Federated Hermes, Inc. — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed February 26, 2021. This is an annual report, not a standalone fourth-quarter filing. Federated Hermes is an investment manager whose revenue primarily comes from asset-based advisory and related fees. Period-end AUM was $619.4 billion.
Financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $1,448.3 million | $1,326.9 million | +9% |
| Operating income | $418.2 million | $347.9 million | +20% |
| Operating margin | 28.9% | 26.2% | +2.7 percentage points |
| Net income attributable to Federated Hermes | $326.4 million | $272.3 million | +20% |
| Diluted EPS | $3.23 | $2.69 | +$0.54 |
| Net cash from operating activities | $373.2 million | $334.9 million | +$38.3 million |
| Cash and cash equivalents, year-end | $301.8 million | $249.2 million | +$52.6 million |
| Long-term debt, year-end | $75.0 million | $100.0 million | -$25.0 million |
Net income margin was approximately 22.5%, compared with 20.5% in 2019. Cash used in investing activities was $24.8 million and cash used in financing activities was $295.1 million. Management reported $432.5 million in liquid assets, net of noncontrolling interests. The company paid $207.8 million in dividends, including a $1.00-per-share special dividend; total dividends were $2.08 per share. A further $0.27-per-share dividend was declared in January 2021.
Assets under management and material changes
- Period-end AUM increased 8% to $619.4 billion. Money market assets rose 6% to $420.3 billion; fixed income rose 22% to $84.3 billion; equity rose 3% to $91.8 billion; alternative/private markets rose 5% to $19.1 billion; multi-asset fell 6% to $3.9 billion.
- Average AUM increased 21% to $613.9 billion, led by money market assets, up 28%, and fixed income, up 14%. Average equity assets declined 1%.
- Revenue rose $121.4 million. Growth reflected higher average money market and fixed-income assets, the consolidation of HGPE, a change in equity asset mix, and higher performance fees. Revenue from alternative/private markets also benefited from recording HGPE in operating revenue from March 2020.
- Administrative service fees increased 29% to $318.2 million; net investment advisory fees increased 11% to $1,011.5 million. Other service fees declined 32% to $118.6 million, largely reflecting lower distribution-related revenue.
- Operating expenses increased $51.2 million. Compensation and related expense rose $61.3 million, while distribution expense declined $22.3 million, including the effect of fee-waiver-related expense sharing. Travel expense fell with pandemic-related restrictions.
- The fourth quarter generated revenue of $363.9 million, operating income of $114.8 million, net income attributable to Federated Hermes of $95.2 million and diluted EPS of $0.93. Fourth-quarter 2019 figures were $358.0 million, $102.8 million, $82.1 million and $0.81, respectively.
Outlook, risks and unusual items
- Low-rate fee waivers: Near-zero short-term rates led to $113.0 million of voluntary money market yield-related fee waivers in 2020, partly offset by $98.4 million of lower distribution expense; net pretax impact was $14.6 million. Assuming asset levels and mix remained constant, management estimated an approximately $14 million negative pretax impact in Q1 2021, while noting substantial uncertainty. The FOMC indicated rates could remain near zero through at least 2022.
- Acquisitions: Federated Hermes acquired HGPE Capital Limited for £15.9 million ($20.4 million), effective March 1, 2020, and acquired MEPC Limited for £9.9 million ($13.1 million), effective January 1, 2020. The HGPE transaction produced a $7.5 million remeasurement gain on the previously held equity interest. Goodwill and intangible assets totaled $1.282 billion at year-end; no impairment was recorded. Management reported that the estimated fair value of certain HFML indefinite-lived intangible assets exceeded carrying value by about 8%, leaving sensitivity to assumptions and future performance.
- Liquidity and debt: The company had $75 million outstanding under a $375 million revolving facility, with $300 million available and an additional $200 million accordion feature. It was in compliance with covenants; reported leverage and interest coverage ratios were 0.16-to-1 and 223-to-1, respectively. Management said available liquidity and expected operating cash flows should meet foreseeable needs.
- Business and regulatory risks: Results remain sensitive to AUM levels and mix, investment performance, market values, redemptions, competition, distribution costs and interest rates. Money market products represented 40% of 2020 revenue. Potential U.S. and international money market reforms, Brexit-related requirements, ESG rules, LIBOR transition, regulatory costs and possible financial transaction taxes could affect products, assets, expenses and profitability.
- COVID-19: Management said the pandemic had not materially affected the company’s financial condition or cash flows as of year-end, while warning that market, operational and regulatory impacts remained uncertain. Approximately 95% of employees were working remotely at year-end.
- Contingencies: Approximately $12 million of previously recognized carried interest was subject to clawback; management estimated a roughly $1 million repayment and recorded a liability, pending final fund valuations. The filing said material losses from ordinary-course legal claims and indemnifications were not considered reasonably possible.
- Reporting and governance: The auditor issued unqualified opinions on the financial statements and internal controls. The control assessment excluded acquired HCL, which represented about 2% of year-end assets and 2% of annual revenue and net income. The company also has a dual-class, controlled-company structure, with voting control held through Class A shares.
Most important facts for investors to verify
- Whether money market fee waivers and intermediary expense-sharing continue at levels that materially affect earnings.
- Whether AUM growth persists, particularly in higher-fee asset classes, and how net flows compare with market appreciation.
- Whether HGPE and MEPC deliver expected growth and whether intangible-asset valuations remain supportable.
- The final carried-interest clawback amount and any material changes to contingent acquisition payments.
- How proposed money market reforms, Brexit-related rules, ESG requirements and other regulatory changes affect costs, distribution and product demand.
- Debt repayment, capital returns and the company’s liquidity position relative to acquisition and operating needs.