FRANKLIN RESOURCES, INC. FORWARD-LOOKING STATEMENTS This Form 10-Q and the documents incorporated by reference herein may include forward-looking statements that reflect our current views with respect to future events and financial performance. Such statements are provided under the "safe harbor" protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and generally can be identified by words or phrases written in the future tense and/or preceded by words such as "anticipate," "believe," "could," "depends," "estimate," "expect," "intend," "likely," "may," "plan," "potential," "seek," "should," "will," "would," or other similar words or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements. Forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that may cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. The forward-looking statements contained in this Form 10-Q or that are incorporated by reference herein are qualified in their entirety by reference to the risks and uncertainties disclosed in this Form 10-Q, including those discussed under the headings "Risk Factors" and "Quantitative and Qualitative Disclosures About Market Risk" below. While forward-looking statements are our best prediction at the time that they are made, you should not rely on them and are cautioned against doing so. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other possible future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They are neither statements of historical fact nor guarantees or assurances of future performance. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. If a circumstance occurs after the date of this Form 10-Q that causes any of our forward-looking statements to be inaccurate, whether as a result of new information, future developments or otherwise, we undertake no obligation to announce publicly the change to our expectations, or to make any revision to our forward-looking statements, to reflect any change in assumptions, beliefs or expectations, or any change in events, conditions or circumstances upon which any forward-looking statement is based, unless required by law. In this section, we discuss and analyze the results of operations and financial condition ofFranklin Resources, Inc. ("Franklin") and its subsidiaries (collectively, the "Company"). The following discussion should be read in conjunction with our Form 10-K for the fiscal year endedSeptember 30, 2020 ("fiscal year 2020") filed with theU.S. Securities and Exchange Commission , and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. OVERVIEWFranklin Resources, Inc. ("Franklin") is a holding company with subsidiaries operating under our Franklin Templeton® and/or subsidiary brand names. We are a global investment management organization that derives operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide. We deliver our investment capabilities through a variety of investment products, which include our sponsored funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. In addition to investment management, our services include fund administration, sales and distribution, and shareholder servicing. We may perform services directly or through third parties. We offer our services and products under our various distinct brand names, including, but not limited to, Franklin®, Templeton®, Legg Mason®, Balanced Equity Management®, Benefit Street Partners®, Brandywine Global Investment Management®, Clarion Partners®,ClearBridge Investments®, Darby®, Edinburgh Partners™, Fiduciary Trust™, Franklin Bissett®, Franklin Mutual Series®, K2®, LibertyShares®, Martin Currie®, Royce® Investment Partners and Western Asset Management Company®. We offer a broad product mix of fixed income, equity, multi-asset, alternative and cash management asset classes and solutions that meet a wide variety of specific investment goals and needs for individual and institutional investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to investors under the brand names of those other companies or on a co-branded basis. The level of our revenues depends largely on the level and relative mix of assets under management ("AUM"). As noted in the "Risk Factors" section set forth below, 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 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. 26 -------------------------------------------------------------------------------- Table of Contents As further noted in the "Risk Factors" section, the outbreak and spread of contagious diseases such as the coronavirus disease 2019 ("COVID-19"), a highly transmissible and pathogenic disease, has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations. Ongoing global 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 full extent to which the pandemic may adversely impact our business, liquidity, capital resources, financial results and operations, which impacts will depend on numerous developing factors that remain uncertain and subject to change. During our second fiscal quarter, the global equity markets continued to provide strong positive returns, reflecting among other things, the successful rollout of COVID-19 vaccines in theU.S. andU.K. and news of an additionalU.S. economic stimulus package. The MSCI World Index and S&P 500 Index increased 5.0% and 6.2% for the quarter and 19.8% and 19.1% for the fiscal year to date. The global bond markets turned negative as the Bloomberg Barclays Global Aggregate Index decreased 4.5% during the quarter and 1.3% for the fiscal year to date. Our total AUM atMarch 31, 2021 was$1,498.9 billion , 6% higher than atSeptember 30, 2020 and 158% higher than atMarch 31, 2020 . Simple monthly average AUM ("average AUM") for the three and six months endedMarch 31, 2021 increased 128% and 118% from the same periods in the prior fiscal year. The increase in total AUM and average AUM from the same period in the prior fiscal year is primarily due to theLegg Mason, Inc. ("Legg Mason") acquisition. 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. 27 --------------------------------------------------------------------------------
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RESULTS OF OPERATIONS
Three Months Ended Six Months Ended
March 31, Percent March 31, Percent
(in millions, except per share data) 2021 2020 Change 2021 2020 Change
Operating revenues1 $ 2,076.5 $ 1,311.2 58 % $ 4,071.6 $ 2,700.4 51 %
Operating income1 456.3 339.9 34 % 865.4 712.8 21 %
Net income attributable to
Franklin Resources, Inc. 381.8 79.1 383 % 727.1 429.6 69 %
Diluted earnings per share $ 0.74 $ 0.16 363 % $ 1.42 $ 0.86 65 %
Operating margin2 22.0 % 25.9 % 21.3 % 26.4 %
As adjusted (non-GAAP):3
Adjusted operating income $ 581.1 $ 385.9 51 % $ 1,131.0 $ 791.4 43 %
Adjusted operating margin 38.0 % 43.2 % 37.6 % 42.9 %
Adjusted net income $ 403.5 $ 332.8 21 % $ 776.9 $ 671.1 16 %
Adjusted diluted earnings per share $ 0.79 $ 0.66 20 % $ 1.51 $ 1.34 13 %
__________________
1Effective with the quarter ended September 30, 2020 , the Company changed the
presentation of its consolidated statements of income to include dividend and
interest income and other expenses from consolidated investment products in
non-operating income (expense). Amounts for the comparative prior fiscal periods
were reclassified to conform to the current presentation. These
reclassifications had no impact on previously reported net income attributable
to Franklin Resources, Inc.
2Defined as operating income divided by total operating revenues.
3"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 increased $116.4 million and $152.6 million for the three and
six months ended March 31, 2021 , as compared to the same periods in the prior
fiscal year, as 58% and 51% increases in operating revenues were substantially
offset by 67% and 61% increases in operating expenses, which reflected higher
levels of compensation and benefits expenses including acquisition-related
retention and other expenses and amortization of intangible assets. Net income
attributable to Franklin Resources, Inc. increased $302.7 million and
$297.5 million for the three and six months ended March 31, 2021 primarily due
to higher other income, net, less the portion attributable to noncontrolling
interests, and increases in operating income, partially offset by higher taxes
on income.
Diluted earnings per share increased for the three and six months ended
March 31, 2021 consistent with the increases in net income available to common
stockholders and the impacts of decreases in diluted average common shares
outstanding in both periods, primarily resulting from repurchases of shares of
our common stock during the twelve-month period ended March 31, 2021 .
Adjusted operating income increased $195.2 million and $339.6 million for the
three and six months ended March 31, 2021 primarily due to 76% and 67% increases
in investment management fees, partially offset by 97% and 85% increases in
compensation and benefits expenses. Adjusted net income increased $70.7 million
and $105.8 million for the three and six months ended March 31, 2021 primarily
due to the increases in adjusted operating income partially offset by higher
taxes on income and decreases in other income, net.
Adjusted diluted earnings per share increased for the three and six months ended
March 31, 2021 , consistent with the increases in adjusted net income and the
impacts of the decreases in diluted average common shares outstanding.
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ASSETS UNDER MANAGEMENT
AUM by asset class was as follows:
March 31, March 31, Percent
(in billions) 2021 2020 Change
Fixed Income $ 642.3 $ 214.9 199 %
Equity 511.9 200.9 155 %
Multi-Asset 148.2 107.4 38 %
Alternative 131.1 46.4 183 %
Cash Management 65.4 10.7 511 %
Total $ 1,498.9 $ 580.3 158 %
In the first quarter of fiscal year 2021, we revised our presentation of AUM to
reflect changes in asset class of certain legacy Legg Mason AUM as part of our
post-acquisition onboarding process.
AUM at March 31, 2021 increased 158% from March 31, 2020 driven by
$800.9 billion from acquisitions as well as $170.7 billion from net market
change, distributions and other, partially offset by $32.6 billion of long-term
net outflows and $20.4 billion of cash management net outflows.
Average AUM and the mix of average AUM by asset class are shown below.
(in billions) Average AUM Mix of Average AUM
for the three months ended March Percent
31, 2021 2020 Change 2021 2020
Fixed Income $ 658.6 $ 234.8 180 % 44 % 36 %
Equity 500.2 246.0 103 % 33 % 37 %
Multi-Asset 143.4 118.5 21 % 10 % 18 %
Alternative 129.0 46.0 180 % 9 % 7 %
Cash Management 66.7 10.5 535 % 4 % 2 %
Total $ 1,497.9 $ 655.8 128 % 100 % 100 %
(in billions) Average AUM Percent Mix of Average AUM
for the six months ended March 31, 2021 2020 Change 2021 2020
Fixed Income $ 658.7 $ 240.4 174 % 45 % 36 %
Equity 475.0 254.4 87 % 32 % 37 %
Multi-Asset 140.2 120.7 16 % 10 % 18 %
Alternative 125.9 45.8 175 % 9 % 7 %
Cash Management 67.2 10.1 565 % 4 % 2 %
Total $ 1,467.0 $ 671.4 118 % 100 % 100 %
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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.
Three Months Ended Six Months Ended
March 31, Percent March 31, Percent
(in billions) 2021 2020 Change 2021 2020 Change
Beginning AUM $ 1,498.0 $ 698.3 115 % $ 1,418.9 692.6 105 %
Long-term inflows 101.7 38.9 161 % 197.8 81.9 142 %
Long-term outflows (105.9) (64.3) 65 % (206.5) (119.6) 73 %
Long-term net flows (4.2) (25.4) (83 %) (8.7) (37.7) (77 %)
Cash management net flows 1.2 0.5 140 % (9.0) 1.5 NM
Total net flows (3.0) (24.9) (88 %) (17.7) (36.2) (51 %)
Acquisition - 5.6 (100 %) - 5.6 (100 %)
Net market change,
distributions and other 3.9 (98.7) NM 97.7 (81.7) NM
Ending AUM $ 1,498.9 $ 580.3 158 % $ 1,498.9 $ 580.3 158 %
Components of the change in AUM by asset class were as follows: (in billions) for the three months ended
Cash
March 31, 2021 Fixed Income Equity Multi-Asset Alternative Management Total
AUM at January 1, 2021 $ 669.9 $ 495.7 $ 141.1 $ 127.1 $ 64.2 $ 1,498.0
Long-term inflows 53.5 32.4 9.6 6.2 - 101.7
Long-term outflows (56.1) (38.0) (8.5) (3.3) - (105.9)
Long-term net flows (2.6) (5.6) 1.1 2.9 - (4.2)
Cash management net flows - - - - 1.2 1.2
Total net flows (2.6) (5.6) 1.1 2.9 1.2 (3.0)
Net market change, distributions
and other (25.0) 21.8 6.0 1.1 - 3.9
AUM at March 31, 2021 $ 642.3 $ 511.9 $ 148.2 $ 131.1 $ 65.4 $ 1,498.9
(in billions)
for the three months ended Cash
March 31, 2020 Fixed Income Equity Multi-Asset Alternative Management Total
AUM at January 1, 2020 $ 243.0 $ 273.2 $ 125.6 $ 46.1 $ 10.4 $ 698.3
Long-term inflows 15.6 13.4 6.7 3.2 - 38.9
Long-term outflows (29.3) (23.2) (9.4) (2.4) - (64.3)
Long-term net flows (13.7) (9.8) (2.7) 0.8 - (25.4)
Cash management net flows - - - - 0.5 0.5
Total net flows (13.7) (9.8) (2.7) 0.8 0.5 (24.9)
Acquisition - - 5.6 - - 5.6
Net market change, distributions
and other (14.4) (62.5) (21.1) (0.5) (0.2) (98.7)
AUM at March 31, 2020 $ 214.9 $ 200.9 $ 107.4 $ 46.4 $ 10.7 $ 580.3
30-------------------------------------------------------------------------------- Table of Contents AUM increased$0.9 billion during the three months endedMarch 31, 2021 due to$3.9 billion of net market change, distributions and other and$1.2 billion of cash management net inflows, partially offset by$4.2 billion of long-term net outflows. Net market change, distributions and other consists of$12.7 billion of market appreciation, partially offset by a$4.8 billion decrease from foreign exchange revaluation and$4.0 billion of long-term distributions. The market appreciation occurred primarily in the equity and multi-asset asset classes, partially offset by depreciation in the fixed income asset class, and reflected positive returns in global equity markets as evidenced by increases of 6.2% in the S&P 500 Index and 5.0% in the MSCI World Index and negative returns in global fixed income markets as evidenced by a 4.5% decrease in the Bloomberg Barclays Global Aggregate Index. Long-term inflows increased 161% to$101.7 billion , as compared to the prior-year period, due to higher inflows in all long-term asset classes. Long-term outflows increased 65% to$105.9 billion due to higher outflows in all long-term asset classes except multi-asset asset class and primarily consisted of$8.6 billion from three institutional products, including a single fixed income institutional redemption of$5.9 billion ,$2.7 billion from two equity funds,$2.7 billion from six fixed income funds, including$1.3 billion from fiveIndia credit funds that were non-management fee earning which are in the process of winding up and$1.7 billion from a multi-asset fund. Long-term outflows were partially offset by inflows of$3.0 billion in a multi-asset fund,$1.8 billion in a fixed income fund,$1.1 billion in an equity fund and$1.1 billion in an institutional separate account. Additionally, long-term outflows in the equity asset class included$2.1 billion of exchanges that are included as long-term inflows in the multi-asset asset class. The foreign exchange revaluation resulted from AUM in products that are notU.S. dollar denominated, which represented 12% of total AUM as ofMarch 31, 2021 , and was primarily due to the strengthening of theU.S. dollar against the Japanese Yen, Euro and Brazilian Real. AUM decreased$118.0 billion during the three months endedMarch 31, 2020 primarily due to$98.7 billion of net market change, distributions and other and$25.4 billion of long-term net outflows, slightly offset by$5.6 billion from an acquisition. Net market change, distributions and other primarily consists of$89.3 billion of market depreciation, a$5.6 billion decrease from foreign exchange revaluation and$3.8 billion of long-term distributions. The market depreciation occurred in all asset classes, most significantly in equity and multi-asset asset classes, and reflected sharp declines in global equity markets as evidenced by decreases of 20.9% in the MSCI World Index and 19.6% in the S&P 500 Index. The foreign exchange revaluation was primarily due to the strengthening of theU.S. dollar against the Canadian dollar, Australian dollar, Indian Rupee and Pound Sterling. Long-term net outflows included outflows of$10.0 billion from six fixed income funds,$1.6 billion from a multi-asset fund and$0.9 billion from an institutional product, partially offset by inflows of$1.2 billion in a private open-end product and$0.8 billion in an equity fund. (in billions) for the six months ended Cash March 31, 2021 Fixed Income Equity Multi-Asset Alternative Management Total AUM at October 1, 2020$ 656.9 $ 438.1 $ 129.4 $ 122.1 $ 72.4 $ 1,418.9 Long-term inflows 95.5 73.9 18.9 9.5 - 197.8 Long-term outflows (104.0) (78.2) (18.1) (6.2) - (206.5) Long-term net flows (8.5) (4.3) 0.8 3.3 - (8.7) Cash management net flows - - - - (9.0) (9.0) Total net flows (8.5) (4.3) 0.8 3.3 (9.0) (17.7) Net market change, distributions and other (6.1) 78.1 18.0 5.7 2.0 97.7 AUM at March 31, 2021$ 642.3 $ 511.9 $ 148.2 $ 131.1 $ 65.4 $ 1,498.9 (in billions) for the six months ended Cash March 31, 2020 Fixed Income Equity Multi-Asset Alternative Management Total AUM at October 1, 2019$ 250.6 $ 263.9 $ 123.6 $ 45.0 $ 9.5 $ 692.6 Long-term inflows 32.3 30.8 13.6 5.2 - 81.9 Long-term outflows (54.7) (44.1) (17.1) (3.7) - (119.6) Long-term net flows (22.4) (13.3) (3.5) 1.5 - (37.7) Cash management net flows - - - - 1.5 1.5 Total net flows (22.4) (13.3) (3.5) 1.5 1.5 (36.2) Acquisition - - 5.6 - - 5.6 Net market change, distributions and other (13.3) (49.7) (18.3) (0.1) (0.3) (81.7) AUM at March 31, 2020$ 214.9 $ 200.9 $ 107.4 $ 46.4 $ 10.7 $ 580.3 31
-------------------------------------------------------------------------------- Table of Contents AUM increased$80.0 billion or 6% during the six months endedMarch 31, 2021 due to$97.7 billion of net market change, distributions and other, partially offset by$9.0 billion of cash management net outflows and$8.7 billion of long-term net outflows. Net market change, distributions and other consists of$113.8 billion of market appreciation and a$3.4 billion increase from foreign exchange revaluation, partially offset by$19.5 billion of long-term distributions. The market appreciation occurred primarily in the equity and multi-asset asset classes, and reflected positive returns in global equity markets as evidenced by increases of 19.8% in the MSCI World Index and 19.1% in the S&P 500 Index. Long-term inflows increased 142% to$197.8 billion , as compared to the prior-year period, and long-term outflows increased 73% to$206.5 billion due to higher inflows and outflows in all asset classes. Long-term outflows primarily consisted of$19.8 billion from eight institutional products, including a single fixed income institutional redemption of$5.9 billion ,$7.1 billion from seven fixed income funds, including$1.3 billion from fiveIndia credit funds that were non-management fee earning which are in the process of winding up,$3.2 billion from two equity funds and$3.1 billion from a multi-asset fund. Long-term outflows were partially offset by inflows of$6.3 billion in two fixed income funds,$5.3 billion in two institutional separate accounts,$3.1 billion in a multi-asset fund and$2.4 billion in an equity fund. Additionally, long-term outflows in the equity asset class included$2.1 billion of exchanges that are included as long-term inflows in the multi-asset asset class. The foreign exchange revaluation resulted from AUM in products that are notU.S. dollar denominated and was primarily due to weakening of theU.S. dollar against the Australian dollar, Canadian dollar and Pound Sterling, partially offset by strengthening of theU.S. dollar against Japanese Yen. AUM decreased$112.3 billion during the six months endedMarch 31, 2020 primarily due to$81.7 billion of net market change, distributions and other and$37.7 billion of long-term net outflows, slightly offset by$5.6 billion from an acquisition. Net market change, distributions and other consists of$61.9 billion of market depreciation,$16.4 billion of long-term distributions and a$3.4 billion decrease from foreign exchange revaluation. The market depreciation occurred in all asset classes except the alternative asset class, and reflected negative returns in global equity markets as evidenced by decreases of 14.1% in the MSCI World Index and 12.3% in the S&P 500 Index. The foreign exchange revaluation was primarily due to strengthening of theU.S. dollar against the Canadian dollar, Indian Rupee and Australian dollar. Long-term net outflows included outflows of$16.9 billion from six fixed income funds,$1.8 billion from two institutional products,$1.7 billion from an equity fund and$1.7 billion from a multi-asset fund, which were partially offset by inflows of$1.2 billion in a private open-end product and$1.2 billion in an equity fund. AUM by sales region was as follows: March 31, March 31, Percent (in billions) 2021 2020 Change United States$ 1,100.5 $ 408.3 170 % International Asia-Pacific 164.5 72.4 127 % Europe, Middle East and Africa 150.1 70.8 112 % Latin America1 57.4 10.5 447 % Canada 26.4 18.3 44 % Total international 398.4 172.0 132 % Total$ 1,498.9 $ 580.3 158 % __________________
1Includes
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Average AUM by sales region was as follows:
Three Months Ended Six Months Ended
March 31, Percent March 31, Percent
(in billions) 2021 2020 Change 2021 2020 Change
United States $ 1,090.4 $ 454.8 140 % $ 1,065.4 $ 464.4 129 %
International
Asia-Pacific 171.5 83.4 106 % 170.2 85.9 98 %
Europe, Middle East and Africa 151.9 83.6 82 % 148.2 85.7 73 %
Latin America1 58.2 12.5 366 % 57.7 12.9 347 %
Canada 25.9 21.5 20 % 25.5 22.5 13 %
Total international 407.5 201.0 103 % 401.6 207.0 94 %
Total $ 1,497.9 $ 655.8 128 % $ 1,467.0 $ 671.4 118 %
__________________
1Includes North America -based advisers serving non-resident clients.
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. Higher long-term relative performance of our
mutual fund AUM during the first half of fiscal year 2021 resulted in a
significant increase from September 30, 2020 to the peer group comparison for
the three- and five-year periods. Approximately half of our mutual fund AUM
exceeded the peer group median comparisons for all periods presented. Our
composites generated strong long-term results with at least 67% of AUM exceeding
the benchmark comparisons for all periods presented, primarily driven by the
performance of our fixed income products which had at least 85% of AUM exceeding
the benchmark comparisons.
The performance of our mutual fund products against peer group medians and of
our composites against benchmarks is presented in the table below.
Peer Group Comparison1 Benchmark Comparison2
% of Mutual Fund AUM % of Composite AUM
in Top Two Peer Group Quartiles Exceeding Benchmark
as of March 31, 2021 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year
Fixed Income 51 % 56 % 56 % 60 % 87 % 85 % 89 % 95 %
Equity 35 % 50 % 40 % 48 % 39 % 38 % 39 % 50 %
Total AUM3 49 % 58 % 53 % 59 % 68 % 67 % 69 % 76 %
__________________
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 41%, 41%, 40% and 39% of our
total AUM as of March 31, 2021 .
2Composite performance measures the percent of composite AUM beating its
benchmark. The benchmark comparisons are based on each account's/composite's
(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 composite AUM measured for the 1-, 3-, 5- and
10-year periods represents 69%, 69%, 68% and 64% of our total AUM as of
March 31, 2021 .
3Total mutual fund AUM includes performance of our multi-asset and alternative
AUM, and total composite AUM includes performance of our alternative AUM.
Multi-asset and alternative AUM represent 10% and 9% of our total AUM at
March 31, 2021 .
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 April 19, 2021 , and are subject to revision. While we remain focused on
achieving strong long-term performance, our future peer group and benchmarking
rankings may vary from our past performance.
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OPERATING REVENUES
The table below presents the percentage change in each operating revenue
category.
Three Months Ended Six Months Ended
March 31, Percent March 31, Percent
(in millions) 2021 2020 Change 2021 2020 Change
Investment management fees
810.5 693.2 17 %
Shareholder servicing fees 55.7 54.8 2 % 105.1 104.8 0 %
Other 8.8 6.5 35 % 17.2 14.5 19 %
Total Operating Revenues $ 2,076.5 $ 1,311.2 58 % $ 4,071.6 $ 2,700.4 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 the
U.S. are generally higher than for U.S. products.
Investment management fees increased $690.2 million for the three months ended
March 31, 2021 primarily due to $683.3 million of revenue earned by legacy Legg
Mason strategies during the current quarter, a 2% increase in average AUM and
higher performance fees, partially offset by lower effective investment
management fee rate. The increase in average AUM occurred primarily in the
equity and multi-asset asset classes, partially offset by fixed income asset
class. The increase occurred primarily in Europe , Middle East and Africa and
U.S. sales regions, partially offset by declines in all the other international
sales regions.
Investment management fees increased $1,250.9 million for the six months ended
March 31, 2021 primarily due to $1,347.3 million of revenue earned by legacy
Legg Mason strategies during the current period, partially offset by a 2%
decrease in average AUM and lower effective investment management fee rate. The
decrease in average AUM occurred primarily in the fixed income asset class,
partially offset by equity and multi-asset asset classes, and across all sales
regions except Europe , Middle East and Africa and U.S. sales regions.
Our effective investment management fee rate excluding performance fees
(annualized investment management fees excluding performance fees divided by
average AUM) decreased to 42.1 and 41.7 basis points for the three and six
months ended March 31, 2021 , from 55.3 and 55.5 basis points for the same
periods in the prior fiscal year. The rate decreases were primarily due to the
Legg Mason acquisition, as legacy Legg Mason strategies generally have a lower
effective fee rate due to a higher mix of institutional and fixed income AUM.
The fee rate decreases were also due to higher weighting of AUM in lower-fee
products and a shift from higher-fee products in the Europe , Middle East and
Africa sales region to lower-fee products in the U.S. sales regions for the
fixed income asset class.
Performance-based investment management fees were $45.3 million and
$87.1 million for the three and six months ended March 31, 2021 , and $7.1
million and $24.5 million for the same periods in the prior fiscal year. The
increases were primarily due to $27.2 million and $62.5 million of performance
fees earned by legacy Legg Mason strategies during the three and six months
ended March 31, 2021 , as well as from a private debt fund and an open end fund
for the three-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 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.
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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 earn distribution fees from our non-U.S. funds based on
daily average AUM.
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.
Three Months Ended Six Months Ended
March 31, Percent March 31, Percent
(in millions) 2021 2020 Change 2021 2020 Change
Asset-based fees $ 322.2 $ 271.6 19 % $ 639.2 $ 559.4 14 %
Sales-based fees 86.4 65.1 33 % 160.0 124.9 28 %
Contingent sales charges 5.0 5.0 0% 11.3 8.9 27 %
Sales and Distribution Fees $ 413.6 $ 341.7 21 % Asset-based distribution fees increased$50.6 million and$79.8 million for the three and six months endedMarch 31, 2021 primarily due to$53.5 million and$107.4 million of fees earned by Legg Mason. The increase for the six-month period was partially offset by decreases of$16.0 million from a higher mix of lower-feeU.S. assets and$8.1 million from a 2% decrease in the related average AUM. Sales-based fees increased$21.3 million and$35.1 million for the three and six months endedMarch 31, 2021 primarily due to$20.0 million and$35.7 million of fees earned by Legg Mason. 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. Contingent sales charges increased$2.4 million for the six months endedMarch 31, 2021 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 increased$0.9 million and$0.3 million for the three and six months endedMarch 31, 2021 primarily due to revenue earned by Legg Mason, which was substantially offset by lower levels of transactions and for the six month period, lower levels of fee earning AUM. Other Other revenue increased$2.3 million and$2.7 million for the three and six months endedMarch 31, 2021 primarily due to higher miscellaneous fee revenues. 35 -------------------------------------------------------------------------------- Table of Contents OPERATING EXPENSES The table below presents the percentage change in each operating expense category. Three Months Ended Six Months Ended March 31, Percent March 31, Percent (in millions) 2021 2020 Change 2021 2020 Change Compensation and benefits$ 732.3 $ 365.7 100 %$ 1,457.8 $ 755.1 93 % Sales, distribution and marketing 541.8 423.9 28 % 1,048.3 867.8 21 % Information systems and technology 117.5 61.8 90 % 234.0 124.3 88 % Occupancy 53.8 34.4 56 % 109.5 68.9 59 % Amortization of intangible assets 57.9 4.4 NM 116.1 9.2
NM
General, administrative and other 116.9 81.1 44 % 240.5 162.3 48 % Total Operating Expenses$ 1,620.2 $ 971.3 67 %$ 3,206.2 $ 1,987.6 61 % Compensation and Benefits The components of compensation and benefits expenses are presented below. Three Months Ended Six Months Ended March 31, Percent March 31, Percent (in millions) 2021 2020 Change 2021 2020
Change
Salaries, wages and benefits$ 361.3 $ 251.0 44 %$ 719.0 $ 491.7 46 % Variable compensation 313.9 87.5 259 % 630.8 214.9 194 % Acquisition-related retention 46.6 27.2 71 % 90.1 48.5 86 % Special termination benefits 10.5 - NM 17.9 - NM Compensation and Benefits Expenses$ 732.3 $ 365.7 100 %$ 1,457.8 $ 755.1
93 %
Salaries, wages and benefits increased$110.3 million and$227.3 million for the three and six months endedMarch 31, 2021 primarily due to$130.0 million and$258.7 million of salaries, wages and benefits of Legg Mason. Variable compensation increased$226.4 million and$415.9 million for the three and six months endedMarch 31, 2021 primarily due to$174.7 million and$377.2 million of variable compensation of Legg Mason, including$9.3 million and$25.3 million of acquisition-related pass through performance fees and$0.2 million and$14.3 million of expenses related to deferred compensation plans and seed investments. Acquisition-related retention expenses increased$19.4 million and$41.6 million for the three and six months endedMarch 31, 2021 primarily related to the acquisition of Legg Mason. Special termination benefits relate to workforce optimization initiatives related to the acquisition of Legg Mason. We expect to incur additional acquisition-related retention expenses of approximately$70 million during the remainder of the current fiscal year, and annual amounts beginning at approximately$130 million in the fiscal year endingSeptember 30, 2022 and decreasing over the following two fiscal years by approximately$15 million and$25 million . AtMarch 31, 2021 , our global workforce had increased to approximately 11,100 employees from approximately 9,600 atMarch 31, 2020 . We continue to place a high emphasis on our pay for performance philosophy. As such, any changes in the underlying performance of our investment products or changes in the composition of our incentive compensation offerings could have an impact on compensation and benefit expenses going forward. However, in order to attract and retain talented individuals, our level of compensation and benefit expenses may increase more quickly or decrease more slowly than our revenue. 36 -------------------------------------------------------------------------------- Table of Contents Sales,Distribution and Marketing Sales, distribution and marketing expenses primarily relate to services provided by financial advisers, broker-dealers and other intermediaries to our sponsored funds, including marketing support services. Substantially all sales expenses are incurred from the same commissionable sales transactions that generate sales fee revenues and are determined as a percentage of sales. Substantially all distribution expenses are incurred from assets that generate distribution fees and are determined as a percentage of AUM. Marketing support expenses are based on AUM, sales or a combination thereof. Also included is the amortization of deferred sales commissions related to upfront commissions on shares sold without a front-end sales charge. The deferred sales commissions are amortized over the periods in which commissions are generally recovered from related revenues. Sales, distribution and marketing expenses by cost driver are presented below. Three Months Ended Six Months Ended March 31, Percent March 31, Percent (in millions) 2021 2020 Change 2021 2020 Change Asset-based expenses$ 437.3 $ 334.2 31 %$ 851.6 $ 695.0 23 % Sales-based expenses 85.1 68.5 24 % 158.3 131.3 21 % Amortization of deferred sales commissions 19.4 21.2 (8 %) 38.4 41.5 (7 %) Sales, Distribution and Marketing$ 541.8 $ 423.9 28 %$ 1,048.3 $ 867.8
21 %
Asset-based expenses increased$103.1 million and$156.6 million for the three and six months endedMarch 31, 2021 primarily due to$91.9 million and$180.1 million of expenses incurred by Legg Mason. The increase for the six-month period was partially offset by decreases of$20.4 million from a higher mix of lower-feeU.S. assets and$7.7 million from a 1% decrease in the related average AUM. 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 increased$16.6 million and$27.0 million for the three and six months endedMarch 31, 2021 primarily due to$18.3 million and$32.9 million of expenses incurred by Legg Mason. The increase for the six-month period was partially offset by a$4.8 million decrease from lower sales ofU.S. Class C shares, which do not generate sales fee revenues. Amortization of deferred sales commissions decreased$1.8 million and$3.1 million for the three and six months endedMarch 31, 2021 primarily due to lower expenses resulting from decreased sales of shares sold without a front-end sales charge. InformationSystems and Technology Information systems and technology expenses increased$55.7 million and$109.7 million for the three and six months endedMarch 31, 2021 primarily due to$54.0 million and$108.1 million of expenses of Legg Mason. 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 increased$19.4 million and$40.6 million for the three and six months endedMarch 31, 2021 primarily due to$18.8 million and$43.0 million of expenses of Legg Mason, partially offset by a decrease of$2.3 million from lower levels of rent expense and other building related costs for the six months endedMarch 31, 2021 . Amortization of intangible assets Amortization of intangible assets increased$53.5 million and$106.9 million for the three and six months endedMarch 31, 2021 primarily related to the intangible assets recognized as part of the acquisition of Legg Mason. 37 -------------------------------------------------------------------------------- Table of Contents General, Administrative and Other General, administrative and other operating 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$35.8 million and$78.2 million for the three and six months endedMarch 31, 2021 , primarily due to$31.1 million and$66.9 million of expenses of Legg Mason and increases of$8.0 million and$10.2 million in third-party fees primarily for sub-advisory and fund administration services, partially offset by decreases of$5.4 million and$15.4 million in travel and entertainment expenses and$6.7 million and$10.8 million in advertising and promotion expenses, both primarily due to lower activity levels. The increase for the six-month period also included a$9.5 million increase in acquisition-related expenses. OTHER INCOME (EXPENSES) Other income (expenses) consisted of the following: Three Months Ended Six Months Ended March 31, Percent March 31, Percent (in millions) 2021 2020 Change 2021 2020 Change Investment and other income (losses), net$ 67.1 $ (181.0) NM$ 144.3 $ (113.1) NM Interest expense (15.9) (3.7) 330 % (45.6) (9.8) 365 % Investment and other income (losses) of consolidated investment products, net 111.2 (40.9) NM 202.3 (25.7)
NM
Expenses of consolidated investment products (5.2) (11.4) (54 %) (15.6) (15.7) (1
%)
Other Income (Expenses), Net$ 157.2 $ (237.0) NM$ 285.4 $ (164.3)
NM
In the quarter endedSeptember 30, 2020 , the Company changed the presentation of its consolidated statements of income to include dividend and interest income and other expenses from consolidated investment products ("CIPs") in other income, net. Amounts for the comparative prior fiscal year period have been reclassified to conform to the current presentation. See Note 1 - Basis of Presentation in the notes to consolidated financial statements in Item 1 of Part I of this Form 10Q. Investment and other income (losses), net consists primarily of income (losses) from equity method investees, gains (losses) on investments held by the Company, gains (losses) on derivatives, foreign currency exchange gains (losses), rental income from excess owned space in ourSan Mateo, California corporate headquarters and other office buildings which we lease to third parties. Investment and other income (losses), net increased$248.1 million and$257.4 million for the three and six months endedMarch 31, 2021 , primarily due to income from equity method investees and gains on investments held by the Company, partially offset by losses on various derivatives and a decrease in dividend income. Equity method investees generated gains of$45.9 million and$84.4 million for the three- and six-month periods, as compared to losses of$159.4 million and$120.3 million in the prior year periods. The current year periods reflect continued recovery in market valuations of investments held by various global equity funds, while the prior year periods reflect steep declines in market valuations of investments held primarily by a global equity fund amid global concerns about the COVID-19 pandemic. Investments held by the Company generated$10.2 million and$58.9 million in net gains for the three- and six-month periods as compared to$79.4 million and$71.6 million in net losses in the prior year periods, primarily from various nonconsolidated funds, separate accounts and assets invested for Legg Mason deferred compensation plans. Dividend income decreased$18.7 million and$34.8 million for the three- and six-month periods primarily due to lower yields on money market funds. Derivatives generated$6.1 million and$16.1 million of losses for the three and six months endedDecember 31, 2020 as compared to$31.4 million and$29.1 million of gains in the prior year periods. Interest expense increased$12.2 million and$35.8 million for the three- and six-month periods, primarily due to interest expense recognized on debt of Legg Mason and the 1.600% senior unsecured unsubordinated notes issued inOctober 2020 . Investment and other income (losses) of consolidated investment products, net consists of dividend and interest income and investment gains (losses) on investments held by CIPs. 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 (losses) of consolidated investment products, net and expenses of consolidated investment products are offset in noncontrolling interests in our consolidated statements of income. 38 -------------------------------------------------------------------------------- Table of Contents Investment and other income (losses) of consolidated investment products, net, increased$152.1 million and$228.0 million for the three- and six-month periods, primarily due to a$156.7 million and$225.9 million increase in net gains on investments held by CIPs, largely related to holdings of various alternative funds. Expenses of consolidated investments products decreased$6.2 million and$0.1 million for the three- and six-month periods. The decrease in the three-month period was primarily due to lower expenses incurred by an alternative fund. Our investments in sponsored funds include initial cash investments made in the course of launching mutual fund and other investment product offerings, as well as investments for other business reasons. The market conditions that impact our AUM similarly affect the investment income earned or losses incurred on our investments in sponsored funds. Our cash, cash equivalents and investments portfolio by asset class and accounting classification atMarch 31, 2021 , excluding third-party assets of CIPs, was as follows: Accounting Classification1 Cash and Investments Equity Direct Cash at Method Investments Total Direct (in millions) Equivalents Fair Value Investments Other Investments in CIPs Portfolio Cash and Cash Equivalents$ 3,740.2 $ - $ - $ - $ -$ 3,740.2 Investments Fixed Income - 225.5 39.1 36.7 321.4 622.7 Equity - 200.3 479.7 33.5 116.7 830.2 Multi-Asset - 33.4 5.2 - 77.3 115.9 Alternative - 95.1 261.5 23.9 522.3 902.8 Total investments - 554.3 785.5 94.1 1,037.7 2,471.6 Total Cash and Cash Equivalents and Investments$ 3,740.2 $ 554.3 $ 785.5 $ 94.1$ 1,037.7 $ 6,211.8 ______________ 1See Note 1 - Significant Accounting Policies and Note 6 - Investments in the notes to consolidated financial statements in Item 8 of Part II of our Form 10-K for fiscal year 2020 for information on investment accounting classifications. TAXES ON INCOME Our effective income tax rate was 20.9% and 23.5% for the three and six months endedMarch 31, 2021 , as compared to 42.9% and 25.8% for the three and six months endedMarch 31, 2020 . The rate decreases were primarily due to net income attributable to noncontrolling interests as compared to net losses in the prior fiscal year and decreases inU.S. taxes on foreign earnings. The rate decrease for the six-month period was partially offset by the prior year tax benefit from the statutory rate reduction enacted inIndia inDecember 2019 , which also resulted in a tax benefit from the revaluation of net deferred tax liabilities. During the six months endedMarch 31, 2021 , we reversed gross unrecognized tax benefits of$29.3 million related to the completion of the tax authorities' examination of Legg Mason's fiscal years 2018 and 2019. The reversal of the tax benefits did not significantly impact the effective income tax rate as the benefits were offset by a valuation allowance related to tax attribute carryforwards. 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. 39 -------------------------------------------------------------------------------- Table of Contents SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES As supplemental information, we are providing performance measures for "adjusted operating income," "adjusted operating margin," "adjusted net income" and "adjusted diluted earnings per share," each of which is based on methodologies other than generally accepted accounting principles ("non-GAAP measures"). Management believes these non-GAAP measures are useful indicators of our financial performance and may be helpful to investors in evaluating our relative performance against industry peers as these measures exclude the impact of CIPs and mitigate the margin variability related to sales and distribution revenues and expenses across multiple distribution channels globally. These measures also exclude performance-based investment management fees which are fully passed through as compensation and benefits expense per the terms of a previous acquisition by Legg Mason and have no impact on net income. These non-GAAP measures also exclude acquisition-related expenses, certain items which management considers to be nonrecurring, unrealized investment gains and losses included in investment and other income (losses), net, and the related income tax effect of these adjustments, as applicable. These non-GAAP measures also exclude the impact on compensation and benefits expense which is offset by gains and losses in investment and other income (losses), net on investments made to fund deferred compensation plans and on seed investments under certain historical revenue sharing arrangements. "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 toFranklin Resources, Inc. and diluted earnings per share on aU.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 withU.S. GAAP, and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate. Adjusted Operating Income We define adjusted operating income as operating income adjusted to exclude the following: •Elimination of operating revenues upon consolidation of investment products. •Acquisition-related retention compensation. •Impact on compensation and benefits expense from gains and losses on investments related to Legg Mason deferred compensation plans and seed investments, which is offset in investment and other income (expense), net. •Other acquisition-related expenses including professional fees and technology costs. •Amortization and impairment of intangible assets. •Special termination benefits related to workforce optimization initiatives related to the acquisition of Legg Mason onJuly 31, 2020 . Adjusted Operating Margin We calculate adjusted operating margin as adjusted operating income divided by adjusted operating revenues. We define adjusted operating revenues as operating revenues adjusted to exclude the following: •Acquisition-related performance-based investment management fees which are passed through as compensation and benefits expense. •Sales and distribution fees and a portion of investment management fees allocated to cover sales, distribution and marketing expenses paid to the financial advisers and other intermediaries who sell our funds on our behalf. •Elimination of operating revenues upon consolidation of investment products. Adjusted Net Income We define adjusted net income as net income attributable toFranklin Resources, Inc. adjusted to exclude the following: •Activities of CIPs, including investment and other income (losses), net, and income (loss) attributable to noncontrolling interests, net of revenues eliminated upon consolidation of investment products. 40 -------------------------------------------------------------------------------- Table of Contents •Acquisition-related retention compensation. •Other acquisition-related expenses including professional fees and technology costs. •Amortization and impairment of intangible assets. •Special termination benefits related to workforce optimization initiatives related to the acquisition of Legg Mason onJuly 31, 2020 . •Net gains or losses on investments related to Legg Mason deferred compensation plans which are not offset by compensation and benefits expense. •Unrealized investment gains and losses other than those that are offset by compensation and benefits expense. •Interest expense for amortization of Legg Mason debt premium from acquisition-date fair value adjustment. •Net income tax expense of the above adjustments based on the respective blended rates applicable to the adjustments. Adjusted Diluted Earnings Per Share We define adjusted diluted earnings per share as diluted earnings per share adjusted to exclude the per share impacts of the adjustments applied to net income in calculating adjusted net income. In calculating adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share, we adjust for activities of CIPs because the impact of consolidated products is not considered reflective of the underlying results of our operations. We adjust for acquisition-related retention compensation, other acquisition-related expenses, amortization and impairment of intangible assets and interest expense for amortization of the Legg Mason debt premium to facilitate comparability of our operating results with the results of other asset management firms. We adjust for special termination benefits related to workforce optimization initiatives related to the acquisition of Legg Mason because these items are deemed nonrecurring. In calculating adjusted net income and adjusted diluted earnings per share, we adjust for unrealized investment gains and losses included in investment and other income (losses), net and net gains or losses on investments related to Legg Mason deferred compensation plans which are not offset by compensation and benefits expense because these items primarily relate to seed and strategic investments which have been and are generally expected to be held long term. 41
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Table of Contents The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows:
Three Months Ended Six Months Ended
March 31, March 31,
(in millions) 2021 2020 2021 2020
Operating income $ 456.3 $ 339.9 $ 865.4 $ 712.8
Add (subtract):
Elimination of operating revenues upon
consolidation of investment products1 5.8 6.2 11.5 12.9
Acquisition-related retention 46.6 27.2 90.1 48.5
Compensation and benefits expense from gains on
deferred compensation and seed investments, net 0.2 - 14.3 -
Other acquisition-related expenses 3.8 5.4 15.7 5.2
Amortization of intangible assets 57.9 4.4 116.1 9.2
Impairment of intangible assets - 2.8 - 2.8
Special termination benefits 10.5 - 17.9 -
Adjusted operating income $ 581.1 $ 385.9 $ 1,131.0 $ 791.4
Total operating revenues $ 2,076.5 $ 1,311.2 $ 4,071.6 $ 2,700.4
Add (subtract):
Acquisition-related pass through performance
fees (9.3) - (25.3) -
Sales and distribution fees (413.6) (341.7) (810.5) (693.2)
Allocation of investment management fees for
sales, distribution and marketing expenses (128.2) (82.2) (237.8) (174.6)
Elimination of operating revenues upon
consolidated of investment products1 5.8 6.2 11.5 12.9
Adjusted operating revenues $ 1,531.2 $ 893.5 $ 3,009.5 $ 1,845.5
Operating margin 22.0 % 25.9 % 21.3 % 26.4 %
Adjusted operating margin 38.0 % 43.2 % 37.6 % 42.9 %
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