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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________________
FORM 10-Q
______________________________________________________________________________________
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-14818
_______________________________________________________________________________________
Federated Hermes, Inc.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________________
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Pennsylvania | | 25-1111467 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1001 Liberty Avenue | | 15222-3779 |
Pittsburgh, | | Pennsylvania | |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code) 412-288-1900
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class B common stock, no par value | FHI | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | | | | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | | | | Smaller reporting company | ☐ |
| | | | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date: As of October 18, 2024, the Registrant had outstanding 9,000 shares of Class A common stock and 81,804,712 shares of Class B common stock.
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| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
Part II. Other Information | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 5. | Other Information | |
| Item 6. | | |
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FORWARD-LOOKING STATEMENTS
Certain statements in this report on Form 10-Q constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that could cause the actual results, levels of activity, performance or achievements of Federated Hermes, Inc. and its consolidated subsidiaries (collectively, Federated Hermes), or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “forecast,” “project,” “predict,” “trend,” “approximate,” “potential,” “opportunity,” “believe,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “projection,” “plan,” “assume,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “can,” “may,” and similar expressions. Among other forward-looking statements, such statements include certain statements relating to, or, as applicable, statements concerning management’s assessments, beliefs, expectations, assumptions, judgments, projections or estimates regarding: asset flows, levels, values and mix and their impact; projected growth rates, projected pre-tax profit margins, discount rates, and the possibility and potential impact of impairments; business mix; the level, timing, degree and impact of changes in interest rates or gross or net yields; money market funds’ potential yield advantage in a falling interest rate environment; rates of inflation; fee rates and recognition; sources, levels and recognition of revenues, expenses, gains, losses, income and earnings; the level and impact of reimbursements, rebates or assumptions of fund-related expenses and fee waivers for competitive reasons such as to maintain positive or zero net yields (Voluntary Yield-related Fee Waivers), to maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements (collectively, Fee Waivers); whether, under what circumstances and the degree to which Fee Waivers will be implemented; the impact of market volatility, liquidity, and other market conditions; whether performance fees or carried interest will be earned or clawed back; whether and when revenue or expense is recognized; whether and when capital contributions could be made, the availability of insurance and probability of insurance reimbursements or recoveries in connection with indemnification obligations or other claims; the components and level of, and prospect for, distribution-related expenses; guarantee and indemnification obligations; the impact of acquisitions on Federated Hermes’ growth; the timing and amount of acquisition-related payment obligations; the results of negotiations involving consideration in business transactions; payment obligations pursuant to employment or incentive and business arrangements; vesting rights and requirements; business and market expansion opportunities; interest and principal payments or expenses; taxes and tax rates; borrowing, debt, future cash needs and principal uses of cash, cash flows and liquidity, including the amount and timing of expected future capital expenditures; the ability to raise additional capital; type, classification and consolidation of investments; uses of treasury stock; Federated Hermes’ product, strategy, and other service (as applicable, offering) and market performance and Federated Hermes’ performance indicators; investor preferences; offering demand, distribution, development and restructuring initiatives and related planning and timing; the effect, and degree of impact, of changes in customer relationships; the outcome and impact of legal proceedings; regulatory matters, including the pace, timing, impact, effects and other consequences of the current regulatory environment; the attractiveness and resiliency of money market funds; dedication of resources; accounting-related assessments, judgements and determinations; compliance, and related legal,
compliance and other professional services expenses; and interest rate, concentration, market, currency and other risks and their impact. Any forward-looking statement is inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, many of which are difficult to predict and beyond Federated Hermes’ control. Among other risks and uncertainties, market conditions can change significantly and impact Federated Hermes’ business and results, including by changing Federated Hermes’ asset flows, levels, and mix, and business mix, which could cause a decline in revenues and net income, result in impairments and change the amount of Fee Waivers incurred by Federated Hermes. The obligation to make purchase price payments in connection with acquisitions is subject to certain adjustments and conditions, and the obligation to make contingent payments is based on net revenue growth levels and will be affected by the achievement of such levels. The obligation to make additional payments pursuant to employment or incentive arrangements can be based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated Hermes’ success in developing, structuring and distributing its offerings, potential changes in assets under management (AUM) and/or changes in the terms of distribution and shareholder services contracts with intermediaries who offer Federated Hermes’ offerings to intermediary customers, opportunities to repurchase shares, and potential increased legal, compliance and other professional services expenses stemming from additional or modified regulation or the dedication of such resources to other initiatives. Federated Hermes’ risks and uncertainties also include liquidity and credit risks in Federated Hermes’ money market funds and revenue risk, which will be affected by yield levels in money market fund offerings, Fee Waivers, changes in fair values of AUM, any additional regulatory reforms, investor preferences and confidence, and the ability of Federated Hermes to collect fees in connection with the management of such offerings. Many of these factors could be more likely to occur as a result of continued scrutiny of the mutual fund industry by domestic or foreign regulators, and any disruption in global financial markets. As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither Federated Hermes nor any other person assumes responsibility for the accuracy and completeness, or updating, of such statements in the future. For more information on these items and additional risks that could impact the forward-looking statements, see Item 1A - Risk Factors included in Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2023.
Part I. Financial Information
Item 1. Financial Statements
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Consolidated Balance Sheets | | | |
(dollars in thousands) | | | |
(unaudited) | | | |
| September 30, 2024 | | December 31, 2023 |
ASSETS | | | |
Current Assets | | | |
Cash and Cash Equivalents | $ | 374,952 | | | $ | 383,180 | |
Investments—Consolidated Investment Companies | 116,380 | | | 70,543 | |
Investments—Affiliates and Other | 73,696 | | | 106,952 | |
Receivables, net of reserve of $21 and $21, respectively | 79,095 | | | 75,721 | |
Receivables—Affiliates | 39,133 | | | 48,694 | |
Prepaid Expenses | 33,627 | | | 29,739 | |
Other Current Assets | 6,303 | | | 5,900 | |
Total Current Assets | 723,186 | | | 720,729 | |
Long-Term Assets | | | |
Goodwill | 813,547 | | | 807,156 | |
| | | |
Intangible Assets, net of accumulated amortization of $77,340 and $64,112, respectively | 342,588 | | | 409,449 | |
Property and Equipment, net of accumulated depreciation of $122,146 and $119,852, respectively | 27,553 | | | 30,711 | |
Right-of-Use Assets, net | 90,471 | | | 99,265 | |
Other Long-Term Assets | 40,206 | | | 34,534 | |
Total Long-Term Assets | 1,314,365 | | | 1,381,115 | |
Total Assets | $ | 2,037,551 | | | $ | 2,101,844 | |
LIABILITIES | | | |
Current Liabilities | | | |
Accounts Payable and Accrued Expenses | $ | 98,112 | | | $ | 88,290 | |
Accrued Compensation and Benefits | 127,215 | | | 158,392 | |
Lease Liabilities | 16,186 | | | 16,283 | |
| | | |
Other Current Liabilities | 21,625 | | | 24,378 | |
Total Current Liabilities | 263,138 | | | 287,343 | |
Long-Term Liabilities | | | |
Long-Term Debt | 348,040 | | | 347,843 | |
Long-Term Deferred Tax Liability, net | 176,423 | | | 186,292 | |
Long-Term Lease Liabilities | 83,593 | | | 93,816 | |
Other Long-Term Liabilities | 29,433 | | | 32,453 | |
Total Long-Term Liabilities | 637,489 | | | 660,404 | |
Total Liabilities | 900,627 | | | 947,747 | |
Commitments and Contingencies (Note (17)) | | | |
TEMPORARY EQUITY | | | |
Redeemable Noncontrolling Interests in Subsidiaries | 53,408 | | | 25,845 | |
PERMANENT EQUITY | | | |
Federated Hermes, Inc. Shareholders’ Equity | | | |
Common Stock: | | | |
Class A, No Par Value, 20,000 Shares Authorized, 9,000 Shares Issued and Outstanding | 189 | | | 189 | |
Class B, No Par Value, 900,000,000 Shares Authorized, 99,505,456 Shares Issued | 497,341 | | | 474,814 | |
Additional Paid-In Capital from Treasury Stock Transactions | 0 | | | 2 | |
Retained Earnings | 1,207,794 | | | 1,194,561 | |
Treasury Stock, at Cost, 17,700,744 and 14,664,467 Shares Class B Common Stock, respectively | (622,696) | | | (521,403) | |
Accumulated Other Comprehensive Income (Loss), net of tax | 888 | | | (19,911) | |
| | | |
| | | |
Total Permanent Equity | 1,083,516 | | | 1,128,252 | |
Total Liabilities, Temporary Equity and Permanent Equity | $ | 2,037,551 | | | $ | 2,101,844 | |
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Income |
(dollars in thousands, except per share data) |
(unaudited) |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
Revenue | | | | | | | | |
Investment Advisory Fees, net—Affiliates | | $ | 215,752 | | | $ | 215,673 | | | $ | 629,654 | | | $ | 666,983 | |
Investment Advisory Fees, net—Other | | 58,869 | | | 61,098 | | | 179,883 | | | 184,106 | |
Administrative Service Fees, net—Affiliates | | 97,687 | | | 88,023 | | | 287,819 | | | 252,402 | |
Other Service Fees, net—Affiliates | | 31,356 | | | 33,507 | | | 96,910 | | | 102,364 | |
Other Service Fees, net—Other | | 4,792 | | | 4,355 | | | 13,144 | | | 12,222 | |
Total Revenue | | 408,456 | | | 402,656 | | | 1,207,410 | | | 1,218,077 | |
Operating Expenses | | | | | | | | |
Compensation and Related | | 136,027 | | | 139,123 | | | 403,321 | | | 435,884 | |
Distribution | | 95,859 | | | 89,838 | | | 284,257 | | | 280,258 | |
Systems and Communications | | 23,656 | | | 21,213 | | | 68,672 | | | 63,259 | |
Professional Service Fees | | 19,849 | | | 17,561 | | | 58,046 | | | 52,881 | |
Office and Occupancy | | 9,884 | | | 10,632 | | | 29,617 | | | 34,910 | |
Advertising and Promotional | | 5,378 | | | 3,857 | | | 16,306 | | | 13,308 | |
Travel and Related | | 4,221 | | | 4,034 | | | 11,341 | | | 11,101 | |
Intangible Asset Related | | 3,504 | | | 3,451 | | | 76,131 | | | 10,194 | |
| | | | | | | | |
Other | | (1,664) | | | 11,523 | | | 8,679 | | | 31,303 | |
Total Operating Expenses | | 296,714 | | | 301,232 | | | 956,370 | | | 933,098 | |
Operating Income | | 111,742 | | | 101,424 | | | 251,040 | | | 284,979 | |
Nonoperating Income (Expenses) | | | | | | | | |
Investment Income, net | | 6,080 | | | 6,160 | | | 18,804 | | | 16,228 | |
Gain (Loss) on Securities, net | | 7,935 | | | (3,438) | | | 8,826 | | | 2,094 | |
Debt Expense | | (3,170) | | | (3,133) | | | (9,478) | | | (9,377) | |
Other, net | | 16 | | | (8) | | | 85 | | | 101 | |
Total Nonoperating Income (Expenses), net | | 10,861 | | | (419) | | | 18,237 | | | 9,046 | |
Income Before Income Taxes | | 122,603 | | | 101,005 | | | 269,277 | | | 294,025 | |
Income Tax Provision | | 32,262 | | | 26,739 | | | 84,701 | | | 75,291 | |
Net Income Including the Noncontrolling Interests in Subsidiaries | | 90,341 | | | 74,266 | | | 184,576 | | | 218,734 | |
Less: Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries | | 2,803 | | | (760) | | | 978 | | | 1,932 | |
Net Income | | $ | 87,538 | | | $ | 75,026 | | | $ | 183,598 | | | $ | 216,802 | |
Amounts Attributable to Federated Hermes, Inc. | | | | | | | |
| | | | | | | | |
Earnings Per Common Share—Basic and Diluted | | $ | 1.06 | | | $ | 0.86 | | | $ | 2.20 | | | $ | 2.44 | |
| | | | | | | | |
Cash Dividends Per Share | | $ | 0.31 | | | $ | 0.28 | | | $ | 1.90 | | | $ | 0.83 | |
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Comprehensive Income |
(dollars in thousands) |
(unaudited) |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
Net Income Including the Noncontrolling Interests in Subsidiaries | | $ | 90,341 | | | $ | 74,266 | | | $ | 184,576 | | | $ | 218,734 | |
| | | | | | | | |
Other Comprehensive Income (Loss), net of tax | | | | | | | | |
Permanent Equity | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Foreign Currency Translation Gain (Loss) | | 25,508 | | | (21,814) | | | 20,799 | | | 2,283 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Temporary Equity | | | | | | | | |
Foreign Currency Translation Gain (Loss) | | 554 | | | (454) | | | 461 | | | 106 | |
Other Comprehensive Income (Loss), net of tax | | 26,062 | | | (22,268) | | | 21,260 | | | 2,389 | |
Comprehensive Income Including the Noncontrolling Interests in Subsidiaries | | 116,403 | | | 51,998 | | | 205,836 | | | 221,123 | |
Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interests in Subsidiaries | | 3,357 | | | (1,214) | | | 1,439 | | | 2,038 | |
| | | | | | | | |
Comprehensive Income Attributable to Federated Hermes, Inc. | | $ | 113,046 | | | $ | 53,212 | | | $ | 204,397 | | | $ | 219,085 | |
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Changes in Equity |
(dollars in thousands) |
(unaudited) |
| | Federated Hermes, Inc. Shareholders’ Equity | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital from Treasury Stock Transactions | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss), net of tax | | | | | | Total Permanent Equity | | Redeemable Noncontrolling Interests in Subsidiaries/ Temporary Equity |
Balance at December 31, 2023 | | $ | 475,003 | | | $ | 2 | | | $ | 1,194,561 | | | $ | (521,403) | | | $ | (19,911) | | | | | | | $ | 1,128,252 | | | $ | 25,845 | |
Net Income (Loss) | | 0 | | | 0 | | | 75,033 | | | 0 | | | 0 | | | | | | | 75,033 | | | (23) | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | (5,235) | | | | | | | (5,235) | | | (106) | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 2,724 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 48,100 | |
Stock Award Activity | | 10,262 | | | (2) | | | (10,936) | | | 10,977 | | | 0 | | | | | | | 10,301 | | | 0 | |
Dividends Declared | | 0 | | | 0 | | | (23,727) | | | 0 | | | 0 | | | | | | | (23,727) | | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (3,410) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (37,197) | | | 0 | | | | | | | (37,197) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at March 31, 2024 | | $ | 485,265 | | | $ | 0 | | | $ | 1,234,931 | | | $ | (547,623) | | | $ | (25,146) | | | | | | | $ | 1,147,427 | | | $ | 73,130 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 21,027 | | | 0 | | | 0 | | | | | | | 21,027 | | | (1,802) | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | 526 | | | | | | | 526 | | | 13 | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 16,303 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (52,723) | |
Stock Award Activity | | 6,128 | | | 0 | | | (8) | | | 8 | | | 0 | | | | | | | 6,128 | | | 0 | |
Dividends Declared | | 0 | | | 0 | | | (110,106) | | | 0 | | | 0 | | | | | | | (110,106) | | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (4,430) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (47,977) | | | 0 | | | | | | | (47,977) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at June 30, 2024 | | $ | 491,393 | | | $ | 0 | | | $ | 1,145,844 | | | $ | (595,592) | | | $ | (24,620) | | | | | | | $ | 1,017,025 | | | $ | 30,491 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 87,538 | | | 0 | | | 0 | | | | | | | 87,538 | | | 2,803 | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | 25,508 | | | | | | | 25,508 | | | 554 | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 13,503 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 16,624 | |
Stock Award Activity | | 6,137 | | | 0 | | | (46) | | | 46 | | | 0 | | | | | | | 6,137 | | | 0 | |
Dividends Declared | | 0 | | | 0 | | | (25,542) | | | 0 | | | 0 | | | | | | | (25,542) | | | 0 | |
Distributions to Noncontrolling Interest in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (10,567) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (27,150) | | | 0 | | | | | | | (27,150) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at September 30, 2024 | | $ | 497,530 | | | $ | 0 | | | $ | 1,207,794 | | | $ | (622,696) | | | $ | 888 | | | | | | | $ | 1,083,516 | | | $ | 53,408 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Changes in Equity |
(dollars in thousands) | | | | | | | | | | | | | | | | | | |
(unaudited) | | | | | | | | | | | | | | | | | | |
| | Federated Hermes, Inc. Shareholders’ Equity | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital from Treasury Stock Transactions | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss), net of tax | | | | | | Total Permanent Equity | | Redeemable Noncontrolling Interests in Subsidiaries/ Temporary Equity |
Balance at December 31, 2022 | | $ | 441,142 | | | 0 | | $ | 1,015,589 | | | $ | (365,363) | | | $ | (45,676) | | | | | | | $ | 1,045,692 | | | $ | 61,821 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 69,601 | | | 0 | | | 0 | | | | | | | 69,601 | | | 1,865 | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | 9,620 | | | | | | | 9,620 | | | 232 | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 12,776 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (33,962) | |
Stock Award Activity | | 10,677 | | | 0 | | | (9,950) | | | 9,950 | | | 0 | | | | | | | 10,677 | | | 0 | |
Dividends Declared | | 0 | | | 0 | | | (24,145) | | | 0 | | | 0 | | | | | | | (24,145) | | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (3,224) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (4,742) | | | 0 | | | | | | | (4,742) | | | 0 | |
Balance at March 31, 2023 | | $ | 451,819 | | | $ | 0 | | | $ | 1,051,095 | | | $ | (360,155) | | | $ | (36,056) | | | | | | | $ | 1,106,703 | | | $ | 39,508 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 72,175 | | | 0 | | | 0 | | | | | | | 72,175 | | | 827 | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | 14,477 | | | | | | | 14,477 | | | 328 | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 19,684 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 12,119 | |
Stock Award Activity | | 8,970 | | | 0 | | | (39) | | | 20 | | | 0 | | | | | | | 8,951 | | | 0 | |
Dividends Declared | | 0 | | | 0 | | | (25,084) | | | 0 | | | 0 | | | | | | | (25,084) | | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (14,454) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (43,366) | | | 0 | | | | | | | (43,366) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at June 30, 2023 | | $ | 460,789 | | | $ | 0 | | | $ | 1,098,147 | | | $ | (403,501) | | | $ | (21,579) | | | | | | | $ | 1,133,856 | | | $ | 58,012 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 75,026 | | | 0 | | | 0 | | | | | | | 75,026 | | | (760) | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | (21,814) | | | | | | | (21,814) | | | (454) | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 35,323 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (6,601) | |
Stock Award Activity | | 7,473 | | | 15 | | | 0 | | | 0 | | | 0 | | | | | | | 7,488 | | | 0 | |
Dividends Declared | | 0 | | | 0 | | | (24,687) | | | 0 | | | 0 | | | | | | | (24,687) | | | 0 | |
Distributions to Noncontrolling Interest in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (14,889) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (69,831) | | | 0 | | | | | | | (69,831) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at September 30, 2023 | | $ | 468,262 | | | $ | 15 | | | $ | 1,148,486 | | | $ | (473,332) | | | $ | (43,393) | | | | | | | $ | 1,100,038 | | | $ | 70,631 | |
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
| | | | | | | | | | | | | | |
Consolidated Statements of Cash Flows |
(dollars in thousands) |
(unaudited) |
| | Nine Months Ended |
| | September 30, |
| | 2024 | | 2023 |
Operating Activities | | | | |
Net Income Including the Noncontrolling Interests in Subsidiaries | | $ | 184,576 | | | $ | 218,734 | |
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities | | | | |
| | | | |
Depreciation and Amortization | | 16,873 | | | 20,817 | |
Share-Based Compensation Expense | | 22,741 | | | 27,165 | |
| | | | |
(Gain) Loss on Disposal of Assets | | (1,225) | | | (157) | |
Provision (Benefit) for Deferred Income Taxes | | (11,156) | | | (4,056) | |
| | | | |
| | | | |
| | | | |
| | | | |
Consolidation/(Deconsolidation) of Other Entities | | (2,316) | | | 3,490 | |
| | | | |
Net Unrealized (Gain) Loss on Investments | | (7,466) | | | (1,920) | |
Net Sales (Purchases) of Investments—Consolidated Investment Companies | | (22,271) | | | (36,311) | |
| | | | |
Impairment of Intangible Asset | | 66,331 | | | 0 | |
| | | | |
Other Changes in Assets and Liabilities: | | | | |
(Increase) Decrease in Receivables, net | | 8,615 | | | (30,981) | |
(Increase) Decrease in Prepaid Expenses and Other Assets | | 14,178 | | | 19,389 | |
Increase (Decrease) in Accounts Payable and Accrued Expenses | | (28,040) | | | (23,942) | |
Increase (Decrease) in Other Liabilities | | (20,986) | | | (10,029) | |
Net Cash Provided (Used) by Operating Activities | | 219,854 | | | 182,199 | |
Investing Activities | | | | |
Purchases of Investments—Affiliates and Other | | (45,058) | | | (13,600) | |
| | | | |
Proceeds from Redemptions of Investments—Affiliates and Other | | 75,529 | | | 27,967 | |
Cash Paid for Property and Equipment | | (3,519) | | | (5,803) | |
Other Investing Activities | | (4,100) | | | 0 | |
| | | | |
| | | | |
Net Cash Provided (Used) by Investing Activities | | 22,852 | | | 8,564 | |
Financing Activities | | | | |
Dividends Paid | | (159,588) | | | (73,963) | |
Purchases of Treasury Stock | | (114,169) | | | (112,013) | |
Distributions to Noncontrolling Interests in Subsidiaries | | (18,407) | | | (32,567) | |
Contributions from Noncontrolling Interests in Subsidiaries | | 32,530 | | | 67,783 | |
| | | | |
Cash paid for Business Acquisitions | | (529) | | | (857) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Other Financing Activities | | 39 | | | 15 | |
Net Cash Provided (Used) by Financing Activities | | (260,124) | | | (151,602) | |
Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents | | 9,079 | | | 1,120 | |
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents | | (8,339) | | | 40,281 | |
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of Period | | 386,954 | | | 340,955 | |
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period | | 378,615 | | | 381,236 | |
Less: Restricted Cash Recorded in Other Current Assets | | 3,192 | | | 3,886 | |
Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets | | 471 | | | 390 | |
Cash and Cash Equivalents | | $ | 374,952 | | | $ | 376,960 | |
| | | | |
| | | | |
| | | | |
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
| | | | | | | | | | | | | | |
|
Notes to the Consolidated Financial Statements |
(unaudited) |
(1) Basis of Presentation
Federated Hermes, Inc. and its consolidated subsidiaries (collectively, Federated Hermes) provide investment advisory, administrative, distribution and other services to various investment products, including sponsored investment companies, collective funds and other funds (Federated Hermes Funds) and separate accounts (which include separately managed accounts, institutional accounts, certain sub-advised funds and other managed products, collectively Separate Accounts) in both domestic and international markets. In addition, Federated Hermes markets and provides stewardship and real estate development services to various domestic and international companies. The interim consolidated financial statements of Federated Hermes included herein (Consolidated Financial Statements) have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP). In the opinion of management, the financial statements reflect all adjustments that are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods presented.
In preparing the Consolidated Financial Statements, management is required to make estimates and assumptions that affect the amounts reported therein and in the accompanying notes. Actual results may differ from those estimates, and such differences may be material to the Consolidated Financial Statements.
The Consolidated Financial Statements should be read in conjunction with Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2023. Certain items reported in previous periods have been reclassified to conform to the current period’s presentation.
(2) Recent Accounting Pronouncements
Recently Issued Accounting Guidance Not Yet Adopted
Segment Reporting
In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU updates reportable segment disclosures by expanding the frequency and extent of segment disclosures. The update is effective for Federated Hermes for the December 31, 2024 Form 10-K, and for interim periods starting in fiscal year 2025. Early adoption is permitted and requires the retrospective adoption method. Management is currently evaluating this ASU to determine its impact on Federated Hermes’ disclosures.
Income Taxes
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU updates income tax disclosures by requiring annual disclosures of disaggregated information, based on meeting a quantitative threshold, about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The update is effective for Federated Hermes for the December 31, 2025 Form 10-K, with early adoption permitted, and allows for either the prospective or retrospective adoption method. Management is currently evaluating this ASU to determine its impact on Federated Hermes’ disclosures. Management does not plan to early adopt this update and will elect the retrospective transition method.
(3) Significant Accounting Policies
For a complete listing of Federated Hermes’ significant accounting policies, please refer to Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2023.
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Notes to the Consolidated Financial Statements (continued) |
(unaudited) | | |
(4) Revenue from Contracts with Customers
The following table presents Federated Hermes’ revenue disaggregated by asset class:
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Money market | $ | 208,443 | | | $ | 186,760 | | | $ | 618,472 | | | $ | 559,622 | |
Equity | 117,844 | | | 123,485 | | | 350,101 | | | 371,282 | |
Fixed-income | 49,512 | | | 47,142 | | | 146,803 | | | 142,590 | |
Other | 32,657 | | | 45,269 | | | 92,034 | | | 144,583 | |
Total Revenue | $ | 408,456 | | | $ | 402,656 | | | $ | 1,207,410 | | | $ | 1,218,077 | |
The following table presents Federated Hermes’ revenue disaggregated by performance obligation:
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Investment Advisory1 | $ | 274,621 | | | $ | 276,771 | | | $ | 809,537 | | | $ | 851,089 | |
Administrative Services | 97,687 | | | 88,023 | | | 287,819 | | | 252,402 | |
Distribution2 | 29,193 | | | 31,466 | | | 90,619 | | | 96,360 | |
Other | 6,955 | | | 6,396 | | | 19,435 | | | 18,226 | |
Total Revenue | $ | 408,456 | | | $ | 402,656 | | | $ | 1,207,410 | | | $ | 1,218,077 | |
1 The Investment Advisory performance obligation can also include administrative, distribution and other services recorded as a single asset management fee under Topic 606, as it is part of a unitary fee arrangement with a single performance obligation.
2 The Distribution performance obligation is satisfied at a point in time. A portion of this revenue relates to a performance obligation that has been satisfied in a prior period.
The following table presents Federated Hermes’ revenue disaggregated by geographical market:
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Domestic | $ | 346,015 | | | $ | 322,028 | | | $ | 1,022,011 | | | $ | 971,077 | |
Foreign1 | 62,441 | | | 80,628 | | | 185,399 | | | 247,000 | |
Total Revenue | $ | 408,456 | | | $ | 402,656 | | | $ | 1,207,410 | | | $ | 1,218,077 | |
1 This represents revenue earned by non-U.S. domiciled subsidiaries.
The following table presents Federated Hermes’ revenue disaggregated by offering type: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2024 | | 2023 | | 2024 | | 2023 |
Federated Hermes Funds | $ | 344,795 | | | $ | 337,203 | | | $ | 1,014,383 | | | $ | 1,021,748 | |
Separate Accounts | 58,869 | | | 61,098 | | | 179,883 | | | 184,106 | |
Other | 4,792 | | | 4,355 | | | 13,144 | | | 12,223 | |
Total Revenue | $ | 408,456 | | | $ | 402,656 | | | $ | 1,207,410 | | | $ | 1,218,077 | |
For nearly all revenue, Federated Hermes is not required to disclose certain estimates of revenue expected to be recorded in future periods as a result of applying the following exemptions: (1) contract terms are short-term in nature (i.e., expected duration of one year or less due to termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods.
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Notes to the Consolidated Financial Statements (continued) |
(unaudited) | | |
Federated Hermes expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services and real estate development performance obligations at September 30, 2024. Generally, contracts are billed in arrears on a quarterly basis and have a three-year duration, after which the customer can terminate the agreement with notice, generally from three to twelve months. Based on existing contracts and the applicable foreign exchange rates as of September 30, 2024, Federated Hermes may recognize future fixed revenue from these services as presented in the following table: | | | | | | | | |
(in thousands) | | |
Remainder of 2024 | | $ | 3,935 | |
2025 | | 7,006 | |
2026 | | 1,956 | |
2027 and Thereafter | | 260 | |
Total Remaining Unsatisfied Performance Obligations | | $ | 13,157 | |
(5) Concentration Risk
(a) Revenue Concentration by Asset Class
The following table presents Federated Hermes’ significant revenue concentration by asset class: | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2024 | | 2023 |
Money Market Assets | | 51 | % | | 46 | % |
Equity Assets | | 29 | % | | 30 | % |
Fixed-Income Assets | | 12 | % | | 12 | % |
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(b) Revenue Concentration by Investment Fund
The following table presents Federated Hermes’ revenue concentration by investment fund strategy:
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| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Federated Hermes Government Obligations Fund | 16 | % | | 14 | % | | 15 | % | | 14 | % |
Federated Hermes Prime Cash Obligations Fund | 10 | % | | 7 | % | | 9 | % | | 6 | % |
A significant and prolonged decline in the AUM in these funds could have a material adverse effect on Federated Hermes’ future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with these funds.
(c) Revenue Concentration by Intermediary
Approximately 10% of Federated Hermes’ total revenue for both the three- and nine-month periods ended September 30, 2024, and 11% for both the three- and nine-month periods ended September 30, 2023, was derived from services provided to one intermediary, The Bank of New York Corporation, including its Pershing subsidiary. Significant negative changes in Federated Hermes’ relationship with this intermediary could have a material adverse effect on Federated Hermes’ future revenues and, to a lesser extent, net income due to a related reduction in distribution expenses associated with this intermediary.
(6) Consolidation
The Consolidated Financial Statements include the accounts of Federated Hermes, certain Federated Hermes Funds, carried interest vehicles and other entities in which Federated Hermes holds a controlling financial interest. Federated Hermes is involved with various entities in the normal course of business that may be deemed to be voting rights entities (VREs) or variable interest entities (VIEs). From time to time, Federated Hermes invests in Federated Hermes Funds for general corporate investment purposes or, in the case of newly launched offerings, in order to provide investable cash to establish a performance history. Federated Hermes’ investment in, and/or receivables from, these Federated Hermes Funds represents its maximum exposure to loss. The assets of each consolidated Federated Hermes Fund are restricted for use by that Federated Hermes Fund.
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Notes to the Consolidated Financial Statements (continued) |
(unaudited) | | |
Generally, neither creditors of, nor equity investors in, the Federated Hermes Funds have any recourse to Federated Hermes’ general credit. Given that the entities consolidated by Federated Hermes generally follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in the recognition of gains or losses for Federated Hermes.
In the ordinary course of business, Federated Hermes could implement fee waivers, rebates or expense reimbursements for various Federated Hermes Funds for competitive reasons (such as waivers to maintain the yields of certain money market funds at or above zero (Voluntary Yield-related Fee Waivers) or to maintain certain fund expense ratios/yields), to meet regulatory requirements or to meet contractual requirements (collectively, Fee Waivers). For the three and nine months ended September 30, 2024, Fee Waivers totaled $110.3 million and $321.6 million, respectively, of which $83.3 million and $241.8 million, respectively, related to money market funds which meet the scope exception of the consolidation guidance. For the three and nine months ended September 30, 2023, Fee Waivers totaled $142.4 million and $398.8 million, respectively, of which $114.0 million and $313.5 million, respectively, related to money market funds which meet the scope exception of the consolidation guidance.
Like other sponsors of investment companies, Federated Hermes in the ordinary course of business could make capital contributions to certain affiliated money market Federated Hermes Funds in connection with the reorganization of such funds into certain other affiliated money market Federated Hermes Funds or in connection with the liquidation of money market Federated Hermes Funds. In these instances, such capital contributions typically are intended to either offset realized losses or other permanent impairments to a fund’s net asset value (NAV), increase the market-based NAV per share of the fund’s portfolio that is being reorganized to equal the market-based NAV per share of the acquiring fund or to bear a portion of expenses relating to a fund liquidation. Under current money market fund regulations and Securities and Exchange Commission (SEC) guidance, Federated Hermes is required to report these types of capital contributions to U.S. money market mutual funds to the SEC as financial support to the investment company that is being reorganized or liquidated. There were no contributions for the nine months ended September 30, 2024 and 2023.
In accordance with Federated Hermes’ consolidation accounting policy, Federated Hermes first determines whether the entity being evaluated is a VRE or a VIE. Once this determination is made, Federated Hermes proceeds with its evaluation of whether to consolidate the entity. The disclosures below represent the results of such evaluations as of September 30, 2024 and December 31, 2023.
(a) Consolidated Voting Rights Entities
Although most of the Federated Hermes Funds meet the definition of a VRE, Federated Hermes consolidates VREs only when it is deemed to have control. Consolidated VREs are reported on Federated Hermes’ Consolidated Balance Sheets primarily in Investments—Consolidated Investment Companies and Redeemable Noncontrolling Interests in Subsidiaries.
(b) Consolidated Variable Interest Entities
As of the periods ended September 30, 2024 and December 31, 2023, Federated Hermes was deemed to be the primary beneficiary of, and therefore consolidated, certain entities as a result of its controlling financial interest. The following table presents the balances related to the consolidated VIEs that were included on the Consolidated Balance Sheets as well as Federated Hermes’ net interest in the consolidated VIEs for each period presented: | | | | | | | | | | | | | | |
(in millions) | | September 30, 2024 | | December 31, 2023 |
Cash and Cash Equivalents | | $ | 8.5 | | | $ | 10.1 | |
Investments—Consolidated Investment Companies | | 45.9 | | | 12.4 | |
Receivables-Affiliates | | 2.5 | | | 4.7 | |
Other Current Assets | | 1.2 | | | 0.3 | |
Other Long-Term Assets | | 14.6 | | | 13.8 | |
Less: Liabilities | | 10.9 | | | 14.0 | |
Less: Accumulated Other Comprehensive Income (Loss), net of tax | | 0.4 | | | 0.6 | |
Less: Redeemable Noncontrolling Interests in Subsidiaries | | 33.3 | | | 11.6 | |
Federated Hermes’ Net Interest in VIEs | | $ | 28.1 | | | $ | 15.1 | |
Federated Hermes’ net interest in the consolidated VIEs represents the value of Federated Hermes’ economic ownership interest in those VIEs. Federated Hermes consolidated one VIE in the first quarter 2024 due primarily to redemptions from outside investors, which was subsequently deconsolidated in the second quarter 2024 due primarily to additional investments from
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Notes to the Consolidated Financial Statements (continued) |
(unaudited) | | |
outside investors. Federated Hermes consolidated one VIE in the third quarter 2024 due to additional investments by Federated Hermes. There was no material impact to the Consolidated Statements of Income as a result of this consolidation and deconsolidation on a net basis.
(c) Non-Consolidated Variable Interest Entities
Federated Hermes’ involvement with certain Federated Hermes Funds that are deemed to be VIEs includes serving as investment manager, or, at times, holding a minority interest or both. Federated Hermes’ variable interest is not deemed to absorb losses or receive benefits that could potentially be significant to the VIE. Therefore, Federated Hermes is not the primary beneficiary of these VIEs and has not consolidated these entities.
Federated Hermes’ maximum risk of loss related to investments in variable interests in non-consolidated VIEs was $165.1 million (primarily recorded in Cash and Cash Equivalents on the Consolidated Balance Sheets) at September 30, 2024 and was $133.9 million (primarily recorded in Cash and Cash Equivalents on the Consolidated Balance Sheets) at December 31, 2023, and was entirely related to Federated Hermes Funds. AUM for these non-consolidated Federated Hermes Funds totaled $10.6 billion and $9.3 billion at September 30, 2024 and December 31, 2023, respectively. Of the Receivables—Affiliates at September 30, 2024 and December 31, 2023, $1.2 million and $1.1 million, respectively, was related to non-consolidated VIEs and represented Federated Hermes’ maximum risk of loss from non-consolidated VIE receivables.
(7) Investments
At September 30, 2024 and December 31, 2023, Federated Hermes held investments in non-consolidated fluctuating-value Federated Hermes Funds of $66.5 million and $99.5 million, respectively, primarily in mutual funds which represent equity investments for Federated Hermes, and held investments in Separate Accounts of $7.2 million and $7.5 million at September 30, 2024 and December 31, 2023, respectively, that were included in Investments—Affiliates and Other on the Consolidated Balance Sheets. Federated Hermes’ investments held in Separate Accounts as of September 30, 2024 and December 31, 2023 were primarily composed of stocks of large domestic and foreign companies ($3.1 million and $3.4 million, respectively) and domestic debt securities ($2.4 million for both periods).
Federated Hermes consolidates certain Federated Hermes Funds into its Consolidated Financial Statements as a result of its controlling financial interest in these Federated Hermes Funds (see Note (6)). All investments held by these consolidated Federated Hermes Funds were included in Investments—Consolidated Investment Companies on Federated Hermes’ Consolidated Balance Sheets.
The investments held by consolidated Federated Hermes Funds as of September 30, 2024 and December 31, 2023 were composed of domestic and foreign debt securities ($87.8 million and $59.1 million, respectively), stocks of large domestic and foreign companies ($16.2 million and $4.9 million, respectively), stocks of small and mid-sized domestic and foreign companies ($8.1 million and $4.2 million, respectively) and mutual funds ($4.3 million and $2.3 million, respectively).
The following table presents gains and losses recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income in connection with Federated Hermes’ investments: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
(in thousands) | | 2024 | | 2023 | | 2024 | | 2023 |
Investments—Consolidated Investment Companies | | | | | | | | |
Net Unrealized Gains (Losses) | | $ | 4,433 | | | $ | (1,680) | | | $ | 2,296 | | | $ | 2,582 | |
Net Realized Gains (Losses)1 | | 20 | | | (125) | | | (204) | | | (1,101) | |
Net Gains (Losses) on Investments—Consolidated Investment Companies | | 4,453 | | | (1,805) | | | 2,092 | | | 1,481 | |
Investments—Affiliates and Other | | | | | | | | |
Net Unrealized Gains (Losses) | | 2,035 | | | (1,518) | | | 5,170 | | | (662) | |
Net Realized Gains (Losses)1 | | 1,447 | | | (115) | | | 1,564 | | | 1,275 | |
Net Gains (Losses) on Investments—Affiliates and Other | | 3,482 | | | (1,633) | | | 6,734 | | | 613 | |
Gain (Loss) on Securities, net | | $ | 7,935 | | | $ | (3,438) | | | $ | 8,826 | | | $ | 2,094 | |
1 Realized gains and losses are computed on a specific-identification basis.
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Notes to the Consolidated Financial Statements (continued) |
(unaudited) | | |
(8) Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price that would be paid to transfer a liability as of the measurement date. A fair value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The levels are:
Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets can include equity and debt securities that are traded in an active exchange market, including shares of mutual funds.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active markets.
NAV Practical Expedient – Investments that calculate NAV per share (or its equivalent) as a practical expedient. These investments have been excluded from the fair value hierarchy.
(a) Fair Value Measurements on a Recurring Basis
The following table presents fair value measurements for classes of Federated Hermes’ financial assets and liabilities measured at fair value on a recurring basis:
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(in thousands) | | Level 1 | | Level 2 | | Level 3 | | | | Total |
September 30, 2024 | | | | | | | | | | |
Financial Assets | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 374,952 | | | $ | 0 | | | $ | 0 | | | | | $ | 374,952 | |
Investments—Consolidated Investment Companies | | 25,583 | | | 90,797 | | | 0 | | | | | 116,380 | |
Investments—Affiliates and Other | | 70,730 | | | 2,944 | | | 22 | | | | | 73,696 | |
Other1 | | 10,129 | | | 6,121 | | | 0 | | | | | 16,250 | |
Total Financial Assets | | $ | 481,394 | | | $ | 99,862 | | | $ | 22 | | | | | $ | 581,278 | |
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Total Financial Liabilities2 | | $ | 0 | | | $ | 0 | | | $ | 8,260 | | | | | $ | 8,260 | |
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December 31, 2023 | | | | | | | | | | |
Financial Assets | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 383,180 | | | $ | 0 | | | $ | 0 | | | | | $ | 383,180 | |
Investments—Consolidated Investment Companies | | 11,402 | | | 59,141 | | | 0 | | | | | 70,543 | |
Investments—Affiliates and Other | | 104,341 | | | 2,588 | | | 23 | | | | | 106,952 | |
Other1 | | 6,160 | | | 1,644 | | | 0 | | | | | 7,804 | |
Total Financial Assets | | $ | 505,083 | | | $ | 63,373 | | | $ | 23 | | | | | $ | 568,479 | |
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Total Financial Liabilities2 | | $ | 0 | | | $ | 335 | | | $ | 7,626 | | | | | $ | 7,961 | |
1 Amounts primarily consist of restricted cash, security and other deposits and derivative assets.
2 Amounts primarily consist of acquisition-related future contingent consideration liabilities.
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis. Federated Hermes did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at September 30, 2024 or December 31, 2023.
Cash and Cash Equivalents
Cash and Cash Equivalents include deposits with banks and investments in money market funds. Investments in money market funds totaled $341.5 million and $333.3 million at September 30, 2024 and December 31, 2023, respectively. Cash investments in publicly available money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.
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Notes to the Consolidated Financial Statements (continued) |
(unaudited) | | |
Investments—Consolidated Investment Companies
Investments—Consolidated Investment Companies represent securities held by consolidated Federated Hermes Funds. For publicly traded securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. The fair values of certain securities held by consolidated Federated Hermes Funds which are determined by third-party pricing services and utilize observable market inputs of comparable investments are classified within Level 2 of the valuation hierarchy.
Investments—Affiliates and Other
Investments—Affiliates and Other primarily represent investments in fluctuating-value Federated Hermes Funds, as well as investments held in Separate Accounts. For investments in fluctuating-value Federated Hermes Funds that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For publicly traded securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. The fair values of certain securities which are determined by third-party pricing services and utilize observable market inputs of comparable investments are classified within Level 2 of the valuation hierarchy.
Acquisition-related future contingent consideration liabilities
From time to time, pursuant to agreements entered into in connection with certain business combinations and asset acquisitions, Federated Hermes could be required to make future consideration payments if certain contingencies are met. In connection with certain business combinations, Federated Hermes records a liability representing the estimated fair value of future consideration payments as of the acquisition date. The liability is subsequently re-measured at fair value on a recurring basis with changes in fair value recorded in earnings. As of September 30, 2024, acquisition-related future consideration liabilities of $8.3 million were primarily related to business combinations made in 2022 and 2020 and were recorded in Other Current Liabilities ($5.4 million) and Other Long-Term Liabilities ($2.9 million) on the Consolidated Balance Sheets. Management estimated the fair value of future consideration payments based primarily upon expected future cash flows using an income approach valuation methodology with unobservable market data inputs (Level 3).
The following table presents a reconciliation of the beginning and ending balances for Federated Hermes’ liability for future consideration payments related to these business combinations:
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(in thousands) | | |
Balance at December 31, 2023 | | $ | 7,626 | |
Changes in Fair Value | | 1,163 | |
Contingent Consideration Payments | | (529) | |
Balance at September 30, 2024 | | $ | 8,260 | |
Investments using Practical Expedients
For investments in mutual funds that are not publicly available but for which the NAV is calculated monthly and for which there are redemption restrictions, the investments are valued using NAV as a practical expedient and are excluded from the fair value hierarchy. As of September 30, 2024 and December 31, 2023, these investments totaled $20.0 million and $19.9 million, respectively, and were recorded in Other Long-Term Assets.
(b) Fair Value Measurements on a Nonrecurring Basis
Federated Hermes did not hold any assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2024.
(c) Fair Value Measurements of Other Financial Instruments
The fair value of Federated Hermes’ debt is estimated by management using observable market data (Level 2). Based on this fair value estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value, net of unamortized issuance costs in the amount of $2.0 million.
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Notes to the Consolidated Financial Statements (continued) |
(unaudited) | | |
(9) Derivatives
Federated Hermes enters into foreign currency forward transactions in order to hedge against foreign exchange rate fluctuations related to Federated Hermes Limited (FHL), a British Pound Sterling-denominated subsidiary. None of these forwards have been designated as hedging instruments for accounting purposes.
As of September 30, 2024, Federated Hermes held foreign currency forwards expiring from December 2024 through June 2025 with a combined notional amount of £89.1 million. Federated Hermes recorded $6.1 million in Receivables, net on the Consolidated Balance Sheets, which represented the fair value of these derivative instruments as of September 30, 2024.
As of December 31, 2023, Federated Hermes held foreign currency forwards expiring from March 2024 through September 2024 with two counterparties. For foreign currency forwards with a notional amount of £28.8 million, Federated Hermes recorded $1.6 million in Receivables, net on the Consolidated Balance Sheets, which represented the fair value as of December 31, 2023. For foreign currency forwards with a combined notional amount of £55.5 million, Federated Hermes recorded $0.3 million in Other Current Liabilities on the Consolidated Balance Sheets, which represented the fair value as of December 31, 2023.
(10) Intangible Assets, including Goodwill
Intangible Assets, net at September 30, 2024 decreased $66.9 million from December 31, 2023 primarily due to a $66.3 million non-cash impairment of an indefinite-lived intangible asset recognized at June 30, 2024, $9.8 million of amortization expense offset by a $8.2 million increase in the value of intangible assets denominated in a foreign currency as a result of foreign exchange rate fluctuations.
Due to actual results trailing projected results, driven by a combination of lower gross sales and higher redemptions for the quarter ended June 30, 2024 as compared to the quarter ended March 31, 2024, management concluded that an indicator of potential impairment existed as of June 30, 2024 for the indefinite-lived intangible asset related to the FHL right to manage public fund assets acquired in connection with the 2018 FHL acquisition. Management used an income-based approach, the discounted cash flow method, to value the asset as of June 30, 2024, which resulted in a non-cash impairment charge of $66.3 million. The non-cash impairment was recorded in Operating Expenses - Intangible Asset Related on the Consolidated Statements of Income. There were no impairments recorded in the quarter ended September 30, 2024.
Goodwill at September 30, 2024 increased $6.4 million from December 31, 2023 as a result of foreign exchange rate fluctuations on goodwill denominated in a foreign currency.
(11) Debt
Unsecured Senior Notes
On March 17, 2022, Federated Hermes entered into a Note Purchase Agreement (Note Purchase Agreement) by and among Federated Hermes and the purchasers of certain unsecured senior notes in the aggregate amount of $350 million ($350 million Notes), at a fixed interest rate of 3.29% per annum, payable semiannually in arrears in March and September in each year of the agreement. Citigroup Global Markets Inc. and PNC Capital Markets LLC acted as lead placement agents in relation to the $350 million Notes and certain subsidiar