Franklin Resources, Inc. — FY2009 Form 10-K
Reporting period: Fiscal year ended September 30, 2009; this is an annual filing, not a standalone fourth-quarter report. Franklin Templeton Investments is the company’s operating brand. Its primary business is investment management and related services; banking and finance is a smaller segment.
Financial and operating highlights
| Metric | FY2009 | FY2008 | Change |
|---|---|---|---|
| Operating revenue | $4.194 billion | $6.032 billion | Down 30% |
| Operating income | $1.203 billion | $2.099 billion | Down 43% |
| Net income | $896.8 million | $1.588 billion | Down 44% |
| Diluted EPS | $3.87 | $6.67 | Down 42% |
| Operating margin | 29% | 35% | Down 6 percentage points |
| Operating cash flow | $641.4 million | $1.409 billion | Down 54% |
| Ending AUM | $523.4 billion | $507.3 billion | Up 3% |
| Simple monthly average AUM | $442.2 billion | $604.9 billion | Down 27% |
| Cash and cash equivalents | $3.104 billion | $2.528 billion | Up $576.9 million |
| Total debt | $121.2 million | $269.3 million | Down $148.1 million |
| Stockholders’ equity | $7.632 billion | $7.074 billion | Up 8% |
Business trends and changes versus prior year
- Results were pressured by the global financial crisis and recession. First-half market depreciation and investor redemptions reduced average AUM and fee revenue; markets and results improved in the second half.
- AUM experienced $90.0 billion of market depreciation in the first half and $115.4 billion of appreciation in the second half. Net new flows were negative $5.5 billion for the year: negative $23.7 billion in the first half, followed by positive $18.2 billion in the second half.
- Year-end AUM rose despite lower average AUM, reflecting market recovery. The mix shifted toward lower-fee fixed income: fixed-income AUM increased 20% to $171.3 billion, while equity AUM declined 6% to $247.0 billion. The effective investment management fee rate fell to 0.566% from 0.609%.
- Investment management fees fell 32%; underwriting and distribution fees fell 30%. Operating expenses declined 24%, including lower distribution, compensation, advertising, and technology costs.
- The company reduced its global workforce by approximately 10%; FY2009 severance expense was $38.4 million. Headcount declined to about 7,745 from 8,809.
Liquidity, debt, and capital
- Reported liquid assets were $5.833 billion at year-end. The company reported $3.104 billion of cash and cash equivalents and $2.221 billion of investment securities.
- Debt comprised $64.2 million of commercial paper and $57.0 million of Federal Home Loan Bank advances. The commercial paper matured in the quarter ending December 31, 2009; the advances had a weighted-average rate of 2.94%.
- No borrowing was outstanding under the revolving credit facility at year-end. $355.8 million remained available under the $420 million facility, which expires June 9, 2010. Management stated it expected existing liquid assets, operating cash flows, and borrowing capacity to cover foreseeable cash needs.
- FY2009 cash dividends were $0.84 per share; management expected to continue comparable quarterly dividends, subject to earnings and other factors. The company repurchased 5.5 million shares for $376.9 million during the year.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management expected challenging and volatile conditions could persist, and said it would prioritize investment performance, client service, cost control, strategic investment in systems and technology, and distribution relationships.
- Banking/finance reported a $50.3 million pretax loss, compared with a $2.0 million loss in FY2008. FY2009 included $46.0 million of losses on trading investments, primarily reflecting lower fair value of securitization residual interests.
- The company recorded $63.1 million of other-than-temporary investment impairments, versus $13.8 million in FY2008. It also recorded $46.0 million of write-downs on Level 3 residual interests; assumptions for cumulative life loss rates increased amid higher expected loan losses.
- Key risks include market-driven AUM and revenue volatility, poor investment performance and redemptions, dependence on third-party distributors, regulatory and litigation exposure, foreign-exchange risk, and credit losses in consumer lending. Management disclosed pending U.S. and Canadian market-timing-related litigation and a newer derivative claim; outcomes and potential effects were uncertain.
- Contractual obligations and commitments totaled $722.4 million, including $469.8 million of contractual obligations and $252.6 million of loan origination and capital contribution commitments. Unrecognized tax benefits were $76.0 million, plus approximately $13.6 million accrued interest.
- The company planned to sell its 49% interests in Lightning Finance Company and Lightning Asset Finance in FY2010. It had repurchased remaining deferred commission assets from the entities in September 2009.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether average AUM, net flows, asset mix, and the effective fee rate continued to recover after year-end.
- The valuation and loss assumptions for securitization residual interests, and the exposure to further impairment or cash support needs.
- Progress and outcome of the disclosed litigation, tax examinations, and potential tax payments.
- Availability and renewal of credit facilities, including the facility expiring in June 2010, and the company’s capacity to sustain dividends and repurchases.
- Completion and financial effects of the planned Lightning Finance and Lightning Asset Finance divestiture.