Business Context and Reporting Period
Company: Franklin Resources, Inc. (FRI)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended September 30, 1998
Business Overview: FRI is a global financial services company providing investment management, marketing, distribution, and administrative services to the Franklin Templeton Group of funds, institutional accounts, and other investment products. As of September 30, 1998, the Company employed over 8,600 people worldwide and managed $208.6 billion in assets.
Key Financial Metrics
| Metric (in millions, except per share) | 1998 | 1997 | 1996 |
|---|---|---|---|
| Operating Revenues | $2,577.3 | $2,163.3 | $1,519.5 |
| Net Income | $500.5 | $434.1 | $314.7 |
| Operating Cash Flow | $693.7 | $428.5 | $359.6 |
| Total Assets | $3,480.0 | $3,095.2 | $2,374.2 |
| Long-Term Debt | $494.5 | $493.2 | $399.5 |
| Stockholders' Equity | $2,280.8 | $1,854.2 | $1,400.6 |
| Assets Under Management (AUM) (in billions) | $208.6 | $226.0 | $151.6 |
| Earnings Per Share (Diluted) | $1.98 | $1.71 | $1.25 |
| Operating Profit Margin | 25% | 27% | 27% |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 19% to $2.58 billion, driven by a 17% increase in investment management fees and a 19% increase in underwriting and distribution fees.
- Profitability: Net income rose 15% to $500.5 million, and diluted EPS increased 16% to $1.98.
- Assets Under Management: AUM declined 8% to $208.6 billion, primarily due to market depreciation in equity portfolios during the fourth quarter of fiscal 1998. However, net fund purchases exceeded redemptions by $16.1 billion for the full year.
- Acquisition Costs: A contingent payment of $64.2 million related to the 1996 Heine Securities Corporation acquisition was made in the third quarter of 1998 and recorded as goodwill.
- Banking/Finance: The Company securitized approximately $134.3 million of auto loan receivables in September 1998, reducing loan receivables and using proceeds to reduce debt.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects cash needs to be met by existing liquid assets ($556 million in cash and equivalents), operating cash flows, and borrowing capacity. The Company anticipates continued growth in assets under management but notes that revenues are highly sensitive to market conditions and asset mix.
Year 2000 and Euro Issues
The Company is actively addressing the Year 2000 problem, with estimated total costs ranging from $50 million to $60 million. Approximately $13 million had been expended by September 30, 1998. The Company is also preparing for the introduction of the Euro, though it does not currently anticipate a material adverse effect on cash flows or operations.
Risk Factors
- Market Volatility: A shift toward equity assets (57% of AUM) has increased exposure to global equity market volatility. A 12% reduction in AUM occurred in the fourth quarter due to market declines.
- Competition: Intense competition from banks, insurance companies, and other investment managers may pressure sales charges and distribution costs.
- Regulatory: Changes in regulations regarding sales charges (NASD rules) and international currency movements could impact revenues.
- Third-Party Dependence: Reliance on third-party systems (e.g., transfer agency) for Year 2000 compliance poses operational risks.
Investor Verification Checklist
- AUM Volatility: Verify the impact of the 8% decline in AUM on future fee revenue, given the heavy weighting in equity assets.
- Year 2000 Costs: Monitor the remaining $37-$47 million in estimated Year 2000 remediation costs and potential delays in third-party system compliance.
- Contingent Payments: Track future contingent payments related to the Heine acquisition (due in fiscal 2000 and 2001) based on growth targets.
- Debt Structure: Review the maturity schedule of long-term debt, with $304.8 million due in 1999, and the Company's ability to refinance commercial paper.
- Class II Share Economics: Assess the impact of increasing Class II share sales on profit margins, as distribution expenses for these shares have exceeded revenues for certain products.