Federated Hermes, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Federated Hermes is an investment manager; revenue depends chiefly on managed assets, asset mix, fee rates and fee waivers. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $381.1 | $326.6 | $1,071.9 | $978.8 |
| Operating income | $96.8 | $98.4 | $273.0 | $277.7 |
| Net income attributable to Federated Hermes | $69.5 | $71.4 | $183.0 | $201.7 |
| Diluted EPS | $0.78 | $0.73 | $2.02 | $2.04 |
| Operating margin | 25.4% | 30.1% | 25.5% | 28.4% |
- Revenue and earnings: Q3 revenue grew 16.7% year over year, while net income declined 2.6%; higher revenue was largely offset by increased distribution expense and securities losses. Nine-month revenue rose 9.5%, while operating income fell 1.7% and net income fell 9.3%.
- Revenue mix: Q3 money-market asset revenue was $170.5 million versus $55.7 million a year earlier. Equity revenue was $127.2 million versus $172.3 million. Nine-month revenue from equity assets was 38% of total, down from 52%; money-market revenue was 37%, up from 19%.
- Assets under management (AUM): Period-end managed assets were $624.4 billion, down 2% year over year. Long-term assets fell 17% to $183.1 billion, while money-market assets increased 7% to $441.3 billion. Average managed assets were essentially flat for both Q3 and the first nine months.
- Cash flow: Operating cash flow for the first nine months was $191.5 million, versus $101.0 million in 2021. Cash and cash equivalents were $304.5 million at September 30, 2022, compared with $233.3 million at year-end 2021. Financing activities used $90.0 million, including $211.2 million of treasury-stock purchases and $73.8 million of dividends paid.
- Debt and liquidity: Long-term debt was $397.5 million, up from $223.4 million at year-end. It included $347.5 million, net of issuance costs, of 3.29% senior notes due in 2032, and $50.0 million drawn on a revolving facility. The company reported $300 million of additional revolving capacity, plus a $200 million accordion option. It was in compliance with debt covenants; reported leverage and interest coverage ratios were 0.9-to-1 and 57-to-1, respectively.
Changes, outlook and material items
- Money-market fee waivers: Rising short-term rates reduced voluntary yield-related waivers; there were no material such waivers in Q3. For the first nine months, waivers totaled $85.3 million and were partly offset by $66.5 million of lower distribution expense, leaving a net pretax impact of $18.8 million. Management said rate increases had eliminated the net negative pretax impact.
- Market-related losses: Net securities losses were $39.4 million for the first nine months, compared with a $7.0 million gain in 2021. Foreign-currency translation losses contributed to a $107.0 million nine-month other comprehensive loss; accumulated other comprehensive income (loss) was negative $87.4 million at quarter-end.
- Share repurchases: The company repurchased approximately 6.1 million shares for $199.0 million during the first nine months. A 7.5-million-share repurchase authorization was completed in September; approximately 5.0 million shares remained available under a new authorization at quarter-end. Repurchases reduced the weighted-average share count and supported Q3 EPS.
- Acquisition: The C.W. Henderson acquisition closed October 1, 2022. A $28.0 million initial payment made September 30 was recorded in other current assets. Additional contingent payments may total up to $17.6 million over five years, subject to net-revenue growth. The purchase-price allocation was not yet available.
- Outlook and liquidity: No specific financial guidance was provided. Management expects cash uses to include acquisitions and expansion, compensation, distributions, dividends, debt repayment, repurchases, product development and technology. It believes projected liquidity and operating cash flows will be sufficient for short- and reasonably foreseeable long-term needs.
- Risks and contingencies: Market declines, asset outflows and mix shifts can reduce fee revenue; the company also identifies regulatory, currency, geopolitical, cyber and operational risks. Proposed U.S. money-market reforms, including swing pricing and liquidity changes, could affect products, assets and compliance costs. Management reported no material loss as reasonably possible from ordinary-course legal claims or indemnifications.
- Impairment sensitivity: The estimated fair value of certain indefinite-lived FHL-related intangible assets exceeded carrying value by less than 10% at September 30. Lower projected cash flows or a higher discount rate could lead to impairment.
Key facts for investors to verify
- Whether AUM and long-term asset flows stabilize, particularly in equity and fixed-income products, and how market performance affects fee revenue.
- Whether higher short-term rates continue to reduce money-market fee waivers, and the associated distribution-expense impact.
- Debt levels, borrowing capacity, covenant compliance and cash allocation among repurchases, dividends and acquisitions.
- Progress and contingent-payment terms for the C.W. Henderson acquisition, and the final purchase-price allocation.
- Potential valuation headroom for FHL-related intangible assets and any subsequent impairment indicators.
- Regulatory developments affecting money-market funds and the resulting effects on products, investor flows, costs and operations.