Franklin Resources, Inc. Announces Preliminary Fourth Quarter and Fiscal Year Results

Franklin Resources, Inc. (the “Company”) [NYSE: BEN] today announced preliminary net income¹ of $665.7 million or $1.30 per diluted share for the quarter ended September 30, 2021, as compared to $438.4 million or $0.86 per diluted share for the previous quarter, and $78.9 million or $0.15 per diluted share for the quarter ended September 30, 2020. Preliminary net income¹ for the year ended September 30, 2021 was $1,831.2 million or $3.57 per diluted share, as compared to $798.9 million or $1.59 per diluted share for the prior year. Preliminary operating income was $531.5 million for the quarter ended September 30, 2021, as compared to $478.1 million for the previous quarter and $103.6 million in the prior year. The quarter ended September 30, 2021 includes a tax benefit² of $155.1 million or $0.30 per diluted share due to the release of certain tax reserves primarily related to the closure of Internal Revenue Service audits and increases in our ability to utilize certain tax attributes resulting from the integration of our business.

As supplemental information, the Company is providing certain adjusted performance measures which are based on methodologies other than generally accepted accounting principles. Preliminary adjusted net income³ was $644.6 million and adjusted diluted earnings per share³ was $1.26 for the quarter ended September 30, 2021, inclusive of the aforementioned $0.30 per share tax benefit, as compared to $493.7 million and $0.96 for the previous quarter, and $291.0 million and $0.56 for the quarter ended September 30, 2020. Preliminary adjusted net income³ was $1,915.2 million and adjusted diluted earnings per share³ was $3.74 for the year ended September 30, 2021, as compared to $1,311.0 million and $2.61 for the prior year. Preliminary adjusted operating income³ was $647.1 million for the quarter ended September 30, 2021, as compared to $601.2 million for the previous quarter and $428.9 million in the prior year.

“Fiscal 2021 was the first full year of results since we closed the Legg Mason transaction. The strategic and financial benefits from the acquisition have exceeded our goals and position our company for success in the years ahead,” said Jenny Johnson, President and CEO of Franklin Resources, Inc. “Investment performance across our specialist investment managers was strong and improved meaningfully across all time periods compared to a year ago. Improved performance has led to increased and more diversified gross sales as well as improved redemption rates. We continue to see momentum in a number of core growth areas, with positive net flows during the fiscal year in alternatives, wealth management, SMAs and ESG-specific strategies.

“Building upon our existing strengths, we have thoughtfully deployed our balance sheet capital to seize opportunities in areas that will drive industry growth. Our focus on growing our alternatives capabilities led us to today’s announced acquisition of Lexington Partners and we are delighted to attract such a talented team to partner with Franklin Templeton. The acquisition will further diversify our alternative asset management business to include alternative equity, the largest segment of the market. We also ended the quarter with our announced acquisition of O’Shaughnessy Asset Management (OSAM) and its Canvas Custom Indexing platform. OSAM is poised to take our existing strengths in SMA to the next level, particularly in our tax management, factor-based, and ESG customization capabilities.”

Total assets under management (“AUM”) were $1,530.1 billion at September 30, 2021, down $22.0 billion or 1% during the quarter due to $11.7 billion of net market change, distributions and other, $9.9 billion of long-term net outflows and $3.9 billion of cash management net outflows, slightly offset by $3.5 billion from an acquisition. AUM increased $111.2 billion or 8% during the fiscal year due to $148.0 billion of net market change, distributions and other, and $3.5 billion from an acquisition, partially offset by $25.2 billion of long-term net outflows and $15.1 billion of cash management net outflows.

Cash and cash equivalents and investments were $5.9 billion at September 30, 2021, as compared to $4.3 billion at September 30, 2020. Including the Company’s direct investments in consolidated investment products, cash and cash equivalents and investments were $6.9 billion at September 30, 2021, as compared to $5.1 billion at September 30, 2020. Total stockholders’ equity was $11.8 billion at September 30, 2021, as compared to $10.9 billion at September 30, 2020. The Company had 501.8 million shares of common stock outstanding at September 30, 2021, as compared to 495.1 million shares outstanding at September 30, 2020. The Company repurchased 2.2 million shares of its common stock for a total cost of $70.4 million during the quarter ended September 30, 2021, and 7.3 million shares for a total cost of $208.2 million during the fiscal year.

Conference Call Information

A written commentary on the results by Jenny Johnson, President and CEO; Matthew Nicholls, Executive Vice President and CFO; and Adam Spector, Executive Vice President, Head of Global Distribution will be available via investors.franklinresources.com today at approximately 8:30 a.m. Eastern Time.

Ms. Johnson and Messrs. Nicholls and Spector will also lead a live teleconference today at 11:00 a.m. Eastern Time to answer questions. Access to the teleconference will be available via investors.franklinresources.com or by dialing (833) 350-1245 in the U.S. and Canada or (236) 712-2205 internationally. A replay of the teleconference can also be accessed by calling (800) 585-8367 in the U.S. and Canada or (416) 621-4642 internationally using access code 1859388, after 2:00 p.m. Eastern Time on November 1, 2021 through November 8, 2021, or via investors.franklinresources.com.

Analysts and investors are encouraged to review the Company’s recent filings with the U.S. Securities and Exchange Commission and to contact Investor Relations at (650) 312-4091 before the live teleconference for any clarifications or questions related to the earnings release or commentary.

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 consolidated investment products (“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 a previous acquisition by Legg Mason and have no impact on net income. These non-GAAP 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 non-GAAP measures also exclude the impact on compensation and benefits expense from gains and losses on investments made to fund deferred compensation plans and on seed investments under certain historical revenue sharing arrangements, which is offset in investment and other income (losses), net.

“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 Legg Mason 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 liabilities.
• Amortization and impairment of intangible assets and goodwill.
• Special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company.

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 liabilities.
• Amortization and impairment of intangible assets.
• Impairment of goodwill and write off of noncontrolling interests related to the wind down of an acquired business.
• 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 Legg Mason 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 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 and goodwill, the write-off of noncontrolling interests, 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 and net gains or losses on investments related to Legg Mason 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.

The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows: