Franklin Resources, Inc. — Form 10-Q summary
Issuer and period: The filing identifies the registrant as Franklin Resources, Inc.; the request metadata names Franklin Templeton Inc. This is the fiscal third quarter ended June 30, 2009, with nine-month results for the period then ended. Unless noted otherwise, dollar amounts below are in millions.
Business context and performance
Franklin Resources is a global investment manager whose results depend principally on assets under management (AUM), fee rates, fund sales and redemptions. Banking and consumer finance are secondary businesses. Management described the global economy as still in recession, but reported improved markets and quarter-on-quarter operating results in the June quarter.
| Metric | Three months ended June 30, 2009 | Year-over-year | Nine months ended June 30, 2009 | Year-over-year |
|---|---|---|---|---|
| Operating revenue | $1,073.6 | Down 29% | $2,955.2 | Down 37% |
| Operating income | $326.2 | Down 39% | $817.9 | Down 52% |
| Net income | $297.7 | Down 26% | $529.4 | Down 59% |
| Diluted EPS | $1.29 | Down 25% | $2.28 | Down 58% |
| Operating margin | 30% | 35% prior year | 28% | 36% prior year |
Revenue, AUM and material changes
- Quarterly investment management fees fell 32% to $625.0; underwriting and distribution fees declined 28% to $365.2. Lower average AUM and a shift toward lower-fee fixed-income products were principal factors. The nine-month declines were 38% in both categories.
- Simple monthly average AUM was $428.0 billion for the quarter, down 29% year over year, and $424.6 billion for the nine months, down 32%. Ending AUM was $451.2 billion, 22% below June 2008 but 15% above March 2009.
- June-quarter AUM benefited from $54.7 billion of market appreciation and $6.0 billion of net new flows; nine-month AUM reflected $35.3 billion of depreciation and $17.7 billion of negative net new flows. Management said long-term redemptions slowed in the quarter.
- Quarterly results also benefited from improved investment valuations: other income was $87.7 million versus $21.7 million a year earlier. For the nine months, other income was a net expense of $40.3 million, versus income of $95.8 million in 2008.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $489.0, compared with $1,411.5 in 2008. Investing cash used was $374.2; financing cash used was $254.6. Cash and cash equivalents ended at $2,370.7, down from $2,527.6 at September 30, 2008.
- Management-defined liquid assets were $5,642.7. Total assets were $9,242.9 and stockholders’ equity was $7,343.5 at June 30, 2009.
- Total debt was $180.8, down from $269.3 at September 30, 2008. It included $95.0 of Federal Home Loan Bank advances and $84.3 of long-term debt; commercial paper was $1.4. The company reported no borrowings under its $420.0 revolving credit facility and compliance with its covenants.
- The company reported $420.0 of available revolving credit, $498.6 of remaining capacity under its uncommitted commercial-paper program, and additional banking/finance borrowing capacity. Banking regulatory capital ratios exceeded stated minimums.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management expected challenging, volatile markets to persist, while focusing on investment performance, client service, cost control, strategic technology investment and maintaining distribution relationships.
- The company reduced its global workforce by approximately 10%; nine-month severance costs were $36.8. Headcount was approximately 7,800, down from 9,000 a year earlier.
- Nine-month other-than-temporary investment impairments were $59.7, versus $5.7 in 2008. Separately, residual interests from auto-loan securitizations were written down by $44.5 in the nine months, principally reflecting higher expected cumulative loan losses. These Level 3 valuations rely on significant unobservable assumptions.
- No auto-loan securitizations occurred in the 2009 quarter or nine-month period; warehouse credit facilities were terminated in November 2008 and were not expected to be replaced. Maximum potential securitization-guarantee payments fell to $7.8 from $49.0, after additional cash was placed on deposit.
- Unresolved U.S. and Canadian market-timing and related lawsuits remained pending. Management considered the claims without merit and intended to defend them, but said outcomes and any material adverse effect could not be predicted with certainty.
- New accounting standards on transfers of financial assets and variable-interest entities were expected to apply beginning October 1, 2010. The company said eliminating the qualifying-special-purpose-entity concept could require consolidation of assets previously sold and could significantly affect its financial statements.
Investor verification priorities
- Confirm the issuer identity: the filing is for Franklin Resources, Inc., despite the metadata naming Franklin Templeton Inc.
- Track AUM, net flows, market appreciation and fee-rate mix; these drove the sharp revenue decline and inform recovery prospects.
- Review the valuation assumptions and sensitivity of residual interests and other Level 3 assets, including the reported $44.5 write-down.
- Assess liquidity and funding after termination of the auto-loan warehouse facilities, and monitor securitization guarantees and loan-credit performance.
- Follow developments in the pending litigation and the potential financial-statement effects of the forthcoming transfer and VIE accounting standards.