Business context and reporting period
Franklin Resources, Inc. (Franklin Templeton) filed this unaudited Form 10-Q for its fiscal third quarter ended June 30, 2022, and the nine months then ended. The company is a global investment manager whose results depend substantially on assets under management (AUM), asset mix, investment performance, and fee levels. The filing describes challenging equity and bond markets amid rising interest rates, inflation, and recession concerns.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Nine months ended June 30, 2022 |
|---|---|---|
| Operating revenue | $2.031 billion, down 7% | $6.336 billion, up 1% |
| Operating income | $404.7 million, down 15% | $1.425 billion, up 6% |
| Operating margin | 19.9%, versus 22.0% | 22.5%, versus 21.5% |
| Net income attributable to Franklin Resources | $256.4 million, down 42% | $1.059 billion, down 9% |
| Diluted EPS | $0.50, versus $0.86 | $2.07, versus $2.27 |
| Adjusted diluted EPS (non-GAAP) | $0.82, versus $0.96 | $2.86, versus $2.48 |
| Operating cash flow | Not separately presented | $1.090 billion, versus $739.3 million |
Quarterly revenue was pressured by lower average AUM and sales and distribution fees. Quarterly other income and expenses were a net expense of $91.6 million, compared with net income of $77.3 million a year earlier, including investment losses at consolidated investment products. For the nine months, adjusted net income was $1.461 billion, up 15%; adjusted measures exclude specified items and are not GAAP measures.
At June 30, 2022, total AUM was $1.380 trillion, down 11% year over year. Quarterly average AUM was $1.440 trillion, down 6%; nine-month average AUM was $1.498 trillion, up 1%. Third-quarter AUM fell $97.7 billion: $135.5 billion of market depreciation, distributions and other effects and $19.8 billion of long-term net outflows were partly offset by $57.2 billion from acquisitions. Alternative AUM grew 60% year over year, while fixed income and equity AUM declined 19% and 21%, respectively.
Nine-month investing cash outflow was $2.680 billion, including $1.355 billion net cash paid for acquisitions; financing cash inflow was $1.489 billion. The balance sheet reported $3.806 billion cash and cash equivalents and $3.382 billion of company debt. Excluding consolidated investment products, the company reported $5.793 billion of liquid assets against $3.382 billion of debt. It had a $500 million revolving credit facility with no amounts drawn. Debt of consolidated investment products was $5.497 billion; the filing says those debt holders have no recourse to company assets beyond Franklin’s direct investments.
Material changes versus comparable periods
- Quarterly GAAP earnings weakened: operating margin contracted 2.1 percentage points and attributable net income and diluted EPS each fell 42% year over year. Nine-month operating income rose, but attributable net income and EPS declined.
- Market depreciation and currency translation weighed on AUM; quarterly long-term net outflows were $19.8 billion. Nine-month long-term net outflows were $7.4 billion, compared with $15.3 billion in the prior-year period.
- Franklin acquired Lexington Partners on April 1, 2022, expanding alternatives. It paid $984.7 million at closing and recorded deferred consideration with a $706.4 million acquisition-date fair value against $750 million of stated deferred payments. Lexington contributed $90.7 million of revenue through June 30, with no material impact on attributable net income. OSAM was acquired December 31, 2021 for approximately $300 million.
- Amortization of intangible assets increased 41% in the quarter, primarily from Lexington-related intangible assets. Nine-month operating cash flow increased despite lower net income, while investing cash outflow increased largely because of acquisitions.
- Currency translation reduced comprehensive income: nine-month currency translation adjustments were a $123.8 million loss, contributing to a $126.0 million total other comprehensive loss.
Outlook, commentary, risks and unusual items
The filing provides no quantified revenue, earnings, or AUM guidance. Management said it would focus on investment performance, client service, expense management, talent, and strategic investment in systems and technology. It expected approximately $60 million of additional acquisition-related retention expense for the remainder of fiscal 2022, followed by about $230 million in fiscal 2023, declining over the next two fiscal years.
Management expected to meet reasonably foreseeable operating cash needs through liquid assets, operating cash flow, credit facilities, and access to capital markets. It was considering refinancing or using cash to repay $300 million of senior notes due September 2022. Regular quarterly dividends were expected to continue at comparable levels, subject to earnings and other relevant factors. The company also agreed to acquire BNY Alcentra for approximately $350 million at closing plus up to $350 million in contingent payments, subject to performance thresholds.
Key risks include market declines and volatility, rising rates, recession, fee pressure, investment performance and redemptions, foreign exchange movements, geopolitical disruption including the Russia-Ukraine war, regulation, technology and cybersecurity, and possible impairment of goodwill or intangible assets. The company noted it may voluntarily support sponsored funds, though it provided no such support during the nine months ended June 30, 2022. Management reported no material expected loss from other litigation and no material change in the India credit fund closure matters; approximately $3.5 billion had been distributed to fund unitholders. The company was in compliance with debt covenants, and management reported effective disclosure controls.
Important facts for investors to verify
- Whether market performance, net flows, and acquisitions sustain AUM and fee revenue, particularly given the sharp year-over-year AUM declines in equity and fixed income.
- How much future revenue and earnings the Lexington and OSAM acquisitions contribute relative to deferred consideration, retention costs, and increased intangible amortization; also track the proposed Alcentra transaction and contingent payments.
- Drivers of the gap between GAAP and adjusted earnings, especially investment losses, consolidated investment products, acquisition costs, and other excluded items.
- Available liquidity after operational and regulatory needs, the September 2022 note repayment or refinancing, and the distinction between company debt and nonrecourse consolidated-product debt.
- Fund performance, redemption or liquidity pressures, litigation developments, and market, currency, and valuation risks affecting AUM and investments.