Business context and reporting period
Franklin Resources, Inc. (Franklin Templeton; NYSE: BEN) filed this Form 10-K for the fiscal year ended September 30, 2023. The company operates one segment—investment management and related services—and reported $1.374 trillion in ending assets under management (AUM). This is an annual summary, not a standalone fourth-quarter report.
Financial and operating highlights
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Operating revenue | $7.849 billion | $8.275 billion | Down 5% |
| Operating income / margin | $1.102 billion / 14.0% | $1.774 billion / 21.4% | Income down 38% |
| Net income attributable to Franklin | $882.8 million | $1.292 billion | Down 32% |
| Diluted EPS | $1.72 | $2.53 | Down 32% |
| Adjusted operating income / margin (non-GAAP) | $1.824 billion / 29.9% | $2.324 billion / 35.9% | Income down 22% |
| Adjusted net income / diluted EPS (non-GAAP) | $1.332 billion / $2.60 | $1.856 billion / $3.63 | Income and EPS down 28% |
Investment management fees were $6.453 billion (down 2%); sales and distribution fees were $1.204 billion (down 15%); shareholder servicing fees were $152.7 million (down 21%). Average AUM fell 5% to $1.400 trillion, while period-end AUM rose 6% to $1.374 trillion. The increase in ending AUM reflected $58.9 billion of market change, distributions and other, $34.9 billion from acquisitions, and $4.3 billion of cash-management inflows, offset partly by $21.3 billion of long-term net outflows.
Operating cash flow was $1.139 billion, versus $1.957 billion in FY2022. Investing cash use was $3.582 billion and financing cash inflow was $2.029 billion. At year-end, liquid assets were $5.873 billion and company debt was $3.053 billion; these liquidity figures exclude assets and liabilities of consolidated investment products (CIPs). The company also reported $3.686 billion in consolidated cash and cash equivalents on its balance sheet. Its $800 million five-year revolving credit facility was undrawn at filing, and the company was in compliance with debt covenants. The board declared $1.20 per share in regular dividends for FY2023; the company repurchased $256.3 million of shares.
Material changes versus the prior comparable period
- Revenue and average AUM declined, while GAAP operating income and margin fell substantially. Management cited lower average AUM, lower sales and servicing fees, higher compensation and benefits, and increased amortization of acquisition-related intangibles.
- FY2023 operating expenses rose 4% to $6.747 billion. Compensation and benefits increased 13% to $3.494 billion; intangible amortization rose 21% to $341.1 million.
- Investment and other income increased to $340.0 million from $91.1 million, primarily reflecting higher dividend and interest income and investment gains versus prior-year losses. This helped support pretax income but did not offset the decline in operating income.
- AUM composition shifted: alternative average AUM rose 36%, including acquired businesses, while average fixed-income and equity AUM fell 15% and 11%, respectively. Long-term net outflows improved to $21.3 billion from $27.8 billion.
Outlook, management commentary, risks and unusual items
Management provided no specific earnings or revenue guidance in the supplied filing text. It said it remains focused on investment performance, client service, expense management, retaining talent, and strategic investment in systems and technology. It expected acquisition-related retention expense of approximately $240 million in FY2024, declining in the following two fiscal years, and approximately $50 million of additional FY2024 occupancy expense related primarily to new New York office space.
Franklin had agreed to acquire Putnam Investments for approximately 33.3 million Franklin shares plus $100 million in cash payable 180 days after closing. At the time of the filing, the transaction was subject to customary conditions and expected to close in Q1 FY2024. The company also disclosed the Alcentra acquisition and remaining potential contingent consideration of up to $350 million based on performance thresholds.
Material risks include market declines and volatility reducing AUM and fee revenue; long-term net outflows and competitive fee pressure; investment performance and key-personnel retention; acquisition integration and execution; cybersecurity, technology and third-party-provider risks; and extensive, changing global regulation. The filing describes ongoing Indian proceedings relating to the 2020 wind-up of six funds. Appeals and related investigations remained pending; the company said it could not predict the outcome or reasonably estimate any possible loss. The auditor identified realizability of deferred tax assets as a critical audit matter; gross deferred tax assets were $982.4 million, with a $292.9 million valuation allowance. Goodwill and indefinite-lived intangible assets passed the annual qualitative impairment assessment, and no definite-lived intangible impairment was recorded in FY2023.
Important facts for investors to verify
- Track subsequent average AUM, long-term flows, fee mix and investment performance; the improvement in ending AUM was partly market- and acquisition-driven despite ongoing long-term outflows.
- Verify Putnam’s closing, share issuance, cash payment, integration costs and realized synergies; also monitor Alcentra and Lexington retention and contingent-payment obligations.
- Assess whether operating margins recover as acquisition-related amortization, compensation and retention costs continue, and distinguish reported GAAP results from management’s non-GAAP adjustments.
- Review liquidity and debt figures on a consistent basis, especially the distinction between company resources and consolidated investment-product assets and liabilities; monitor the leverage covenant and scheduled debt maturities.
- Follow developments in the India fund litigation and regulatory matters, as well as tax examinations, uncertain tax positions and deferred-tax-asset realization.