Form 10Q 6.30.2012


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(MARK ONE)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-09318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter) 
 
Delaware
 
13-2670991
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One Franklin Parkway, San Mateo, CA
 
94403
(Address of principal executive offices)
 
(Zip Code)
(650) 312-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    o  NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  YES    o  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     x
  
Accelerated filer     o
Non-accelerated filer  o  (Do not check if a smaller reporting company)
  
Smaller reporting company    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding: 212,602,957 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of July 23, 2012.



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Income
Unaudited
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
(in thousands, except per share data)
 
2012
 
2011
 
2012
 
2011
Operating Revenues
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,114,404

 
$
1,168,920

 
$
3,315,861

 
$
3,338,159

Sales and distribution fees
 
569,138

 
594,187

 
1,679,387

 
1,707,517

Shareholder servicing fees
 
77,221

 
77,520

 
229,365

 
225,325

Other, net
 
22,821

 
12,406

 
60,196

 
31,908

Total operating revenues
 
1,783,584

 
1,853,033

 
5,284,809

 
5,302,909

Operating Expenses
 
 
 
 
 
 
 
 
Sales, distribution and marketing
 
692,038

 
719,311

 
2,038,099

 
2,043,399

Compensation and benefits
 
314,563

 
313,592

 
938,006

 
921,796

Information systems and technology
 
44,079

 
41,266

 
128,805

 
123,110

Occupancy
 
31,444

 
32,112

 
95,180

 
95,683

General, administrative and other
 
58,538

 
64,055

 
192,260

 
147,508

Total operating expenses
 
1,140,662

 
1,170,336

 
3,392,350

 
3,331,496

Operating Income
 
642,922

 
682,697

 
1,892,459

 
1,971,413

Other Income (Expenses)
 
 
 
 
 
 
 
 
Investment and other income (losses), net
 
(17,975
)
 
14,503

 
135,612

 
118,282

Interest expense
 
(10,089
)
 
(10,056
)
 
(28,287
)
 
(26,315
)
Other income (expenses), net
 
(28,064
)
 
4,447

 
107,325

 
91,967

Income before taxes
 
614,858

 
687,144

 
1,999,784

 
2,063,380

Taxes on income
 
184,906

 
208,944

 
588,322

 
599,498

Net income
 
429,952

 
478,200

 
1,411,462

 
1,463,882

Less: Net income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
(24,209
)
 
(24,575
)
 
(30,027
)
 
(44,029
)
Redeemable noncontrolling interests
 
(1,106
)
 
(572
)
 
2,218

 
307

Net Income Attributable to Franklin Resources, Inc.
 
$
455,267

 
$
503,347

 
$
1,439,271

 
$
1,507,604

Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
2.12

 
$
2.27

 
$
6.66

 
$
6.76

Diluted
 
2.12

 
2.26

 
6.65

 
6.73

Dividends per Share
 
$
0.27

 
$
0.25

 
$
2.81

 
$
0.75

See Notes to Condensed Consolidated Financial Statements.

2


FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
(in thousands)
 
June 30,
2012
 
September 30,
2011
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
4,676,520

 
$
4,699,994

Cash and cash equivalents of consolidated variable interest entities
 
42,363

 
88,238

Receivables
 
793,914

 
772,475

Investment securities, trading
 
1,019,226

 
889,686

Investment securities, available-for-sale
 
602,917

 
990,976

Investments of consolidated variable interest entities, at fair value
 
—

 
10,994

Investments in equity method investees and other
 
69,049

 
21,861

Deferred taxes
 
96,639

 
107,898

Prepaid expenses and other
 
41,024

 
34,646

Total current assets
 
7,341,652

 
7,616,768

Banking/Finance Assets
 
 
 
 
Cash and cash equivalents
 
666,169

 
410,381

Investment securities, available-for-sale
 
257,873

 
345,486

Loans held for sale
 
81,876

 
21,525

Loans receivable, net
 
266,073

 
401,860

Loans receivable of consolidated variable interest entities, net
 
55,347

 
149,386

Other
 
20,152

 
29,485

Total banking/finance assets
 
1,347,490

 
1,358,123

Non-Current Assets
 
 
 
 
Investments of consolidated sponsored investment products
 
822,530

 
584,608

Investments of consolidated variable interest entities, at fair value
 
826,187

 
811,618

Investments in equity method investees and other
 
477,181

 
535,509

Property and equipment, net
 
585,173

 
589,748

Goodwill
 
1,528,295

 
1,536,212

Other intangible assets, net
 
599,193

 
611,979

Other
 
106,612

 
131,278

Total non-current assets
 
4,945,171

 
4,800,952

Total Assets
 
$
13,634,313

 
$
13,775,843

[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.

3


FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
[Table continued from previous page]
(dollars in thousands, except per share data)
 
June 30,
2012
 
September 30,
2011
Liabilities and Stockholders’ Equity
 
 
 
 
Current Liabilities
 
 
 
 
Compensation and benefits
 
$
378,950

 
$
400,885

Commercial paper
 
—

 
29,997

Current maturities of long-term debt
 
320,550

 
29,656

Current maturities of long-term debt of consolidated variable interest entities, at fair value
 
290

 
24,858

Accounts payable, accrued expenses and other
 
278,109

 
328,303

Commissions
 
368,123

 
369,539

Income taxes
 
39,954

 
128,826

Total current liabilities
 
1,385,976

 
1,312,064

Banking/Finance Liabilities
 
 
 
 
Deposits
 
925,571

 
890,189

Long-term debt of consolidated variable interest entities
 
61,738

 
164,176

Federal Home Loan Bank advances
 
69,000

 
69,000

Other
 
760

 
970

Total banking/finance liabilities
 
1,057,069

 
1,124,335

Non-Current Liabilities
 
 
 
 
Long-term debt
 
666,997

 
1,004,381

Long-term debt of consolidated variable interest entities, at fair value
 
827,834

 
846,369

Deferred taxes
 
263,246

 
274,435

Other
 
96,572

 
91,789

Total non-current liabilities
 
1,854,649

 
2,216,974

Total liabilities
 
4,297,694

 
4,653,373

Commitments and Contingencies (Note 10)
 
 
 
 
Redeemable Noncontrolling Interests
 
29,712

 
18,611

Stockholders’ Equity
 
 
 
 
Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued
 
—

 
—

Common stock, $0.10 par value, 1,000,000,000 shares authorized; 212,592,351 and 217,693,435 shares issued and outstanding, at June 30, 2012 and September 30, 2011
 
21,259

 
21,769

Retained earnings
 
8,704,623

 
8,443,531

Appropriated retained earnings of consolidated variable interest entities
 
31,993

 
18,969

Accumulated other comprehensive income (loss)
 
(8,546
)
 
40,462

Total Franklin Resources, Inc. stockholders’ equity
 
8,749,329

 
8,524,731

Nonredeemable noncontrolling interests
 
557,578

 
579,128

Total stockholders’ equity
 
9,306,907

 
9,103,859

Total Liabilities and Stockholders’ Equity
 
$
13,634,313

 
$
13,775,843

See Notes to Condensed Consolidated Financial Statements.


4


FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Nine Months Ended
June 30,
(in thousands)
 
2012
 
2011
Net Income
 
$
1,411,462

 
$
1,463,882

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
162,480

 
181,765

Stock-based compensation
 
77,419

 
67,267

Excess tax benefit from stock-based compensation
 
(18,675
)
 
(13,911
)
Net gains on sale of assets
 
(34,667
)
 
(64,839
)
Net losses on non-current investments of consolidated sponsored investment products
 
26,424

 
—

Net (gains) losses of consolidated variable interest entities
 
(15,666
)
 
43,226

Equity in net income of affiliated companies
 
(50,275
)
 
(59,243
)
Other-than-temporary impairment of investments
 
8,302

 
13,606

Provision for loan losses
 
5,486

 
4,181

Deferred income taxes
 
8,082

 
(3,471
)
Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(160,624
)
 
(222,922
)
Increase in trading securities, net
 
(439,307
)
 
(539,297
)
Increase (decrease) in income taxes payable
 
(61,735
)
 
18,999

Increase (decrease) in commissions payable
 
(1,416
)
 
88,476

Decrease in other liabilities
 
(10,471
)
 
(8,466
)
Increase (decrease) in accrued compensation and benefits
 
(20,987
)
 
39,346

Net cash provided by operating activities
 
885,832

 
1,008,599

Purchase of investments
 
(340,301
)
 
(278,833
)
Purchase of investments by consolidated variable interest entities
 
(337,058
)
 
(817,282
)
Liquidation of investments
 
694,185

 
521,193

Liquidation of investments by consolidated variable interest entities
 
404,832

 
991,256

Purchase of banking/finance investments
 
—

 
(41,794
)
Liquidation of banking/finance investments
 
86,179

 
88,092

Decrease (increase) in loans receivable, net
 
14,358

 
(56,252
)
Decrease in loans receivable held by consolidated variable interest entities, net
 
54,475

 
123,223

Decrease in loans held for sale
 
24,858

 
—

Proceeds from sale of loans held for sale
 
70,026

 
—

Additions of property and equipment, net
 
(61,853
)
 
(84,716
)
Acquisition of subsidiaries, net of cash acquired
 
—

 
(58,067
)
Cash and cash equivalents recognized due to adoption of new consolidation guidance
 
—

 
45,841

Net cash provided by investing activities
 
609,701

 
432,661

Increase in deposits
 
35,382

 
33,551

Issuance of common stock
 
31,388

 
35,964

Dividends paid on common stock
 
(605,539
)
 
(161,193
)
Repurchase of common stock
 
(698,821
)
 
(617,103
)
Excess tax benefit from stock-based compensation
 
18,675

 
13,911

Decrease in commercial paper, net
 
(30,017
)
 
(39
)
Proceeds from issuance of debt
 
42,873

 
—

Payments on debt
 
(88,532
)
 
—

Payments on debt by consolidated variable interest entities
 
(193,974
)
 
(259,592
)
Noncontrolling interests
 
197,858

 
84,742

Net cash used in financing activities
 
$
(1,290,707
)
 
$
(869,759
)
[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.

5


FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
[Table continued from previous page]
 
 
Nine Months Ended
June 30,
(in thousands)
 
2012
 
2011
Effect of exchange rate changes on cash and cash equivalents
 
$
(18,387
)
 
$
24,772

Increase in cash and cash equivalents
 
186,439

 
596,273

Cash and cash equivalents, beginning of period
 
5,198,613

 
4,123,716

Cash and Cash Equivalents, End of Period
 
$
5,385,052

 
$
4,719,989

 
 
 
 
 
Components of Cash and Cash Equivalents
 
 
 
 
Cash and cash equivalents, beginning of period
 
 
 
 
Current assets
 
$
4,699,994

 
$
3,985,312

Current assets of consolidated variable interest entities
 
88,238

 
—

Banking/finance assets
 
410,381

 
138,404

Total
 
$
5,198,613

 
$
4,123,716

Cash and cash equivalents, end of period
 
 
 
 
Current assets
 
$
4,676,520

 
$
4,481,196

Current assets of consolidated variable interest entities
 
42,363

 
77,892

Banking/finance assets
 
666,169

 
160,901

Total
 
$
5,385,052

 
$
4,719,989

 
 
 
 
 
Supplemental Disclosure of Non-Cash Information
 
 
 
 
Decrease in noncontrolling interests due to net deconsolidation of certain sponsored investment products
 
$
(167,473
)
 
$
(1,674
)
Increase in assets, net of liabilities, related to consolidation of variable interest entities
 
—

 
60,760

Increase in receivables of consolidated variable interest entities related to investment trades pending settlement
 
9,166

 
57,111

Decrease (increase) in other liabilities of consolidated variable interest entities related to investment trades pending settlement
 
2,379

 
(78,328
)
Transfers of loans receivable, net to loans held for sale
 
117,456

 
—

Transfers of loans receivable of consolidated variable interest entities, net to loans held for sale
 
37,423

 
—

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
636,954

 
$
586,033

Cash paid for interest
 
41,763

 
37,445

Cash paid for interest by consolidated variable interest entities
 
35,485

 
35,604

See Notes to Condensed Consolidated Financial Statements.

6


FRANKLIN RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2012
(Unaudited)
Note 1 – Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. (“Franklin”) and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. These financial statements should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended September 30, 2011 (“fiscal year 2011”). Certain amounts for the comparative prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended June 30, 2012.
In the quarter ended September 30, 2011, the Company discontinued the classification of a portion of the investment management fees earned by certain of its non-U.S. subsidiaries as sales and distribution fees. Amounts for the comparative prior fiscal year period have been reclassified to conform to the current year presentation. This reclassification had no impact on previously reported net income or financial position and does not represent a restatement of any previously published financial results. See Note 1 – Significant Accounting Policies in the Company's Form 10-K for fiscal year 2011.
The following table presents the effects of the changes in the presentation of operating revenues to the Company’s previously-reported condensed consolidated statement of income:
(in thousands)
 
Three Months Ended
June 30, 2011
 
Nine Months Ended
June 30, 2011
 
As Reported    
 
Adjustments    
 
As Amended    
 
As Reported    
 
Adjustments    
 
As Amended    
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,142,846

 
$
26,074

 
$
1,168,920

 
$
3,260,440

 
$
77,719

 
$
3,338,159

Sales and distribution fees
 
620,261

 
(26,074
)
 
594,187

 
1,785,236

 
(77,719
)
 
1,707,517

Shareholder servicing fees
 
77,520

 
—

 
77,520

 
225,325

 
—

 
225,325

Other, net
 
12,406

 
—

 
12,406

 
31,908

 
—

 
31,908

Total operating revenues
 
$
1,853,033

 
$
—

 
$
1,853,033

 
$
5,302,909

 
$
—

 
$
5,302,909

Note 2 – New Accounting Guidance
On October 1, 2011, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance that requires separate disclosures about purchases, sales, issuances and other settlements in the rollforward of activity in Level 3 fair value measurements.
On January 1, 2012, the Company adopted new FASB guidance that requires additional qualitative discussion for the sensitivity of recurring Level 3 fair value measurements to changes in the unobservable inputs, quantitative disclosure about the significant unobservable inputs used for all Level 3 measurements, and the categorization by level of the fair value hierarchy for financial instruments that are not measured at fair value.
See Note 7 - Fair Value Measurements for the expanded disclosures.
There were no significant updates to new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for fiscal year 2011.

7


Note 3 – Stockholders' Equity, Redeemable Noncontrolling Interests and Comprehensive Income
The changes in total stockholders’ equity and redeemable noncontrolling interests were as follows:
(in thousands)
 
Franklin
Resources,  Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the nine months ended June 30, 2012
 
 
 
 
Balance at October 1, 2011
 
$
8,524,731

 
$
579,128

 
$
9,103,859

 
$
18,611

Net income (loss)
 
1,439,271

 
(30,027
)
 
1,409,244

 
2,218

Net income reclassified to appropriated retained earnings
 
13,025

 
(13,025
)
 
—

 
 
Other comprehensive income
 
 
 
 
 
 
 
 
Net unrealized losses on investments, net of tax
 
(2,638
)
 
 
 
(2,638
)
 
 
Currency translation adjustments
 
(46,192
)
 
 
 
(46,192
)
 
 
Net unrealized losses on defined benefit plans, net of tax
 
(178
)
 
 
 
(178
)
 
 
Cash dividends on common stock
 
(609,238
)
 
 
 
(609,238
)
 
 
Repurchase of common stock
 
(698,821
)
 
 
 
(698,821
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 
 
 
138,880

 
138,880

 
58,978

Net deconsolidation of certain sponsored investment products
 
 
 
(117,378
)
 
(117,378
)
 
(50,095
)
Other 1
 
129,369

 
 
 
129,369

 
 
Balance at June 30, 2012
 
$
8,749,329

 
$
557,578

 
$
9,306,907

 
$
29,712

________________
1 
Primarily relates to stock-based compensation plans.
(in thousands)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the nine months ended June 30, 2011
 
 
 
 
Balance at October 1, 2010
 
$
7,726,994

 
$
3,452

 
$
7,730,446

 
$
19,533

Adjustment for adoption of new consolidation guidance
 
106,601

 
 
 
106,601

 
 
Net income (loss)
 
1,507,604

 
(44,029
)
 
1,463,575

 
307

Net loss reclassified to appropriated retained earnings
 
(46,294
)
 
46,294

 
—

 
 
Other comprehensive income
 
 
 
 
 
 
 
 
Net unrealized losses on investments, net of tax
 
(5,354
)
 
 
 
(5,354
)
 
 
Currency translation adjustments
 
63,096

 
 
 
63,096

 
 
Net unrealized gains on defined benefit plans, net of tax
 
232

 
 
 
232

 
 
Cash dividends on common stock
 
(166,856
)
 
 
 
(166,856
)
 
 
Repurchase of common stock
 
(617,103
)
 
 
 
(617,103
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 

 
70,471

 
70,471

 
16,995

Purchase of noncontrolling equity interest
 
(3,473
)
 
749

 
(2,724
)
 
 
Net deconsolidation of certain sponsored investment products
 
 
 
—

 
—

 
(1,674
)
Other 1
 
121,052

 
 
 
121,052

 
 
Balance at June 30, 2011
 
$
8,686,499

 
$
76,937

 
$
8,763,436

 
$
35,161

________________
1 
Primarily relates to stock-based compensation plans.

8


The components of comprehensive income, including amounts attributable to noncontrolling interests, were as follows:
(in thousands)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net income
 
$
429,952

 
$
478,200

 
$
1,411,462

 
$
1,463,882

Net unrealized gains (losses) on investments, net of tax
 
(20,309
)
 
7,678

 
(2,638
)
 
(5,354
)
Currency translation adjustments
 
(64,581
)
 
17,771

 
(46,192
)
 
63,096

Net unrealized gains (losses) on defined benefit plans, net of tax
 
—

 
—

 
(178
)
 
232

Total comprehensive income
 
345,062

 
503,649

 
1,362,454

 
1,521,856

Less: comprehensive income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
(24,209
)
 
(24,575
)
 
(30,027
)
 
(44,029
)
Redeemable noncontrolling interests
 
(1,106
)
 
(572
)
 
2,218

 
307

Total Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
370,377

 
$
528,796

 
$
1,390,263

 
$
1,565,578

During the three and nine months ended June 30, 2012, the Company repurchased approximately 2.7 million and 6.7 million shares of its common stock at a cost of $282.0 million and $698.8 million under its stock repurchase program. In December 2011, the Company’s Board of Directors authorized the repurchase of up to 10.0 million additional shares of its common stock under the stock repurchase program. At June 30, 2012, approximately 8.1 million shares of common stock remained available for repurchase under the stock repurchase program. During the three and nine months ended June 30, 2011, the Company repurchased 1.6 million and 5.1 million shares of its common stock at a cost of $203.6 million and $617.1 million. The stock repurchase program is not subject to an expiration date.
Note 4 – Earnings per Share
The components of basic and diluted earnings per share were as follows: 
(in thousands, except per share data)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net Income Attributable to Franklin Resources, Inc.
 
$
455,267

 
$
503,347

 
$
1,439,271

 
$
1,507,604

Less: Allocation of earnings to participating nonvested stock and stock unit awards
 
3,087

 
2,887

 
9,172

 
7,638

Net Income Available to Common Stockholders
 
$
452,180

 
$
500,460

 
$
1,430,099

 
$
1,499,966

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
213,097

 
220,313

 
214,592

 
221,731

Effect of dilutive common stock options and non-participating nonvested stock unit awards
 
544

 
971

 
622

 
1,077

Weighted-Average Shares Outstanding – Diluted
 
213,641

 
221,284

 
215,214

 
222,808

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
2.12

 
$
2.27

 
$
6.66

 
$
6.76

Diluted
 
2.12

 
2.26

 
6.65

 
6.73

Non-participating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive were 0.1 million for the three and nine months ended June 30, 2012, and nil for the three and nine months ended June 30, 2011.
Note 5 – Variable Interest Entities
The Company has interests in various types of variable interest entities (“VIEs”). It is the primary beneficiary of collateralized loan obligations (“CLOs”) and an auto loan securitization trust and therefore consolidates these VIEs. Other VIEs, for which the Company is not the primary beneficiary, primarily consist of certain sponsored and other investment products (collectively “other investment products”) from which the Company earns investment management and related services fees and/or has an equity ownership interest in the VIE.


9


Collateralized Loan Obligations
The Company provides collateral management services to the CLOs, which are asset-backed financing entities collateralized by a pool of assets.
The changes in fair values of the underlying assets and liabilities of the CLOs were as follows:
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
(in thousands)
 
2012
 
2011
 
2012
 
2011
Net gains from changes in fair value of assets
 
$
9,811

 
$
7,496

 
$
67,222

 
$
71,476

Net losses from changes in fair value of liabilities
 
(11,245
)
 
(32,717
)
 
(50,383
)
 
(111,598
)
Total net gains (losses)
 
$
(1,434
)
 
$
(25,221
)
 
$
16,839

 
$
(40,122
)
The following tables present the unpaid principal balance and fair value of investments, including investments 90 days or more past due, and long-term debt of the CLOs:
(in thousands)
 
Total Investments    
 
Investments
90 Days or More
Past Due
 
Long-term Debt    
as of June 30, 2012
 
 
 
Unpaid principal balance
 
$
849,387

 
$
8,306

 
$
937,222

Excess unpaid principal over fair value
 
(23,200
)
 
(6,276
)
 
(109,098
)
Fair value
 
$
826,187

 
$
2,030

 
$
828,124

(in thousands)
 
Total Investments    
 
Investments
90 Days or More
Past Due
 
Long-term Debt    
as of September 30, 2011
 
 
 
Unpaid principal balance
 
$
887,838

 
$
21,577

 
$
1,044,863

Excess unpaid principal over fair value
 
(65,226
)
 
(10,178
)
 
(173,636
)
Fair value
 
$
822,612

 
$
11,399

 
$
871,227

Automobile Loan Securitization Trusts
The Company retained certain interests in and servicing responsibilities for automobile loan securitization trusts (“securitization trusts”), which originated from securitization transactions between the Company and the securitization trusts in previous years. During the quarter ended March 31, 2012, the Company exercised its repurchase rights with respect to the outstanding loans in two of the three remaining securitization trusts and engaged a third party to solicit bids for these loans and related assets.
The following table provides details of the loans serviced by the Company that were held by the securitization trusts and the loans that were managed together with them:
(in thousands)
 
June 30,
2012
 
September 30,
2011
Principal amount of loans
 
 
 
 
Loans receivable of consolidated VIEs
 
$
57,922

 
$
155,071

Loans receivable
 
—

 
83,791

Loans held for sale
 
89,302

 
8,994

Total
 
$
147,224

 
$
247,856

Principal amount of loans 30 days or more past due
 
 
 
 
Loans receivable of consolidated VIEs
 
$
1,482

 
$
3,651

Loans receivable
 
—

 
1,721

Loans held for sale
 
2,110

 
8,994

Total
 
$
3,592

 
$
14,366

The Company had previously provided a guarantee to cover shortfalls for one of the securitization trusts in amounts due to the holders of the asset-backed securities if the shortfall exceeded cash on deposit. The guarantee is no longer in place due to the Company's repurchase of the outstanding loans of the related trust. The Company did not provide any additional financial or other

10


support to the securitization trusts or the holders of the asset-backed securities during fiscal year 2011 or the nine months ended June 30, 2012.
The original amount of loans serviced for the securitization trusts that were still in existence totaled $0.5 billion and $1.2 billion at June 30, 2012 and September 30, 2011. The securitization trusts had approximately 7,900 and 19,100 loans outstanding, with weighted-average annualized interest rates of 10.53% and 10.55% at June 30, 2012 and September 30, 2011.
Other Investment Products
The carrying values of the Company’s investment management and related service fees receivable from and the equity ownership interests in the other investment product VIEs as recorded in the Company’s condensed consolidated balance sheets are set forth below. These amounts represent the Company’s maximum exposure to loss from these investment products. 
(in thousands)
 
June 30,
2012
 
September 30,
2011
Current Assets
 
 
 
 
Receivables
 
$
36,692

 
$
42,218

Investment securities, available-for-sale
 
116,146

 
139,981

Investments in equity method investees and other
 
27,346

 
154

Total Current
 
180,184

 
182,353

Non-Current Assets
 
 
 
 
Investments in equity method investees and other
 
36,514

 
36,584

Total
 
$
216,698

 
$
218,937

The Company’s total assets under management (“AUM”) of the other investment products was $32.7 billion at June 30, 2012 and $36.1 billion at September 30, 2011.
While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored investment products. The Company also may voluntarily elect to provide its sponsored investment products with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its investment products during fiscal year 2011 or the nine months ended June 30, 2012.

11


Note 6 – Investments
Investments consisted of the following:
(in thousands)
 
June 30,
2012
 
September 30,
2011
Current
 
 
 
 
Investment securities, trading
 
$
1,019,226

 
$
889,686

Investment securities, available-for-sale
 
 
 
 
Sponsored investment products
 
553,863

 
925,711

Securities of U.S. states and political subdivisions
 
32,788

 
41,199

Securities of the U.S. Treasury and federal agencies
 
601

 
602

Other equity securities
 
15,665

 
23,464

Total investment securities, available-for-sale
 
602,917

 
990,976

Investments of consolidated VIEs, at fair value
 
—

 
10,994

Investments in equity method investees and other
 
69,049

 
21,861

Total Current
 
$
1,691,192

 
$
1,913,517

Banking/Finance
 
 
 
 
Investment securities, available-for-sale
 
 
 
 
Securities of U.S. states and political subdivisions
 
$
56

 
$
311

Securities of the U.S. Treasury and federal agencies
 
1,796

 
1,837

Corporate debt securities1
 
70,553

 
121,634

Mortgage-backed securities – agency residential2
 
185,468

 
221,611

Other equity securities
 
—

 
93

Total investment securities, available-for-sale
 
257,873

 
345,486

Total Banking/Finance
 
$
257,873

 
$
345,486

Non-Current
 
 
 
 
Investments of consolidated sponsored investment products
 
 
 
 
Debt securities
 
$
338,272

 
$
323,208

Equity securities
 
484,258

 
261,400

Total investments of consolidated sponsored investment products
 
822,530

 
584,608

Investments of consolidated VIEs, at fair value
 
826,187

 
811,618

Investments in equity method investees and other
 
477,181

 
535,509

Total Non-Current
 
$
2,125,898

 
$
1,931,735

________________
1 
Corporate debt securities are insured by the Federal Deposit Insurance Corporation or non-U.S. government agencies.
2 
Consists of U.S. government-sponsored enterprise obligations.
At June 30, 2012 and September 30, 2011, current investment securities, trading included $173.0 million and $361.1 million of investments held by sponsored investment products that were consolidated in the Company’s condensed consolidated financial statements.
At June 30, 2012 and September 30, 2011, banking/finance segment investment securities with aggregate carrying amounts of $131.7 million and $156.4 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank, and $49.9 million and $60.8 million were pledged as collateral for outstanding Federal Home Loan Bank (“FHLB”) borrowings and amounts available in secured FHLB short-term borrowing capacity (see Note 9 – Debt). In addition, investment management and related services segment securities with an aggregate carrying value of $6.5 million and $6.9 million were pledged as collateral primarily for financing arrangements at June 30, 2012 and September 30, 2011.

12


A summary of the gross unrealized gains and losses relating to investment securities, available-for-sale is as follows:
(in thousands)
 
 
 
Gross Unrealized
 
 
as of June 30, 2012
Cost Basis    
 
Gains        
 
Losses        
 
Fair Value    
Sponsored investment products
 
$
510,184

 
$
52,925

 
$
(9,246
)
 
$
553,863

Securities of U.S. states and political subdivisions
 
31,593

 
1,251

 
—

 
32,844

Securities of the U.S. Treasury and federal agencies
 
2,359

 
38

 
—

 
2,397

Corporate debt securities
 
70,000

 
553

 
—

 
70,553

Mortgage-backed securities – agency residential
 
180,984

 
4,484

 
—

 
185,468

Other equity securities
 
14,994

 
673

 
(2
)
 
15,665

Total
 
$
810,114

 
$
59,924

 
$
(9,248
)
 
$
860,790

(in thousands)
 
 
 
Gross Unrealized
 
 
as of September 30, 2011
Cost Basis
 
Gains
 
Losses
 
Fair Value
Sponsored investment products
 
$
877,632

 
$
78,013

 
$
(29,934
)
 
$
925,711

Securities of U.S. states and political subdivisions
 
39,950

 
1,560

 
—

 
41,510

Securities of the U.S. Treasury and federal agencies
 
2,423

 
16

 
—

 
2,439

Corporate debt securities
 
120,041

 
1,593

 
—

 
121,634

Mortgage-backed securities – agency residential
 
216,736

 
4,905

 
(30
)
 
221,611

Other equity securities
 
23,061

 
703

 
(207
)
 
23,557

Total
 
$
1,279,843

 
$
86,790

 
$
(30,171
)
 
$
1,336,462

The net unrealized holding gains (losses) on investment securities, available-for-sale included in accumulated other comprehensive income (loss) were $(23.0) million and $21.1 million for the three and nine months ended June 30, 2012, and $15.6 million and $43.6 million for the three and nine months ended June 30, 2011.
The following tables show the gross unrealized losses and fair values of investment securities, available-for-sale with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in thousands)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of June 30, 2012
 
 
 
 
 
Sponsored investment products
 
$
93,803

 
$
(9,147
)
 
$
829

 
$
(99
)
 
$
94,632

 
$
(9,246
)
Other equity securities
 
—

 
—

 
16

 
(2
)
 
16

 
(2
)
Total
 
$
93,803

 
$
(9,147
)
 
$
845

 
$
(101
)
 
$
94,648

 
$
(9,248
)

 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in thousands)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of September 30, 2011
 
 
 
 
 
Sponsored investment products
 
$
228,926

 
$
(29,731
)
 
$
4,658

 
$
(203
)
 
$
233,584

 
$
(29,934
)
Mortgage-backed securities – agency residential
 
18,305

 
(30
)
 
—

 
—

 
18,305

 
(30
)
Other equity securities
 
8

 
(1
)
 
4,116

 
(206
)
 
4,124

 
(207
)
Total
 
$
247,239

 
$
(29,762
)
 
$
8,774

 
$
(409
)
 
$
256,013

 
$
(30,171
)

The Company recognized $8.3 million of other-than-temporary impairment of investments for the three and nine months ended June 30, 2012, all of which related to available-for-sale equity securities. The Company did not recognize any other-than-temporary impairment of investments for the three months ended June 30, 2011. For the nine months ended June 30, 2011, the Company recognized $13.6 million of other-than-temporary impairment of investments of which $7.3 million related to available-for-sale equity securities and none related to available-for-sale debt securities.

13


At June 30, 2012, contractual maturities of available-for-sale debt securities were as follows: 
(in thousands)
 
Cost Basis  
 
Fair Value    
Due in one year or less
 
$
78,198

 
$
78,805

Due after one year through five years
 
16,352

 
17,024

Due after five years through ten years
 
22,743

 
24,547

Due after ten years
 
167,643

 
170,886

Total
 
$
284,936

 
$
291,262

Note 7 – Fair Value Measurements
The Company records the majority of its investments at fair value or amounts that approximate fair value. The tables below present the balances of assets and liabilities measured at fair value on a recurring basis. 
(in thousands)
 
Level 1      
 
Level 2      
 
Level 3      
 
Total        
as of June 30, 2012
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
—

 
$
42,363

 
$
—

 
$
42,363

Receivables of consolidated VIEs
 
—

 
21,119

 
—

 
21,119

Investment securities, trading
 
918,121

 
98,911

 
2,194

 
1,019,226

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored investment products
 
553,863

 
—

 
—

 
553,863

Securities of U.S. states and political subdivisions
 
—

 
32,788

 
—

 
32,788

Securities of the U.S. Treasury and federal agencies
 
—

 
601

 
—

 
601

Other equity securities
 
15,665

 
—

 
—

 
15,665

Investments of consolidated VIEs
 
—

 
—

 
—

 
—

Banking/Finance Assets
 
 
 
 
 
 
 
 
Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Securities of U.S. states and political subdivisions
 
—

 
56

 
—

 
56

Securities of the U.S. Treasury and federal agencies
 
—

 
1,796

 
—

 
1,796

Corporate debt securities
 
—

 
70,553

 
—

 
70,553

Mortgage-backed securities – agency residential
 
—

 
185,468

 
—

 
185,468

Non-Current Assets
 
 
 
 
 
 
 
 
Investments of consolidated sponsored investment products
 
 
 
 
 
 
 
 
Debt securities
 
—

 
—

 
338,272

 
338,272

Equity securities
 
9,393

 
—

 
474,865

 
484,258

Investments of consolidated VIEs
 
—

 
826,187

 
—

 
826,187

Life settlement contracts
 
—

 
—

 
11,915

 
11,915

Total Assets Measured at Fair Value
 
$
1,497,042

 
$
1,279,842

 
$
827,246

 
$
3,604,130

Current Liabilities
 
 
 
 
 
 
 
 
Current maturities of long-term debt of consolidated VIEs
 
$
—

 
$
—

 
$
290

 
$
290

Other liabilities of consolidated VIEs
 
—

 
29,566

 
—

 
29,566

Non-Current Liabilities
 
 
 
 
 
 
 
 
Long-term debt of consolidated VIEs
 
—

 
767,200

 
60,634

 
827,834

Total Liabilities Measured at Fair Value
 
$
—

 
$
796,766

 
$
60,924

 
$
857,690



14


(in thousands)
 
Level 1      
 
Level 2      
 
Level 3      
 
Total        
as of September 30, 2011
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
14,700

 
$
73,538

 
$
—

 
$
88,238

Receivables of consolidated VIEs
 
—

 
11,953

 
—

 
11,953

Investment securities, trading
 
579,225

 
279,308

 
31,153

 
889,686

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored investment products
 
925,711

 
—

 
—

 
925,711

Securities of U.S. states and political subdivisions
 
—

 
41,199

 
—

 
41,199

Securities of the U.S. Treasury and federal agencies
 
—

 
602

 
—

 
602

Other equity securities
 
19,365

 
4,099

 
—

 
23,464

Investments of consolidated VIEs
 
—

 
10,994

 
—

 
10,994

Banking/Finance Assets
 
 
 
 
 
 
 
 
Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Securities of U.S. states and political subdivisions
 
—

 
311

 
—

 
311

Securities of the U.S. Treasury and federal agencies
 
—

 
1,837

 
—

 
1,837

Corporate debt securities
 
—

 
121,634

 
—

 
121,634

Mortgage-backed securities – agency residential
 
—

 
221,611

 
—

 
221,611

Other equity securities
 
—

 
—

 
93

 
93

Non-Current Assets
 
 
 
 
 
 
 
 
Investments of consolidated sponsored investment products
 
 
 
 
 
 
 
 
Debt securities
 
—

 
—

 
323,208

 
323,208

Equity securities
 
7,084

 
92

 
254,224

 
261,400

Investments of consolidated VIEs
 
—

 
809,762

 
1,856

 
811,618

Life settlement contracts
 
—

 
—

 
10,813

 
10,813

Total Assets Measured at Fair Value
 
$
1,546,085

 
$
1,576,940

 
$
621,347

 
$
3,744,372

Current Liabilities
 
 
 
 
 
 
 
 
Current maturities of long-term debt of consolidated VIEs
 
$
—

 
$
—

 
$
24,858

 
$
24,858

Other liabilities of consolidated VIEs
 
—

 
32,315

 
—

 
32,315

Non-Current Liabilities
 
 
 
 
 
 
 
 
Long-term debt of consolidated VIEs
 
—

 
787,301

 
59,068

 
846,369

Total Liabilities Measured at Fair Value
 
$
—

 
$
819,616

 
$
83,926

 
$
903,542

Transfers into Level 1 from Level 2 were $1.1 million and $26.8 million during the three and nine months ended June 30, 2012, and transfers into Level 2 from Level 1 were nil and $0.9 million during the same periods. The securities that were transferred into Level 1 had adjustments to the quoted market prices for observable price movements within country-specific market proxies due to after hour trades or decreased liquidity of the market proxies, or were based on prices of comparable or similar securities because quoted market prices were not available, during the previous reporting periods but not in the current period. The securities that were transferred into Level 2 were valued based on prices of comparable or similar securities because quoted market prices were not available in the current period. There were no significant transfers between Level 1 and Level 2 during the three and nine months ended June 30, 2011.

15


The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
(in thousands)
 
Securities Held by
Consolidated Sponsored
Investment Products
 
Investments of
Consolidated
VIEs
 
Other
 
Total 
Level 3
Assets
 
Long-term
Debt of
Consolidated
VIEs
for the three months ended June 30, 2012
 
Debt
 
Equity
 
 
 
 
Balance at April 1, 2012
 
$
319,010

 
$
310,262

  
$
2,456

  
$
11,589

  
$
643,317

 
$
(65,265
)
Realized and unrealized gains (losses) included in investment and other income (losses), net
 
486

 
97

  
(227
)
  
520

  
876

 
4,341

Purchases
 
28,929

 
176,002

  
—

  
206

 
205,137

 
—

Sales
 
(4,154
)
 
(6,503
)
 
(1,332
)
 
—

 
(11,989
)
 
—

Settlements
 
(118
)
 
—

 
—

 
(400
)
 
(518
)
 
—

Transfers out of Level 3
 
—

 
—

 
(897
)
 
—

 
(897
)
 
—

Effect of exchange rate changes
 
(4,660
)
 
(4,020
)
  
—

  
—

  
(8,680
)
 
—

Balance at June 30, 2012
 
$
339,493

 
$
475,838

  
$
—

  
$
11,915

  
$
827,246

 
$
(60,924
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at June 30, 2012
 
$
2,007

 
$
(1,507
)
 
$
—