Franklin Resources, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022. The filing is for Franklin Resources, Inc. (ticker BEN), the parent of Franklin Templeton, rather than an entity named Franklin Templeton Inc. It operates one segment: investment management and related services.
Financial and operating results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Operating revenue | $8.275 billion | $8.426 billion | Down 2% |
| Operating income / margin | $1.774 billion / 21.4% | $1.875 billion / 22.3% | Income down 5% |
| Net income attributable to Franklin Resources | $1.292 billion | $1.831 billion | Down 29% |
| Diluted EPS | $2.53 | $3.57 | Down 29% |
| Adjusted operating income / margin | $2.324 billion / 35.9% | $2.379 billion / 37.7% | Income down 2% |
| Adjusted net income / diluted EPS | $1.856 billion / $3.63 | $1.915 billion / $3.74 | Income down 3% |
| Operating cash flow | $1.957 billion | $1.245 billion | Up $711 million |
Adjusted measures are non-GAAP and exclude specified acquisition-related costs, amortization, consolidated investment product activity and other items; they are not substitutes for GAAP results.
Investment management fees were $6.617 billion, up 1%, including $498 million of performance fees versus $259 million the prior year. Excluding performance fees, the effective management fee rate fell to 41.6 basis points from 41.8, mainly due to a shift toward lower-fee products. Sales and distribution fees declined 13% to $1.415 billion, while shareholder servicing fees declined 9% to $193 million.
Ending assets under management (AUM) were $1.297 trillion, down 15% from $1.530 trillion. Average AUM fell 2% to $1.469 trillion. AUM’s $232.7 billion decrease reflected $269.0 billion in negative market change, distributions and other items, and $28.6 billion of net outflows, partly offset by $64.9 billion from acquisitions. Fixed-income and equity ending AUM each fell 25%; alternative AUM rose 55%, substantially reflecting acquisitions.
Cash, debt and liquidity
- Company liquid assets, as defined in the filing and excluding third-party assets of consolidated investment products, totaled $6.048 billion: $4.087 billion cash and cash equivalents, $1.131 billion receivables and $830 million investments.
- Company debt was $3.376 billion, compared with $3.399 billion a year earlier. The company repaid $300 million of notes due in September 2022 and established a $300 million term loan. A $500 million revolving facility had no amounts outstanding at filing, and the company reported compliance with debt covenants.
- Operating cash flow was $1.957 billion; investing cash outflow was $3.329 billion, including acquisition spending; financing cash inflow was $1.585 billion. The filing says management believes available liquidity, operating cash flows and borrowing capacity can meet present and reasonably foreseeable cash needs.
- FY2022 dividends declared were $1.16 per share. The company repurchased 6.5 million shares for $180.8 million; 24.4 million shares remained available under its authorization at year-end.
Changes, outlook and risks
- FY2022 markets were materially weaker: the S&P 500 fell 15.5%, MSCI World fell 19.3% and the global aggregate bond index fell 20.4% during the fiscal year. Management attributed pressure to inflation, rising interest rates, tighter monetary policy, the war in Ukraine and recession concerns.
- Acquisitions included Lexington Partners (April 2022) and O’Shaughnessy Asset Management (December 2021). After year-end, on November 1, 2022, the company acquired Alcentra for approximately $587 million at closing, including investments, plus up to $350 million in contingent consideration.
- Management provided no specific financial guidance in the supplied filing text. It emphasized investment performance, client service, expense management, talent retention and strategic investment in systems and technology. It expected approximately $230 million of acquisition-related retention expense in FY2023, declining in subsequent years.
- Key risks include market declines and AUM outflows, fee pressure and shifts to lower-fee products, investment performance, reliance on third-party distribution and service providers, cybersecurity and operational disruptions, regulatory and tax uncertainty, foreign-exchange exposure, and retaining key investment personnel.
- India fund-winding-up litigation and regulatory proceedings remain unresolved. SEBI orders included penalties and fee disgorgement with continuing interest, and a two-year restriction on launching new fixed-income funds in India; appeals were pending. The company stated it could not predict the outcome or reasonably estimate a possible loss range.
- Other notable items: a New York office lease signed in September 2022 carries an expected $766.7 million commitment over 16 years; a voluntary employee buyout announced after year-end was expected to increase FY2023 compensation expense, with its impact not yet known.
Important facts for investors to verify
- Whether market performance, net flows and product mix continue to pressure AUM, fee rates and revenue.
- How the Lexington, OSAM and Alcentra acquisitions affect earnings, integration costs, retention expense and leverage.
- Developments and potential financial exposure in the India proceedings, including the status of appeals and any payments or accruals.
- Cash available for corporate use versus regulatory, operational and investment commitments, and the terms and capacity of borrowing facilities.
- FY2023 acquisition-related retention costs, the employee buyout impact, and the economics of the long-term New York lease.
- The tax asset judgments highlighted as a critical audit matter: deferred tax assets were $1.015 billion before a $258 million valuation allowance.