Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended June 30, 2014. The filing is for Franklin Resources, Inc. (the registrant identified in the filing), a global investment manager operating Franklin Templeton and other brands.
Financial performance
| Metric | Three months ended June 30, 2014 | Change year over year | Nine months ended June 30, 2014 | Change year over year |
|---|---|---|---|---|
| Operating revenue | $2.131 billion | +2% | $6.336 billion | +6% |
| Operating income | $786.8 million | +2% | $2.386 billion | +9% |
| Net income attributable to Franklin Resources | $578.9 million | +5% | $1.744 billion | +6% |
| Diluted EPS | $0.92 | +7% | $2.77 | +8% |
| Operating margin | 36.9% | 37.0% prior year | 37.7% | 36.4% prior year |
Revenue growth reflected higher investment management fees, supported by average AUM growth of 8% for the quarter and 10% for the nine-month period. Operating expenses rose 2% and 4%, respectively. Investment management fees increased 6% and 9%; sales and distribution fees declined 3% for the quarter and were flat for the nine months, while shareholder servicing fees fell 11% and 7%.
Quarterly other income was unusually high at $107.6 million, versus $10.3 million a year earlier. The increase chiefly reflected gains on consolidated sponsored investment product securities and higher equity-method investment income. This materially boosted quarterly pretax income; the nine-month increase in other income was more modest.
Assets under management and flows
- AUM was $920.5 billion at June 30, up 13% from a year earlier and 9% from September 30, 2013. Average AUM increased 8% for the quarter and 10% for the nine months year over year.
- Over the nine months, market appreciation and other effects added $83.8 billion, while net new flows were negative $4.5 billion. Long-term sales were $147.2 billion, down 12%; redemptions were $151.5 billion, up 9%.
- Quarterly net flows were positive $7.1 billion, but below the prior-year $13.2 billion. Quarterly AUM growth was primarily driven by $31.9 billion of market appreciation.
- Equity and hybrid AUM grew strongly year over year; fixed-income AUM was down 1%, with tax-free AUM notably weaker. Management reported strong longer-term performance in several taxable fixed-income and hybrid strategies, while U.S. equity performance generally lagged benchmarks and peer groups.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $1.411 billion, down from $1.528 billion. Investing cash flow was positive $284.3 million; financing cash flow used $332.3 million, versus $1.508 billion used in the prior-year period.
- Cash and cash equivalents on the balance sheet were $7.604 billion at June 30, 2014, versus $6.186 billion at September 30, 2013. The cash flow statement reports $7.698 billion at period-end, including cash associated with consolidated investment entities.
- Management-defined liquid assets, excluding assets attributable to consolidated investment entities, totaled $10.902 billion, compared with $9.449 billion at September 30. Corporate debt was $1.198 billion, approximately unchanged; all outstanding notes bore fixed rates. The company said it was in compliance with debt covenants.
- Total assets were $16.692 billion and total liabilities $4.587 billion. Cash available for transfer was subject to operational, regulatory and international restrictions; $1.126 billion of liquid assets was identified as restricted from transfer to Franklin and other subsidiaries.
- The company repurchased 8.3 million shares for $444.4 million during the nine months. It paid regular dividends of $0.36 per share; 33.0 million shares remained available for repurchase at June 30.
Outlook, commentary and risks
- No numerical earnings or revenue guidance was provided. Management said it expected to continue comparable quarterly regular dividends, subject to earnings and other relevant factors, and believed existing liquidity, operating cash flow and financing access would meet present and reasonably foreseeable needs.
- Management attributed improved results to stronger markets and AUM, while noting the business remains sensitive to market levels, asset mix, investor redemptions and fee rates. Effective investment management fee rates declined to 61.7 basis points for the quarter and 62.6 basis points for the nine months.
- Key disclosed risks include market and AUM volatility, investment performance and redemptions, dependence on third-party distribution, competition, foreign exchange, changing regulation and compliance costs, tax exposure, cybersecurity and operational disruption, and retention of key personnel.
- After quarter-end, the company closed its client deposit accounts on July 14, ceased accepting deposits and originating loans, and submitted a request to withdraw its bank holding company registration on July 16. It also closed its Federal Reserve account and related borrowing access on July 11; management said the changes were not expected to materially affect future liquidity.
- Routine-course litigation was disclosed. Management considered a material adverse outcome unlikely and stated that accruals had been made for probable, estimable losses. The filing reported no material change in other commitments and contingencies from the 2013 Form 10-K.
Most important facts for investors to verify
- Whether AUM growth can be sustained through net sales rather than market appreciation, given nine-month net outflows and lower long-term sales.
- Whether quarterly earnings benefited materially from investment gains that may not recur, and how investment income and noncontrolling interests affect reported results.
- Trends in investment management fee rates, asset mix, expenses and investment performance—particularly U.S. equity results.
- The practical impact of ending banking activities, including any regulatory transition, restrictions on cash movement and continuing liquidity needs.
- Future capital returns and liquidity after substantial share repurchases, alongside the company’s stated dividend policy and debt maturities.