Franklin Resources, Inc. (Franklin Templeton) — Form 10-Q Summary
Business context and reporting period
The registrant is Franklin Resources, Inc., a global investment manager operating under the Franklin Templeton and related brands, with a smaller banking and consumer-finance business. This fiscal third-quarter report covers the three months ended June 30, 2011, and year-to-date results for the nine months ended that date; comparisons are with the corresponding 2010 periods.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Operating revenue | $1.853 billion, up 21% | $5.303 billion, up 23% |
| Operating income | $682.7 million, up 31% | $1.971 billion, up 36% |
| Net income attributable to Franklin Resources | $503.3 million, up 40% | $1.508 billion, up 41% |
| Diluted EPS | $2.26, up 43% | $6.73, up 44% |
| Operating margin | 36.8%, versus 34.0% | 37.2%, versus 33.5% |
| Operating cash flow | Not presented separately for the quarter | $1.009 billion, versus $1.340 billion |
Investment management fees rose 25% in the quarter and 27% year to date, chiefly reflecting higher average assets under management (AUM). Sales and distribution fees increased 17% and 18%, respectively. The investment-management segment generated $2.054 billion of year-to-date pretax income; banking/finance generated $9.8 million.
At June 30, AUM was $734.2 billion, up 14% from September 30, 2010 and 29% from June 30, 2010. Year-to-date average AUM increased 24% year over year. For the nine months, net new flows were $33.3 billion and market appreciation was $57.1 billion; long-term redemptions rose 48% to $135.1 billion. Quarterly AUM increased $30.7 billion, including record net new flows of $21.7 billion.
Balance sheet, cash flow, and capital
- Cash and cash equivalents excluding consolidated VIE cash were $4.642 billion, compared with $4.124 billion at September 30, 2010. Reported total cash including VIEs was $4.720 billion.
- Management-defined liquid assets were $7.801 billion, versus $6.684 billion at fiscal year-end. The company reported $840.4 million of receivables and $2.319 billion of investments in this liquidity summary.
- Company debt, excluding debt of consolidated variable interest entities (VIEs), was $978.1 million: $30.0 million commercial paper, $49.0 million Federal Home Loan Bank advances, and $899.1 million long-term debt. Consolidated total debt was $2.110 billion, including VIE debt that is generally payable solely from VIE collateral.
- Nine-month operating cash flow declined to $1.009 billion from $1.340 billion despite higher net income, partly due to increased purchases of trading securities and working-capital movements. Investing cash flow was positive $432.7 million; financing cash flow was negative $869.8 million, including $617.1 million of share repurchases.
- The company repurchased 5.1 million shares year to date, with approximately 7.9 million shares remaining authorized for repurchase at June 30. It declared a quarterly dividend of $0.25 per share, payable July 15.
Material changes and unusual items
- New VIE consolidation guidance, adopted October 1, 2010, brought automobile-loan securitization trusts and CLOs onto the balance sheet. At adoption, it added $1.385 billion of assets, $1.278 billion of long-term debt, and $106.6 million of equity. The company states that VIE assets and liabilities do not affect its own liquidity because creditors have recourse to VIE collateral.
- Quarterly operating income included the benefit of stronger AUM-driven fee revenue. Year-to-date general and administrative expenses included $38.5 million of net insurance recoveries for prior-year losses.
- Other income included VIE fair-value net losses of $25.2 million for the quarter and $40.1 million year to date, partly offset by gains in equity-method investments and securities. Year-to-date other-than-temporary investment impairments were $13.6 million.
- Rensburg Fund Management was acquired in January 2011 for $72.4 million in cash. On July 6, after quarter-end, the company acquired Australian manager Balanced Equity Management for $64.1 million in cash and stock.
- The income statement reports nine-month dividends per share of $0.75 for 2011 and $3.66 for 2010, while the cash-flow statement reports dividends paid of $161.2 million and $833.9 million. The filing does not clearly explain this large comparative difference in the provided text; verify whether the 2010 amount reflects a special dividend.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said global markets improved over the nine-month period but volatility increased in the third quarter amid concerns about economic growth and Europe’s sovereign-debt crisis. It emphasized investment performance, client service, expense management, technology investment, and adapting to regulatory change.
Results remain sensitive to market levels and AUM mix, investment performance, net flows and redemptions, distribution costs, currency movements, and interest rates. Management highlighted evolving Dodd-Frank requirements, broader regulatory and compliance costs, competition for distribution, technology and operational risks, and the possibility of further market disruption. The company said it could meet reasonably foreseeable cash needs through liquid assets, operating cash flow, and borrowing capacity, while noting that capital-market access depends on market conditions and creditworthiness.
Market-timing litigation remained partly unresolved. The company agreed in principle to contribute $2.75 million toward a class-action settlement, subject to final court approval; the hearing was scheduled for October 25, 2011. Related derivative cases remained pending or stayed, and the company said it could not estimate possible additional losses. A separate appeal concerning asset-based compensation was dismissed, making that case final. Management stated that it had accrued probable estimable losses but could not predict the outcome of unresolved matters.
Important facts for investors to verify
- Confirm the apparent 2010 special-dividend effect behind the reported nine-month dividend-per-share and cash-dividend comparisons.
- Assess whether rising redemptions, especially the 48% year-over-year increase in nine-month long-term redemptions, continued after quarter-end.
- Separate company-level debt and liquidity from consolidated VIE balances when evaluating leverage and cash availability.
- Review subsequent performance of AUM, net flows, fee rates, and the integration and contribution of the Rensburg and BEM acquisitions.
- Track final approval and payment of the $2.75 million settlement and developments in the remaining derivative litigation.