Franklin Resources, Inc. (Franklin Templeton) — FY2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2015 (including the quarter ended that date). Franklin Resources is a global active investment manager whose revenues are primarily tied to assets under management (AUM), asset mix, investment performance and sales. Year-end AUM was $770.9 billion.
Key financial metrics
| Metric | FY2015 | Change vs. FY2014 |
|---|---|---|
| Operating revenue | $7.949 billion | Down 6% |
| Operating income | $3.028 billion | Down 6% |
| Operating margin | 38.1% | Up from 37.9% |
| Net income attributable to Franklin Resources | $2.035 billion | Down 15% |
| Diluted earnings per share | $3.29 | Down 13% |
| Operating cash flow | $2.252 billion | Up from $2.138 billion |
| Ending AUM | $770.9 billion | Down 14% |
| Average AUM | $869.5 billion | Down 2% |
- Investment management fees were $5.328 billion, down 4%; sales and distribution fees were $2.252 billion, down 12%. The effective investment management fee rate declined to 61.3 basis points from 62.7.
- Ending AUM fell by $127.1 billion: $73.0 billion from market depreciation and other changes (including $15.1 billion of foreign-exchange impact) and $48.8 billion from net new outflows. Long-term sales declined 16% and redemptions rose 6%.
- Cash and cash equivalents on the company balance sheet were $8.185 billion; liquid assets, including receivables and investments, totaled $11.107 billion. Company debt was $1.348 billion, versus $1.198 billion a year earlier. Stockholders’ equity attributable to Franklin Resources was $11.841 billion.
- The company repurchased 22.5 million shares for $1.060 billion during the year. It paid regular dividends of $0.60 per share plus a $0.50 special dividend.
Material changes versus the prior year
- Market weakness, particularly in the fourth fiscal quarter, and net outflows reversed the prior year’s AUM growth. The S&P 500 fell 6.4% and the MSCI World Index fell 8.3% in the fourth quarter, according to the filing.
- Operating expenses declined 7% to $4.921 billion, helping operating margin edge up despite lower revenue. Sales, distribution and marketing expense fell 11%, largely alongside lower sales and AUM.
- Investment and other income, net, dropped to $40.4 million from $235.8 million. The filing cites equity-method investment losses of $63.2 million versus prior-year income of $68.1 million, trading-security losses, and lower realized gains.
- The effective income tax rate increased to 30.5% from 29.3%. The company recorded $8.2 million of impairment on definite-lived intangible assets, citing reduced AUM growth assumptions.
Outlook, risks and unusual items
- No quantitative earnings or AUM guidance is provided. Management says it will emphasize investment performance, client service, expense management, employee retention, and strategic investment in systems and technology. It expects comparable regular quarterly dividends, subject to earnings and other factors.
- Key risks include market declines and volatility, continued AUM outflows, weak relative investment performance, shifts toward lower-fee passive products, dependence on third-party distribution, foreign-exchange exposure, and rising regulatory and compliance costs. Management reported that equity products mostly lagged benchmarks and peer medians over the periods shown; global/international fixed-income performance was comparatively strong over longer periods.
- Regulatory uncertainty includes proposed U.S. retirement-advice requirements and evolving European rules, including MiFID II. The filing warns that changes could affect distribution arrangements, costs and product access.
- Outstanding commitments include $140.4 million of contingent consideration, primarily related to the planned acquisition of remaining K2 interests, and $28.9 million of committed capital contributions. Management stated that probable litigation losses were adequately accrued and that existing claims were not expected to materially affect the company.
- The company issued $400 million of 2.85% notes due 2025, using proceeds in part to repay $250 million of notes at maturity. Management says available liquidity, operating cash flow and financing capacity should meet reasonably foreseeable needs; some overseas cash is subject to regulatory or contractual transfer restrictions.
- PwC gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Track whether net outflows persist and which products and regions are driving sales, redemptions and AUM changes.
- Assess subsequent investment performance, particularly in equity, hybrid and global/international taxable fixed-income products, and its potential impact on client retention and fee rates.
- Review the sustainability of margins and earnings given lower average fee rates and the sharp decline in investment and other income.
- Verify the timing and assumptions behind K2 contingent consideration, intangible-asset valuations and other Level 3 measurements.
- Monitor regulatory developments, tax examinations, currency movements and restrictions on cash transfers from non-U.S. subsidiaries.