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Item 7. Management’s Discussion and Analysis

2025-02-28 compared with 2024-02-23 · 90 added, 122 removed, 361 unchanged (37% of the section changed)

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Generally, managed assets in Federated Hermes’ public market investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement, while managed assets in Federated Hermes’ private market investment products and strategies are subject to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

Generally, managed assets in Federated Hermes’ public market investment offerings can be redeemed or withdrawn at any time with no advance notice requirement, while managed assets in Federated Hermes’ private market investment offerings are subject to restrictions to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

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

Generally, advisory fees charged for services provided to multi-asset and equity products and strategies are higher than advisory fees charged to alternative/private markets and fixed-income products and strategies, which in turn are higher than advisory fees charged to money market products and strategies.

Generally, advisory fees charged for services provided to multi-asset and equity offerings are higher than advisory fees charged to alternative/private markets and fixed-income offerings, which in turn are higher than advisory fees charged to money market offerings.

Likewise, Federated Hermes Funds typically have higher advisory fees than Separate Accounts.

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

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

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

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.

Certain components of Distribution expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship.

Federated Hermes generally pays out a larger portion of the revenue earned from managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity, fixed-income and alternative/private markets funds.

Federated Hermes generally pays out a larger portion of the revenue earned from managed assets in equity, money market and multi-asset funds than the revenue earned from managed assets in fixed-income and alternative/private markets funds.

Federated Hermes’ most significant operating expenses are Compensation and Related expense and Distribution expense.

Compensation and Related expense includes base salary and wages, incentive compensation and other employee expenses including payroll taxes and benefits.

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.

Incentive compensation, which includes share-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 (including results of operations) are based on Federated Hermes’ Consolidated Financial Statements.

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Fees for mutual fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds and, as required by law, fund shareholders.

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 believes that meaningful indicators of Federated Hermes’ financial performance include AUM, gross and net offering sales, total revenue and net income, both in total and per diluted share.

Business Developments

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

In March 2020, in response to disrupted economic activity as a result of the Pandemic, the FOMC decreased the federal funds target rate range to 0% - 0.25%.

The federal funds target rate drives short-term interest rates.

As a result of the near-zero interest-rate environment, the gross yield earned by certain money market funds was not sufficient to cover all of the fund’s operating expenses.

Beginning in the first quarter 2020, Federated Hermes had implemented Voluntary Yield-related Fee Waivers.

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 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.

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.

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.

Intangible Asset Impairment

During the second quarter of 2024, a $66.3 million non-cash impairment of an indefinite-lived intangible asset associated with the 2018 FHL acquisition was recorded in Intangible Asset Related expense on the Consolidated Statements of Income.

See Note (9) to the Consolidated Financial Statements for additional information related to the impairment of this indefinite-lived intangible asset.

There were no other impairments during the year ended December 31, 2024.

Current Regulatory Environment

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.

With Federated Hermes’ global operations, Federated Hermes, and certain of its subsidiaries and offerings (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.

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

Federated Hermes’ business and offerings 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.

laws, regulations, rules, codes, notices, directives, guidelines, listing standards, judicial decisions, orders, circulars and/or conditions.

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 Regulatory Requirements for additional information.

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Total Managed Assets $ 829,578 $ 757,622 9 %

By Product/Strategy Type

By Offering Type

Equity $ 43,752 $ 42,513 3 %

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Total Average Managed Assets $ 788,471 $ 705,978 $ 632,633 12 % 12 %

By Product/Strategy Type

By Offering Type

Equity $ 43,380 $ 43,314 $ 47,047 0 % (8) %

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Market Gains and (Losses) 2

3,706 (10,417)

Ending Assets $ 43,752 $ 42,513

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Net Sales (Redemptions) 3

(6,896) (2,061)

Net Exchanges 0 51

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Market Gains and (Losses) 2

4,120 (11,898)

Ending Assets $ 79,423 $ 79,291

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Market Gains and (Losses) 2

2,593 (4,900)

Ending Assets $ 45,550 $ 43,908

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Beginning Assets $ 51,012 $ 43,563

10,283 12,070

Redemptions 3

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Net Exchanges (18) (22)

Acquisitions/(Dispositions) 0 3,524

Impact of Foreign Exchange 1

Market Gains and (Losses) 2

2,652 (2,336)

Ending Assets $ 52,509 $ 51,012

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Net Sales (Redemptions) 3

2,917 (6,710)

Net Exchanges (163) (113)

Acquisitions/(Dispositions) 0 3,524

Impact of Foreign Exchange 1

Market Gains and (Losses) 2

5,245 (7,236)

Ending Assets $ 98,059 $ 94,920

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Impact of Foreign Exchange 1

1,025 (2,624)

Market Gains and (Losses) 2

5,891 (15,452)

Ending Assets $ 103,567 $ 101,530

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Net Sales (Redemptions) 3

(7,615) 3,425

Net Exchanges (18) 6

Acquisitions/(Dispositions) 0 3,524

Impact of Foreign Exchange 1

Market Gains and (Losses) 2

2,412 (4,072)

Ending Assets $ 95,662 $ 96,099

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Net Exchanges 8 9

Acquisitions/(Dispositions) 0 3,524

Impact of Foreign Exchange 1

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Market Gains and (Losses) 2

8,303 (19,524)

Ending Assets $ 199,229 $ 197,629

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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:

Changes in Federated Hermes’ average asset mix year-over-year across both asset classes and offering 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 offering 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 offering type over the last three years:

Percent of Total Average Managed Assets Percent of Total Revenue

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Other — % — % — % 1 % 1 % 1 %

By Product/Strategy Type

By Offering Type

Money Market 55 % 52 % 47 % 48 % 44 % 37 %

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Multi-Asset 0 % 0 % 1 % 1 % 1 % 2 %

Other 0 % 0 % 0 % 0 % 0 % 0 %

Separate Accounts:

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Other — % — % — % 1 % 1 % 1 %

Total managed assets represent the balance of AUM at a point in time, while total average managed assets represent the average balance of AUM during a period of time.

Total managed assets represent the total AUM at a point in time, while total average managed assets represent the average balance of AUM during a period of time.

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 increased 12% for 2024 as compared to 2023.

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.

Period-end managed assets increased 9% at December 31, 2024 as compared to December 31, 2023, primarily from an increase in money market assets.

Total average money market assets increased 15% for 2024 compared to 2023.

Period-end money market assets increased 13% at December 31, 2024 as compared to December 31, 2023.

The Federal Reserve lowered the federal funds rate three times beginning in September, settling at a range of 4.25% to 4.5% in December, and U.S.

money market funds reached a record high at nearly $7 trillion.

Money market funds continued to offer a yield advantage compared to some securities in the direct market, especially overnight securities and those with floating rates, which trace the Federal Reserve moves immediately.

Average equity assets decreased 2% for 2024 as compared to 2023.

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 increased 9% at December 31, 2023 as compared to December 31, 2022 primarily due to market appreciation and net sales.

Period-end equity assets remained flat at December 31, 2024 as compared to December 31, 2023 primarily due to market appreciation nearly completely offset by net redemptions.

The S&P 500 finished the year up more than 21%, aided by the tech stocks, which benefited from the artificial intelligence boom.

Average fixed-income assets increased 9% for 2024 as compared to 2023.

Period-end fixed-income assets increased 3% at December 31, 2024 as compared to December 31, 2023 primarily due to market appreciation.

Overall, fixed-income markets had a volatile year, with yields surging late in 2024 on concerns over a potential reacceleration of inflation.

Yields on the 10-Year Treasury note increased from 3.9% at the start of the year to above 4.5% by the year’s end.

Average alternative/private markets assets decreased 4% for 2024 as compared to 2023.

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.

Period-end alternative/private markets assets decreased 8% at December 31, 2024 as compared to December 31, 2023 primarily due to net redemptions.

For an explanation of the changes in managed assets at December 31, 2023 compared to December 31, 2022 and changes in average managed assets for 2023 as compared to 2022, see Federated Hermes’ Annual Report on Form 10-K for the year ended

December 31, 2023, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset Highlights.

Results of Operations

For an explanation of changes for 2023 as compared to 2022, see Federated Hermes’ Annual Report on Form 10-K for the year ended December 31, 2023, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.

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.

Revenue increased $22.5 million in 2024 as compared to 2023 primarily due to increases in money market and fixed-income revenue of $85.0 million and $9.6 million, respectively, primarily related to higher average assets.

These increases were partially offset by (1) a decrease in carried interest of $50.0 million (partially offset in Compensation and Related expense) and (2) decreases in equity and alternative/private markets revenue of $9.4 million and $6.5 million, respectively, due to lower average assets.

Federated Hermes’ ratio of revenue to average managed assets was 0.20% and 0.23% for 2024 and 2023, respectively.

The decrease in the rate was primarily due to the decrease in carried interest and a decrease in revenue from lower average equity assets during 2024 as compared to 2023.

Operating Expenses.

Total operating expenses for 2024 increased $48.6 million compared to 2023.

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.

Intangible Asset Related expense increased $65.5 million primarily due to an impairment of an indefinite-lived intangible asset (see Note (9) to the Consolidated Financial Statements for additional information).

Distribution expense increased $11.1 million primarily related to higher average managed money market fund assets.

Compensation and Related expense decreased $22.9 million primarily due to less carried interest paid as compensation of $32.1 million partially offset by increases due to higher compensation related to merit and staffing increases of $11.3 million.

Other expense decreased $18.2 million primarily due to a decrease in the costs associated with a fund restructuring in 2023.

Nonoperating Income (Expenses).

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.

Nonoperating Income (Expenses), net decreased $3.6 million in 2024 as compared to 2023.

The decrease is primarily due to a $6.6 million decrease in Gain (Loss) on Securities, net due primarily to a smaller increase in the market value of investments in 2024 as compared to 2023.

This decrease was partially offset by a $3.5 million increase in Investment Income, net primarily due to an increase in the yield on investments due to rising interest rates and higher cash and cash equivalents balances.

Income Taxes.

The income tax provision for 2024 and 2023 was $113.2 million and $106.6 million, respectively.

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

The provision for 2024 increased $6.6 million as compared to 2023 primarily due to an increase in U.S.

income tax resulting from increased U.S.

The effective tax rate was 29.7% for 2024 and 25.9% for 2023.

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.

The increase in the effective tax rate was primarily the result of a valuation allowance on foreign deferred tax assets and the impairment of an indefinite-lived intangible asset (2.3%), and a state law change and a state deferred tax adjustment (0.8%).

See Note (15) 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 .

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

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

Federated Hermes is in scope of the 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, for fiscal year 2024 Federated Hermes expects to be able to rely on the transitional safe harbor for each of the jurisdictions in which it operates.

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

This assessment will continue to be monitored and updated as additional guidance and/or legislation is released.

Net Income Attributable to Federated Hermes, Inc.

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).

Net income decreased $30.7 million in 2024 as compared to 2023 primarily as a result of the changes in revenue, operating expenses, nonoperating income (expenses) and income taxes noted above.

Diluted earnings per share for 2024 decreased $0.17 as compared to 2023 primarily due to decreased net income ($0.35), partially offset by a decrease in shares outstanding resulting from share repurchases ($0.18).

Liquidity and Capital Resources

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At December 31, 2024, Federated Hermes’ liquid assets included investments in certain money market and fluctuating-value Federated Hermes Funds that can have direct and/or indirect exposures to international sovereign debt and currency risks.

Federated Hermes continues to actively monitor its investment portfolios to manage sovereign debt and currency risks with respect to certain European countries (such as the UK in light of Brexit), China and certain other countries subject to economic sanctions.

Federated Hermes continues to actively monitor its investment portfolios to manage sovereign debt and currency risks with respect to certain European countries, China and certain other countries subject to economic sanctions.

Federated Hermes’ experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis.

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Net cash provided by operating activities totaled $346.6 million for 2024 as compared to $311.8 million for 2023.

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 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.

The increase of $34.8 million was primarily due to (1) an increase in cash received related to the $22.5 million increase in revenue previously discussed, (2) a $17.9 million payment made in 2023 representing a settlement with affected shareholders related to an administrative error (see Note (20) to the Consolidated Financial Statements for additional information) and (3) a net decrease of $5.8 million in cash paid for trading securities for 2024 as compared to 2023.

These increases were partially offset by an increase of cash paid for taxes of $17.2 million.

Cash Provided by Investing Activities.

In 2024, net cash provided by investing activities was $64.3 million which primarily represented $119.9 million in cash received from redemptions of Investments—Affiliates and Other, partially offset by $47.5 million paid for purchases of Investments—Affiliates and Other.

Cash Used by Financing Activities.

In 2024, net cash used by financing activities was $286.4 million.

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.

Of this amount, Federated Hermes paid (1) $184.8 million or $2.21 per share in dividends to holders of its common shares, (2) $137.6 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) $31.3 million of distributions to noncontrolling interests in subsidiaries.

This activity was partially offset by $69.1 million of contributions from noncontrolling interests in subsidiaries.

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

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

Borrowings 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, 2024, Federated Hermes has $350 million available to borrow under the Credit Agreement.

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Cash dividends of $184.8 million, $98.1 million and $97.9 million were paid in 2024, 2023 and 2022, respectively, to holders of Federated Hermes common stock.

Of the amount paid in 2024, $84.2 million represented a $1.00 per share special dividend.

All dividends were considered ordinary dividends for tax purposes.

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Long-Term Debt Obligations.

The entire principal amount of the $350 million Notes will become due no later than March 17, 2032.

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

The interest rate is fixed at 3.29% per annum, payable semiannually.

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Purchase Obligations.

Federated Hermes is a party to various contracts pursuant to which it receives certain services, including services for marketing and information technology, access to various fund-related information systems and research databases, trade order transmission and recovery services as well as other services.

These contracts contain certain minimum noncancelable payments, cancellation provisions and renewal terms.

Costs for such services are expensed as incurred.

As of December 31, 2023, Federated Hermes had purchase obligations of approximately $37.0 million payable within 12 months and an additional $33.2 million thereafter.

Costs for such services are expensed as incurred or capitalized in accordance with the applicable accounting guidance.

As of December 31, 2024, Federated Hermes had purchase obligations of approximately $63 million payable within 12 months and an additional $71 million payable thereafter.

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, 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 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 offerings, modifying existing offerings and relationships and maintaining regulatory liquidity and capital requirements.

In addition, Federated Hermes expects to invest approximately $280 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 $90 million) over the next three years to support a number of planned technology-driven initiatives.

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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.

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).

Investments—Consolidated Investment Companies at December 31, 2024 increased $11.9 million from December 31, 2023 primarily due to an increase of $55.5 million related to the consolidation of two variable interest entities (VIEs) in 2024.

This increase was partially offset by a decrease of $40.2 million related to the deconsolidation of two voting rights entities (VREs) in 2024.

Investments—Affiliates and Other at December 31, 2024 decreased $52.8 million from December 31, 2023 primarily due to a decrease of $72.5 million in net redemptions, partially offset by an increase of $16.9 million related to the deconsolidation of a VRE which reclassified Federated Hermes' investments into Investments—Affiliates and Other.

Receivables—Affiliates at December 31, 2024 decreased $12.4 million from December 31, 2023 primarily due to a decrease in investment advisory and administrative service fees ($5.3 million) and the 2024 receipt of carried interest earned in 2023 ($4.4 million).

Accounts Payable and Accrued Expenses at December 31, 2024 increased $11.7 million from December 31, 2023 primarily due to an accrual for proxy costs related to a change in fund directors ($6.2 million) and an increase in accrued distribution fees due primarily to higher average managed money market fund assets ($4.8 million).

Accrued Compensation and Benefits at December 31, 2024 decreased $1.3 million from December 31, 2023 primarily due to the 2023 accrued annual incentive compensation being paid in the first quarter 2024 ($129.4 million), partially offset by 2024 incentive compensation accruals recorded at December 31, 2024 ($127.4 million).

Variable Interest Entities

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(1) FHL right to manage public fund assets;

(2) FHL trade name;

(2) Hermes trade name;

and (3) all other rights to manage fund assets.

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 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.

During the year ended December 31, 2024, management used both qualitative and quantitative approaches .

For the quantitative analyses, m anagement used an income-based approach to valuation, the discounted cash flow method.

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.

In addition, management reconsiders on a quarterly basis whether events or circumstances indicate that a change in the useful life has occurred.

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.

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.

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%.

As of June 30, 2024, due to actual results trailing projected results, driven by a combination of lower gross sales and higher redemptions management concluded that an indicator of potential impairment existed for the FHL right to manage public fund assets.

The discounted cash flow analysis resulted in a non-cash impairment charge of £52.2 million ($66.3 million).

As of December 31, 2024, due to a decrease in near term projected cash flows, primarily driven by a decrease in AUM as a result of net redemptions, management concluded that an indicator of potential impairment existed for the indefinite-lived intangible asset related to the FHL right to manage public fund assets, which had a carrying value of £72.2 million ($90.4 million).

A discounted cash flow analysis was prepared which resulted in the estimated fair value exceeding the carrying value by more than 15%.

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.

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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 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.

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 performed 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 – Specific Risk Factors – Risks Related to Federated Hermes’ Investment Management Business and Offerings – Potential Adverse Effects of Termination or Failure to Renew Advisory Agreements.

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