FRANKLIN RESOURCES, INC. FORWARD-LOOKING STATEMENTS
The following discussion and analysis of the results of operations and financial condition ofFranklin Resources, Inc. ("Franklin") and its subsidiaries (collectively, the "Company") should be read in conjunction with the "Forward-looking Statements" disclosure set forth in Part I and the "Risk Factors" set forth in Item 1A of Part I of this Annual Report on Form 10K (this "Annual Report") and in any more recent filings with theU.S. Securities and Exchange Commission (the "SEC"), each of which describe our risks, uncertainties and other important factors in more detail.
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. Related 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®, Alcentra®, Benefit Street Partners®, Brandywine Global Investment Management®, Clarion Partners®,ClearBridge Investments®, Fiduciary Trust International™, Franklin Bissett®, Franklin Mutual Series®, K2®, Lexington Partners®, 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. 30
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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 above in Item 1A of Part I of this Annual Report, 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 the fiscal year ended September 30, 2022 ("fiscal year 2022"), global
equity markets experienced significant declines driven by the economic impacts
of inflationary pressures, interest rate increases by the Federal Reserve and
other developed market central banks in an effort to combat inflation, central
banks' tightened monetary policies, the Russian invasion of Ukraine , and
concerns about the risk of recession. The S&P 500 Index and MSCI World Index
decreased 15.5% and 19.3% for the fiscal year. The global bond markets also
declined as the Bloomberg Barclays Global Aggregate Index decreased 20.4% for
the fiscal year driven by the interest rate increases.
Our total AUM was $1,297.4 billion at September 30, 2022 , which was 15% lower
than at September 30, 2021 driven by the negative impact of $269.0 billion of
net market change, distributions and other, $27.8 billion of long-term net
outflows and $0.8 billion of cash management net outflows, partially offset by
$64.9 billion from acquisitions. Simple monthly average AUM ("average AUM")
decreased 2% during fiscal year 2022.
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 to certain
employees that 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 $300 million , excluding future payments to
be made subject to the attainment of certain performance measures.
The business and regulatory environments in which we operate globally remain
complex, uncertain and subject to change. We are subject to various laws, rules
and regulations globally that impose restrictions, limitations, registration,
reporting and disclosure requirements on our business, and add complexity to our
global compliance operations.
Uncertainties regarding the global economy remain for the foreseeable future. As
we continue to confront the challenges of the current economic and regulatory
environments, we remain focused on the investment performance of our products
and on providing high quality service to our clients. We continuously perform
reviews of our business model. While we remain focused on expense management, we
will also seek to attract, retain and develop personnel and invest strategically
in systems and technology that will provide a secure and stable environment. We
will continue to seek to protect and further our brand recognition while
developing and maintaining broker-dealer and client relationships. The success
of these and other strategies may be influenced by the factors discussed in the
"Risk Factors" section.
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RESULTS OF OPERATIONS
(in millions, except per share data) for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Operating revenues$ 8,275.3 $ 8,425.5 $ 5,566.5 (2 %) 51 % Operating income 1,773.9 1,875.0 1,048.9 (5 %) 79 % Operating margin1 21.4 % 22.3 % 18.8 % Net income attributable to Franklin Resources, Inc.$ 1,291.9 $ 1,831.2 $ 798.9 (29 %) 129 % Diluted earnings per share$ 2.53 $ 3.57 $ 1.59 (29 %) 125
%
As adjusted (non-GAAP):2 Adjusted operating income$ 2,323.5 $ 2,379.3 $ 1,491.1 (2 %) 60 % Adjusted operating margin 35.9 % 37.7 % 38.5 % Adjusted net income$ 1,855.6 $ 1,915.2 $ 1,311.0 (3 %) 46 % Adjusted diluted earnings per share$ 3.63 $ 3.74 $ 2.61 (3 %) 43 % __________________ 1Defined 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.
ASSETS UNDER MANAGEMENT
AUM by asset class was as follows:
(in billions)
as of September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Fixed Income $ 490.9 $ 650.3 $ 656.9 (25 %) (1 %)
Equity 392.3 523.6 438.1 (25 %) 20 %
Alternative 225.1 145.2 122.1 55 % 19 %
Multi-Asset 131.5 152.4 129.4 (14 %) 18 %
Cash Management 57.6 58.6 72.4 (2 %) (19 %)
Total $ 1,297.4 $ 1,530.1 $ 1,418.9 (15 %) 8 %
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Changes in average AUM are generally more indicative of trends in revenue for providing investment management services than the year-over-year change in ending AUM. Average AUM and the mix of average AUM by asset class are shown below.
(in billions) Average AUM for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Fixed Income$ 586.5 $ 657.5 $ 330.5 (11 %) 99 % Equity 491.3 502.9 290.8 (2 %) 73 % Alternative 185.1 132.6 63.7 40 % 108 % Multi-Asset 146.1 146.4 122.7 0 % 19 % Cash Management 60.2 64.7 25.2 (7 %) 157 % Total$ 1,469.2 $ 1,504.1 $ 832.9 (2 %) 81 % Mix of Average AUM
for the fiscal years ended September 30, 2022 2021 2020
Fixed Income 40 % 44 % 39 %
Equity 33 % 33 % 35 %
Alternative 13 % 9 % 8 %
Multi-Asset 10 % 10 % 15 %
Cash Management 4 % 4 % 3 %
Total 100 % 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, and foreign exchange revaluation.
(in billions) for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Beginning AUM$ 1,530.1 $ 1,418.9 $ 692.6 8 % 105 % Long-term inflows 320.4 364.7 182.4 (12 %) 100 % Long-term outflows (348.2) (389.9) (244.0) (11 %) 60 % Long-term net flows (27.8) (25.2) (61.6) 10 % (59 %) Cash management net flows (0.8) (15.1) (9.9) (95 %) 53% Total net flows (28.6) (40.3) (71.5) (29 %) (44 %) Acquisitions 64.9 3.5 806.5 NM (100 %) Net market change, distributions and other (269.0) 148.0 (8.7) NM NM Ending AUM$ 1,297.4 $ 1,530.1 $ 1,418.9 (15 %) 8 % 33
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Components of the change in AUM by asset class were as follows:
(in billions) for the fiscal year ended Fixed Cash September 30, 2022 Income Equity Alternative Multi-Asset Management Total AUM at October 1, 2021$ 650.3 $ 523.6 $ 145.2 $ 152.4 $ 58.6 $ 1,530.1 Long-term inflows 138.4 123.0 22.4 36.6 - 320.4 Long-term outflows (168.6) (131.6) (16.1) (31.9) - (348.2) Long-term net flows (30.2) (8.6) 6.3 4.7 - (27.8) Cash management net flows - - - - (0.8) (0.8) Total net flows (30.2) (8.6) 6.3 4.7 (0.8) (28.6) Acquisitions - 4.6 58.0 2.3 - 64.9 Net market change, distributions and other (129.2) (127.3) 15.6 (27.9) (0.2) (269.0) AUM at September 30, 2022$ 490.9 $ 392.3 $ 225.1 $ 131.5 $ 57.6 $ 1,297.4 AUM decreased$232.7 billion or 15% during fiscal year 2022 due to the negative impact of$269.0 billion of net market change, distributions and other,$27.8 billion of long-term net outflows and$0.8 billion of cash management net outflows, partially offset by acquisitions of$64.9 billion . Net market change, distributions and other primarily consists of$199.2 billion of market depreciation,$48.7 billion of long-term distributions and a$21.1 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 notU.S. dollar denominated was primarily due to a strongerU.S. dollar compared to the Japanese Yen, Euro, Pound Sterling and Australian dollar. Long-term inflows decreased 12% to$320.4 billion , as compared to the prior year, driven by lower inflows in fixed income institutional separate accounts, open-end funds, and retail separately managed accounts, as well as equity open-end funds, partially offset by higher alternative inflows for private funds. Long-term outflows decreased 11% to$348.2 billion due to lower outflows in fixed income institutional separate accounts, equity and multi-asset open-end funds, and equity sub-advised mutual funds, partially offset by higher equity outflows in retail separately managed accounts and multi-asset sub-advised mutual funds. (in billions) for the fiscal year ended Fixed Cash September 30, 2021 Income Equity Alternative Multi-Asset Management Total AUM at October 1, 2020$ 656.9 $ 438.1 $ 122.1 $ 129.4 $ 72.4 $ 1,418.9 Long-term inflows 176.5 132.1 19.8 36.3 - 364.7 Long-term outflows (188.2) (154.2) (11.8) (35.7) - (389.9) Long-term net flows (11.7) (22.1) 8.0 0.6 - (25.2) Cash management net flows - - - - (15.1) (15.1) Total net flows (11.7) (22.1) 8.0 0.6 (15.1) (40.3) Acquisitions 3.5 - - - - 3.5 Net market change, distributions and other 1.6 107.6 15.1 22.4 1.3 148.0 AUM at September 30, 2021$ 650.3 $ 523.6 $ 145.2 $ 152.4 $ 58.6 $ 1,530.1 AUM increased$111.2 billion or 8% during fiscal year 2021 due to the positive impact of$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. Net market change, distributions and other primarily consists of$176.3 billion of market appreciation, partially offset by$29.1 billion of long-term distributions. The market appreciation occurred in all asset classes, most significantly in the equity and multi-asset classes and reflected positive returns in global equity markets. Long-term inflows increased 100% to$364.7 billion , as compared to the prior year, and long-term outflows increased 60% to$389.9 billion due to higher inflows and outflows in all long-term asset classes primarily due to the acquisition ofLegg Mason . Long-term net outflows included outflows of$35.7 billion from sixteen institutional products, including two fixed income redemptions of$5.9 billion and$2.0 billion and two equity redemptions of$3.7 billion and 34
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$2.2 billion ,$12.5 billion from seven fixed income funds, including$3.3 billion from fiveIndia credit funds that were non-management fee earning which are in the process of winding up,$5.4 billion from a 529 plan redemption,$3.9 billion from two equity funds and$3.1 billion from a multi-asset fund, partially offset by inflows of$12.3 billion in three fixed income funds,$6.7 billion in three institutional products,$3.7 billion in an equity fund,$3.1 billion in a multi-asset fund and$3.0 billion in two alternative funds. (in billions) for the fiscal year ended Fixed Cash September 30, 2020 Income Equity Alternative Multi-Asset Management Total AUM at October 1, 2019$ 250.6 $ 263.9 $ 45.0 $ 123.6 $ 9.5 $ 692.6 Long-term inflows 79.7 64.6 10.6 27.5 - 182.4 Long-term outflows (112.9) (90.6) (7.3) (33.2) - (244.0) Long-term net flows (33.2) (26.0) 3.3 (5.7) - (61.6) Cash management net flows - - - - (9.9) (9.9) Total net flows (33.2) (26.0) 3.3 (5.7) (9.9) (71.5) Acquisition 449.6 189.2 73.9 18.2 75.6 806.5 Net market change, distributions and other (10.1) 11.0 (0.1) (6.7) (2.8) (8.7) AUM at September 30, 2020$ 656.9 $ 438.1 $ 122.1 $ 129.4 $ 72.4 $ 1,418.9
AUM by sales region was as follows:
(in billions) as of September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 United States$ 971.3 $ 1,140.2 $ 1,024.0 (15 %) 11 % International Asia-Pacific 118.4 155.6 168.6 (24 %) (8 %) Europe, Middle East and Africa 126.6 153.9 141.8 (18 %) 9 % Americas, excl. U.S. 81.1 80.4 84.5 1 % (5 %) Total international$ 326.1 $ 389.9 $ 394.9 (16 %) (1 %) Total$ 1,297.4 $ 1,530.1 $ 1,418.9 (15 %) 8 %
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 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.
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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 % of Strategy Composite AUM
in Top Two Peer Group Quartiles Exceeding Benchmark
as of September 30, 2022 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year
Fixed Income 40 % 42 % 32 % 69 % 26 % 49 % 58 % 92 %
Equity 44 % 34 % 49 % 64 % 39 % 29 % 44 % 37 %
Total AUM3 52 % 47 % 51 % 57 % 41 % 48 % 58 % 70 %
_______________
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 36%, 36%, 36% and 34% of our
total AUM as of September 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 64%, 63%, 63% and 59% of our total AUM as of
September 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 17% and 10% of our total
AUM at September 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 October 7, 2022 and are subject to revision.
Past performance is not indicative of future results. For AUM included in
institutional and retail separately managed 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.
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OPERATING REVENUES
The table below presents the percentage change in each operating revenue category.
(in millions) for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Investment management fees$ 6,616.8 $ 6,541.6 $ 3,981.7 1 % 64 % Sales and distribution fees 1,415.0 1,635.5 1,362.0 (13 %) 20 % Shareholder servicing fees 193.0 211.2 195.1 (9 %) 8 % Other 50.5 37.2 27.7 36 % 34 % Total Operating Revenues$ 8,275.3 $ 8,425.5 $ 5,566.5 (2 %) 51 % 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 asset class and type of services provided. Fee rates for products sold outside of theU.S. are generally higher than forU.S. products. Investment management fees increased$75.2 million in fiscal year 2022 primarily due to higher performance fees, partially offset by a 2% decrease in average AUM. 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$2,559.9 million in fiscal year 2021 primarily due to the acquisition ofLegg Mason , a 5% increase in average AUM and higher performance fees. The increase in average AUM occurred primarily in the equity and multi-asset asset classes, partially offset by a decrease in the fixed income asset class. Our effective investment management fee rate excluding performance fees (investment management fees excluding performance fees divided by average AUM) was 41.6, 41.8 and 47.3 basis points for fiscal years 2022, 2021 and 2020. The rate decrease in fiscal year 2022 was primarily due to a shift in assets from higher-fee products to lower-fee products in the fixed income and equity asset classes. The rate decrease in fiscal year 2021 was primarily due to the Legg Mason acquisition, asLegg Mason generally had a lower overall effective fee rate due to a higher mix of institutional and fixed income AUM. Performance-based investment management fees were$498.2 million ,$258.6 million and$44.0 million for fiscal years 2022, 2021 and 2020. The increase in fiscal year 2022 was primarily due to strong performance by our alternative specialist investment managers, while the increase in fiscal year 2021 was primarily due to the acquisition ofLegg Mason as well as strong performance.
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 asset class, 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 generally 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 of our
U.S. mutual funds, with the exception of certain money market funds and certain
other funds specifically designed for purchase through separately managed
account programs, 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. We
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earn distribution fees from our non-
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 vary with the mix of redemptions of these shares.
We pay substantially all of our sales and distribution fees to the financial advisers, broker-dealers and other intermediaries that 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.
(in millions) for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Asset-based fees$ 1,150.2 $ 1,302.3 $ 1,096.3 (12 %) 19 % Sales-based fees 251.1 314.6 245.9 (20 %) 28 % Contingent sales charges 13.7 18.6 19.8 (26 %) (6 %) Sales and Distribution Fees$ 1,415.0 $ 1,635.5 $ 1,362.0 (13 %) 20 %
Asset-based distribution fees decreased
Sales-based fees decreased$63.5 million in fiscal year 2022 primarily due to a 20% decrease in commissionable sales. Sales-based fees increased$68.7 million in fiscal year 2021 primarily due to the acquisition ofLegg Mason and$13.0 million from higher commissionable sales.
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$18.2 million in fiscal year 2022 primarily due to lower levels of related AUM and transactions. Shareholder servicing fees increased$16.1 million in fiscal year 2021 primarily due to the acquisition ofLegg Mason and higher levels of related AUM, partially offset by lower levels of transactions. Other Other revenue increased$13.3 million and increased$9.5 million in fiscal years 2022 and 2021 primarily due to higher real estate transaction fees earned by certain of our alternative asset managers. 38
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OPERATING EXPENSES
The table below presents the percentage change in each operating expense category.
(in millions) for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Compensation and benefits$ 3,089.8 $ 2,971.3 $ 1,873.9 4 % 59 % Sales, distribution and marketing 1,845.6 2,105.8 1,703.1 (12 %) 24 % Information systems and technology 500.2 486.1 288.4 3 % 69 % Occupancy 218.9 218.1 147.9 0 % 47 % Amortization of intangible assets 282.0 232.0 54.0 22 % 330 % General, administrative and other 564.9 537.2 450.3 5 % 19 % Total Operating Expenses$ 6,501.4 $ 6,550.5 $ 4,517.6 (1 %) 45 % Compensation and Benefits
The components of compensation and benefits expenses are presented below.
(in millions) for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Salaries, wages and benefits$ 1,426.4 $ 1,428.6 $ 1,062.7 0 % 34 % Incentive compensation 1,500.5 1,303.9 550.0 15 % 137 % Acquisition-related retention 167.2 163.7 195.8 2 % (16 %) Other1 (4.3) 75.1 65.4 NM 15 % Compensation and Benefits Expenses$ 3,089.8 $ 2,971.3 $ 1,873.9 4 % 59 % _______________ 1 Includes 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; special termination benefits; and acquisition-related performance-based investment management fees which are passed through as compensation and benefits expense. Salaries, wages and benefits decreased$2.2 million in fiscal year 2022 primarily due to a$16.8 million decrease in termination benefits and the impact of headcount reductions which were substantially offset by increases due to annual salary adjustments and the acquisitions of Lexington and OSAM. Salaries, wages and benefits increased$365.9 million in fiscal year 2021, primarily due to the acquisition ofLegg Mason . Incentive compensation increased$196.6 million in fiscal year 2022, primarily due to higher performance fees and the acquisition of Lexington. Incentive compensation increased$753.9 million in fiscal year 2021, primarily due to the acquisition ofLegg Mason . Acquisition-related retention expenses increased$3.5 million in fiscal year 2022, primarily due to acquisition of Lexington and decreased$32.1 million in fiscal year 2021 primarily due to lower costs associated with the acquisition ofLegg Mason . Other compensation and benefits were$(4.3) million ,$75.1 million , and$65.4 million for fiscal years 2022, 2021, and 2020. The changes for fiscal years 2022 and 2021 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$18.9 million and$27.7 million in fiscal years 2022 and 2021 primarily due to workforce optimization initiatives related to the acquisition ofLegg Mason .
We expect to incur acquisition-related retention expenses of approximately
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We continue to place a high emphasis on our pay for performance philosophy. As such, any changes in the underlying performance of our investment products or changes in the composition of our incentive compensation offerings could have an impact on compensation and benefits expenses going forward. However, in order to attract and retain talented individuals, our level of compensation and benefit expenses may increase more quickly or decrease more slowly than our revenue.
Sales,
Sales, distribution and marketing expenses primarily relate to services provided by financial advisers, broker-dealers and other intermediaries to our sponsored funds, including marketing support services. Substantially all distribution expenses are incurred from assets that generate distribution fees and are determined as a percentage of AUM. Substantially all sales expenses are incurred from the same commissionable sales transactions that generate sales fee revenues and are determined as a percentage of sales. Marketing support expenses are based on AUM, sales or a combination thereof. Also included is the amortization of deferred sales commissions related to upfront commissions on shares sold without a front-end sales charge. The deferred sales commissions are amortized over the periods in which commissions are generally recovered from related revenues.
Sales, distribution and marketing expenses by cost driver are presented below.
(in millions) for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Asset-based expenses$ 1,532.6 $ 1,714.7 $ 1,369.0 (11 %) 25 % Sales-based expenses 248.2 312.9 253.8 (21 %) 23 % Amortization of deferred sales commissions 64.8 78.2 80.3 (17 %) (3 %) Sales, Distribution and Marketing$ 1,845.6 $ 2,105.8 $ 1,703.1 (12 %)
24 %
Asset-based expenses decreased$182.1 million in fiscal year 2022 primarily due to an 11% decrease in the related average AUM. Asset-based expenses increased$345.7 million in fiscal year 2021 primarily due to the acquisition ofLegg Mason and$59.7 million from a 5% increase in the related average AUM. Sales-based expenses decreased$64.7 million in fiscal year 2022 primarily due to a 20% decrease in commissionable sales. Sales-based expenses increased$59.1 million in fiscal year 2021 primarily due to the acquisition ofLegg Mason and$12.1 million from higher commissionable sales.
Information
Information systems and technology expenses increased$14.1 million in fiscal year 2022 primarily due to higher costs incurred for technology consulting, software and external data services offset in part by lower technology depreciation. Information systems and technology expenses increased$197.7 million in fiscal year 2021 primarily due to higher external data service and software costs and technology consulting as a result of the Legg Mason acquisition.
Occupancy
Occupancy expenses remained relatively flat in fiscal year 2022 and increased
Amortization of intangible assets
Amortization of intangible assets increased$50.0 million in fiscal year 2022, primarily due to intangible assets recognized as part of the acquisition ofLexington Partners , and increased$178.0 million in fiscal year 2021 primarily due to intangible assets recognized as part of the acquisition ofLegg Mason . 40
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General, Administrative and Other
General, administrative and other expenses primarily consist of professional fees, fund-related service fees payable to external parties, advertising and promotion, travel and entertainment, and other miscellaneous expenses. General, administrative and other operating expenses increased$27.7 million in fiscal year 2022, primarily due to increases of$27.1 million in advertising and promotion expenses, due in part to our global brand campaign,$25.7 million in professional fees, largely related to acquisition-costs, and$24.0 million in travel and entertainment expenses. Fiscal year 2022 also included$20.3 million of non-recurring costs incurred in connection with the outsourcing of our transfer agent functions. These increases were partially offset by$43.0 million of closed-end fund product launch costs incurred in the prior year. Fiscal year 2022 also included net credits of$19.2 million to adjust the fair values of our contingent consideration asset and liabilities, as compared to$4.1 million of expense recognized in the prior year. General, administrative and other operating expenses increased$86.9 million in fiscal year 2021, primarily due to the acquisition ofLegg Mason and$43.0 million of closed-end fund product launch costs. The increase was also due to increases of$35.0 million in third-party fund administration and sub-advisory service fees and$12.9 million in placement and platform fees. The increases were partially offset by$55.4 million of prior year impairments of intangible assets and goodwill primarily related to assets recognized from the acquisitions ofBenefit Street Partners, L.L.C. andOnsa, Inc. , (formally known asTokenVault, Inc. ).
OTHER INCOME (EXPENSES)
Other income (expenses) consisted of the following:
(in millions) for the fiscal years ended September 30, 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Investment and other income (losses), net
$ (38.4) (66 %) NM Interest expense (98.2) (85.4) (33.4) 15 % 156 % Investment and other income (losses) of consolidated investment products, net (17.7) 421.1 70.2 NM 500 % Expenses of consolidated investment products (19.7) (31.2) (29.4) (37 %) 6 % Other Income (Expenses), Net$ (44.5) $ 569.2 $ (31.0) NM NM Investment and other income (losses), net consists primarily of gains (losses) on investments held by the Company, income (losses) from equity method investees, foreign currency exchange gains (losses), rental income from excess owned space which we lease to third parties, gains (losses) on derivatives, and dividend income. Investment and other income (losses), net decreased$173.6 million in fiscal year 2022 primarily due to the impact of market declines in the current year. Investment and other income (losses), net increased$303.1 million in fiscal year 2021 primarily due to income from equity method investees and gains on investments held by the Company, partially offset by a decrease in dividend income and losses on derivatives. Income from equity method investees decreased$118.1 million in fiscal year 2022. The current year included a$52.6 million gain recognized on the sale of our investment in Embark, offset in part by losses from equity method investees, largely related to declines in market valuations of investments held by various global equity and alternative funds, while the prior year included gains from equity method investees. Equity method investees generated income of$154.3 million in fiscal year 2021, as compared to losses of$98.1 million in fiscal year 2020, reflecting recovery in market valuations of investments held by various global equity funds. Investments held by the Company generated net losses of$75.4 million , as compared to net gains of$90.9 million in the prior year, 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 change. Investments held by the Company generated net gains of$90.9 million in fiscal year 2021, as compared to net losses of$16.8 million in fiscal year 2020, primarily from various nonconsolidated funds, and in fiscal year 2021, assets invested forLegg Mason deferred compensation plans. 41
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Net foreign currency exchange gains were$40.6 million in fiscal year 2022, as compared to net losses of$11.9 million in the prior year. The increases were primarily due to the impact of the strengthening of theU.S. dollar against the Euro and British Pound.
Derivatives generated gains of
Dividend and interest income increased
Interest expense increased$12.8 million in fiscal year 2022 primarily due to accretion on Lexington deferred consideration. Interest expense increased$52.0 million in fiscal year 2021 primarily due to interest expense recognized on debt ofLegg Mason and on the senior unsecured unsubordinated notes issued during fiscal year 2021, partially offset by the redemption of the junior notes issued byLegg Mason. Investment and other income (loss) of consolidated investment products, net consists of investment gains (losses) on investments held by consolidated investment products ("CIPs") and dividend and interest income. Expenses of consolidated investment products primarily consists of fund-related expenses, including professional fees and other administrative expenses, and interest expense. Significant portions of the investment and other income of consolidated investment products, net and expenses of consolidated investment products are offset in noncontrolling interests in our consolidated statements of income. Investments held by CIPs generated losses of$66.9 million in fiscal year 2022, as compared to gains of$324.6 million in the prior year, largely related to net losses on holdings of various equity and fixed income funds and lower gains on holdings of various alternative funds. Dividend and interest income of CIPs was$49.2 million in fiscal year 2022, as compared to$96.5 million in the prior year. Investment and other income of consolidated investment products, net increased$350.9 million in fiscal year 2021 primarily due to net gains on investments held by various alternative funds. Expenses of consolidated investment products decreased$11.5 million in fiscal year 2022 and increased$1.8 million in fiscal year 2021, due to activity of the funds. Our investments in sponsored funds include initial cash investments made in the course of launching mutual fund and other investment product offerings, as well as investments for other business reasons. The market conditions that impact our AUM similarly affect the investment income earned or losses incurred on our investments in sponsored funds. 42
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Our cash, cash equivalents and investments portfolio by asset class and accounting classification atSeptember 30, 2022 , excluding third-party assets of CIPs, was as follows: Accounting Classification 1 Investments, Direct Cash and Cash at Equity Method Other Investments (in millions) Equivalents Fair Value Investments Investments in CIPs Total Cash and Cash Equivalents$ 4,134.9 $ - $ - $ - $ -$ 4,134.9 Investments Alternative - 167.2 510.9 78.3 580.3 1,336.7 Equity - 229.8 235.5 152.0 82.9 700.2 Fixed Income - 172.7 10.2 36.0 232.4 451.3 Multi-Asset - 43.8 14.9 - 71.6 130.3 Total investments - 613.5 771.5 266.3 967.2 2,618.5 Total Cash and Cash Equivalents and Investments 2, 3$ 4,134.9 $ 613.5 $ 771.5 $ 266.3 $ 967.2 $ 6,753.4 ______________ 1See Note 1 - Significant Accounting Policies and Note 5 - Investments in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for information on investment accounting classifications. 2Total cash and cash equivalents and investments includes$3,602.0 million held for operational activities, including investments in sponsored funds and other products, and$216.4 million necessary to comply with regulatory requirements. 3Total cash and cash equivalents and investments includes$296.3 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 for fiscal year 2022 was 22.9% as compared to 14.3% in fiscal year 2021 and 22.7% in fiscal year 2020. The rate increase in fiscal year 2022 was primarily due to the release of a tax reserve in the prior year following the close of anIRS audit of theU.S. taxation of deemed foreign dividends for fiscal year 2018, net losses on investments held by CIPs for which there are no related tax benefits, as compared to net gains in fiscal year 2021, and a decrease in foreign earnings. The rate decrease in fiscal year 2021 was primarily due the release of the tax reserve mentioned above and net income attributable to noncontrolling interests as compared to a net loss in fiscal year 2020. 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.
"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:
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•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
•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.
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•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:
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(in millions) for the fiscal years ended September 30, 2022 2021 2020 Operating income$ 1,773.9 $ 1,875.0 $ 1,048.9 Add (subtract): Elimination of operating revenues upon consolidation of investment products¹ 48.2 22.8 23.6 Acquisition-related retention 167.2 163.7 195.8
Compensation and benefits expense from gains (losses) on deferred compensation and seed investments, net
(36.7) 22.7 1.2
Other acquisition-related expenses 60.7 36.0 57.4
Amortization of intangible assets 282.0 232.0 54.0
Impairment of goodwill and intangible assets - - 55.4
Special termination benefits 8.2 27.1 54.8
Compensation and benefits expense related to minority interests in certain subsidiaries
20.0 - - Adjusted operating income$ 2,323.5 $ 2,379.3 $ 1,491.1 Total operating revenues$ 8,275.3 $ 8,425.5 $ 5,566.5 Add (subtract): Acquisition-related pass through performance fees (4.2) (25.3) (9.4) Sales and distribution fees (1,415.0) (1,635.5) (1,362.0)
Allocation of investment management fees for sales, distribution and marketing expenses
(430.6) (470.3) (341.1)
Elimination of operating revenues upon consolidation of
investment products¹ 48.2 22.8 23.6
Adjusted operating revenues $ 6,473.7 $ 6,317.2 $ 3,877.6
Operating margin 21.4 % 22.3 % 18.8 %
Adjusted operating margin 35.9 % 37.7 % 38.5 %
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(in millions, except per share data) for the fiscal years ended September 30, 2022 2021 2020 Net income attributable to Franklin Resources, Inc.$ 1,291.9 $ 1,831.2 $ 798.9 Add (subtract): Net income of consolidated investment products¹ (0.2) (2.8) (4.6) Acquisition-related retention 167.2 163.7 195.8 Other acquisition-related expenses 73.3 34.0 58.6 Amortization of intangible assets 282.0 232.0 54.0 Impairment of goodwill and intangible assets - - 55.4 Special termination benefits 8.2 27.1 54.8
Net losses (gains) on deferred compensation plan investments not offset by compensation and benefits expense
9.0 (1.2) (0.1)
Unrealized investment losses (gains) 191.9 (285.7) 221.0
Interest expense for amortization of debt premium (25.2) (51.4) (4.7)
Write-off of noncontrolling interests - - (16.7)
Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests
1.4 - -
Net income tax expense of adjustments (143.9) (31.7) (101.4)
Adjusted net income $ 1,855.6 $ 1,915.2 $ 1,311.0
Diluted earnings per share $ 2.53 $ 3.57 $ 1.59
Adjusted diluted earnings per share 3.63 3.74 2.61
__________________
1The impact of consolidated investment products is summarized as follows:
(in millions) for the fiscal years ended September 30, 2022 2021 2020
Elimination of operating revenues upon consolidation
$ (22.8) $ (23.6) Other income, net 24.2 207.4 33.6 Less: income (loss) attributable to noncontrolling interests (24.2) 181.8 5.4 Net income$ 0.2 $ 2.8 $ 4.6
LIQUIDITY AND CAPITAL RESOURCES
Cash flows were as follows:
(in millions) for the fiscal years ended September 30, 2022 2021 2020 Operating cash flows$ 1,956.7 $ 1,245.4 $ 1,083.3 Investing cash flows (3,329.2) (2,615.9) (4,061.9) Financing cash flows 1,585.0 2,030.1 734.4 Net cash provided by operating activities increased in fiscal year 2022 primarily due to lower net purchases of investments by CIPs, higher net income adjusted for non-cash items and timing differences in the cash settlement of operating assets and liabilities. Net cash used in investing activities increased as compared to the prior year 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 as compared to the prior year primarily due to proceeds from issuance of debt in the prior year, partially offset by higher net proceeds from debt of CIPs.
Net cash provided by operating activities increased in fiscal year 2021 primarily due to higher net income, a higher
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adjustment for amortization of intangible assets and increases in accrued compensation and benefits, partially offset by a lower change in investments, net, adjustments for gains of CIPs as compared to losses in the prior year, increases in receivables and other assets and income from investments in equity method investees as compared to losses in the prior year. Net cash used in investing activities decreased as compared to the prior year primarily due to lower cash paid for acquisitions, partially offset by net deconsolidation of CIPs as compared to net consolidation in the prior year, higher net purchases of investments by CLOs and net purchases of investments as compared to net liquidations in the prior year. Net cash provided by financing activities increased as compared to the prior year primarily due to proceeds from debt of CIPs, proceeds from issuance of debt and higher net subscriptions in CIPs by noncontrolling interests, partially offset by higher payments on debt by CIPs and debt. 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) as of September 30, 2022 2021 2020 Assets Cash and cash equivalents$ 4,086.8 $ 4,357.8 $ 3,026.8 Receivables 1,130.8 1,300.4 1,114.8 Investments 830.0 1,042.2 982.2 Total Liquid Assets$ 6,047.6 $ 6,700.4 $ 5,123.8 Liability Debt$ 3,376.4 $ 3,399.4 $ 3,017.1 Liquidity
Liquid assets consist of cash and cash equivalents, receivables and certain
investments. Cash and cash equivalents at
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. OnSeptember 15, 2022 , we repaid all of the outstanding$300.0 million 2.800% senior notes due inSeptember 2022 issued byFranklin Resources, Inc. at the principal amount plus accrued and unpaid interest of$4.2 million .
On
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OnJanuary 10, 2022 , we entered into a bi-lateral credit agreement withBank of America, N.A . to establish a 364- day revolving credit facility with an aggregate commitment of$500.0 million . OnSeptember 8, 2022 , we amended and restated the credit facility to, among other things, extend its maturity toSeptember 7, 2023 . 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. AtSeptember 30, 2022 , Franklin's outstanding senior notes had an aggregate principal amount due of$1,600.0 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$1,583.3 million . AtSeptember 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 paid semi-annually and have an aggregate carrying value, inclusive of unamortized premium, of$1,493.1 million . EffectiveAugust 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. The 364-day revolving credit facility and term loan credit agreement contain a financial performance covenant requiring that the Company maintains a consolidated net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 3.00 to 1.00. We were in compliance with all debt covenants atSeptember 30, 2022 .
At
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 stock-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. In the ordinary course of business, we enter into contracts or purchase obligations with third parties whereby the third parties provide goods or services to or on behalf of the Company. Purchase obligations include contractual amounts that will be due to purchase goods and services to be used in our operations and are recorded as liabilities in the consolidated financial statements when services are provided. AtSeptember 30, 2022 , we had$706.6 million of purchase obligations. We typically declare cash dividends on a quarterly basis, subject to approval by our Board of Directors. We declared regular dividends of$1.16 per share ($0.29 per share per quarter) in fiscal year 2022, and of$1.12 per share ($0.28 per share per quarter) in fiscal year 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 fiscal years 2022 and 2021, we repurchased 6.5 million and 7.3 million shares of our common stock at a cost of$180.8 million and$208.2 million . AtSeptember 30, 2022 , 24.4 million shares remained available for repurchase under the authorization of 80.0 million shares approved by our Board of Directors inApril 2018 . 49
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We routinely make cash investments in the course of launching sponsored funds. AtSeptember 30, 2022 , we had$227.6 million of committed capital contributions which relate to discretionary commitments to invest in sponsored funds and other investment products and entities, including CIPs. These unfunded commitments are not recorded in the consolidated balance sheet.
We invested
OnSeptember 27, 2022 we entered into a lease agreement for office space inNew York City located atOne Madison Avenue with occupancy expected to begin in early fiscal year 2024 with an aggregate expected commitment of$766.7 million over 16 years. This is part of an initiative to consolidate our existing office space inNew York City . OnNovember 1, 2022 , we acquired all of the outstanding ownership interests inBNY Alcentra Group Holdings, Inc. from The Bank of New York Mellon Corporation for cash consideration of approximately$587.3 million paid at closing, including$188.3 million related to investments, and up to$350.0 million in contingent consideration to be paid upon on the achievement of certain performance thresholds over the next four years. We paid the purchase price from our existing cash. OnApril 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 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% profits interest in Lexington and performance-based cash retention awards to certain employees that vest over approximately five years. We paid the purchase price from our existing cash. OnDecember 31, 2021 , we acquired all of the outstanding ownership interests in OSAM, a leading quantitative asset management firm, for cash consideration of approximately$300.0 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. We did not provide financial or other support to our sponsored funds during fiscal year 2022 or 2021.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted inthe 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, concerns about the global economic outlook and the risk of 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. Described below are the accounting policies that we believe are most critical to understanding our financial position and results of operations. For additional information about our accounting policies, see Note 1 - Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report.
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 ("VOE") or are
the primary beneficiary of a variable interest entity ("VIE").
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A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or do not have defined rights and obligations normally associated with an equity investment. The assessment of whether an entity is a VIE or VOE involves judgment and analysis on a structure by structure basis. When performing the assessment, we consider factors such as the entity's legal organization, design and capital structure, the rights of the equity investment holders and our contractual involvement with and ownership interest in the entity. 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. We are the primary beneficiary of a VIE if we have the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. Investment management fees earned from VIEs are excluded from the primary beneficiary determination if they are deemed to be at market and commensurate with service. The key assumption used in the analysis includes the amount of AUM. These estimates and assumptions are subject to variability. For example, AUM is impacted by market volatility and the level of sales, redemptions, distributions to investors and reinvested distributions. There is judgment involved in assessing whether we have the power to direct the activities that most significantly impact VIEs' economic performance and the obligation to absorb losses of or right to receive benefits from VIEs that could potentially be significant to the VIEs. As ofSeptember 30, 2022 , we were the primary beneficiary of 53 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. Determining the fair value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in earnings. Intangible assets acquired in business combinations consist primarily of investment management contracts and trade names. The fair values of the acquired management contracts are based on the net present value of estimated future cash flows attributable to the contracts, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate. The fair value of trade names is determined using the relief from royalty method based on net present value of estimated future cash flows, which include significant assumptions about royalty rate, revenue growth rate, discount rate and effective tax rate. Our estimates are based on assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, may differ from actual results. Our management contract intangible assets are amortized over their estimated useful lives, which range from three to sixteen years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Indefinite-lived intangible assets represent contracts to manage investment assets for which there is no foreseeable limit on the contract period. Trade names are amortized over their estimated useful lives which range from five to twenty years using the straight-line method.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. We have one reporting unit, investment management and related services, consistent with our single operating segment, to which all goodwill has been assigned. We make significant estimates and assumptions when evaluating goodwill and other intangible assets for impairment. We may first assess goodwill and indefinite-lived intangible assets for qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The qualitative analysis considers entity-specific and macroeconomic factors and their potential impact on key assumptions used in the determination of the fair value of the reporting unit or indefinite-lived intangible asset. A quantitative impairment test is performed if the results of the qualitative assessment indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value or an indefinite-lived intangible asset is impaired, or if a qualitative assessment is not performed. Quantitative tests compare the fair value of the asset to its carrying value. 51
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The fair values of the reporting unit and indefinite-lived intangible assets are based on the net present value of estimated future cash flows, which include significant assumptions about the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate. The most relevant of these assumptions to the determination of estimated fair value are the AUM growth rate, pre-tax profit margin and the discount rate.
We performed a qualitative annual impairment test for goodwill and all
indefinite-lived intangible assets as of
We subsequently monitored market conditions and their potential impact on the assumptions used in the annual assessment 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 other indefinite-lived intangible assets might be impaired. We considered, among other things, changes in our AUM and weighted-average cost of capital by assessing whether these changes would impact the reasonableness of our impairment assessment as ofAugust 1, 2022 . We also monitored fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole. Subsequent toAugust 1, 2022 , there were no impairments of goodwill or indefinite-lived intangible assets as no events occurred or circumstances changed that would indicate these assets might be impaired. We test definite-lived intangible assets for impairment quarterly. Impairment is indicated when the carrying value of an asset is not recoverable and exceeds its fair value. Recoverability is evaluated based on estimated undiscounted future cash flows using assumptions about the AUM growth rate, pre-tax profit margin, average effective fee rate and expected useful life as well as royalty rate for trade name intangible assets. The most relevant of these assumptions to determine future cash flows is the AUM growth rate. If the carrying value of an asset is not recoverable through undiscounted cash flows, impairment is recognized in the amount by which the carrying value exceeds the asset's fair value, as determined by discounted cash flows or other methods as appropriate for the asset type. There were no impairments of definite-lived intangible assets during fiscal year 2022.
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
Our investments are primarily 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. The assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. See Note 1 - Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for more information on the fair value hierarchy. As ofSeptember 30, 2022 , Level 3 assets represented 12% of total assets measured at fair value, substantially all of which related to CIPs' investments in equity and debt securities, and real estate. There were$5.8 million of transfers into and$9.3 million of transfers out of Level 3 during fiscal year 2022.
The following are descriptions of the significant assets measured at fair value and their fair value methodologies.
Sponsored funds and separate accounts consist primarily of investments in
nonconsolidated sponsored funds and to a lesser extent, separate accounts.
Changes in the fair value of the investments are recognized as gains and losses
in earnings. The fair values of fund products are determined based on their
published NAV or estimated using NAV as a practical expedient. The fair values
of the underlying investments in the separate accounts are determined using
quoted market prices, or independent third-party broker or dealer price quotes
if quoted market prices are not available.
Investments related to long-term incentive plans consist primarily of
investments in sponsored funds related to certain compensation plans that have
certain vesting provisions. Changes in fair value are recognized as gains and
losses in earnings. The fair values of the investments are determined based on
the fund products' published NAV or estimated using NAV as a practical
expedient.
Other equity and debt securities consist of other equity investment securities
and debt securities carried at fair value. Changes in the fair value are
recognized as gains and losses in earnings. The fair values of equity
securities, excluding fund products, and debt securities are determined using
independent third-party broker or dealer price quotes or based on either a
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market-based or income-based approach using significant unobservable inputs. The fair values of fund products are determined based on their published NAV or estimated using NAV as a practical expedient.
Investments of CIPs consist of marketable debt and equity securities and other investments that are not generally traded in active markets. Changes in the fair value of the investments are recognized as gains and losses in earnings. The fair values of marketable securities are determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available. The investments that are not generally traded in active markets consist of loans, other equity and debt securities of entities in emerging markets, fund products and real estate. The fair values are determined using significant unobservable inputs in either a market-based or income-based approach, except for fund products, for which fair values are estimated using NAV as a practical expedient. Noncontrolling interests consist of third-party equity interests in CIPs and minority interests in certain subsidiaries. Noncontrolling interests that are redeemable or convertible for cash or other assets at the option of the noncontrolling interest holders and are classified as temporary equity at fair value, except when the fair value is less than the issuance date fair value, the reported amount is the issuance date fair value. Changes in fair value of redeemable noncontrolling interest is recognized as an adjustment to retained earnings. Nonredeemable noncontrolling interests do not permit the noncontrolling interest holders to request settlement, are reported at their issuance value and undistributed net income (loss) attributable to noncontrolling interests. The fair value of third-party equity interests in CIPs are determined based on the published NAV or estimated using NAV a practical expedient. The fair values of redeemable noncontrolling interests related to minority interest in certain subsidiaries are determined using discounted cash flows and guideline public company methods, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate and public company earnings multiples.
Revenues
We earn revenue primarily from providing investment management and related
services to our customers, which are generally investment products or investors
in separate accounts. Related services include fund administration, sales and
distribution, and shareholder servicing. Revenues are recognized when our
obligations related to the services are satisfied and it is probable that a
significant reversal of the revenue amount would not occur in future periods.
The obligations are satisfied over time as the services are rendered, except for
the sales and distribution obligations for the sale of shares of sponsored
funds, which are satisfied on trade date. Multiple services included in customer
contracts are accounted for separately when the obligations are determined to be
distinct.
Fees from providing investment management and fund administration services
("investment management fees"), other than performance-based investment
management fees, are determined based on a percentage of AUM, primarily on a
monthly basis using daily average AUM, and are recognized as the services are
performed over time. Performance-based investment management fees are generated
when investment products' performance exceeds targets established in customer
contracts. These fees are recognized when significant reversal of the amount is
no longer probable and may relate to investment management services that were
provided in prior periods.
Sales and distribution fees primarily consist of upfront sales commissions and
ongoing distribution fees. Sales commissions are based on contractual rates for
sales of certain classes of sponsored funds and are recognized on trade date.
Distribution service fees are determined based on a percentage of AUM, primarily
on a monthly basis using daily average AUM. As the fee amounts are uncertain on
trade date, they are recognized over time as the amounts become known and may
relate to sales and distribution services provided in prior periods.
AUM is generally based on the fair value of the underlying securities held by
investment products and is calculated using fair value methods derived primarily
from unadjusted quoted market prices, unadjusted independent third-party broker
or dealer price quotes in active markets, or market prices or price quotes
adjusted for observable price movements after the close of the primary market.
The fair values of securities for which market prices are not readily available
are valued internally using various methodologies which incorporate significant
unobservable inputs as appropriate for each security type. Pricing of the
securities is governed by our global valuation and pricing policy, which defines
valuation and pricing conventions for each security type, including practices
for responding to unexpected or unusual market events.
As substantially all of our AUM is valued based on observable market prices or
inputs, market risk is the most significant risk underlying the valuation of our
AUM.
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Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. In assessing whether a valuation allowance should be established against a deferred income tax asset, we consider all positive and negative evidence, which includes timing of expiration, projected sources of taxable income, limitations on utilization under the statute and the effectiveness of prudent and feasible tax planning strategies among other factors. For each tax position taken or expected to be taken in a tax return, we utilize significant judgment related to the range of possible favorable or unfavorable outcomes to determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. We operate in numerous countries, states and other taxing jurisdictions. The income tax laws are complex and subject to different interpretations by the taxpayer and the relevant taxing authorities. Significant judgment is required in the determination of our annual income tax provisions, which includes the assessment of deferred tax assets and uncertain tax positions, as well as the interpretation and application of existing and newly enacted tax laws, regulation changes, and new judicial rulings. We repatriate foreign earnings that are in excess of regulatory, capital or operational requirements of all of our non-U.S. subsidiaries.
It is possible that actual results will vary from those recognized in our consolidated financial statements due to changes in the interpretation of applicable guidance or as a result of examinations by taxing authorities.
Loss Contingencies
We are involved in various lawsuits and claims encountered in the normal course of business. When such a matter arises and periodically thereafter, we consult with our legal counsel and evaluate the merits of the claims based on the facts available at that time. In management's opinion, an adequate accrual has been made as ofSeptember 30, 2022 to provide for any probable losses that may arise from such matters for which we could reasonably estimate an amount. See also Note 15 - Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report. 54
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