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BEN > SEC Filings for BEN > Form 10-K on 15-Nov-2012All Recent SEC Filings

Show all filings for FRANKLIN RESOURCES INC

Form 10-K for FRANKLIN RESOURCES INC


15-Nov-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements
In this section, we discuss and analyze the results of operations and financial condition of Franklin Resources, Inc. ("Franklin") and its subsidiaries (collectively, the "Company"). In addition to historical information, we also make statements relating to the future, called "forward-looking" statements, which are provided under the "safe harbor" protection of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will," "may," "could," "expect," "believe," "anticipate," "intend," "plan," "seek," "estimate," or other similar words. Moreover, statements that speculate about future events are forward-looking statements. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. You should carefully review the "Risk Factors" section set forth in Item 1A of Part I of this Annual Report on Form 10-K and in any more recent filings


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with the U.S. Securities and Exchange Commission (the "SEC"), each of which describe these risks, uncertainties and other important factors in more detail. While forward-looking statements are our best prediction at the time that they are made, you should not rely on them. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. If a circumstance occurs after the date of this Annual Report on Form 10-K that causes any of our forward-looking statements to be inaccurate, whether as a result of new information, future developments or otherwise, we do not have an obligation, and we undertake no obligation, to announce publicly the change to our expectations, or to make any revisions to our forward-looking statements, unless required by law.
Overview
We are a global investment management organization and derive our operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide through products that include investment funds and institutional, high net-worth and separately-managed accounts (collectively, our "sponsored investment products" or "SIPs"). In addition to investment management, our services include fund administration, sales, distribution, shareholder services, transfer agency, trustee, custodial and other fiduciary services, as well as select private banking services. Our sponsored investment products and investment management and related services are distributed or marketed to the public globally under seven distinct brand names:
Franklin®, Templeton®, Mutual Series®, Bissett®, Fiduciary Trust™, Darby® and Balanced Equity Management™. We offer a broad range of SIPs under equity, hybrid, fixed-income and cash management funds and accounts, including alternative investment products, that meet a wide variety of specific investment needs of individual and institutional investors. We also manage certain sub-advised investment products which may be sold to the public under one of our brand names or those of other companies or on a co-branded basis.
Effective July 1, 2012, we have one operating segment, investment management and related services. Previously, we had a secondary operating segment, banking/finance, which offered select retail banking, private banking and consumer lending services. During the fiscal year ended September 30, 2012 ("fiscal year 2012"), we significantly reduced these services and now only offer select private banking services to investment management clients. The level of our revenues depends largely on the level and relative mix of assets under management ("AUM"). As noted in the "Risk Factors" section set forth above in Item 1A of Part I of this Annual Report on Form 10-K, the amount and mix of our AUM are subject to significant fluctuations and can negatively impact our revenues and income. The level of our revenues also depends on mutual fund sales and the number of mutual fund shareholder accounts. The fees charged for our services are based on contracts with our SIPs or our clients. These arrangements could change in the future.
During fiscal year 2012, global financial markets produced strong positive returns, evidenced by a 22% increase in the MSCI World Index, a 30% increase in the S&P 500 Index, and a 5% increase in the Barclays Global Aggregate Index. The markets recovered from the significant volatility and negative sentiment experienced during the fourth quarter of the fiscal year ended September 30, 2011 ("fiscal year 2011"), but remained volatile throughout the year amid continued investor concerns related to the European sovereign debt crisis and the global economy. In this environment our simple monthly average AUM ("average AUM") and earnings per share increased slightly from fiscal year 2011. Our total AUM at September 30, 2012 was $749.9 billion, 14% higher than at September 30, 2011. The increase was almost entirely due to $96.4 billion in market appreciation as the strong market returns resulted in valuation increases in all investment objectives. The increase in average AUM was lower, at 2%, due to market volatility and depreciation experienced in the fourth quarter of fiscal year 2011. Long-term sales decreased 23% to $170.8 billion for fiscal year 2012, primarily due to reduced demand for global/international fixed-income and equity products. Redemption activity decreased 7% to $172.7 billion, as global/international equity and tax-free fixed-income product redemptions declined, but were partially offset by an increase in redemptions in global/international fixed-income products.


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The business and regulatory environments in which we operate remain complex, uncertain and subject to change. In the U.S., the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Reform Act") imposes additional restrictions and limitations on our business, and we expect that the Foreign Account Tax Compliance Act ("FATCA") will cause us to incur significant administrative and compliance costs. We are also subject to numerous regulations by U.S. and non-U.S. regulators that add further complexity to our ongoing global compliance operations.
Uncertainties regarding economic stabilization and improvement remain in the foreseeable future. As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our SIPs and on providing high quality customer service to our clients. While we are focused on expense management, we will also seek to attract, retain and develop employees and invest strategically in systems and technology that will provide a secure and stable environment. We will continue to protect and further our brand recognition while developing and maintaining broker/dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed in the "Risk Factors" section in Part I of this Annual Report.

Results of Operations
(dollar amounts in millions, except per
share data)
for the fiscal years ended                                                             2012         2011
September 30,                                  2012          2011          2010      vs. 2011     vs. 2010
Operating Income                          $ 2,515.2     $ 2,659.8     $ 1,958.7        (5 )%         36 %
Net Income Attributable to Franklin
Resources, Inc.                             1,931.4       1,923.6       1,445.7         0  %         33 %
Earnings Per Share
Basic                                     $    8.98     $    8.66     $    6.36         4  %         36 %
Diluted                                        8.95          8.62          6.33         4  %         36 %
Operating Margin1                              35.4 %        37.3 %        33.5 %



1 Defined as operating income divided by total operating revenues.
Operating income decreased $144.6 million in fiscal year 2012 primarily due to a 2% decrease in investment management fee revenues, which resulted from a lower effective management fee rate partially offset by a 2% increase in average AUM, and $38.5 million of net insurance recoveries during fiscal year 2011 for losses incurred in previous years. Net income attributable to Franklin Resources, Inc. increased $7.8 million as higher investment and other income, net more than offset the decrease in operating income.
Operating income increased $701.1 million and net income attributable to Franklin Resources, Inc. increased $477.9 million in fiscal year 2011 primarily due to a 27% increase in investment management fee revenues, which was driven by a 22% increase in average AUM and a higher effective management fee rate. Diluted earnings per share increased in fiscal year 2012 despite the minimal increase in net income due to a 3% decrease in diluted average common shares outstanding primarily resulting from the repurchase of shares of our common stock. Diluted earnings per share increased in fiscal year 2011 consistent with the increase in net income and a 2% decrease in diluted average common shares outstanding.


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Assets Under Management
AUM by investment objective was as follows:

(dollar amounts in billions)                                      2012        2011
as of September 30,              2012       2011       2010     vs. 2011    vs. 2010
Equity
Global/international           $ 214.9    $ 185.8    $ 204.2      16  %       (9 )%
United States                     82.2       68.4       69.5      20  %       (2 )%
Total equity                     297.1      254.2      273.7      17  %       (7 )%
Hybrid                           110.1      101.3      110.8       9  %       (9 )%
Fixed-Income
Tax-free                          83.2       72.0       77.7      16  %       (7 )%
Taxable
Global/international             196.4      178.8      130.7      10  %       37  %
United States                     56.7       46.9       45.4      21  %        3  %
Total fixed-income               336.3      297.7      253.8      13  %       17  %
Cash Management                    6.4        6.7        6.6      (4 )%        2  %
Total                          $ 749.9    $ 659.9    $ 644.9      14  %        2  %
Average for the Year           $ 705.7    $ 694.4    $ 571.1       2  %       22  %

AUM at September 30, 2012 increased 14% from September 30, 2011, almost entirely due to $96.4 billion in market appreciation as strong positive returns in global markets resulted in valuation increases in all investment objectives. AUM increased 2% during fiscal year 2011, driven by $36.4 billion of net new flows and $12.5 billion from acquisitions, largely offset by $30.5 billion in market depreciation as volatile market conditions led to valuation decreases. Average AUM, which is generally more indicative of trends in revenue for providing investment management and fund administration services than the year-over-year change in ending AUM, increased by 2% and 22% during fiscal years 2012 and 2011.


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The average mix of AUM by investment objective is shown below. The change in mix towards fixed-income products during fiscal years 2012 and 2011 reflects investor preference for globally diversified fixed-income investments. We expect this trend to continue in the near future. for the fiscal years ended September 30, 2012 2011 2010

Equity
Global/international                        29 %    32 %    32 %
United States                               11 %    11 %    12 %
Total equity                                40 %    43 %    44 %
Hybrid                                      14 %    16 %    18 %
Fixed-Income
Tax-free                                    11 %    10 %    13 %
Taxable
Global/international                        26 %    23 %    17 %
United States                                8 %     7 %     7 %
Total fixed-income                          45 %    40 %    37 %
Cash Management                              1 %     1 %     1 %
Total                                      100 %   100 %   100 %

Components of the change in AUM were as follows:
(dollar amounts in billions)

for the fiscal year ended                                                      2012           2011
September 30,                        2012          2011          2010        vs. 2011       vs. 2010
Beginning AUM                     $   659.9     $   644.9     $   523.4            2  %         23  %
Long-term sales                       170.8         220.8         188.5          (23 )%         17  %
Long-term redemptions                (172.7 )      (184.8 )      (122.8 )         (7 )%         50  %
Net cash management                    (0.4 )         0.4           4.2           NM           (90 )%
Net new flows                          (2.3 )        36.4          69.9           NM           (48 )%
Reinvested distributions               18.4          16.3          11.5           13  %         42  %
Net flows                              16.1          52.7          81.4          (69 )%        (35 )%
Distributions                         (22.5 )       (19.7 )       (14.2 )         14  %         39  %
Acquisitions                              -          12.5             -         (100 )%         NM
Appreciation (depreciation) and
other                                  96.4         (30.5 )        54.3           NM            NM
Ending AUM                        $   749.9     $   659.9     $   644.9           14  %          2  %


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Components of the change in AUM by investment objective were as follows:

(in billions)                         Equity                                         Fixed-Income
                                                                                        Taxable        Taxable
for the fiscal year ended       Global/        United                                   Global/         United         Cash
September 30, 2012           International     States      Hybrid      Tax-Free      International      States      Management       Total
AUM at October 1, 2011      $       185.8     $  68.4     $ 101.3     $    72.0     $       178.8     $   46.9     $      6.7      $ 659.9
Long-term sales                      40.8        16.1        19.3          13.5              64.0         17.1              -        170.8
Long-term redemptions               (41.7 )     (18.7 )     (26.5 )        (8.9 )           (64.2 )      (12.7 )            -       (172.7 )
Net exchanges                        (1.5 )       0.2         0.5           0.3              (0.9 )        1.4              -            -
Net cash management                     -           -           -             -                 -            -           (0.4 )       (0.4 )
Net new flows                        (2.4 )      (2.4 )      (6.7 )         4.9              (1.1 )        5.8           (0.4 )       (2.3 )
Reinvested distributions              2.2         1.7         4.9           2.3               5.6          1.7              -         18.4
Net flows                            (0.2 )      (0.7 )      (1.8 )         7.2               4.5          7.5           (0.4 )       16.1
Distributions                        (2.4 )      (1.8 )      (5.7 )        (3.0 )            (7.5 )       (2.1 )            -        (22.5 )
Appreciation and other               31.7        16.3        16.3           7.0              20.6          4.4            0.1         96.4
AUM at September 30, 2012   $       214.9     $  82.2     $ 110.1     $    83.2     $       196.4     $   56.7     $      6.4      $ 749.9


(in billions)                    Equity                                         Fixed-Income
for the fiscal year                                                                Taxable        Taxable
ended                      Global/        United                                   Global/         United         Cash
September 30, 2011      International     States      Hybrid      Tax-Free      International      States      Management       Total
AUM at October 1,
2010                   $       204.2     $  69.5     $ 110.8     $    77.7     $       130.7     $   45.4     $      6.6      $ 644.9
Long-term sales                 53.3        19.6        21.4           9.5             102.8         14.2              -        220.8
Long-term
redemptions                    (61.0 )     (19.1 )     (29.0 )       (14.3 )           (48.5 )      (12.9 )            -       (184.8 )
Net exchanges                   (0.5 )       0.3         0.5          (1.9 )             2.4         (0.5 )         (0.3 )          -
Net cash management                -           -           -             -                 -            -            0.4          0.4
Net new flows                   (8.2 )       0.8        (7.1 )        (6.7 )            56.7          0.8            0.1         36.4
Reinvested
distributions                    2.7         1.6         4.2           2.2               4.3          1.3              -         16.3
Net flows                       (5.5 )       2.4        (2.9 )        (4.5 )            61.0          2.1            0.1         52.7
Distributions                   (3.3 )      (1.7 )      (5.2 )        (3.2 )            (4.6 )       (1.7 )            -        (19.7 )
Acquisitions                    12.5           -           -             -                 -            -              -         12.5
Appreciation
(depreciation) and
other                          (22.1 )      (1.8 )      (1.4 )         2.0              (8.3 )        1.1              -        (30.5 )
AUM at September 30,
2011                   $       185.8     $  68.4     $ 101.3     $    72.0     $       178.8     $   46.9     $      6.7      $ 659.9


(in billions)                         Equity                                         Fixed-Income
                                                                                        Taxable        Taxable
for the fiscal year ended       Global/        United                                   Global/         United         Cash
September 30, 2010           International     States      Hybrid      Tax-Free      International      States      Management       Total
AUM at October 1, 2009      $       183.1     $  63.9     $  98.2     $    69.6     $        63.3     $   38.4     $      6.9      $ 523.4
Long-term sales                      50.5        13.4        16.7          14.3              79.5         14.1              -        188.5
Long-term redemptions               (47.0 )     (14.1 )     (13.2 )        (9.1 )           (29.2 )      (10.2 )            -       (122.8 )
Net exchanges                        (0.6 )      (0.3 )      (0.2 )        (0.1 )             5.4          0.3           (4.5 )          -
Net cash management                     -           -           -             -                 -            -            4.2          4.2
Net new flows                         2.9        (1.0 )       3.3           5.1              55.7          4.2           (0.3 )       69.9
Reinvested distributions              1.5         0.7         3.8           2.0               2.3          1.2              -         11.5
Net flows                             4.4        (0.3 )       7.1           7.1              58.0          5.4           (0.3 )       81.4
Distributions                        (1.5 )      (0.8 )      (4.9 )        (3.2 )            (2.3 )       (1.5 )            -        (14.2 )
Appreciation and other               18.2         6.7        10.4           4.2              11.7          3.1              -         54.3
AUM at September 30, 2010   $       204.2     $  69.5     $ 110.8     $    77.7     $       130.7     $   45.4     $      6.6      $ 644.9


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AUM increased $90.0 billion or 14% during fiscal year 2012, almost entirely due to market appreciation of $96.4 billion, partially offset by $2.3 billion in net new outflows. Strong positive returns in global markets, evidenced by increases in the MSCI World, S&P 500 and Barclays Global Aggregate indexes of 22%, 30% and 5%, resulted in market appreciation across all investment objectives. Long-term sales decreased 23% to $170.8 billion, primarily due to reduced demand for global/international fixed-income and equity products as a result of ongoing investor concerns related to the European sovereign debt crisis and the strength of the global economic recovery. Long-term redemptions decreased 7% to $172.7 billion, as global/international equity and tax-free fixed-income product redemptions declined, but were partially offset by an increase in redemptions in global/international fixed-income products. Redemptions included $11.1 billion from an institutional advisory account in the hybrid objective. AUM increased $15.0 billion or 2% during fiscal year 2011, driven by $36.4 billion of net new flows and $12.5 billion from acquisitions, largely offset by $30.5 billion in market depreciation. Net new flows decreased 48% from the prior year, despite a 17% increase in long-term sales led by growth in global/international fixed-income products, as long-term redemptions increased 50%, with increases in all investment objectives as a result of persistent market volatility amid investor concerns about economic growth, the sovereign debt crisis in Europe and default risk associated with municipal bonds. The negative sentiment in the global financial markets, evidenced by a decrease in the MSCI World Index of 4%, also resulted in significant market depreciation in global/international equity and fixed-income products. Redemptions included $12.0 billion from an institutional advisory account in the hybrid objective and losses of a few global equity institutional accounts. The average mix of AUM by sales region is shown below.

(dollar amounts in
billions)
for the fiscal years ended
September 30,                    2012       % of Total       2011       % of Total       2010       % of Total
United States                 $  461.3           65 %     $  459.4           66 %     $  404.3           71 %
International
Europe, the Middle East and
Africa                           112.1           16 %        109.3           16 %         68.2           12 %
Asia-Pacific                      74.3           10 %         66.5            9 %         50.0            9 %
Canada                            32.1            5 %         33.8            5 %         31.3            5 %
Latin America1                    25.9            4 %         25.4            4 %         17.3            3 %
Total international           $  244.4           35 %     $  235.0           34 %     $  166.8           29 %
Total                         $  705.7          100 %     $  694.4          100 %     $  571.1          100 %



1 Latin America sales region includes North America-based advisors serving non-resident clients. Due to the global nature of our business operations, investment management and related services may be performed in locations unrelated to the sales region. Investment Performance Overview
A key driver of our overall success is the long-term investment performance of our SIPs. A standard measure of the performance of these investment products is the percentage of AUM exceeding benchmarks and peer group medians. The long-term investment performance of our fixed-income products has been strong with AUM frequently outperforming the benchmarks and peer group medians for the three-, five- and ten-year periods ended September 30, 2012. Our global/international fixed-income funds generated exceptional results with at least 87% of AUM exceeding the benchmarks and peer group medians for all periods presented, as did our hybrid products with at least 94% of AUM exceeding the peer group median for all periods. In addition, at least 95% of AUM of our tax-free fixed-income products exceeded the peer group medians for the five- and ten-year periods. The long-term performance of our equity products has also been solid with AUM regularly exceeding the peer group medians for the three-, five- and ten-year periods.


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The performance of our products against benchmarks and peer group medians is presented in the table below.

                                        Benchmark Comparison                                Peer Group Comparison
                                    % of AUM Exceeding Benchmark                   % of AUM in Top Two Peer Group Quartiles
As of September 30, 2012    1-Year        3-Year       5-Year     10-Year      1-Year           3-Year        5-Year     10-Year
Equity
Global/international          43 %          36 %         54 %       50 %         62 %             60 %          67 %         66 %
United States                  2 %          13 %         36 %       38 %         17 %             44 %          75 %         46 %
Total equity                  30 %          28 %         48 %       46 %         48 %             54 %          70 %         58 %
Hybrid                        87 %          85 %         13 %       96 %         96 %             95 %          94 %         98 %
Fixed-Income
Tax-free                      75 %          61 %          2 %       31 %         41 %             70 %          95 %        100 %
Taxable
Global/international          87 %          88 %         90 %       91 %         93 %             92 %          99 %         99 %
United States                 84 %          72 %         67 %       78 %         67 %             54 %          54 %         68 %
Total fixed-income            83 %          78 %         62 %       70 %         74 %             80 %          90 %         94 %

AUM measured in the benchmark and peer group rankings represents 89% of our total AUM as of September 30, 2012. The benchmark comparisons are based on each fund's return as compared to a market index that has been selected to be generally consistent with the investment objectives of the fund. The peer group rankings are sourced from Lipper, Morningstar or eVestment in each fund's market and were based on an absolute ranking of returns as of September 30, 2012. For products with multiple share classes, rankings for the primary share class are . . .

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