FRANKLIN RESOURCES INC - 10-Q Summary (Q1 2007)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Franklin Resources, Inc. for the three-month period ended December 31, 2006. The Company is a large accelerated filer and operates primarily in two segments: Investment Management and Related Services (retail mutual funds, institutional accounts) and Banking/Finance (consumer lending, retail banking). As of January 31, 2007, there were 253,656,949 shares of common stock outstanding.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2007 (Ended Dec 31, 2006) | Q1 2006 (Ended Dec 31, 2005) |
|---|---|---|
| Total Operating Revenues | $1,427.8 | $1,181.5 |
| Net Income | $426.8 | $318.0 |
| Diluted Earnings Per Share | $1.67 | $1.21 |
| Operating Margin | 36% | 34% |
| Cash and Cash Equivalents | $4,006.0 | $3,626.4 |
| Total Debt | $902.7 | $1,028.3 |
| Assets Under Management (AUM) | $552.9 Billion | $464.8 Billion |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 21% year-over-year, driven by an 18% increase in simple monthly average AUM and higher fee rates due to a shift toward equity and hybrid products.
- Profitability: Net income rose 34% and diluted EPS increased 38%. Operating income grew 26% to $508.1 million.
- AUM Expansion: AUM grew 19% to $552.9 billion, fueled by $36.3 billion in market appreciation and $10.0 billion in excess sales over redemptions.
- Expense Trends: Total operating expenses increased 18% to $919.7 million. Underwriting and distribution expenses rose 26%, and compensation and benefits increased 15% due to higher bonuses and staffing levels.
- Debt Reduction: Total debt decreased by approximately $125.6 million, primarily due to repayments under the variable funding note warehouse credit facility following an automobile loan securitization.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to continue focusing on expanding AUM internationally, maintaining investment performance, and controlling costs. They anticipate higher compensation expenses in the next quarter due to full-quarter impact of merit salary adjustments.
- Legal Proceedings: The Company is involved in multiple class-action lawsuits regarding market timing, late trading, and excessive fees. Management believes claims are without merit but notes litigation costs and potential reputational risks. A new lawsuit was filed in December 2006.
- Contingencies: The Company has exposure to loss related to variable interest entities (LFL and LAFL) totaling approximately $210.5 million. There is also a potential termination fee of approximately $10.6 million related to a data center outsourcing agreement if terminated in January 2007.
- Stock Repurchases: The Company repurchased 0.7 million shares for $73.7 million during the quarter. Approximately 8.8 million shares remain available under the repurchase program.
- Dividends: A quarterly dividend of $0.15 per share was declared, payable January 12, 2007.
Investor Verification Checklist
- AUM Sustainability: Verify the durability of the 19% AUM growth, specifically the reliance on market appreciation ($36.3B) versus net inflows ($10.0B).
- Legal Exposure: Monitor the status of the "In re Mutual Funds Investment Litigation" (MDL) and the new December 2006 lawsuit regarding marketing support payments.
- Compensation Costs: Track the impact of the 15% increase in compensation expenses on future margins, particularly with the upcoming full-quarter effect of salary adjustments.
- Debt Facilities: Confirm the renewal status of the $250 million variable funding note warehouse credit facility, which is critical for the banking/finance segment's automotive lending.
- Foreign Tax Repatriation: Review the utilization of the $2.1 billion repatriated under the Jobs Act to ensure compliance with the American Jobs Creation Act of 2004 to maintain beneficial tax treatment.