Franklin Resources, Inc. (Franklin Templeton) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The filing is for Franklin Resources, Inc., the parent company of Franklin Templeton.
Business context and results
The company is a global asset manager whose revenue is largely driven by assets under management (AUM), asset mix, investment performance, and fee rates. During the quarter, management cited market declines amid Russia’s invasion of Ukraine, inflation concerns, and expectations of higher interest rates.
| Metric | Three months ended Mar. 31, 2022 | Year-over-year | Six months ended Mar. 31, 2022 | Year-over-year |
|---|---|---|---|---|
| Operating revenue | $2,081.0 | Flat | $4,305.0 | +6% |
| Operating income | $463.0 | +1% | $1,020.7 | +18% |
| GAAP operating margin | 22.2% | 22.0% prior year | 23.7% | 21.3% prior year |
| Net income attributable to Franklin Resources | $349.6 | −8% | $802.8 | +10% |
| Diluted EPS | $0.68 | −8% | $1.57 | +11% |
| Adjusted diluted EPS (non-GAAP) | $0.96 | +22% | $2.04 | +35% |
Quarterly investment management fees rose 3%, helped by higher performance fees, while sales and distribution fees fell 10%. For the six-month period, investment management fees increased 9%; sales and distribution fees declined 5%. Performance-based investment management fees were $105.1 million for the quarter and $245.0 million for six months, compared with $45.3 million and $87.1 million, respectively, a year earlier. Adjusted operating margin was 35.7% for the quarter versus 38.0% and 37.8% for six months versus 37.6%; adjusted measures are non-GAAP and exclude specified items.
AUM, cash flow, debt and liquidity
- AUM was $1,477.5 billion at March 31, 2022, down 1% from a year earlier and 3% from September 30, 2021. Quarter-end AUM fell $100.6 billion during the quarter, mainly from $81.8 billion of market depreciation, distributions and other changes, alongside $18.8 billion of net outflows. Six-month long-term net flows were positive $12.4 billion; total net flows were positive $11.1 billion.
- Six-month operating cash flow was $270.5 million, down from $546.3 million. Investing cash outflow was $1,151.3 million; financing cash inflow was $1,275.9 million. The company attributed the operating cash-flow decline mainly to compensation payments and decreases in accrued liabilities.
- At March 31, company liquid assets, excluding third-party assets of consolidated investment products, were $6,353.4 million, including $4,303.7 million of cash and cash equivalents. Company debt carrying value was $3,388.0 million. A $500 million, 364-day revolving credit facility was undrawn; the company reported compliance with debt covenants.
- Consolidated investment products had $5,100.1 million of debt, primarily CLO debt. The filing says these debt holders have no recourse to the company’s assets beyond its direct investment; this debt should be distinguished from company debt.
- The company declared $0.58 per share in dividends during the six months and paid $290.5 million in common dividends. It repurchased $104.3 million of shares during the period.
Material changes, outlook and risks
- Market weakness weighed on AUM: the S&P 500 and MSCI World fell 4.6% and 5.0% in the quarter, while the Bloomberg Global Aggregate Index fell 6.2%. Fixed income and equity were the principal sources of market depreciation in the company’s AUM.
- On April 1, 2022, the company completed its acquisition of Lexington Partners for $1.0 billion cash, with a further $750 million payable over three years. It also disclosed granting a 25% ownership stake and performance-based retention awards. The acquisition occurred after quarter-end. OSAM was acquired on December 31, 2021 for approximately $300 million, excluding contingent future payments.
- Management said it expects approximately $130 million in additional acquisition-related retention expense during the remainder of fiscal 2022, followed by approximately $240 million in fiscal 2023, declining over the next two fiscal years. It expects comparable regular quarterly dividends, subject to earnings and other relevant factors. No formal earnings or AUM guidance is provided.
- Key risks include market volatility and declining AUM, fee pressure, competition, regulatory and technology changes, Russia-related geopolitical disruption, inflation and interest rates, and continuing uncertainty related to COVID-19. Management noted that actual results and estimates may be affected by these conditions.
- The company reported no financial or other support to sponsored funds in the six months. It may nevertheless voluntarily support funds in the future. The India credit fund closure matters had no significant update; approximately $3.5 billion had been distributed to fund unitholders by March 31. Management said ordinary-course litigation was not expected to materially affect the company and that adequate accruals were recorded for probable estimable losses.
- A prior-period accounting error involving CLO consolidation was revised in comparative cash-flow disclosures. The company said it did not materially misstate prior financial statements and had no impact on net income attributable to the company, EPS, retained earnings, or total parent-company equity.
Important facts for investors to verify
- How AUM and flows evolve after the quarter’s market losses, especially fixed income and equity outflows, and whether performance fees remain elevated.
- The full cash and financing impact of the Lexington acquisition, including the deferred payments, minority ownership grant, and retention awards.
- Whether adjusted earnings and margins remain comparable to GAAP results, given the company’s non-GAAP exclusions and acquisition-related costs.
- The distinction between company debt and consolidated investment product debt, and the availability of liquid assets after operating and regulatory needs.
- Any developments in geopolitical, market, regulatory, litigation, or sponsored-fund liquidity risks, including the India fund closures.