Franklin Resources, Inc. (Franklin Templeton) — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. The company is a global investment manager with one operating segment. Fiscal 2020 included only two months of Legg Mason results following its July 31, 2020 acquisition, so year-over-year comparisons are substantially affected by that transaction.
Financial and operating performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Operating revenue | $8.426 billion | $5.567 billion | +51% |
| Operating income | $1.875 billion | $1.049 billion | +79% |
| Operating margin | 22.3% | 18.8% | +3.5 percentage points |
| Net income attributable to Franklin Resources | $1.831 billion | $798.9 million | +129% |
| Diluted EPS | $3.57 | $1.59 | +125% |
| Adjusted operating income (non-GAAP) | $2.379 billion | $1.491 billion | +60% |
| Adjusted operating margin (non-GAAP) | 37.7% | 38.5% | −0.8 percentage points |
| Adjusted net income (non-GAAP) | $1.915 billion | $1.311 billion | +46% |
| Adjusted diluted EPS (non-GAAP) | $3.74 | $2.61 | +43% |
Investment management fees rose 64% to $6.542 billion, primarily reflecting Legg Mason and higher performance fees. The effective investment management fee rate excluding performance fees fell to 41.8 basis points from 47.3, principally because of Legg Mason’s greater institutional and fixed-income mix. Operating expenses rose 45% to $6.551 billion; compensation and benefits increased 59% and intangible-asset amortization increased to $232 million from $54 million, largely due to the acquisition. The 14.3% effective tax rate (versus 22.7%) benefited mainly from a $126.8 million tax-reserve release following an IRS audit resolution and income attributable to noncontrolling interests.
AUM, cash flow, debt and liquidity
- Ending AUM was $1.530 trillion, up 8% year over year; average AUM was $1.504 trillion, up 81%, reflecting a full year of Legg Mason. Market appreciation, distributions and other added $148.0 billion, and acquisitions added $3.5 billion.
- Net flows were negative $40.3 billion: long-term net outflows of $25.2 billion and cash-management outflows of $15.1 billion. Long-term inflows were $364.7 billion and outflows $389.9 billion. Equity had $22.1 billion of net outflows; fixed income had $11.7 billion of net outflows.
- Operating cash flow was $1.245 billion, compared with $1.083 billion in FY2020. Investing cash outflow was $2.616 billion and financing cash inflow was $2.030 billion, with acquisition-related cash payments much lower than in the prior year.
- Direct company liquid assets—cash, receivables and certain investments—totaled $6.700 billion; direct cash and cash equivalents were $4.358 billion. The company said $4.060 billion of liquid assets was used for operational and regulatory purposes, including $262.6 million restricted by regulation.
- Company debt was $3.399 billion, compared with $3.017 billion. All outstanding company debt was fixed-rate; covenants were met. Separately, consolidated investment products had $3.671 billion of debt, generally without recourse to Franklin beyond its direct investment.
- Dividends declared totaled $1.12 per share, versus $1.08 in FY2020. The company repurchased 7.3 million shares for $208.2 million; 30.9 million shares remained authorized for repurchase at year-end.
Outlook, developments and material risks
- No specific revenue, earnings or AUM guidance was provided. Management said it expects comparable quarterly regular dividends, subject to earnings and other factors, and anticipates acquisition-related retention expense of approximately $130 million in FY2022, declining by about $15 million and $25 million over the following two fiscal years.
- After year-end, Franklin agreed to acquire Lexington Partners for approximately $1.0 billion at closing plus $750 million over three years, expected to be funded from available cash and to close in FY2022’s second quarter. The OSAM acquisition, for approximately $300 million plus potential performance-based payments, was expected to close in FY2022’s first quarter. Both remained subject to customary conditions.
- Key business exposures include market declines and volatility, AUM outflows, poor investment performance, fee pressure and shifts toward lower-fee products, reliance on third-party distribution, acquisition integration, foreign exchange, regulation, cybersecurity and retention of key personnel. COVID-19-related economic, operational and market uncertainty remained ongoing.
- India credit-fund proceedings remain significant. Six funds with approximately $3.4 billion in AUM were placed into winding-up in 2020; approximately $3.2 billion had been distributed by September 2021. India’s SEBI imposed penalties of approximately $2.7 million, ordered disgorgement of approximately $69.1 million plus continuing interest, and restricted new fixed-income fund launches for two years. Appeals and related investigations were pending; the company said it could not reasonably estimate potential loss.
- The company revised prior-period balance-sheet, cash-flow and related disclosures for a consolidation error involving CLOs and a limited partnership. It stated the error did not materially misstate previously issued statements and did not affect net income, EPS, retained earnings or Franklin stockholders’ equity. The auditor issued unqualified opinions on the financial statements and internal controls; deferred-tax-asset realizability was identified as a critical audit matter.
Investor verification points
- Separate underlying organic flow and fee-rate trends from Legg Mason’s acquisition-driven contribution to revenue, average AUM and expenses.
- Track whether long-term net outflows persist, particularly in equity and fixed income, and how flows affect the fee mix and effective management fee rate.
- Assess the cash funding, closing conditions, integration risks and expected returns for OSAM and Lexington, including Lexington’s deferred payments.
- Monitor the India proceedings, appeals, escrow deposits and potential disgorgement, penalties and interest; the ultimate exposure is not estimable from the filing.
- Review cash available after regulatory and operating needs, debt service, dividends, repurchases and acquisition commitments; distinguish Franklin debt from nonrecourse consolidated investment-product debt.
- Consider the tax-reserve release’s effect on FY2021 reported earnings and the company’s ongoing tax uncertainties and deferred-tax-asset valuation allowance.