Federated(FHI) - 2022 Q2 - Quarterly Report

Part I. Financial Information Financial Statements This section presents Federated Hermes, Inc.'s unaudited consolidated financial statements as of and for the periods ended June 30, 2022 Consolidated Balance Sheets As of June 30, 2022, total assets were $1.95 billion, a decrease from $2.02 billion at year-end 2021, primarily due to lower intangible assets and investments Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,951,917 | $2,018,187 | | Goodwill | $784,900 | $798,871 | | Intangible Assets, net | $433,091 | $471,209 | | Total Liabilities | $929,293 | $840,968 | | Long-Term Debt | $397,448 | $223,350 | | Total Permanent Equity | $967,893 | $1,114,017 | Consolidated Statements of Income For Q2 2022, total revenue increased to $366.0 million, with net income attributable to the company at $57.7 million, or $0.64 per diluted share Q2 & H1 2022 Financial Performance (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $366,008 | $311,040 | $690,772 | $652,213 | | Operating Income | $92,318 | $81,809 | $176,267 | $179,287 | | Gain (Loss) on Securities, net | ($20,885) | $6,245 | ($32,580) | $7,624 | | Net Income | $57,657 | $55,884 | $113,520 | $130,368 | | EPS—Diluted | $0.64 | $0.56 | $1.24 | $1.31 | Consolidated Statements of Cash Flows For the six months ended June 30, 2022, net cash provided by operating activities increased to $79.5 million, while financing activities used $47.0 million Six Months Ended June 30 - Cash Flow Summary (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $79,516 | $54,951 | | Net Cash Provided by Investing Activities | $97 | $5,017 | | Net Cash Used by Financing Activities | ($46,967) | ($111,810) | | Net Increase (Decrease) in Cash | $14,929 | ($50,016) | Notes to the Consolidated Financial Statements The notes provide critical details underlying the financial statements, including acquisitions, revenue shifts, debt issuance, and share repurchases - On March 14, 2022, the company acquired the remaining ~10% noncontrolling interest in Federated Hermes Limited (FHL), making it a 100% indirect, wholly-owned subsidiary[22] - Revenue from money market assets constituted 34% of total revenue in H1 2022, up from 20% in H1 2021, primarily due to a decrease in Voluntary Yield-related Fee Waivers[30] - In March 2022, the company issued $350.0 million in unsecured senior notes with a fixed interest rate of 3.29%, due in 2032[72] - During the first six months of 2022, the company repurchased approximately 5.9 million shares of its Class B common stock for $192.1 million[86] - Subsequent to quarter-end, on July 15, 2022, the company entered into a definitive agreement to acquire substantially all of the assets of C.W. Henderson and Associates, Inc. for an initial purchase price of $30 million, with potential contingent payments up to $20 million[100] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial condition and results of operations, highlighting AUM, fee waivers, regulatory environment, liquidity, and critical accounting policies Business Developments and Market Conditions Business developments focused on reduced fee waivers due to rising interest rates, while market conditions were challenging with significant declines in equity and fixed-income markets Net Pre-Tax Impact of Voluntary Yield-related Fee Waivers (in millions) | Period | Fee Waivers | Distribution Expense Reduction | Net Pre-Tax Impact | | :--- | :--- | :--- | :--- | | Q2 2022 | $9.5 | $9.0 | ($0.5) | | Q2 2021 | $117.8 | $71.0 | ($46.8) | | H1 2022 | $85.3 | $66.5 | ($18.8) | | H1 2021 | $200.9 | $132.5 | ($68.4) | - Market conditions in Q2 2022 were difficult, with the S&P 500 returning -16.4% and the Bloomberg US Aggregate Bond Index returning -4.7%, marking the worst first-half performance for both indices in decades[227] Current Regulatory Environment The regulatory environment is highly active, with proposed SEC money market fund reforms, increased focus on ESG disclosures, and post-Brexit regulatory divergence - The SEC proposed money market fund reforms that include removing redemption gates, requiring swing pricing for institutional funds, and increasing liquidity minimums. The company has submitted extensive comment letters opposing most of these proposals, particularly swing pricing[118][122][127] - The SEC and other regulators have increased their focus on ESG, with the SEC proposing mandatory climate-risk disclosures for public companies and specific ESG disclosure rules for funds and advisers[130][143] - Post-Brexit, the UK is developing its own financial regulatory framework (e.g., Brexit Freedoms Bill, Financial Services and Markets Bill), which may diverge significantly from EU regulations like SFDR, increasing compliance complexity[156][160][162] - The company is actively managing the transition from LIBOR to alternative reference rates like SOFR, having addressed most legacy contracts and updated its own credit facilities[200] Asset Highlights Total managed assets decreased 2% to $631.9 billion at June 30, 2022, driven by declines in equity and fixed-income assets, while money market assets grew Managed Assets by Class at Period End (in billions) | Asset Class | June 30, 2022 | June 30, 2021 | % Change | | :--- | :--- | :--- | :--- | | Equity | $81.0 | $100.5 | (19)% | | Fixed-Income | $86.3 | $90.8 | (5)% | | Money Market | $439.7 | $429.8 | 2% | | Total Managed Assets | $631.9 | $645.8 | (2)% | Total Long-Term Asset Flows (in millions) | Period | Net Sales (Redemptions) | Market Gains (Losses) | Impact of Foreign Exchange | | :--- | :--- | :--- | :--- | | Q2 2022 | ($3,003) | ($12,317) | ($2,979) | | H1 2022 | ($5,013) | ($19,569) | ($4,174) | Results of Operations Q2 2022 revenue increased primarily due to reduced voluntary fee waivers, though operating and nonoperating expenses also rose significantly - Q2 2022 revenue increased primarily due to a $108.3 million decrease in Voluntary Yield-related Fee Waivers[228] - Q2 2022 Distribution expense increased by $46.1 million, largely due to a $62.0 million increase related to the reduction in shared fee waivers[231] - Nonoperating results worsened by $29.5 million in Q2 2022 compared to Q2 2021, mainly because of a $27.1 million decrease in Gain (Loss) on Securities, reflecting market depreciation[233] - The effective tax rate for Q2 2022 was 27.1%, down from 39.7% in Q2 2021. The prior year's rate was elevated by a deferred tax expense related to a UK tax rate increase[236] Liquidity and Capital Resources As of June 30, 2022, the company maintained strong liquidity, generating $79.5 million in cash from operations and remaining in compliance with all debt covenants - Issued $350.0 million in unsecured senior notes at a fixed rate of 3.29% due 2032[246] - Used cash for $204.6 million of treasury stock purchases and $49.7 million of dividend payments in the first six months of 2022[245] - The company was in compliance with its debt covenants, with an interest coverage ratio of 88 to 1 (vs. required 4 to 1) and a leverage ratio of 0.89 to 1 (vs. required max of 3.0 to 1)[248] Critical Accounting Policies Management identifies the valuation of indefinite-lived intangible assets as a critical accounting policy, with an impairment test showing fair value exceeded carrying value by less than 20% - An impairment test on indefinite-lived intangible assets of $183.0 million (related to the FHL acquisition) was performed due to market uncertainty[261] - As of June 30, 2022, the estimated fair value of these assets exceeded their carrying value by less than 20%, highlighting the risk of future impairment if revenue growth or profit margins decrease[261] Quantitative and Qualitative Disclosures About Market Risk As of June 30, 2022, there were no material changes to the company's market risk exposures compared to its 2021 Annual Report on Form 10-K - There were no material changes to the company's market risk exposures as of June 30, 2022, compared to the disclosures in the 2021 Form 10-K[263] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - The President and Chief Executive Officer and the Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[264] - No changes occurred during the quarter ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[265] Part II. Other Information Legal Proceedings The company faces ordinary course legal claims, but management does not believe a material loss is reasonably possible as of June 30, 2022 - As of June 30, 2022, the company does not believe that a material loss related to any outstanding legal claims is reasonably possible[98][266] Risk Factors This section updates the company's risk factors, specifically highlighting increased risks stemming from Russia's invasion of Ukraine, including sanctions and cybersecurity threats - The company highlights risks associated with Russia's invasion of Ukraine, including sanctions, potential Russian countermeasures, and increased cybersecurity threats, which could negatively impact economies and securities markets globally[267] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activity during Q2 2022, with 2,877,691 shares repurchased at a weighted-average price of $31.12 per share Q2 2022 Share Repurchase Summary | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April | 497,691 | $31.70 | | May | 2,125,000 | $30.82 | | June | 255,000 | $32.45 | | Total | 2,877,691 | $31.12 | - As of June 30, 2022, 5,162,000 shares remained available for repurchase under the company's publicly announced plans[273] Exhibits This section lists the exhibits filed with the Form 10-Q, including the Asset Purchase Agreement for C.W. Henderson & Associates, Inc., and CEO/CFO certifications - Exhibits filed include the Asset Purchase Agreement with C.W. Henderson & Associates, Inc., CEO/CFO certifications, and XBRL data files[274]