Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; comparisons are with the periods ended June 30, 2019. The filing identifies the registrant as Franklin Resources, Inc., although the request metadata names Franklin Templeton Inc.
Business context and financial performance
The company is a global investment manager whose revenue depends substantially on assets under management (AUM), asset mix, investment performance, and fees. Unless noted otherwise, financial amounts below are in U.S. dollars.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $1,188.1 million, down 20% | $3,939.1 million, down 9% |
| Operating income | $253.7 million, down 32%; operating margin 21.4% versus 25.4% | $1,002.5 million, down 14%; operating margin 25.4% versus 27.0% |
| Net income attributable to Franklin Resources | $290.4 million, up 18% | $720.0 million, down 19% |
| Diluted EPS | $0.58, up 21% | $1.44, down 17% |
| Adjusted operating margin (non-GAAP) | 34.0% versus 43.4% | 40.2% versus 42.8% |
| Adjusted diluted EPS (non-GAAP) | $0.70 versus $0.55 | $2.04 versus $1.90 |
Quarterly attributable net income rose despite lower operating income, primarily due to lower income taxes and higher investment and other income, with effects from noncontrolling interests. For the nine-month period, investment and other losses were $166.5 million, compared with income of $103.8 million a year earlier; this and lower operating income drove the decline in attributable earnings. The nine-month effective tax rate was 19.3%, versus 28.4%.
AUM, revenue drivers, and material changes
- AUM at June 30, 2020 was $622.8 billion, down 13% year over year and 10% from September 30, 2019. Average AUM fell 15% for the quarter and 6% for the nine months year over year.
- Nine-month AUM change included $49.0 billion of net outflows and $29.9 billion of negative market change, distributions, and other, partly offset by $9.1 billion from acquisitions. Long-term redemptions rose 17% to $136.7 billion; sales declined 6% to $72.3 billion.
- Quarter-end AUM rebounded 7% from March 31, helped by $50.3 billion of market change, distributions, and other, despite $11.3 billion of net outflows. The filing attributes the market recovery to positive equity-market returns in the quarter.
- Nine-month investment management fees declined 10%, reflecting lower average AUM, lower effective fee rates, and lower performance fees. The effective fee rate excluding performance fees was 53.8 basis points for the quarter and 54.6 basis points year to date, below prior-year levels.
- Global/international strategies were a particular pressure point: year-over-year AUM was down 25% in global/international equity and 31% in global/international taxable fixed income. The filing also reports weak relative performance in several categories, including multi-asset/balanced and U.S. fixed income.
Cash flow, liquidity, and debt
- For the nine months, operating cash flow was $646.6 million, investing cash flow was positive $269.1 million, and financing cash flow was positive $96.4 million. Cash and cash equivalents on the balance sheet were $6.36 billion at June 30, 2020, versus $5.80 billion at September 30, 2019.
- The filing’s liquidity measure, excluding third-party assets and liabilities of consolidated investment products, was $8.31 billion, including cash, receivables, and certain investments. Corporate debt was $697.2 million. Management said available liquidity, operating cash flow, potential capital-market access, and borrowing capacity should meet present and reasonably foreseeable needs.
- Separately, consolidated cash-flow-statement ending cash was $6.98 billion; that presentation includes cash of consolidated investment products. The company states that third-party CIP assets and liabilities do not provide general recourse to, or materially affect, its liquidity.
- The company had $700 million face value of senior notes outstanding, due in 2022 and 2025, and reported compliance with debt covenants. A $500 million uncommitted commercial-paper program was available but had been inactive since 2012.
- Dividends declared were $0.81 per share for the nine months. Share repurchases cost $188.3 million year to date, versus $592.9 million in the prior-year period. Management expected comparable regular quarterly dividends, subject to earnings and other relevant factors.
Outlook, risks, contingencies, and unusual items
- COVID-19: Management said the pandemic had adversely affected and was expected to continue affecting the business, financial condition, and results. Key exposures include market volatility and lower AUM or fee revenue, redemptions and fund liquidity needs, investment performance, operational continuity, remote-work and cybersecurity risks. The magnitude and duration remained uncertain; the filing provides no quantified earnings guidance.
- Legg Mason acquisition: The announced all-cash transaction valued at $50 per share had estimated consideration and related obligations and fees of approximately $4.7 billion, with approximately $2 billion of Legg Mason debt to be assumed. After quarter-end, the company reported that closing was expected July 31, 2020, subject to a remaining covenant condition, and that consideration had been placed in escrow. Integration, financing, and realization of expected benefits were identified risks.
- India fund closures: Six fixed-income mutual fund schemes were put into wind-up proceedings in April 2020. Legal challenges and a regulator-initiated forensic audit were pending. Management said it could not predict the outcome or reasonably estimate any potential loss. The company had authorized up to approximately $66.2 million of secured, demand loans to affected sponsored funds; $58.0 million was outstanding at June 30.
- Investment valuation and earnings volatility: Nine-month losses included $110.3 million from equity-method investees and $103.0 million of losses on investments of consolidated investment products. The company also reported $247.9 million of unrealized investment losses included in the reconciliation to adjusted net income. Management noted that COVID-related uncertainty affects estimates for investments, goodwill and intangible-asset impairment, and taxes.
- Other notable matters: A quantitative impairment test for a Benefit Street Partners management-contract intangible asset found fair value approximately equal to carrying value; management said delayed economic recovery could lead to future impairment. The company expected approximately $14 million of additional termination benefits during the rest of fiscal 2020 related to Legg Mason workforce optimization, as well as ongoing acquisition-retention costs.
Most important facts for investors to verify
- Whether the Legg Mason transaction closed as expected, and its actual financing, assumed debt, integration costs, and realized synergies.
- Subsequent AUM flows, fee-rate trends, investment performance, and redemptions—especially in global/international fixed income and other weaker-performing strategies.
- Developments in the India fund litigation, regulator audit, wind-up process, and repayment or recoverability of the $58.0 million in loans.
- How market conditions and COVID-19 affect investment valuations, impairment assumptions, operating results, and the company’s liquidity needs.
- The comparability and components of non-GAAP adjusted results, which exclude specified acquisition costs, intangible amortization and impairment, certain termination costs, consolidated-product activity, and unrealized investment gains or losses.