Franklin Resources(BEN) - 2024 Q3 - Quarterly Report

PART I Financial Information Financial Statements Presents unaudited consolidated financial statements for Q3 and YTD FY2024 and FY2023, including the Putnam Investments acquisition Consolidated Statements of Income Q3 FY2024 saw operating revenues rise to $2.12 billion, but operating income and net income attributable to Franklin Resources declined | Financial Metric | Three Months Ended June 30, 2024 (in millions) | Three Months Ended June 30, 2023 (in millions) | Nine Months Ended June 30, 2024 (in millions) | Nine Months Ended June 30, 2023 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Total operating revenues | $2,122.9 | $1,969.0 | $6,266.8 | $5,863.3 | | Operating Income | $222.5 | $314.9 | $558.3 | $764.0 | | Net Income Attributable to Franklin Resources, Inc. | $174.0 | $227.5 | $549.5 | $587.3 | | Diluted Earnings per Share | $0.32 | $0.44 | $1.03 | $1.14 | Consolidated Balance Sheets Total assets increased to $33.25 billion by June 30, 2024, driven by the Putnam acquisition, with a corresponding rise in liabilities | Balance Sheet Item | June 30, 2024 (in millions) | September 30, 2023 (in millions) | | :--- | :--- | :--- | | Total Assets | $33,254.9 | $30,121.2 | | Cash and cash equivalents | $3,378.5 | $3,686.4 | | Goodwill | $6,198.5 | $6,003.8 | | Intangible assets, net | $5,267.8 | $4,902.2 | | Total Liabilities | $18,353.5 | $16,547.3 | | Debt | $3,035.0 | $3,052.8 | | Total Stockholders' Equity | $13,635.2 | $12,547.8 | Consolidated Statements of Cash Flows Net cash from operations increased to $413.1 million, while investing activities used less cash, and financing activities provided less cash | Cash Flow Activity (Nine Months Ended June 30) | 2024 (in millions) | 2023 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $413.1 | $324.7 | | Net cash used in investing activities | ($1,222.7) | ($3,278.2) | | Net cash provided by financing activities | $506.4 | $2,492.6 | | Decrease in cash and cash equivalents | ($290.7) | ($394.9) | Notes to Consolidated Financial Statements Detailed disclosures cover accounting policies, the Putnam acquisition, revenue, fair value, CIPs, legal proceedings, and a subsidiary's regulatory investigation - On January 1, 2024, the Company acquired Putnam Investments from Great-West Lifeco Inc. for 31.6 million shares of its common stock, $221.7 million in cash at closing, and $100.0 million in deferred cash consideration[25][26] - The Putnam acquisition resulted in goodwill of $190.2 million, primarily attributed to expected growth opportunities, and is expected to be tax-deductible[28][29] - Western Asset Management (WAM), a subsidiary, is under parallel investigations by the SEC and U.S. Department of Justice regarding certain past trade allocations of treasury derivatives[57] - On July 15, 2024, subsequent to the quarter end, the company repaid all outstanding $250.0 million 3.950% senior notes issued by Legg Mason[65] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A covers AUM growth to $1.65 trillion, revenue increase, operating income decline due to acquisition costs, and liquidity Assets Under Management (AUM) Total AUM increased 15% year-over-year to $1.65 trillion, primarily due to the Putnam acquisition, with mixed quarterly flows | AUM by Asset Class | June 30, 2024 (in billions) | June 30, 2023 (in billions) | Percent Change | | :--- | :--- | :--- | :--- | | Equity | $595.0 | $458.0 | 30% | | Fixed Income | $564.5 | $505.1 | 12% | | Alternative | $254.5 | $257.2 | (1%) | | Multi-Asset | $168.1 | $148.3 | 13% | | Cash Management | $64.5 | $62.9 | 3% | | Total | $1,646.6 | $1,431.5 | 15% | | Change in AUM (Three Months Ended June 30, 2024) | Amount (in billions) | | :--- | :--- | | Beginning AUM | $1,644.7 | | Long-term net flows | ($3.2) | | Cash management net flows | $3.0 | | Net market change, distributions and other | $2.1 | | Ending AUM | $1,646.6 | Operating Revenues Q3 operating revenues rose 8% to $2.12 billion, driven by increased investment management, sales, and shareholder servicing fees, partly due to Putnam | Revenue Category (Three Months Ended June 30) | 2024 (in millions) | 2023 (in millions) | Percent Change | | :--- | :--- | :--- | :--- | | Investment management fees | $1,689.9 | $1,613.4 | 5% | | Sales and distribution fees | $358.3 | $304.0 | 18% | | Shareholder servicing fees | $61.8 | $38.8 | 59% | | Total Operating Revenues | $2,122.9 | $1,969.0 | 8% | - The effective investment management fee rate (excluding performance fees) decreased to 40.2 basis points for the quarter from 42.0 basis points in the prior year, mainly due to lower catch-up fees and the addition of lower-fee products from the Putnam acquisition[98] Operating Expenses Total operating expenses increased 15% to $1.90 billion in Q3, primarily due to the Putnam acquisition and higher occupancy and administrative costs | Expense Category (Three Months Ended June 30) | 2024 (in millions) | 2023 (in millions) | Percent Change | | :--- | :--- | :--- | :--- | | Compensation and benefits | $893.8 | $841.2 | 6% | | Sales, distribution and marketing | $481.1 | $406.8 | 18% | | Information systems and technology | $156.6 | $127.3 | 23% | | Occupancy | $104.8 | $56.9 | 84% | | General, administrative and other | $180.1 | $136.5 | 32% | | Total Operating Expenses | $1,900.4 | $1,654.1 | 15% | - The 84% increase in occupancy expenses was driven by an impairment of a right-of-use asset for vacated office space and costs for new leased space in New York City as part of an office consolidation initiative[116] Liquidity and Capital Resources The company maintains $5.68 billion in liquid assets, utilizing capital for share repurchases and deferred acquisition payments | Category | June 30, 2024 (in millions) | September 30, 2023 (in millions) | | :--- | :--- | :--- | | Total Liquid Assets | $5,676.1 | $5,873.3 | | Cash and cash equivalents | $3,336.1 | $3,592.8 | | Debt | $3,035.0 | $3,052.8 | - During the nine months ended June 30, 2024, the company repurchased 7.1 million shares of common stock at a cost of $172.0 million[153] - Significant deferred cash payments were made for prior acquisitions, including $400.0 million for Lexington in April 2024 and $60.8 million for Alcentra in November 2023[155] Quantitative and Qualitative Disclosures About Market Risk No material changes occurred in market risk disclosures compared to the fiscal year 2023 Annual Report on Form 10-K - There were no material changes from the market risk disclosures in the Form 10-K for the fiscal year ended September 30, 2023[164] Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal control over financial reporting - The Company's principal executive and financial officers concluded that disclosure controls and procedures were effective as of June 30, 2024[165] - No changes occurred during the fiscal quarter ended June 30, 2024, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[166] PART II Other Information Legal Proceedings Refers to Note 11 for legal proceedings, highlighting ongoing SEC and DOJ investigations into WAM regarding trade allocations - The report refers to Note 11 for a description of legal proceedings, which includes parallel investigations by the SEC and U.S. Department of Justice into Western Asset Management (WAM) regarding past trade allocations[168][57] Risk Factors No material changes to risk factors were reported compared to the fiscal year 2023 Annual Report on Form 10-K - There were no material changes from the Risk Factors disclosed in the Annual Report on Form 10-K for fiscal year 2023[169] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 4.27 million shares in Q3 FY2024, with 34.8 million shares remaining for repurchase authorization | Month | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2024 | 691,857 | $24.79 | | May 2024 | 3,080,243 | $23.58 | | June 2024 | 502,162 | $23.35 | | Total | 4,274,262 | | - As of June 30, 2024, 34,832,896 shares remained available for repurchase under the company's stock repurchase program[171] Exhibits Lists exhibits filed with Form 10-Q, including CEO/CFO certifications and iXBRL financial data files - The exhibits filed with the report include CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as iXBRL data files for the financial statements[172][176]