Federated Hermes, Inc. — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with fiscal 2022. Federated Hermes is an active investment manager, with stewardship and real estate development activities. Its principal revenue source is investment advisory fees tied largely to assets under management (AUM). The filing reports one operating segment.
Financial and operating performance
| Metric | FY2023 | FY2022 | Change or context |
|---|---|---|---|
| Total revenue | $1.610 billion | $1.446 billion | Up 11% |
| Operating income | $387.5 million | $336.8 million | Up 15%; operating margin approximately 24.1%, versus 23.3% |
| Net income attributable to Federated Hermes | $299.0 million | $239.5 million | Up 25%; net margin approximately 18.6%, versus 16.6% |
| Diluted earnings per share | $3.40 | $2.65 | Up $0.75 |
| Net cash from operating activities | $311.8 million | $323.9 million | Down $12.1 million |
| Period-end managed assets | $757.6 billion | $668.9 billion | Up 13% |
| Average managed assets | $706.0 billion | $632.6 billion | Up 12% |
- Revenue drivers: Money market revenue increased $86.2 million, reflecting higher average assets and product structures. The absence of voluntary yield-related fee waivers added $85.3 million to revenue versus 2022; this was partly offset by $66.5 million of lower distribution expense in 2022 associated with those waivers. Carried interest increased $53.2 million, partly offset by compensation expense. Lower long-term average assets reduced revenue by $67.7 million.
- Revenue mix and asset trends: Money market assets generated 47% of 2023 revenue, up from 40%; they represented 72% of average AUM. Period-end money market AUM rose 17% to $560.0 billion. Long-term AUM rose 3% to $197.6 billion, but average long-term AUM fell 3%. Equity AUM ended down 3%, fixed income up 9%, and alternative/private markets down 1%.
- Expenses and other income: Operating expenses rose $113.0 million, including increases in distribution ($56.6 million) and compensation ($50.7 million). Intangible-asset-related expense declined $30.2 million, primarily because 2022 included a $31.5 million impairment charge. Net nonoperating income improved $54.4 million, principally from investment gains and higher investment income.
- Liquidity and debt: Liquid assets, net of noncontrolling interests, were $656.4 million at year-end, versus $559.5 million; balance-sheet cash and cash equivalents were $383.2 million. Long-term debt was $347.8 million, net of issuance costs, consisting of $350 million of 3.29% senior notes due in 2032. No revolver borrowings were outstanding; $350 million was available under the credit facility, with a further $200 million accordion option. The company reported covenant compliance, a 39-to-1 interest coverage ratio and 0.75-to-1 leverage ratio.
- Capital returns and investment: The company paid $98.1 million in common dividends and used $177.1 million for share repurchases in 2023. It repurchased 5.3 million shares during the year. Management expects approximately $310 million of technology-driven investment over the next three years, including about $120 million of external spend and $190 million allocated to existing technology-related overhead.
Material changes, outlook and commentary
- Revenue and earnings increased as money market assets grew, voluntary yield-related waivers ended, carried interest rose and investment results improved. Share repurchases also reduced weighted-average shares and added $0.08 to the year-over-year diluted EPS increase, according to management.
- Management provided no formal earnings or revenue guidance in the supplied filing text. It stated that existing liquid assets, operating cash flow and borrowing capacity should be sufficient for short- and reasonably foreseeable long-term cash needs. The board declared a $0.28-per-share dividend in January 2024, paid in February.
- The Federal Reserve target rate range was 5.25%–5.50% at the January 2024 meeting. Management noted that future rate declines could reduce money market yields and lead to renewed voluntary yield-related waivers; no such waivers were incurred in 2023.
- SEC money market reforms adopted in 2023 introduce higher minimum liquidity requirements and liquidity-fee provisions on phased compliance dates in 2024. Management anticipates minimal impact on retail and government funds but expects some requirements to affect institutional prime and municipal funds. It estimates that about $13 billion of AUM could shift from institutional prime and municipal funds to government funds.
- Other regulatory developments include proposed changes affecting open-end fund liquidity and swing pricing, fund names, custody, ESG disclosures and fiduciary obligations. The company warns that compliance and implementation costs and changes in product attractiveness or asset mix could materially affect results; the full impact is uncertain.
Risks, contingencies and unusual items
- Money market concentration: Money market assets produced 47% of 2023 revenue. Changes in rates, investor preferences, regulation, liquidity or confidence could materially affect AUM and fee waivers. Money market fund investments are not government-insured, and stable-NAV funds are not guaranteed to maintain a $1.00 share price.
- Infrastructure fund restructuring: The company recorded $9.8 million for purchased carried-interest rights and a further $5.1 million of additional consideration in 2023. Negotiations continue, and final consideration could differ materially; related amounts are not tax deductible.
- Administrative error and insurance dispute: A share-registration error at a closed-end tender fund resulted in an estimated $19.6 million cost. A $17.9 million shareholder settlement was paid, and $2.5 million of company-retained costs was recorded. The company recorded a probable $15.9 million insurance receivable, but its recovery is being litigated with two insurers; the final outcome could materially differ.
- Intangible asset valuation: The FHL right-to-manage public fund assets had a $158.6 million carrying value at year-end. The company recorded no 2023 impairment, but estimated fair value exceeded carrying value by less than 5%. Forecast cash flows and discount-rate assumptions are sensitive, and impairment remains a risk.
- Other exposures: Risks include market and AUM declines, investment performance, competition and fee pressure, advisory-contract termination, regulatory and legal matters, cyber and operational incidents, foreign exchange and sovereign exposure, and dependence on key employees and distribution relationships. The company disclosed an August 2023 class action alleging fiduciary breaches in connection with its employee 401(k) plan. It said ordinary-course claims were not expected to result in a material loss, while noting that outcomes are uncertain.
Important facts for investors to verify
- Whether growth in money market AUM and related fees continues, and how any rate changes affect waivers, revenue and profitability.
- Actual effects and compliance costs of money market reforms, including whether the estimated $13 billion asset shift occurs.
- Resolution and collectability of the $15.9 million insurance receivable, and any additional costs from the infrastructure fund restructuring.
- Whether the FHL intangible asset’s valuation headroom narrows and triggers a future impairment.
- Execution, timing and realized returns from the planned $310 million technology initiative, alongside the company’s cash uses, dividends and repurchases.
- Developments in the 401(k) lawsuit, regulatory matters and other contingencies; confirm details in the financial statement notes and subsequent filings.