Franklin Resources, Inc. (the “Company”) [NYSE: BEN] today announced net income¹ of $438.4 million or $0.86 per diluted share for the quarter ended June 30, 2021, as compared to $381.8 million or $0.74 per diluted share for the previous quarter, and $290.4 million or $0.58 per diluted share for the quarter ended June 30, 2020. Operating income² was $478.1 million for the quarter ended June 30, 2021, as compared to $456.3 million for the previous quarter and $232.5 million in the prior year. The quarter ended June 30, 2021 includes $45.3 million, or $0.07 per diluted share, of closed-end fund product launch costs associated with the Western Asset Diversified Income Fund.

As supplemental information, the Company is providing certain adjusted performance measures which are based on methodologies other than generally accepted accounting principles.³ Adjusted net income³ was $493.7 million and adjusted diluted earnings per share³ was $0.96 for the quarter ended June 30, 2021, as compared to $403.5 million and $0.79 for the previous quarter, and $348.9 million and $0.70 for the quarter ended June 30, 2020. Adjusted operating income³ was $601.2 million for the quarter ended June 30, 2021, as compared to $581.1 million for the previous quarter and $270.8 million in the prior year.

“When we acquired Legg Mason a year ago, we set ambitious goals for our combined organization, and we’re proud of the progress made toward achieving them,” said Jenny Johnson, President and CEO of Franklin Resources, Inc. “Investment performance continues to strengthen across our differentiated specialist investment managers in a broad array of investment strategies. And our distribution teams’ collective sales initiatives are resulting in deeper relationships and increased diversification in flows across funds, vehicles, and asset classes. These factors have led to significant improvement in total net flows since the time of the acquisition.

“Specific to the third quarter, we saw positive net flows into the majority of our specialist investment managers – and Benefit Street Partners, Clarion, ClearBridge, Fiduciary Trust International, and Martin Currie all reached record highs in AUM. Alternative net inflows were a record $3.1 billion, and fixed income net flows returned to positive territory at $2.1 billion.

“Financial results continue to progress with adjusted operating income increasing by 3% to $601.2 million from the prior quarter, inclusive of the one-time impact of costs associated with the successful launch of the $1.0 billion Western Asset Diversified Income Fund. The strength of our balance sheet enables us to invest with confidence in the business and make sure we’re best positioned to be a leader in an ever-evolving industry.”

Total assets under management (“AUM”) were $1,552.1 billion at June 30, 2021, up $53.2 billion during the quarter due to $62.0 billion of net market change, distributions and other, partially offset by $6.6 billion of long-term net outflows and $2.2 billion of cash management net outflows.

Cash and cash equivalents and investments were $5.5 billion at June 30, 2021, as compared to $4.3 billion at September 30, 2020. Including the Company’s direct investments in consolidated investment products, cash and cash equivalents and investments were $6.4 billion at June 30, 2021, as compared to $5.1 billion at September 30, 2020. Total stockholders’ equity was $11.4 billion at June 30, 2021, as compared to $10.9 billion at September 30, 2020. The Company had 502.9 million shares of common stock outstanding at June 30, 2021, as compared to 495.1 million shares outstanding at September 30, 2020. The Company repurchased 1.4 million shares of its common stock for a total cost of $46.4 million during the quarter ended June 30, 2021.

Conference Call Information

A written commentary on the results by Jenny Johnson, President and CEO; Greg Johnson, Executive Chairman; Matthew Nicholls, Executive Vice President and CFO; and Adam Spector, Executive Vice President – Global Advisory Services, Head of Global Distribution will be available via investors.franklinresources.com today at approximately 8:30 a.m. Eastern Time.

Ms. Johnson and Messrs. Johnson, Nicholls and Spector will also lead a live teleconference today at 11:00 a.m. Eastern Time to answer questions. Access to the teleconference will be available via investors.franklinresources.com or by dialing (833) 350-1245 in the U.S. and Canada or (236) 712-2205 internationally. A replay of the teleconference can also be accessed by calling (800) 585-8367 in the U.S. and Canada or (416) 621-4642 internationally using access code 6559334, after 2:00 p.m. Eastern Time on August 3, 2021 through August 10, 2021, or via investors.franklinresources.com.

Analysts and investors are encouraged to review the Company’s recent filings with the U.S. Securities and Exchange Commission and to contact Investor Relations at (650) 312-4091 before the live teleconference for any clarifications or questions related to the earnings release or commentary.

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 consolidated investment products (“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, Inc. (“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 from gains and losses on investments made to fund deferred compensation plans and on seed investments under certain historical revenue sharing arrangements, which is offset in investment and other income (expense), net.

“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are defined below, followed by reconciliations of operating income, operating margin, net income attributable to Franklin Resources, Inc. and diluted earnings per share on a U.S. GAAP basis to these non-GAAP measures. Non-GAAP measures should not be considered in isolation from, or as substitutes for, any financial information prepared in accordance with U.S. GAAP, and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.

Adjusted Operating Income

We define adjusted operating income as operating income adjusted to exclude the following:

• 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 on July 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 to Franklin 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.
• 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 on July 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.

The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows: