QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-09318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware
13-2670991
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One Franklin Parkway, San Mateo, CA94403
(Address of principal executive offices) (Zip code)
(650) 312-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
BEN
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Number of shares of the registrant’s common stock outstanding at July 21, 2022: 498,357,111.
Investments (including $660.8 and $588.3 at fair value at June 30, 2022 and September 30, 2021)
1,658.5
1,510.3
Assets of consolidated investment products
Cash and cash equivalents
672.4
289.4
Investments, at fair value
7,475.3
5,820.1
Property and equipment, net
759.1
770.0
Goodwill
5,807.1
4,457.7
Intangible assets, net
5,177.4
4,710.2
Operating lease right-of-use assets
486.8
448.4
Other
338.3
376.3
Total Assets
$
27,596.0
$
24,168.4
Liabilities
Compensation and benefits
$
1,234.3
$
1,179.3
Accounts payable and accrued expenses
541.7
479.3
Commissions
209.8
259.8
Income taxes
521.2
693.6
Debt
3,382.2
3,399.4
Liabilities of consolidated investment products
Accounts payable and accrued expenses
451.4
558.0
Debt
5,496.5
3,671.0
Deferred tax liabilities
290.9
311.7
Operating lease liabilities
555.3
518.4
Other
1,133.9
354.3
Total liabilities
13,817.2
11,424.8
Commitments and Contingencies (Note 11)
Redeemable Noncontrolling Interests
1,493.7
933.0
Stockholders’ Equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued
—
—
Common stock, $0.10 par value, 1,000,000,000 shares authorized; 498,356,132 and 501,807,677 shares issued and outstanding at June 30, 2022 and September 30, 2021
49.8
50.2
Retained earnings
11,997.5
11,550.8
Accumulated other comprehensive loss
(503.6)
(377.6)
Total Franklin Resources, Inc. stockholders’ equity
11,543.7
11,223.4
Nonredeemable noncontrolling interests
741.4
587.2
Total stockholders’ equity
12,285.1
11,810.6
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
The unaudited interim financial statements of Franklin Resources, Inc. (“Franklin”) and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission. Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. Management also believes that the accounting estimates are appropriate, and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates, actual amounts may differ from these estimates. These financial statements should be read together with the Company’s audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (“fiscal year 2021”). Certain comparative amounts for the prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended June 30, 2022.
Note 2 –Acquisitions
Lexington Partners L.P.
On April 1, 2022, the Company acquired all of the outstanding ownership interests in Lexington Partners L.P. (“Lexington”), a leading global manager of secondary private equity and co-investment funds, for cash consideration of $984.7 million paid at the time of close and deferred consideration of $750.0 million that has an acquisition-date fair value of $706.4 million. The consideration paid at close was funded from existing cash. In connection with the acquisition, the Company granted a 25% profits interest in Lexington and performance-based cash retention awards that both vest over approximately five years. The acquisition bolsters the Company’s alternative asset capabilities, complementing its existing strengths in real estate, private credit, and hedge fund strategies.
The preliminary allocation of estimated fair values of the assets acquired and liabilities and noncontrolling interests assumed was as follows:
The goodwill is primarily attributable to expected growth opportunities from the combined operations and is deductible for tax purposes. The definite-lived intangible assets relate to acquired investment management contracts and trade names, which are amortized over their estimated useful lives ranging from 6.0 years to 20.0 years. Amortization expense related to the definite-lived intangible assets was $21.3 million for the period ended June 30, 2022. These assets had a weighted-average remaining useful life of 7.3 years at June 30, 2022, with estimated remaining amortization expense as follows:
(in millions)
for the fiscal years ending September 30,
Amount
2022 (remainder of year)
$
21.3
2023
85.3
2024
85.3
2025
85.3
2026
85.3
Thereafter
168.2
Total
$
530.7
Costs incurred in connection with the acquisition were $16.3 million for the nine months ended June 30, 2022.
Lexington contributed $90.7 million of revenue and did not have a material impact to net income attributable to Franklin Resources, Inc. for the period ended June 30, 2022. Consequently, the Company has not presented pro forma combined results of operations for this acquisition.
O’Shaughnessy Asset Management, LLC
On December 31, 2021, the Company acquired all of the outstanding ownership interests in O’Shaughnessy Asset Management, LLC (“OSAM”), a leading quantitative asset management firm, for cash consideration paid of approximately $300.0 million, excluding future payments to be made subject to the attainment of certain performance measures. The acquisition resulted in $262.3 million of goodwill attributable to expected growth opportunities and synergies from the combined operations and is deductible for tax purposes.
Note 3 –Earnings per Share
The components of basic and diluted earnings per share were as follows:
(in millions, except per share data)
Three Months Ended June 30,
Nine Months Ended June 30,
2022
2021
2022
2021
Net income attributable to Franklin Resources, Inc.
$
256.4
$
438.4
$
1,059.2
$
1,165.5
Less: allocation of earnings to participating nonvested stock and stock unit awards
11.2
19.4
45.6
50.6
Net Income Available to Common Stockholders
$
245.2
$
419.0
$
1,013.6
$
1,114.9
Weighted-average shares outstanding – basic
487.5
489.2
489.1
490.3
Dilutive effect of nonparticipating nonvested stock unit awards
0.4
0.7
0.6
0.6
Weighted-Average Shares Outstanding – Diluted
487.9
489.9
489.7
490.9
Earnings per Share
Basic
$
0.50
$
0.86
$
2.07
$
2.27
Diluted
0.50
0.86
2.07
2.27
Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were insignificant for the three and nine months ended June 30, 2022 and 2021.
Operating revenues by geographic area were as follows:
(in millions)
United States
Luxembourg
Asia-Pacific
Americas Excluding United States
Europe, Middle East and Africa, Excluding Luxembourg
Total
for the three months ended June 30, 2022
Investment management fees
$
1,234.7
$
211.6
$
71.2
$
59.4
$
59.2
$
1,636.1
Sales and distribution fees
238.1
80.2
5.8
11.5
—
335.6
Shareholder servicing fees
37.5
8.5
0.4
0.1
0.4
46.9
Other
12.0
0.3
0.2
—
0.2
12.7
Total
$
1,522.3
$
300.6
$
77.6
$
71.0
$
59.8
$
2,031.3
(in millions)
United States
Luxembourg
Asia-Pacific
Americas Excluding United States
Europe, Middle East and Africa, Excluding Luxembourg
Total
for the nine months ended June 30, 2022
Investment management fees
$
3,720.8
$
707.2
$
242.5
$
194.3
$
181.0
$
5,045.8
Sales and distribution fees
778.1
268.3
20.0
37.6
—
1,104.0
Shareholder servicing fees
116.4
27.9
1.1
0.2
1.2
146.8
Other
38.2
0.8
0.5
—
0.2
39.7
Total
$
4,653.5
$
1,004.2
$
264.1
$
232.1
$
182.4
$
6,336.3
(in millions)
United States
Luxembourg
Asia-Pacific
Americas Excluding United States
Europe, Middle East and Africa, Excluding Luxembourg
Total
for the three months ended June 30, 2021
Investment management fees
$
1,213.0
$
269.9
$
85.7
$
73.1
$
55.6
$
1,697.3
Sales and distribution fees
293.7
100.5
8.4
14.0
0.3
416.9
Shareholder servicing fees
38.3
10.1
2.0
0.1
—
50.5
Other
7.8
0.3
0.1
—
—
8.2
Total
$
1,552.8
$
380.8
$
96.2
$
87.2
$
55.9
$
2,172.9
(in millions)
United States
Luxembourg
Asia-Pacific
Americas Excluding United States
Europe, Middle East and Africa, Excluding Luxembourg
Total
for the nine months ended June 30, 2021
Investment management fees
$
3,416.1
$
803.2
$
248.0
$
212.7
$
156.1
$
4,836.1
Sales and distribution fees
852.4
295.2
37.4
38.9
3.5
1,227.4
Shareholder servicing fees
119.9
26.0
5.9
0.2
3.6
155.6
Other
17.9
0.8
1.6
—
5.1
25.4
Total
$
4,406.3
$
1,125.2
$
292.9
$
251.8
$
168.3
$
6,244.5
Operating revenues are attributed to geographic areas based on the locations of the subsidiaries that provide the services, which may differ from the regions in which the related investment products are sold.
Revenues earned from sponsored funds were 83% and 81% of the Company’s total operating revenues for the three and nine months ended June 30, 2022 and 78% and 80% for the three and nine months ended June 30, 2021.
The disclosures below include details of the Company’s investments, excluding those of consolidated investment products (“CIPs”). See Note 8–Consolidated Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions)
June 30, 2022
September 30, 2021
Investments, at fair value
Sponsored funds and separate accounts
$
463.5
$
368.3
Investments related to long-term incentive plans
141.0
160.0
Other equity and debt investments
56.3
60.0
Total investments, at fair value
660.8
588.3
Investments in equity method investees
744.5
814.3
Other investments
253.2
107.7
Total
$
1,658.5
$
1,510.3
The Company recognized other-than-temporary impairment of $8.7 million and $29.9 million in earnings during the three and nine months ended June 30, 2022.
Note 6 –Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of CIPs. See Note 8 – Consolidated Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liabilities measured at fair value on a recurring basis were as follows:
Investments for which fair value was estimated using reported NAV as a practical expedient primarily consist of nonredeemable private debt, equity and infrastructure funds, and redeemable global equity and private real estate funds. These investments were as follows:
(in millions)
June 30, 2022
September 30, 2021
Nonredeemable investments1
Investments with unknown liquidation periods
$
35.8
$
46.6
Investments with known liquidation periods
33.9
53.9
Redeemable investments2
25.6
26.9
Unfunded commitments
51.4
51.8
_______________
1The investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets. Investments with known liquidation periods have an expected weighted-average life of 3.6 years and 4.0 years at June 30, 2022 and September 30, 2021.
2Investments are redeemable on a monthly and quarterly basis.
Financial instruments that were not measured at fair value were as follows:
(in millions)
Fair Value Level
June 30, 2022
September 30, 2021
Carrying Value
Estimated Fair Value
Carrying Value
Estimated Fair Value
Financial Assets
Cash and cash equivalents
1
$
3,806.3
$
3,806.3
$
4,357.8
$
4,357.8
Other investments
Time deposits
2
10.8
10.8
13.2
13.2
Equity securities
3
242.4
242.4
94.5
99.1
Financial Liability
Debt
2
$
3,382.2
$
2,878.6
$
3,399.4
$
3,434.1
Note 7 –Debt
On January 10, 2022, the Company entered into a bi-lateral credit agreement with Bank of America, N.A. to establish a 364 day revolving credit facility with an aggregate commitment of $500.0 million. As of June 30, 2022, there were no amounts outstanding.
There were no other material changes to the Company’s debt during the nine months ended June 30, 2022.
Note 8 –Consolidated Investment Products
CIPs consist of mutual and other investment funds, limited partnerships and similar structures and CLOs, all of which are sponsored by the Company, and include both voting interest entities and variable interest entities (“VIEs”). The Company had 58 CIPs, including 14 CLOs, as of June 30, 2022 and 60 CIPs, including 10 CLOs, as of September 30, 2021.
The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:
(in millions)
June 30, 2022
September 30, 2021
Assets
Cash and cash equivalents
$
672.4
$
289.4
Receivables
178.8
127.8
Investments, at fair value
7,475.3
5,820.1
Total Assets
$
8,326.5
$
6,237.3
Liabilities
Accounts payable and accrued expenses
$
451.4
$
558.0
Debt
5,496.5
3,671.0
Other liabilities
22.5
13.8
Total liabilities
5,970.4
4,242.8
Redeemable Noncontrolling Interests
994.5
622.5
Stockholders’ Equity
Franklin Resources, Inc.’s interests
957.7
1,000.7
Nonredeemable noncontrolling interests
403.9
371.3
Total stockholders’ equity
1,361.6
1,372.0
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
$
8,326.5
$
6,237.3
The CIPs did not have a significant impact on net income attributable to the Company during the three and nine months ended June 30, 2022 and 2021.
The Company has no right to the CIPs’ assets, other than its direct equity investments in them and investment management and other fees earned from them. The debt holders of the CIPs have no recourse to the Company’s assets beyond the level of its direct investment, therefore the Company bears no other risks associated with the CIPs’ liabilities.
Fair Value Measurements
Assets of CIPs measured at fair value on a recurring basis were as follows:
(in millions)
Level 1
Level 2
Level 3
NAV as a Practical Expedient
Total
as of June 30, 2022
Assets
Cash and cash equivalents of CLOs
$
299.5
$
—
$
—
$
—
$
299.5
Receivables of CLOs
—
105.0
—
—
105.0
Investments
Equity and debt securities
79.5
875.2
557.0
217.7
1,729.4
Loans
—
5,467.8
37.6
—
5,505.4
Real estate
—
—
240.5
—
240.5
Total Assets Measured at Fair Value
$
379.0
$
6,448.0
$
835.1
$
217.7
$
7,879.8
(in millions)
Level 1
Level 2
Level 3
NAV as a Practical Expedient
Total
as of September 30, 2021
Assets
Cash and cash equivalents of CLOs
$
145.4
$
—
$
—
$
—
$
145.4
Receivables of CLOs
—
84.0
—
—
84.0
Investments
Equity and debt securities
310.8
647.3
453.3
343.5
1,754.9
Loans
—
3,955.3
20.5
—
3,975.8
Real estate
—
—
89.4
—
89.4
Total Assets Measured at Fair Value
$
456.2
$
4,686.6
$
563.2
$
343.5
$
6,049.5
Investments for which fair value was estimated using reported NAV as a practical expedient consist of a redeemable global hedge fund, nonredeemable private equity funds and a redeemable U.S. equity fund. These investments were as follows:
(in millions)
June 30, 2022
September 30, 2021
Nonredeemable investments1
Investments with known liquidation periods
$
38.2
$
141.4
Investments with unknown liquidation periods
12.2
—
Redeemable investments2
167.3
202.1
Unfunded commitments3
0.2
0.5
_______________
1The investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets. Investments with known liquidation periods have an expected weighted-average life of 0.5 year at June 30, 2022 and 1.3 years at September 30, 2021.
2Investments are redeemable on a monthly basis and liquidation periods are unknown.
3Of the total unfunded commitments, the Company was contractually obligated to fund $0.1 million and $0.2 million based on its ownership percentage in the CIPs, at June 30, 2022 and September 30, 2021.
Realized and unrealized gains included in investment and other income (losses) of consolidated investment products, net
26.3
5.1
0.2
31.6
Purchases
34.1
116.5
—
150.6
Sales and settlements
(59.4)
—
(3.7)
(63.1)
Deconsolidations
(36.2)
(448.8)
—
(485.0)
Transfers into Level 3
2.1
—
—
2.1
Transfers out of Level 3
(1.0)
—
—
(1.0)
Foreign exchange revaluation
0.7
10.5
—
11.2
Balance at June 30, 2021
$
288.9
$
22.5
$
21.4
$
332.8
Change in unrealized gains included in net income relating to assets held at June 30, 2021
$
25.9
$
2.2
$
0.3
$
28.4
Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:
(in millions)
as of June 30, 2022
Fair Value
Valuation Technique
Significant Unobservable Inputs
Range (Weighted Average1)
Equity and debt securities
$
492.7
Market pricing
Private sale pricing
$0.39–$789.78 ($45.27) per share
64.3
Market comparable companies
Enterprise value/ EBITDA multiple
14.7
Discount for lack of marketability
14.6%–25.0% (19.4%)
Price-to-book value ratio
1.2
Real estate
240.5
Discounted cash flow
Discount rate
5.5%–6.3% (6.0%)
Exit capitalization rate
4.5%–5.5% (4.9%)
(in millions)
as of September 30, 2021
Fair Value
Valuation Technique
Significant Unobservable Inputs
Range (Weighted Average1)
Equity and debt securities
$
301.1
Market pricing
Private sale pricing
$0.39-$100.00 ($19.34) per share
102.3
Market comparable companies
Enterprise value/ EBITDA multiple
6.0–20.6 (13.7)
Discount for lack of marketability
6.0%–25.5% (17.6%)
Enterprise value/ Revenue multiple
0.6–7.2 (5.1)
Price-to-book value ratio
0.7–1.8 (1.4)
Control premium
20%
Price-to-earnings ratio
28.8
49.9
Discounted cash flow
Discount rate
3.3%–6.3% (4.3%)
Real estate
89.4
Discounted cash flow
Discount rate
5.8%–6.0% (5.9%)
Exit capitalization rate
5.0%–5.3% (5.1%)
__________________
1Based on the relative fair value of the instruments.
If the relevant significant inputs used in the market-based valuations, other than discount for lack of marketability, were independently higher (lower) as of June 30, 2022, the resulting fair value of the assets would be higher (lower). If the relevant significant inputs used in the discounted cash flow valuations, as well as the discount for lack of marketability used in the market-based valuations, were independently higher (lower) as of June 30, 2022, the resulting fair value of the assets would be lower (higher).
Financial instruments of CIPs that were not measured at fair value were as follows:
(in millions)
Fair Value Level
June 30, 2022
September 30, 2021
Carrying Value
Estimated Fair Value
Carrying Value
Estimated Fair Value
Financial Asset
Cash and cash equivalents
1
$
372.9
$
372.9
$
144.0
$
144.0
Receivables of CLOs
2
16.7
16.7
—
—
Financial Liabilities
Debt of CLOs1
2 or 3
$
5,396.8
$
5,437.8
$
3,634.1
$
3,610.6
Other debt
3
99.7
92.9
36.9
36.6
__________________
1Substantially all was Level 2.
Debt
Debt of CIPs consisted of the following:
June 30, 2022
September 30, 2021
(in millions)
Amount
Weighted- Average Effective Interest Rate
Amount
Weighted- Average Effective Interest Rate
Debt of CLOs
$
5,396.8
2.03%
$
3,634.1
2.11%
Other debt
99.7
3.73%
36.9
1.95%
Total
$
5,496.5
$
3,671.0
The debt of CLOs had fixed and floating interest rates ranging from 1.00% to 8.27% at June 30, 2022, and from 1.00% to 8.22% at September 30, 2021. The other debt had fixed and floating interest rates ranging from 3.31% to 6.00% at June 30, 2022, and from 1.63% to 2.42% at September 30, 2021. The floating rates were primarily based on LIBOR.
The contractual maturities for the debt of CIPs at June 30, 2022 were as follows:
(in millions)
for the fiscal years ending September 30,
Amount
2022 (remainder of year)
$
99.4
2023
21.9
2024
84.2
2025
—
2026
—
Thereafter
5,291.0
Total
$
5,496.5
Collateralized Loan Obligations
The unpaid principal balance and fair value of the investments of CLOs were as follows:
(in millions)
June 30, 2022
September 30, 2021
Unpaid principal balance
$
5,549.5
$
3,951.1
Difference between unpaid principal balance and fair value
(46.9)
20.9
Fair Value
$
5,502.6
$
3,972.0
There were no investments 90 days or more past due at June 30, 2022 and September 30, 2021.
The Company recognized $4.9 million and $17.8 million of net gains during the three and nine months ended June 30, 2022 and $1.1 million and $8.5 million of net gains during the three and nine months ended June 30, 2021, related to its own economic interests in the CLOs. The aggregate principal amount due of the debt of CLOs was $5,463.1 million and $3,629.9 million at June 30, 2022 and September 30, 2021.
Note 9 –Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests were as follows:
VIEs for which the Company is not the primary beneficiary consist of sponsored funds and other investment products in which the Company has an equity ownership interest. The Company’s maximum exposure to loss from these VIEs consists of equity investments, investment management and other fee receivables as follows:
(in millions)
June 30, 2022
September 30, 2021
Investments
$
728.7
$
639.2
Receivables
175.9
172.1
Total
$
904.6
$
811.3
While the Company has no legal or contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. As it has done in the past, the Company also may voluntarily elect to provide its sponsored funds with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its sponsored funds assessed as VIEs during the nine months ended June 30, 2022. During the fiscal year ended September 30, 2020, the Company authorized loans to certain sponsored funds in India that experienced increased liquidity risks and redemptions. The loans were fully repaid by March 31, 2021. See Note 16 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for fiscal year 2021 for further information.
India Credit Fund Closure Matters. During the nine months ended June 30, 2022, there were no significant changes from the disclosure in the Form 10‑K for the fiscal year ended September 30, 2021. As of June 30, 2022, the amount reported as distributed to Fund unitholders is approximately $3.5 billion.
Other Litigation Matters. The Company is from time to time involved in other litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business, financial position, results of operations or liquidity. In management’s opinion, an adequate accrual has been made as of June 30, 2022 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.
Indemnifications and Guarantees
In the ordinary course of business or in connection with certain acquisition agreements, the Company enters into contracts that provide for indemnifications by the Company in certain circumstances. In addition, certain Company entities guarantee certain financial and performance-related obligations of various Franklin subsidiaries. The Company is also subject to certain legal requirements and agreements providing for indemnifications of directors, officers and personnel against liabilities and expenses they may incur under certain circumstances in connection with their service in those positions. The terms of these indemnities and guarantees vary pursuant to applicable facts and circumstances, and from agreement to agreement. Future payments for claims against the Company under these indemnities or guarantees could negatively impact the Company’s financial condition. In management’s opinion, no material loss was deemed probable or reasonably possible pursuant to such indemnification agreements and/or guarantees as of June 30, 2022.
Other Commitments and Contingencies
At June 30, 2022, there were no material changes in the other commitments and contingencies as reported in the Company’s Annual Report on Form 10-K for fiscal year 2021.
Note 12 –Stock-Based Compensation
Stock and stock unit award activity was as follows:
(shares in thousands)
Time-Based Shares
Performance- Based Shares
Total Shares
Weighted- Average Grant-Date Fair Value
for the nine months ended June 30, 2022
Nonvested balance at October 1, 2021
14,176
3,658
17,834
$
22.27
Granted
4,713
227
4,940
34.36
Vested
(1,891)
(98)
(1,989)
25.43
Forfeited/canceled
(435)
(188)
(623)
26.20
Nonvested Balance at June 30, 2022
16,563
3,599
20,162
$
24.48
Total unrecognized compensation expense related to nonvested stock and stock unit awards was $286.4 million at June 30, 2022. This expense is expected to be recognized over a remaining weighted-average vesting period of 2.0 years.
Investment and other income, net consisted of the following:
Three Months Ended June 30,
Nine Months Ended June 30,
(in millions)
2022
2021
2022
2021
Dividend and interest income
$
6.3
$
3.4
$
17.5
$
12.4
Gains (losses) on investments, net
(35.6)
17.3
(32.9)
76.2
Income (losses) from investments in equity method investees
(0.1)
39.4
51.6
123.8
Gains (losses) on derivatives, net
17.5
(9.1)
15.2
(25.2)
Rental income
9.6
7.2
27.9
22.7
Foreign currency exchange gains (losses), net
14.5
(7.2)
24.2
(17.2)
Other, net
0.8
1.9
(5.8)
4.5
Investment and other income, net
$
13.0
$
52.9
$
97.7
$
197.2
Net gains (losses) recognized on equity securities measured at fair value and trading debt securities that were held by the Company at June 30, 2022 and 2021 were $(50.3) million and $(79.1) million for the three and nine months ended June 30, 2022, and $(0.2) million and $27.2 million for the three and nine months ended June 30, 2021.
Note 14 –Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component were as follows:
(in millions)
Currency Translation Adjustments
Unrealized Losses on Defined Benefit Plans
Total
for the three months ended June 30, 2022
Balance at April 1, 2022
$
(393.7)
$
(6.9)
$
(400.6)
Other comprehensive loss
Other comprehensive loss before reclassifications, net of tax
(101.5)
(2.4)
(103.9)
Reclassifications to net investment and other income, net of tax
0.9
—
0.9
Total other comprehensive loss
(100.6)
(2.4)
(103.0)
Balance at June 30, 2022
$
(494.3)
$
(9.3)
$
(503.6)
(in millions)
Currency Translation Adjustments
Unrealized Losses on Defined Benefit Plans
Total
for the nine months ended June 30, 2022
Balance at October 1, 2021
$
(370.5)
$
(7.1)
$
(377.6)
Other comprehensive loss
Other comprehensive loss before reclassifications, net of tax
(125.8)
(1.6)
(127.4)
Reclassifications to compensation and benefits expense, net of tax
—
(0.6)
(0.6)
Reclassifications to net investment and other income, net of tax
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q and the documents incorporated by reference herein may include forward-looking statements that reflect our current views with respect to future events, financial performance and market conditions. Such statements are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and generally can be identified by words or phrases written in the future tense and/or preceded by words such as “anticipate,” “believe,” “could,” “depends,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “potential,” “seek,” “should,” “will,” “would,” or other similar words or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements.
Forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that may cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements, including pandemic-related risks, market and volatility risks, investment performance and reputational risks, global operational risks, competition and distribution risks, third-party risks, technology and security risks, human capital risks, cash management risks, and legal and regulatory risks. The forward-looking statements contained in this Form 10-Q or that are incorporated by reference herein are qualified in their entirety by reference to the risks and uncertainties disclosed in this Form 10-Q, including those discussed under the heading “Risk Factors” below, and/or discussed under the headings “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (“fiscal year 2021”).
While forward-looking statements are our best prediction at the time that they are made, you should not rely on them and are cautioned against doing so. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other possible future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They are neither statements of historical fact nor guarantees or assurances of future performance. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them.
If a circumstance occurs after the date of this Form 10-Q that causes any of our forward-looking statements to be inaccurate, whether as a result of new information, future developments or otherwise, we undertake no obligation to announce publicly the change to our expectations, or to make any revision to our forward-looking statements, to reflect any change in assumptions, beliefs or expectations, or any change in events, conditions or circumstances upon which any forward-looking statement is based, unless required by law.
In this section, we discuss and analyze the results of operations and financial condition of Franklin Resources, Inc. (“Franklin”) and its subsidiaries (collectively, the “Company”). The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year 2021 filed with the U.S. Securities and Exchange Commission, and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.
OVERVIEW
Franklin is a holding company with subsidiaries operating under our Franklin Templeton® and/or subsidiary brand names. We are a global investment management organization that derives operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide. We deliver our investment capabilities through a variety of investment products, which include our sponsored funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. In addition to investment management, our services include fund administration, sales and distribution, and shareholder servicing. We may perform services directly or through third parties. We offer our services and products under our various distinct brand names, including, but not limited to, Franklin®, Templeton®, Legg Mason®, Benefit Street Partners®, Brandywine Global Investment Management®, Clarion Partners®, ClearBridge Investments®, Fiduciary Trust International™, Franklin Bissett®, Franklin Mutual Series®, K2®, Lexington Partners®,LibertyShares®, Martin Currie®, O’Shaughnessy® Asset Management, Royce® Investment Partners and Western Asset Management Company®. We offer a broad product mix of fixed income, equity, alternative, multi-asset and cash management asset classes and solutions that meet a wide variety of specific investment goals and needs for individual and institutional investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to investors under the brand names of those other companies or on a co-branded basis.
The level of our revenues depends largely on the level and relative mix of assets under management (“AUM”). As noted in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year 2021, the amount and mix of our AUM are subject to significant fluctuations that can negatively impact our revenues and income. The level of our revenues also depends on the fees charged for our services, which are based on contracts with our funds and customers, fund sales, and the number of shareholder transactions and accounts. These arrangements could change in the future.
During our third fiscal quarter, global equity markets remained challenged amid continued concerns about further interest rate increases, the global economic growth outlook and the risk of a recession. The S&P 500 Index and MSCI World Index each decreased 16.1% for the quarter, and decreased 11.1% and 14.0% for the fiscal year to date. The global bond markets had negative returns, with the Bloomberg Global Aggregate Index decreasing 8.3% during the quarter and 14.5% for the fiscal year to date, as the Federal Reserve and other developed market central banks continued to increase interest rates in an effort to combat inflation.
Our total AUM at June 30, 2022 was $1,379.8 billion, 10% lower than at September 30, 2021 and 11% lower than at June 30, 2021. Monthly average AUM (“average AUM”) for the three and nine months ended June 30, 2022 decreased 6% and increased 1% from the same periods in the prior fiscal year.
On April 1, 2022, we acquired all of the outstanding ownership interests in Lexington Partners L.P. (“Lexington”), a leading global manager of secondary private equity and co-investment funds, for cash consideration of $1.0 billion and additional payments totaling $750.0 million to be paid in cash over the next three years. In connection with the acquisition, we granted a 25% ownership stake in Lexington and performance-based cash retention awards that both vest over approximately five years. On December 31, 2021, we acquired all of the outstanding ownership interest in O’Shaughnessy Asset Management, LLC (“OSAM”), a leading quantitative asset management firm, for cash consideration paid of approximately $300 million, excluding future payments to be made subject to the attainment of certain performance measures.
The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change. We are subject to various laws, rules and regulations globally that impose restrictions, limitations, registration, reporting and disclosure requirements on our business, and add complexity to our global compliance operations.
As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our products and on providing high quality service to our clients. We continuously perform reviews of our business model. While we remain focused on expense management, we will also seek to attract, retain and develop personnel and invest strategically in systems and technology that will provide a secure and stable environment. We will continue to seek to protect and further our brand recognition while developing and maintaining broker-dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed under the heading “Risk Factors” below and in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year 2021.
Net income attributable to Franklin Resources, Inc.
$
256.4
$
438.4
(42
%)
$
1,059.2
$
1,165.5
(9
%)
Diluted earnings per share
0.50
0.86
(42
%)
2.07
2.27
(9
%)
As adjusted (non-GAAP):2
Adjusted operating income
$
566.9
$
601.2
(6
%)
$
1,829.4
$
1,732.2
6
%
Adjusted operating margin
35.3
%
36.5
%
37.0
%
37.2
%
Adjusted net income
$
416.0
$
493.7
(16
%)
$
1,461.2
$
1,270.6
15
%
Adjusted diluted earnings per share
0.82
0.96
(15
%)
2.86
2.48
15
%
_________________
1Defined as operating income divided by operating revenues.
2“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are based on methodologies other than generally accepted accounting principles. See “Supplemental Non-GAAP Financial Measures” for definitions and reconciliations of these measures.
ASSETS UNDER MANAGEMENT
AUM by asset class was as follows:
(in billions)
June 30, 2022
June 30, 2021
Percent Change
Fixed Income
$
536.3
$
658.1
(19
%)
Equity
424.9
536.9
(21
%)
Alternative
224.8
140.8
60
%
Multi-Asset
136.2
153.0
(11
%)
Cash Management
57.6
63.3
(9
%)
Total
$
1,379.8
$
1,552.1
(11
%)
Average AUM and the mix of average AUM by asset class are shown below.
Components of the change in AUM are shown below. Net market change, distributions and other includes appreciation (depreciation), distributions to investors that represent return on investments and return of capital, and foreign exchange revaluation.
(in billions)
Three Months Ended June 30,
Percent Change
Nine Months Ended June 30,
Percent Change
2022
2021
2022
2021
Beginning AUM
$
1,477.5
$
1,498.9
(1
%)
$
1,530.1
$
1,418.9
8
%
Long-term inflows
77.4
83.7
(8
%)
260.5
281.5
(7
%)
Long-term outflows
(97.2)
(90.3)
8
%
(267.9)
(296.8)
(10
%)
Long-term net flows
(19.8)
(6.6)
200
%
(7.4)
(15.3)
(52%)
Cash management net flows
0.4
(2.2)
NM
(0.9)
(11.2)
(92%)
Total net flows
(19.4)
(8.8)
120
%
(8.3)
(26.5)
(69%)
Acquisitions
57.2
—
NM
64.9
—
NM
Net market change, distributions and other
(135.5)
62.0
NM
(206.9)
159.7
NM
Ending AUM
$
1,379.8
$
1,552.1
(11
%)
$
1,379.8
$
1,552.1
(11
%)
Components of the change in AUM by asset class were as follows:
(in billions)
Fixed Income
Equity
Alternative
Multi-Asset
Cash Management
Total
for the three months ended June 30, 2022
AUM at April 1, 2022
$
595.0
$
515.4
$
157.9
$
151.9
$
57.3
$
1,477.5
Long-term inflows
35.2
24.5
5.9
11.8
—
77.4
Long-term outflows
(49.5)
(33.7)
(3.8)
(10.2)
—
(97.2)
Long-term net flows
(14.3)
(9.2)
2.1
1.6
—
(19.8)
Cash management net flows
—
—
—
—
0.4
0.4
Total net flows
(14.3)
(9.2)
2.1
1.6
0.4
(19.4)
Acquisition
—
—
57.2
—
—
57.2
Net market change, distributions and other
(44.4)
(81.3)
7.6
(17.3)
(0.1)
(135.5)
AUM at June 30, 2022
$
536.3
$
424.9
$
224.8
$
136.2
$
57.6
$
1,379.8
AUM decreased $97.7 billion, or 7%, during the three months ended June 30, 2022 due to the negative impact of $135.5 billion of net market change, distributions and other and $19.8 billion of long-term net outflows, partially offset by an acquisition of $57.2 billion and $0.4 billion of cash management net inflows. Net market change, distributions and other primarily consists of $117.3 billion of market depreciation, a $10.3 billion decrease from foreign exchange revaluation and $7.9 billion of long-term distributions. The market depreciation occurred in all long-term asset classes with the exception of the alternative asset class. Foreign exchange revaluation from AUM in products that are not U.S. dollar denominated, which represented 10% of total AUM as of June 30, 2022, was primarily due to a stronger U.S. dollar compared to the Australian dollar, Japanese Yen, Pound sterling and Euro.
AUM decreased $172.3 billion, or 11%, as compared to the prior year period. Long-term inflows decreased 8% to $77.4 billion, driven by lower inflows in fixed income, equity and alternative open-end funds and equity investment trusts,
partially offset by higher inflows in multi-asset open end funds, alternative private closed-end funds and multi-asset and equity sub-advised mutual funds. Long-term outflows increased 8% to $97.2 billion driven by higher redemptions in fixed income open-end funds and institutional separate accounts, multi-asset sub-advised mutual funds, and equity retail separate accounts, partially offset by lower redemptions in equity sub-advised mutual funds, open-end funds and institutional separate accounts.
(in billions)
Fixed Income
Equity
Alternative
Multi-Asset
Cash Management
Total
for the three months ended June 30, 2021
AUM at April 1, 2021
$
642.3
$
511.9
$
131.1
$
148.2
$
65.4
$
1,498.9
Long-term inflows
40.2
29.1
5.8
8.6
—
83.7
Long-term outflows
(38.1)
(40.6)
(2.7)
(8.9)
—
(90.3)
Long-term net flows
2.1
(11.5)
3.1
(0.3)
—
(6.6)
Cash management net flows
—
—
—
—
(2.2)
(2.2)
Total net flows
2.1
(11.5)
3.1
(0.3)
(2.2)
(8.8)
Net market change, distributions and other
13.7
36.5
6.6
5.1
0.1
62.0
AUM at June 30, 2021
$
658.1
$
536.9
$
140.8
$
153.0
$
63.3
$
1,552.1
AUM increased $53.2 billion, or 4%, during the three months ended June 30, 2021 due to $62.0 billion of net market change, distributions and other, partially offset by $6.6 billion of long-term net outflows and $2.2 billion of cash management net outflows. Net market change, distributions and other consists of $66.1 billion of market appreciation and a $1.5 billion increase from foreign exchange revaluation, partially offset by $5.6 billion of long-term distributions. The market appreciation occurred in all long-term asset classes, most significantly in the equity and fixed income asset classes, and reflected positive returns in global equity and fixed income markets. Foreign exchange revaluation was primarily due to a weaker U.S. dollar compared to the Brazilian Real, Canadian dollar and Euro, partially offset by a stronger U.S. dollar compared to the Australian dollar.
Long-term outflows included outflows of $7.0 billion from three institutional products, including two equity redemptions of $3.7 billion and $2.2 billion, and $2.5 billion from six fixed income funds, including $1.2 billion from five India credit funds that were non-management fee earning which are in the process of winding up. Long-term outflows were partially offset by inflows of $3.8 billion in two fixed income funds, including the $1.0 billion launch of a closed-end fund.
(in billions)
Fixed Income
Equity
Alternative
Multi-Asset
Cash Management
Total
for the nine months ended June 30, 2022
AUM at October 1, 2021
$
650.3
$
523.6
$
145.2
$
152.4
$
58.6
$
1,530.1
Long-term inflows
112.2
100.4
16.6
31.3
—
260.5
Long-term outflows
(126.3)
(103.0)
(11.5)
(27.1)
—
(267.9)
Long-term net flows
(14.1)
(2.6)
5.1
4.2
—
(7.4)
Cash management net flows
—
—
—
—
(0.9)
(0.9)
Total net flows
(14.1)
(2.6)
5.1
4.2
(0.9)
(8.3)
Acquisitions
—
4.6
58.0
2.3
—
64.9
Net market change, distributions and other
(99.9)
(100.7)
16.5
(22.7)
(0.1)
(206.9)
AUM at June 30, 2022
$
536.3
$
424.9
$
224.8
$
136.2
$
57.6
$
1,379.8
AUM decreased $150.3 billion, or 10%, during the nine months ended June 30, 2022 due to the negative impact of $206.9 billion of net market change, distributions and other, $7.4 billion of long-term net outflows and $0.9 billion of cash management net outflows, partially offset by $64.9 billion from acquisitions. Net market change, distributions and other primarily consists of $152.5 billion of market depreciation, $42.6 billion of long-term distributions and $11.8 billion decrease from foreign exchange revaluation. The market depreciation occurred in all asset classes with the exception of the alternative asset class. Foreign exchange revaluation from AUM in products that are not U.S. dollar denominated was primarily due to a stronger U.S. dollar compared to the Japanese Yen, Euro, Pound Sterling and Australian dollar.
Long-term inflows decreased 7% to $260.5 billion, as compared to the prior-year period, driven by lower inflows in fixed income open-end funds and institutional separate accounts, partially offset by higher inflows for alternative private closed end funds. Long-term outflows decreased 10% to $267.9 billion due to lower outflows in fixed income institutional separate accounts and equity open-end funds, partially offset by higher outflows for multi-asset sub-advised mutual funds.
(in billions)
Fixed Income
Equity
Alternative
Multi-Asset
Cash Management
Total
for the nine months ended June 30, 2021
AUM at October 1, 2020
$
656.9
$
438.1
$
122.1
$
129.4
$
72.4
$
1,418.9
Long-term inflows
135.7
103.0
15.3
27.5
—
281.5
Long-term outflows
(142.1)
(118.8)
(8.9)
(27.0)
—
(296.8)
Long-term net flows
(6.4)
(15.8)
6.4
0.5
—
(15.3)
Cash management net flows
—
—
—
—
(11.2)
(11.2)
Total net flows
(6.4)
(15.8)
6.4
0.5
(11.2)
(26.5)
Net market change, distributions and other
7.6
114.6
12.3
23.1
2.1
159.7
AUM at June 30, 2021
$
658.1
$
536.9
$
140.8
$
153.0
$
63.3
$
1,552.1
AUM increased $133.2 billion, or 9%, during the nine months ended June 30, 2021 due to $159.7 billion of net market change, distributions and other, partially offset by $15.3 billion of long-term net outflows and $11.2 billion of cash management net outflows. Net market change, distributions and other consists of $179.9 billion of market appreciation and a $4.9 billion increase from foreign exchange revaluation, partially offset by $25.1 billion of long-term distributions. The market appreciation occurred in all asset classes, most significantly in the equity and multi-asset asset classes, and reflected positive returns in global equity markets. Foreign exchange revaluation was primarily due to a weaker U.S. dollar compared to the Canadian dollar, Australian dollar, Pound Sterling and Brazilian Real, partially offset by a stronger U.S. dollar compared to the Japanese Yen.
Long-term outflows included outflows of $26.9 billion from eleven institutional products, including a single fixed income redemption of $5.9 billion, and two equity redemptions of $3.7 billion and $2.2 billion, $10.2 billion from seven fixed income funds, including $2.5 billion from five India credit funds that were non-management fee earning which are in the process of winding up, $3.6 billion from two equity funds and $3.1 billion from a multi-asset fund. Long-term outflows were partially offset by inflows of $10.6 billion in three fixed income funds, including the $1.0 billion launch of a closed-end fund, $5.3 billion in two institutional separate accounts, $3.1 billion in a multi-asset fund and $3.0 billion in an equity fund. Additionally, long-term outflows in the equity asset class included $2.1 billion of exchanges that are included as long-term inflows in the multi-asset asset class.
A key driver of our overall success is the long-term investment performance of our investment products. A measure of the performance of these products is the percentage of AUM exceeding peer group medians and benchmarks. We compare the relative performance of our mutual funds against peers, and of our strategy composites against benchmarks.
The performance of our mutual fund products against peer group medians and of our strategy composites against benchmarks is presented in the table below.
Peer Group Comparison1
Benchmark Comparison2
% of Mutual Fund AUM in Top Two Peer Group Quartiles
% of Strategy Composite AUM Exceeding Benchmark
as of June 30, 2022
1-Year
3-Year
5-Year
10-Year
1-Year
3-Year
5-Year
10-Year
Fixed Income
38
%
38
%
32
%
68
%
18
%
48
%
84
%
95
%
Equity
46
%
27
%
55
%
50
%
41
%
34
%
42
%
40
%
Total AUM3
52
%
42
%
54
%
50
%
35
%
49
%
69
%
73
%
__________________
1Mutual fund performance is sourced from Morningstar and measures the percent of ranked AUM in the top two quartiles versus peers. Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 37%, 37%, 37% and 35% of our total AUM as of June 30, 2022.
2Strategy composite performance measures the percent of composite AUM beating its benchmark. The benchmark comparisons are based on each account’s/composite’s (strategy composites may include retail separately managed accounts and mutual fund assets managed as part of the same strategy) return as compared to a market index that has been selected to be generally consistent with the asset class of the account/composite. Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 65%, 64%, 64% and 59% of our total AUM as of June 30, 2022.
3Total mutual fund AUM includes performance of our alternative and multi-asset funds, and total strategy composite AUM includes performance of our alternative composites. Alternative and multi-asset AUM represent 16% and 10% of our total AUM at June 30, 2022.
Mutual fund performance data includes U.S. and cross-border domiciled mutual funds and exchange-traded funds, and excludes cash management and fund of funds. These results assume the reinvestment of dividends, are based on data available as of July 10, 2022, and are subject to revision.
Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ. The information in this presentation is provided solely for use in connection with this document, and is not directed toward existing or potential clients of Franklin.
OPERATING REVENUES
The table below presents the percentage change in each operating revenue category.
Investment management fees decreased $61.2 million for the three months ended June 30, 2022 primarily due to a 6% decrease in average AUM, partially offset by higher performance fees. The decrease in average AUM occurred primarily in the fixed income and equity asset classes, partially offset by an increase in the alternative asset class that includes the acquisition of Lexington.
Investment management fees increased $209.7 million for the nine months ended June 30, 2022 primarily due to higher performance fees and a 1% increase in average AUM. The increase in average AUM occurred primarily in the alternative and equity asset classes, partially offset by decreases in the fixed income asset class.
Our effective investment management fee rate excluding performance fees (annualized investment management fees excluding performance fees divided by average AUM) increased to 42.3 and 41.8 basis points for the three and nine months ended June 30, 2022, from 41.8 and 41.7 basis points for the same periods in the prior fiscal year. The increases were primarily due to the acquisition of Lexington, partially offset by a shift in assets from higher-fee products to lower-fee products in the fixed income and equity asset classes.
Performance fees were $119.3 million and $364.3 million for the three and nine months ended June 30, 2022, and $102.6 million and $189.7 million for the same periods in the prior fiscal year, with the increase due to strong performance by our alternative specialist investment managers.
Sales and Distribution Fees
Sales and distribution fees by revenue driver are presented below.
(in millions)
Three Months Ended June 30,
Percent Change
Nine Months Ended June 30,
Percent Change
2022
2021
2022
2021
Asset-based fees
$
272.5
$
332.0
(18
%)
$
890.5
$
971.2
(8
%)
Sales-based fees
59.4
80.9
(27
%)
202.6
240.9
(16
%)
Contingent sales charges
3.7
4.0
(8
%)
10.9
15.3
(29
%)
Sales and Distribution Fees
$
335.6
$
416.9
(20
%)
$
1,104.0
$
1,227.4
(10
%)
Asset-based distribution fees decreased $59.5 million and $80.7 million for the three and nine months ended June 30, 2022 primarily due to $44.9 million and $41.2 million from decreases of 15% and 5% in the related average AUM, and $9.4 million and $30.4 million from a higher mix of lower-fee assets.
Sales-based fees decreased $21.5 million and $38.3 million for the three and nine months ended June 30, 2022 primarily due to $22.6 million and $42.3 million from lower commissionable sales, partially offset by $1.2 million and $4.2 million from a higher mix of equity sales, which typically generate higher sales fees than fixed income products.
Other
Other revenue increased $4.5 million and $14.3 million for the three and nine months ended June 30, 2022 primarily due to an increase inreal estate transaction fees earned by certain of our alternative asset managers.
The table below presents the percentage change in each operating expense category.
Three Months Ended June 30,
Percent Change
Nine Months Ended June 30,
Percent Change
(in millions)
2022
2021
2022
2021
Compensation and benefits
$
766.7
$
771.4
(1
%)
$
2,321.8
$
2,229.2
4
%
Sales, distribution and marketing
440.3
531.0
(17
%)
1,432.8
1,579.3
(9
%)
Information systems and technology
125.9
121.8
3
%
376.6
355.8
6
%
Occupancy
53.8
54.6
(1
%)
163.1
164.1
(1
%)
Amortization of intangible assets
81.8
58.0
41
%
200.5
174.1
15
%
General, administrative and other
158.1
158.0
0
%
416.1
398.5
4
%
Total Operating Expenses
$
1,626.6
$
1,694.8
(4
%)
$
4,910.9
$
4,901.0
0
%
Compensation and Benefits
The components of compensation and benefits expenses are presented below.
Three Months Ended June 30,
Percent Change
Nine Months Ended June 30,
Percent Change
(in millions)
2022
2021
2022
2021
Salaries, wages and benefits
$
366.5
$
366.7
0
%
$
1,078.9
$
1,091.1
(1
%)
Incentive compensation
364.3
352.1
3
%
1,136.8
963.2
18
%
Acquisition-related retention
44.2
39.1
13
%
118.4
129.2
(8
%)
Other1
(8.3)
13.5
NM
(12.3)
45.7
NM
Compensation and Benefits Expenses
$
766.7
$
771.4
(1
%)
$
2,321.8
$
2,229.2
4
%
_______________
1Includes impact of gains and losses on investments related to deferred compensation plans and seed investments, which is offset in investment and other income (losses), net, minority interests in certain subsidiaries, which is offset in net income (loss) attributable to redeemable noncontrolling interests and special termination benefits.
Salaries, wages and benefits remained flat for the three months ended June 30, 2022 and decreased $12.2 million for the nine months ended June 30, 2022, as the impact of headcount reductions associated with strategic initiatives and a $15.5 million decrease in termination benefits for the nine-month period, were substantially offset by salaries, wages and benefits expense due to the acquisitions of Lexington and OSAM.
Incentive compensation increased $12.2 million for the three months ended June 30, 2022 primarily due to an increase of approximately $50.0 million at alternative specialist investment managers, including the acquisition of Lexington, partially offset by lower incentive compensation at other specialist investment managers and declines in our sales-based and discretionary incentive expense. Incentive compensation increased $173.6 million for the nine months ended June 30, 2022 primarily due to a $142.0 million increase related to higher incentive compensation at the specialist investment managers, driven by higher performance fees and the acquisition of Lexington, and an increase of $39.1 million in stock and stock unit award amortization.
Acquisition-related retention expenses increased $5.1 million for the three months ended June 30, 2022, primarily due to the acquisition of Lexington.
Other compensation and benefits was $(8.3) million and $13.5 million for the three months ended June 30, 2022 and 2021, and $(12.3) million and $45.7 million for the nine months ended June 30, 2022 and 2021. The changes for both periods were primarily related to market adjustments on investments related to our deferred compensation plans and compensation related to minority interests. Special termination benefits also decreased $3.2 million and $14.0 million for the three and nine months ended ended June 30, 2022 primarily due to workforce optimization initiatives related to the acquisition of Legg Mason, Inc. (“Legg Mason”) in the prior year periods.
We expect to incur additional acquisition-related retention expenses of approximately $60 million during the remainder of the current fiscal year, and annual amounts beginning at approximately $230 million in the fiscal year ending September 30, 2023 and decreasing over the following two fiscal years by approximately $30 million and $70 million. At June 30, 2022, our global workforce had decreased to approximately 9,800 employees from approximately 10,600 at June 30, 2021.
Sales, Distribution and Marketing
Sales, distribution and marketing expenses by cost driver are presented below.
Three Months Ended June 30,
Percent Change
Nine Months Ended June 30,
Percent Change
(in millions)
2022
2021
2022
2021
Asset-based expenses
$
367.0
$
430.7
(15
%)
$
1,182.8
$
1,282.3
(8
%)
Sales-based expenses
58.7
79.9
(27
%)
200.4
238.2
(16
%)
Amortization of deferred sales commissions
14.6
20.4
(28
%)
49.6
58.8
(16
%)
Sales, Distribution and Marketing
$
440.3
$
531.0
(17
%)
$
1,432.8
$
1,579.3
(9
%)
Asset-based expenses decreased $63.7 million and $99.5 million for the three and nine months ended June 30, 2022 primarily due to $42.0 million and $33.0 million from decreases of 12% and 3% in related average AUM, and $23.7 million and $48.1 million from a higher mix of lower-fee assets. Distribution expenses are generally not directly correlated with distribution fee revenues due to certain fee structures that do not provide full recovery of distribution costs.
Sales-based expenses decreased $21.2 million and $37.8 million for the three and nine months ended June 30, 2022 substantially all due to lower commissionable sales.
Information Systems and Technology
Information systems and technology expenses increased $4.1 million and $20.8 million for the three and nine months ended June 30, 2022, primarily due to higher costs incurred for consulting and software.
Amortization of intangible assets
Amortization of intangible assets increased $23.8 million and $26.4 million for the three and nine months ended June 30, 2022, primarily related to intangible assets recognized as part of the acquisition of Lexington.
General, Administrative and Other
General, administrative and other operating expenses increased $0.1 million and $17.6 million for the three and nine months ended June 30, 2022, primarily due increases of $14.1 million and $7.8 million in professional fees, largely related to acquisition-related costs, as well as increases of $10.0 million and $24.3 million in advertising and promotion expenses primarily related to our global brand campaign and $12.2 million and $23.6 million in travel and entertainment expenses. The nine months ended June 30, 2022, also included $15.7 million of non-recurring costs incurred in connection with the outsourcing of our global transfer agent functions. The increases for both the three- and nine-month periods were partially offset by $43.0 million of closed-end fund product launch costs incurred in the prior year and the increase for the nine-month period was also partially offset by a net $7.7 million credit to adjust the fair value of our contingent consideration asset and liabilities recognized in the current year.
Other income (expenses) consisted of the following:
Three Months Ended June 30,
Percent Change
Nine Months Ended June 30,
Percent Change
(in millions)
2022
2021
2022
2021
Investment and other income, net
$
13.0
$
52.9
(75
%)
$
97.7
$
197.2
(50
%)
Interest expense
(28.9)
(25.7)
12
%
(71.1)
(71.3)
0
%
Investment and other income (losses) of consolidated investment products, net
(74.4)
61.0
NM
33.3
263.3
(87
%)
Expenses of consolidated investment products
(1.3)
(10.9)
(88
%)
(10.1)
(26.5)
(62
%)
Other Income (Expenses), Net
$
(91.6)
$
77.3
NM
$
49.8
$
362.7
(86
%)
Investment and other income, net decreased $39.9 million and $99.5 million for the three and nine months ended June 30, 2022 primarily due to the impact of market declines in the current year periods.
Equity method investees generated net losses of $0.1 million for the three months ended June 30, 2022, as compared to income of $39.4 million in the prior year, and for the nine-month periods generated income of $51.6 million and $123.8 million, largely related to various global equity and alternative funds. The nine-month period in the current year also reflects a $52.6 million gain recognized on the sale of our investment in Embark.
Investments held by the Company generated net losses of $35.6 million and $32.9 million for the three and nine months ended June 30, 2022, as compared to net gains of $17.3 million and $76.2 million in the prior year periods, primarily from investments in nonconsolidated funds and separate accounts and assets invested for deferred compensation plans, partially offset by net gains from investments measured at cost adjusted for observable price changes.
Net foreign currency exchange gains were $14.5 million and $24.2 million for the three and nine months ended June 30, 2022, as compared to net losses of $7.2 million and $17.2 million for the three and nine months ended June 30, 2021. The increases were primarily due to the impact of the strengthening of the U.S. dollar against the Euro and British Pound.
Derivatives generated $17.5 million and $15.2 million of gains for the three and nine months ended June 30, 2022 as compared to losses of $9.1 million and $25.2 million in the prior year periods.
Interest expense increased $3.2 million for the three months ended June 30, 2022 and decreased $0.2 million for the nine months ended June 30, 2022. The increase for the three-month period was primarily due to $6.1 million of accretion on the Lexington deferred consideration and $3.1 million of interest expense recognized on the senior unsecured unsubordinated notes issued in August 2021, offset in part by a $6.8 million decrease due to the redemption in September 2021 of the junior notes issued by Legg Mason.
Investments held by consolidated investment products (“CIPs”) generated losses of $78.5 million and $4.0 million in the three and nine months ended June 30, 2022, as compared to gains of $33.2 million and $182.8 million in the prior year periods, largely related to losses on holdings of various equity, fixed income and alternative funds for the three month-period, and losses on holdings of various equity and fixed income funds, partially offset by higher gains on holdings of various alternative funds for the nine-month period. Dividend and interest income of CIPs was $4.1 million and $37.3 million for the three and nine months ended June 30, 2022, as compared to $27.8 million and $80.5 million in the prior year periods.
Expenses of consolidated investments products decreased $9.6 million and $16.4 million for the three- and nine- months ended June 30, 2022, primarily due to lower expenses incurred by an alternative fund.
Our cash, cash equivalents and investments portfolio by asset class and accounting classification at June 30, 2022, excluding third-party assets of CIPs, was as follows:
Accounting Classification1
Total
(in millions)
Cash and Cash Equivalents
Investments at Fair Value
Equity Method Investments
Other Investments
Direct Investments in CIPs
Cash and Cash Equivalents
$
3,806.3
$
—
$
—
$
—
$
—
$
3,806.3
Investments
Alternative
—
99.0
517.9
65.7
478.0
1,160.6
Equity
—
315.3
191.0
150.0
139.1
795.4
Fixed Income
—
206.2
22.0
37.5
269.5
535.2
Multi-Asset
—
40.3
13.6
—
75.0
128.9
Total investments
—
660.8
744.5
253.2
961.6
2,620.1
Total Cash and Cash Equivalents and Investments2, 3
$
3,806.3
$
660.8
$
744.5
$
253.2
$
961.6
$
6,426.4
______________
1See Note 1 – Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for fiscal year 2021 for information on investment accounting classifications.
2Total cash and cash equivalents and investments includes $3,620.8 million used for operational activities, including investments in sponsored funds and other products, and $229.7 million necessary to comply with regulatory requirements.
3Total cash and cash equivalents and investments includes $308.7 million attributable to employee-owned and other third-party investments made through partnerships which are offset in nonredeemable noncontrolling interests.
TAXES ON INCOME
Our effective income tax rate was 28.6% and 23.6% for the three and nine months ended June 30, 2022, as compared to 15.1% and 20.8% for the three and nine months ended June 30, 2021. The rate increase for three-month period was primarily due to net losses on investments held by CIPs for which there are no related tax benefits, benefits in the prior year from the release of the valuation allowance for interest expense carryforward and a decrease in foreign earnings. The rate increase for the nine-month period was primarily due to a decrease in foreign earnings.
Our effective income tax rate reflects the relative contributions of earnings in the jurisdictions in which we operate, which have varying tax rates. Changes in our pre-tax income mix, tax rates or tax legislation in such jurisdictions may affect our effective income tax rate and net income.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES
As supplemental information, we are providing performance measures for “adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share,” each of which is based on methodologies other than generally accepted accounting principles (“non-GAAP measures”). Management believes these non-GAAP measures are useful indicators of our financial performance and may be helpful to investors in evaluating our relative performance against industry peers as these measures exclude the impact of CIPs and mitigate the margin variability related to sales and distribution revenues and expenses across multiple distribution channels globally. These measures also exclude performance-based investment management fees which are fully passed through as compensation and benefits expense per the terms of certain acquisitions and have no impact on net income. These measures also exclude acquisition-related expenses, certain items which management considers to be nonrecurring, unrealized investment gains and losses included in investment and other income (losses), net, and the related income tax effect of these adjustments, as applicable. These measures also exclude the impact on compensation and benefits expense from arrangements which are offset in investment and other income (loss), net or net income (loss) attributable to noncontrolling interests.
“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are defined below, followed by reconciliations of operating income, operating margin, net income attributable to Franklin Resources, Inc. and diluted earnings per share on a U.S. GAAP basis to these non-GAAP measures. Non-GAAP measures should not be considered in isolation from, or as substitutes for, any financial information prepared in accordance with U.S. GAAP, and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.
Adjusted Operating Income
We define adjusted operating income as operating income adjusted to exclude the following:
•Elimination of operating revenues upon consolidation of investment products.
•Acquisition-related retention compensation.
•Impact on compensation and benefits expense from gains and losses on investments related to deferred compensation plans and seed investments, which is offset in investment and other income (losses), net.
•Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities.
•Amortization and impairment of intangible assets, if any.
•Special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company.
•Impact on compensation and benefits expense related to minority interests in certain subsidiaries, which is offset in net income (loss) attributable to redeemable noncontrolling interests.
Adjusted Operating Margin
We calculate adjusted operating margin as adjusted operating income divided by adjusted operating revenues. We define adjusted operating revenues as operating revenues adjusted to exclude the following:
•Acquisition-related performance-based investment management fees which are passed through as compensation and benefits expense.
•Sales and distribution fees and a portion of investment management fees allocated to cover sales, distribution and marketing expenses paid to the financial advisers and other intermediaries who sell our funds on our behalf.
•Elimination of operating revenues upon consolidation of investment products.
Adjusted Net Income
We define adjusted net income as net income attributable to Franklin Resources, Inc. adjusted to exclude the following:
•Activities of CIPs, including investment and other income (losses), net, and income (loss) attributable to noncontrolling interests, net of revenues eliminated upon consolidation of investment products.
•Acquisition-related retention compensation.
•Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities.
•Amortization and impairment of intangible assets, if any.
•Special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company.
•Net gains or losses on investments related to deferred compensation plans which are not offset by compensation and benefits expense.
•Unrealized investment gains and losses other than those that are offset by compensation and benefits expense.
•Interest expense for amortization of Legg Mason debt premium from acquisition-date fair value adjustment.
•Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests.
•Net income tax expense of the above adjustments based on the respective blended rates applicable to the adjustments.
Adjusted Diluted Earnings Per Share
We define adjusted diluted earnings per share as diluted earnings per share adjusted to exclude the per share impacts of the adjustments applied to net income in calculating adjusted net income.
In calculating adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share, we adjust for activities of CIPs because the impact of consolidated products is not considered reflective of the underlying results of our operations. We adjust for acquisition-related retention compensation, other acquisition-related expenses, amortization and impairment of intangible assets, if any, and interest expense for amortization of the Legg Mason debt premium to facilitate comparability of our operating results with the results of other asset management firms. We adjust for special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company because these items are deemed nonrecurring. In calculating adjusted net income and adjusted diluted earnings per share, we adjust for unrealized investment gains and losses included in investment and other income (losses), net, net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income
(loss) attributable to redeemable noncontrolling interests because these items relate to profits interest shares and net gains or losses on investments related to deferred compensation plans which are not offset by compensation and benefits expense because these items primarily relate to seed and strategic investments which have been and are generally expected to be held long term.
Net income attributable to Franklin Resources, Inc.
$
256.4
$
438.4
$
1,059.2
$
1,165.5
Add (subtract):
Net (income) loss of consolidated investment products1
(6.8)
(0.6)
3.3
14.3
Acquisition-related retention
44.2
39.1
118.4
129.2
Other acquisition-related expenses
37.6
7.2
65.4
21.0
Amortization of intangible assets
81.8
58.0
200.5
174.1
Special termination benefits
0.7
3.9
7.8
21.8
Net (gains) losses on deferred compensation plan investments not offset by compensation and benefits expense
6.1
(0.9)
8.6
(2.3)
Unrealized investment losses (gains)
45.7
(30.1)
117.8
(186.6)
Interest expense for amortization of debt premium
(6.3)
(6.4)
(18.9)
(29.3)
Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests
0.5
—
0.5
—
Net income tax expense of adjustments
(43.9)
(14.9)
(101.4)
(37.1)
Adjusted net income
$
416.0
$
493.7
$
1,461.2
$
1,270.6
Diluted earnings per share
$
0.50
$
0.86
$
2.07
$
2.27
Adjusted diluted earnings per share
0.82
0.96
2.86
2.48
__________________
1The impact of CIPs is summarized as follows:
(in millions)
Three Months Ended June 30,
Nine Months Ended June 30,
2022
2021
2022
2021
Elimination of operating revenues upon consolidation
$
(13.0)
$
(5.2)
$
(38.5)
$
(16.7)
Other income (expenses), net
(33.6)
13.1
48.8
129.0
Less: income (loss) attributable to noncontrolling interests
(53.4)
7.3
13.6
126.6
Net income (loss)
$
6.8
$
0.6
$
(3.3)
$
(14.3)
LIQUIDITY AND CAPITAL RESOURCES
Cash flows were as follows:
Nine Months Ended June 30,
(in millions)
2022
2021
Operating cash flows
$
1,090.3
$
739.3
Investing cash flows
(2,679.9)
(1,936.0)
Financing cash flows
1,489.2
1,542.9
Net cash provided by operating activities increased during the nine months ended June 30, 2022 primarily due to adjustments for losses from CIPs as compared to gains in the prior year, increases in acquisition-related accrued compensation and benefits, lower net purchases of investments by CIPs and net losses on investments as compared to net gains in the prior year, partially offset by lower net income. Net cash used in investing activities increased primarily due to cash paid for acquisitions in the current year, partially offset by net liquidations of our investments as compared to net purchases in the prior year. Net cash provided by financing activities decreased primarily due to proceeds from the issuance of debt in the prior year, partially offset by higher net proceeds from the debt of CIPs.
The assets and liabilities of CIPs attributable to third-party investors do not impact our liquidity and capital resources. We have no right to the CIPs’ assets, other than our direct equity investment in them and investment management and other fees earned from them. The debt holders of the CIPs have no recourse to our assets beyond the level of our direct investment, therefore we bear no other risks associated with the CIPs’ liabilities. Accordingly, the assets and liabilities of CIPs, other than our direct investments in them, are excluded from the amounts and discussion below.
Our liquid assets and debt consisted of the following:
(in millions)
June 30, 2022
September 30, 2021
Assets
Cash and cash equivalents
$
3,697.5
$
4,357.8
Receivables
1,236.0
1,300.4
Investments
859.5
1,042.2
Total Liquid Assets
$
5,793.0
$
6,700.4
Liability
Debt
$
3,382.2
$
3,399.4
Liquidity
Liquid assets consist of cash and cash equivalents, receivables and certain investments. Cash and cash equivalents at June 30, 2022 primarily consist of money market funds and deposits with financial institutions. Liquid investments consist of investments in sponsored and other funds, direct investments in redeemable CIPs, other equity and debt securities, and time deposits with maturities greater than three months.
We utilize a significant portion of our liquid assets to satisfy operational and regulatory requirements and fund capital contributions to sponsored and other products. Certain of our subsidiaries are required by our internal policy or regulation to maintain minimum levels of cash and/or capital, and may be restricted in their ability to transfer cash to their parent companies. Should we require more capital than is available for use, we could elect to reduce the level of discretionary activities, such as share repurchases or investments in sponsored and other products, we could raise capital through debt or equity issuances, or utilize existing or new credit facilities. These alternatives could result in increased interest expense, decreased dividend or interest income, or other dilution to our earnings.
Capital Resources
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations, amounts available under the credit facility discussed below, the ability to issue debt or equity securities and borrowing capacity under our uncommitted commercial paper private placement program.
On January 10, 2022, the Company entered into a bi-lateral credit agreement with Bank of America, N.A. to establish a 364 day revolving credit facility with an aggregate commitment of $500.0 million. As of the time of this filing, there were no amounts outstanding.
In prior fiscal years, we issued senior unsecured unsubordinated notes for general corporate purposes and to redeem outstanding notes. At June 30, 2022, Franklin’s outstanding senior notes had an aggregate principal amount due of $1,900.0 million. The notes have fixed interest rates from 1.600% to 2.950% with interest paid semi-annually and have an aggregate carrying value, inclusive of unamortized discounts and debt issuance costs, of $1,882.7 million. We are considering repaying the $300.0 million 2.800% senior notes due September 2022 by refinancing or using existing cash. At June 30, 2022, Legg Mason’s outstanding senior notes had an aggregate principal amount due of $1,250.0 million. The notes have fixed interest rates from 3.950% to 5.625% with interest payable semi-annually for senior notes, and have an aggregate carrying value, inclusive of unamortized premium and debt issuance costs, of $1,499.5 million at June 30, 2022. Effective August 2, 2021, Franklin agreed to unconditionally and irrevocably guarantee all of the outstanding notes issued by Legg Mason.
The senior notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The indentures governing the senior notes contain limitations on our ability and the ability of our subsidiaries to pledge voting stock or profit participating equity interests in our subsidiaries to secure other debt without similarly securing the notes equally and ratably. In addition, the indentures include requirements that must be met if we consolidate or merge with, or sell all of our assets to, another entity. We were in compliance with all debt covenants at June 30, 2022.
At June 30, 2022, we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012 and is unrated.
Our ability to access the capital markets in a timely manner depends on a number of factors, including our credit rating, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. If we are unable to access capital markets in a timely manner, our business could be adversely impacted.
Uses of Capital
We expect that our main uses of cash will be to invest in and grow our business including through acquisitions, pay stockholder dividends, invest in our products, pay income taxes and operating expenses of the business, enhance technology infrastructure and business processes, repurchase shares of our common stock, and repay and service debt. While we expect to continue to repurchase shares to offset dilution from share-based compensation, and expect to continue to repurchase shares opportunistically from time to time, we will likely spend more of our post-dividend free cash flow investing in our business, including seed capital and acquiring resources to help grow our investment teams and operations.
On November 15, 2021, we entered into an agreement with FIS, a financial technology leader, to assume operation of the Company’s global transfer agent function as a sub-agent or delegate, depending on the jurisdiction. We will incur transfer agent expenses for the services provided by FIS which will be recorded gross of shareholder servicing revenue earned from the funds.
We typically declare cash dividends on a quarterly basis, subject to approval by our Board of Directors. We declared regular dividends of $0.87 per share during the nine months ended June 30, 2022 and $0.84 per share during the nine months ended June 30, 2021. We currently expect to continue paying comparable regular dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors.
We maintain a stock repurchase program to manage our equity capital with the objective of maximizing shareholder value. Our stock repurchase program is effected through open-market purchases and private transactions in accordance with applicable laws and regulations, and is not subject to an expiration date. The size and timing of these purchases will depend on business conditions, price, market and other factors. During the three and nine months ended June 30, 2022, we repurchased 2.0 million and 5.4 million shares of our common stock at a cost of $51.0 million and $153.5 million. At June 30, 2022, 25.4 million shares remained available for repurchase under the authorization of 80.0 million shares approved by our Board of Directors in April 2018. During the three and nine months ended June 30, 2021, we repurchased 1.4 million and 5.2 million shares of our common stock at a cost of $46.4 million and $137.8 million.
We invested $19.7 million and $199.2 million, net of redemptions, into our sponsored products during the nine months ended June 30, 2022 and 2021.
On May 31, 2022, we entered into an acquisition agreement to acquire all of the outstanding ownership interests in BNY Alcentra Group Holdings, Inc. from BNY Mellon for cash consideration of approximately $350 million to be paid at closing and up to $350 million in contingent consideration to be paid upon on the achievement of certain performance thresholds over the next four years. The acquisition is expected to be funded from our existing balance sheet resources.
On April 1, 2021, we acquired all of the outstanding ownership interests in Lexington, a leading global manager of secondary private equity and co-investment funds, for cash consideration of approximately $1.0 billion, excluding future payments to be made subject to the attainment of certain performance measures. In connection with the acquisition, we granted a 25% profits interest in Lexington and performance-based cash retention awards that both vest over approximately five years. We paid the purchase price from our existing cash.
On December 31, 2021, we acquired all of the outstanding ownership interests in OSAM, a leading quantitative asset management firm, for cash consideration of approximately $300 million, excluding future payments to be made subject to the attainment of certain performance measures. We paid the purchase price from our existing cash.
The funds that we manage have their own resources available for purposes of providing liquidity to meet shareholder redemptions, including securities that can be sold or provided to investors as in-kind redemptions, and lines of credit. Increased liquidity risks and redemptions have required, and may continue to require, increased cash in the form of loans or other lines of credit to help settle redemptions and for other related purposes. While we have no legal or contractual obligation to do so, we have in certain instances voluntarily elected to provide the funds with direct or indirect financial support based on our business objectives. During the fiscal year ended September 30, 2020, the Company authorized loans to certain sponsored funds in India that experienced increased liquidity risks and redemptions. The loans were fully repaid during the second quarter of fiscal year 2021. See Note 16 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for fiscal year 2021 for further information. We did not provide financial or other support to our sponsored funds during the nine months ended June 30, 2022.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These estimates, judgments and assumptions are affected by our application of accounting policies. Further, global concerns about the the global economic growth outlook and the risk of a recession as well as the ongoing COVID-19 pandemic have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations including the estimates and assumptions made by management. Actual results could differ from the estimates. The following are updates to our critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year 2021.
Consolidation
We consolidate our subsidiaries and investment products in which we have a controlling financial interest. We have a controlling financial interest when we own a majority of the voting interest in a voting interest entity or are the primary beneficiary of a variable interest entity (“VIE”). Our VIEs are primarily investment products and our variable interests consist of our equity ownership interests in and investment management fees earned from these products. As of June 30, 2022, we were the primary beneficiary of 51 investment product VIEs.
Business Combinations
Business combinations are accounted for by recognizing the acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition-date estimated fair values. Any excess of the purchase consideration over the acquisition-date fair values of these identifiable assets and liabilities is recognized as goodwill. Goodwill and indefinite-lived intangible assets are tested for impairment annually and when an event occurs or circumstances change that more likely than not reduce the fair value of the related reporting unit or indefinite-lived intangible asset below its carrying value. Definite-lived intangible assets are tested for impairment quarterly.
Subsequent to the annual impairment tests performed as of August 1, 2021, we monitored both macroeconomic and entity-specific factors, including changes in our AUM to determine whether circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value or indicate that the indefinite-lived intangible assets might be impaired. We also monitored fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole. During the nine months ended June 30, 2022, there were no events or circumstances which would indicate that goodwill, indefinite-lived intangible assets or definite-lived intangible assets might be impaired.
While we believe that the assumptions used to estimate fair value in our impairment tests are reasonable and appropriate, future changes in the assumptions could result in recognition of impairment.
Fair Value Measurements
A substantial amount of our investments are recorded at fair value or amounts that approximate fair value on a recurring basis. We use a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable.
As of June 30, 2022, Level 3 assets represented 10% of total assets measured at fair value, which primarily related to CIPs’ investments in equity and debt securities. There were insignificant transfers into and out of Level 3 during the nine months ended June 30, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the nine months ended June 30, 2022, there were no material changes from the market risk disclosures in our Form 10‑K for the fiscal year ended September 30, 2021.
Item 4. Controls and Procedures.
The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2022. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures as of June 30, 2022 were designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
For a description of our legal proceedings, please see the description set forth in the “Legal Proceedings” section in Note 11 – Commitments and Contingencies in the notes to consolidated financial statements in Item 1 of Part I of this Form 10‑Q, which is incorporated herein by reference.
Item 1A. Risk Factors.
The following Risk Factor disclosure supplements the discussion of our Risk Factors previously disclosed in our Annual Report on Form 10‑K for fiscal year 2021. The Risk Factors disclosed in our Annual Report on Form 10-K for fiscal year 2021 and the Risk Factor below could materially and adversely affect our business, financial condition and results of operations, and our business also could be impacted by other risk factors that are not presently known to us or that we currently consider to be immaterial. Further, our disclosure of a risk should not be interpreted to imply that the risk has not already developed or materialized.
Volatility and disruption of our business and financial markets and adverse changes in the global economy may significantly affect our results of operations and put pressure on our financial results.
We derive substantially all of our operating revenues and income from providing investment management and related services to investors in jurisdictions worldwide through our investment products, which include our funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. In addition to investment management, our services include fund administration, sales and distribution, and shareholder servicing. We may perform services directly or through third parties. The asset management industry continues to experience disruption and challenges, including increased fee pressure, regulatory changes, an increasing and changing role of technology in asset management services, the continuous introduction of new products and services, and the consolidation of financial services firms through mergers and acquisitions. Further, financial markets have and may continue, from time to time, to experience volatility and disruption worldwide. Declines in global economic conditions have in the past resulted in significant decreases in our AUM, revenues and income, and future declines may further negatively impact our financial results. Such declines have had, and may in the future have, a material adverse impact on our business. We may need to modify our business, strategies or operations and we may be subject to additional constraints or costs in order to compete in a changing global economy and business environment.
Individual financial, equity, debt and commodity markets may be adversely affected by financial, economic, political, electoral, diplomatic or other instabilities that are particular to the country or region in which a market is located, including without limitation local acts of terrorism, economic crises, political protests, war, insurrection or other business, social or political crises. For example, the Russian invasion of Ukraine, and the threat that Russia’s military aggression may expand beyond Ukraine, has significantly impacted the global economy and financial markets, which has had, and may continue to have, an adverse effect on our investment performance and flows in certain products. Global economic conditions, exacerbated by war, terrorism, social, civil or political unrest, natural disasters, public health crises, such as epidemics or pandemics, or financial crises, changes in the equity, debt or commodity marketplaces, changes in currency exchange rates, interest rates, inflation rates, the yield curve, defaults by trading counterparties, bond defaults, revaluation and bond market liquidity risks, geopolitical risks, the imposition of economic sanctions and other factors that are difficult to predict, affect the mix, market values and levels of our AUM. Changing market conditions could also cause an impairment to the value of our goodwill and other intangible assets.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information with respect to the shares of our common stock that we repurchased during the three months ended June 30, 2022.
Month
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 2022
580,651
$
26.40
580,651
26,873,739
May 2022
1,039,302
24.68
1,039,302
25,834,437
June 2022
404,784
24.75
404,784
25,429,653
Total
2,024,737
2,024,737
Under our stock repurchase program, which is not subject to an expiration date, we can repurchase shares of our common stock from time to time in the open market and in private transactions in accordance with applicable laws and regulations, including without limitation applicable federal securities laws. In order to pay taxes due in connection with the vesting of employee and executive officer stock and stock unit awards, we may repurchase shares under our program using a net stock issuance method. In April 2018, we announced that our Board of Directors authorized the repurchase of up to 80.0 million additional shares of our common stock under the stock repurchase program.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index to this Form 10-Q are incorporated herein by reference.
The following materials from Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL), include: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes (filed herewith)
104
Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)
_______________
*
Management contract or compensatory plan or arrangement
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FRANKLIN RESOURCES, INC.
Date:
July 28, 2022
By:
/s/ Matthew Nicholls
Matthew Nicholls
Executive Vice President, Chief Financial Officer and Chief Operating Officer
