Federated(US:FHI)2022-05-02 16:00Part I Item 1. Financial Statements This section presents the unaudited consolidated financial statements for the quarterly period ended March 31, 2022, detailing financial position, performance, cash flows, and key accounting events Consolidated Balance Sheets Total assets remained stable at approximately $2.019 billion as of March 31, 2022, while long-term debt increased to $397.4 million and total permanent equity decreased to $1.058 billion Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $2,018,522 | $2,018,187 | | Total Current Assets | $581,845 | $559,447 | | Total Long-Term Assets | $1,436,677 | $1,458,740 | | Total Liabilities | $912,032 | $840,968 | | Long-Term Debt | $397,383 | $223,350 | | Total Permanent Equity | $1,057,921 | $1,114,017 | Consolidated Statements of Income Total revenue decreased to $324.8 million in Q1 2022, leading to a decline in operating income to $83.9 million and net income to $55.9 million, with diluted EPS at $0.61 Q1 2022 vs. Q1 2021 Income Statement (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Total Revenue | $324,764 | $341,173 | | Total Operating Expenses | $240,815 | $243,695 | | Operating Income | $83,949 | $97,478 | | Gain (Loss) on Securities, net | ($11,695) | $1,379 | | Net Income | $55,863 | $74,484 | | Earnings Per Share—Diluted | $0.61 | $0.75 | Consolidated Statements of Cash Flows Net cash used by operating activities was $19.2 million in Q1 2022, while financing activities provided $54.9 million, resulting in a $28.7 million increase in cash and cash equivalents Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net Cash Provided (Used) by Operating Activities | ($19,247) | ($30,013) | | Net Cash Provided (Used) by Investing Activities | ($2,540) | ($1,504) | | Net Cash Provided (Used) by Financing Activities | $54,861 | ($48,990) | - Financing activities were primarily driven by $488.3 million in new borrowings and $30.3 million in contributions from noncontrolling interests, offset by $311.7 million in debt payments and $113.3 million for treasury stock purchases19 Notes to the Consolidated Financial Statements Key notes include the acquisition of the remaining HFML noncontrolling interest, revenue concentration by asset class, the $18.3 million net negative impact of fee waivers, new $350 million senior notes, and $102.5 million in share repurchases - On March 14, 2022, Federated Hermes acquired the remaining approximate 10% noncontrolling interests in Federated Hermes Limited (HFML), making it a 100% indirect, wholly-owned subsidiary25 Revenue Concentration by Asset Class | Asset Class | Q1 2022 Revenue % | Q1 2021 Revenue % | | :--- | :--- | :--- | | Equity Assets | 45% | 49% | | Money Market Assets | 27% | 24% | | Fixed-Income Assets | 18% | 16% | - Voluntary yield-related fee waivers totaled $75.8 million, partially offset by $57.5 million in related distribution expense reductions, resulting in a net negative pre-tax impact of $18.3 million for Q1 2022, compared to $21.7 million in Q1 202136 - The company issued $350.0 million of unsecured senior notes at a fixed rate of 3.29%, due March 17, 203272 - During Q1 2022, the company repurchased approximately 3.0 million shares of its Class B common stock for $102.5 million87 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's performance, noting a 5% increase in managed assets to $647.2 billion, discussing market impacts, regulatory reforms, and the decline in revenue and net income, alongside capital structure strengthening Business Developments This section covers key business events, including the HFML acquisition, the impact of rising interest rates on fee waivers, and the company's strong opposition to proposed SEC money market fund reforms - Due to rising interest rates, management expects the net negative pre-tax impact from Voluntary Yield-related Fee Waivers to decrease significantly to approximately $1 million in Q2 2022, down from $18.3 million in Q1 2022110 - The company strongly opposes the SEC's proposed money market fund reforms, particularly the mandatory implementation of swing pricing, arguing it would be harmful to investors and interfere with the stability of short-term markets119125126 - The company continues to monitor and address numerous other regulatory developments, including proposals on ESG disclosures, cybersecurity, and changes to fiduciary rules, which require significant internal and external resources130135198 Asset Highlights Total managed assets increased 1% to $631.1 billion, with long-term assets growing 2% to $210.5 billion driven by fixed-income and alternative markets, despite $2.0 billion in net redemptions Managed Assets by Class (in millions) | Asset Class | March 31, 2022 | March 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Equity | $91,676 | $96,170 | (5)% | | Fixed-Income | $92,146 | $86,464 | 7% | | Alternative / Private Markets | $23,109 | $19,301 | 20% | | Money Market | $420,596 | $419,080 | 0% | | Total Managed Assets | $631,082 | $624,996 | 1% | - Total long-term assets saw net redemptions of $2.0 billion in Q1 2022, compared to net sales of $3.2 billion in Q1 2021, primarily driven by redemptions in fixed-income and equity funds218 - The market environment in Q1 2022 was challenging, with major equity indices down and the bond market suffering its worst quarter in over 40 years due to rising interest rates and inflation222224 Results of Operations Q1 2022 revenue decreased by $16.4 million due to lower equity assets and performance fees, while operating expenses fell by $2.9 million, leading to a $18.6 million drop in net income to $55.9 million - Revenue decreased by $16.4 million YoY, primarily due to a $18.1 million drop in equity revenue and a $9.3 million decrease in carried interest/performance fees225 - Operating expenses decreased by $2.9 million, mainly due to a $9.7 million reduction in compensation and related expenses227 - Nonoperating income saw a net decrease of $13.6 million, driven by a $13.1 million decline in gains on securities due to market depreciation228 - Diluted EPS decreased by $0.14 to $0.61, primarily due to lower net income, which was partially offset by a lower share count from repurchases230 Liquidity and Capital Resources The company maintains strong liquidity with $502.4 million in liquid assets, having issued $350 million in new senior notes and remaining in full compliance with debt covenants, ensuring sufficient cash to meet future needs - The company issued $350.0 million in unsecured senior notes at a fixed rate of 3.29% due in 2032, with proceeds used to supplement cash flow, fund share repurchases, and pay down existing debt238 - As of March 31, 2022, the company was in compliance with all debt covenants, with an interest coverage ratio of 210 to 1 (vs. required 4 to 1) and a leverage ratio of 0.94 to 1 (vs. required max of 3.0 to 1)240 - Management expects principal uses of cash to include business acquisitions, global expansion, dividends, debt repayment, and share repurchases, believing it has sufficient liquidity to meet these needs242245 Critical Accounting Policies The valuation of indefinite-lived intangible assets, particularly from the HFML acquisition, is a critical accounting policy, with an impairment test showing fair value exceeded carrying value by less than 5%, indicating heightened future impairment risk - The valuation of indefinite-lived intangible assets is considered a critical accounting policy due to the high degree of judgment involved253 - An impairment test on certain intangible assets from the HFML acquisition, totaling $197.4 million, showed their estimated fair value exceeded carrying value by less than 5% as of March 31, 2022, indicating heightened future impairment risk255 Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to the company's market risk exposures have occurred since the disclosures in the 2021 Annual Report on Form 10-K - As of March 31, 2022, there were no material changes to the company's exposures to market risk compared to the disclosures in the 2021 Annual Report on Form 10-K256 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2022257 - No material changes to the company's internal control over financial reporting occurred during the first quarter of 2022258 Part II Item 1. Legal Proceedings The company does not anticipate a material loss from legal claims asserted or threatened in the ordinary course of business as of March 31, 2022 - As of March 31, 2022, Federated Hermes does not believe that a material loss related to ordinary course legal claims is reasonably possible97259 Item 1A. Risk Factors This section updates risk factors, highlighting significant geopolitical and economic risks from Russia's invasion of Ukraine, including sanctions, securities valuation volatility, and increased cybersecurity threats - The company highlights new and heightened risks stemming from Russia's invasion of Ukraine, including sanctions imposed by the U.S. and other countries, which are restricting trading and creating securities valuation volatility260262 - The geopolitical tensions have increased the possibility of cybersecurity attacks, and any further escalation of the conflict or sanctions could exacerbate these risks262 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 318,807 treasury shares for the HFML acquisition and repurchased approximately 3.04 million shares for $102.5 million under its authorized program - On March 14, 2022, the company issued 318,807 treasury shares of Class B common stock, valued at $10.1 million, in a non-public offering as part of the HFML acquisition263 Q1 2022 Share Repurchase Summary | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January | 752,600 | $36.82 | | February | 926,800 | $33.05 | | March | 1,360,517 | $32.48 | | Total | 3,039,917 | $33.73 | Item 5. Other Information This section reports on the Annual Meeting, where all directors were elected, and the Board approved increased compensation for independent directors, including a $53,000 annual base fee and 2,350 shares of Class B Common Stock - At the Annual Meeting on April 28, 2022, all director nominees were elected by the holder of the Class A common stock266267 - The Board approved an increase in compensation for independent directors, including raising the annual base fee from $50,000 to $53,000 and the annual stock award from 2,250 to 2,350 shares269 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the Note Purchase Agreement for the $350 million senior notes and CEO/CFO certifications - A key exhibit filed is the Note Purchase Agreement for the $350,000,000 3.29% Senior Notes due March 17, 2032270 - Certifications from the Chief Executive Officer and Chief Financial Officer as required by Section 302 and Section 906 of the Sarbanes-Oxley Act were also filed270