Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015. The filing is for Franklin Resources, Inc., the parent of the Franklin Templeton investment-management businesses.
Business context
The company earns most revenue from investment management and related services, with revenue closely tied to assets under management (AUM), fee rates, product mix, sales, and investor flows. Ending AUM was $880.6 billion, down 1% from March 31, 2014 and 2% from September 30, 2014. Average AUM rose 1% for the quarter and 2% for the six-month period year over year.
Financial results and liquidity
| Metric | Quarter ended Mar. 31, 2015 | Six months ended Mar. 31, 2015 |
|---|---|---|
| Operating revenue | $2,009.8 million; down 4% | $4,074.1 million; down 3% |
| Operating income | $757.7 million; down 4% | $1,539.7 million; down 4% |
| Operating margin | 37.7%, versus 37.5% | 37.8%, versus 38.0% |
| Net income attributable to Franklin Resources | $606.5 million; up 8% | $1,172.9 million; up 1% |
| Diluted EPS | $0.98; up 10% | $1.88; versus $1.84 |
| Operating cash flow | Not separately presented | $1,121.4 million, versus $639.4 million |
Quarterly revenue declines reflected lower sales and distribution fees, partly offset by slightly higher average AUM. For the six months, sales and distribution fees declined 8%; investment management fees were essentially flat. Investment management fees per average AUM fell: the effective annualized rate was 61.1 basis points for the quarter, versus 62.4 basis points a year earlier.
At March 31, 2015, cash and cash equivalents were $8,030.2 million, total liquid assets were $11,133.7 million, and company debt was $1,597.7 million. The company issued $400 million of 2.85% notes due 2025; proceeds were intended partly to repay $250 million of notes due May 2015. The company reported compliance with debt covenants and had a $500 million uncommitted commercial-paper program, inactive since April 2012. Separately, debt of consolidated sponsored products and VIEs was $880.3 million and is generally non-recourse to the company beyond its direct investments.
Six-month financing cash outflow was $545.0 million. The company paid $481.0 million of common dividends and repurchased $341.2 million of stock. The six-month dividend per share was $0.80, including a $0.50 special dividend. Corporate cash flow statement ending cash, including consolidated entities, was $8,122.3 million.
Material changes versus prior comparable periods
- Quarterly attributable net income rose despite lower operating income, principally because investment and other income improved substantially. This included $67.1 million of foreign-exchange gains versus a $2.1 million loss a year earlier, and $20.7 million of gains on consolidated SIP investments versus $15.4 million of losses.
- For the six months, AUM declined $17.4 billion from September 30, 2014: net new outflows were $9.1 billion and depreciation and other changes were $5.1 billion, including a $12.3 billion adverse foreign-exchange effect partly offset by market appreciation.
- Quarterly net new flows were negative $5.6 billion; six-month net new flows were negative $9.1 billion. Six-month net flows were positive $9.3 billion only after $18.4 billion of reinvested distributions.
- Six-month operating cash flow increased year over year, mainly because consolidated SIP trading securities had a net decrease rather than the prior-year net increase. Cash dividends paid were higher than in the prior-year period.
- Currency translation generated a $181.0 million six-month other comprehensive loss, contributing to accumulated other comprehensive loss of $289.0 million at period-end.
Outlook, commentary, risks, and unusual items
- No specific earnings, revenue, or AUM guidance was provided. Management said it believed existing liquid assets, operating cash flows, potential capital-market access, and the commercial-paper program could meet present and reasonably foreseeable needs. It expected to continue comparable regular quarterly dividends, subject to earnings and other relevant factors.
- Management highlighted volatile equity markets, mixed bond-market results, concerns about global growth and interest rates, and U.S.-dollar strength. It emphasized investment performance, client service, expense management, employee retention, and strategic technology investment.
- Investment performance was mixed: taxable global/international fixed-income products generally showed strong benchmark and peer-group results, while equity products mostly lagged benchmarks and peer groups. Hybrid results had weakened from September 2014, mainly reflecting the one-year performance of the Franklin Income Fund.
- Quarterly and six-month results benefited from lower interest expense, including reversal of $10.1 million of accrued interest following recognition of tax benefits after statutes of limitations expired. Effective tax rates were 27.5% for the quarter and 29.3% for the six months.
- Key risks include AUM and market volatility, investment underperformance and redemptions, foreign-exchange movements, changing fee and product mix, competition and distribution-channel dependence, extensive and evolving regulation, tax uncertainty, cyber and operational risks, and litigation. Management said there were no material changes to the risk factors disclosed in its prior Form 10-K.
- Legal proceedings arise in the ordinary course; management believed their resolution would not materially affect the company and said adequate accruals had been recorded for estimable probable losses. Unrecognized tax benefits and related accrued interest were $93.1 million and $9.4 million; amounts expected to be paid in the next 12 months were described as insignificant.
Important facts for investors to verify
- Whether net flows, sales, and redemptions improve, particularly in global/international products, and how AUM changes affect fee revenue.
- Whether the gains supporting quarterly earnings—especially foreign-exchange and SIP investment gains—are recurring; operating income and revenue declined.
- Whether investment performance improves in equity and hybrid products and whether performance affects AUM retention and sales.
- How the $400 million note issuance, May 2015 maturity repayment, dividends, and continued buybacks affect cash, debt, and capital allocation.
- Whether currency movements, regulatory and tax developments, and fund-level liquidity or valuation exposures create material changes to reported results.