Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2020 (fiscal 2020). The company is a global investment manager; its revenues depend substantially on assets under management (AUM) and related fee income. The filing is for Franklin Resources, Inc. (ticker BEN), despite the request metadata naming Franklin Templeton Inc.
Financial performance
| Metric | Quarter ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Operating revenue | $1,338.3 million; down 7% | $2,751.0 million; down 3% |
| Operating income | $356.1 million; down 6% | $748.8 million; down 5% |
| GAAP operating margin | 26.6%, versus 26.5% | 27.2%, versus 27.8% |
| Net income attributable to Franklin Resources | $79.1 million; down 78% | $429.6 million; down 33% |
| Diluted EPS | $0.16, versus $0.72 | $0.86, versus $1.25 |
| Adjusted operating income (non-GAAP) | $385.9 million; down 5% | $791.4 million; down 3% |
| Adjusted operating margin (non-GAAP) | 43.2%, versus 41.9% | 42.9%, versus 42.5% |
| Adjusted diluted EPS (non-GAAP) | $0.66, versus $0.65 | $1.34, versus $1.35 |
Quarterly other income and expenses were a net loss of $253.2 million, compared with net income of $113.0 million a year earlier. The six-month net loss was $200.3 million, versus net income of $47.5 million. Investment losses, including losses from equity-method investees and consolidated investment products, were the main drivers. The company recorded $31.4 million of quarterly gains on a swap hedging a sponsored-fund investment.
Quarterly revenue fell mainly as investment management fees decreased 8%, sales and distribution fees 5%, and shareholder servicing fees 4%. Lower average AUM and a lower effective investment management fee rate contributed. The effective fee rate excluding performance fees was 55.3 basis points, versus 57.5 basis points.
Assets under management and flows
- AUM was $580.3 billion at March 31, down 19% year over year and 16% from September 30, 2019.
- Quarterly AUM fell $118.0 billion: $98.2 billion from market change, distributions and other, and $25.4 billion of net outflows, partly offset by $5.6 billion from an acquisition.
- For the six months, AUM fell $112.3 billion, reflecting $80.2 billion of market change, distributions and other and $37.7 billion of net outflows, partly offset by the acquisition.
- Quarterly average AUM was $655.8 billion, down 5% year over year; six-month average AUM was $671.4 billion, down 3%.
- Long-term redemptions rose 50% to $54.3 billion for the quarter and 27% to $100.0 billion for six months. Long-term sales increased 3% in both periods.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $141.0 million, compared with $444.2 million in the prior-year period. Investing cash flow was positive $6.1 million, versus negative $734.2 million; financing cash flow was negative $64.1 million, versus negative $662.8 million.
- Company cash and cash equivalents were $5.801 billion at March 31, approximately unchanged from September 30. Liquid assets, as defined by management and excluding third-party consolidated investment product assets, totaled $8.145 billion, versus $8.573 billion.
- Corporate debt was $697.2 million, compared with $696.9 million at September 30. The company reported compliance with debt covenants and $500 million of capacity under an uncommitted commercial paper program.
- Management said existing liquid assets, operating cash flows and potential borrowing or securities issuance should meet present and reasonably foreseeable needs. Of liquid assets, $3.300 billion was used for operational or regulatory purposes, including $257.2 million restricted by regulation.
- Cash dividends paid in the six months were $265.2 million. The company repurchased 7.5 million shares for approximately $188.2 million and declared dividends of $0.54 per share.
- Consolidated investment products had $613.8 million of debt, including $495.1 million of CLO debt. The filing states these obligations generally have no recourse to the company beyond its direct investment.
Material changes and unusual items
- COVID-19 market turmoil drove steep quarterly market declines: the S&P 500 fell 19.6% and MSCI World fell 20.9%. Company AUM experienced $89.3 billion of market depreciation during the quarter.
- Net investment and other losses were $249.0 million for the quarter, including $159.4 million of losses from equity-method investees and $68.0 million of losses on consolidated investment product investments. Six-month net investment and other losses totaled $189.4 million.
- Quarterly comprehensive loss attributable to Franklin Resources was $20.8 million, including a $102.5 million after-tax currency translation loss.
- The company recognized $2.8 million of impairment on acquired indefinite-lived management-contract intangible assets amid market declines and revised AUM expectations. It reported that estimated fair values for the reporting unit and most other indefinite-lived assets remained more than 45% above carrying values.
- New lease accounting adopted October 1, 2019 resulted in recognition of operating lease right-of-use assets and liabilities; at March 31, lease liabilities were $308.9 million.
Outlook, acquisition and risks
- Management expects COVID-19 to continue adversely affecting business, financial condition and results, but said the extent was not predictable given rapidly changing and uncertain conditions. No specific earnings or revenue guidance was provided.
- The company agreed to acquire Legg Mason for $50 per share in cash, with estimated purchase consideration and related obligations and fees of approximately $4.7 billion, and to assume about $2 billion of Legg Mason debt. Closing was expected in fiscal fourth quarter 2020 (calendar third quarter), subject to shareholder approval and customary conditions. Risks include closing delays, integration challenges, loss of clients or personnel, and failure to realize expected benefits.
- Management expects approximately $40 million of additional acquisition-related retention expense in the remainder of fiscal 2020, followed by about $70 million in fiscal 2021, declining by roughly $10 million annually over the next three fiscal years. It also expected about $4 million of additional termination-benefit expense for the rest of fiscal 2020.
- Key risks include further market declines and AUM outflows, weaker investment performance, fund redemption and liquidity pressures, cybersecurity and remote-work risks, regulatory and tax changes, and integration of Legg Mason. The company said it did not provide financial or other support to sponsored funds during the six months, though it may elect to do so in the future.
- Management considered ordinary-course litigation outcomes unlikely to materially affect the company and stated that adequate accruals were recorded for probable estimable losses. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Subsequent AUM, net flows, redemptions and fee-rate trends as markets and investor behavior evolve.
- Whether investment losses and valuations, particularly Level 3 and equity-method holdings, recover or require further impairment.
- Legg Mason transaction approval, financing, assumed debt, closing timing, integration costs and realized synergies.
- Cash generation and available liquidity after acquisition funding, dividends, repurchases and any support provided to funds.
- Actual COVID-19 effects on investment performance, operations, clients, redemptions, cybersecurity and future results.