Business Context and Reporting Period
Company: Franklin Resources, Inc. (FRI)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2001
Business Overview: FRI is a diversified financial services company and bank holding company. Its primary business is investment advisory and management, offering a broad range of mutual funds and institutional accounts under the Franklin, Templeton, Mutual Series, Bissett, and Fiduciary brands. A secondary segment involves banking and finance operations, including consumer lending and private banking.
Key Financial Metrics
| Metric (in millions, except per share) | Fiscal 2001 | Fiscal 2000 |
|---|---|---|
| Operating Revenues | $2,354.8 | $2,340.1 |
| Net Income | $484.7 | $562.1 |
| Earnings Per Share (Diluted) | $1.91 | $2.28 |
| Operating Cash Flow | $553.2 | $701.7 |
| Total Assets | $6,265.7 | $4,042.4 |
| Long-Term Debt | $566.0 | $294.1 |
| Stockholders' Equity | $3,977.9 | $2,965.5 |
| Assets Under Management (AUM) | $246.4 billion | $229.9 billion |
Liquidity: As of September 30, 2001, the company held $569.0 million in cash and cash equivalents. Liquid assets totaled $2.38 billion. The company had $850 million available under unused commercial paper and medium-term note programs and $500 million in revolving credit facilities.
Material Changes vs. Prior Period
- Revenue: Operating revenues increased 1% to $2.35 billion. This was driven by the acquisition of Fiduciary Trust Company International, which added significant assets under management (AUM), offset by a decline in shareholder servicing fees due to fewer billable accounts.
- Profitability: Net income decreased 14% to $484.7 million. Earnings per share (diluted) fell 16% to $1.91. The decline was primarily due to higher operating expenses (compensation, technology, occupancy) and increased share count from the Fiduciary stock issuance, which diluted earnings.
- Assets Under Management: AUM grew 7% to $246.4 billion. This growth was largely due to acquisitions (Bissett and Fiduciary added $49.5 billion combined) and net cash inflows, which offset a $41.9 billion market depreciation in equity assets.
- Debt: Outstanding debt increased to $574.4 million, primarily due to the issuance of $877 million in zero-coupon convertible senior notes in May 2001 to fund operations and acquisitions.
- Acquisitions: The company completed the acquisition of Fiduciary Trust Company International in April 2001 for approximately $776 million in stock, significantly expanding its high net worth and institutional client base.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items
- September 11, 2001 Event: The terrorist attacks destroyed the Fiduciary headquarters at the World Trade Center, resulting in the loss of 87 employees. The company recognized a net expense of $7.6 million for the fiscal year, including asset write-offs and accelerated employee retention payments. Total estimated costs were approximately $50.2 million, partially offset by insurance proceeds.
Risks and Contingencies
- Market Volatility: The company faces increased risk from global equity market fluctuations, which directly impact AUM and fee revenue. A shift in asset mix toward lower-fee fixed-income products reduces effective fee rates.
- Competition: Intense competition from larger financial institutions and proprietary funds offered by distribution intermediaries could limit sales and increase distribution costs.
- Regulatory: As a bank holding company, FRI is subject to Federal Reserve Board regulations regarding capital adequacy and dividend restrictions.
- Technology: Operations are highly dependent on technology infrastructure; disruptions could negatively impact service levels.
Outlook
Management expects to continue paying quarterly dividends. Future cash needs will be met through operating cash flows, existing credit facilities, and potential debt or equity issuances. The company anticipates continued investment in technology and global expansion.
Investor Verification Checklist
- Acquisition Integration: Verify the timeline and cost synergies realized from the Fiduciary and Bissett acquisitions, particularly given the disruption from the September 11 attacks.
- Asset Mix Impact: Monitor the shift in AUM from equity to fixed-income/hybrid assets and its effect on the effective management fee rate (which declined to 0.58% in 2001).
- Debt Structure: Review the terms of the $877 million convertible notes issued in May 2001, including conversion premiums and redemption options.
- Expense Management: Assess the sustainability of rising operating expenses, specifically in compensation, technology, and occupancy, relative to revenue growth.
- Legal Proceedings: Track the status of the consolidated complaint regarding the Templeton Vietnam Opportunities Fund (settled for $6.5 million) and the class action lawsuit regarding distribution contracts.