Business Context and Reporting Period
Company: Franklin Resources, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A global investment management company deriving the majority of revenue from investment management and related services for retail mutual funds, institutional accounts, and other products. The company also operates a secondary banking/finance segment offering retail banking and consumer lending services.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Mar 31, 2009 | Three Months Ended Mar 31, 2008 | Six Months Ended Mar 31, 2009 | Six Months Ended Mar 31, 2008 |
|---|---|---|---|---|
| Total Operating Revenues | $912,272 | $1,503,692 | $1,881,602 | $3,189,283 |
| Operating Income | $223,322 | $519,087 | $491,686 | $1,154,816 |
| Net Income | $110,806 | $366,096 | $231,706 | $884,412 |
| Earnings Per Share (Diluted) | $0.48 | $1.54 | $1.00 | $3.67 |
| Operating Margin | 24% | 35% | 26% | 36% |
| Cash and Cash Equivalents | $2,444,336 | N/A | N/A | N/A |
| Total Debt | $231,716 | N/A | N/A | N/A |
Note: Balance sheet data is as of March 31, 2009. Prior period balance sheet data is not provided in the text for direct comparison in this table.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 39% for the three months and 41% for the six months ended March 31, 2009, compared to the prior year. This was driven by a 35% decrease in simple monthly average assets under management (AUM) and a shift in asset mix toward lower-fee fixed-income products.
- Profitability Drop: Net income fell 70% for the quarter and 74% for the six-month period. Operating income declined 57% in both periods.
- Non-Operating Losses: Other income (expenses) swung from a net income of $0.4 million in the prior year quarter to a net loss of $45.4 million in the current quarter. This was primarily due to other-than-temporary impairments of investments ($23.8 million for the quarter) and net losses on trading investments ($21.2 million).
- Assets Under Management: Total AUM was $391.1 billion at March 31, 2009, a 34% decrease from March 31, 2008. Market depreciation accounted for $19.0 billion of the decline in the quarter, while negative net flows totaled $3.6 billion.
- Cost Reductions: Operating expenses decreased 30% for the quarter and 32% for the six months, reflecting workforce reductions (approximately 10% globally), reduced variable compensation, and lower advertising spend.
Guidance, Outlook, and Risks
- Outlook: Management expects market conditions to continue to put pressure on financial results throughout fiscal year 2009. The company anticipates further decreases in compensation expenses due to recent workforce reductions.
- Cost Management: The company is actively reducing expenditures in travel, entertainment, advertising, and professional fees. It has deferred non-business critical initiatives and halted annual merit salary increases.
- Key Risks:
- Market Volatility: Continued disruption in capital and credit markets poses a significant risk to AUM levels and fee revenues.
- Asset Mix Shift: A shift toward fixed-income products, which carry lower management fees, negatively impacts revenue per dollar of AUM.
- Legal Proceedings: The company is involved in multiple class-action lawsuits regarding market timing and late trading. Management believes claims are without merit but notes potential for material negative impact if outcomes are unfavorable.
- Liquidity: While the company maintains significant liquid assets ($5.28 billion) and credit facilities ($420 million revolving credit facility), access to capital markets depends on credit ratings and global economic conditions.
- Unusual Items: Significant write-downs were recognized on residual interests from securitization transactions ($26.0 million for the quarter) due to increased discount rates and loss assumptions reflecting market liquidity premiums.
Investor Verification Checklist
- Asset Under Management (AUM) Trends: Verify the sustainability of the 34% year-over-year decline in AUM and the impact of negative net flows on future fee revenue.
- Investment Portfolio Impairments: Review the magnitude of other-than-temporary impairments ($57.7 million for six months) and the assumptions used for Level 3 fair value measurements (residual interests, CDOs).
- Banking/Finance Segment Performance: Assess the continued losses in the banking/finance segment (loss before taxes of $47.2 million for the quarter) and the status of automobile loan securitization guarantees.
- Legal Contingencies: Monitor the status of the multidistrict litigation (MDL) regarding market timing and potential settlement costs.
- Capital Structure: Confirm the company's ability to service debt ($231.7 million total) and maintain liquidity given the reduced operating cash flows ($246.6 million for six months).