Franklin Resources, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2011, three months ended December 31, 2010. The filing identifies the registrant as Franklin Resources, Inc.
Business context and results
The company is a global investment manager, with a smaller banking/finance business. Results are primarily driven by assets under management (AUM), market performance, sales and redemptions.
| Metric | Q1 FY2011 | Prior-year quarter | Change |
|---|---|---|---|
| Operating revenue | $1.700 billion | $1.377 billion | +23% |
| Operating income | $659.2 million | $467.0 million | +41% |
| Operating margin | 38.8% | 33.9% | +4.9 percentage points |
| Net income attributable to Franklin Resources | $501.2 million | $355.6 million | +41% |
| Diluted EPS | $2.23 | $1.54 | +45% |
| Operating cash flow | $245.8 million | $317.1 million | Down |
Investment management fees rose 29% to $1.041 billion; sales and distribution fees rose 18% to $577.8 million. The effective investment management fee rate increased to 0.635% from 0.603%. The effective tax rate was 29.75%, versus 30.48%.
Assets under management and material changes
- Period-end AUM was $670.7 billion, up 21% year over year and 4% from September 30, 2010. Average AUM increased 23% year over year to $655.6 billion.
- Quarterly net new flows were $3.2 billion, compared with $14.3 billion a year earlier. Record long-term sales of $54.9 billion were partly offset by $52.8 billion in long-term redemptions, including $12.0 billion from one institutional advisory account.
- Market appreciation and other effects added $24.1 billion to quarterly AUM; total net flows, including reinvested distributions, were $9.0 billion.
- Expense presentation was revised and prior-year figures reclassified for comparability; the changes did not affect net income or financial position. General, administrative and other expenses included $26.5 million of net insurance recoveries for prior-year losses.
- New VIE consolidation guidance brought automobile loan securitization trusts and CLOs onto the balance sheet. Adoption increased assets, long-term debt and equity by $1.385 billion, $1.278 billion and $106.6 million, respectively, as of October 1, 2010.
Cash, liquidity and debt
- Cash and cash equivalents were $4.248 billion excluding consolidated VIE cash, compared with $4.124 billion at September 30, 2010. Management-defined liquid assets were $7.100 billion, up from $6.684 billion.
- Cash flow from investing was $244.1 million, versus $69.1 million in the prior-year quarter. Financing used $292.7 million, compared with $640.6 million used previously; current-quarter common-stock dividends paid were $49.8 million and repurchases were $198.5 million.
- Management’s liquidity discussion reported $977.2 million of debt, excluding debt of consolidated VIEs. The balance sheet reported $2.206 billion of total debt, including $1.229 billion of VIE debt. VIE collateral assets are available only to satisfy VIE obligations.
- The company reported $472.8 million of uncommitted commercial-paper capacity and additional uncommitted bank and secured borrowing capacity. Management said existing liquid assets, operating cash flow and borrowing capacity should cover present and reasonably foreseeable needs. The company was in compliance with note covenants.
Outlook, risks and unusual items
- Management cited improving markets and economic recovery as supportive of AUM, fee revenue and operating income, while emphasizing continued uncertainty. No quantitative earnings or revenue guidance was provided.
- Management’s stated priorities include investment performance, customer service, expense management, employee retention and investment in systems and technology. The Dodd-Frank Act was expected to bring additional restrictions; its impact was not yet known.
- Key risks include market declines and redemptions reducing AUM and fees; competition and investment performance; changing regulation and distribution costs; technology, operational and cybersecurity risks; international and currency exposure; and loan-credit and liquidity risks.
- Other income included $13.2 million of investment impairments, a $9.1 million net loss from consolidated CLO assets and liabilities, and higher realized gains and equity-method income. Interest expense increased following $900 million of notes issued in May 2010.
- Market-timing litigation in the U.S. reached a settlement-in-principle requiring a $2.75 million company contribution, subject to conditions and court approval. Canadian settlements totaling approximately $5.0 million were approved in December 2010. Other litigation remained unresolved; management said adequate accruals had been made for estimable probable losses.
- On January 18, 2011, the company acquired Rensburg Fund Management for approximately $72 million in cash; Rensburg had approximately $1.5 billion in AUM at December 31, 2010.
Important facts for investors to verify
- Whether AUM growth, fee rates and positive flows persist, given the substantial increase in redemptions and the institutional account withdrawal.
- How much reported debt and asset growth reflects VIE consolidation rather than obligations or resources available to the parent company.
- The repeatability of earnings given the insurance recovery, investment gains and impairments, tax benefits, and CLO fair-value losses.
- Progress and financial effects of Dodd-Frank implementation, pending litigation, and the Rensburg acquisition.