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

Franklin Resources, Inc. (the “Company”) [NYSE: BEN] today announced preliminary net income¹ of $295.5 million or $0.58 per diluted share for the quarter ended September 30, 2023, as compared to $227.5 million or $0.44 per diluted share for the previous quarter, and $232.7 million or $0.46 per diluted share for the quarter ended September 30, 2022. Preliminary net income¹ for the year ended September 30, 2023 was $882.8 million or $1.72 per diluted share, as compared to $1,291.9 million or $2.53 per diluted share for the prior year. Preliminary operating income was $338.3 million for the quarter ended September 30, 2023, as compared to $314.9 million for the previous quarter and $348.5 million for the prior year.

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 income² was $427.0 million and adjusted diluted earnings per share² was $0.84 for the quarter ended September 30, 2023, as compared to $326.1 million and $0.63 for the previous quarter, and $394.4 million and $0.78 for the quarter ended September 30, 2022. Preliminary adjusted net income² was $1,332.2 million and adjusted diluted earnings per share² was $2.60 for the year ended September 30, 2023, as compared to $1,855.6 million and $3.63 for the prior year. Preliminary adjusted operating income² was $511.7 million for the quarter ended September 30, 2023, as compared to $476.8 million for the previous quarter and $494.1 million for the prior year.

“As we look back over our fiscal year, challenging global financial markets and geopolitical uncertainty weighed on investor sentiment,” said Jenny Johnson, President and CEO of Franklin Resources, Inc. “Against this backdrop and amidst ongoing industry-wide change, we continued to make progress executing on our long-term plan focused on further diversifying our business across asset classes, vehicles, and geographies.

“For the fiscal year, long-term net flows were positive in key areas, including alternatives, multi-asset, ETFs, Canvas®, and the high-net-worth channel. While long-term inflows were impacted by the risk-off environment, long-term outflows improved by over 20% from the prior year. Our largest alternative managers, Benefit Street Partners, Clarion Partners, and Lexington Partners, generated $11 billion in net flows for the year. Fixed income net outflows improved from the prior year, and starting in the second quarter, we saw investor interest accelerate. In addition, the successful execution of our regionally focused distribution strategy resulted in positive net flows for the fourth quarter for our non-US regions and a significant improvement in long-term net outflows for the fiscal year. Our Asia-Pacific region generated positive long-term net flows for the fiscal year, and our EMEA region turned positive in the second half of fiscal 2023.

“One of our strategic priorities has been to increase our scale in key segments of the industry reflecting long-term client demand. In this pursuit to offer more choice to more clients, we closed the acquisition of Alcentra, a leading European credit manager, doubling our alternative credit assets under management (“AUM’). Firmwide alternative AUM increased by over 13% to $255 billion from the prior year, making Franklin Templeton one of the largest managers of alternative assets. Furthermore, we were pleased to announce the pending acquisition of Putnam Investments with $136 billion of AUM and our relationship with Power Corporation and Great-West Lifeco, strengthening our presence in the retirement and insurance segments. The transaction will enable us to further increase our investment in these key sectors to better serve all our clients and remains on track to close in the fourth quarter of calendar 2023.

“While continuing to invest in long-term growth initiatives, we also continued to strengthen the foundation of our business through disciplined expense management and operational efficiencies. Our balance sheet gives us the financial flexibility to continue to grow our business. We ended the fiscal year with $6.9 billion of cash and investments, after funding acquisitions and returning $870 million to shareholders through dividends and share repurchases.

“Finally, I would like to thank our dedicated employees around the world for all their efforts this past year to grow our business by always putting our clients first in a continuously evolving industry. It is their hard work and innovative spirit that positions Franklin Templeton well for future success.”

Total AUM were $1,374.2 billion at September 30, 2023, down $57.3 billion or 4% during the quarter due to the negative impact of $48.8 billion of net market change, distributions, and other, $6.9 billion of long-term net outflows, and $1.6 billion of cash management net outflows. AUM increased $76.8 billion or 6% during the fiscal year due to the positive impact of $58.9 billion of net market change, distributions and other, $34.9 billion from an acquisition, and $4.3 billion of cash management net inflows, partially offset by $21.3 billion of long-term net outflows.

Cash and cash equivalents and investments were $5.9 billion and, including the Company’s direct investments in consolidated investment products, were $6.9 billion⁴ at September 30, 2023. Total stockholders’ equity was $12.5 billion and the Company had 495.9 million shares of common stock outstanding at September 30, 2023. The Company repurchased 7.0 million shares of its common stock for a total cost of $187.6 million during the quarter ended September 30, 2023.

Conference Call Information

A written commentary on the results by Jenny Johnson, President and CEO; Matthew Nicholls, Executive Vice President, CFO and COO; 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 10:00 a.m. Eastern Time to answer questions. Access to the teleconference will be available via investors.franklinresources.com or by dialing (+1) (888) 396-8049 in North America or (+1) (416) 764-8646 in other locations using access code 23594627. A replay of the teleconference can also be accessed by calling (+1) (877) 674-7070 in North America or (+1) 416-764-8692 in other locations using access code 594627# after 2:00 p.m. Eastern Time on October 31, 2023 through November 7, 2023, 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 written 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.

“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 items:
  • 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 of intangible assets.
  • Impairment of intangible assets and goodwill, if any.
• Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company.
• Impact on compensation and benefits expense from gains and losses on investments related to deferred compensation plans, which is offset in investment and other income (losses), net.
• 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:

• Elimination of operating revenues upon consolidation of investment products.
• 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.

Adjusted Net Income and Adjusted Diluted Earnings Per Share

We define adjusted net income as net income attributable to Franklin Resources, Inc. adjusted to exclude the following:

• Activities of CIPs.
• Acquisition-related items:
  • 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 of intangible assets.
  • Impairment of intangible assets and goodwill, if any.
  • Write off of noncontrolling interests related to the wind down of an acquired business.
  • Interest expense for amortization of Legg Mason debt premium from acquisition-date fair value adjustment.
• Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company.
• Net gains or losses on investments related to deferred compensation plans which are not offset by compensation and benefits expense.
• Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests.
• Unrealized investment gains and losses.
• Net income tax expense of the above adjustments based on the respective blended rates applicable to the adjustments.

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 our non-GAAP measures, we adjust for the impact of CIPs because it is not considered reflective of our underlying results of operations. Acquisition-related items and special termination benefits are excluded to facilitate comparability to other asset management firms. We adjust for compensation and benefits expense related to funded deferred compensation plans because it is partially offset in other income (expense), net. We adjust for compensation and benefits expense and net income (loss) attributable to redeemable noncontrolling interests to reflect the economics of certain profits interest arrangements. Sales and distribution fees and a portion of investment management fees generally cover sales, distribution and marketing expenses and, therefore, are excluded from adjusted operating revenues. In addition, when calculating adjusted net income and adjusted diluted earnings per share we exclude unrealized investment gains and losses included in investment and other income (losses) because the related investments 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: