Federated Hermes, Inc. — 2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, compared primarily with 2020. Federated Hermes is an investment manager with one operating segment. It earns most revenue from investment advisory and related services priced largely on assets under management (AUM). At year-end, managed assets were $668.9 billion.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $1,300.4 million | $1,448.3 million | Down 10% |
| Operating income | $366.3 million | $418.2 million | Down 12% |
| Operating margin | 28.2% | 28.9% | Down 0.7 percentage points |
| Net income attributable to Federated Hermes | $270.3 million | $326.4 million | Down 17% |
| Diluted EPS | $2.75 | $3.23 | Down $0.48 |
| Net cash from operating activities | $170.4 million | $373.2 million | Down $202.8 million |
| Period-end AUM | $668.9 billion | $619.4 billion | Up 8% |
| Average AUM | $632.8 billion | $613.9 billion | Up 3% |
Revenue fell chiefly because voluntary money-market yield-related fee waivers increased by $307.3 million year over year. Waivers totaled $420.3 million in 2021, partly offset by $277.1 million of related distribution-expense reductions, for a net negative pretax impact of $143.2 million. Higher average equity and fixed-income assets partly offset the decline.
Average AUM shifted toward higher-revenue long-term assets: average equity AUM rose 22% and fixed-income AUM rose 23%, while average money-market AUM declined 4%. Year-end long-term AUM rose 11%; money-market AUM rose 7%. Revenue mix moved accordingly: equity generated 52% of revenue versus 38% in 2020, while money market generated 19% versus 40%.
At December 31, 2021, cash and cash equivalents were $233.3 million, and management reported liquid assets, net of noncontrolling interests, of $492.7 million. Total debt was $223.4 million, compared with $75.0 million a year earlier. The $350 million revolving facility had $126.6 million available, plus a $200 million optional increase. The company reported compliance with its covenants; its leverage ratio was 0.51 to 1 against a maximum of 3 to 1.
Material changes, outlook, and other disclosures
- Expenses and earnings: Total operating expenses declined $95.9 million, mainly because of lower distribution expenses associated with fee waivers. Compensation expense rose $29.1 million, while systems and communications expense increased $10.7 million. The effective tax rate rose to 27.6% from 24.7%, principally reflecting the revaluation of UK deferred tax liabilities after the UK corporate tax rate increase scheduled for 2023.
- Cash uses and capital allocation: Financing activities used $249.5 million. The company paid $228.3 million for share repurchases, $165.9 million to acquire additional HFML equity, $147.3 million on debt, and $105.8 million in dividends; borrowings and noncontrolling-interest contributions partly offset these uses. The 2021 dividend was $1.08 per share, compared with $2.08 in 2020, which included a $1.00 special dividend.
- Acquisition: On August 31, 2021, Federated Hermes acquired BT Pension Scheme’s 29.5% noncontrolling interest in Hermes Fund Managers Limited (HFML) for £116.5 million (approximately $160.2 million). It then owned approximately 90% of HFML. A February 2022 tender offer sought the remaining approximately 10%, with estimated consideration of about 1.5 million Class B shares.
- Management outlook: Management estimated a net negative pretax impact from voluntary yield-related fee waivers of approximately $22 million in first-quarter 2022. Assuming a 25-basis-point Federal Reserve rate increase in March, management expected that impact to decline by approximately 90% in the second quarter. Actual results depend on rates, fund assets and mix, expenses, distribution arrangements, and other factors. The filing does not provide broader quantitative earnings or revenue guidance.
- Key risks and contingencies: The SEC’s proposed money-market reforms could increase operating costs or shift assets from institutional prime and municipal funds to government funds; management estimated approximately $8 billion could shift based on mid-December 2021 AUM. Market volatility, asset flows and values, interest rates, competition, fee waivers, regulation, and cybersecurity are material business risks. Approximately $11 million of previously recognized carried interest was subject to clawback; management did not expect a clawback based on fund valuations at year-end, but future declines could trigger repayment. Management reported no material loss from legal claims as reasonably possible.
- Impairment and controls: No impairment was recorded in 2021. The estimated fair value of HFML fund-management rights exceeded carrying value by less than 10%, making future impairment sensitive to forecasts and discount-rate assumptions. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified financial-statement opinion.
Investor verification priorities
- Review the trend in fee waivers, money-market yields, and their net effect after distribution-expense offsets.
- Check AUM flows and revenue mix, especially money-market assets and growth in equity and fixed-income assets.
- Verify debt balances, available revolving capacity, covenant headroom, and the proposed longer-term financing mentioned by management.
- Assess the assumptions and sensitivity underlying the HFML intangible-asset valuation and monitor any impairment indicators.
- Track the SEC money-market reform process and the proposed acquisition of HFML’s remaining interest, including share consideration and completion.