Franklin Resources, Inc. (Franklin Templeton) — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013; comparisons are primarily with FY2012. The filing’s registrant is Franklin Resources, Inc. (NYSE: BEN), which operates as Franklin Templeton Investments. This is an annual report, not a standalone fourth-quarter filing.
Business context
The company is a global investment manager earning most revenue from investment management and distribution fees, generally tied to assets under management (AUM). It also provides administration, shareholder servicing, trust, custody and select private-banking services. Year-end AUM was $844.7 billion across equity, hybrid, fixed-income and cash-management products.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Operating revenue | $7,985.0 million | $7,101.0 million |
| Operating income | $2,921.3 million | $2,515.2 million |
| Operating margin | 36.6% | 35.4% |
| Net income attributable to Franklin Resources | $2,150.2 million | $1,931.4 million |
| Diluted EPS | $3.37 | $2.98 |
| Operating cash flow | $2,035.7 million | $1,066.2 million |
| Ending AUM | $844.7 billion | $749.9 billion |
| Corporate debt | $1,197.7 million | $1,566.1 million |
- Revenue rose 12%; operating income rose 16%; net income attributable to the company rose 11%. Investment management fees increased 14%, largely reflecting higher average AUM, while the effective management fee rate eased to 62.7 basis points from 63.2.
- AUM increased 13%, driven by $66.1 billion of market appreciation and $24.3 billion of net new flows. Average AUM rose 15% to $808.2 billion. Long-term sales increased 26% to $215.6 billion, while redemptions rose 10% to $190.0 billion.
- Operating expenses increased 10% to $5,063.7 million, including higher sales and distribution costs and compensation. Sales, distribution and marketing expense increased 11%.
- Net income was also affected by lower investment and other income: $152.2 million versus $199.7 million in FY2012. FY2013 included $30.9 million of foreign-exchange losses and $16.0 million of net losses on consolidated CLO assets and liabilities.
- At year-end, corporate liquid assets were $9,448.9 million, including $6,186.0 million cash and cash equivalents; corporate debt was $1,197.7 million, consisting of fixed-rate senior notes. These liquidity figures exclude assets and liabilities of consolidated funds and VIEs. Management said it expected existing liquid assets, operating cash flows and available financing capacity to meet present and reasonably foreseeable needs.
Changes, outlook and notable items
- Compared with FY2012, AUM growth included both market gains and a return to net new inflows; FY2012 AUM growth was driven almost entirely by market appreciation and included $2.3 billion of net new outflows.
- Performance was uneven by strategy: global/international fixed-income and hybrid products showed strong benchmark and peer-group results, while U.S. equity results were weaker over several periods. Management cautioned that past rankings do not predict future results.
- Management provided no quantified earnings or AUM guidance. It said it expected continued market volatility and ongoing economic uncertainty, and highlighted focus on investment performance, client service, expense management, staff retention, and strategic investment in systems and technology.
- In November 2012, Franklin acquired approximately 69% of K2 Advisors for a $182.9 million cash investment and agreed to acquire remaining interests beginning in fiscal 2017. Contingent consideration was estimated at $97.7 million at year-end; the acquisition added $9.4 billion of K2 AUM to the company’s reported managed-account and alternative-investment categories.
- The company declared $0.39 per share in regular dividends and a $1.00 per-share special dividend for FY2013. It repurchased 10.5 million shares for $491.0 million. A three-for-one stock split occurred in July 2013; reported per-share data were adjusted retrospectively.
- Material risks include market-driven AUM and fee volatility, investment performance and redemption risk, dependence on third-party distribution, rising distribution and compliance costs, changing regulation (including Dodd-Frank, FATCA and Basel III), foreign-exchange exposure, cyber and operational risks, and tax uncertainty. Management stated litigation accruals were adequate and that existing matters were not expected to materially affect the company; unrecognized tax benefits and related interest were $109.5 million and $15.6 million, respectively.
Important facts for investors to verify
- Whether net inflows and AUM growth continued after year-end, and how much depended on market appreciation versus client flows.
- Current product-level investment performance, especially U.S. equity and tax-free fixed-income results, and resulting redemption trends.
- The sustainability of the 36.6% operating margin given higher distribution costs and compensation, and the trajectory of the effective fee rate.
- K2’s performance, contingent-consideration assumptions and future payments for remaining ownership interests.
- Available parent-company liquidity after considering cash restrictions, regulatory capital needs and non-U.S. repatriation limits; distinguish Franklin’s corporate debt from debt of consolidated funds and VIEs.
- Developments in regulatory implementation, tax audits and any litigation or contingencies that could change costs or cash requirements.
Audit and controls: The independent auditor gave unqualified opinions on the consolidated financial statements and internal control over financial reporting as of September 30, 2013.