Franklin Resources, Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. Franklin Resources is a global investment manager operating under Franklin Templeton and affiliated brands. Results include Legg Mason, acquired July 31, 2020, so year-over-year comparisons are materially affected by the acquisition.
Key financial metrics
| Metric | Quarter ended March 31, 2021 | Year-over-year change |
|---|---|---|
| Operating revenue | $2.077 billion | +58% |
| Operating income | $456.3 million | +34% |
| Operating margin | 22.0% | 25.9% prior year |
| Net income attributable to Franklin Resources | $381.8 million | +383% |
| Diluted EPS | $0.74 | $0.16 prior year |
| Adjusted operating income (non-GAAP) | $581.1 million | +51% |
| Adjusted operating margin (non-GAAP) | 38.0% | 43.2% prior year |
| Adjusted net income / diluted EPS (non-GAAP) | $403.5 million / $0.79 | +21% / +20% |
For the six months, revenue was $4.072 billion, operating income $865.4 million, net income attributable to Franklin Resources $727.1 million, and diluted EPS $1.42. Operating margin was 21.3%, compared with 26.4% a year earlier. Adjusted operating income was $1.131 billion and adjusted diluted EPS was $1.51.
Quarterly revenue growth was led by investment management fees, up 76% to $1.598 billion; Legg Mason contributed $683.3 million of those fees. Average AUM rose 128% year over year to $1.498 trillion, primarily reflecting the acquisition. The effective investment management fee rate excluding performance fees fell to 42.1 basis points from 55.3, principally due to Legg Mason’s lower-fee asset mix and product/geographic mix changes.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $505.4 million, versus $141.0 million a year earlier. Investing cash flow was negative $773.0 million, largely reflecting purchases of investments by consolidated CLOs and net deconsolidation of investment products. Financing cash flow was positive $659.9 million, including debt issuance.
- At March 31, 2021, cash and cash equivalents were $3.740 billion and corporate debt carrying value was $3.487 billion, excluding debt of consolidated investment products. Reported liquid assets, including receivables and certain investments, were $6.187 billion; $3.899 billion was used for operational or regulatory requirements, including $315.6 million restricted by regulation.
- Debt increased from $3.017 billion at September 30, 2020. The company issued $750 million of 1.6% senior notes due 2030 and redeemed Legg Mason’s $250 million 6.375% junior notes. Debt covenants were met. The filing says the company expected to call Legg Mason’s remaining 5.45% junior notes in September 2021, subject to Board approval.
- Dividends declared were $0.28 per share per quarter. Management expected comparable regular quarterly dividends, subject to earnings and other relevant factors. The company repurchased 3.8 million shares for $91.4 million over six months.
Material changes and management commentary
- AUM at quarter-end was $1.499 trillion, up 6% from September 30, 2020 and 158% from March 31, 2020. The year-over-year increase included $800.9 billion from acquisitions. Six-month AUM growth was supported by $97.7 billion of market appreciation and other changes, partly offset by $17.7 billion of total net outflows.
- Quarterly long-term net outflows were $4.2 billion; six-month long-term net outflows were $8.7 billion. Six-month cash-management net outflows were $9.0 billion. Quarterly long-term flows included a $5.9 billion institutional fixed-income redemption.
- Operating expenses increased 67% in the quarter and 61% over six months, including higher compensation, acquisition-related retention costs, and amortization of Legg Mason acquisition intangibles. GAAP operating margin declined despite revenue growth. Management expects about $70 million of additional acquisition-related retention expense in the remainder of fiscal 2021 and approximately $130 million in fiscal 2022, declining in subsequent years.
- Management described equity markets as strong in the quarter and global bond markets as negative. It emphasized investment performance, service, expense management, talent retention, and strategic investment in systems and technology. It provided no formal earnings or AUM guidance.
Risks, contingencies and unusual items
- India fund wind-down matters: Litigation and regulatory proceedings continue regarding the 2020 closure of six Indian fixed-income funds. India’s Supreme Court confirmed the unitholder vote results and appointed a third-party liquidator; approximately $1.6 billion had been distributed by April 12, 2021. SEBI show-cause proceedings and other government inquiries remain pending. Franklin says it cannot predict the outcome or reasonably estimate a possible loss.
- Market and business risks: Results are sensitive to AUM levels and mix, investment performance, market volatility, fee pressure, redemptions, foreign exchange movements, and integration of Legg Mason. COVID-19-related economic, operational, liquidity, and cybersecurity uncertainty remains a disclosed risk.
- Other exposures: The company identifies regulatory, litigation, operational, cyber, and third-party risks. It states no material loss was considered probable or reasonably possible for indemnifications and guarantees at quarter-end; ordinary-course litigation was not expected by management to materially affect results.
- Quarterly earnings benefited from a sharp improvement in investment and other income versus prior-year market losses, including equity-method investee gains and investment gains. Consequently, GAAP earnings growth was stronger than adjusted earnings growth. The filing also notes the income-statement presentation for consolidated investment products was reclassified, with no effect on previously reported net income or financial position.
Important facts for investors to verify
- How much reported growth and AUM expansion reflects Legg Mason versus organic flows, and whether expected integration benefits are being realized.
- Whether long-term outflows persist, particularly in fixed income and institutional mandates, and how AUM mix and fee-rate compression affect recurring revenue.
- The trajectory of acquisition-related retention, integration, and intangible-amortization costs, and the reconciliation between GAAP and non-GAAP performance.
- Developments, potential sanctions, and any financial exposure from the India litigation and regulatory proceedings, for which the filing provides no estimable loss range.
- Debt repayment and refinancing plans, the expected junior-note redemption subject to Board approval, and liquidity available after operational and regulatory needs.