BEN

Business Context and Reporting Period

Company: Franklin Resources, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: A global investment management company deriving substantially all revenues from investment management and related services (Franklin, Templeton, Mutual Series, Bissett, Fiduciary Trust, and Darby brands). Secondary operations include a banking/finance segment offering retail banking and consumer lending services.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 43% for the quarter and 46% for the nine-month period compared to the prior year. Investment management fees rose 47% (quarter) and 44% (nine months), driven by a 36% and 31% increase in simple monthly average AUM, respectively.
• Profitability: Net income attributable to Franklin Resources increased 21% for the quarter and 103% for the nine-month period. Operating income grew 60% (quarter) and 77% (nine months).
• Assets Under Management: Ending AUM was $570.5 billion, up 26% from June 30, 2009. This increase was driven by $50.5 billion in net new flows over nine months, partially offset by $1.4 billion in market depreciation.
• Debt Structure: Total debt increased significantly from $121.2 million at September 30, 2009, to $949.8 million at June 30, 2010. This reflects the issuance of $900 million in senior unsecured notes in May 2010, which was used to repay commercial paper.
• Other Income: Other income (expenses) swung from a net gain of $96.9 million in the prior year quarter to a net loss of $26.8 million in the current quarter, primarily due to losses from equity method investees and consolidated sponsored investment products.

Guidance, Outlook, and Risks

• Market Conditions: Management notes that while the global economy appeared to emerge from recession, the sovereign debt crisis in Europe led to turbulent conditions and lower returns in the third fiscal quarter. Market depreciation of $34.5 billion occurred during the quarter.
• Regulatory Environment: The company highlights the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (signed July 21, 2010), which may impose additional restrictions, increase capital/liquidity requirements, and raise compliance costs.
• Capital Allocation: The company continues a stock repurchase program (4.7 million shares remaining available) and paid a quarterly dividend of $0.22 per share. Proceeds from the new debt issuance are available for general corporate purposes.
• Legal Proceedings: Ongoing litigation includes market timing and late trading class actions in the U.S. and Canada. A settlement in principle for approximately $5.0 million was reached for Canadian actions in July 2010. Management believes claims are without merit but cannot predict outcomes.
• Impairment Testing: No impairment losses were recognized for goodwill or intangible assets. However, an indication of potential impairment occurred for approximately 11% of indefinite-lived intangible assets (related to India operations), though testing showed fair value exceeded carrying value.

Investor Verification Checklist

• Debt Maturity Profile: Verify the specific maturity dates and interest rates of the $900 million in new long-term debt issued in May 2010 (2013, 2015, and 2020 maturities).
• Net New Flows Sustainability: Assess the sustainability of the $50.5 billion in net new flows, particularly the shift toward fixed-income products which typically generate lower fee rates than equity products.
• Regulatory Impact Costs: Monitor future filings for quantified estimates of increased compliance costs resulting from the Dodd-Frank Act.
• Legal Settlement Finalization: Confirm the final court approval and payment terms of the $5.0 million settlement for Canadian market timing lawsuits.
• India Operations: Track the performance of Franklin Templeton Asset Management (India) Private Limited, as regulatory changes there previously triggered an impairment review.