Franklin Resources, Inc. (Franklin Templeton) — Q1 FY2022 10-Q
Reporting period: Three months ended December 31, 2021; comparative period ended December 31, 2020. The registrant is Franklin Resources, Inc., which operates under Franklin Templeton and other brands. Figures are in U.S. dollars.
Financial and operating performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Operating revenue | $2.224 billion | $1.995 billion | +11% |
| Operating income / margin | $557.7 million / 25.1% | $409.1 million / 20.5% | Income +36% |
| Net income attributable to Franklin Resources | $453.2 million | $345.3 million | +31% |
| Diluted EPS | $0.88 | $0.67 | +31% |
| Adjusted operating income / margin | $685.9 million / 39.8% | $549.9 million / 37.2% | Income +25% |
| Adjusted net income / diluted EPS | $553.6 million / $1.08 | $373.4 million / $0.73 | Income and EPS +48% |
Investment management fees rose 14%, primarily reflecting average AUM growth and higher performance fees. Performance-based management fees were $139.9 million versus $41.8 million. Operating expenses increased 5%; compensation and benefits rose 11%, largely on higher incentive compensation. The effective income tax rate was 21.7%, down from 26.5%, reflecting stock-compensation tax benefits and expiration of tax reserves.
- AUM: $1.578 trillion at quarter-end, up 5% year over year and 3% from September 30, 2021. Average AUM increased 8% year over year to $1.554 trillion.
- Flows and markets: Long-term net inflows were $24.1 billion, versus $4.5 billion of outflows a year earlier; cash-management net inflows were $5.8 billion. Net market change, distributions and other added $10.4 billion. Equity and alternative AUM grew year over year, while fixed-income AUM declined.
- Cash flow: Operating cash flow was $166.4 million, down from $291.2 million. Investing cash outflow was $728.6 million, including $372.3 million of net acquisition spending; financing cash inflow was $467.3 million. The cash-flow statement reports ending cash and cash equivalents of $4.544 billion, including consolidated investment products.
- Liquidity and debt: Management reported $6.329 billion of liquid assets, excluding third-party consolidated investment product assets, and $3.394 billion of company debt at December 31. The company reported compliance with debt covenants. Consolidated investment product debt was a separate $4.179 billion; its holders have no recourse to company assets beyond Franklin’s direct investment.
- Capital returns: The company declared a $0.29-per-share dividend and repurchased 0.7 million shares for $21.7 million. It said it expects comparable quarterly dividends, subject to earnings and other factors.
Material developments, outlook and risks
- Franklin acquired quantitative investment manager O’Shaughnessy Asset Management on December 31, 2021, for approximately $300 million in cash, excluding performance-contingent future payments. It also agreed to acquire Lexington Partners for approximately $1.0 billion at closing plus $750 million over three years; closing was expected around April 1, 2022.
- A new $500 million, 364-day revolving credit facility was entered into on January 10, 2022; no amounts were outstanding as of filing. No specific earnings or revenue guidance was provided.
- Management cited continued focus on investment performance, service, expense management, talent and technology. It expects about $110 million of acquisition-related retention expense during the remainder of FY2022, followed by approximately $130 million in FY2023, declining in subsequent years.
- India fund matters: Litigation and regulatory proceedings remain outstanding following the 2020 wind-up decision for six Indian fixed-income funds. SEBI orders included approximately $2.7 million in penalties, disgorgement of approximately $68.8 million plus continuing 12% interest, and a two-year restriction on launching new fixed-income funds in India. Enforcement was stayed subject to escrow deposits while appeals remain pending. Franklin said it cannot predict the outcome or reasonably estimate any potential loss. Approximately $3.5 billion had been distributed to fund unitholders by December 2021.
- Other disclosed risks include market and AUM volatility, investment performance, competition, operational and cybersecurity risks, regulation, and continuing uncertainty related to COVID-19. Management reported no material change in risk factors from the FY2021 10-K and no material change in market-risk disclosures.
Key facts for investors to verify
- Whether AUM inflows and investment performance persist, particularly across fixed income, equity and alternative strategies.
- Acquisition closing, integration costs and expected contributions from OSAM and Lexington.
- Developments in the India proceedings, including appeal outcomes, escrow and potential financial exposure.
- Cash-flow generation and liquidity after acquisition spending, dividends, buybacks and ongoing retention costs.