10-Q: Franklin Resources Reports Q3 2025 Earnings with Significant Net Income Decline Amid AUM Outflows and Legal Challenges

Franklin Resources, Inc. reported a substantial decrease in net income and diluted earnings per share for the three and nine months ended June 30, 2025, primarily driven by lower average assets under management and increased operating expenses, alongside ongoing legal proceedings.

Summary

• Operating revenues for the three months ended June 30, 2025, decreased by 3% to $2,064.0 million compared to $2,122.9 million in the prior year period.
• Operating revenues for the nine months ended June 30, 2025, increased by 3% to $6,427.0 million compared to $6,266.8 million in the prior year period.
• Operating income for the three months ended June 30, 2025, decreased by 31% to $154.1 million compared to $222.5 million in the prior year period.
• Operating income for the nine months ended June 30, 2025, decreased by 7% to $518.7 million compared to $558.3 million in the prior year period.
• Net income attributable to Franklin Resources, Inc. for the three months ended June 30, 2025, decreased by 47% to $92.3 million compared to $174.0 million in the prior year period.
• Net income attributable to Franklin Resources, Inc. for the nine months ended June 30, 2025, decreased by 26% to $407.3 million compared to $549.5 million in the prior year period.
• Diluted earnings per share for the three months ended June 30, 2025, decreased by 53% to $0.15 compared to $0.32 in the prior year period.
• Diluted earnings per share for the nine months ended June 30, 2025, decreased by 32% to $0.70 compared to $1.03 in the prior year period.
• Total Assets Under Management (AUM) at June 30, 2025, was $1,611.8 billion, a 4% decrease from September 30, 2024, and a 2% decrease from June 30, 2024.
• Average AUM for the three months ended June 30, 2025, decreased by 4% to $1,565.2 billion compared to $1,632.6 billion in the prior year period.
• Average AUM for the nine months ended June 30, 2025, increased by 4% to $1,596.4 billion compared to $1,533.1 billion in the prior year period.
• Long-term net outflows totaled $9.3 billion for the three months and $85.5 billion for the nine months ended June 30, 2025, including $17.1 billion and $118.6 billion from Western Asset Management (WAM) respectively.
• An impairment charge of $24.4 million was recognized during the nine months ended June 30, 2025, related to certain indefinite-lived intangible assets for acquired mutual fund investment management contracts.
• The global workforce decreased to approximately 10,100 employees at June 30, 2025, from approximately 10,300 at June 30, 2024.
• The effective income tax rate increased to 33.9% for the three months and 32.3% for the nine months ended June 30, 2025, compared to 22.7% and 23.7% respectively in the prior year periods.

Sentiment

Score: 4

Explanation: The company's financial performance for the quarter and year-to-date shows significant declines in net income and EPS, coupled with substantial long-term AUM outflows, particularly from a key subsidiary. While some AUM growth was observed over nine months due to acquisitions and market appreciation, the underlying net outflows and increased operating expenses, along with a higher effective tax rate, indicate fundamental challenges. The ongoing legal and regulatory investigations add further uncertainty and potential financial liabilities, outweighing the positive market performance and strategic investments.

Positives

• Nine-month operating revenues increased by 3% to $6,427.0 million, driven partly by the Putnam acquisition.
• Nine-month average AUM increased by 4% to $1,596.4 billion.
• Equity AUM increased 10% to $656.6 billion at June 30, 2025, compared to June 30, 2024.
• Multi-Asset AUM increased 9% to $183.2 billion at June 30, 2025, compared to June 30, 2024.
• Cash Management AUM increased 11% to $71.9 billion at June 30, 2025, compared to June 30, 2024.
• Mutual fund performance showed 44% of AUM in the top two peer group quartiles for the 1-year period and 63% for the 5-year period as of June 30, 2025.
• Strategy composite performance showed 45% of AUM exceeding its benchmark for the 1-year period and 61% for the 10-year period as of June 30, 2025.
• The Commodity Futures Trading Commission (CFTC) closed its investigation into Western Asset Management on June 30, 2025.
• Successfully repaid $400.0 million of senior notes due March 2025 using existing cash and borrowings from the revolving credit facility.
• Entered into an Amended and Restated Revolving Credit Agreement on April 30, 2025, with $1.1 billion of aggregate available borrowings.
• The company was in compliance with all debt covenants at June 30, 2025.

Negatives

• Operating revenues for the three months ended June 30, 2025, decreased by 3% to $2,064.0 million.
• Operating income for the three months ended June 30, 2025, decreased by 31% to $154.1 million.
• Operating income for the nine months ended June 30, 2025, decreased by 7% to $518.7 million.
• Net income attributable to Franklin Resources, Inc. decreased by 47% for the three months and 26% for the nine months ended June 30, 2025.
• Diluted earnings per share decreased by 53% for the three months and 32% for the nine months ended June 30, 2025.
• Total AUM at June 30, 2025, decreased by 4% from September 30, 2024, and 2% from June 30, 2024.
• Average AUM for the three months ended June 30, 2025, decreased by 4% from the prior year period.
• Fixed Income AUM decreased 22% to $441.7 billion at June 30, 2025, compared to June 30, 2024.
• Experienced significant long-term net outflows of $9.3 billion for the three months and $85.5 billion for the nine months ended June 30, 2025.
• Western Asset Management (WAM) experienced substantial long-term net outflows of $17.1 billion for the three months and $118.6 billion for the nine months.
• An impairment charge of $24.4 million was recognized on indefinite-lived intangible assets during the nine months ended June 30, 2025.
• Amortization of intangible assets increased by 34% for the three months and 33% for the nine months ended June 30, 2025, primarily due to a reduction in the remaining useful life of definite-lived intangible assets related to WAM.
• Net losses on investments held by the Company were $31.4 million for the three months and $41.7 million for the nine months ended June 30, 2025.
• Income from investments in equity method investees decreased significantly to $23.0 million for the three months and $38.5 million for the nine months ended June 30, 2025, compared to prior year periods.
• Net foreign currency exchange losses were $14.4 million for the three months ended June 30, 2025.
• The effective income tax rate increased to 33.9% for the three months and 32.3% for the nine months ended June 30, 2025.
• Ongoing SEC and U.S. Department of Justice (DOJ) investigations into Western Asset Management remain unresolved.
• A new class action lawsuit was filed on July 3, 2025, against Franklin, WAM, and Ken Leech related to alleged trade allocation violations.
• A new lawsuit was filed on July 22, 2025, against Franklin and the Franklin Templeton 401(k) Retirement Plan Committee regarding alleged breaches of fiduciary duties related to proprietary funds.

Risks

• Market and volatility risks can negatively impact revenues and income.
• Investment performance and reputational risks, including from legal proceedings, can lead to AUM fluctuations and financial harm.
• Global operational risks due to complex and uncertain business and regulatory environments.
• Competition and distribution risks affecting revenue levels and AUM mix.
• Third-party risks related to services performed through external parties.
• Technology and security risks impacting operations and data integrity.
• Human capital risks related to attracting, retaining, and developing personnel.
• Cash management risks, including the ability to meet operational and regulatory requirements.
• Legal and regulatory risks from ongoing investigations and litigation, potentially resulting in additional costs, monetary judgments, settlements, fines, penalties, restitution, or alterations in business practices.
• Uncertainties regarding the global economy remain for the foreseeable future.
• Inability to access capital markets in a timely manner could adversely impact the business.
• Increased liquidity risks and redemptions may require increased cash in the form of loans or other lines of credit.
• Future changes in assumptions used for impairment tests could result in recognition of additional impairment charges.

Future Outlook

The company expects to continue paying comparable regular dividends on a quarterly basis. Management intends to spend more of its post-dividend free cash flow on investing in the business, including seed capital and acquiring resources to grow investment teams and operations. The business and regulatory environments globally remain complex, uncertain, and subject to change, with uncertainties regarding the global economy persisting for the foreseeable future. The company remains focused on investment performance, providing high-quality client service, expense management, attracting and retaining personnel, and strategically investing in systems and technology.

Management Comments

• Management believes all adjustments necessary for a fair statement of the financial position and results of operations have been made and are normal and recurring.
• Management believes accounting estimates are appropriate and resulting balances are reasonable, though actual amounts may differ due to inherent uncertainties.
• The company remains focused on the investment performance of its products and on providing high quality service to its clients.
• The company continuously performs reviews of its business model and remains focused on expense management.
• The company will seek to attract, retain and develop personnel and invest strategically in systems and technology that will provide a secure and stable environment.
• The company will continue to seek to protect and further its brand recognition while developing and maintaining broker-dealer and client relationships.
• Management believes the claims made in the lawsuits are without merit and the company intends to defend against them vigorously.

Industry Context

During the third fiscal quarter, U.S. and global equity markets rebounded, with the S&P 500 Index increasing 10.9% and the MSCI World Index increasing 11.6% for the quarter. Global bond markets also provided positive results, with the Bloomberg Global Aggregate Index increasing 4.5% during the quarter. Despite these positive market movements, the company experienced significant long-term net outflows, particularly in fixed income, indicating potential challenges in retaining assets amidst broader market trends. The business and regulatory environments globally remain complex and uncertain, impacting the investment management industry.

Comparison to Industry Standards

• Mutual fund performance against Morningstar peer group medians: 44% of AUM in the top two quartiles for the 1-year period, 63% for the 3-year period, 51% for the 5-year period, and 59% for the 10-year period as of June 30, 2025.
• Strategy composite performance against market benchmarks: 31% of AUM exceeding benchmark for the 1-year period, 45% for the 3-year period, 35% for the 5-year period, and 44% for the 10-year period for Equity.
• Strategy composite performance against market benchmarks: 65% of AUM exceeding benchmark for the 1-year period, 74% for the 3-year period, 82% for the 5-year period, and 86% for the 10-year period for Fixed Income.
• Overall, 45% of total strategy composite AUM exceeded its benchmark for the 1-year period, 56% for the 3-year period, 53% for the 5-year period, and 61% for the 10-year period as of June 30, 2025.

Management Changes

Corporate Governance

Legal Proceedings

• India Credit Fund Closure Matters: No significant changes from the disclosure in the Form 10-K for the fiscal year ended September 30, 2024.
• Western Asset Management Investigations and Litigation: The CFTC closed its investigation on June 30, 2025. However, parallel investigations by the SEC and the U.S. Department of Justice (DOJ) remain ongoing. Ken Leech, former co-Chief Investment Officer of WAM, received a Wells Notice from the SEC in August 2024 and subsequently retired. On November 25, 2024, the SEC filed a complaint and the DOJ filed an indictment against Mr. Leech for alleged violations related to trade allocations and false statements. On July 3, 2025, Franklin, WAM, and Ken Leech were named as defendants in a class action lawsuit filed by the Western PA Electrical Employees Insurance Trust Fund, seeking damages under the Securities Exchange Act of 1934 for trade allocations made by Mr. Leech between January 1, 2021, and October 31, 2023.
• Franklin Templeton 401(k) Retirement Plan Litigation: On July 22, 2025, Franklin and the Franklin Templeton 401(k) Retirement Plan Committee were named as defendants in a lawsuit filed by certain former employees. The plaintiffs seek to represent a class of participants and beneficiaries of the Plan who were invested in company-managed funds on or after July 22, 2019. Claims are pursued under ERISA for alleged breaches of fiduciary duties and failure to monitor plan fiduciaries in connection with the Plan's inclusion of certain proprietary funds as investment options. Plaintiffs seek damages, disgorgement, removal of investments, removal/replacement of fiduciaries, attorneys' fees, and pre-judgment interest.
• Management believes the claims in these lawsuits are without merit and intends to defend against them vigorously. The outcome of these lawsuits cannot be predicted, nor can any reasonably possible loss or range of loss be estimated at this time.

Related Party Transactions

• Revenues earned from sponsored funds constituted 83% of the company's total operating revenues for both the three and nine months ended June 30, 2025, and 82% for the corresponding periods in the prior fiscal year.
• The company routinely makes cash investments in the course of launching sponsored funds, though it has no legal or contractual obligation to do so.
• The company did not provide significant financial or other support to its sponsored funds assessed as Variable Interest Entities (VIEs) during the nine months ended June 30, 2025, or fiscal year 2024.

Stakeholder Impact

• Shareholders: Experienced significant declines in net income and diluted EPS, facing ongoing legal and reputational risks, but benefit from continued dividend payments and share repurchase programs.
• Employees: Impacted by workforce optimization initiatives leading to headcount reductions and special termination benefits.
• Customers/Clients: Affected by investment performance and AUM outflows, particularly from WAM, with management emphasizing focus on high-quality service.
• Regulatory Authorities: Engaged in ongoing investigations (SEC, DOJ) and one concluded investigation (CFTC) related to company activities.
• Creditors: The company remains in compliance with all debt covenants, indicating stable creditworthiness despite financial performance declines.

Next Steps

• Adopt annual disclosures for the new segment reporting guidance in the Annual Report on Form 10-K for the fiscal year ending September 30, 2025.
• Adopt interim disclosures for the new segment reporting guidance in the Quarterly report on Form 10-Q for the quarter ending December 31, 2025.
• The acquisition of a majority interest in Apera Asset Management is expected to close during the first quarter of fiscal year 2026.
• Continue to defend vigorously against the ongoing SEC and DOJ investigations and new lawsuits.
• Continue paying comparable regular dividends on a quarterly basis to holders of common stock.
• Continue the stock repurchase program opportunistically to manage equity capital and maximize shareholder value.
• Spend more of post-dividend free cash flow investing in the business, including seed capital and acquiring resources to grow investment teams and operations.

Key Dates

Recommendation

The company's latest financial results show a significant deterioration in profitability, with net income and diluted EPS experiencing substantial year-over-year declines for both the quarter and the nine-month period. This is compounded by considerable long-term AUM outflows, particularly from a key segment like Western Asset Management, indicating challenges in client retention and competitive positioning. The increase in the effective tax rate further pressures earnings. Moreover, the company is facing escalating legal and regulatory scrutiny, including new class-action lawsuits, which introduce significant uncertainty, potential financial liabilities, and reputational damage. While the company is taking steps to manage expenses and invest in future growth, the current negative trends in core financial metrics and the heightened legal risks suggest a challenging outlook. A seasoned investor would likely view these factors as strong indicators to divest or avoid the stock, as the downside risks appear to outweigh potential upside in the near to medium term.

Keywords

Asset Management, Investment Management, SEC Filing, 10-Q, Financial Results, Assets Under Management, AUM, Franklin Templeton, Western Asset Management, Putnam, Earnings, Revenue, Net Income, Diluted EPS, Shareholder Servicing, Distribution Fees, Legal Proceedings, Risk Factors, Corporate Governance, Financial Performance, Capital Resources, Liquidity, Impairment, Outflows