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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________________
FORM 10-Q
_______________________________________________________________________________________
(Mark One)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021
OR
| | | | | |
| ☐ | 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)
_______________________________________________________________________________________
| | | | | | | | |
| Pennsylvania | | 25-1111467 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | | | | |
| 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 22, 2021, the Registrant had outstanding 9,000 shares of Class A Common Stock and 96,843,698 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. | | |
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| 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 "trend," "potential," "opportunity," "believe," "expect," "anticipate," "current," "intention," "estimate," "position," "projection," "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 coronavirus and pandemic, their impact and status, and plans in response; asset flows, levels, values and mix or their impact; business mix; the level, timing, degree and impact of changes in interest rates or gross or net yields; fee rates and recognition; sources and levels of revenues, expenses, gains, losses, income and earnings; the level and impact of reimbursements, rebates or assumptions of fund-related expenses (Consideration Payable to Customers) 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; whether and when revenue is recognized; whether performance fees or carried interest will be earned or repaid or clawed-back; whether and when capital contributions could be made; the components and level of, and prospect for, distribution-related expenses; guarantee and indemnification obligations; the timing and nature of payment obligations; acquisition-related matters, including future contingent consideration payments; payment obligations pursuant to incentive compensation arrangements; business and market expansion opportunities, including, anticipated, or acceleration of, global growth; interest and principal payments, expenses and repayment obligations; taxes 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; market conditions, 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; the pace, timing, impact, effects and other consequences of the current regulatory environment, regulatory developments and continuing regulatory oversight by United States (U.S.) and foreign regulators and other authorities; the attractiveness and resiliency of money market funds; dedication of resources; the adoption and impact of accounting policies, new accounting pronouncements and accounting treatment determinations; compliance, and related legal, compliance and other professional services expenses; level and impact of changes in currency exchange rates; interest rate, concentration, market, currency and other risks; and various other items set forth under Item 1A - Risk Factors in Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2020. 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 increase 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 levels and will be affected by the achievement of such levels. The obligation to make additional payments pursuant to incentive compensation 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 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, changes in fair values of AUM, any additional regulatory reforms, investor preferences and confidence, Fee Waivers, 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, 2020.
Part I. Financial Information
Item 1. Financial Statements
| | | | | | | | | | | |
| Consolidated Balance Sheets | | | |
(dollars in thousands) | | | |
| (unaudited) | | | |
| September 30,
2021 | | December 31,
2020 |
| ASSETS | | | |
| Current Assets | | | |
| Cash and Cash Equivalents | $ | 201,692 | | | $ | 301,819 | |
| Investments—Consolidated Investment Companies | 54,075 | | | 91,359 | |
| Investments—Affiliates and Other | 89,318 | | | 45,593 | |
Receivables, net of reserve of $16 and $16, respectively | 67,374 | | | 64,857 | |
| Receivables—Affiliates | 31,381 | | | 41,107 | |
| Prepaid Expenses | 27,445 | | | 22,130 | |
| Other Current Assets | 6,757 | | | 8,478 | |
| Total Current Assets | 478,042 | | | 575,343 | |
| Long-Term Assets | | | |
| Goodwill | 798,258 | | | 800,267 | |
| | | |
Intangible Assets, net of accumulated amortization of $36,076 and $26,372, respectively | 472,920 | | | 481,753 | |
Property and Equipment, net of accumulated depreciation of $110,322 and $106,317, respectively | 49,421 | | | 52,610 | |
| Right-of-Use Assets, net | 111,718 | | | 122,078 | |
| Other Long-Term Assets | 36,050 | | | 28,788 | |
| Total Long-Term Assets | 1,468,367 | | | 1,485,496 | |
| Total Assets | $ | 1,946,409 | | | $ | 2,060,839 | |
| LIABILITIES | | | |
| Current Liabilities | | | |
| Accounts Payable and Accrued Expenses | $ | 62,648 | | | $ | 61,736 | |
| Accrued Compensation and Benefits | 133,123 | | | 170,646 | |
| Lease Liabilities | 17,181 | | | 15,845 | |
| | | |
| Other Current Liabilities | 21,760 | | | 17,219 | |
| Total Current Liabilities | 234,712 | | | 265,446 | |
| Long-Term Liabilities | | | |
| Long-Term Debt | 102,150 | | | 75,000 | |
| Long-Term Deferred Tax Liability, net | 205,317 | | | 187,937 | |
| Long-Term Lease Liabilities | 109,290 | | | 121,922 | |
| Other Long-Term Liabilities | 34,617 | | | 36,550 | |
| Total Long-Term Liabilities | 451,374 | | | 421,409 | |
| Total Liabilities | 686,086 | | | 686,855 | |
| Commitments and Contingencies (Note (15)) | | | |
| TEMPORARY EQUITY | | | |
| Redeemable Noncontrolling Interest in Subsidiaries | 55,472 | | | 236,987 | |
| 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, 109,505,456 Shares Issued | 441,924 | | | 418,669 | |
| Additional Paid-In Capital from Treasury Stock Transactions | 30 | | | 0 | |
| Retained Earnings | 1,153,539 | | | 1,027,699 | |
Treasury Stock, at Cost, 12,531,058 and 10,174,013 Shares Class B Common Stock, respectively | (403,807) | | | (324,731) | |
| Accumulated Other Comprehensive Income (Loss), net of tax | 12,976 | | | 15,171 | |
| | | |
| | | |
| Total Permanent Equity | 1,204,851 | | | 1,136,997 | |
| Total Liabilities, Temporary Equity and Permanent Equity | $ | 1,946,409 | | | $ | 2,060,839 | |
(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, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| Revenue | | | | | | | | |
| Investment Advisory Fees, net—Affiliates | | $ | 163,806 | | | $ | 202,978 | | | $ | 496,747 | | | $ | 573,242 | |
| Investment Advisory Fees, net—Other | | 66,404 | | | 57,111 | | | 195,441 | | | 172,633 | |
| Administrative Service Fees, net—Affiliates | | 76,853 | | | 83,028 | | | 228,904 | | | 238,960 | |
| Other Service Fees, net—Affiliates | | 15,377 | | | 17,952 | | | 46,439 | | | 87,765 | |
| Other Service Fees, net—Other | | 4,149 | | | 3,386 | | | 11,271 | | | 11,750 | |
| Total Revenue | | 326,589 | | | 364,455 | | | 978,802 | | | 1,084,350 | |
| Operating Expenses | | | | | | | | |
| Compensation and Related | | 131,996 | | | 126,186 | | | 408,385 | | | 365,104 | |
| Distribution | | 38,486 | | | 73,726 | | | 120,990 | | | 258,925 | |
| Systems and Communications | | 18,537 | | | 16,193 | | | 56,086 | | | 46,179 | |
| Professional Service Fees | | 14,294 | | | 14,006 | | | 44,052 | | | 41,162 | |
| Office and Occupancy | | 11,036 | | | 10,578 | | | 33,358 | | | 32,539 | |
| Advertising and Promotional | | 4,660 | | | 2,921 | | | 12,107 | | | 10,981 | |
| Travel and Related | | 1,643 | | | 542 | | | 2,838 | | | 4,026 | |
| Other | | 7,535 | | | 6,922 | | | 23,297 | | | 22,058 | |
| Total Operating Expenses | | 228,187 | | | 251,074 | | | 701,113 | | | 780,974 | |
| Operating Income | | 98,402 | | | 113,381 | | | 277,689 | | | 303,376 | |
| Nonoperating Income (Expenses) | | | | | | | | |
| Investment Income, net | | 686 | | | 770 | | | 2,466 | | | 3,171 | |
| Gain (Loss) on Securities, net | | (644) | | | 5,852 | | | 6,980 | | | 3,840 | |
| Debt Expense | | (476) | | | (494) | | | (1,313) | | | (2,211) | |
| Other, net | | (1,319) | | | 103 | | | (1,158) | | | 8,426 | |
| Total Nonoperating Income (Expenses), net | | (1,753) | | | 6,231 | | | 6,975 | | | 13,226 | |
| Income Before Income Taxes | | 96,649 | | | 119,612 | | | 284,664 | | | 316,602 | |
| Income Tax Provision | | 23,163 | | | 32,928 | | | 83,353 | | | 81,852 | |
| Net Income Including the Noncontrolling Interests in Subsidiaries | | 73,486 | | | 86,684 | | | 201,311 | | | 234,750 | |
| Less: Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries | | 2,124 | | | 862 | | | (419) | | | 3,554 | |
| Net Income | | $ | 71,362 | | | $ | 85,822 | | | $ | 201,730 | | | $ | 231,196 | |
| Amounts Attributable to Federated Hermes, Inc. | | | | | | | |
| Earnings Per Common Share—Basic | | $ | 0.73 | | | $ | 0.86 | | | $ | 2.05 | | | $ | 2.30 | |
| Earnings Per Common Share—Diluted | | $ | 0.73 | | | $ | 0.85 | | | $ | 2.04 | | | $ | 2.29 | |
| 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, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| Net Income Including the Noncontrolling Interests in Subsidiaries | | $ | 73,486 | | | $ | 86,684 | | | $ | 201,311 | | | $ | 234,750 | |
| | | | | | | | |
| Other Comprehensive Income (Loss), net of tax | | | | | | | | |
| Permanent Equity | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Foreign Currency Translation Gain (Loss) | | (7,248) | | | 16,239 | | | (2,195) | | | (9,333) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Temporary Equity | | | | | | | | |
| Foreign Currency Translation Gain (Loss) | | (9,953) | | | 7,316 | | | (7,655) | | | (4,573) | |
| Other Comprehensive Income (Loss), net of tax | | (17,201) | | | 23,555 | | | (9,850) | | | (13,906) | |
| Comprehensive Income Including the Noncontrolling Interests in Subsidiaries | | 56,285 | | | 110,239 | | | 191,461 | | | 220,844 | |
| Less: Comprehensive Income (Loss) Attributable to Redeemable Noncontrolling Interest in Subsidiaries | | (7,829) | | | 8,178 | | | (8,074) | | | (1,019) | |
| | | | | | | | |
| Comprehensive Income Attributable to Federated Hermes, Inc. | | $ | 64,114 | | | $ | 102,061 | | | $ | 199,535 | | | $ | 221,863 | |
(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, 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 Interest 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 Interest 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 Interest in Subsidiaries | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (1,178) | |
| Acquisition of Additional Equity of HFML | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (165,112) | |
| Change in Estimated Redemption Value of Redeemable Noncontrolling Interests | | 0 | | | 0 | | | 16,502 | | | 0 | | | 0 | | | | | | | 16,502 | | | (16,502) | |
| 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 Changes in Equity |
(dollars in thousands) | | | | | | | | | | | | | | | | | | |
| (unaudited) | | | | | | | | | | | | | | | | | | |
| | | Federated Hermes, Inc. Shareholders' Equity | | | | | | | | |
| | | Common
Stock | | | | 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, 2019 | | $ | 392,210 | | | | | $ | 930,351 | | | $ | (281,032) | | | $ | (249) | | | | | | | $ | 1,041,280 | | | $ | 212,086 | |
| | | | | | | | | | | | | | | | | | |
| Net Income (Loss) | | 0 | | | | | 64,178 | | | 0 | | | 0 | | | | | | | 64,178 | | | (913) | |
| Other Comprehensive Income (Loss), net of tax | | 0 | | | | | 0 | | | 0 | | | (24,859) | | | | | | | (24,859) | | | (11,454) | |
| Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 5,577 | |
| Consolidation (Deconsolidation) | | 0 | | | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (4,019) | |
| Stock Award Activity | | 7,467 | | | | | (16,146) | | | 16,146 | | | 0 | | | | | | | 7,467 | | | 2,153 | |
| Dividends Declared | | 0 | | | | | (27,304) | | | 0 | | | 0 | | | | | | | (27,304) | | | 0 | |
| Distributions to Noncontrolling Interest in Subsidiaries | | 0 | | | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (6,039) | |
| Change in Estimated Redemption Value of Redeemable Noncontrolling Interests | | 0 | | | | | (1,870) | | | 0 | | | 0 | | | | | | | (1,870) | | | 1,870 | |
| Purchase of Treasury Stock | | 0 | | | | | 0 | | | (15,959) | | | 0 | | | | | | | (15,959) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2020 | | $ | 399,677 | | | | | $ | 949,209 | | | $ | (280,845) | | | $ | (25,108) | | | | | | | $ | 1,042,933 | | | $ | 199,261 | |
| | | | | | | | | | | | | | | | | | |
| Net Income (Loss) | | 0 | | | | 81,196 | | | 0 | | 0 | | | | | | 81,196 | | 3,605 | |
| Other Comprehensive Income (Loss), net of tax | | 0 | | | | 0 | | 0 | | (713) | | | | | | | (713) | | (435) | |
| Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | | 0 | | 0 | | 0 | | | | | | 0 | | 6,225 | |
| | | | | | | | | | | | | | | | | | |
| Stock Award Activity | | 6,456 | | | | | (678) | | | 829 | | | 0 | | | | | | 6,607 | | 2,087 | |
| Dividends Declared | | 0 | | | | (27,243) | | | 0 | | 0 | | | | | | (27,243) | | 0 | |
| Distributions to Noncontrolling Interest in Subsidiaries | | 0 | | | | 0 | | | 0 | | | 0 | | | | | | 0 | | (4,058) | |
| | | | | | | | | | | | | | | | | | |
| Change in Estimated Redemption Value of Redeemable Noncontrolling Interests | | 0 | | | | | 2,013 | | | 0 | | | 0 | | | | | | | 2,013 | | (2,013) | |
| Purchase of Treasury Stock | | 0 | | | | 0 | | (18,126) | | | 0 | | | | | | (18,126) | | 0 | |
| | | | | | | | | | | | | | | | | | |
| Balance at June 30, 2020 | | $ | 406,133 | | | | | $ | 1,004,497 | | | $ | (298,142) | | | $ | (25,821) | | | | | | | $ | 1,086,667 | | | $ | 204,672 | |
| | | | | | | | | | | | | | | | | | |
| Net Income (Loss) | | 0 | | | | | 85,822 | | | 0 | | | 0 | | | | | | | 85,822 | | | 862 | |
| Other Comprehensive Income (Loss), net of tax | | 0 | | | | | 0 | | | 0 | | | 16,239 | | | | | | | 16,239 | | | 7,316 | |
| Subscriptions—Redeemable Noncontrolling Interest Holders | | 0 | | | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | 3,212 | |
| | | | | | | | | | | | | | | | | | |
| Stock Award Activity | | 6,281 | | | | | 0 | | | 67 | | | 0 | | | | | | | 6,348 | | | 2,164 | |
| Dividends Declared | | 0 | | | | | (27,044) | | | 0 | | | 0 | | | | | | | (27,044) | | | 0 | |
| Distributions to Noncontrolling Interest in Subsidiaries | | 0 | | | | | 0 | | | 0 | | | 0 | | | | | | | 0 | | | (358) | |
| Change in Estimated Redemption Value of Redeemable Noncontrolling Interests | | 0 | | | | | 3,567 | | | 0 | | | 0 | | | | | | | 3,567 | | | (3,567) | |
| | | | | | | | | | | | | | | | | | |
| Purchase of Treasury Stock | | 0 | | | | | 0 | | | (20,023) | | | 0 | | | | | | | (20,023) | | | 0 | |
| | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2020 | | $ | 412,414 | | | | | $ | 1,066,842 | | | $ | (318,098) | | | $ | (9,582) | | | | | | | $ | 1,151,576 | | | $ | 214,301 | |
| | | | | | | | | | | | | | |
| Consolidated Statements of Cash Flows |
(dollars in thousands) |
| (unaudited) |
| | Nine Months Ended |
| | September 30, |
| | 2021 | | 2020 |
| Operating Activities | | | | |
| Net Income Including the Noncontrolling Interests in Subsidiaries | | $ | 201,311 | | | $ | 234,750 | |
| Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities | | | | |
| | | | |
| Depreciation and Amortization | | 22,639 | | | 22,431 | |
| Share-Based Compensation Expense | | 23,283 | | | 20,224 | |
| Subsidiary Share-Based Compensation Expense | | 7,556 | | | 6,404 | |
| (Gain) Loss on Disposal of Assets | | (6,975) | | | 1,590 | |
| Provision (Benefit) for Deferred Income Taxes | | 19,495 | | | 11,907 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Consolidation/(Deconsolidation) of Other Entities | | 10,379 | | | (3,051) | |
| | | | |
| Net Unrealized (Gain) Loss on Investments | | 27 | | | (5,397) | |
| Net Sales (Purchases) of Investments—Consolidated Investment Companies | | (129,647) | | | (7,516) | |
| | | | |
| | | | |
| | | | |
| Other Changes in Assets and Liabilities: | | | | |
| (Increase) Decrease in Receivables, net | | 3,914 | | | 5,998 | |
| (Increase) Decrease in Prepaid Expenses and Other Assets | | 3,887 | | | (9,317) | |
| Increase (Decrease) in Accounts Payable and Accrued Expenses | | (36,769) | | | (27,411) | |
| Increase (Decrease) in Other Liabilities | | (18,144) | | | (7,154) | |
| Net Cash Provided (Used) by Operating Activities | | 100,956 | | | 243,458 | |
| Investing Activities | | | | |
| Purchases of Investments—Affiliates and Other | | (7,221) | | | (19,050) | |
| Cash Paid for Business Acquisitions, Net of Cash Acquired | | (5,324) | | | 2,697 | |
| Proceeds from Redemptions of Investments—Affiliates and Other | | 33,291 | | | 6,415 | |
| Cash Paid for Property and Equipment | | (7,753) | | | (8,559) | |
| | | | |
| | | | |
| Net Cash Provided (Used) by Investing Activities | | 12,993 | | | (18,497) | |
| Financing Activities | | | | |
| Dividends Paid | | (79,668) | | | (81,612) | |
| Purchases of Treasury Stock | | (92,426) | | | (53,145) | |
| Distributions to Noncontrolling Interest in Subsidiaries | | (4,092) | | | (10,455) | |
| Contributions from Noncontrolling Interest in Subsidiaries | | 101,297 | | | 15,014 | |
| Payments to Acquire Additional Equity in HFML | | (163,696) | | | 0 | |
| | | | |
| Proceeds from New Borrowings | | 82,150 | | | 100,000 | |
| | | | |
| Payments on Debt | | (55,000) | | | (110,000) | |
| | | | |
| Other Financing Activities | | (1,948) | | | (1,616) | |
| Net Cash Provided (Used) by Financing Activities | | (213,383) | | | (141,814) | |
| Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents | | (2,758) | | | (3,408) | |
| Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents | | (102,192) | | | 79,739 | |
| Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of Period | | 308,635 | | | 249,511 | |
| Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period | | 206,443 | | | 329,250 | |
| Less: Restricted Cash Recorded in Other Current Assets | | 4,449 | | | 6,091 | |
| Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets | | 302 | | | 312 | |
| Cash and Cash Equivalents | | $ | 201,692 | | | $ | 322,847 | |
| | | | |
| | | | |
| | | | |
(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) 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 have been prepared in accordance with 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 financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates, and such differences may be material to the Consolidated Financial Statements.
These financial statements should be read in conjunction with Federated Hermes' Annual Report on Form 10-K for the year ended December 31, 2020. 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, 2020. The following accounting policy has been updated as a result of newly consolidated variable interest entities (VIEs).
Consolidation of Variable Interest Entities
Federated Hermes has a controlling financial interest in a VIE and is, therefore, deemed to be the primary beneficiary of a VIE if it has (1) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (2) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Financial information for certain entities, whose primary purpose is to collect and distribute carried interest paid by foreign private equity and infrastructure funds, is not available timely and is therefore consolidated on a one quarter lag, adjusted for any known material carried interest revenue and compensation transactions occurring through the balance sheet date.
(3) Equity Acquisition and Business Combination
2021 Acquisition of HFML Noncontrolling Interest
On August 31, 2021 (Closing Date), Federated Hermes completed the acquisition of a 29.5% noncontrolling interest in Hermes Fund Managers Limited (HFML) from BT Pension Scheme (BTPS) for £116.5 million ($160.2 million) pursuant to the terms of a certain Put and Call Option Deed, dated July 2, 2018 (the Option Deed), between BTPS and Federated Hermes (2021 Acquisition of HFML Noncontrolling Interest). Because Federated Hermes had previously acquired a 60% controlling interest in HFML from BTPS as of July 1, 2018 (2018 HFML Acquisition), the 2021 Acquisition of HFML Noncontrolling Interest was accounted for as an acquisition of additional equity. The difference between the carrying value of the BTPS noncontrolling interest and the purchase price was reclassified from temporary equity to permanent equity. The remaining approximate 10% of the equity interests of HFML is held in an employee benefit trust for the benefit of certain members of HFML's management and other key employees under a long-term incentive plan established in connection with the 2018 HFML Acquisition.
Pursuant to the Option Deed, Federated Hermes and BTPS agreed upon a third-party valuation company, which determined the fair value of HFML for purposes of the Option Deed. The Option Deed provided that the consideration to be paid for BTPS' remaining interest in HFML would be based on BTPS' equity proportion of the fair value of HFML as determined in accordance with the terms of the Option Deed. Federated Hermes paid the purchase price by using a combination of cash on hand and borrowings under its corporate credit facility. Upon completion of the acquisition on the Closing Date, BTPS no longer has any ownership interest in HFML nor any representation on HFML's board of directors.
| | | | | | | | | | | | | | |
|
| Notes to the Consolidated Financial Statements |
| (unaudited) |
HCL Acquisition
On March 5, 2020, Federated Hermes acquired, effective as of March 1, 2020, 100 percent ownership of HGPE Capital Limited (HCL Acquisition) for £15.9 million ($20.4 million). The principal activity of HGPE Capital Limited is that of a holding company for an infrastructure and private equity investment management business. As a result of the HCL Acquisition, Federated Hermes gained control of Hermes GPE LLP (HGPE) (collectively with HGPE Capital Limited, HCL). The addition of London-based HCL provides the opportunity to further accelerate and broaden Federated Hermes' global growth.
The HCL Acquisition included upfront cash payments that totaled £11.2 million ($14.3 million). The transaction also includes contingent purchase price payments payable through December 2024 that were deposited into escrow. The maximum contingent purchase price payments, recorded in Other Long-Term Liabilities, totaled £3.5 million ($4.5 million as of March 1, 2020), which represents the payment of certain future carried interest.
Prior to March 1, 2020, Federated Hermes accounted for its partial ownership interest in HGPE (through its ownership of HFML) as an equity-method investment recorded in Other Long-Term Assets on the Consolidated Balance Sheets. Management used an independent valuation expert to assist in estimating the fair value of this equity interest in HGPE using primarily the discounted cash flow methodology under the income approach. The acquisition-date fair value of this previous equity interest was $34.5 million. In the first quarter 2020, Federated Hermes recognized a gain of $7.5 million as a result of remeasuring the prior equity interest in HGPE held before the business combination and the consolidation of HGPE. This gain is included in Nonoperating Income (Expenses) - Other, net on the Consolidated Statements of Income.
Federated Hermes performed a valuation of the fair market value of acquired assets and assumed liabilities of the HCL Acquisition. The accounting for this acquisition was finalized in the first quarter 2021. During the first quarter 2021, Federated Hermes recorded adjustments that primarily resulted from the consolidation of certain foreign subsidiaries not previously consolidated. The provisional amounts recognized for certain acquired assets and incurred liabilities were adjusted by $25.8 million and $17.2 million, respectively, with the net offset of $8.6 million recorded to the related redeemable noncontrolling interest in subsidiary. This adjustment reflected facts and circumstances that existed as of the acquisition date. As a result of the consolidation of these subsidiaries, Federated Hermes recorded revenue of $6.9 million offset by $6.9 million of Compensation and Related expense, which represented the income and expense that would have been recorded had these entities been consolidated on March 1, 2020. There was no change to net income or earnings per share for the three-month period ended March 31, 2021 as a result of these adjustments.
The following table summarizes the final purchase price allocation determined as of the purchase date:
| | | | | | | | |
| (in millions) | | |
| Cash and Cash Equivalents | | $ | 32.7 | |
Other Current Assets1 | | 11.8 | |
Goodwill2 | | 19.1 | |
Intangible Assets3 | | 27.6 | |
| Other Long-Term Assets | | 16.4 | |
| | |
| Less: Liabilities Acquired | | (44.1) | |
Less: Fair Value of Redeemable Noncontrolling Interest in Subsidiary4 | | (43.1) | |
| Total Purchase Price Consideration | | $ | 20.4 | |
1 Includes $5.0 million of accounts receivable.
2 The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled workforce of HGPE. In this instance, goodwill is not deductible for tax purposes.
3 Includes $20.3 million for rights to manage fund assets for private equity funds with a weighted-average useful life of 9.0 years and $6.9 million for rights to manage fund assets for infrastructure funds with a weighted-average useful life of 11.0 years, all of which are recorded in Intangible Assets, net on the Consolidated Balance Sheets.
4 The fair value of the noncontrolling interest was determined utilizing primarily the discounted cash flow methodology under the income approach.
| | | | | | | | | | | | | | |
|
| 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) | 2021 | | 2020 | | 2021 | | 2020 |
| Equity | $ | 172,349 | | | $ | 138,590 | | | $ | 510,302 | | | $ | 399,208 | |
| Fixed-income | 60,622 | | | 49,407 | | | 175,115 | | | 139,705 | |
| Money market | 55,726 | | | 143,391 | | | 185,704 | | | 452,240 | |
Other1 | 37,892 | | | 33,067 | | | 107,681 | | | 93,197 | |
| Total Revenue | $ | 326,589 | | | $ | 364,455 | | | $ | 978,802 | | | $ | 1,084,350 | |
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) | 2021 | | 2020 | | 2021 | | 2020 |
Asset Management1 | |