Business context and reporting period
Franklin Resources, Inc. (Franklin Templeton) filed this unaudited Form 10-Q for the quarter and nine months ended June 30, 2021, its fiscal third quarter. The global investment manager earns primarily asset-based fees from investment management and related services. Results include the Legg Mason acquisition, completed July 31, 2020; management said integration made it impracticable to separately quantify Legg Mason’s contribution in the current periods.
Key financial metrics
| Metric | Quarter ended June 30, 2021 | Nine months ended June 30, 2021 |
|---|---|---|
| Operating revenue | $2,172.9 million; up 87% | $6,244.5 million; up 62% |
| Operating income / margin | $478.1 million / 22.0% | $1,343.5 million / 21.5% |
| Net income attributable to Franklin Resources | $438.4 million; up 51% | $1,165.5 million; up 62% |
| Diluted EPS | $0.86; up 48% | $2.27; up 58% |
| Adjusted operating income / margin (non-GAAP) | $601.2 million / 36.5% | $1,732.2 million / 37.2% |
| Adjusted net income / diluted EPS (non-GAAP) | $493.7 million / $0.96 | $1,270.6 million / $2.48 |
Quarterly and nine-month revenue and earnings growth principally reflected the Legg Mason acquisition and higher average AUM. Adjusted measures exclude specified items and are not GAAP measures.
- AUM: $1,552.1 billion at June 30, up 149% year over year (primarily acquisition-driven) and 9% from September 30, 2020. Average AUM was $1,531.0 billion for the quarter and $1,489.4 billion for the nine months. Nine-month total net outflows were $26.5 billion, including $15.3 billion long-term and $11.2 billion cash-management outflows; positive market change and distributions/other added $159.7 billion.
- Cash flow: Nine-month operating cash flow was $739.3 million, investing cash flow $(1,936.0) million and financing cash flow $1,542.9 million. Company cash and cash equivalents were $3,856.2 million at June 30, excluding cash held by consolidated investment products.
- Liquidity and debt: Company liquid assets, as defined by management, totaled $6,305.4 million; $3,998.6 million was used for operational/regulatory requirements or capital needs, including $264.9 million restricted by regulation. Company debt was $3,480.6 million, versus $3,017.1 million at September 30, 2020. Management reported compliance with debt covenants and believes available liquidity and operating cash flows can meet foreseeable needs. Debt of consolidated investment products was a separate $3,174.8 million and is generally nonrecourse to the Company beyond its direct investments.
- Margins and fees: GAAP operating margin increased year over year for the quarter but declined for the nine-month period. The effective investment management fee rate excluding performance fees fell to 41.8 basis points for the quarter and 41.7 for the nine months, from 53.8 and 54.6 basis points, primarily because acquired AUM had a greater institutional and fixed-income mix.
Material changes versus comparable periods
Compared with 2020, AUM and average AUM rose sharply, primarily due to Legg Mason and favorable market appreciation; the prior-year period also reflected pandemic-related market disruption. Operating expenses increased 83% for the quarter and 68% for the nine months, reflecting the acquisition, including higher compensation, distribution costs, technology costs and intangible-asset amortization. Quarterly GAAP operating income rose 106%, while nine-month GAAP operating margin decreased from 24.5% to 21.5%. Higher investment and other income, including recovery in equity-method investments and gains associated with consolidated investment products, also affected comparisons.
The Company revised prior-period balance-sheet, cash-flow and related disclosures after identifying an error in accounting for indirect CLO interests and consolidation of a limited partnership. It said the error was not material to previously issued statements and did not affect net income attributable to the Company, EPS, retained earnings or Franklin Resources stockholders’ equity.
Outlook, commentary, risks and contingencies
- Outlook: The filing provides no formal earnings or revenue guidance. Management expects approximately $30 million of additional acquisition-related retention expense for the rest of fiscal 2021, followed by approximately $130 million in fiscal 2022, decreasing over the next two fiscal years. It expects to continue comparable quarterly dividends, subject to the Board and other relevant factors, and may repurchase shares opportunistically. Management expected to call Legg Mason junior notes in September 2021, subject to Board approval.
- India matters: Litigation and regulatory proceedings relate to the 2020 wind-up of six India fixed-income funds. In July 2021, India’s Supreme Court found the trustee’s notice effectively froze redemptions pending unitholder votes; remaining appeal issues were expected to be heard later. Approximately $2.8 billion had been distributed to fund unitholders by July 2021. SEBI orders included approximately $2.7 million of penalties, disgorgement of approximately $68.9 million plus continuing 12% interest, and a two-year restriction on launching new fixed-income funds in India. Appeals and stays were pending; the company had deposited approximately $33.6 million in escrow for the stay, with additional escrow required from other respondents. The Company said it could not predict the outcome or reasonably estimate any possible loss.
- Principal risks: AUM and fee revenue remain exposed to market movements, investment performance, redemptions, fee pressure and product mix. The filing also highlights COVID-19 uncertainty, acquisition integration, cybersecurity and operational dependencies, regulatory and litigation exposure, and LIBOR transition risks. The Company reported no material change to previously disclosed risk factors and no material change in market-risk disclosures.
- Other reporting matters: Management concluded disclosure controls were effective at June 30, 2021 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of future revenue, margin and AUM performance reflects durable organic growth versus acquisition effects and market appreciation; monitor long-term net flows and fee-rate trends.
- Integration costs, expected retention expenses and whether anticipated Legg Mason benefits are realized.
- Developments in India litigation, SEBI appeals and potential disgorgement, penalties, interest or other financial exposure.
- Company-only liquidity, debt maturities and planned debt redemption; distinguish the Company’s obligations from nonrecourse consolidated investment-product debt.
- Effects of market volatility, investment performance, redemptions, COVID-19 and regulatory or technology risks on AUM and earnings.