Federated Hermes, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Federated Hermes provides investment management, administration, distribution and related services. Period-end managed assets were $778.7 billion, up 11% year over year.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Revenue | $396.4 million | $382.2 million; up 3.7% |
| Operating income | $98.6 million | $85.2 million; up 15.7% |
| Operating margin | 24.9% | 22.3% (calculated) |
| Net income attributable to Federated Hermes | $75.0 million | $69.6 million; up 7.8% |
| Diluted EPS | $0.89 | $0.78 |
| Operating cash flow | $14.0 million | $5.4 million |
| Cash and cash equivalents at March 31 | $359.8 million | $383.2 million at December 31, 2023 |
| Long-term debt at March 31 | $347.9 million | $347.8 million at December 31, 2023 |
Net income margin was approximately 18.9% versus 18.2% (calculated). Management reported liquid assets, net of noncontrolling interests, of $605.7 million at March 31, down from $656.4 million at year-end. The company had no revolving-credit borrowings and $350 million available under its revolver, plus a $200 million accordion feature. It reported compliance with debt covenants; its interest coverage ratio was 40:1 and leverage ratio was 0.72:1.
Material changes and operating trends
- Average managed assets rose 14% to $776.5 billion. Average money-market assets increased 20%, while average equity assets declined 6%; fixed-income assets increased 9%.
- Money-market revenue increased $22.2 million, principally reflecting higher average assets. Equity revenue fell $8.6 million with lower average assets. Money-market assets represented 51% of revenue, compared with 47% a year earlier.
- Revenue growth exceeded asset-management fee growth: revenue as a percentage of average managed assets declined to 0.20% from 0.23%, reflecting asset and product mix.
- Total operating expenses were nearly flat at $297.8 million, up $0.8 million. Distribution expense increased $1.6 million, mainly with money-market fund assets.
- Net nonoperating income declined $1.9 million, primarily because securities gains were lower; higher investment income partly offset the decline.
- EPS growth reflected higher net income and lower shares outstanding following repurchases. The company repurchased approximately 1.1 million shares for $37.0 million during the quarter; about 3.5 million shares remained authorized for repurchase at March 31.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects cash uses to include compensation, distributions, dividends, acquisitions, share repurchases, taxes and regulatory and technology spending. It expects to invest approximately $310 million through 2026 in technology initiatives, including about $120 million of external spending and $190 million allocated to existing technology-related overhead.
- On April 25, 2024, the board declared a $1.31 per-share dividend, comprising a $0.31 quarterly dividend and a $1.00 special dividend, payable May 15. Management estimated the special dividend would reduce Q2 2024 diluted EPS by approximately $0.01–$0.02. It expects liquidity to remain sufficient after payment.
- Fee waivers totaled $108.2 million in Q1 2024, compared with $125.2 million in Q1 2023. Changes in rates, assets, product mix and the need for fee waivers can affect revenue and profitability.
- A UK public-fund management-right intangible asset had estimated fair value less than 10% above carrying value at March 31. Lower projected cash flows or a higher discount rate could lead to impairment.
- A prior administrative error involving registration of closed-end fund shares carries an estimated $19.6 million cost; $17.9 million was paid in 2023. A $15.9 million expected insurance reimbursement remains recorded as a receivable and is being litigated with two insurers, so recovery and final costs are uncertain.
- Management said ordinary-course legal claims were not reasonably likely to result in a material loss. It reported no material change to the risk factors in its 2023 Form 10-K, while highlighting continuing regulatory uncertainty, including money-market-fund reforms and evolving domestic and international requirements.
Most important facts for investors to verify
- Whether money-market asset growth and favorable cash-market conditions persist, and whether equity outflows continue.
- Whether revenue yield and product mix stabilize, and how fee waivers affect reported revenue and margins.
- Progress toward the planned technology investment and its effect on expenses, cash needs and returns.
- Resolution and collectability of the $15.9 million insurance receivable, and updated valuation headroom for the UK intangible asset.
- Cash and liquidity after the special dividend, alongside ongoing repurchases, debt obligations and covenant compliance.