Franklin Resources, Inc. (Franklin Templeton) — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing also reports unaudited fourth-quarter results. Franklin is a global investment manager; revenues principally depend on assets under management (AUM), fee rates, product mix and sales.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Operating revenue | $8.491 billion | $7.985 billion | +6% |
| Operating income | $3.221 billion | $2.921 billion | +10% |
| Operating margin | 37.9% | 36.6% | +1.3 percentage points |
| Net income attributable to Franklin | $2.384 billion | $2.150 billion | +11% |
| Diluted EPS | $3.79 | $3.37 | +12% |
| Operating cash flow | $2.138 billion | $2.036 billion | +5% |
Investment management fees rose 10% to $5.566 billion, principally reflecting higher average AUM. Sales and distribution fees increased 1% to $2.546 billion; shareholder servicing fees fell 7% to $281 million. Expenses rose 4% to $5.270 billion. Effective tax rate was 29.3%, up from 28.3%.
Year-end AUM was $898.0 billion, up 6% from $844.7 billion; average AUM rose 10% to $887.9 billion. Market appreciation and other added $62.4 billion, while net new flows were negative $4.6 billion and foreign-exchange effects reduced AUM. Equity and hybrid AUM increased 9% and 16%, respectively; fixed-income AUM was approximately flat.
At September 30, 2014, cash and cash equivalents were $7.477 billion and reported liquid assets were $10.627 billion. Company debt was $1.198 billion, consisting of fixed-rate senior notes; cash and cash equivalents less company debt were approximately $6.279 billion. Operating, investing and financing cash flows were $2.138 billion, $391 million and negative $1.195 billion, respectively. Separately reported debt of consolidated sponsored products and variable-interest entities was $951 million; the filing says those creditors have no recourse to Franklin beyond its direct investments.
Prior-period changes and fourth-quarter results
- Revenue, operating income, net income and diluted EPS all increased year over year. The operating-margin improvement reflects revenue growth exceeding expense growth.
- Net new flows weakened from positive $24.3 billion in FY2013 to negative $4.6 billion in FY2014. Long-term sales declined 11% to $192.6 billion while redemptions rose 4% to $197.5 billion.
- FY2014 fourth-quarter revenue was $2.156 billion, operating income $835 million, net income attributable to Franklin $641 million and diluted EPS $1.02. Ending AUM was $898.0 billion, down from $920.5 billion at June 30.
- FY2014’s stronger other income included foreign-exchange net gains of $32.1 million versus losses of $30.9 million in FY2013, and net gains of $7.1 million on consolidated CLO assets and liabilities versus losses of $16.0 million.
Outlook, management commentary, risks and unusual items
- Management identified investment performance, client service, expense discipline, employee retention, technology investment, brand strength and distributor relationships as priorities. The filing provides no specific revenue, earnings or AUM forecast.
- Management expected comparable regular quarterly dividends to continue, subject to earnings and other factors. FY2014 regular dividends were $0.48 per share; FY2013 included a $1.00-per-share special dividend.
- A tax ruling expired at fiscal year-end and was replaced at a higher rate. Management estimated this could increase FY2015 tax expense by about $25 million, potentially offset in part by tax benefits from expiring statutes of limitation.
- Franklin deregistered as a bank holding company in September 2014 after limiting Fiduciary Trust and Franklin Templeton Bank & Trust activities to trust and fiduciary services; it also ceased accepting deposits and originating loans and sold substantially all private-bank loans.
- Key risks include market-driven AUM declines, redemptions and weak investment performance; reliance on third-party distribution; fee and product-mix pressure; foreign-exchange exposure; extensive and changing regulation; tax audits; cyber and operational disruption; and litigation or regulatory investigations. Management said pending legal matters were not expected to materially affect the company and that adequate accruals had been made for estimable probable losses.
- The company repurchased 11.5 million shares for $622 million in FY2014. At year-end, 29.8 million shares remained authorized for repurchase. $7.3 billion of cumulative undistributed non-U.S. earnings was treated as indefinitely reinvested.
Investor facts to verify
- Whether subsequent AUM, flows and investment performance—particularly U.S. equity performance, which lagged benchmarks in many periods—support the fee and earnings trajectory.
- The persistence of FY2014’s negative net new flows and the consequences of the year-end AUM decline.
- The realized FY2015 tax impact of the higher-rate ruling, tax examinations and potential statute-expiration benefits.
- Cash availability for parent-company use, given regulatory and contractual restrictions on some subsidiary cash and overseas repatriation.
- Future buybacks, dividends and debt maturities, including the $250 million note due in 2015.
- Regulatory and distribution-cost effects of evolving rules, including European commission restrictions and U.S. fund regulation.