10-Q: Federated Hermes Reports Q3 2024 Results, Impacted by Intangible Asset Impairment

Federated Hermes' Q3 2024 results show a mixed performance with increased revenue offset by an intangible asset impairment and changes in asset mix.

Summary

• Federated Hermes reported a net income of $87.5 million for the third quarter of 2024, compared to $75.0 million in the same period of 2023.
• The company's total revenue for the quarter was $408.5 million, a slight increase from $402.7 million in Q3 2023.
• For the first nine months of 2024, net income was $183.6 million, down from $216.8 million in the same period of 2023.
• The company experienced a $66.3 million non-cash impairment of an intangible asset related to its UK subsidiary, impacting overall profitability.
• Average managed assets increased by 12% year-over-year, reaching $793.5 billion for the quarter and $783.2 billion for the nine-month period.
• Money market assets saw a significant increase, while equity assets experienced a slight decrease in average value.
• The effective tax rate for the nine-month period was 31.5%, up from 25.6% in the same period of 2023, due to a valuation allowance on foreign deferred tax assets and the impairment of a foreign intangible asset.
• The company repurchased approximately 3.5 million shares of its Class B common stock for $111.5 million during the first nine months of 2024.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the mixed results. While Q3 net income increased, the year-to-date results were negatively impacted by an intangible asset impairment and a higher tax rate. The increase in money market assets is a positive, but the decrease in equity assets and the overall decrease in net income for the first nine months of 2024 temper the positive aspects.

Positives

• Net income for Q3 2024 increased to $87.5 million, up from $75.0 million in Q3 2023.
• Total revenue for Q3 2024 increased slightly to $408.5 million, up from $402.7 million in Q3 2023.
• Average managed assets increased by 12% year-over-year, reaching $793.5 billion for the quarter.
• Money market assets saw a significant increase, indicating strong investor interest in these products.
• The company repurchased approximately 3.5 million shares of its Class B common stock for $111.5 million during the first nine months of 2024, indicating a commitment to shareholder value.

Negatives

• The company recorded a $66.3 million non-cash impairment of an intangible asset in Q2 2024, significantly impacting year-to-date results.
• Net income for the first nine months of 2024 decreased to $183.6 million, down from $216.8 million in the same period of 2023.
• Equity assets experienced a slight decrease in average value, indicating potential challenges in this asset class.
• The effective tax rate for the nine-month period increased to 31.5%, up from 25.6% in the same period of 2023, due to a valuation allowance on foreign deferred tax assets and the impairment of a foreign intangible asset.

Risks

• The company's performance is subject to market conditions and the ability to attract and retain assets.
• Changes in interest rates can impact the value of managed assets and money market fund flows.
• Regulatory developments and requirements could have a material impact on the company's business and financial condition.
• The company faces risks related to sovereign debt and currency exposures in its investment portfolios.
• The company's intangible asset impairment highlights the risk of potential future impairments.

Future Outlook

Management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, paying debt obligations, paying taxes, repurchasing company stock, developing and seeding new offerings, modifying existing offerings and relationships, maintaining regulatory liquidity and capital requirements and funding property and equipment expenditures. In addition, Federated Hermes expects to invest approximately $295 million (including the allocation of approximately $195 million in existing technology-related overhead, primarily the compensation expense of existing employees, and an external spend of approximately $100 million) over the next three years to support a number of planned technology-driven initiatives.

Management Comments

• Management believes that meaningful indicators of Federated Hermes financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.
• Management expects that principal uses of cash will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, paying debt obligations, paying taxes, repurchasing company stock, developing and seeding new offerings, modifying existing offerings and relationships, maintaining regulatory liquidity and capital requirements and funding property and equipment expenditures.

Industry Context

The report reflects the ongoing trends in the asset management industry, including the shift towards money market funds in a volatile interest rate environment and the increasing regulatory scrutiny. The company's performance is also influenced by broader market conditions and investor sentiment.

Comparison to Industry Standards

• Federated Hermes' performance in money market funds aligns with the industry trend of increased inflows into these assets during periods of interest rate uncertainty, similar to trends seen at competitors like BlackRock and Vanguard.
• The intangible asset impairment is a specific issue for Federated Hermes, but other asset managers have also faced challenges related to acquisitions and asset valuations, such as Invesco's struggles with its Oppenheimer acquisition.
• The company's share repurchase program is a common practice among large asset managers to return capital to shareholders, similar to programs at T. Rowe Price and Franklin Resources.
• The increase in the effective tax rate due to foreign deferred tax assets and intangible asset impairment is a unique situation for Federated Hermes, but other global asset managers also face tax complexities due to international operations, such as Schroders and Amundi.
• The company's focus on technology-driven initiatives is consistent with the industry's move towards digital transformation, similar to investments made by State Street and Northern Trust.

Management Changes

Corporate Governance

Legal Proceedings

• Federated Hermes has claims asserted against it from time to time.
• The insurance claim related to an administrative error is now the subject of litigation with two of Federated Hermes insurance carriers.

Stakeholder Impact

• Shareholders will be impacted by the share repurchase program and dividend payments.
• Employees will be impacted by incentive compensation and share-based compensation plans.
• Customers will be impacted by the company's ability to attract and retain assets and the performance of its investment products.
• Creditors will be impacted by the company's debt obligations and compliance with debt covenants.

Next Steps

• The company will continue to monitor and assess the impact of regulatory developments and requirements.
• The company will continue to evaluate its investment portfolios to manage sovereign debt and currency risks.
• The company will continue to execute its share repurchase program.
• The company will continue to invest in technology-driven initiatives.

Key Dates

Keywords

asset management, investment advisory, money market funds, equity assets, fixed income, intangible asset impairment, financial results, share repurchase, regulatory compliance, AUM