Federated Hermes, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Federated Hermes provides investment management, administrative, distribution and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $311.0 | $360.7 | $652.2 | $719.9 |
| Operating income | $81.8 | $97.3 | $179.3 | $190.0 |
| Net income attributable to Federated Hermes | $55.9 | $81.2 | $130.4 | $145.4 |
| Diluted EPS | $0.56 | $0.80 | $1.31 | $1.44 |
| Operating margin | 26.3% | 27.0% | 27.5% | 26.4% |
Q2 revenue declined 13.8% year over year and six-month revenue declined 9.4%. The principal pressure was substantially higher voluntary money-market yield-related fee waivers; higher equity and fixed-income assets and related revenues partly offset the decline. Operating expenses fell, mainly because lower distribution expenses offset some of the lost fee revenue. The UK tax-rate change contributed a $14.5 million deferred tax expense in Q2; the effective tax rate was 39.7% for the quarter and 32.0% for the six months.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $253.7 million at June 30, 2021, versus $301.8 million at December 31, 2020. Long-term debt was $65.0 million, down from $75.0 million.
- For the first six months, operating cash flow was $55.0 million, compared with $153.4 million in 2020. Investing activities provided $5.0 million; financing activities used $111.8 million, including $78.0 million of treasury-stock purchases and $53.3 million of dividends paid.
- Management reported $390.7 million in liquid assets, net of noncontrolling interests, at June 30, compared with $432.5 million at year-end. It said projected liquidity and borrowing capacity should cover present and reasonably foreseeable cash needs.
- At June 30, $310 million remained available on the then-current $375 million revolving facility, with a further $200 million accordion option. The company was in compliance with covenants; reported leverage and interest-coverage ratios were 0.14-to-1 and 393-to-1, respectively.
Assets under management and business trends
Period-end managed assets were $645.8 billion, up 3% from a year earlier. Long-term assets rose 26% to $216.0 billion, while money-market assets declined 6% to $429.8 billion. For the six months, average equity and fixed-income assets increased 24% and 26%, respectively, while average money-market assets declined 4%. Long-term assets recorded $5.3 billion of net sales for the six months, compared with $1.4 billion of net redemptions in the prior-year period.
Money-market funds generated 20% of six-month revenue, down from 43% in 2020, reflecting fee waivers and lower average assets. Equity accounted for 52% of revenue, compared with 36% a year earlier.
Outlook, risks and notable items
- Fee-waiver outlook: Yield-related waivers reduced pretax income by $46.8 million in Q2 and $68.4 million for the first half, net of related distribution-expense reductions. Assuming asset levels and mix remain constant, management estimated a further negative pretax impact of approximately $38 million in Q3 2021. Actual results depend on rates, fund assets and yields, expenses, distribution arrangements and other factors. The filing provides no broader earnings or revenue guidance.
- Regulatory and market exposure: Management identified possible money-market-fund reforms, continued near-zero interest rates, the pandemic and variants, Brexit, regulatory changes, and the LIBOR transition as sources of uncertainty that could affect assets, revenues, costs and operations.
- Valuation and contingencies: The estimated fair value of certain indefinite-lived intangibles associated with the HFML acquisition exceeded carrying value by less than 5% at June 30; adverse changes in assumptions could lead to impairment. Approximately $11 million of previously recognized carried interest was subject to clawback, although management did not expect repayment based on current valuations.
- Tax and capital actions: The UK corporate tax rate increase, effective in 2023, drove the $14.5 million Q2 deferred-tax charge. The company repurchased approximately 2.5 million shares for $76.8 million in the first half and had about 3.2 million shares remaining under its then-current buyback authorization.
- Subsequent events: On July 30, 2021, the company amended its credit agreement, extending maturity to July 30, 2026 and reducing the revolver limit to $350 million, with an alternative reference rate provision for the LIBOR transition. The board declared a $0.27-per-share dividend payable August 13, 2021.
- Management said the pandemic had not materially affected financial condition or cash flows except through the increased fee-waiver burden. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether money-market yields and fee waivers develop in line with management’s Q3 estimate, and how much distribution-expense sharing continues to offset them.
- Whether long-term asset flows, AUM mix and market performance support revenue growth sufficient to offset money-market pressures.
- Whether the intangible-asset valuation remains above carrying value and whether any carried-interest clawback becomes probable.
- Implementation and financial effects of money-market-fund regulation, LIBOR transition and the amended credit agreement.
- How operating cash generation and liquidity evolve alongside dividends, share repurchases and other capital needs.