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, financial performance and market conditions. 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, including pandemic-related risks, market and volatility risks, investment performance and reputational risks, global operational risks, competition and distribution risks, third-party risks, technology and security risks, human capital risks, cash management risks, and legal and regulatory risks. 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 and/or discussed under the headings "Risk Factors" and "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2022 ("fiscal year 2022"). 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 Annual Report on Form 10-K for the fiscal year 2022 filed with theU.S. Securities and Exchange Commission , and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.
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. 20
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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 of our
Annual Report on Form 10-K for the fiscal year 2022, 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 our first fiscal quarter, global equity markets provided positive returns
reflecting indications that central banks may begin to slow the pace of monetary
policy tightening, signs that elevated inflation could be softening, and strong
corporate earnings in certain sectors. The S&P 500 Index and MSCI World Index
increased 7.6% and 9.9% for the quarter. The global bond markets remained
positive as the Bloomberg Global Aggregate Index increased 4.6% during the
quarter, reflecting expectations of easing monetary policy.
Our total AUM at December 31, 2022 was $1,387.7 billion , 7% higher than at
September 30, 2022 and 12% lower than at December 31, 2021 . Monthly average AUM
("average AUM") for the three months ended December 31, 2022 decreased 13% from
the same period in the prior fiscal year.
On November 1, 2022 , we acquired BNY Alcentra Group Holdings, Inc. (together
with its subsidiaries, "Alcentra"), one of the largest European credit and
private debt managers, with global expertise in senior secured loans, high yield
bonds, private credit, structured credit, special situations and multi-strategy
credit strategies, for cash consideration of $587.3 million , which includes
$188.3 million for certain securities held in Alcentra's collateralized loan
obligations; deferred consideration of $60.4 million due November 1, 2023 ; and
contingent consideration to be paid upon the achievement of certain performance
thresholds over the next four years of up to $350.0 million that had an
acquisition-date fair value of $24.6 million .
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 of our Annual Report on Form 10-K for the fiscal year
2022.
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RESULTS OF OPERATIONS
Three Months Ended
December 31, Percent
(in millions, except per share data) 2022 2021 Change
Operating revenues $ 1,967.1 $ 2,224.0 (12 %)
Operating income 194.0 557.7 (65 %)
Operating margin1 9.9 % 25.1 %
Net income attributable to Franklin Resources, Inc. $ 165.6 $ 453.2 (63 %)
Diluted earnings per share 0.32 0.88 (64 %)
As adjusted (non-GAAP):2
Adjusted operating income $ 395.1 $ 685.9 (42 %)
Adjusted operating margin 27.5 % 39.8 %
Adjusted net income $ 262.4 $ 553.6 (53 %)
Adjusted diluted earnings per share 0.51 1.08 (53 %)
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1Defined as operating income divided by 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:
December 31, December 31, Percent
(in billions) 2022 2021 Change
Fixed Income $ 494.8 $ 642.1 (23 %)
Equity 419.1 563.4 (26 %)
Alternative 257.4 154.3 67 %
Multi-Asset 141.4 154.0 (8 %)
Cash Management 75.0 64.3 17 %
Total $ 1,387.7 $ 1,578.1 (12 %)
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 December Percent 31, 2022 2021 Change 2022 2021 Fixed Income$ 490.3 $ 642.4 (24 %) 36 % 41 % Equity 417.3 549.3 (24 %) 31 % 35 % Alternative 240.4 149.4 61 % 18 % 10 % Multi-Asset 138.6 151.7 (9 %) 10 % 10 % Cash Management 66.9 61.4 9 % 5 % 4 % Total$ 1,353.5 $ 1,554.2 (13 %) 100 % 100 % 22
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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
December 31, Percent
(in billions) 2022 2021 Change
Beginning AUM $ 1,297.4 $ 1,530.1 (15 %)
Long-term inflows 70.5 107.0 (34 %)
Long-term outflows (81.4) (82.9) (2 %)
Long-term net flows (10.9) 24.1 NM
Cash management net flows 17.5 5.8 202%
Total net flows 6.6 29.9 (78%)
Acquisitions 34.9 7.7 353%
Net market change, distributions and other 48.8 10.4 369%
Ending AUM $ 1,387.7 $ 1,578.1 (12 %)
Components of the change in AUM by asset class were as follows:
(in billions) for the three months ended Cash December 31, 2022 Fixed Income Equity Alternative Multi-Asset Management Total AUM at October 1, 2022$ 490.9 $ 392.3 $ 225.1 $ 131.5 $ 57.6 $ 1,297.4 Long-term inflows 28.5 27.2 6.5 8.3 - 70.5 Long-term outflows (41.8) (26.9) (6.8) (5.9) - (81.4) Long-term net flows (13.3) 0.3 (0.3) 2.4 - (10.9) Cash management net flows - - - - 17.5 17.5 Total net flows (13.3) 0.3 (0.3) 2.4 17.5 6.6 Acquisition - - 34.9 - - 34.9 Net market change, distributions and other 17.2 26.5 (2.3) 7.5 (0.1) 48.8 AUM at December 31, 2022$ 494.8 $ 419.1 $ 257.4 $ 141.4 $ 75.0 $ 1,387.7 AUM increased$90.3 billion , or 7%, during the three months endedDecember 31, 2022 due to the positive impact of$48.8 billion of net market change, distributions and other,$34.9 billion from an acquisition, and$17.5 billion of cash management net inflows, partially offset by$10.9 billion of long-term net outflows. Long-term net outflows included a$2.1 billion fixed income institutional redemption that had minimal impact on revenue. Net market change, distributions and other primarily consists of$58.5 billion of market appreciation, an$8.8 billion increase from foreign exchange revaluation, partially offset by$18.5 billion of long-term distributions. The market appreciation occurred in all asset classes with the exception of the alternative asset class and reflected positive returns in the global equity and fixed income markets. Foreign exchange revaluation from AUM in products that are notU.S. dollar denominated was primarily due to a weakerU.S. dollar compared to the Euro, Japanese Yen, Australian dollar and Pound Sterling. Long-term inflows decreased 34% to$70.5 billion , as compared to the prior year period, driven by lower inflows in equity, multi-asset, and fixed income open end funds, fixed income institutional separate accounts, sub-advised CITs, and equity retail separate accounts. Decreased inflows for open end mutual funds include the impact of lower reinvested distributions, which were$12.1 billion in the current year quarter, as compared to$23.5 billion in the prior year quarter. Long-term outflows decreased 2% to$81.4 billion due to lower outflows in equity open end funds and multi-asset and equity sub-advised mutual funds, partially offset by higher outflows in fixed income and alternative institutional separate accounts, fixed income open end funds, and alternative private open end funds. 23
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Table of Contents (in billions) for the three months ended Cash December 31, 2021 Fixed Income Equity Alternative Multi-Asset Management Total AUM at October 1, 2021$ 650.3 $ 523.6 $ 145.2 $ 152.4 $ 58.6 $ 1,530.1 Long-term inflows 43.7 46.1 6.1 11.1 - 107.0 Long-term outflows (35.6) (33.4) (3.1) (10.8) - (82.9) Long-term net flows 8.1 12.7 3.0 0.3 - 24.1 Cash management net flows - - - - 5.8 5.8 Total net flows 8.1 12.7 3.0 0.3 5.8 29.9 Acquisitions - 4.6 0.8 2.3 - 7.7 Net market change, distributions and other (16.3) 22.5 5.3 (1.0) (0.1) 10.4 AUM at December 31, 2021$ 642.1 $ 563.4 $ 154.3 $ 154.0 $ 64.3 $ 1,578.1 AUM increased$48.0 billion , or 3%, during the three months endedDecember 31, 2021 due to$24.1 billion of long-term net inflows, the positive impact of$10.4 billion of net market change, distributions and other,$7.7 billion from acquisitions and$5.8 billion of cash management net inflows. Net market change, distributions and other consists of$41.8 billion of market appreciation, partially offset by$30.1 billion of long-term distributions and a$1.3 billion decrease from foreign exchange revaluation. The market appreciation occurred primarily in the equity asset class, partially offset by depreciation in the fixed income asset class. The foreign exchange revaluation resulted from AUM in products that are notU.S. dollar denominated, which represented 11% of total AUM as ofDecember 31, 2021 , and was primarily due to the strengthening of theU.S. dollar against the Japanese Yen, Euro and Brazilian Real, partially offset by weakening of theU.S. dollar against the Australian dollar. Long-term inflows increased 29% to$107.0 billion , as compared to the prior quarter period, due to higher inflows in all long-term asset classes including$7.4 billion in net client accounts related to the newly joined InvestmentGrade Credit team as well as$23.5 billion of reinvested distributions. Long-term outflows decreased 11% to$82.9 billion due to lower outflows in the fixed income and equity asset classes. Long-term outflows in the multi-asset asset class included a$3.6 billion institutional redemption.
AUM by sales region was as follows:
December 31, December 31, Percent
(in billions) 2022 2021 Change
United States $ 993.1 $ 1,186.5 (16 %)
International
Asia-Pacific 123.4 155.0 (20 %)
Europe, Middle East and Africa 156.4 156.2 0 %
Americas, excl. U.S. 114.8 80.4 43 %
Total international 394.6 391.6 1 %
Total $ 1,387.7 $ 1,578.1 (12 %)
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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.
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 December 31, 2022 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year
Fixed Income 45 % 44 % 39 % 69 % 27 % 40 % 50 % 90 %
Equity 52 % 50 % 56 % 61 % 58 % 49 % 52 % 37 %
Total AUM3 57 % 56 % 57 % 55 % 52 % 54 % 59 % 67 %
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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 35%, 35%, 35% and 33% of our
total AUM as of December 31, 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 56%, 56%, 55% and 47% of our total AUM as of
December 31, 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 19% and 10% of our total
AUM at December 31, 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 January 10, 2023 , 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.
OPERATING REVENUES
The table below presents the percentage change in each operating revenue
category.
Three Months Ended
December 31, Percent
(in millions) 2022 2021 Change
Investment management fees $ 1,631.8 $ 1,760.5 (7 %)
Sales and distribution fees 291.9 398.2 (27 %)
Shareholder servicing fees 33.4 47.7 (30 %)
Other 10.0 17.6 (43 %)
Total Operating Revenues $ 1,967.1
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Investment Management Fees
Investment management fees decreased$128.7 million for the three months endedDecember 31, 2022 primarily due to a 13% decrease in average AUM, partially offset by higher performance fees. 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 ofLexington Partners L.P. ("Lexington") and Alcentra.
Our effective investment management fee rate excluding performance fees
(annualized investment management fees excluding performance fees divided by
average AUM) increased to 41.7 basis points for the three months ended
Performance fees were$209.0 million and$139.9 million for the three months endedDecember 31, 2022 and 2021. The increase was primarily due to$144.5 million of performance fees earned by Lexington, which were passed through as compensation expense per the terms of the acquisition agreement, partially offset by lower performance fees earned by our other alternative specialist investment managers.
Sales and Distribution Fees
Sales and distribution fees by revenue driver are presented below.
Three Months Ended
December 31, Percent
(in millions) 2022 2021 Change
Asset-based fees $ 245.0 $ 321.9 (24 %)
Sales-based fees 46.9 76.3 (39 %)
Sales and Distribution Fees $ 291.9 Asset-based distribution fees decreased$76.9 million for the three months endedDecember 31, 2022 primarily due to a 21% decrease in the related average AUM and a higher mix of lower-fee assets.
Sales-based fees decreased
Shareholder Servicing Fees
Shareholder servicing fees decreased$14.3 million for the three months endedDecember 31, 2022 primarily due to lower levels of related AUM, a reduction in fee rates charged for transfer agency services in theU.S. , and fewer transactions.
Other
Other revenue decreased$7.6 million for the three months endedDecember 31, 2022 primarily due to lower real estate transaction fees earned by certain of our alternative asset managers.
OPERATING EXPENSES
The table below presents the percentage change in each operating expense
category.
Three Months Ended
December 31, Percent
(in millions) 2022 2021 Change
Compensation and benefits $ 979.2 $ 802.6 22 %
Sales, distribution and marketing 388.6 510.1 (24 %)
Information systems and technology 121.4 123.8 (2 %)
Occupancy 54.5 56.3 (3 %)
Amortization of intangible assets 83.2 58.3 43 %
General, administrative and other 146.2 115.2 27 %
Total Operating Expenses $ 1,773.1 $ 1,666.3 6 %
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Compensation and Benefits
The components of compensation and benefits expenses are presented below.
Three Months Ended
December 31, Percent
(in millions) 2022 2021 ChangeSalaries, wages and benefits$ 360.6 $ 349.8 3 % Incentive compensation 383.9 405.5 (5 %) Acquisition-related retention 63.6 40.0 59 % Acquisition-related performance fee pass through 144.5 0.4 NM Other1 26.6 6.9 286 % Compensation and Benefits Expenses$ 979.2 $ 802.6 22 %
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1Includes 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; and special termination benefits. Salaries, wages and benefits increased$10.8 million for the three months endedDecember 31, 2022 , primarily due to the recent acquisitions and a$4.3 million increase in termination benefits, which were substantially offset by the impact of headcount reductions. Incentive compensation decreased$21.6 million for the three months endedDecember 31, 2022 primarily due to lower incentive compensation at specialist investment managers and lower expectations of our annual performance, offset in part by the recent acquisitions, and an increase in expense for deferred compensation awards, due in part to an increase in annual acceleration for retirement-eligible employees. Acquisition-related retention expenses increased$23.6 million for the three months endedDecember 31, 2022 , primarily due to the acquisitions of Lexington and Alcentra.
Acquisition-related performance fee pass through increased
Other compensation and benefits increased$19.7 million for the three months endedDecember 31, 2022 primarily due to compensation related to minority interests and an increase in special termination benefits, primarily due to the acquisition of Alcentra and workforce optimization initiatives. We expect to incur additional acquisition-related retention expenses of approximately$190 million during the remainder of the current fiscal year, and annual amounts beginning at approximately$220 million in the fiscal year endingSeptember 30, 2024 and decreasing over the following two fiscal years by approximately$70 million and$20 million . AtDecember 31, 2022 , our global workforce had decreased to approximately 9,400 employees from approximately 10,400 atDecember 31, 2021 .
Sales,
Sales, distribution and marketing expenses by cost driver are presented below.
Three Months Ended
December 31, Percent
(in millions) 2022 2021 Change
Asset-based expenses $ 331.9 $ 419.6 (21 %)
Sales-based expenses 44.3 72.1 (39 %)
Amortization of deferred sales commissions 12.4 18.4 (33 %)
Sales, Distribution and Marketing $ 388.6 $ 510.1 (24 %)
Asset-based expenses decreased $87.7 million for the three months ended
December 31, 2022 primarily due to a 20% decrease in related average AUM and a
higher mix of lower-fee assets. Distribution expenses are generally not directly
correlated with distribution fee revenues due to certain fee structures that do
not provide full recovery of distribution costs.
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Sales-based expenses decreased
Information
Information systems and technology expenses decreased
Amortization of intangible assets
Amortization of intangible assets increased$24.9 million for the three months endedDecember 31, 2022 , primarily due to intangible assets recognized as part of the acquisition of Lexington.
General, Administrative and Other
General, administrative and other operating expenses increased$31.0 million for the three months endedDecember 31, 2022 , primarily due to a$12.4 million increase in acquisition-related expenses, a$10.1 million increase in platform and placement fees and a$6.2 million increase in professional fees.
OTHER INCOME (EXPENSES)
Other income (expenses) consisted of the following:
Three Months Ended
December 31, Percent
(in millions) 2022 2021 Change
Investment and other income, net $ 91.1 $ 57.0 60 %
Interest expense (30.9) (19.3) 60 %
Investment and other income (losses) of consolidated investment products, net
(13.6) 104.7 NM
Expenses of consolidated investment products (11.5) (4.2) 174 %
Other Income, Net $ 35.1 $ 138.2 (75 %)
Investment and other income, net increased $34.1 million for the three months
ended December 31, 2022 primarily due to an increase in dividend and interest
income and higher gains on investments, partially offset by foreign currency
exchange losses in the current period.
Investments held by the Company generated net gains of $45.5 million for the
three months ended December 31, 2022 , primarily from investments in
nonconsolidated funds and separate accounts and assets invested for deferred
compensation plans, partially offset by net losses from investments measured at
cost adjusted for observable price changes. Investments held by the Company
generated net gains of $25.8 million in the prior year period, primarily from
investments measured at cost adjusted for observable price changes, investments
in nonconsolidated funds and separate accounts, and assets invested for deferred
compensation plans.
Equity method investees generated income of $33.2 million for the three months
ended December 31, 2022 , primarily related to various global fixed income and
equity funds, as compared to income of $24.7 million in the prior year,
primarily related to various global equity funds.
Net foreign currency exchange losses were $27.1 million for the three months
ended December 31, 2022 , as compared to net gains of $3.9 million for the three
months ended December 31, 2021 . The decrease was primarily due to the impact of
the weakening of the U.S. dollar against the Euro and British Pound on cash and
cash equivalents denominated in U.S. dollars held by our European subsidiaries.
Dividend and interest income increased $30.4 million for the three months ended
December 31, 2022 , as compared to the prior year period, primarily due to higher
yields.
Interest expense increased
Investments held by consolidated investment products ("CIPs") generated losses
of $13.6 million in the three months ended December 31, 2022 , largely related to
losses on holdings of various equity and fixed income funds, partially offset by
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gains on various alternative funds. Investments held by CIPs generated gains of$104.7 million in the prior year period, primarily related to gains on various holdings of alternative funds, partially offset by losses on holdings of various equity and fixed income funds.
Expenses of consolidated investments products increased
Our cash, cash equivalents and investments portfolio by asset class and accounting classification atDecember 31, 2022 , excluding third-party assets of CIPs, was as follows: Accounting Classification1 Cash and Investments Equity Direct Cash at Method Investments (in millions) Equivalents Fair Value Investments Other Investments in CIPs Total Cash and Cash Equivalents$ 3,547.8 $ - $ - $ - $ -$ 3,547.8 Investments Alternative - 409.4 599.8 55.3 617.4 1,681.9 Equity - 292.8 191.8 152.8 113.0 750.4 Fixed Income - 234.4 28.1 37.4 248.4 548.3 Multi-Asset - 33.0 11.0 - 73.7 117.7 Total investments - 969.6 830.7 245.5 1,052.5 3,098.3 Total Cash and Cash Equivalents and Investments2, 3$ 3,547.8 $ 969.6 $ 830.7 $ 245.5$ 1,052.5 $ 6,646.1 ______________ 1See Note 1 - Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for fiscal year 2022 for information on investment accounting classifications. 2Total cash and cash equivalents and investments includes$4,053.3 million used for operational activities, including investments in sponsored funds and other products, and$206.2 million necessary to comply with regulatory requirements. 3Total cash and cash equivalents and investments includes$300.0 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 was 26.3% and 21.7% for the three months endedDecember 31, 2022 , and 2021. The rate increase for three-month period was primarily due to activity of CIPs for which there is no related tax impact, benefits in the prior year related to the release of tax reserves due to statute of limitation expiration and a decrease in foreign earnings. 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.
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"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 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.
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•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
•Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company.
•Net gains or losses on investments related to deferred compensation plans which are not offset by compensation and benefits expense.
•Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests.
•Unrealized investment gains and losses.
•Net income tax expense of the above adjustments based on the respective blended rates applicable to the adjustments.
We define adjusted diluted earnings per share as diluted earnings per share adjusted to exclude the per share impacts of the adjustments applied to net income in calculating adjusted net income.
In calculating our non-GAAP measures, we adjust for the impact of CIPs because
it is not considered reflective of our underlying results of operations.
Acquisition-related items and special termination benefits are excluded to
facilitate comparability to other asset management firms. We adjust for
compensation and benefits expense related to funded deferred compensation plans
because it is partially offset in other income (expense), net. We adjust for
compensation and benefits expense and net income (loss) attributable to
redeemable noncontrolling interests to reflect the economics of certain profits
interest arrangements. Sales and distribution fees and a portion of investment
management fees generally cover sales, distribution and marketing expenses and,
therefore, are excluded from adjusted operating revenues. In addition, when
calculating adjusted net income and adjusted diluted earnings per share we
exclude unrealized investment gains and losses included in investment and other
income (losses) because the related investments are generally expected to be
held long term.
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The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows:
Three Months Ended
December 31,
(in millions) 2022 2021
Operating income $ 194.0 $ 557.7 Add (subtract): Elimination of operating revenues upon consolidation of investment products1
5.1 8.3
Acquisition-related retention 63.6 40.0
Compensation and benefits expense from gains on deferred compensation and seed investments, net
5.6 4.2
Other acquisition-related expenses 22.6 14.7
Amortization of intangible assets 83.2 58.3
Special termination benefits 10.9 2.7
Compensation and benefits expense related to minority interests
in certain subsidiaries 10.1 -
Adjusted operating income $ 395.1 $ 685.9
Total operating revenues $ 1,967.1 $ 2,224.0
Add (subtract):
Acquisition-related pass through performance fees (144.5) (0.4)
Sales and distribution fees (291.9) (398.2)
Allocation of investment management fees for sales, distribution and marketing expenses
(96.7) (111.9)
Elimination of operating revenues upon consolidation of
investment products1 5.1 8.3
Adjusted operating revenues $ 1,439.1 $ 1,721.8
Operating margin 9.9% 25.1%
Adjusted operating margin 27.5% 39.8%
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