FRANKLIN RESOURCES, INC. FORWARD-LOOKING STATEMENTS In this section, we discuss and analyze the results of operations and financial condition ofFranklin Resources, Inc. ("Franklin") and its subsidiaries (collectively, the "Company"). In addition to historical information, we also make statements relating to the future, called "forward-looking" statements, which are provided under the "safe harbor" protection of theU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will," "may," "could," "expect," "believe," "anticipate," "intend," "plan," "seek," "estimate" or other similar words. Moreover, statements that speculate about future events are forward-looking statements. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. You should carefully review the "Risk Factors" section set forth below, which describes these risks, uncertainties and other important factors in more detail. 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 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 do not have an obligation, and we undertake no obligation, to announce publicly the change to our expectations, or to make any revision to our forward-looking statements, unless required by law. The following discussion should be read in conjunction with our Form 10-K for the fiscal year endedSeptember 30, 2019 ("fiscal year 2019") filed with theU.S. Securities and Exchange Commission , and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. OVERVIEW We are a global investment management organization and derive our operating revenues and net income from providing investment management and related services in jurisdictions worldwide for investors in our investment products, which include our sponsored funds, as well as institutional and high-net-worth separate accounts. 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®, Balanced Equity Management®, Benefit Street Partners®, Darby®, Edinburgh Partners™, Fiduciary Trust™, Franklin Bissett®, Franklin Mutual Series®, K2® and LibertyShares®. We offer a broad product mix of equity, multi-asset/balanced, fixed income and cash management investment objectives 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 that 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 set forth below, the amount and mix of our AUM are subject to significant fluctuations and can negatively impact our revenues and income. The level of our revenues also depends on mutual fund sales, the number of shareholder transactions and accounts, and the fees charged for our services, which are based on contracts with our funds and our clients. These arrangements could change in the future. As further noted in the "Risk Factors" section, the outbreak and spread of contagious diseases such as the novel coronavirus ("COVID-19"), a highly transmissible and pathogenic disease, has adversely affected, and we expect will continue to adversely affect, our business, financial condition and results of operations. Global and national health concerns, and uncertainty regarding the impact of COVID-19, could lead to further and/or increased volatility in global capital and credit markets, adversely affect our key executives and other personnel, clients, investors, providers, suppliers, lessees, and other third parties, and negatively impact our AUM, revenues, income, business and operations. As of the time of this filing, as the COVID-19 pandemic continues to evolve, it is not possible to predict the extent to which COVID-19 will adversely impact our business, liquidity, capital resources, financial results and operations, which impacts will depend on numerous developing factors that are highly uncertain and rapidly changing. 28
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During our third fiscal quarter, the global equity markets rebounded amidst ongoing global concerns about the COVID-19 pandemic which caused steep declines in equities and lower government bond yields in the prior quarter. Despite easing of shutdown measures and some signs of economic recovery following significant accommodative economic efforts by governments and central banks, concerns about the severe economic impact of the ongoing COVID-19 pandemic persist. The S&P 500 Index and MSCI World Index increased 20.5% and 19.5% for the quarter and 5.7% and 2.7% for the fiscal year to date. The global bond markets were also positive as the Bloomberg Barclays Global Aggregate Index increased 3.3% during the quarter and 3.5% for the fiscal year to date. Our total AUM atJune 30, 2020 was$622.8 billion , 10% lower than atSeptember 30, 2019 and 13% lower than atJune 30, 2019 . Simple monthly average AUM ("average AUM") for the three and nine months endedJune 30, 2020 decreased 15% and 6% from the same periods in the prior fiscal year. The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change. We are subject to various laws, rules and regulations globally that impose restrictions, limitations, registration, reporting and disclosure requirements on our business, and add complexity to our global compliance operations. Uncertainties regarding the global economy remain for the foreseeable future. As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our products and on providing high quality service to our clients. We continuously perform reviews of our business model. While we remain focused on expense management, we will also seek to attract, retain and develop personnel and invest strategically in systems and technology that will provide a secure and stable environment. We will continue to seek to protect and further our brand recognition while developing and maintaining broker-dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed in the "Risk Factors" section set forth below. RESULTS OF OPERATIONS Three Months Ended Nine Months Ended June 30, June 30, (in millions, except per Percent Percent share data) 2020 2019 Change 2020 2019 Change Operating revenues$ 1,188.1 $ 1,476.7 (20 %)$ 3,939.1 $ 4,322.0 (9 %) Operating income 253.7 374.9 (32 %) 1,002.5 1,165.9 (14 %) Net income attributable to Franklin Resources, Inc. 290.4 245.9 18 % 720.0 889.3 (19 %) Diluted earnings per share$ 0.58 $ 0.48 21 %$ 1.44 $ 1.74 (17 %) Operating margin1 21.4 % 25.4 % 25.4 % 27.0 % As adjusted (non-GAAP):2 Adjusted operating income$ 270.8 $ 430.7 (37 %)$ 1,062.2 $ 1,247.4 (15 %) Adjusted operating margin 34.0 % 43.4 % 40.2 % 42.8 % Adjusted net income$ 348.9 $ 281.5 24 %$ 1,020.0 $ 972.9 5 % Adjusted diluted earnings per share$ 0.70 $ 0.55 27 %$ 2.04 $ 1.90 7 % __________________
1 Defined as operating income divided by total 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.
Operating income decreased$121.2 million and$163.4 million for the three and nine months endedJune 30, 2020 , as compared to the same periods in the prior fiscal year, as 20% and 9% decreases in operating revenues were partially offset by 15% and 7% decreases in operating expenses. Net income attributable toFranklin Resources, Inc. increased$44.5 million for the three months endedJune 30, 2020 primarily due to lower taxes on income and higher investment and other income, net, less the portion attributable to noncontrolling interests, partially offset by the decrease in operating income. Net income attributable toFranklin Resources, Inc. decreased$169.3 million for the nine months endedJune 30, 2020 primarily due to the impact of steep declines in market valuations amid global concerns about the COVID-19 pandemic, which resulted in net investment and other losses of$166.5 million , as compared to net gains of$103.8 million in the prior year, less the portion attributable to noncontrolling interests,and the decrease in operating income, partially offset by lower taxes on income. 29
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Diluted earnings per share increased for the three months endedJune 30, 2020 and decreased for the nine-month period, consistent with the changes in net income and the impacts of 2% and 3% decreases in diluted average common shares outstanding, primarily resulting from repurchases of shares of our common stock during the twelve-month period endedJune 30, 2020 . ASSETS UNDER MANAGEMENT AUM by investment objective was as follows: June 30, June 30, Percent (in billions) 2020 2019 Change Equity Global/international$ 127.4 $ 169.8 (25 %) United States 115.6 112.4 3 % Total equity 243.0 282.2 (14 %) Multi-Asset/Balanced 129.3 136.0 (5 %) Fixed Income Tax-free 66.3 65.0 2 % Taxable Global/international 106.6 154.9 (31 %) United States 67.2 67.9 (1 %) Total fixed income 240.1 287.8 (17 %) Cash Management 10.4 9.2 13 % Total$ 622.8 $ 715.2 (13 %) AUM atJune 30, 2020 decreased 13% fromJune 30, 2019 as$61.8 billion of net outflows and a$39.7 billion decrease from net market change, distributions and other were slightly offset by$9.1 billion from acquisitions. Average AUM and the mix of average AUM by investment objective are shown below. (in billions) Average AUM Percent Mix of Average AUM for the three months ended June 30, 2020 2019 Change 2020 2019 Equity Global/international$ 122.6 $ 170.8 (28 %) 20 % 24 % United States 106.3 110.3 (4 %) 18 % 16 % Total equity 228.9 281.1 (19 %) 38 % 40 % Multi-Asset/Balanced 124.8 134.4 (7 %) 21 % 19 % Fixed Income Tax-free 65.0 64.2 1 % 11 % 9 % Taxable Global/international 109.5 153.7 (29 %) 18 % 22 % United States 66.5 68.2 (2 %) 11 % 9 % Total fixed income 241.0 286.1 (16 %) 40 % 40 % Cash Management 10.3 9.2 12 % 1 % 1 % Total$ 605.0 $ 710.8 (15 %) 100 % 100 % 30
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(in billions) Average AUM Percent Mix of Average AUM for the nine months ended June 30, 2020 2019 Change 2020 2019 Equity Global/international$ 143.0 $ 175.5 (19 %) 22 % 25 % United States 110.7 108.1 2 % 17 % 16 % Total equity 253.7 283.6 (11 %) 39 % 41 % Multi-Asset/Balanced 130.1 133.1 (2 %) 20 % 19 % Fixed Income Tax-free 66.3 63.2 5 % 10 % 9 % Taxable Global/international 126.6 151.8 (17 %) 20 % 22 % United States 67.0 55.8 20 % 10 % 8 % Total fixed income 259.9 270.8 (4 %) 40 % 39 % Cash Management 10.3 9.4 10 % 1 % 1 % Total$ 654.0 $ 696.9 (6 %) 100 % 100 % 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, foreign exchange revaluation and net cash management. Three Months Ended Nine Months Ended June 30, Percent June 30, Percent (in billions) 2020 2019 Change 2020 2019 Change Beginning AUM$ 580.3 $ 712.3 (19 %)$ 692.6 $ 717.1 (3 %) Long-term sales 21.9 28.4 (23 %) 72.3 77.1 (6 %) Long-term redemptions (36.7 ) (38.2 ) (4 %) (136.7 ) (116.8 ) 17 % Long-term net exchanges - - NM (1.6 ) (0.5 ) 220 % Long-term reinvested distributions 3.5 4.4 (20 %) 17.0 21.2 (20 %) Net flows (11.3 ) (5.4 ) 109 % (49.0 ) (19.0 ) 158 % Acquisitions 3.5 - NM 9.1 26.4 (66 %) Net market change, distributions and other 50.3 8.3 506 % (29.9 ) (9.3 ) 222 % Ending AUM$ 622.8 $ 715.2 (13 %)$ 622.8 $ 715.2 (13 %) Components of the change in AUM by investment objective were as follows: (in billions) Equity Fixed Income for the three months Taxable Taxable ended Global/ United Multi-Asset/ Global/ United Cash June 30, 2020 International States Balanced
Tax-Free International States Management Total AUM at April 1, 2020$ 114.7 $ 92.7 $ 118.2 $ 64.9 $ 113.3 $ 65.8 $ 10.7 $ 580.3 Long-term sales 4.2 7.1 2.8 1.9 3.3 2.6 - 21.9 Long-term redemptions (8.5 ) (6.2 ) (5.1 ) (1.9 ) (12.5 ) (2.5 ) - (36.7 ) Long-term net exchanges (0.3 ) 0.6 (0.2 ) - (0.5 ) 0.4 - - Long-term reinvested distributions 0.1 0.4 1.7 0.4 0.7 0.2 - 3.5 Net flows (4.5 ) 1.9 (0.8 ) 0.4 (9.0 ) 0.7 - (11.3 ) Acquisition - - 3.5 - - - - 3.5 Net market change, distributions and other 17.2 21.0 8.4 1.0 2.3 0.7 (0.3 ) 50.3 AUM at June 30, 2020$ 127.4 $ 115.6 $ 129.3 $ 66.3 $ 106.6 $ 67.2 $ 10.4 $ 622.8 31
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Table of Contents (in billions) Equity Fixed Income for the three months Taxable Taxable ended Global/ United Multi-Asset/ Global/ United Cash June 30, 2019 International States Balanced
Tax-Free International States Management Total
AUM at
63.4
4.4 4.3 3.7 2.1 12.1 1.8 - 28.4
Long-term redemptions (10.1 ) (5.4 ) (5.6 ) (1.9 ) (12.0 ) (3.2 ) - (38.2 )
Long-term net
exchanges (0.9 ) (0.6 ) 1.4 0.1 - - - -
Long-term reinvested
distributions 0.3 0.6 1.6 0.4 1.2 0.3 - 4.4
Net flows (6.3 ) (1.1 ) 1.1 0.7 1.3 (1.1 ) - (5.4 )
Net market change,
distributions and
other 1.7 4.0 0.2 0.9 1.1 0.1 0.3 8.3
AUM at
65.0
AUM increased$42.5 billion or 7% during the three months endedJune 30, 2020 due to$50.3 billion of net market change, distributions and other and$3.5 billion from an acquisition, partially offset by$11.3 billion of net outflows. Net market change, distributions and other primarily consists of$52.8 billion of market appreciation and$1.9 billion increase from foreign exchange revaluation, partially offset by$4.1 billion of long-term distributions. The market appreciation occurred in all long-term investment objectives, most significantly in the equity and multi-asset/balanced investment objectives, and reflected positive returns in global equity markets as evidenced by increases of 20.5% and 19.5% in the S&P 500 Index and MSCI World Index. The net outflows included outflows of$5.8 billion from six global/international fixed income funds,$0.9 billion from a global/international equity fund and$0.6 billion from a multi-asset/balanced fund, partially offset by inflows of$2.5 billion in twoU.S. equity funds. Long-term sales decreased 23% to$21.9 billion , as compared to the prior-year period, primarily due to lower sales of global/international fixed income products partially offset by higher sales ofU.S. equity products, and long-term redemptions decreased 4% to$36.7 billion primarily due to lower redemptions in global/international equity products. The foreign exchange revaluation resulted from AUM in products that are notU.S. dollar denominated, which represented 13% of total AUM as ofJune 30, 2020 , and was primarily due to weakening of theU.S. dollar against the Australian dollar, Canadian dollar and Euro. AUM increased$2.9 billion during the quarter endedJune 30, 2019 due to$8.3 billion of net market change, distributions and other, partially offset by$5.4 billion of net outflows. Net market change, distributions and other primarily consists of$13.4 billion of market appreciation, partially offset by$6.1 billion of long-term distributions. The market appreciation occurred in all long-term investment objectives, most significantly in equity and fixed income products, and reflected positive returns in global equity and fixed income markets as evidenced by increases of 4.3% in the S&P 500 Index, 4.2% in the MSCI World Index and 3.3% in the Bloomberg Barclays Global Aggregate Index. The net outflows included$0.9 billion from a global/international equity fund,$0.9 billion from a sub-advised variable annuity client,$0.7 billion from a global/international fixed income fund and$0.7 billion from an institutionalU.S. fixed income product. (in billions) Equity Fixed Income for the nine months Taxable Taxable ended Global/ United Multi-Asset/ Global/ United Cash June 30, 2020 International States Balanced
Tax-Free International States Management Total AUM at October 1, 2019$ 158.4 $ 112.1 $ 134.3 $ 66.3 $ 144.6 $ 67.4 $ 9.5 $ 692.6 Long-term sales 12.6 17.9 11.4 6.4 16.6 7.4 - 72.3 Long-term redemptions (31.8 ) (21.5 ) (19.6 ) (7.0 ) (47.6 ) (9.2 ) - (136.7 ) Long-term net exchanges (0.8 ) 0.6 (0.6 ) (0.2 ) (1.9 ) 1.3 - (1.6 ) Long-term reinvested distributions 2.6 5.3 4.7 1.2 2.5 0.7 - 17.0 Net flows (17.4 ) 2.3 (4.1 ) 0.4 (30.4 ) 0.2 - (49.0 ) Acquisition - - 9.1 - - - - 9.1 Net market change, distributions and other (13.6 ) 1.2 (10.0 ) (0.4 ) (7.6 ) (0.4 ) 0.9 (29.9 ) AUM at June 30, 2020$ 127.4 $ 115.6 $ 129.3 $ 66.3 $ 106.6 $ 67.2 $ 10.4 $ 622.8 32
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Table of Contents (in billions) Equity Fixed Income for the nine months Taxable Taxable ended Global/ United Multi-Asset/ Global/ United Cash June 30, 2019 International States Balanced
Tax-Free International States Management Total AUM at October 1, 2018$ 194.4 $ 115.2 $ 138.9 $ 63.9 $ 150.6 $ 44.8 $ 9.3 $ 717.1 Long-term sales 13.8 12.4 9.6 5.5 30.6 5.2 - 77.1 Long-term redemptions (31.8 ) (17.5 ) (16.8 ) (8.0 ) (32.7 ) (10.0 ) - (116.8 ) Long-term net exchanges (1.5 ) (0.6 ) 1.3 0.1 0.2 - - (0.5 ) Long-term reinvested distributions 4.8 5.6 4.6 1.3 4.1 0.8 - 21.2 Net flows (14.7 ) (0.1 ) (1.3 ) (1.1 ) 2.2 (4.0 ) - (19.0 ) Acquisition - - - - - 26.4 - 26.4 Net market change, distributions and other (9.9 ) (2.7 ) (1.6 ) 2.2 2.1 0.7 (0.1 ) (9.3 ) AUM at June 30, 2019$ 169.8 $ 112.4 $ 136.0 $ 65.0 $ 154.9 $ 67.9 $ 9.2 $ 715.2 AUM decreased$69.8 billion or 10% during the nine months endedJune 30, 2020 due to$49.0 billion of net outflows and$29.9 billion of net market change, distributions and other, slightly offset by$9.1 billion from acquisitions. The net outflows included outflows of$22.7 billion from six global/international fixed income funds,$2.3 billion from a multi-asset/balanced fund,$2.0 billion from aU.S. equity fund,$1.7 billion from two institutional products and$1.6 billion from a global/international equity fund, which were partially offset by inflows of$3.8 billion from twoU.S. equity funds and$1.2 billion in a private open-end product. Long-term sales decreased 6% to$72.3 billion , as compared to the prior-year period, as lower sales in global/international objectives were partially offset by higher sales inU.S. and multi-asset/balanced investment objectives, and long-term redemptions increased 17% to$136.7 billion due to higher redemptions of global/international fixed income,U.S. equity and multi-asset/balanced products. Net market change, distributions and other primarily consists of$20.2 billion of long-term distributions,$9.1 billion of market depreciation and a$1.5 billion decrease from foreign exchange revaluation. The market depreciation occurred in the global/international and multi-asset/balanced investment objectives, partially offset by appreciation in the other long-term investment objectives, and reflected positive returns in global equity markets as evidenced by increase of 5.7% and 2.7% in the S&P 500 Index and MSCI World Index. The foreign exchange revaluation resulted from AUM in products that are notU.S. dollar denominated and was primarily due to strengthening of theU.S. dollar against the Indian Rupee and Canadian dollar, partially offset by weakening of theU.S. dollar against Euro. AUM decreased$1.9 billion during the nine months endedJune 30, 2019 due to$19.0 billion of net outflows and$9.3 billion of net market change, distributions and other, substantially offset by$26.4 billion from an acquisition. The net outflows included outflows of$2.2 billion from a global/international equity fund,$2.1 billion from three institutional separate accounts due to the clients' mandatory redemption policies following portfolio manager departures,$1.3 billion from a multi-asset/balanced fund,$1.3 billion from a global/international fixed income fund,$1.2 billion from an institutionalU.S. fixed income product,$1.2 billion from two sub-advised institutional products and$1.0 billion from a sub-advised variable annuity client, and inflows of$2.9 billion in two global/international fixed income funds and$1.3 billion in aU.S. equity fund. Net market change, distributions and other primarily consists of$25.8 billion of long-term distributions, partially offset by$16.9 billion of market appreciation. The market appreciation occurred in all long-term investment objectives except global/international equity, and reflected positive returns in global fixed income markets as evidenced by a 6.8% increase in the Bloomberg Barclays Global Aggregate Index and in theU.S. equity market as evidenced by a 2.5% increase in the S&P 500 Index. 33
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Average AUM by sales region was as follows:
Three Months Ended Nine Months Ended
June 30, Percent June 30, Percent
(in billions) 2020 2019 Change 2020 2019 Change
United States $ 426.9 $ 485.2 (12 %) $ 455.0 $ 471.4 (3 %)
International
Europe, Middle East and Africa 75.1 91.2 (18 %) 83.0 92.4 (10 %)
Asia-Pacific 73.1 92.1 (21 %) 82.1 90.4 (9 %)
Canada 19.2 27.6 (30 %) 21.6 27.9 (23 %)
Latin America1 10.7 14.7 (27 %) 12.3 14.8 (17 %)
Total international 178.1 225.6 (21 %) 199.0 225.5 (12 %)
Total $ 605.0 $ 710.8 (15 %) $ 654.0 $ 696.9 (6 %)
__________________
1
The percentage of average AUM inthe United States sales region was 71% and 70% for the three and nine months endedJune 30, 2020 and 68% for the same periods in the prior fiscal year. The region in which investment products are sold may differ from the geographic area in which we provide investment management and related services to the products. Investment Performance Overview A key driver of our overall success is the long-term investment performance of our investment products. A standard measure of the performance of these products is the percentage of AUM exceeding benchmarks and peer group medians. Our global/international fixed income products generated notable long-term results with 59% of AUM exceeding the peer group median comparison for the ten-year period, however, lower performance of these products during the nine months endedJune 30, 2020 resulted in significant decreases fromSeptember 30, 2019 to the benchmark and peer group comparisons for the three-year period and to the benchmark comparison for the ten-year period. The performance of our multi-asset/balanced products reflects the performance of a fund that represents 68% of this category. Lower relative investment performance by this fund during the nine months endedJune 30, 2020 resulted in significant decreases fromSeptember 30, 2019 to the peer group median comparison for the one-year and ten-year periods. The performance of our tax-free andU.S. taxable fixed income, as well as of our global/international equity products, has mostly lagged the benchmarks and peer group medians during the periods presented. Improved performance of ourU.S. tax-free fixed income products during the nine months endedJune 30, 2020 resulted in a significant increase fromSeptember 30, 2019 to the peer group median comparisons for the one-year period. 34
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The performance of our products against benchmarks and peer group medians is presented in the table below.
Benchmark Comparison1, 2 Peer Group Comparison1, 3
% of AUM Exceeding Benchmark % of AUM in Top Two Peer Group Quartiles
as of June 30, 2020 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year
Equity
Global/international 24 % 19 % 21 % 25 % 40 % 25 % 25 % 30 %
United States 49 % 51 % 42 % 32 % 40 % 59 % 80 % 48 %
Total equity 37 % 36 % 32 % 28 % 40 % 43 % 53 % 39 %
Multi-Asset/Balanced 9 % 11 % 12 % 6 % 13 % 18 % 18 % 17 %
Fixed Income
Tax-free 9 % 27 % 32 % 40 % 89 % 48 % 48 % 50 %
Taxable
Global/international 8 % 14 % 14 % 49 % 15 % 19 % 21 % 59 %
United States 17 % 2 % 1 % 14 % 31 % 25 % 8 % 4 %
Total fixed income 10 % 16 % 18 % 39 % 43 % 29 % 28 % 46 %
__________________1 AUM measured in the 1-year benchmark and peer group rankings represents 83%
and 84% of our total AUM as of
2 The benchmark comparisons are based on each fund's return as compared to a
market index that has been selected to be generally consistent with the
investment objectives of the fund.
3 The peer group rankings are sourced from Lipper, a
Morningstar or eVestment and various international third-party providers in
each fund's market and were based on an absolute ranking of returns. © 2019
Morningstar, Inc. All rights reserved. The information herein: (1) is
proprietary to Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be accurate, complete or
timely. Neither Morningstar nor its content providers are responsible for any
damages or losses arising from any use of this information.
For products with multiple share classes, rankings for all share classes with applicable history in their respective time periods are included. Rankings for most institutional separate accounts are as of the prior quarter-end due to timing of availability of information. Private equity and debt funds, certain privately-offered emerging market and real estate funds, cash management funds and certain hedge and other funds are not included. Certain other funds and products were also excluded because of limited benchmark or peer group data. Had this data been available, the results may have been different. These results assume the reinvestment of dividends, are based on data available as ofJuly 10, 2020 , and are subject to revision. While we remain focused on achieving strong long-term performance, our future benchmark and peer group rankings may vary from our past performance. OPERATING REVENUES The table below presents the percentage change in each operating revenue category. Three Months Ended Nine Months Ended June 30, Percent June 30, Percent (in millions) 2020 2019 Change 2020 2019 Change
Investment management fees$ 809.2 $ 1,019.4 (21 %)$ 2,697.1 $ 2,983.6 (10 %) Sales and distribution fees 302.1 367.5 (18 %) 995.3 1,080.8 (8 %) Shareholder servicing fees 44.6 52.7 (15 %) 149.4 164.9 (9 %) Other 32.2 37.1 (13 %) 97.3 92.7 5 % Total Operating Revenues$ 1,188.1 $ 1,476.7 (20 %)$ 3,939.1 $ 4,322.0 (9 %) 35
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Investment Management Fees Investment management fees are generally calculated under contractual arrangements with our investment products and the products for which we provide sub-advisory services as a percentage of AUM. Annual fee rates vary by investment objective and type of services provided. Fee rates for products sold outside of theU.S. are generally higher than forU.S. products. Investment management fees decreased$210.2 million and$286.5 million for the three and nine months endedJune 30, 2020 primarily due to 15% and 6% decreases in average AUM, lower effective investment management fee rates and lower performance fees. The decreases in average AUM occurred across all sales regions and primarily in the global/international investment objectives, partially offset by an increase in theU.S. taxable fixed income investment objective for the nine-month period. Our effective investment management fee rate excluding performance fees (annualized investment management fees excluding performance fees divided by average AUM) decreased to 53.8 and 54.6 basis points for the three and nine months endedJune 30, 2020 , from 56.4 and 56.5 basis points for the same periods in the prior fiscal year. The rate decreases were primarily due to lower weighting of AUM in the global/international investment objectives, which generally have higher fee rates, along with a higher mix of AUM in lower-fee products within theEurope ,Middle East andAfrica sales region for these investment objectives. The rate decrease for the nine-month period also reflects a higher weighting of AUM in theU.S. taxable fixed income investment objective. The fee rate decreases for the three and nine months also reflect certain sponsored funds inIndia with total AUM of$3.3 billion atJune 30, 2020 which are closed pursuant to a wind-up determination and for which the Company no longer earns investment management fees. Performance-based investment management fees were$0.2 million and$24.7 million for the three and nine months endedJune 30, 2020 , and$19.2 million and$39.5 million for the same periods in the prior fiscal year. The decreases were primarily due to lower performance fees earned from separate accounts, as well as from a private debt fund for the three-month period and a real estate fund for the nine-month period. Our product offerings and global operations are diverse. As such, the impact of future changes in AUM on investment management fees will be affected by the relative mix of investment objective, geographic region, distribution channel and investment vehicle of the assets. Sales and Distribution Fees Sales and distribution fees primarily consist of upfront sales commissions and ongoing distribution fees. Sales commissions are earned from the sale of certain classes of sponsored funds at the time of purchase ("commissionable sales") and may be reduced or eliminated depending on the amount invested and the type of investor. Therefore, sales fees will change with the overall level of gross sales, the size of individual transactions, and the relative mix of sales between different share classes and types of investors. Our sponsored mutual funds generally pay us distribution fees in return for sales, marketing and distribution efforts on their behalf. The majority ofU.S. -registered mutual funds, with the exception of certain money market funds, have adopted distribution plans under Rule 12b-1 (the "Rule 12b-1 Plans") promulgated under the Investment Company Act of 1940. The Rule 12b-1 Plans permit the funds to pay us for marketing, marketing support, advertising, printing and sales promotion services relating to the distribution of their shares, subject to the Rule 12b-1 Plans' limitations on amounts based on daily average AUM. Similar arrangements exist for the distribution of non-U.S. funds. We pay substantially all of our sales and distribution fees to the financial advisers and other intermediaries who sell our funds on our behalf. See the description of sales, distribution and marketing expenses below. Sales and distribution fees by revenue driver are presented below. Three Months Ended Nine Months Ended June 30, Percent June 30, Percent (in millions) 2020 2019 Change 2020 2019 Change Asset-based fees$ 243.5 $ 297.9 (18 %)$ 802.9 $ 891.9 (10 %) Sales-based fees 52.5 66.4 (21 %) 177.4 180.0 (1 %) Contingent sales charges 6.1 3.2 91 % 15.0 8.9 69 %
Sales and Distribution Fees
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Asset-based distribution fees decreased$54.4 million and$89.0 million for the three and nine months endedJune 30, 2020 primarily due to decreases of$48.3 million and$69.2 million from 14% and 6% decreases in the related average AUM, and$6.0 million and$18.5 million from a higher mix of lower-feeU.S. assets. Sales-based fees decreased$13.9 million for the three months endedJune 30, 2020 primarily due to a$16.5 million decrease from a 29% decrease in total commissionable sales, partially offset by a$2.9 million increase mainly from a higher mix ofU.S. product commissionable sales. Sales-based fees decreased$2.6 million for the nine months endedJune 30, 2020 primarily due to a$16.6 million decrease from a 58% decrease in non-U.S. product commissionable sales, substantially offset by a$14.0 million increase from a 9% increase inU.S. product commissionable sales.U.S. products typically generate higher sales fees than non-U.S. products. Commissionable sales represented 8% of total sales for the three and nine months endedJune 30, 2020 and 2019. Contingent sales charges are earned from investor redemptions within a contracted period of time. Substantially all of these charges are levied on certain shares sold without a front-end sales charge, and they vary with the mix of redemptions of these shares. Contingent sales charges increased$2.9 million and$6.1 million due to higher redemptions. Shareholder Servicing Fees Substantially all shareholder servicing fees are earned from our sponsored funds for providing transfer agency services, which include providing shareholder statements, transaction processing, customer service and tax reporting. These fees are primarily determined based on a percentage of AUM and either the number of transactions in shareholder accounts or the number of shareholder accounts, while fees from certain funds are based only on AUM. Shareholder servicing fees also include fund reimbursements of expenses incurred while providing transfer agency services. Shareholder servicing fees decreased$8.1 million and$15.5 million for the three and nine months endedJune 30, 2020 primarily due to lower levels of transactions and related AUM. Other Other revenue decreased$4.9 million for the three months endedJune 30, 2020 and increased$4.6 million for the nine months endedJune 30, 2020 primarily due to changes in miscellaneous fee and consolidated investment products ("CIPs") revenues. OPERATING EXPENSES The table below presents the percentage change in each operating expense category. Three Months Ended Nine Months Ended June 30, Percent June 30, Percent (in millions) 2020 2019 Change 2020 2019 Change
Sales, distribution and marketing$ 368.6 $ 462.4 (20 %)$ 1,236.4 $ 1,356.3 (9 %) Compensation and benefits 386.5 437.7 (12 %) 1,141.6 1,202.3 (5 %) Information systems and technology 62.1 65.7 (5 %) 186.4 188.7 (1 %) Occupancy 31.5 32.2 (2 %) 100.4 94.8 6 % General, administrative and other 85.7 103.8 (17 %) 271.8 314.0 (13 %) Total Operating Expenses$ 934.4 $ 1,101.8 (15 %)$ 2,936.6 $ 3,156.1 (7 %) Sales, Distribution and Marketing Sales, distribution and marketing expenses primarily relate to services provided by financial advisers, broker-dealers and other third parties to our sponsored funds, including marketing support services. Substantially all sales expenses are incurred from the same commissionable sales transactions that generate sales fee revenues and are determined as a percentage of sales. Substantially all distribution expenses are incurred from assets that generate distribution fees and are determined as a percentage of AUM. Marketing support expenses are based on AUM, sales or a combination thereof. Also included is the amortization of deferred sales commissions related to upfront commissions on shares sold without a front-end sales charge. The deferred sales commissions are amortized over the periods in which commissions are generally recovered from related revenues. 37
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Sales, distribution and marketing expenses by cost driver are presented below.
Three Months Ended Nine Months Ended
June 30, Percent June 30, Percent
(in millions) 2020 2019 Change 2020 2019 Change
Asset-based expenses $ 296.1 $ 371.7 (20 %) $ 991.1 $ 1,106.1 (10 %)
Sales-based expenses 53.9 70.4 (23 %) 185.2 190.1 (3 %)
Amortization of deferred
sales commissions 18.6 20.3 (8 %) 60.1 60.1 0%
Sales, Distribution and
Marketing $ 368.6 $ 462.4 (20 %) $ 1,236.4 $ 1,356.3 (9 %)
Asset-based expenses decreased $75.6 million and $115.0 million for the three
and nine months ended June 30, 2020 primarily due to decreases of $61.0 million
and $94.5 million from 15% and 8% decreases in the related average AUM and
$4.8 million and $15.7 million from a higher mix of lower-fee U.S. assets.
Distribution expenses are generally not directly correlated with distribution
fee revenues due to certain international fee structures that do not provide
full recovery of distribution costs.
Sales-based expenses decreased $16.5 million for the three months ended June 30,
2020 primarily due to a $17.4 million decrease from a 29% decrease in total
commissionable sales. Sales-based expenses decreased $4.9 million for the nine
months ended June 30, 2020 primarily due to an $18.0 million decrease from 58%
decrease in non-U.S. product commissionable sales, substantially offset by a
$14.0 million increase from a 9% increase in U.S. product commissionable sales.
U.S. products typically generate higher sales commissions than non-U.S.
products.
Amortization of deferred sales commissions decreased $1.7 million for the three
months ended June 30, 2020 primarily due to lower expenses resulting from
decreased sales of U.S. shares and non-U.S. shares sold without a front-end
sales charge.
Compensation and Benefits
Compensation and benefit expenses decreased $51.2 million and $60.7 million for
the three and nine months ended June 30, 2020 due to decreases of $47.5 million
and $26.8 million in salaries, wages and benefits, and $3.7 million and
$33.9 million in variable compensation. Salaries, wages and benefits decreased
primarily due to decreases of $32.0 million and $33.0 million in termination
benefits and $12.0 million and $30.4 million from lower average staffing levels,
partially offset by increases of $4.6 million and $14.8 million for annual
salary increases that were effective December 1, 2019 and 2018.
Acquisition-related retention compensation decreased $6.0 million for the
three-month period and increased $21.0 million for the nine-month period.
Variable compensation decreased for the three-month period primarily due to
decreases of $2.5 million related to acquired firms' performance bonus plans,
$1.6 million for sales-related bonuses and $1.4 million primarily related to
private equity and other product performance fees, partially offset by a
$2.2 million increase in bonus expense based on current expectations of our
annual performance. Variable compensation decreased for the nine-month period
primarily due to decreases of $36.1 million in bonus expense due to lower
expectations of our annual performance, $13.1 million related to unvested mutual
fund awards and $4.7 million for sales-related bonuses, partially offset by a
$19.1 million increase related to acquired firms' performance bonus plans.
We expect to incur additional acquisition-related retention expenses related to
prior acquisitions of approximately $20 million during the remainder of the
current fiscal year, and annual amounts beginning at approximately $70 million
in the fiscal year ending September 30, 2021 and gradually decreasing by
approximately $10 million per year in the following three fiscal years. We also
expect to incur additional termination benefit expenses related to workforce
optimization initiatives related to the pending acquisition of Legg Mason, Inc.
("Legg Mason") of approximately $14 million during the remainder of the fiscal
year.
Variable compensation as a percentage of compensation and benefits was 32% and
29% for the three and nine months ended June 30, 2020 and 29% and 31% for the
same periods in the prior fiscal year. At June 30, 2020 , our global workforce
had decreased to approximately 9,500 employees from approximately 9,800 at
June 30, 2019 .
We continue to place a high emphasis on our pay for performance philosophy. As
such, any changes in the underlying performance of our investment products or
changes in the composition of our incentive compensation offerings could have an
impact on compensation and benefit expenses going forward. However, in order to
attract and retain talented individuals, our level of compensation and benefit
expenses may increase more quickly or decrease more slowly than our revenue.
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Information Systems and Technology Information systems and technology expenses decreased$3.6 million and$2.3 million for the three and nine months endedJune 30, 2020 primarily due to lower technology consulting and maintenance, and external data service costs, partially offset by higher software costs. Details of capitalized information systems and technology costs are shown below. Three Months Ended Nine Months Ended June 30, June 30, (in millions) 2020 2019 2020 2019 Net carrying value at beginning of period$ 105.1 $ 106.0 $ 112.0 $ 106.2 Additions, net of disposals 6.1 11.1 23.3 34.6 Amortization (12.9 ) (12.6 )
(37.0 ) (36.3 )
Net Carrying Value at End of Period
Occupancy
We conduct our worldwide operations using a combination of leased and owned facilities. Occupancy expenses include rent and other facilities-related costs including depreciation and utilities. Occupancy expenses decreased$0.7 million and increased$5.6 million for the three and nine months endedJune 30, 2020 . The increase for the nine-month period was primarily due to higher depreciation and other expenses related to our new buildings inSan Mateo, California and Poznan,Poland which we occupied beginning in the second half of fiscal year 2019. General, Administrative and Other General, administrative and other operating expenses primarily consist of fund-related service fees payable to external parties, professional fees, travel and entertainment, advertising and promotion, and other miscellaneous expenses. General, administrative and other operating expenses decreased$18.1 million and$42.2 million for the three and nine months endedJune 30, 2020 , primarily due to lower travel and entertainment and advertising and promotion expenses and impairments of intangible assets, partially offset by higher CIPs expenses. The decrease for the three-month period was also partially offset by higher professional fees. The decrease for the nine-month period was also due to a prior-year litigation settlement, partially offset by higher amortization of intangible assets. Travel and entertainment expenses decreased$9.5 million and$15.2 million and advertising and promotion expenses decreased$5.8 million and$9.5 million for the three and nine months endedJune 30, 2020 primarily due to lower activity levels. Impairments of intangible assets related to previous acquisitions decreased$9.3 million and$6.5 million for the three and nine months endedJune 30, 2020 . The decreases for the three and nine months periods were partially offset by increases of$3.2 million and$9.1 million in CIPs expenses, as well as a$4.4 million increase in professional fees for the three-month period primarily related to acquisitions. The decrease for the nine-month period also included a prior-year$13.9 million litigation settlement, partially offset by a$4.2 million increase in intangible asset amortization primarily related to the prior-year acquisition ofBenefit Street Partners L.L.C. ("BSP"). Non-employee directors' compensation increased$2.1 million for the three-month period and decreased$2.3 million for the nine-month period, primarily due to the impacts of changes in our stock price. We are committed to investing in advertising and promotion in response to changing business conditions, and to advance our products where we see continued or potential new growth opportunities. As a result of potential changes in our strategic marketing campaigns, the level of advertising and promotion expenses may increase more rapidly, or decrease more slowly, than our revenues. 39
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OTHER INCOME (EXPENSES)
Other income (expenses) consisted of the following:
Three Months Ended Nine Months Ended
June 30, Percent June 30, Percent
(in millions) 2020 2019 Change 2020 2019 Change
Investment and other income $ 22.9 $ 44.2 $ (166.5 ) $ 103.8
(losses), net (48 %) NM
Interest expense (6.8 ) (5.6 ) 21 % (17.7 ) (17.7 ) 0%
Other Income (Expenses),
Net $ 16.1 $ 38.6 (58 %) $ (184.2 ) $ 86.1 NM
Investment and other income (losses), net consists primarily of dividend and
interest income, income (losses) from equity method investees, gains (losses) on
investments held by the Company and investments of CIPs, rental income and
foreign currency exchange gains (losses).
Other income (expenses), net decreased $22.5 million and $270.3 million for the
three and nine months ended June 30, 2020 , primarily reflecting partial recovery
in market valuations in the three-month period following steep declines amid
global concerns about the COVID-19 pandemic during the nine-month period. Equity
method investees generated losses of $110.3 million for the nine-month period,
as compared to income of $15.1 million in the prior-year, primarily related to
investments in two global equity funds. Net losses on investments of CIPs
increased $28.4 million and $87.5 million for the three and nine-month periods
primarily from holdings of various fixed income funds. Investments held by the
Company generated a $42.0 million increase in net gains for the three-month
period and a $13.2 million increase in net losses for the nine-month period,
primarily from various nonconsolidated funds and other equity and debt
securities. Swap contracts to hedge against changes in the value of certain
investments generated $20.2 million of losses and $8.9 million of gains for the
three and nine months ended June 30, 2020 . Dividend income decreased
$18.7 million and $29.9 million for the three and nine-periods primarily due to
lower yields on money market funds. Interest income decreased $13.3 million for
the nine-month period primarily due to lower levels of cash equivalents and debt
securities and interest rates. Weakening of the U.S. dollar against the Euro
resulted in $11.5 million of foreign exchange losses during the nine-month
period on cash and cash equivalents denominated in U.S. dollars held in Europe ,
as compared to net gains of $7.3 million in the prior-year period.
Significant portions of the net gains (losses) of CIPs are offset in
noncontrolling interests in our consolidated statements of income.
Our investments in sponsored funds include initial cash investments made in the
course of launching mutual fund and other investment product offerings, as well
as investments for other business reasons. The market conditions that impact our
AUM similarly affect the investment income earned or losses incurred on our
investments in sponsored funds.
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Our cash, cash equivalents and investments portfolio by investment objective and accounting classification atJune 30, 2020 , excluding third-party assets of CIPs, was as follows: Accounting Classification1 Cash and Equity Cash Securities, Equity Direct Equivalents at Method Investments Total Direct (in millions) and Other2 Fair Value Investments in CIPs Portfolio Cash and Cash Equivalents$ 6,358.7 $ - $ - $ -$ 6,358.7 Investments Equity Global/international 36.1 165.8 185.4 145.2 532.5 United States 35.0 3.5 46.0 84.8 169.3 Total equity 71.1 169.3 231.4 230.0 701.8 Multi-Asset/Balanced - 33.8 1.9 130.5 166.2 Fixed Income Tax-free - - - 10.9 10.9 Taxable Global/international 44.2 47.8 111.1 281.7 484.8 United States 22.8 275.8 125.8 93.0 517.4 Total fixed income 67.0 323.6 236.9 385.6 1,013.1 Total investments 138.1 526.7 470.2 746.1 1,881.1 Total Cash and Cash Equivalents and Investments$ 6,496.8 $ 526.7 $ 470.2 $ 746.1 $ 8,239.8 ______________
1 See Note 1 - Significant Accounting Policies in the notes to consolidated
financial statements in Item 8 of Part II of our Form 10-K for fiscal year
2019 for information on investment accounting classifications.
2 Other consists of
TAXES ON INCOME Our effective income tax rate was 6.0% and 19.3% for the three and nine months endedJune 30, 2020 , as compared to 38.4% and 28.4% for the same periods in the prior fiscal year. The rate decreases were primarily due to the prior-year reversal of the tax benefit included in the transition tax related toU.S. taxation of deemed foreign dividends upon issuance of final regulations by theU.S. Department of Treasury for the Tax Cuts and Jobs Act of 2017, and tax benefits from capital losses subsequent to the change in corporate tax structure of a foreign holding company to aU.S. branch. The Coronavirus Aid, Relief, and Economic Security Act, which includes several corporate tax provisions and was signed into law onMarch 27, 2020 , did not have a material impact on our income taxes. 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. 41
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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 are 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 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.
"Adjusted operating income," "adjusted operating margin," "adjusted net income"
and "adjusted diluted earnings per share" are defined below, along with
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 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:
• Revenues and expenses of CIPs, net of revenues eliminated upon
consolidation of investment products.
• Acquisition-related retention compensation.
• Other acquisition-related expenses including professional fees and fair
value adjustments related to contingent consideration liabilities.
• Amortization and impairment of intangible assets.
• Special termination benefits related to workforce optimization initiatives
related to the pending acquisition of Legg Mason in fiscal year 2020, and
voluntary separation and workforce reduction initiatives of 4.5% of our
global workforce in fiscal year 2019.
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:
• 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.
• Revenues of CIPs, net of revenues eliminated upon consolidation of
investment products.
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Adjusted Net Income We define adjusted net income as net income attributable toFranklin Resources, Inc. adjusted to exclude the following: • Activities of CIPs, including revenues, expenses, investment and other
income (losses), net, and income (loss) attributable to noncontrolling
interests, net of amounts eliminated upon consolidation of investment
products.
• Acquisition-related retention compensation.
• Other acquisition-related expenses including professional fees and fair
value adjustments related to contingent consideration liabilities and
retention awards.
• Amortization and impairment of intangible assets.
• Special termination benefits related to workforce optimization initiatives
related to the pending acquisition of Legg Mason in fiscal year 2020, and
voluntary separation and workforce reduction initiatives of 4.5% of our
global workforce in fiscal year 2019.
• Unrealized investment gains and losses included in investment and other
income (losses), net.
• Net income tax benefit 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 CIPs are not considered reflective of the underlying
results of our operations. We adjust for acquisition-related retention
compensation, other acquisition-related expenses, and amortization and
impairment of intangible assets 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
the pending acquisition of Legg Mason in fiscal year 2020 and certain voluntary
separation and workforce reduction initiatives 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 because these items primarily relate
to seed and strategic investments which have been and are generally expected to
be held long term.
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The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows:
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