Federated Hermes, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Federated Hermes provides investment management and related services. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $366.0 million | $311.0 million | $690.8 million | $652.2 million |
| Operating income | $92.3 million | $81.8 million | $176.3 million | $179.3 million |
| Net income attributable to Federated Hermes | $57.7 million | $55.9 million | $113.5 million | $130.4 million |
| Diluted earnings per share | $0.64 | $0.56 | $1.24 | $1.31 |
| Operating margin, approximate | 25.2% | 26.3% | 25.5% | 27.5% |
Q2 revenue rose 17.7% year over year, mainly because money-market fee waivers fell as short-term rates increased. First-half revenue increased 5.9%, but operating income declined 1.7% and attributable net income declined 12.9%. Q2 attributable net income increased 3.2%; lower investment gains and losses, expenses, and taxes affected comparisons.
- Revenue mix: Q2 investment advisory fees, net, were $258.0 million; administrative service fees were $70.2 million. Money-market revenue was $145.8 million versus $49.3 million a year earlier, while equity revenue fell to $132.6 million from $171.6 million.
- Expenses and unusual items: Q2 distribution expense increased $46.1 million year over year, largely because lower fee waivers also meant smaller related reductions in distribution costs. Q2 net securities losses were $20.9 million, compared with a $6.2 million gain in Q2 2021; first-half net securities losses were $32.6 million.
- Cash flow: First-half operating cash flow was $79.5 million, compared with $55.0 million in 2021. Investing cash flow was $0.1 million used/provided (reported as $97,000 provided); financing cash flow used $47.0 million. Cash and cash equivalents ended at $248.7 million.
- Balance sheet and debt: Total assets were $1.952 billion and total liabilities were $929.3 million at June 30. Long-term debt was $397.4 million, including $347.4 million in senior notes, net of issuance costs, and $50.0 million drawn on the revolver. The company reported $300 million of remaining revolver availability and a further $200 million optional increase. It was in compliance with debt covenants.
- Capital returns: The company paid $49.7 million in dividends during the first half ($0.54 per share) and repurchased about 5.9 million shares for $192.1 million. The quarterly dividend was $0.27 per share.
Assets under management and period changes
Managed assets were $631.9 billion at June 30, down 2% from a year earlier. Long-term assets fell 11% to $192.2 billion, while money-market assets increased 2% to $439.7 billion. First-half long-term net redemptions were $5.0 billion; market losses and foreign exchange also reduced long-term assets. Equity assets declined 19% year over year, while alternative/private markets assets increased 4%.
Average managed assets were down 3% in Q2 but up 1% for the first half year over year. The company’s operating results remain sensitive to average assets, asset mix, market performance, flows, and fee waivers.
Outlook, risks, and other notable items
- Interest rates and fee waivers: Management said 2022 rate increases had nearly eliminated the net negative pretax effect of voluntary money-market yield-related fee waivers. Those waivers had a net negative impact of $0.5 million in Q2 and $18.8 million in the first half, compared with $46.8 million and $68.4 million, respectively, in 2021. Future results remain exposed to interest rates and fund yields.
- Market and regulatory risks: Management described difficult markets amid inflation, rising rates, and the Russia-Ukraine war. It highlighted proposed U.S. and international money-market reforms, including liquidity requirements and swing-pricing proposals, as potential sources of business, operational, and compliance impacts. The company opposed key elements of the SEC proposals; outcomes and effects were uncertain.
- Liquidity and spending: Management believes projected liquid assets, operating cash flow, borrowing capacity, and access to financing will be sufficient for short- and reasonably foreseeable long-term needs. Expected uses include acquisitions, compensation, distributions, dividends, debt service, technology, and compliance costs.
- Impairment sensitivity: The estimated fair value of certain FHL indefinite-lived intangible assets exceeded carrying value by less than 20% at June 30. Management noted that weaker projected cash flows or a higher discount rate could increase impairment risk.
- Contingencies: Management said it did not believe a material loss related to ordinary-course claims or indemnification matters was reasonably possible as of June 30.
- Subsequent events: On July 15, 2022, Federated Hermes agreed to acquire substantially all assets of C.W. Henderson and Associates for an initial expected price of $30 million, subject to customary closing conditions, with up to $20 million of contingent payments tied to revenue growth. The board also declared a $0.27 dividend payable August 15.
- Guidance: The filing does not provide numerical earnings or revenue guidance.
Most important facts for investors to verify
- Whether higher short-term rates continue to reduce fee-waiver costs, and how related distribution expenses change.
- Trends in money-market and long-term asset flows, market values, and product mix, given their effect on revenue and profitability.
- Progress and potential business impacts of money-market, ESG, and other regulatory proposals.
- Debt levels, revolver availability, share repurchases, and the company’s capacity to maintain dividends and fund acquisitions.
- Whether assumptions supporting the FHL intangible-asset valuations remain reasonable as assets, revenues, and markets change.
- Closing terms and performance-based payments for the proposed C.W. Henderson acquisition.