Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: Unaudited quarter and six months ended March 31, 2016. The filing identifies the registrant as Franklin Resources, Inc. (rather than Franklin Templeton Inc.). The company is a global investment manager whose revenue depends heavily on assets under management (AUM), investment performance and fund sales.
Key financial results
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 | Change from prior year |
|---|---|---|---|
| Operating revenue | $1,613.9 million | $3,371.9 million | Down 20% and 17% |
| Operating income | $537.3 million | $1,190.9 million | Down 29% and 23% |
| Operating margin | 33.3% | 35.3% | Prior year: 37.7% and 37.8% |
| Net income attributable to Franklin Resources | $360.4 million | $808.2 million | Down 41% and 31% |
| Diluted earnings per share | $0.61 | $1.36 | Down 38% and 28% |
| Operating cash flow | Not separately stated for the quarter | $429.7 million | Prior-year six months: $1,121.4 million |
For the six months, investment management fees fell 16% to $2,281.9 million and sales and distribution fees fell 22% to $915.4 million. The effective investment management fee rate declined to 60.2 basis points from 61.4 basis points. The six-month effective tax rate increased to 32.2% from 29.3%.
AUM and material changes
- Period-end AUM was $742.6 billion, down 16% year over year and 4% from September 30, 2015. Average AUM fell 16% for the quarter and 15% for the six-month period versus prior-year periods.
- Six-month net new outflows were $45.2 billion, compared with $9.1 billion in the prior-year period. Long-term sales fell 40% to $56.3 billion; redemptions were nearly flat at $100.5 billion. Market appreciation and other factors added $19.2 billion, partly offsetting outflows.
- Quarterly outflows were $24.6 billion, primarily in global/international products. The company cited lower sales across long-term investment objectives and weaker investment performance in many equity and U.S. taxable fixed-income products.
- Operating expenses declined 14% in both comparison periods, mainly as sales, distribution and marketing costs tracked lower AUM and sales. Compensation and benefits included termination benefits associated with voluntary separation of approximately 300 employees.
Financial position and liquidity
- At March 31, 2016, cash and cash equivalents were $7,931.8 million, total assets were $15,890.9 million, and total liabilities were $3,450.4 million.
- Management’s liquidity measure—cash, receivables and certain investments—was $10,806.1 million, versus $11,107.2 million at September 30, 2015. Corporate debt was $1,442.6 million, including $1,348.3 million of senior notes and a $94.3 million Indian-rupee loan.
- Operating cash flow for the six months was $429.7 million; investing cash flow was $99.0 million and financing cash flow was negative $866.5 million. Financing outflows included $734.3 million of share repurchases and $198.9 million of dividends paid.
- The company reported $500 million of uncommitted commercial-paper capacity, inactive since 2012, and stated it expected available liquidity and ongoing operating cash flows to meet foreseeable needs. Some subsidiary cash is subject to regulatory, contractual or repatriation restrictions.
- Debt of consolidated sponsored investment products and variable interest entities is generally nonrecourse to the company beyond its direct investments; it should not be treated as equivalent to corporate debt.
Outlook, commentary, risks and unusual items
- Management gave no specific quantitative earnings or revenue guidance. It said it was reviewing the business, focusing on investment performance and client service, managing expenses, and making strategic systems and technology investments. It expected to continue comparable regular quarterly dividends, subject to earnings and other relevant factors.
- The company recorded a $28.2 million impairment of definite-lived management-contract intangible assets, primarily related to the K2 acquisition, citing increased redemptions, lower expected sales and renegotiated investment-management fees. Management noted future assumption changes could cause further impairment.
- Management expects approximately $6 million of additional separation-related expense over the rest of fiscal 2016 and said further termination costs could arise as business changes continue.
- The company purchased $182.7 million of debt securities from six India-domiciled funds to provide them liquidity. It borrowed 6.3 billion Indian rupees at a fixed 9.89% rate, due March 2017, and secured the borrowing with a standby letter of credit collateralized by a $116 million time deposit.
- Other income was markedly lower, reflecting foreign-exchange losses and losses on consolidated fund investments versus prior-year gains, as well as higher interest expense. A $16.6 million quarterly loss from equity-method investees also contributed. The filing also reports a $17.7 million quarterly decrease in the K2 contingent-consideration liability, reducing expense.
- Principal risks include market declines and further AUM outflows, sustained weak investment performance, fee pressure and competition, foreign-exchange exposure, evolving regulation and distribution-channel changes. The filing discusses the DOL fiduciary rule announced in April 2016 and says its effects were still being assessed. Management said pending litigation was not expected to materially affect the company and that an adequate accrual had been recorded for probable estimable losses.
Important facts for investors to verify
- Whether AUM outflows, especially in global/international and hybrid strategies, persist and how they affect fee revenue and margins.
- Investment performance versus benchmarks and peers, and whether weak performance in major product categories improves.
- Whether the K2 impairment assumptions, contingent-consideration valuation and expected additional separation costs change in later filings.
- Availability of corporate liquidity after accounting for restricted subsidiary cash, capital needs, fund support and planned repurchases and dividends.
- The effects of the DOL fiduciary rule and other regulatory or distribution changes on sales, intermediary compensation and operating costs.