | Net Sales (Redemptions) | 1,042 | 230 | | Market Gains and (Losses) | 1,729 | 85 | | Ending Assets | $14,788 | $12,100 | Changes in Alternative / Private Markets Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $6,984 | $6,713 | | Sales | 1,124 | 563 | | Redemptions | (513) | (568) | | Net Sales (Redemptions) | 611 | (5) | | Market Gains and (Losses) | 629 | (391) | | Ending Assets | $8,132 | $6,984 | - Total Alternative / Private Markets assets increased to $22,920 million in 2021 from $19,084 million in 2020, driven by $1,653 million in net sales and $2,358 million in market gains[343] Changes in Multi-Asset Fund and Separate Account Assets Multi-Asset Fund assets decreased 4% to $3,608 million in 2021 due to net redemptions, while Separate Account assets declined 16% to $172 million Changes in Multi-Asset Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $3,744 | $4,000 | | Sales | 299 | 214 | | Redemptions | (894) | (688) | | Net Sales (Redemptions) | (595) | (474) | | Market Gains and (Losses) | 364 | 237 | | Ending Assets | $3,608 | $3,744 | Changes in Multi-Asset Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $204 | $199 | | Sales | 2 | 27 | | Redemptions | (42) | (36) | | Net Sales (Redemptions) | (40) | (9) | | Market Gains and (Losses) | 8 | 14 | | Ending Assets | $172 | $204 | - Total Multi-Asset assets decreased to $3,780 million in 2021 from $3,948 million in 2020, primarily due to $635 million in net redemptions, partially offset by $372 million in market gains[345] Changes in Total Long-Term Assets Total Long-Term Fund Assets increased 9% to $135,294 million in 2021, driven by net sales and market gains, with Separate Accounts up 14% to $85,672 million Changes in Total Long-Term Fund Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $123,713 | $107,724 | | Sales | 49,125 | 46,401 | | Redemptions | (44,368) | (40,974) | | Net Sales (Redemptions) | 4,757 | 5,427 | | Market Gains and (Losses) | 7,394 | 9,627 | | Ending Assets | $135,294 | $123,713 | Changes in Total Long-Term Separate Account Assets (in millions) | in millions for the years ended December 31, | 2021 | 2020 | | :------------------------------------------- | :--- | :--- | | Beginning Assets | $75,384 | $72,611 | | Sales | 20,454 | 14,426 | | Redemptions | (16,243) | (15,224) | | Net Sales (Redemptions) | 4,211 | (798) | | Market Gains and (Losses) | 6,431 | 2,234 | | Ending Assets | $85,672 | $75,384 | - Total Long-Term Assets increased to $220,966 million in 2021 from $199,097 million in 2020, driven by $8,968 million in net sales and $13,825 million in market gains[347] Results of Operations Total revenue decreased in 2021 due to fee waivers, while operating expenses declined, leading to a $56.1 million decrease in net income and lower diluted EPS - Total revenue decreased by $147.8 million in 2021 compared to 2020, mainly due to a $307.3 million increase in Voluntary Yield-related Fee Waivers and a $38.1 million decrease in money market revenue[356] - Operating expenses decreased by $95.9 million in 2021, driven by a $157.5 million decrease in distribution expense (due to fee waivers), partially offset by a $29.1 million increase in compensation and related expense[358] - Nonoperating Income (Expenses), net, decreased by $17.9 million, primarily due to a smaller increase in market value of investments and a one-time gain in 2020[359] - Net income attributable to Federated Hermes, Inc. decreased by $56.1 million in 2021, leading to a $0.48 decrease in diluted earnings per share[361] Key Financial Performance Indicators (in thousands, except per share data) | Metric | 2021 | 2020 | 2019 | | :------------------------------------------------------------------- | :--- | :--- | :--- | | Total Revenue | $1,300,447 | $1,448,268 | $1,326,894 | | Operating Income | 366,272 | 418,151 | 347,927 | | Net Income | $270,293 | $326,364 | $272,339 | | Earnings Per Common Share—Diluted | $2.75 | $3.23 | $2.69 | Liquidity and Capital Resources Liquid assets increased to $492.7 million at December 31, 2021, while operating cash flow decreased, and financing activities increased due to share repurchases and acquisitions - Liquid assets, net of noncontrolling interests, totaled $492.7 million at December 31, 2021, up from $432.5 million in 2020[363] - Net cash provided by operating activities decreased by $202.8 million to $170.4 million in 2021, primarily due to increased cash paid for trading securities and decreased cash received from revenue[365] - Net cash used by financing activities was $249.5 million in 2021, driven by $228.3 million for share repurchases, $165.9 million for HFML equity acquisition, and $147.3 million for debt payments[367] - Federated Hermes entered into a new $350 million revolving credit facility (Fourth Amended and Restated Credit Agreement) expiring July 30, 2026, with $126.6 million available as of December 31, 2021[368][374] - The company was in compliance with all debt covenants, including an interest coverage ratio of 359 to 1 and a leverage ratio of 0.51 to 1, as of December 31, 2021[369] - Cash dividends of $105.8 million were paid in 2021 ($1.08 per share)[371] - Future cash needs include funding acquisitions, distribution, compensation, dividends, debt repayment, and new product development[377] Financial Position This section highlights changes in assets and liabilities, including increased investments, decreased ROU assets, and increased deferred tax liability due to UK tax rate change - Investments—Consolidated Investment Companies increased by $14.2 million, primarily due to consolidation of certain entities[381] - Investments—Affiliates and Other increased by $42.2 million, mainly due to reclassification from deconsolidation of two VREs[382] - Right-of-Use Assets, net, decreased by $13.8 million due to annual amortization[384] - Long-Term Deferred Tax Liability, net, increased by $17.3 million, primarily from the revaluation of foreign net deferred tax liability due to the UK tax rate change (19% to 25% effective April 1, 2023)[385] Variable Interest Entities (VIEs) Federated Hermes consolidates VIEs where it is the primary beneficiary, with a maximum risk of loss of $170.6 million from non-consolidated VIEs at December 31, 2021 - Federated Hermes consolidates VIEs where it is the primary beneficiary, meaning it has power to direct activities and obligation to absorb losses or right to receive benefits[386] - The maximum risk of loss related to investments in non-consolidated VIEs was $170.6 million at December 31, 2021, primarily from Federated Hermes Funds[537] Critical Accounting Policies Financial statements are prepared under U.S. GAAP, with critical accounting policies involving indefinite-lived intangible assets and annual impairment tests - Financial statements are prepared in accordance with U.S. GAAP, requiring management estimates and assumptions[387] - The indefinite-lived intangible assets policy, particularly rights to manage fund assets, involves a high degree of judgment and complexity[388] - Annual impairment tests for indefinite-lived intangible assets are performed, considering projected AUM, revenue growth, profit margins, tax rates, and discount rates[390] - The Pandemic's uncertainty led to potential impairment indicators for HFML rights to manage fund assets throughout 2021, with estimated fair value exceeding carrying value by less than 10%[391] - As of December 31, 2021, Federated Hermes had $400.9 million in indefinite-lived intangible assets, with no impairments recorded in 2021, 2020, or 2019[394] ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Disclosures Federated Hermes is exposed to interest-rate, credit, price, and foreign exchange risks, managed through diversification, with hypothetical fluctuations impacting financial condition - Federated Hermes is exposed to interest-rate risk, credit risk, price risk, and foreign exchange risk from its investments and revenue model[395] - A hypothetical 300-basis-point fluctuation in interest rates would not materially affect financial condition or results of operations for certain investments[396] - A hypothetical 300-basis-point fluctuation in credit spreads could impact financial condition by approximately $13 million[396] - A hypothetical 20% fluctuation in the fair value of equity investments could impact financial condition by approximately $16 million[398] - A hypothetical 20% fluctuation in foreign currency exchange rates could impact financial condition by approximately $12 million for non-U.S. dollar holdings and $11 million for hedged revenue[400][401] - Changes in the market value of managed assets directly impact revenue; a 20% decline in average AUM would result in a corresponding 20% decline in revenue[402] ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Management's Assessment of Internal Control Over Financial Reporting Management concluded that Federated Hermes' internal control over financial reporting was effective as of December 31, 2021, as audited by Ernst & Young LLP - Management is responsible for establishing and maintaining adequate internal control over financial reporting[405] - As of December 31, 2021, management concluded that Federated Hermes' internal controls over financial reporting were effective, based on the COSO 2013 framework[406] - Ernst & Young LLP audited the effectiveness of internal control over financial reporting and expressed an unqualified opinion[406][411] Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on financial statements and internal controls, highlighting indefinite-lived intangible asset valuation as a critical audit matter - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2021[410] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[411][422] - The critical audit matter was the valuation of indefinite-lived intangible assets, specifically the HFML rights to manage fund assets ($203.4 million at December 31, 2021), due to significant estimation uncertainty in fair value determination[415] - Audit procedures included evaluating management's assumptions (discount rate, revenue growth, profit margins) and performing sensitivity analyses[418] Consolidated Balance Sheets The Consolidated Balance Sheets present Federated Hermes' financial position as of December 31, 2021, with total assets decreasing from $2.06 billion in 2020 to $2.02 billion Consolidated Balance Sheets (dollars in thousands) | (dollars in thousands) December 31, | 2021 | 2020 | | :---------------------------------- | :--- | :--- | | ASSETS | | | | Current Assets | | | | Cash and Cash Equivalents | 233,327 | 301,819 | | Investments—Consolidated Investment Companies | 105,542 | 91,359 | | Investments—Affiliates and Other | 87,805 | 45,593 | | Receivables, net | 65,317 | 64,857 | | Receivables—Affiliates | 30,956 | 41,107 | | Prepaid Expenses | 29,322 | 22,130 | | Other Current Assets | 7,178 | 8,478 | | Total Current Assets | 559,447 | 575,343 | | Long-Term Assets | | | | Goodwill | 798,871 | 800,267 | | Intangible Assets, net | 471,209 | 481,753 | | Property and Equipment, net | 46,965 | 52,610 | | Right-of-Use Assets, net | 108,306 | 122,078 | | Other Long-Term Assets | 33,389 | 28,788 | | Total Long-Term Assets | 1,458,740 | 1,485,496 | | Total Assets | $2,018,187 | $2,060,839 | | LIABILITIES | | | | Current Liabilities | | | | Accounts Payable and Accrued Expenses | 64,019 | 61,736 | | Accrued Compensation and Benefits | 162,203 | 170,646 | | Lease Liabilities | 17,447 | 15,845 | | Other Current Liabilities | 27,038 | 17,219 | | Total Current Liabilities | 270,707 | 265,446 | | Long-Term Liabilities | | | | Long-Term Debt | 223,350 | 75,000 | | Long-Term Deferred Tax Liability, net | 205,206 | 187,937 | | Long-Term Lease Liabilities | 105,270 | 121,922 | | Other Long-Term Liabilities | 36,435 | 36,550 | | Total Long-Term Liabilities | 570,261 | 421,409 | | Total Liabilities | 840,968 | 686,855 | | TEMPORARY EQUITY | | | | Redeemable Noncontrolling Interests in Subsidiaries | 63,202 | 236,987 | | PERMANENT EQUITY | | | | Federated Hermes, Inc. Shareholders' Equity | | | | Common Stock: | | | | Class A, No Par Value | 189 | 189 | | Class B, No Par Value | 448,929 | 418,669 | | Retained Earnings | 1,187,001 | 1,027,699 | | Treasury Stock, at Cost | (538,464) | (324,731) | | Accumulated Other Comprehensive Income (Loss), net of tax | 16,362 | 15,171 | | Total Permanent Equity | 1,114,017 | 1,136,997 | | Total Liabilities, Temporary Equity and Permanent Equity | $2,018,187 | $2,060,839 | Consolidated Statements of Income The Consolidated Statements of Income show total revenue decreased 10% in 2021, with operating income and net income declining, and diluted EPS at $2.75 Consolidated Statements of Income (dollars in thousands, except per share data) | (dollars in thousands, except per share data) Years Ended December 31, | 2021 | 2020 | 2019 | | :------------------------------------------------------------------- | :--- | :--- | :--- | | Revenue | | | | | Investment Advisory Fees, net—Affiliates | $656,958 | $769,836 | $685,849 | | Investment Advisory Fees, net—Other | 259,026 | 241,631 | 221,756 | | Administrative Service Fees, net—Affiliates | 306,639 | 318,152 | 245,887 | | Other Service Fees, net—Affiliates | 61,326 | 103,862 | 161,421 | | Other Service Fees, net—Other | 16,498 | 14,787 | 11,981 | | Total Revenue | 1,300,447 | 1,448,268 | 1,326,894 | | Operating Expenses | | | | | Compensation and Related | 532,492 | 503,400 | 442,147 | | Distribution | 160,884 | 318,343 | 340,663 | | Systems and Communications | 75,429 | 64,698 | 52,988 | | Professional Service Fees | 60,331 | 55,123 | 43,714 | | Office and Occupancy | 44,573 | 38,975 | 44,926 | | Advertising and Promotional | 21,600 | 15,834 | 17,774 | | Travel and Related |