What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-02-23 compared with 2023-02-24 · 106 added, 147 removed, 377 unchanged (40% of the section changed)

7 unchanged sentences

Federated Hermes’ revenue is primarily dependent upon factors that affect the value of managed/serviced assets, including market conditions and the ability to attract and retain assets.

Generally, managed assets in Federated Hermes’ public market investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement, while managed assets in Federated Hermes private market investment products and strategies are subject to restrictions and withdrawals.

Generally, managed assets in Federated Hermes’ public market investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement, while managed assets in Federated Hermes’ private market investment products and strategies are subject to restrictions on withdrawals.

Fee rates for Federated Hermes’ services generally vary by asset and service type and can vary based on changes in asset levels.

2 unchanged sentences

Similarly, revenue is also dependent upon the relative composition of average AUM across both asset and product types.

Federated Hermes can implement Fee Waivers for competitive reasons such as Voluntary Yield-related Fee Waivers, to maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements.

Since Federated Hermes’ public market products are largely distributed and serviced through financial intermediaries, Federated Hermes pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products and strategies.

Federated Hermes can implement fee waivers for competitive reasons such as Voluntary Yield-related Fee Waivers, to maintain certain fund expense ratios, to meet regulatory requirements or to meet contractual requirements (collectively, Fee Waivers).

Since Federated Hermes’ public market products are largely distributed and serviced through financial intermediary customers, Federated Hermes pays a portion of fees earned from sponsored products to the financial intermediary customers that sell these products and strategies.

These payments are generally calculated as a percentage of net assets attributable to the applicable financial intermediary and represent the vast majority of Distribution expense on the Consolidated Statements of Income.

4 unchanged sentences

Incentive compensation, which includes stock-based compensation, can vary depending on various factors including, but not limited to, the overall results of operations of Federated Hermes, investment management performance and sales performance.

The discussion and analysis of Federated Hermes’ financial condition and results of operations are based on Federated Hermes’ Consolidated Financial Statements.

Management evaluates Federated Hermes’ performance at the consolidated level.

Therefore, Federated Hermes operates in one operating segment, the investment management business.

The discussion and analysis of Federated Hermes’ Financial Condition (including results of operations) are based on Federated Hermes’ Consolidated Financial Statements.

Federated Hermes operates in one operating segment, the investment management business.

Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business.

3 unchanged sentences

Business Developments

Intangible Asset Impairment

A $31.5 million non-cash impairment of an intangible asset associated with the 2018 acquisition of FHL was recorded in Intangible Asset Related expense on the Consolidated Statements of Income as of December 31, 2022.

See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Note (9) to the Consolidated Financial Statements for additional information.

Business Combination

Effective October 1, 2022, Federated Hermes completed the acquisition of substantially all of the assets of C.W.

Henderson and

Associates, Inc.

(CWH), a Chicago-based registered investment advisor specializing in the management of tax-exempt

municipal securities (CWH Acquisition).

See Note (2) to the Consolidated Financial Statements for additional information.

Unsecured Senior Notes

On March 17, 2022, Federated Hermes entered into a Note Purchase Agreement (Note Purchase Agreement) by and among Federated Hermes and the purchasers of certain unsecured senior notes in the aggregate amount of $350 million ($350 million Notes), at a fixed interest rate of 3.29% per annum, payable semiannually in arrears in March and September in each year of the agreement.

T he entire principal amount of the $350 million Notes will become due March 17, 2032, subject to certain prepayment requirements under limited conditions.

See Note (11) to the Consolidated Financial Statements for additional information.

Equity Acquisition

On March 14, 2022, Federated Hermes completed a tender offer resulting in the acquisition of the remaining approximately 10% noncontrolling interests in FHL from a trustee of a non-U.S.

domiciled employee benefit trust established for the benefit of certain members of FHL’s management, a non-U.S.

resident former FHL employee and other non-U.S.

resident key FHL employees under a long-term incentive plan established in connection with the 2018 acquisition of FHL (2022 Acquisition of FHL Noncontrolling Interests).

As a result of the 2022 Acquisition of FHL Noncontrolling Interests, FHL became an indirect, wholly-owned subsidiary of Federated Hermes.

See Note (2) to the Consolidated Financial Statements for additional information.

Federated Hermes continues to actively monitor the ongoing Pandemic and resulting developments and their potential impact on Federated Hermes’ employees and Financial Condition.

The Pandemic adversely impacted the global economy, contributed to significant volatility in financial markets and impacted the workforce and recruiting practices.

Over the course of the Pandemic, many jurisdictions instituted quarantines, imposed limitations on travel, and restricted access to offices and public venues, some of which are ongoing or could reoccur, and many businesses implemented similar precautionary measures.

Such measures, as well as the general uncertainty surrounding the containment and impact of the Pandemic, created significant disruption in economic activity.

Throughout the Pandemic, there has not been a significant disruption of Federated Hermes’ business processes, allowing it to remain fully operational and to continue to provide services to its customers.

As of December 31, 2022, while Federated Hermes’ stock price has fluctuated amidst the volatility in stock prices on major exchanges (particularly at the beginning of the Pandemic), and Federated Hermes’ business operations have had to adapt to a remote and current hybrid working environment, the Pandemic has not materially affected Federated Hermes’ Financial Condition (as defined below) except to the extent that the net Voluntary Yield-related Fee Waivers resulting from the near-zero interest rate environment that existed throughout 2021 and into the second quarter 2022 were attributable to the Pandemic.

With the increase in short-term interest rates beginning in March 2022, net Voluntary Yield-related Fee Waivers were greatly diminished in the second quarter 2022 and ceased early in the third quarter 2022.

See “Low Short-Term Interest Rates” below for additional information on Voluntary Yield-related Fee Waivers.

A further prolonged period of economic and financial distress and volatility as a result of the Pandemic could exacerbate human resource capital management, economic, market and other risks, and could impact, including in a material way, Federated Hermes’ Financial Condition.

The aggregate extent to which the Pandemic, including existing and new variants, and its related impact on the global economy and financial markets, affects Federated Hermes’ Financial Condition, will depend on future developments that are highly uncertain and cannot be predicted, including any residual effects of the Pandemic, the emergence and spread of variants, any prevalence of severe, unconstrained and/or escalating rates of infection in certain countries and regions, the availability, adoption and efficacy of

treatments and vaccines, and future actions taken by governmental authorities, central banks and other third parties in response to such events.

Fund-Related Transaction

In connection with the restructuring of an infrastructure fund, Federated Hermes purchased certain limited partners’ rights to receive future carried interest at fair value, which was calculated by a third-party, for $9.8 million and was included in Operating Expenses - Other in the second quarter 2023.

Due to the restructuring, an existing clawback risk on previously earned carried interest was removed.

The purchase of these carried interest rights and related legal and professional fees and other costs are not deductible for tax purposes.

Negotiations for additional consideration continue with a subset of limited partners, with an additional $5.1 million in consideration being recorded in Operating Expenses - Other in the second half of 2023.

The final consideration may be different from the amounts recorded and the difference could be material.

Low Short-Term Interest Rates

4 unchanged sentences

These waivers had been partially offset by related reductions in distribution expense as a result of Federated Hermes’ mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers.

In response to global economic activity and elevated inflation levels, the FOMC raised the federal funds target rate multiple times in 2022 and in February 2023.

The range is currently 4.50% - 4.75% as of the February 1, 2023 FOMC meeting.

In response to global economic activity and elevated inflation levels, the FOMC raised the federal funds target rate multiple times in 2022 and 2023.

The range is currently 5.25% - 5.50% as of the January 31, 2024 FOMC meeting.

These rate increases eliminated the net negative pre-tax impact of the Voluntary Yield-related Fee Waivers in the second half of 2022.

For the year ended December 31, 2022, Voluntary Yield-related Fee Waivers totaled $85.3 million.

These fee waivers were partially offset by related reductions in distribution expenses of $66.5 million, such that the net negative pre-tax impact to Federated Hermes was $18.8 million.

There were no Voluntary Yield-related Fee Waivers during the year ended December 31, 2023.

For the year ended December 31, 2022, Voluntary Yield-related Fee Waivers totaled $85.3 million.

1 unchanged sentence

Current Regulatory Environment

Federated Hermes and its investment management business are subject to extensive regulation both within and outside the U.S.

Federated Hermes and its products, such as t he Federated Hermes Funds, and strategies are subject to:

various federal securities laws, such as the 1933 Act, 1934 Act, 1940 Act, and Advisers Act;

state laws regarding securities fraud and registration;

regulations or other rules promulgated by various regulatory authorities, or other authorities.

Various laws and regulations that have or are expected to be re-examined, modified, or reversed, or that become effective, and any new proposed laws, rules, regulations and directives or consultations (collectively, both domestically and internationally, as applicable, Regulatory Developments) continue to impact the investment management industry generally, and will continue to impact, to various degrees, Federated Hermes’ Financial Condition.

See Item 1 - Business - Regulatory Matters and Item 1A - Risk Factors - General Risk Factors - Regulatory and Legal Risks - Potential Adverse Effects of Changes in Laws, Regulations and Other Rules for additional information.

With Federated Hermes’ global operations, Federated Hermes, and certain of its subsidiaries and products (such as the Federated Hermes Funds), are registered with or licensed by, and subject to examination by, various U.S.

and/or non-U.S.

regulators, self-regulatory agencies or exchanges, such as, among others, the SEC, FINRA, the CFTC, the DOL, the NYSE, the FCA, the CBI, the CIMA, and the CSSF.

Federated Hermes’ business and offerings also are subject to various U.S.

and/or non-U.S.

laws, regulations, rules, codes, notices, directives, guidelines, listing standards, judicial decisions, orders, circulars and/or conditions, such as the 1933 Act, the 1934 Act, the 1940 Act, the Advisers Act, the Dodd-Frank Act, and SOX, and related regulations;

the NYSE Listed Company Manual;

corporate laws regarding governance, reporting, disclosure and other requirements;

and state or foreign laws regarding securities fraud, securities registrations, reporting, and escheatment of unclaimed or abandoned property.

Asset Highlights

10 unchanged sentences

Total Managed Assets $ 757,622 $ 668,901 13 %

By Product Type

By Product/Strategy Type

Equity $ 42,513 $ 43,342 (2) %

27 unchanged sentences

Total Average Managed Assets $ 705,978 $ 632,633 $ 632,799 12 % 0 %

By Product Type

By Product/Strategy Type

Equity $ 43,314 $ 47,047 $ 58,426 (8) % (19) %

23 unchanged sentences

Net Exchanges 69 (31)

Acquisitions/(Dispositions) 0 408

Impact of Foreign Exchange 1

10 unchanged sentences

Market Gains and (Losses) 2

(1,481) 5,657

Ending Assets $ 36,778 $ 38,181

6 unchanged sentences

Net Exchanges 120 (59)

Acquisitions/(Dispositions) 0 408

Impact of Foreign Exchange 1

(1,621) (1,096)

Market Gains and (Losses) 2

3 unchanged sentences

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

3 For Separate Accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

Changes in Fixed-Income Fund and Separate Account Assets

6 unchanged sentences

Net Exchanges (91) (63)

Acquisitions/(Dispositions) 0 17

Impact of Foreign Exchange 1

Market Gains and (Losses) 2

2,593 (4,900)

Ending Assets $ 43,908 $ 43,180

8 unchanged sentences

Market Gains and (Losses) 2

2,652 (2,336)

Ending Assets $ 51,012 $ 43,563

10 unchanged sentences

Market Gains and (Losses) 2

5,245 (7,236)

Ending Assets $ 94,920 $ 86,743

1 unchanged sentence

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

3 For Separate Accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

Changes in Alternative / Private Markets Fund and Separate Account Assets

6 unchanged sentences

Net Exchanges 14 1

Acquisitions/(Dispositions) 0 81

Impact of Foreign Exchange 1

(1,463) (162)

Market Gains and (Losses) 2

4 unchanged sentences

Net Sales (Redemptions) 3

Net Exchanges (23) 0

Impact of Foreign Exchange 1

7 unchanged sentences

Net Exchanges (9) 1

Acquisitions/(Dispositions) 0 81

Impact of Foreign Exchange 1

(2,317) (254)

Market Gains and (Losses) 2

2 unchanged sentences

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

3 For Separate Accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

Changes in Multi-Asset Fund and Separate Account Assets

6 unchanged sentences

Net Exchanges 11 8

Acquisitions/(Dispositions) 0 54

Market Gains and (Losses) 1

4 unchanged sentences

Net Sales (Redemptions) 2

Net Exchanges 0 1

Impact of Foreign Exchange 3

Market Gains and (Losses) 1

5 unchanged sentences

Net Exchanges 11 8

Acquisitions/(Dispositions) 0 54

Impact of Foreign Exchange 3

Market Gains and (Losses) 1

1 unchanged sentence

1 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

2 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

3 Reflects the impact of translating non-USD denominated AUM into USD for reporting purposes.

2 For Separate Accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

Changes in Total Long-Term Assets

6 unchanged sentences

Net Exchanges 3 (85)

Acquisitions/(Dispositions) 0 560

Impact of Foreign Exchange 1

12 unchanged sentences

Impact of Foreign Exchange 1

(1,635) (710)

Market Gains and (Losses) 2

17 unchanged sentences

2 Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions and net investment income.

3 For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

Changes in Federated Hermes’ average asset mix year-over-year across both asset classes and product types have a direct impact on Federated Hermes’ operating income.

Asset mix impacts Federated Hermes’ total revenue due to the difference in the fee rates earned on each asset class and product type per invested dollar, and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship.

The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset class and product type over the last three years:

3 For Separate Accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.

Changes in Federated Hermes’ average asset mix year-over-year across both asset classes and product/strategy types have a direct impact on Federated Hermes’ operating income.

Asset mix impacts Federated Hermes’ total revenue due to the difference in the fee rates earned on each asset class and product/strategy type per invested dollar, and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship.

The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset class and product/strategy type over the last three years:

Percent of Total Average Managed Assets Percent of Total Revenue

7 unchanged sentences

Other 0 % 0 % 0 % 1 % 1 % 1 %

By Product Type

By Product/Strategy Type

Money Market 52 % 47 % 46 % 44 % 37 % 15 %

13 unchanged sentences

Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.

Average managed assets remained flat for 2022 as compared to 2021.

Period-end managed assets remained flat at December 31, 2022 as compared to December 31, 2021, with an increase in money market assets, partially offset by decreases in equity and fixed-income assets.

Average managed assets increased 12% for 2023 as compared to 2022.

Period-end managed assets increased 13% at December 31, 2023 as compared to December 31, 2022, with an increase in money market and fixed-income assets, partially offset by decreases in equity assets.

Total average money market assets increased 18% for 2023 compared to 2022.

1 unchanged sentence

Average equity assets decreased 4% for 2023 as compared to 2022.

Period-end equity assets decreased 16% at December 31, 2022 as compared to December 31, 2021 primarily due to market depreciation.

Period-end equity assets decreased 3% at December 31, 2023 as compared to December 31, 2022 primarily due to net redemptions, partially offset by market appreciation.

Average fixed-income assets decreased 1% for 2023 as compared to 2022.

Period-end fixed-income assets decreased 11% at December 31, 2022 as compared to December 31, 2021 primarily due to market depreciation and net redemptions, partially offset by assets acquired in connection with the CWH Acquisition.

Average alternative/private markets assets increased 5% for 2022 as compared to 2021.

Period-end alternative/private markets assets decreased 9% at December 31, 2022 as compared to December 31, 2021 primarily due to foreign exchange rate fluctuations.

Moderating inflation and expectations that the FOMC can soon end interest rate increases rallied risk assets in the fourth quarter 2022, easing the sting of a volatile year for most equity and fixed-income asset classes.

In December, the FOMC pared the magnitude of its federal funds target rate increases to 50 basis points from 75 basis points the prior four meetings, though the target range still rose 425 basis points to 4.25% - 4.50% in nine months in 2022, the most aggressive tightening cycle since the early 1980s.

Policymakers also signaled the pace of target rate increases would ease further and eventually end in 2023.

Futures markets went a step further and began pricing rate cuts as early as fall 2023.

Recession risks rose toward the end of the fourth quarter 2022 amid broadening economic deterioration.

Various gauges of manufacturing and services activity contracted, housing remained mired in a deep slump, business investment slowed, and both consumer spending and job growth decelerated.

For all of 2022, the S&P 500 Index and the Nasdaq Composite posted total returns of -19.4% and -33.1%, respectively, their worst years since 2008, while the Dow Jones Industrial Average returned -8.8%.

Overseas, a warm winter, reopening China and diminished impacts from Russia’s war on Ukraine brightened economic sentiment in 2022’s waning weeks, lifting the markets in what still was a tough year, with the MSCI World ex USA and MSCI All Country World ex USA indexes returning a respective -16.6% and -18.3% for all of 2022.

Although money market and liquidity products benefited, rising rates created challenges for fixed-income markets over the course of 2022, with the Bloomberg US Aggregate Bond Index returning -13.0%, the worst year in its history.

Period-end fixed-income assets increased 9% at December 31, 2023 as compared to December 31, 2022 primarily due to market appreciation and net sales.

Average alternative/private markets assets decreased 3% for 2023 as compared to 2022.

Period-end alternative/private markets assets decreased 1% at December 31, 2023 as compared to December 31, 2022 primarily due to market depreciation.

Stocks and bonds stumbled in the fourth quarter on concerns that the Fed would hold interest rates higher for longer than necessary, pushing the U.S.

into a recession.

The S&P 500, Dow Jones and Nasdaq slipped to around 4,100, 32,400 and 12,600, respectively, in the last full week of October, and the U.S.

10-year Treasury yield briefly hit 5%.

However, multiple measures showed that inflation continued to decline and market sentiment reversed course, pricing in rate cuts in 2024 and rallying.

Optimism intensified in December after the Fed eschewed a rate hike, keeping the target range at 5.25% - 5.50% throughout the quarter, and projected three quarter-point cuts in 2024.

For the quarter, the S&P rose 11.2%, the Dow 12.7%, and the Nasdaq 12.8%, respectively, while the U.S.

10-year Treasury yield ended at 3.88% and Bloomberg US Aggregate Bond Index returned 6.8%.

For an explanation of the changes in managed assets at December 31, 2022 compared to December 31, 2021 and changes in average managed assets for 2022 as compared to 2021, see Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2022, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset Highlights.

1 unchanged sentence

For an explanation of changes for 2022 as compared to 2021, see Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2022, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations.

Revenue increased $145.4 million in 2022 as compared to 2021 primarily due to a decrease of $335.0 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact).

This increase in revenue was partially offset by (1) a decrease in equity revenue of $147.9 million due to lower average equity assets, (2) a decrease in fixed-income revenue of $28.6 million due to a change in the mix of average assets and (3) a decrease in performance fees of $7.7 million.

Federated Hermes’ ratio of revenue to average managed assets for 2022 was 0.23% as compared to 0.20% for 2021.

The increase in the rate was primarily due to the increase in revenue from lower Voluntary Yield-related Fee Waivers, partially offset by a decrease in revenue from lower average equity assets during 2022 as compared to 2021.

Revenue increased $163.8 million in 2023 as compared to 2022 primarily due to (1) an increase in money market revenue of $86.2 million due to a change in average assets and product structures (partially offset by Distribution expense), (2) a decrease of $85.3 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to expense and the net pre-tax impact) and (3) an increase in carried interest of $53.2 million (partially offset in Compensation and Related expense).

These increases were partially offset by a decrease in revenue of $67.7 million due to lower long-term average assets.

Federated Hermes’ ratio of revenue to average managed assets was 0.23% for both 2023 and 2022.

The rate was flat primarily due to the increase in revenue from the elimination of Voluntary Yield-related Fee Waivers and an increase in carried interest, offset by a decrease in revenue from lower average equity and fixed-income assets during 2023 as compared to 2022.

Operating Expenses.

Total operating expenses for 2023 increased $113.0 million compared to 2022.

Distribution expense increased $153.7 million primarily related to a decrease of $210.6 million in Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact).

This increase in Distribution expense was partially offset by (1) changes in the mix of average money market assets ($19.0 million), (2) lower average equity assets ($16.7 million) and (3) a decrease in competitive payments ($15.5 million).

Compensation and Related expense decreased $19.8 million primarily driven by the decrease in the average USD/GBP exchange rate for 2022 as compared to 2021.

Intangible Asset Related expense increased $30.2 million primarily due to the intangible asset impairment.

Distribution expense increased $56.6 million primarily related to an increase of $66.5 million resulting from the elimination of Voluntary Yield-related Fee Waivers (see Business Developments - Low Short-Term Interest Rates for additional information, including the impact to revenue and the net pre-tax impact), partially offset by a $7.4 million decrease due to lower long-term average assets.

Compensation and Related expense increased $50.7 million primarily related to consolidated carried interest vehicles ($34.2 million) and increased staff and compensation rates ($13.4 million).

Professional Service Fees increased $11.8 million primarily due to legal fees ($4.8 million) and increased spending on technology initiatives ($3.0 million).

Intangible Asset Related expense decreased $30.2 million primarily due to the intangible asset impairment in 2022.

See Note (10) to the Consolidated Financial Statements for additional information on this impairment.

Other expense increased $11.0 million primarily due to the costs associated with an infrastructure fund restructuring.

Nonoperating Income (Expenses).

Nonoperating Income (Expenses), net, decreased $40.6 million in 2022 as compared to 2021.

The decrease is primarily due to a $38.2 million decrease in Gain (Loss) on Securities, net due primarily to a decrease in the market value of investments in 2022 as compared to an increase in the market value of investments in 2021 and a decrease of $9.3 million from higher debt expense primarily due to the Note Purchase Agreement entered into in 2022.

These decreases were partially offset by an increase in yield on investments of $5.8 million due to rising interest rates.

Nonoperating Income (Expenses), net, increased $54.4 million in 2023 as compared to 2022.

The increase is primarily due to (1) a $41.9 million increase in Gain (Loss) on Securities, net due primarily to an increase in the market value of investments in 2023 as compared to a decrease in the market value of investments in 2022 and (2) an increase of $13.6 million in Investment Income, net primarily due to an increase in yield on investments due to rising interest rates.

Income Taxes.

The income tax provision for 2023 and 2022 was $106.6 million and $71.7 million, respectively.

The provision for 2022 decreased $32.3 million as compared to 2021 primarily as a result of (1) lower income before income taxes ($18.2 million) and (2) a $14.5 million increase to deferred tax expense recorded in 2021 associated with the change in the UK tax rate from 19% to 25% effective April 1, 2023.

The provision for 2023 increased $34.9 million as compared to 2022 primarily as a result of higher income before income taxes.

The effective tax rate was 25.9% for 2023 and 23.4% for 2022.

The increase in the effective tax rate was primarily due to an increase in the valuation allowance on certain foreign deferred tax assets (1.0%) and nondeductible expenses associated with the restructuring of an infrastructure fund (0.9%) in 2023 and a write-off of a foreign subsidiary (0.8%) in 2022.

See Note (16) to the Consolidated Financial Statements for additional information on the effective tax rate, as well as other tax disclosures.

Pillar Two legislation has been enacted or substantively enacted in certain jurisdictions Federated Hermes operates.

The legislation will be effective for the financial year beginning January 1, 2024.

Federated Hermes is in scope of the enacted or substantively enacted legislation and has performed an assessment of its potential exposure to Pillar Two income taxes based on the most recent tax filings, country-by-country report and financial statements for the constituent entities of Federated Hermes.

Based on the assessment, the Pillar Two effective tax rates in most of the jurisdictions in which Federated Hermes operates are above 15%.

However, there are a limited number of jurisdictions where the transitional safe harbor relief does not apply, and the Pillar Two effective tax rate is close to 15%.

Federated Hermes does not expect a material exposure to Pillar Two income taxes in those jurisdictions .

Net Income Attributable to Federated Hermes, Inc.

Net income decreased $30.8 million in 2022 as compared to 2021 primarily as a result of the changes in revenue, operating expenses, nonoperating income (expenses) and income taxes noted above.

Diluted earnings per share for 2022 decreased $0.10 as compared to 2021 primarily due to decreased net income ($0.32), partially offset by a decrease in shares outstanding due to share repurchases ($0.22).

Net income increased $59.5 million in 2023 as compared to 2022 primarily as a result of the changes in revenue, operating expenses, nonoperating income (expenses) and income taxes noted

Diluted earnings per share for 2023 increased $0.75 as compared to 2022 primarily due to increased net income ($0.67), and a decrease in the number of weighted average shares primarily due to share repurchases ($0.08).

Liquidity and Capital Resources

8 unchanged sentences

Net cash provided by operating activities totaled $311.8 million for 2023 as compared to $323.9 million for 2022.

The increase of $153.5 million was primarily due to (1) a net decrease of $159.2 million in cash paid for trading securities for the year ended December 31, 2022 as compared to 2021, (2) an increase in cash received related to the $145.4 million increase in revenue previously discussed, (3) a decrease of $7.8 million in cash paid for incentive compensation for the year ended December 31, 2022 as compared to 2021 and (4) a decrease of $6.3 million in cash paid for taxes for the year ended December 31, 2022 as compared to 2021.

These increases in cash were partially offset by (1) an increase in cash paid related to the $153.7 million increase in Distribution expense previously discussed and (2) an increase of $6.1 million in cash paid for interest for the year ended December 31, 2022 as compared to 2021 primarily related to the $350 million Notes issued in March 2022.

The decrease of $12.1 million was primarily due to (1) an increase in cash paid related to the $56.6 million increase in Distribution expense previously discussed, (2) an increase in cash paid related to the $50.7 million increase in Compensation and Related expense previously discussed, (3) an increase of $23.1 million in cash paid for taxes, (4) a $17.9 million payment representing a settlement with affected shareholders related to an administrative error (see Note (21) to the Consolidated Financial Statements for additional information), (5) a net increase of $14.2 million in cash paid for trading securities for 2023 as compared to 2022, (6) an increase of $4.5 million in cash paid for interest primarily related to the $350 million Notes issued in March 2022 and (7) an increase in cash paid of $4.0 million related to an infrastructure fund restructuring.

These decreases in cash were partially offset by an increase in cash received related to the $163.8 million increase in revenue previously discussed.

Cash Used by Investing Activities.

In 2022, net cash used by investing activities was $32.4 million which primarily represented $28.1 million related to the initial closing payment for the CWH Acquisition (see Note (2) to the Consolidated Financial Statements) and $22.6 million paid for purchases of Investments—Affiliates and Other, partially offset by $22.8 million in cash received from redemptions of Investments—Affiliates and Other.

In 2023, net cash used by investing activities was $30.6 million which primarily represented $58.0 million paid for purchases of Investments—Affiliates and Other and $7.9 million paid for property and equipment, offset by $35.3 million in cash received from redemptions of Investments—Affiliates and Other.

Cash Used by Financing Activities.

In 2023, net cash used by financing activities was $243.1 million.

Of this amount, Federated Hermes paid (1) $361.7 million in connection with its debt obligations, (2) $218.1 million to repurchase shares of Class B common stock primarily in connection with its stock repurchase programs (see Note (14) to the Consolidated Financial Statements for additional information) and (3) $97.9 million or $1.08 per share in dividends to holders of its common shares.

This activity was partially offset by (1) $488.3 million of new borrowings, including amounts borrowed under Federated Hermes’ revolving credit facility and the proceeds from the $350 million Notes issued in March 2022 and (2) $55.2 million of contributions from noncontrolling interests in subsidiaries.

On March 17, 2022, pursuant to a Note Purchase Agreement, Federated Hermes issued unsecured senior notes in the aggregate amount of $350 million at a fixed interest rate of 3.29% per annum, payable semiannually in arrears in March and September in each year of the agreement.

Of this amount, Federated Hermes paid (1) $177.1 million to repurchase shares of Class B common stock primarily in connection with its stock repurchase programs (see Note (15) to the Consolidated Financial Statements for additional information), (2) $98.1 million or $1.11 per share in dividends to holders of its common shares and (3) $40.0 million of distributions to noncontrolling interests in subsidiaries.

This activity was partially offset by $72.8 million of contributions from noncontrolling interests in subsidiaries.

The entire principal amount of the $350 million Notes will become due March 17, 2032.

2 unchanged sentences

As of December 31, 2023, the outstanding balance of the $350 million Notes was $347.8 million, net of unamortized issuance costs in the amount of $2.2 million, and was recorded in Long-Term Debt on the Consolidated Balance Sheets.

The proceeds were or will be used to supplement cash flow from operations, to fund share repurchases and potential acquisitions, to pay down debt outstanding under the Credit Agreement and for other general corporate purposes.

The proceeds were or will be used to supplement cash flow from operations, to fund share repurchases and potential acquisitions, to pay down outstanding debt and for other general corporate purposes.

See Note (12) to the Consolidated Financial Statements for additional information on the Note Purchase Agreement.

2 unchanged sentences

The Credit Agreement consists of a $350 million revolving credit facility with an additional $200 million available via an optional increase (or accordion) feature.

The original proceeds were used for general corporate purposes including cash payments related to acquisitions, dividends, investments and

share repurchases.

under the Credit Agreement may be used for general corporate purposes including cash payments related to acquisitions, dividends, investments and share repurchases.

As of December 31, 2023, Federated Hermes has $350 million available to borrow under the Credit Agreement.

See Note (12) to the Consolidated Financial Statements for additional information.

Both the Note Purchase Agreement and the Credit Agreement include an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions.

Both the Note Purchase Agreement and Credit Agreement include an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated EBITDA) as well as other customary terms and conditions.

Federated Hermes was in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the year ended December 31, 2023.

4 unchanged sentences

Cash dividends of $98.1 million, $97.9 million and $105.8 million were paid in 2023, 2022 and 2021, respectively, to holders of Federated Hermes common stock.

Of the amount paid in 2020, $99.3 million represented a $1.00 per share special dividend.

All dividends were considered ordinary dividends for tax purposes.

7 unchanged sentences

Operating Lease Obligations.

See Note (17) to the Consolidated Financial Statements for additional information.

See Note (18) to the Consolidated Financial Statements for information on Federated Hermes’ operating lease obligations.

Purchase Obligations.

4 unchanged sentences

Future Cash Needs.

In addition to the contractual obligations described above, 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, repurchasing company stock, paying taxes, developing and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and equipment (including technology).

In addition to the contractual obligations described above, 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 products and strategies, modifying existing products, strategies and relationships and maintaining regulatory liquidity and capital requirements.

In addition, Federated Hermes expects to invest approximately $310 million (including the allocation of approximately $190 million in existing technology-related overhead, primarily the compensation expense of existing employees and an external spend of approximately $120 million) over the next three years to support a number of planned technology-driven initiatives.

Any number of factors can cause Federated Hermes’ future cash needs to increase.

5 unchanged sentences

The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

See Note (2) to the Consolidated Financial Statements for additional information on the CWH Acquisition.

Investments—Consolidated Investment Companies at December 31, 2022 increased $2.9 million from December 31, 2021 primarily due to an increase of (1) $17.6 million related to the consolidation of a variable interest entity (VIE) and a voting rights entity (VRE) and (2) $16.2 million in net purchases in existing consolidated funds in 2022.

These increases were partially offset by a decrease of (1) $15.9 million related to the deconsolidation of VREs and (2) $15.0 million of net depreciation on existing consolidated funds in 2022.

Investments—Affiliates and Other at December 31, 2022 decreased $11.3 million from December 31, 2021 primarily due to (1) $14.2 million in net depreciation and (2) a decrease of $4.7 million related to the consolidation of a VIE and a VRE which reclassified Federated Hermes' investments into Investments—Consolidated Investment Companies.

These decreases were partially offset by an increase of $10.2 million related to the deconsolidation of a VRE in 2022 which reclassified Federated Hermes’ investment into Investments—Affiliates and Other.

Goodwill at December 31, 2022 increased $1.5 million from December 31, 2021 primarily as a result of the CWH Acquisition ($16.4 million), partially offset by a $14.8 million decrease related to foreign exchange rate fluctuations on goodwill denominated in a foreign currency.

Intangible Assets, net at December 31, 2022 decreased $62.1 million from December 31, 2021 primarily due to (1) a $34.4 million decrease in the value of intangible assets denominated in a foreign currency as a result of foreign exchange rate fluctuations, (2) a $31.5 million impairment charge and (3) $12.5 million of amortization expense.

These decreases were partially offset by a $16.2 million increase in intangibles primarily related to the CWH Acquisition.

Right-of-Use Assets, net at December 31, 2022 decreased $15.4 million from December 31, 2021 due primarily to annual amortization and Long-Term Lease Liabilities at December 31, 2022 decreased $18.5 million from December 31, 2021 primarily due to payments made on leases during 2022.

Accrued Compensation and Benefits at December 31, 2022 decreased $12.4 million from December 31, 2021 primarily due to the 2021 accrued annual incentive compensation being paid in the first quarter 2022 ($123.4 million), partially offset by 2022 incentive compensation accruals recorded at December 31, 2022 ($113.5 million).

Long-Term Deferred Tax Liability, net at December 31, 2022 decreased $24.8 million from December 31, 2021 primarily due to a $7.9 million reduction in the foreign deferred tax liability associated with the impairment of an intangible asset, an increase in foreign deferred tax assets of $6.4 million and a $6.0 million decrease related to foreign exchange rate fluctuations on deferred tax assets and liabilities denominated in a foreign currency.

In July 2022, Federated Hermes’ board of directors authorized the retirement of 10 million treasury shares which restored these shares to authorized but unissued status.

Federated Hermes recorded a $313.8 million reduction to Treasury Stock, at cost using the specific-identification method and a $42.7 million reduction to Class B common stock, at cost using the average cost method.

The difference was recorded as a reduction to Retained Earnings and Additional Paid-In Capital from Treasury Stock Transactions.

There was no impact to total equity as a result of this non-cash transaction.

Investments—Consolidated Investment Companies at December 31, 2023 decreased $37.9 million from December 31, 2022 primarily due to a decrease of $45.3 million related to the deconsolidation of two variable interest entities (VIE) and a voting rights entity (VRE) in 2023.

This decrease was partially offset by an increase of (1) $4.9 million related to the consolidation of a VIE and (2) $3.2 million of net appreciation on existing consolidated funds in 2023.

Investments—Affiliates and Other at December 31, 2023 increased $30.4 million from December 31, 2022 primarily due to (1) $18.9 million in net purchases, (2) $5.4 million in net appreciation and (3) an increase of $5.4 million related to the deconsolidation of a VIE which reclassified Federated Hermes' investments into Investments—Affiliates and Other.

Receivables, net at December 31, 2023 increased $17.7 million from December 31, 2022 primarily due to an insurance receivable excluding Federated Hermes' retention under the policy.

See Note (21) to the Consolidated Financial Statements for additional information.

Receivables—Affiliates at December 31, 2023 increased $12.8 million from December 31, 2022 primarily due to the accrual for carried interest earned in December 31, 2023 which will be received in 2024.

Accounts Payable and Accrued Expenses at December 31, 2023 increased $14.4 million from December 31, 2022 primarily due to an accrual related to an infrastructure fund restructuring.

Accrued Compensation and Benefits at December 31, 2023 increased $8.6 million from December 31, 2022 primarily due to the 2022 accrued annual incentive compensation being paid in the first quarter 2023 ($120.3 million), partially offset by 2023 incentive compensation accruals recorded at December 31, 2023 ($123.5 million).

Variable Interest Entities

2 unchanged sentences

See Note (6) to the Consolidated Financial Statements for more information.

Recent Accounting Pronouncements

For a complete list of new accounting standards applicable to Federated Hermes, see Note (2) to the Consolidated Financial Statements.

Critical Accounting Policies

18 unchanged sentences

Management may use a qualitative or quantitative approach which requires the weighting of positive and negative evidence collected through the consideration of various factors to determine whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired.

In 2022, management used both a quantitative and qualitative approach.

In 2023 and 2022, management used both a quantitative and qualitative approach.

Management considers macroeconomic and entity-specific factors, including projected AUM, projected revenue growth rates, projected pre-tax profit margins, tax rates, discount rates and, in the case of a trade name valuation, a royalty rate.

1 unchanged sentence

Indicators of a possible change in useful life monitored by management generally include changes in the expected use of the asset, a significant decline in the level of managed assets, changes to legal, regulatory or contractual provisions of the rights to manage fund assets, the effects of obsolescence, demand, competition and other economic factors that could impact the funds’ projected performance and existence, and significant reductions in underlying operating cash flows.

The uncertainty caused by the Pandemic resulted in management determining that an indicator of potential impairment existed beginning in the first quarter 2020 for the FHL right to manage public fund assets which totaled £150.3 million acquired in connection with the 2018 FHL acquisition.

Increases in market interest rates and a decrease in near-term projected cash flows resulted in management determining that an indicator of potential impairment existed as of December 31, 2022 for the FHL right to manage public fund assets which totaled £150.3 million acquired in connection with the 2018 FHL acquisition.

Management used an income-based approach to valuation, the discounted cash flow method, in valuing the asset.

This method resulted in no impairment for the first three quarters of 2022 since the estimated fair value of this intangible asset exceeded the carrying value.

The discounted cash flow analysis prepared as of September 30, 2022 resulted in the estimated fair value exceeding the carrying value by less than 10%.

As a result of continued increases in market interest rates and a decrease in near-term projected cash flows, a discounted cash flow analysis was prepared as of December 31, 2022 and resulted in a non-cash impairment charge of $31.5 million driven by changes in projected cash flows and a higher discount rate as compared to the prior quarter.

After the impairment, the FHL right to manage public fund assets totaled £124.4 million ($150.4 million).

A discounted cash flow analysis prepared as of December 31, 2022 resulted in a non-cash impairment charge of $31.5 million.

The impairment charge was recorded in Operating Expenses - Intangible Asset Related expense on the Consolidated Statements of Income.

The discounted cash flow method resulted in no impairment for the first three quarters of 2023 as the estimated fair value of this intangible asset exceeded the carrying value.

As a result of a decrease in projected cash flows, a discounted cash flow analysis

was prepared as of December 31, 2023 which resulted in the estimated fair value exceeding the carrying value by less than 5%.

The key assumptions in the discounted cash flow analysis include revenue growth rates, pre-tax profit margins and the discount rate applied to the projected cash flows.

1 unchanged sentence

As of December 31, 2023, assuming all other assumptions remain static, an increase or decrease of 10% in projected revenue growth rates would result in a corresponding change to estimated fair value of approximately 8%.

An increase or decrease of 10% in pre-tax profit margins would result in a

corresponding change to estimated fair value of approximately 12%.

An increase or decrease of 10% in pre-tax profit margins would result in a corresponding change to estimated fair value of approximately 12%.

An increase or decrease in the discount rate of 25 basis points would result in an inverse change to estimated fair value of approximately 3%.

Any market volatility and other events related to geopolitical, Pandemic-related or other unexpected events could further reduce the AUM, revenues and earnings associated with this intangible asset and can result in subsequent impairment tests being based upon updated assumptions and future cash flow projections, which can result in an impairment.

For additional information on risks related to geopolitical, Pandemic-related or other unexpected events, see Item 1A - Risk Factors - General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences (including the Pandemic).

The impairment charge was recorded in Operating Expenses - Intangible Asset Related expense on the Consolidated Statements of Income.

After the impairment charge, Federated Hermes had $343.2 million in indefinite-lived intangible assets recorded on its Consolidated Balance Sheets as of December 31, 2022.

No impairment charges were recorded during the years ended December 31, 2021 or 2020.

Any market volatility and other events related to geopolitical or other unexpected events could further reduce the AUM, revenues and earnings associated with this intangible asset and can result in subsequent impairment tests being based upon updated assumptions and future cash flow projections, which can result in an impairment.

For additional information on risks related to geopolitical or other unexpected events, see Item 1A - Risk Factors - General Risk Factors - Other General Risks - Potential Adverse Effects of Unpredictable Events or Consequences.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis