Business context and reporting period
Franklin Resources, Inc. (Franklin Templeton) filed this Form 10-Q for its fiscal first quarter ended December 31, 2009. The company primarily earns fees from investment management and related services; banking and finance is a smaller business. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2009 | Prior-year quarter | Change |
|---|---|---|---|
| Operating revenue | $1.377 billion | $969.3 million | +42% |
| Operating income | $467.0 million | $268.4 million | +74% |
| Operating margin | 34% | 28% | +6 percentage points |
| Net income attributable to Franklin | $355.6 million | $120.9 million | +194% |
| Diluted EPS | $1.54 | $0.52 | +196% |
| Operating cash flow | $317.1 million | $41.9 million |
- Investment management fees rose 34% to $806.7 million, supported by a 22% increase in average AUM and a higher effective management fee rate (0.603% versus 0.547%). Underwriting and distribution fees rose 60% to $488.1 million.
- Operating expenses increased 30% to $910.4 million, mainly reflecting higher distribution costs, variable compensation, advertising, and deferred sales commission amortization. The effective tax rate fell to 30.48% from 37.08%.
- AUM was $553.5 billion at quarter-end, up 33% year over year and 6% from September 30, 2009. Quarterly AUM growth included $16.6 billion of market appreciation and $14.3 billion of positive net new flows. Fixed-income AUM grew 42% year over year; cash-management AUM declined 22%.
- Cash and cash equivalents totaled $2.850 billion at December 31, down from $3.104 billion at September 30. Management reported liquid assets of $5.530 billion. Total debt was $322.7 million: $256.7 million of commercial paper and $66.0 million of Federal Home Loan Bank advances.
- Total assets were $9.224 billion and total liabilities $2.053 billion at December 31. Shareholders’ equity was $7.137 billion, down from $7.634 billion at September 30.
- Investing cash flow was $69.1 million; financing cash flow was negative $640.6 million. Financing outflows included $733.0 million of common dividends and $174.0 million of share repurchases. The quarter-end cash decrease was $254.1 million.
Material changes and unusual items
- Results improved substantially against the recession-affected prior-year quarter, when investment losses were significant. Other income shifted to a $47.3 million gain from a $93.7 million loss, mainly reflecting improved investment valuations, including gains on consolidated sponsored products and trading investments, and lower impairment charges.
- The quarter’s dividend outflow included a $3.00-per-share special dividend, in addition to a regular $0.22-per-share quarterly dividend. Dividends per share reported for the quarter were $3.22, versus $0.21 a year earlier.
- Franklin repurchased 1.6 million shares for $174.0 million; approximately 8.0 million shares remained authorized for repurchase at quarter-end.
- Commercial paper increased from $64.2 million at September 30 to $256.7 million at December 31. It carried a 0.20% weighted-average annualized rate and matured during the quarter ending March 31, 2010.
- The company liquidated its ownership interests in Lightning Finance Company Limited and Lightning Asset Finance Limited during the quarter. Amortization of deferred sales commissions increased, partly due to accelerated amortization of assets repurchased from LAFL.
Outlook, risks and contingencies
Management described improving markets and growing optimism about economic recovery, but emphasized that recovery uncertainties remained. It identified investment performance, customer service, expense management, talent retention, technology investment, and distribution relationships as priorities. The filing provides no specific numerical earnings or revenue guidance.
- Results remain sensitive to market levels, AUM mix, investment performance, redemptions, fee rates, and currency movements. Management noted that equity assets generally earn higher fees than fixed-income assets.
- The company had $420.0 million available under a revolving credit facility expiring June 9, 2010, with no borrowings outstanding; it reported compliance with the facility’s covenants. Management said existing liquidity, operating cash flow, and borrowing capacity should meet foreseeable needs.
- Market-timing-related U.S. and Canadian litigation remains unresolved. A separate derivative suit concerning asset-based payments to broker-dealers was filed in October 2009; defendants moved to dismiss in January 2010. Management considers the claims without merit, but cannot predict outcomes. It reported an adequate accrual for probable, estimable losses.
- Automobile-loan securitization guarantees had a maximum potential payment of $6.9 million at December 31; the recognized fair value was not significant. Banking/finance also had $6.3 million in standby letters of credit and $173.0 million of commitments to extend credit.
- About 2.3% of assets measured at fair value were Level 3 at quarter-end. Management reported no goodwill or indefinite-lived intangible impairment; it noted that an approximately 5% AUM decline could prompt further evaluation of definite-lived intangible assets.
- Management said a 2% interest-rate movement was not expected to have a material effect on results over the next 12 months. The filing identifies regulatory, litigation, operational, market, credit, and liquidity risks, among others.
Important facts for investors to verify
- Whether AUM growth and positive net flows persist, and how markets and product mix affect fee revenue.
- How much of the earnings rebound reflects recurring operating performance versus market-driven investment gains and the prior-year comparison.
- The sustainability of distributions and repurchases, particularly following the special dividend and substantial financing cash outflow.
- Commercial-paper refinancing and the June 2010 expiry of the revolving credit facility.
- Developments in the disclosed litigation, securitization exposures, and impairment assumptions.
Note: The filing registrant is Franklin Resources, Inc.; “Franklin Templeton” is the company’s global marketing name.