Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2010. Unless noted otherwise, financial amounts below are in U.S. dollars. Franklin is a global investment manager; investment management and related services are its primary business, with banking/finance as a smaller segment.
Financial performance
| Metric | Quarter ended Mar. 31, 2010 | Year-over-year change | Six months ended Mar. 31, 2010 | Year-over-year change |
|---|---|---|---|---|
| Operating revenue | $1.413 billion | +55% | $2.791 billion | +48% |
| Operating income | $461.1 million | +106% | $928.1 million | +89% |
| Net income attributable to Franklin | $356.7 million | +222% | $712.3 million | +207% |
| Diluted earnings per share | $1.55 | Up from $0.47 | $3.10 | Up from $0.99 |
| Operating margin | 33% | Up from 24% | 33% | Up from 26% |
- Investment management fees rose 51% for the quarter and 42% for the half year, driven by higher average assets under management and a higher effective fee rate. Underwriting and distribution fees increased 63% and 62%, respectively.
- Expenses also rose: total operating expenses increased 38% for the quarter and 34% for the half year. Underwriting and distribution costs grew with sales; compensation increased in part because of higher performance-related bonuses.
- Other income turned positive, at $47.2 million for the quarter and $94.5 million for the half year, versus losses of $47.1 million and $140.8 million in the comparable 2009 periods. Management attributed the improvement mainly to higher investment valuations and lower impairment charges.
- The effective income tax rate was 29.50% for the quarter and 29.99% for the half year, down from 38.11% and 37.59%, respectively, primarily due to the forecast mix of foreign earnings.
Assets under management and business trends
- Assets under management were $586.8 billion at March 31, up 50% from a year earlier and 6% from December 31, 2009. Six-month average AUM rose 31% year over year.
- For the quarter, net new flows were $17.4 billion and market appreciation was $16.5 billion. For the half year, the respective amounts were $31.7 billion and $33.1 billion. Management cited improving markets and recovery-related optimism, while cautioning that economic recovery remained uncertain.
- Long-term sales increased 134% for the quarter and 86% for the half year. Global/international fixed-income and equity products contributed to quarterly sales growth. Cash-management AUM declined 28% year over year.
- Management said it would focus on investment performance, client service, expense management, talent retention, and strategic investment in systems and technology. The filing gives no quantified earnings or revenue guidance.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $696.4 million, compared with $246.6 million a year earlier. Investing cash use was $31.0 million, versus $182.0 million; financing cash use was $734.0 million, versus $92.0 million.
- Cash and cash equivalents totaled $3.024 billion at March 31, down from $3.104 billion at September 30, 2009. The filing reports liquid assets of $5.663 billion, compared with $5.833 billion at September 30.
- Total debt was $352.0 million, up from $121.2 million at September 30, primarily reflecting commercial paper issuance. Commercial paper outstanding was $286.0 million at a 0.23% weighted-average annualized rate; $66.0 million of FHLB advances carried a 2.93% weighted-average rate.
- Current assets were $5.123 billion and current liabilities were $989.6 million. The company reported $420 million available under its revolving credit facility, which expired June 9, 2010, and intended to replace it in the third quarter. No amounts were drawn and the company reported covenant compliance at March 31.
- Six-month cash dividends paid were $783.8 million, compared with $95.5 million in the prior-year period; the income statement reports dividends per share of $3.44 for the six months versus $0.42. The board declared a regular quarterly dividend of $0.22 per share, payable April 9. The company repurchased 2.7 million shares for $291.5 million during the half year.
- Total assets were $9.521 billion and total liabilities were $2.104 billion at March 31. The company said it exceeded applicable bank regulatory capital requirements.
Risks, contingencies and unusual items
- Adoption of a new variable-interest-entity accounting standard on October 1, 2010 could require consolidation of some automobile-loan securitization trusts or collateralized loan obligations. The company was evaluating entities holding approximately $1.5 billion of aggregate assets; the final impact was not yet clear.
- Franklin disclosed ongoing U.S. and Canadian litigation, including market-timing-related cases and a derivative suit concerning asset-based compensation. Management considers the claims without merit and intends to defend them, but cannot predict their outcomes or rule out a material adverse effect.
- The company had $6.2 million of maximum potential payments under guarantees to automobile-loan securitization trusts and $6.3 million of standby letters of credit. It also held $266.2 million off balance sheet as agent or trustee for investors and affiliated funds.
- After quarter-end, Franklin sold its remaining retained subordinated securities from automobile-loan securitizations for $41.6 million in net cash proceeds.
- Key business risks include market declines and redemptions that reduce fee-generating AUM, investment underperformance, regulatory and litigation exposure, foreign-exchange movements, technology or operational disruptions, and access to distribution channels and capital markets. Management states that risks disclosed were not materially changed from its fiscal 2009 Form 10-K.
Important facts for investors to verify
- Whether positive AUM flows and market appreciation persisted after March 31, and how subsequent markets affected fee revenue and product mix.
- The replacement and terms of the revolving credit facility that was due to expire in June 2010.
- The accounting effect of the upcoming VIE standard, particularly any consolidation of the identified securitization trusts or CLOs.
- Developments in the disclosed litigation and any changes to loss accruals or contingent exposure.
- The drivers and sustainability of the unusually large six-month dividend cash outflow and the reported $3.44 per-share dividend figure.