Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; comparisons are with the quarter ended December 31, 2018 unless noted. The filing’s registrant is Franklin Resources, Inc. (ticker BEN), rather than “Franklin Templeton Inc.”
Business context and operating trends
The company is a global investment manager whose results depend primarily on assets under management (AUM), fee rates, investment performance and client flows. Markets rose during the quarter: the S&P 500 gained 9.1% and the MSCI World Index gained 8.7%.
- AUM ended at $698.3 billion, up 7% year over year and 1% from September 30, 2019. Average AUM was $693.8 billion, up 2% year over year.
- Quarterly AUM increased $5.7 billion: $18.0 billion of market change, distributions and other gains was offset by $12.3 billion of net outflows. Long-term sales rose 5% to $22.7 billion, while redemptions rose 8% to $45.7 billion.
- Net outflows were concentrated in global/international fixed income funds, including $6.0 billion from four funds. AUM growth year over year also reflected a $26.4 billion acquisition contribution.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
| Metric | Quarter ended Dec. 31, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Operating revenue | $1,412.7 | $1,411.5 | Flat |
| Operating income | $392.7 | $411.5 | Down 5% |
| Operating margin | 27.8% | 29.2% | Down 1.4 percentage points |
| Net income attributable to Franklin Resources | $350.5 | $275.9 | Up 27% |
| Diluted earnings per share | $0.70 | $0.54 | Up 30% |
| Operating cash flow | $31.7 | $254.8 | Down $223.1 |
- Investment management fees increased 1% to $979.7 million, reflecting higher performance fees and average AUM, partly offset by a lower effective fee rate. The fee rate excluding performance fees declined to 55.2 basis points from 56.2.
- Operating expenses rose 2% to $1,020.0 million. Compensation and benefits increased 10% to $389.4 million, including acquisition-related retention compensation; general, administrative and other expense fell 17% to $89.7 million, partly because the prior-year quarter included a $13.9 million litigation settlement.
- Net income benefited from a $52.9 million net contribution from other income and expenses, versus a $65.5 million net loss in the prior-year quarter. The improvement primarily reflected stronger investment-related results, including equity-method investee income of $39.1 million versus a loss of $37.6 million. The effective tax rate declined to 21.9% from 24.9%.
- Operating cash flow fell substantially, primarily due to net purchases of company investments rather than net liquidations in the prior-year quarter, higher purchases by consolidated investment products, and cash compensation payments. Investing cash use was $29.6 million; financing cash use was $9.3 million.
Balance sheet, debt and liquidity
- At December 31, 2019, the balance sheet reported $5.817 billion of cash and cash equivalents, $2.004 billion of investments, $697.0 million of company debt and total assets of $15.002 billion. Company debt was essentially unchanged from September 30, 2019.
- Management reported $8.610 billion of liquid assets, including cash, receivables and certain investments, against $697.0 million of debt. Of those liquid assets, $3.442 billion was used for operational or regulatory requirements, including $271.4 million restricted by regulation.
- The company’s senior notes had $700.0 million aggregate face value: $300.0 million due 2022 at 2.80% and $400.0 million due 2025 at 2.85%. The company reported compliance with debt covenants and access to a $500.0 million uncommitted commercial-paper program, which had been inactive since 2012.
- Consolidated investment product debt was $99.4 million; the filing states its holders have no recourse to company assets beyond the company’s direct investment. This debt is distinct from company debt.
- The company adopted lease accounting on October 1, 2019, recognizing operating lease right-of-use assets and liabilities; at quarter-end these were $275.3 million and $317.9 million, respectively.
Outlook, management commentary and risks
- No specific revenue, earnings or AUM guidance was provided. Management said it would continue focusing on investment performance, client service, expense management, employee retention and strategic systems and technology investment.
- Management expected approximately $60 million of additional acquisition-related retention expense and approximately $11 million of termination-benefit expense during the remainder of fiscal 2020. Retention expenses were expected to begin at approximately $70 million annually in fiscal 2021 and decline by about $10 million per year over the following three fiscal years.
- The company expected to continue paying comparable quarterly dividends, subject to earnings and other relevant factors. It declared $0.27 per share for the quarter and repurchased 4.6 million shares for $123.6 million; 42.6 million shares remained authorized for repurchase.
- Investment performance remained a business risk: several equity and fixed-income categories lagged benchmarks or peer medians in multiple measured periods, and multi-asset/balanced performance was weak against benchmarks. Management noted strong ten-year results for global/international fixed income and multi-asset/balanced products against certain comparisons.
- Key disclosed risks include AUM volatility and client redemptions, investment underperformance, fee and product-mix pressure, competition and distribution-channel dependence, foreign exchange and international-market exposure, cybersecurity and operational disruption, regulatory change, and legal and tax matters. The filing reported no material change to previously disclosed risk factors or market-risk disclosures.
- Management said ordinary-course litigation was not expected to materially affect the company and that an adequate accrual had been recorded for probable, estimable losses. No material changes to other commitments and contingencies were reported.
Important facts for investors to verify
- Whether AUM outflows persist, particularly in global/international fixed income, and whether investment performance improves across underperforming categories.
- Whether revenue and margins can stabilize as effective fee rates decline and compensation and acquisition-related costs continue.
- The sustainability of operating cash generation, given the sharp year-over-year decline in operating cash flow and investment-related cash needs.
- The amount and timing of expected retention and termination costs, and their effect on fiscal 2020 and later results.
- Liquidity available for discretionary uses after operational and regulatory requirements, and the distinction between company debt and nonrecourse debt of consolidated investment products.
- Progress and costs associated with fund-administration outsourcing, technology and compliance obligations, as well as any developments in litigation, tax audits or regulatory matters.