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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, 2022
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:
| | | | | | | | |
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 21, 2022, the Registrant had outstanding 9,000 shares of Class A common stock and 88,986,067 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 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: the pandemic and its impact; Russia’s invasion of Ukraine and its impact; asset flows, levels, values and mix and their impact; the possibility of impairments; business mix; the level, timing, degree and impact of changes in interest rates or gross or net yields; 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 and when revenue or expense is recognized; whether and when capital contributions could be made; 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; payment obligations pursuant to employment or incentive arrangements; vesting rights and requirements; business and market expansion opportunities, including acceleration of global growth; interest and principal payments or expenses; taxes, tax rates and the impact of tax law changes; borrowing, debt, future cash needs and principal uses of cash, cash flows and liquidity; the ability to raise additional capital; type, classification and consolidation of investments; uses of treasury stock; Federated Hermes’ product and market performance and Federated Hermes’ performance indicators; investor preferences; product and strategy demand, distribution, development and restructuring initiatives and related planning and timing; the effect, and degree of impact, of changes in customer relationships; 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 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 products and strategies, 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’ products to intermediary customers, 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 products, 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 products. 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, 2021 and Part II, Item 1A - Risk Factors.
Part I. Financial Information
Item 1. Financial Statements
| | | | | | | | | | | |
Consolidated Balance Sheets | | | |
(dollars in thousands) | | | |
(unaudited) | | | |
| September 30, 2022 | | December 31, 2021 |
ASSETS | | | |
Current Assets | | | |
Cash and Cash Equivalents | $ | 304,520 | | | $ | 233,327 | |
Investments—Consolidated Investment Companies | 107,277 | | | 105,542 | |
Investments—Affiliates and Other | 69,399 | | | 87,805 | |
Receivables, net of reserve of $21 and $21, respectively | 48,586 | | | 65,317 | |
Receivables—Affiliates | 33,000 | | | 30,956 | |
Prepaid Expenses | 26,112 | | | 29,322 | |
Other Current Assets | 41,389 | | | 7,178 | |
Total Current Assets | 630,283 | | | 559,447 | |
Long-Term Assets | | | |
Goodwill | 774,570 | | | 798,871 | |
| | | |
Intangible Assets, net of accumulated amortization of $40,949 and $39,618, respectively | 406,813 | | | 471,209 | |
Property and Equipment, net of accumulated depreciation of $114,535 and $113,624, respectively | 37,928 | | | 46,965 | |
Right-of-Use Assets, net | 93,271 | | | 108,306 | |
Other Long-Term Assets | 29,705 | | | 33,389 | |
Total Long-Term Assets | 1,342,287 | | | 1,458,740 | |
Total Assets | $ | 1,972,570 | | | $ | 2,018,187 | |
LIABILITIES | | | |
Current Liabilities | | | |
Accounts Payable and Accrued Expenses | $ | 72,037 | | | $ | 64,019 | |
Accrued Compensation and Benefits | 118,143 | | | 162,203 | |
Lease Liabilities | 17,839 | | | 17,447 | |
| | | |
Other Current Liabilities | 30,910 | | | 27,038 | |
Total Current Liabilities | 238,929 | | | 270,707 | |
Long-Term Liabilities | | | |
Long-Term Debt | 397,514 | | | 223,350 | |
Long-Term Deferred Tax Liability, net | 188,884 | | | 205,206 | |
Long-Term Lease Liabilities | 88,402 | | | 105,270 | |
Other Long-Term Liabilities | 32,826 | | | 36,435 | |
Total Long-Term Liabilities | 707,626 | | | 570,261 | |
Total Liabilities | 946,555 | | | 840,968 | |
Commitments and Contingencies (Note (17)) | | | |
TEMPORARY EQUITY | | | |
Redeemable Noncontrolling Interests in Subsidiaries | 54,586 | | | 63,202 | |
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 and 109,505,456 Shares Issued, respectively | 433,842 | | | 448,929 | |
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Retained Earnings | 1,002,201 | | | 1,187,001 | |
Treasury Stock, at Cost, 10,519,389 and 16,094,488 Shares Class B Common Stock, respectively | (377,387) | | | (538,464) | |
Accumulated Other Comprehensive Income (Loss), net of tax | (87,416) | | | 16,362 | |
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| | | |
Total Permanent Equity | 971,429 | | | 1,114,017 | |
Total Liabilities, Temporary Equity and Permanent Equity | $ | 1,972,570 | | | $ | 2,018,187 | |
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
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Consolidated Statements of Income |
(dollars in thousands, except per share data) |
(unaudited) |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | | |
Investment Advisory Fees, net—Affiliates | | $ | 206,394 | | | $ | 163,806 | | | $ | 574,081 | | | $ | 496,747 | |
Investment Advisory Fees, net—Other | | 57,250 | | | 66,404 | | | 180,600 | | | 195,441 | |
Administrative Service Fees, net—Affiliates | | 75,021 | | | 76,853 | | | 218,710 | | | 228,904 | |
Other Service Fees, net—Affiliates | | 38,265 | | | 15,377 | | | 85,120 | | | 46,439 | |
Other Service Fees, net—Other | | 4,213 | | | 4,149 | | | 13,404 | | | 11,271 | |
Total Revenue | | 381,143 | | | 326,589 | | | 1,071,915 | | | 978,802 | |
Operating Expenses | | | | | | | | |
Compensation and Related | | 126,668 | | | 131,996 | | | 388,719 | | | 408,385 | |
Distribution | | 91,032 | | | 38,486 | | | 223,837 | | | 120,990 | |
Systems and Communications | | 19,294 | | | 18,537 | | | 57,234 | | | 56,086 | |
Professional Service Fees | | 14,203 | | | 14,294 | | | 41,647 | | | 44,052 | |
Office and Occupancy | | 10,622 | | | 11,036 | | | 32,457 | | | 33,358 | |
Advertising and Promotional | | 6,496 | | | 4,660 | | | 13,965 | | | 12,107 | |
Travel and Related | | 3,421 | | | 1,643 | | | 8,543 | | | 2,838 | |
Other | | 12,627 | | | 7,535 | | | 32,466 | | | 23,297 | |
Total Operating Expenses | | 284,363 | | | 228,187 | | | 798,868 | | | 701,113 | |
Operating Income | | 96,780 | | | 98,402 | | | 273,047 | | | 277,689 | |
Nonoperating Income (Expenses) | | | | | | | | |
Investment Income, net | | 2,599 | | | 686 | | | 5,270 | | | 2,466 | |
Gain (Loss) on Securities, net | | (6,825) | | | (644) | | | (39,406) | | | 6,980 | |
Debt Expense | | (3,302) | | | (476) | | | (7,873) | | | (1,313) | |
Other, net | | (38) | | | (1,319) | | | 31 | | | (1,158) | |
Total Nonoperating Income (Expenses), net | | (7,566) | | | (1,753) | | | (41,978) | | | 6,975 | |
Income Before Income Taxes | | 89,214 | | | 96,649 | | | 231,069 | | | 284,664 | |
Income Tax Provision | | 21,640 | | | 23,163 | | | 58,140 | | | 83,353 | |
Net Income Including the Noncontrolling Interests in Subsidiaries | | 67,574 | | | 73,486 | | | 172,929 | | | 201,311 | |
Less: Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries | | (1,905) | | | 2,124 | | | (10,070) | | | (419) | |
Net Income | | $ | 69,479 | | | $ | 71,362 | | | $ | 182,999 | | | $ | 201,730 | |
Amounts Attributable to Federated Hermes, Inc. | | | | | | | |
Earnings Per Common Share—Basic | | $ | 0.78 | | | $ | 0.73 | | | $ | 2.02 | | | $ | 2.05 | |
Earnings Per Common Share—Diluted | | $ | 0.78 | | | $ | 0.73 | | | $ | 2.02 | | | $ | 2.04 | |
Cash Dividends Per Share | | $ | 0.27 | | | $ | 0.27 | | | $ | 0.81 | | | $ | 0.81 | |
(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, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net Income Including the Noncontrolling Interests in Subsidiaries | | $ | 67,574 | | | $ | 73,486 | | | $ | 172,929 | | | $ | 201,311 | |
| | | | | | | | |
Other Comprehensive Income (Loss), net of tax | | | | | | | | |
Permanent Equity | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Foreign Currency Translation Gain (Loss) | | (43,760) | | | (7,248) | | | (103,778) | | | (2,195) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Temporary Equity | | | | | | | | |
Foreign Currency Translation Gain (Loss) | | (1,713) | | | (9,953) | | | (3,238) | | | (7,655) | |
Other Comprehensive Income (Loss), net of tax | | (45,473) | | | (17,201) | | | (107,016) | | | (9,850) | |
Comprehensive Income Including the Noncontrolling Interests in Subsidiaries | | 22,101 | | | 56,285 | | | 65,913 | | | 191,461 | |
Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interests in Subsidiaries | | (3,618) | | | (7,829) | | | (13,308) | | | (8,074) | |
| | | | | | | | |
Comprehensive Income Attributable to Federated Hermes, Inc. | | $ | 25,719 | | | $ | 64,114 | | | $ | 79,221 | | | $ | 199,535 | |
(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 Interest in Subsidiaries/ Temporary Equity |
Balance at December 31, 2021 | | $ | 449,118 | | | $ | 0 | | | $ | 1,187,001 | | | $ | (538,464) | | | $ | 16,362 | | | | | | | $ | 1,114,017 | | | $ | 63,202 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 55,863 | | | 0 | | | 0 | | | | | | | 55,863 | | | (1,266) | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | (17,134) | | | | | | | (17,134) | | | (457) | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 30,340 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (16,034) | |
Stock Award Activity | | 9,288 | | | 0 | | | (12,116) | | | 12,147 | | | 0 | | | | | | | 9,319 | | | 707 | |
Dividends Declared | | 0 | | | 0 | | | (24,952) | | | 0 | | | 0 | | | | | | | (24,952) | | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (4,339) | |
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests | | 0 | | | 0 | | | (14,221) | | | 0 | | | 0 | | | | | | | (14,221) | | | 14,221 | |
Acquisition of Additional Equity of FHL | | 0 | | | 3,518 | | | 0 | | | 34,048 | | | 0 | | | | | | | 37,566 | | | (37,805) | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (102,537) | | | 0 | | | | | | | (102,537) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at March 31, 2022 | | $ | 458,406 | | | $ | 3,518 | | | $ | 1,191,575 | | | $ | (594,806) | | | $ | (772) | | | | | | | $ | 1,057,921 | | | $ | 48,569 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 57,657 | | | 0 | | | 0 | | | | | | | 57,657 | | | (6,899) | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | (42,884) | | | | | | | (42,884) | | | (1,068) | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 15,314 | |
| | | | | | | | | | | | | | | | | | |
Stock Award Activity | | 9,430 | | | (46) | | | 0 | | | 62 | | | 0 | | | | | | | 9,446 | | | 0 | |
Dividends Declared | | 0 | | | 0 | | | (24,705) | | | 0 | | | 0 | | | | | | | (24,705) | | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (1,185) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (89,542) | | | 0 | | | | | | | (89,542) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at June 30, 2022 | | $ | 467,836 | | | $ | 3,472 | | | $ | 1,224,527 | | | $ | (684,286) | | | $ | (43,656) | | | | | | | $ | 967,893 | | | $ | 54,731 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 69,479 | | | 0 | | | 0 | | | | | | | 69,479 | | | (1,905) | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | (43,760) | | | | | | | (43,760) | | | (1,713) | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 4,494 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 15,599 | |
Stock Award Activity | | 8,895 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 8,895 | | | 0 | |
Dividends Declared | | 0 | | | 0 | | | (24,141) | | | 0 | | | 0 | | | | | | | (24,141) | | | 0 | |
Distributions to Noncontrolling Interest in Subsidiaries | | 0 | | | 0 | | | | | 0 | | | 0 | | | | | | | 0 | | | (16,620) | |
Retirement of Treasury Stock | | (42,700) | | | (3,472) | | | (267,664) | | | 313,836 | | | 0 | | | | | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (6,937) | | | 0 | | | | | | | (6,937) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at September 30, 2022 | | $ | 434,031 | | | $ | 0 | | | $ | 1,002,201 | | | $ | (377,387) | | | $ | (87,416) | | | | | | | $ | 971,429 | | | $ | 54,586 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 Interest in Subsidiaries/ Temporary Equity |
Balance at December 31, 2020 | | $ | 418,858 | | | $ | 0 | | | $ | 1,027,699 | | | $ | (324,731) | | | $ | 15,171 | | | | | | | $ | 1,136,997 | | | $ | 236,987 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 74,484 | | | 0 | | | 0 | | | | | | | 74,484 | | | (138) | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | 3,558 | | | | | | | 3,558 | | | 1,430 | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 25,762 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (16,237) | |
Stock Award Activity | | 9,216 | | | 0 | | | (15,234) | | | 15,249 | | | 0 | | | | | | | 9,231 | | | 2,481 | |
Dividends Declared | | 0 | | | 0 | | | (26,788) | | | 0 | | | 0 | | | | | | | (26,788) | | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (1,898) | |
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests | | 0 | | | 0 | | | 2,670 | | | 0 | | | 0 | | | | | | | 2,670 | | | (2,670) | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (45,030) | | | 0 | | | | | | | (45,030) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at March 31, 2021 | | $ | 428,074 | | | $ | 0 | | | $ | 1,062,831 | | | $ | (354,512) | | | $ | 18,729 | | | | | | | $ | 1,155,122 | | | $ | 245,717 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | 0 | | 55,884 | | | 0 | | 0 | | | | | | 55,884 | | (2,405) | |
Other Comprehensive Income (Loss), net of tax | | 0 | | 0 | | 0 | | 0 | | 1,495 | | | | | | | 1,495 | | 868 | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | | 0 | | 899,962 | |
Consolidation (Deconsolidation) | | 0 | | 0 | | 0 | | 0 | | 0 | | | | | | 0 | | (894,175) | |
Stock Award Activity | | 7,760 | | | 0 | | (189) | | | 205 | | | 0 | | | | | | 7,776 | | 2,518 | |
Dividends Declared | | 0 | | 0 | | (26,550) | | | 0 | | 0 | | | | | | (26,550) | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | 0 | | | 0 | | | 0 | | | 0 | | | | | | 0 | | (1,016) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Purchase of Treasury Stock | | 0 | | 0 | | 0 | | (31,797) | | | 0 | | | | | | (31,797) | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | $ | 435,834 | | | $ | 0 | | | $ | 1,091,976 | | | $ | (386,104) | | | $ | 20,224 | | | | | | | $ | 1,161,930 | | | $ | 251,469 | |
| | | | | | | | | | | | | | | | | | |
Net Income (Loss) | | 0 | | | 0 | | | 71,362 | | | 0 | | | 0 | | | | | | | 71,362 | | | 2,124 | |
Other Comprehensive Income (Loss), net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | (7,248) | | | | | | | (7,248) | | | (9,953) | |
Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 66,903 | |
Consolidation (Deconsolidation) | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (74,836) | |
Stock Award Activity | | 6,279 | | | 30 | | | 0 | | | 0 | | | 0 | | | | | | | 6,309 | | | 2,557 | |
Dividends Declared | | 0 | | | 0 | | | (26,301) | | | 0 | | | 0 | | | | | | | (26,301) | | | 0 | |
Distributions to Noncontrolling Interests in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (1,178) | |
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests | | 0 | | | 0 | | | 16,502 | | | 0 | | | 0 | | | | | | | 16,502 | | | (16,502) | |
Acquisition of Additional Equity of FHL | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (165,112) | |
Purchase of Treasury Stock | | 0 | | | 0 | | | 0 | | | (17,703) | | | 0 | | | | | | | (17,703) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
Balance at September 30, 2021 | | $ | 442,113 | | | $ | 30 | | | $ | 1,153,539 | | | $ | (403,807) | | | $ | 12,976 | | | | | | | $ | 1,204,851 | | | $ | 55,472 | |
(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, |
| | 2022 | | 2021 |
Operating Activities | | | | |
Net Income Including the Noncontrolling Interests in Subsidiaries | | $ | 172,929 | | | $ | 201,311 | |
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities | | | | |
| | | | |
Depreciation and Amortization | | 21,197 | | | 22,639 | |
Share-Based Compensation Expense | | 27,619 | | | 23,283 | |
Subsidiary Share-Based Compensation Expense | | 707 | | | 7,556 | |
(Gain) Loss on Disposal of Assets | | 3,986 | | | (6,975) | |
Provision (Benefit) for Deferred Income Taxes | | (6,969) | | | 19,495 | |
| | | | |
| | | | |
| | | | |
| | | | |
Consolidation/(Deconsolidation) of Other Entities | | (20) | | | 10,379 | |
| | | | |
Net Unrealized (Gain) Loss on Investments | | 35,425 | | | 27 | |
Net Sales (Purchases) of Investments—Consolidated Investment Companies | | (26,216) | | | (129,647) | |
| | | | |
| | | | |
| | | | |
Other Changes in Assets and Liabilities: | | | | |
(Increase) Decrease in Receivables, net | | 4,537 | | | 3,914 | |
(Increase) Decrease in Prepaid Expenses and Other Assets | | (23,734) | | | 3,887 | |
Increase (Decrease) in Accounts Payable and Accrued Expenses | | (22,984) | | | (36,769) | |
Increase (Decrease) in Other Liabilities | | 5,058 | | | (18,144) | |
Net Cash Provided (Used) by Operating Activities | | 191,535 | | | 100,956 | |
Investing Activities | | | | |
Purchases of Investments—Affiliates and Other | | (18,606) | | | (7,221) | |
Cash Paid for Business Acquisitions, Net of Cash Acquired | | 0 | | | (5,324) | |
Proceeds from Redemptions of Investments—Affiliates and Other | | 21,389 | | | 33,291 | |
Cash Paid for Property and Equipment | | (4,094) | | | (7,753) | |
| | | | |
| | | | |
Net Cash Provided (Used) by Investing Activities | | (1,311) | | | 12,993 | |
Financing Activities | | | | |
Dividends Paid | | (73,804) | | | (79,668) | |
Purchases of Treasury Stock | | (211,216) | | | (92,426) | |
Distributions to Noncontrolling Interests in Subsidiaries | | (22,144) | | | (4,092) | |
Contributions from Noncontrolling Interests in Subsidiaries | | 50,148 | | | 101,297 | |
Payments to Acquire Additional Equity in FHL | | 0 | | | (163,696) | |
Cash paid for Business Acquisitions | | (7,053) | | | (2,008) | |
Proceeds from New Borrowings | | 488,300 | | | 82,150 | |
| | | | |
| | | | |
Payments on Debt | | (311,650) | | | (55,000) | |
| | | | |
Other Financing Activities | | (2,571) | | | 60 | |
Net Cash Provided (Used) by Financing Activities | | (89,990) | | | (213,383) | |
Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents | | (29,980) | | | (2,758) | |
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents | | 70,254 | | | (102,192) | |
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of Period | | 238,052 | | | 308,635 | |
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period | | 308,306 | | | 206,443 | |
Less: Restricted Cash Recorded in Other Current Assets | | 3,516 | | | 4,449 | |
Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets | | 270 | | | 302 | |
Cash and Cash Equivalents | | $ | 304,520 | | | $ | 201,692 | |
| | | | |
| | | | |
| | | | |
(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, 2021. Certain items reported in previous periods have been reclassified to conform to the current period’s presentation.
(2) Significant Accounting Policies
For a listing of Federated Hermes’ significant accounting policies, please refer to Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2021.
(3) Business Combination and Equity Acquisition
Effective October 1, 2022, Federated Hermes completed the acquisition of substantially all of the assets of C.W. Henderson and Associates, Inc. (CWH), a Chicago-based registered investment advisor specializing in the management of tax-exempt municipal securities (CWH Acquisition). This acquisition will enhance Federated Hermes’ existing separately managed accounts business. An initial closing purchase price of $28.0 million was paid on September 30, 2022 and was recorded in Other Current Assets on the Consolidated Balance Sheets. The purchase agreement provides for a series of contingent purchase price payments, which can total as much as $17.6 million in the aggregate and can become payable annually over the next five years based on certain levels of net revenue growth. Due to the timing of the CWH Acquisition, the information necessary to complete the preliminary purchase price allocation is not yet available. Federated Hermes expects to disclose the preliminary purchase price allocation in its Annual Report on Form 10-K for the year ended December 31, 2022.
On March 14, 2022, Federated Hermes completed a tender offer resulting in the acquisition of the remaining approximate 10% noncontrolling interests in Federated Hermes Limited (FHL, formerly known as Hermes Fund Managers Limited) from a trustee of a non-U.S. domiciled employee benefit trust established for the benefit of certain members of FHL’s management, a non-U.S. resident former FHL employee and other non-U.S. resident key FHL employees under a long-term incentive plan established in connection with the 2018 acquisition of FHL (2022 Acquisition of FHL Noncontrolling Interests). Pursuant to the 2022 Acquisition of FHL Noncontrolling Interests, FHL became a 100% indirect, wholly-owned subsidiary of Federated Hermes.
The 2022 Acquisition of FHL Noncontrolling Interests was transacted in shares whereby Federated Hermes issued awards of restricted Class B common stock under Federated Hermes Stock Incentive Plan and Federated Hermes UK Sub-Plan, as amended, and treasury Class B common stock, in exchange for the beneficial interests in shares of FHL. The FHL shares were exchanged at fair value for Federated Hermes shares valued at £36.4 million or $47.5 million, which was based on a third-party valuation of FHL. See Note (12) for additional information regarding the share exchange.
| | | | | | | | | | | | | | |
|
Notes to the Consolidated Financial Statements |
(unaudited) |
(4) Revenue from Contracts with Customers
The following table presents Federated Hermes’ revenue disaggregated by asset class:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Equity | $ | 127,183 | | | $ | 172,349 | | | $ | 406,642 | | | $ | 510,302 | |
Money market | 170,542 | | | 55,726 | | | 402,639 | | | 185,704 | |
Fixed-income | 49,197 | | | 60,622 | | | 159,025 | | | 175,115 | |
Other1 | 34,221 | | | 37,892 | | | 103,609 | | | 107,681 | |
Total Revenue | $ | 381,143 | | | $ | 326,589 | | | $ | 1,071,915 | | | $ | 978,802 | |
1 Primarily includes Alternative / Private Markets (including but not limited to private equity, real estate and infrastructure), multi-asset and stewardship services revenue.
The following table presents Federated Hermes’ revenue disaggregated by performance obligation:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Asset Management1 | $ | 263,644 | | | $ | 230,210 | | | $ | 754,681 | | | $ | 692,188 | |
Administrative Services | 75,021 | | | |