Federated Hermes, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Federated Hermes is an active investment manager whose revenue is primarily driven by fees on assets under management (AUM). Period-end AUM was $668.9 billion.
Key financial metrics
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Revenue | $1,445.8 million | $1,300.4 million | +11% |
| Operating income | $336.8 million | $366.3 million | -8% |
| Operating margin | 23.3% | 28.2% | -4.9 percentage points |
| Net income attributable to Federated Hermes | $239.5 million | $270.3 million | -11% |
| Diluted EPS | $2.65 | $2.75 | -4% |
| Cash provided by operating activities | $323.9 million | $170.4 million | +$153.5 million |
| Cash and cash equivalents at year-end | $336.8 million | $233.3 million | +$103.5 million |
| Long-term debt at year-end | $347.6 million | $223.4 million | +$124.2 million |
Management reported liquid assets, net of noncontrolling interests, of $559.5 million, versus $492.7 million a year earlier. The company had no borrowings outstanding on its $350 million revolving facility at year-end, with a further $200 million accordion option available. Debt covenants were met; the reported leverage ratio was 0.79:1 against a 3:1 maximum.
Material changes versus the prior year
- Period-end AUM was essentially flat year over year, but the mix shifted: money-market AUM rose 6% to $476.8 billion, while long-term AUM fell 13% to $192.1 billion. Average AUM was nearly unchanged.
- Revenue rose primarily because higher short-term rates reduced voluntary money-market fee waivers. Their net pretax impact declined to $18.8 million in 2022 from $143.2 million in 2021. The revenue improvement was partly offset by lower equity revenue and lower performance fees.
- Operating expenses increased $174.8 million, including a $153.7 million increase in distribution expense, partly reflecting the reduction in fee-waiver-related distribution offsets. A $31.5 million noncash impairment of an acquired FHL intangible asset also increased expense.
- Nonoperating results weakened, including a $28.7 million net loss on securities compared with a $9.5 million gain in 2021, and higher debt expense following the 2022 note issuance.
- Long-term assets experienced $8.5 billion of net redemptions and $19.5 billion of market losses in 2022. Money-market growth offset these pressures in total AUM.
Cash, capital and significant transactions
- Operating cash flow was $323.9 million. Investing activities used $32.4 million, including the $28.1 million initial payment for the C.W. Henderson acquisition. Financing activities used $168.5 million.
- The company issued $350 million of unsecured senior notes at a fixed 3.29% rate, due March 17, 2032; the year-end carrying value was $347.6 million, net of issuance costs.
- Federated Hermes paid $97.9 million in common dividends and repurchased $207.4 million of Class B shares during the year. The board declared a $0.27-per-share dividend in January 2023, paid in February.
- The C.W. Henderson acquisition included up to $17.6 million of additional contingent payments, dependent on net revenue growth. The filing says the purchase-price allocation was preliminary.
Outlook, commentary and risks
- No specific revenue, earnings or AUM guidance is provided. Management said it expected sufficient liquidity for short-term and reasonably foreseeable long-term cash needs, based on liquid assets, operating cash flow and borrowing capacity.
- Management noted that rising rates eliminated the net negative pretax impact of voluntary yield-related fee waivers in the second half of 2022. Future waiver levels remain sensitive to rates, fund asset levels and mix, yields, expenses, and competitive and distribution arrangements.
- Money-market assets generated 40% of 2022 revenue; equity assets generated 36%. Changes in interest rates, asset values, flows and product mix therefore pose material revenue risks. Management estimated that proposed money-market reforms could shift approximately $10 billion from institutional prime and municipal funds to government funds, based on year-end AUM.
- The filing highlights extensive proposed and adopted U.S. and international regulation, particularly money-market fund reform, liquidity requirements, ESG disclosures, cybersecurity and operational resilience. Compliance, technology and professional-services costs could rise, and new rules could affect products, customers, AUM and profitability.
- Other identified risks include market volatility and recession, poor investment performance, competition and fee pressure, advisory-contract renewals, key-personnel retention, cyber incidents, foreign exchange exposure and geopolitical events. Management reported no material adverse effect from cyber incidents through year-end and no material loss from disclosed legal claims was considered reasonably possible.
- The FHL intangible impairment reflects higher discount rates and lower near-term projected cash flows. Further changes in assumptions or business conditions could result in additional impairment.
Important facts for investors to verify
- Whether rate changes, fund yields and product mix improve or renew fee-waiver impacts, and how associated distribution costs evolve.
- Whether money-market assets remain stable and how regulatory reforms affect institutional prime, municipal and government fund flows.
- Whether long-term AUM, net flows and investment performance recover after 2022 market declines and redemptions.
- Whether the FHL impairment assumptions and preliminary C.W. Henderson purchase-price allocation change, including contingent-payment estimates.
- Debt levels, covenant headroom, cash generation, capital returns and the company’s stated liquidity assessment.