Federated Hermes, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Federated Hermes provides investment management and related services. Unless otherwise noted, financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $324.8 million | $341.2 million | Down 4.8% |
| Operating income | $83.9 million | $97.5 million | Down 13.9% |
| Operating margin | 25.8% | 28.6% | Down 2.7 percentage points |
| Net income attributable to Federated Hermes | $55.9 million | $74.5 million | Down 25.0% |
| Diluted earnings per share | $0.61 | $0.75 | Down $0.14 |
| Cash dividends per share | $0.27 | $0.27 | No change |
| Net cash used by operating activities | $19.2 million | $30.0 million | Use decreased |
- Revenue drivers: Lower equity revenue, including from reduced average equity assets, and lower carried interest and performance fees were partly offset by higher fixed-income and alternative/private markets revenue and reduced money-market fee waivers. The revenue-to-average-managed-assets ratio was 0.20%, versus 0.22%.
- Assets under management: Period-end managed assets were $631.1 billion, up 1% year over year; average managed assets were $647.2 billion, up 5%. At period end, equity assets were down 5%, fixed-income up 7%, alternative/private markets up 20%, and money-market assets broadly flat year over year.
- Cash and liquidity: Cash and cash equivalents were $262.0 million at March 31, versus $233.3 million at year-end 2021. Management reported $502.4 million of liquid assets, net of noncontrolling interests. Operating cash flow was negative, reflecting working-capital movements that included payment of prior-year incentive compensation.
- Debt: Long-term debt was $397.4 million, compared with $223.4 million at December 31, 2021. The company issued $350 million of unsecured senior notes at a fixed 3.29% rate, due March 17, 2032; carrying value at quarter-end was $347.4 million after issuance costs. Revolver borrowings were $50 million, with $300 million of facility capacity remaining and a further $200 million accordion option. The company reported compliance with debt covenants.
Material changes and notable items
- Net income fell primarily because of lower revenue and a $13.1 million year-over-year deterioration in net securities gains/losses: Q1 2022 recorded an $11.7 million loss, versus a $1.4 million gain in Q1 2021. The loss reflected lower investment values.
- Operating expenses decreased $2.9 million to $240.8 million. Lower compensation expense was partly offset by higher distribution expense, including competitive payments.
- The company repurchased approximately 3.04 million shares in Q1 for $102.5 million; approximately 3.03 million shares remained authorized for repurchase at March 31. Cash-flow statement purchases of treasury stock were $113.3 million.
- On March 14, Federated Hermes acquired the remaining approximate 10% noncontrolling interest in HFML through a share exchange valued at £36.4 million (about $47.5 million), making HFML wholly owned.
- Foreign-currency translation reduced other comprehensive income by $17.6 million, including a $17.1 million loss attributable to shareholders.
Outlook, risks and contingencies
- The Federal Reserve raised its target range by 25 basis points in March to 0.25%–0.50%. Management expected further 2022 rate increases to reduce money-market fee waivers. Q1 voluntary yield-related waivers were $75.8 million, partly offset by $57.5 million of distribution-expense reductions, for an $18.3 million net negative pretax impact. Management estimated the Q2 2022 net negative pretax impact could be approximately $1 million; actual results depend on rates, fund assets, expenses, and intermediary arrangements.
- Management said it expected available liquidity, operating cash flow and borrowing capacity to be sufficient for short- and reasonably foreseeable long-term needs. Planned cash uses include acquisitions and expansion, compensation, distributions, dividends, debt repayment, taxes, share repurchases, and product and technology investment.
- Management highlighted market volatility, rising rates and inflation, possible asset-flow and valuation changes, Russia’s invasion of Ukraine and related sanctions, cybersecurity threats, and extensive proposed U.S. and international regulation. Money-market fund reforms are a particular business risk; the company submitted comments opposing several SEC proposals, including mandatory swing pricing.
- Potential impairment remains a sensitivity: the estimated fair value of certain HFML indefinite-lived intangible assets exceeded carrying value by less than 5% at March 31. Lower projected cash flows or a higher discount rate could result in impairment.
- The company reported no material loss as reasonably possible from ordinary-course claims or indemnifications. It was not aware of a material change in market-risk exposures from its 2021 Form 10-K. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether subsequent asset flows, market performance and fee mix sustain or reverse the Q1 changes in AUM and revenue.
- How quickly higher short-term rates reduce fee waivers, and whether actual Q2 and subsequent impacts match management’s estimate.
- The investment valuation and impairment headroom for HFML-related indefinite-lived intangible assets.
- Debt use, interest costs, repurchases and dividends relative to operating cash generation and liquidity.
- How proposed money-market and other regulatory changes, and Russia-related market and cybersecurity risks, affect products, costs and client assets.