Form 10Q 12.31.2013
Table of Contents

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 December 31, 2013
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: 630,845,249 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of January 23, 2014.

Table of Contents


INDEX TO FORM 10-Q
 
 
Page
Financial Information
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
3

 
 
4

 
 
5

 
 
7

 
 
9

 
Item 2.
23

 
Item 3.
44

 
Item 4.
45

 
 
 
 
Other Information
 
 
Item 1.
46

 
Item 1A.
46

 
Item 2.
46

 
Item 6.
47

 
 
 
 
48

 


2
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Income
Unaudited
 
 
Three Months Ended
December 31,
(in millions, except per share data)
 
2013
 
2012
Operating Revenues
 
 
 
 
Investment management fees
 
$
1,373.8

 
$
1,199.9

Sales and distribution fees
 
636.7

 
604.1

Shareholder servicing fees
 
76.1

 
74.4

Other, net
 
22.9

 
23.4

Total operating revenues
 
2,109.5

 
1,901.8

Operating Expenses
 
 
 
 
Sales, distribution and marketing
 
776.7

 
730.9

Compensation and benefits
 
349.0

 
335.1

Information systems and technology
 
50.2

 
43.6

Occupancy
 
33.1

 
33.4

General, administrative and other
 
87.4

 
73.7

Total operating expenses
 
1,296.4

 
1,216.7

Operating Income
 
813.1

 
685.1

Other Income (Expenses)
 
 
 
 
Investment and other income, net
 
48.2

 
45.5

Interest expense
 
(12.6
)
 
(14.5
)
Other income, net
 
35.6

 
31.0

Income before taxes
 
848.7

 
716.1

Taxes on income
 
252.7

 
211.4

Net income
 
596.0

 
504.7

Less: Net income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
(17.2
)
 
(12.7
)
Redeemable noncontrolling interests
 
9.4

 
1.3

Net Income Attributable to Franklin Resources, Inc.
 
$
603.8

 
$
516.1

Earnings per Share
 
 
 
 
Basic
 
$
0.96

 
$
0.81

Diluted
 
0.96

 
0.81

Dividends per Share
 
$
0.120

 
$
1.097

See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
(in millions)
 
Three Months Ended
December 31,
 
2013
 
2012
Net Income
 
$
596.0

 
$
504.7

Other Comprehensive Income (Loss)
 
 
 
 
Net unrealized losses on investments, net of tax
 
(10.0
)
 
(2.1
)
Currency translation adjustments, net of tax
 
8.1

 
3.9

Net unrealized losses on defined benefit plans, net of tax
 
(1.3
)
 
—

Total comprehensive income
 
592.8

 
506.5

Less: Comprehensive income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
(17.2
)
 
(12.7
)
Redeemable noncontrolling interests
 
9.4

 
1.3

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
600.6

 
$
517.9

See Notes to Condensed Consolidated Financial Statements.

4
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
(in millions)
 
December 31,
2013
 
September 30,
2013
Assets
 
 
 
 
Cash and cash equivalents
 
$
6,552.2

 
$
6,186.0

Receivables
 
1,049.6

 
1,038.9

Investments (including $1,835.6 and $1,892.7 at fair value at December 31, 2013 and September 30, 2013)
 
2,480.4

 
2,439.2

Loans held for sale
 
189.2

 
—

Loans receivable, net
 
9.6

 
229.7

Assets of consolidated variable interest entities
 
 
 
 
Cash and cash equivalents
 
65.3

 
44.0

Investments, at fair value
 
908.8

 
941.1

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
82.2

 
93.1

Investments, at fair value
 
1,369.4

 
1,203.2

Deferred taxes
 
118.7

 
112.4

Property and equipment, net
 
559.4

 
564.1

Goodwill and other intangible assets, net
 
2,351.0

 
2,359.2

Other
 
173.5

 
179.4

Total Assets
 
$
15,909.3

 
$
15,390.3

Liabilities
 
 
 
 
Compensation and benefits
 
$
250.9

 
$
444.5

Accounts payable and accrued expenses
 
260.8

 
262.8

Commissions
 
454.1

 
437.7

Deposits
 
654.4

 
586.8

Income taxes
 
211.8

 
20.8

Debt
 
1,197.8

 
1,197.7

Liabilities of consolidated variable interest entities
 
 
 
 
Debt, at fair value
 
936.6

 
988.5

Other, at fair value
 
16.3

 
10.9

Liabilities of consolidated sponsored investment products
 
 
 
 
Debt
 
122.8

 
108.9

Other (including $36.8 and nil at fair value at December 31, 2013 and September 30, 2013)
 
45.3

 
8.5

Deferred taxes
 
271.6

 
272.5

Other
 
248.7

 
243.4

Total liabilities
 
4,671.1

 
4,583.0

Commitments and Contingencies (Note 9)
 

 

Redeemable Noncontrolling Interests
 
153.8

 
121.8

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

5
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
[Table continued from previous page]
(in millions)
 
December 31,
2013
 
September 30,
2013
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; 630,916,855 and 630,917,532 shares issued and outstanding at December 31, 2013 and September 30, 2013
 
63.1

 
63.1

Retained earnings
 
10,423.6

 
9,991.2

Appropriated retained earnings of consolidated variable interest entities
 
17.5

 
12.7

Accumulated other comprehensive income
 
2.9

 
6.1

Total Franklin Resources, Inc. stockholders’ equity
 
10,507.1

 
10,073.1

Nonredeemable noncontrolling interests
 
577.3

 
612.4

Total stockholders’ equity
 
11,084.4

 
10,685.5

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
15,909.3

 
$
15,390.3

See Notes to Condensed Consolidated Financial Statements.

6
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Three Months Ended
December 31,
(in millions)
 
2013
 
2012
Net Income
 
$
596.0

 
$
504.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
34.2

 
32.9

Depreciation and other amortization
 
25.1

 
21.0

Stock-based compensation
 
30.9

 
27.6

Excess tax benefit from stock-based compensation
 
(2.8
)
 
(5.7
)
Gains on sale of assets
 
(20.2
)
 
(20.6
)
Income from investments in equity method investees
 
(24.9
)
 
(21.8
)
Net (gains) losses on other investments of consolidated sponsored investment products
 
16.2

 
(14.1
)
Net (gains) losses of consolidated variable interest entities
 
(6.6
)
 
17.5

Other
 
(2.2
)
 
3.6

Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(126.2
)
 
(56.1
)
Increase in trading securities, net
 
(36.8
)
 
(66.4
)
Increase in trading securities of consolidated sponsored investment products, net
 
(230.4
)
 
(10.5
)
Decrease in accrued compensation and benefits
 
(193.9
)
 
(162.7
)
Increase (decrease) in commissions payable
 
16.4

 
(109.3
)
Increase in income taxes payable
 
194.5

 
149.4

Increase (decrease) in other liabilities
 
55.4

 
(3.1
)
Net cash provided by operating activities
 
324.7

 
286.4

Purchase of investments
 
(80.1
)
 
(78.4
)
Liquidation of investments
 
194.1

 
237.5

Purchase of investments by consolidated sponsored investment products
 
(95.2
)
 
(41.8
)
Liquidation of investments by consolidated sponsored investment products
 
32.1

 
48.6

Purchase of investments by consolidated variable interest entities
 
(45.0
)
 
(243.1
)
Liquidation of investments by consolidated variable interest entities
 
128.0

 
140.6

Decrease (increase) in loans receivable, net
 
30.9

 
(24.9
)
Additions of property and equipment, net
 
(15.0
)
 
(12.3
)
Acquisition of subsidiary, net of cash acquired
 
—

 
5.7

Increase (decrease) in cash from net consolidation (deconsolidation) of sponsored investment products
 
(34.0
)
 
2.6

Net cash provided by investing activities
 
115.8

 
34.5

Increase in deposits
 
66.5

 
213.5

Issuance of common stock
 
7.2

 
11.4

Dividends paid on common stock
 
(64.1
)
 
(757.9
)
Repurchase of common stock
 
(137.1
)
 
(98.0
)
Excess tax benefit from stock-based compensation
 
2.8

 
5.7

Payments on debt
 
—

 
(479.4
)
Proceeds from issuance of debt by consolidated sponsored investment products
 
190.3

 
133.5

Payments on debt by consolidated sponsored investment products
 
(176.8
)
 
(146.7
)
Payments on debt by consolidated variable interest entities
 
(60.0
)
 
(40.4
)
[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.

7
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
[Table continued from previous page]
 
 
Three Months Ended
December 31,
(in millions)
 
2013
 
2012
Payments on contingent consideration liability
 
$
(2.7
)
 
$
—

Noncontrolling interests
 
101.4

 
17.9

Net cash used in financing activities
 
(72.5
)
 
(1,140.4
)
Effect of exchange rate changes on cash and cash equivalents
 
8.6

 
10.8

Increase (decrease) in cash and cash equivalents
 
376.6

 
(808.7
)
Cash and cash equivalents, beginning of period
 
6,323.1

 
6,051.4

Cash and Cash Equivalents, End of Period
 
$
6,699.7

 
$
5,242.7

 
 
 
 
 
Supplemental Disclosure of Non-Cash Activities
 
 
 
 
Transfer of loans receivable, net to loans held for sale
 
$
189.2

 
$
—

Contingent consideration liability recognized due to acquisition
 
—

 
90.6

Increase in noncontrolling interests due to acquisition
 
—

 
38.2

Increase in noncontrolling interests due to net consolidation of sponsored investment products
 
—

 
4.1

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
68.0

 
$
61.6

Cash paid for interest
 
14.2

 
19.4

Cash paid for interest by consolidated sponsored investment products and consolidated variable interest entities
 
11.9

 
11.4

See Notes to Condensed Consolidated Financial Statements.

8
Table of Contents

FRANKLIN RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2013
(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 (“U.S. GAAP”) 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, 2013 (“fiscal year 2013”). 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 December 31, 2013.
Note 2 – New Accounting Guidance
On October 1, 2013, the Company adopted new Financial Accounting Standards Board guidance that requires an entity to report significant reclassifications out of accumulated other comprehensive income by component either on the face of the financial statements or in the notes. See Note 12 – Accumulated Other Comprehensive Income for the expanded disclosures.
Note 3 – Stockholders' Equity and Redeemable Noncontrolling Interests
The changes in total stockholders’ equity and redeemable noncontrolling interests were as follows:
(in millions)
 
Franklin
Resources,  Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the three months ended December 31, 2013
 
 
 
 
Balance at October 1, 2013
 
$
10,073.1

 
$
612.4

 
$
10,685.5

 
$
121.8

Net income (loss)
 
603.8

 
(17.2
)
 
586.6

 
9.4

Net income reclassified to appropriated retained earnings
 
4.8

 
(4.8
)
 
—

 
 
Other comprehensive loss
 
(3.2
)
 
 
 
(3.2
)
 
 
Cash dividends on common stock
 
(75.9
)
 
 
 
(75.9
)
 
 
Repurchase of common stock
 
(137.1
)
 
 
 
(137.1
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions (redemptions)
 
 
 
(13.1
)
 
(13.1
)
 
114.5

Net deconsolidation of sponsored investment products
 
 
 
—

 
—

 
(91.9
)
Other1
 
41.6

 
 
 
41.6

 
 
Balance at December 31, 2013
 
$
10,507.1

 
$
577.3

 
$
11,084.4

 
$
153.8

__________________ 
1 
Primarily relates to stock-based compensation plans.

9
Table of Contents

(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the three months ended December 31, 2012
 
 
 
 
Balance at October 1, 2012
 
$
9,201.3

 
$
559.2

 
$
9,760.5

 
$
26.7

Net income (loss)
 
516.1

 
(12.7
)
 
503.4

 
1.3

Net loss reclassified to appropriated retained earnings
 
(18.5
)
 
18.5

 
—

 
 
Other comprehensive income
 
1.8

 
 
 
1.8

 
 
Cash dividends on common stock
 
(702.0
)
 
 
 
(702.0
)
 
 
Repurchase of common stock
 
(98.0
)
 
 
 
(98.0
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 
 
 
12.5

 
12.5

 
5.4

Net consolidation of sponsored investment products
 
 
 
4.1

 
4.1

 
—

Acquisition
 
 
 
5.4

 
5.4

 
32.8

Other1
 
47.1

 
 
 
47.1

 
 
Balance at December 31, 2012
 
$
8,947.8

 
$
587.0

 
$
9,534.8

 
$
66.2

__________________ 
1 
Primarily relates to stock-based compensation plans.
During the three months ended December 31, 2013 and 2012, the Company repurchased 2.5 million and 2.2 million shares of its common stock at a cost of $137.1 million and $98.0 million under its stock repurchase program. In December 2013, the Company's Board of Directors authorized the repurchase of up to 30.0 million additional shares of its common stock under the stock repurchase program. At December 31, 2013, 38.7 million shares of common stock remained available for repurchase under the stock repurchase program, which 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 millions, except per share data)
 
Three Months Ended
December 31,
 
2013
 
2012
Net Income Attributable to Franklin Resources, Inc.
 
$
603.8

 
$
516.1

Less: Allocation of earnings to participating nonvested stock and stock unit awards
 
3.5

 
4.0

Net Income Available to Common Stockholders
 
$
600.3

 
$
512.1

 
 
 
 
 
Weighted-average shares outstanding – basic
 
628.1

 
634.5

Effect of dilutive common stock options and non-participating nonvested stock unit awards
 
0.4

 
0.9

Weighted-Average Shares Outstanding – Diluted
 
628.5

 
635.4

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
0.96

 
$
0.81

Diluted
 
0.96

 
0.81

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 and 0.5 million for the three months ended December 31, 2013 and 2012.

10
Table of Contents

Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated variable interest entities (“VIEs”) and consolidated sponsored investment products (“SIPs”). See Note 8 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions)
 
December 31,
2013
 
September 30,
2013
Investment securities, trading
 
$
1,235.2

 
$
1,196.7

Investment securities, available-for-sale
 
 
 
 
SIPs
 
466.7

 
534.6

Securities of U.S. states and political subdivisions
 
17.5

 
23.1

Securities of the U.S. Treasury and federal agencies
 
2.3

 
2.3

Mortgage-backed securities – agency residential1
 
92.9

 
110.9

Other equity securities
 
7.1

 
11.3

Total investment securities, available-for-sale
 
586.5

 
682.2

Investments in equity method investees
 
589.1

 
485.4

Other investments
 
69.6

 
74.9

Total
 
$
2,480.4

 
$
2,439.2

__________________ 
1 
Consist of U.S. government-sponsored enterprise obligations.
At December 31, 2013 and September 30, 2013, investment securities with aggregate carrying amounts of $71.5 million and $82.5 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank, $16.3 million and $28.4 million were pledged as collateral for amounts available in secured Federal Home Loan Bank (“FHLB”) short-term borrowing capacity, and $6.9 million and $7.1 million were pledged as collateral for the ability to borrow from uncommitted short-term bank lines of credit (see Note 7 - Debt).
A summary of the gross unrealized gains and losses relating to investment securities, available-for-sale is as follows:
(in millions)
 
 
 
Gross Unrealized
 
 
as of December 31, 2013
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
403.5

 
$
64.9

 
$
(1.7
)
 
$
466.7

Securities of U.S. states and political subdivisions
 
16.9

 
0.6

 
—

 
17.5

Securities of the U.S. Treasury and federal agencies
 
2.3

 
—

 
—

 
2.3

Mortgage-backed securities – agency residential
 
91.2

 
1.7

 
—

 
92.9

Other equity securities
 
6.6

 
0.5

 
—

 
7.1

Total
 
$
520.5

 
$
67.7

 
$
(1.7
)
 
$
586.5

(in millions)
 
 
 
Gross Unrealized
 
 
as of September 30, 2013
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
465.4

 
$
71.7

 
$
(2.5
)
 
$
534.6

Securities of U.S. states and political subdivisions
 
22.3

 
0.8

 
—

 
23.1

Securities of the U.S. Treasury and federal agencies
 
2.3

 
—

 
—

 
2.3

Mortgage-backed securities – agency residential
 
108.9

 
2.0

 
—

 
110.9

Other equity securities
 
10.9

 
0.4

 
—

 
11.3

Total
 
$
609.8

 
$
74.9

 
$
(2.5
)
 
$
682.2


11
Table of Contents

The following tables show the gross unrealized losses and fair values of available-for-sale securities 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 millions)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of December 31, 2013
 
 
 
 
 
SIPs
 
$
18.0

 
$
(1.6
)
 
$
1.4

 
$
(0.1
)
 
$
19.4

 
$
(1.7
)
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in millions)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of September 30, 2013
 
 
 
 
 
SIPs
 
$
50.3

 
$
(2.4
)
 
$
1.4

 
$
(0.1
)
 
$
51.7

 
$
(2.5
)

The Company recognized other-than-temporary impairment of available-for-sale SIPs in the amounts of $0.4 million and $0.3 million, and other-than-temporary impairment of other investments in the amounts of $0.2 million and nil for the three months ended December 31, 2013 and 2012.
At December 31, 2013, contractual maturities of available-for-sale debt securities were as follows: 
(in millions)
 
Cost Basis
 
Fair Value
Due in one year or less
 
$
5.1

 
$
5.3

Due after one year through five years
 
12.5

 
12.9

Due after five years through ten years
 
—

 
—

Due after ten years
 
1.6

 
1.6

Total
 
$
19.2

 
$
19.8

Mortgage-backed securities are not included in the table above as their actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Note 6 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated VIEs and consolidated SIPs. See Note 8 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. The three levels of fair value hierarchy are set forth below. The Company's assessment of the hierarchy level of the assets and liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
Observable inputs other than Level 1 quoted prices, such as non-binding quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or corroborated by observable market data. Level 2 quoted prices are generally obtained from two independent third-party brokers or dealers, including prices derived from model-based valuation techniques for which the significant assumptions are observable in the market or corroborated by observable market data. Quoted prices are validated through price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of third-party vendors.
 
 
Level 3
Unobservable inputs that are supported by little or no market activity. These inputs require significant management judgment and reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability.

12
Table of Contents

Assets and liabilities measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of December 31, 2013
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,161.0

 
$
74.2

 
$
—

 
$
1,235.2

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
466.7

 
—

 
—

 
466.7

Securities of U.S. states and political subdivisions
 
—

 
17.5

 
—

 
17.5

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

 
2.3

 
—

 
2.3

Mortgage-backed securities – agency residential
 
—

 
92.9

 
—

 
92.9

Other equity securities
 
2.3

 
4.8

 
—

 
7.1

Life settlement contracts
 
—

 
—

 
13.9

 
13.9

Total Assets Measured at Fair Value
 
$
1,630.0

 
$
191.7

 
$
13.9

 
$
1,835.6

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
—

 
$
—

 
$
101.2

 
$
101.2

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2013
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,121.5

 
$
75.2

 
$
—

 
$
1,196.7

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
534.6

 
—

 
—

 
534.6

Securities of U.S. states and political subdivisions
 
—

 
23.1

 
—

 
23.1

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

 
2.3

 
—

 
2.3

Mortgage-backed securities – agency residential
 
—

 
110.9

 
—

 
110.9

Other equity securities
 
11.3

 
—

 
—

 
11.3

Life settlement contracts
 
—

 
—

 
13.8

 
13.8

Total Assets Measured at Fair Value
 
$
1,667.4

 
$
211.5

 
$
13.8

 
$
1,892.7

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
—

 
$
—

 
$
97.7

 
$
97.7

The fair values of substantially all trading investments, all available-for-sale SIPs and certain other equity securities are determined based on their published net asset values. The fair values of certain trading investments, all available-for-sale debt securities and certain other equity securities are determined using quoted market prices, if available, or independent third-party broker or dealer price quotes, which are evaluated for reasonableness. The fair value of life settlement contracts is determined using a discounted cash flow valuation technique.
The fair value of contingent consideration liabilities is determined using an income-based method which considers the net present value of anticipated future cash flows. Substantially all of the balance relates to the Company's commitment to acquire the remaining interests in K2 Advisors Holdings, LLC. There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three months ended December 31, 2013 and 2012.

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Table of Contents

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
 
 
2013
 
2012
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
 
Contingent
Consideration
Liabilities
for the three months ended December 31,
 
 
 
 
Balance at beginning of period
 
$
13.8

 
$
(97.7
)
 
$
14.8

 
$
—

Acquisition
 
—

 
—

 
—

 
(90.6
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
0.7

 
—

 
0.4

 
—

Included in general, administrative and other expense
 
—

 
(5.9
)
 
—

 
(2.4
)
Other
 
—

 
(0.3
)
 
—

 
(0.3
)
Purchases
 
0.1

 
—

 
0.6

 
—

Sales
 
(0.7
)
 
—

 
(1.6
)
 
—

Settlements
 
—

 
2.7

 
(1.2
)
 
3.0

Balance at End of Period
 
$
13.9

 
$
(101.2
)
 
$
13.0

 
$
(90.3
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at period end
 
$
0.3

 
$
(6.2
)
 
$
0.4

 
$
(2.7
)
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2013
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
13.9

 
Discounted cash flow
 
Life expectancy
 
25–158 months (75)
Discount rate
 
3.3%–21.7% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
101.2

 
Discounted cash flow
 
AUM growth rate
 
6.0%–21.3% (14.2%)
EBITDA margin
 
28.2% - 43.2% (35.7%)
Discount rate
 
14.0%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2013
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
13.8

 
Discounted cash flow
 
Life expectancy
 
25–160 months (76)
Discount rate
 
3.3%–21.7% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
97.7

 
Discounted cash flow
 
AUM growth rate
 
6.0%–25.0% (14.6%)
EBITDA margin
 
26.4% - 38.9% (34.4%)
Discount rate
 
14.0%
For life settlement contracts, a significant increase (decrease) in the life expectancy or the discount rate in isolation would result in a significantly lower (higher) fair value measurement.
For contingent consideration liabilities, a significant increase (decrease) in the AUM growth rate or EBITDA margin, or decrease (increase) in the discount rate, in isolation would result in a significantly higher (lower) fair value measurement.

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Table of Contents

Financial instruments that were not measured at fair value were as follows:
(in millions)
 
 
 
December 31, 2013
 
September 30, 2013
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
6,552.2

 
$
6,552.2

 
$
6,186.0

 
$
6,186.0

Other investments1
 
2 or 3
 
55.7

 
64.3

 
61.1

 
69.2

Loans held for sale
 
2
 
189.2

 
189.7

 
—

 
—

Loans receivable, net
 
2
 
9.6

 
9.8

 
229.7

 
230.1

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
2
 
$
654.4

 
$
654.4

 
$
586.8

 
$
587.2

Debt
 
2
 
1,197.8

 
1,209.1

 
1,197.7

 
1,221.5

_________________
1     Primarily consist of Level 3 assets.
Note 7 – Debt
The disclosures below include details of the Company’s debt, excluding that of consolidated VIEs and consolidated SIPs. See Note 8 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the debt of these entities.
Debt consisted of the following:
(dollars in millions)
 
December 31, 2013
 
September 30, 2013
 
Effective
Interest Rate   
$250 million 3.125% notes due May 2015
 
$
249.9

 
$
249.9

 
3.32
%
$300 million 1.375% notes due September 2017
 
298.8

 
298.7

 
1.66
%
$350 million 4.625% notes due May 2020
 
349.7

 
349.7

 
4.74
%
$300 million 2.800% notes due September 2022
 
299.4

 
299.4

 
2.93
%
Total Debt
 
$
1,197.8

 
$
1,197.7

 
 
At December 31, 2013, the Company’s outstanding senior unsecured and unsubordinated notes had an aggregate face value of $1.2 billion. The notes have fixed interest rates with interest payable semi-annually and contain an optional redemption feature that allows the Company to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The indentures governing the notes contain limitations on the Company’s ability and the ability of its subsidiaries to pledge voting stock or profit participating equity interests in its subsidiaries to secure other debt without similarly securing the notes equally and ratably. The indentures also include requirements that must be met if the Company consolidates or merges with, or sells all or substantially all of its assets to, another entity. At December 31, 2013, the Company was in compliance with the covenants of the notes.
At December 31, 2013, maturities for debt were as follows: 
(in millions)
 
Amount
for the fiscal years ending September 30,
2014
 
$
—

2015
 
249.9

2016
 
—

2017
 
298.8

2018
 
—

Thereafter
 
649.1

Total
 
$
1,197.8

At December 31, 2013, the Company had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since April 2012, $260.0 million available in uncommitted short-term bank lines of credit under the Federal Reserve system, $70.0 million available through the secured Federal Reserve Bank short-term discount window, $15.5 million available in secured FHLB short-term borrowing capacity and $14.1 million available in uncommitted short-term bank lines of credit.

15
Table of Contents

Note 8 – Variable Interest Entities and Consolidated Sponsored Investment Products
The Company sponsors and manages various types of investment products, which consist of both VIEs and non-VIEs. The Company consolidates the VIE products for which it is the primary beneficiary and the non-VIE products which it controls. The Company has no right to the consolidated products' assets, other than its direct equity investment in them, and/or investment management fees earned from them. The debt holders of these consolidated entities have no recourse to the Company's assets beyond the level of its direct investment, therefore the Company bears no other risks associated with the entities' liabilities.
The balances of consolidated VIEs and consolidated SIPs included in the Company's condensed consolidated balance sheets were as follows:
 
 
December 31, 2013
 
September 30, 2013
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
VIEs
 
SIPs
 
Total
 
VIEs
 
SIPs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
65.3

 
$
82.2

 
$
147.5

 
$
44.0

 
$
93.1

 
$
137.1

Receivables
 
5.5

 
24.9

 
30.4

 
37.7

 
19.1

 
56.8

Investments, at fair value
 
908.8

 
1,369.4

 
2,278.2

 
941.1

 
1,203.2

 
2,144.3

Other assets
 
—

 
0.7

 
0.7

 
—

 
0.7

 
0.7

Total Assets
 
$
979.6

 
$
1,477.2

 
$
2,456.8

 
$
1,022.8

 
$
1,316.1

 
$
2,338.9

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
—

 
$
33.3

 
$
33.3

 
$
—

 
$
25.2

 
$
25.2

Debt, at fair value
 
936.6

 
—

 
936.6

 
988.5

 
—

 
988.5

Debt
 
—

 
122.8

 
122.8

 
—

 
108.9

 
108.9

Other liabilities
 
16.3

 
45.3

 
61.6

 
10.9

 
8.5

 
19.4

Total liabilities
 
952.9

 
201.4

 
1,154.3

 
999.4

 
142.6

 
1,142.0

Redeemable Noncontrolling Interests
 
—

 
153.8

 
153.8

 
—

 
121.8

 
121.8

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Franklin Resources, Inc.'s interests
 
26.7

 
560.4

 
587.1

 
23.4

 
454.8

 
478.2

Nonredeemable noncontrolling interests
 
—

 
561.6

 
561.6

 
—

 
596.9

 
596.9

Total stockholders' equity
 
26.7

 
1,122.0

 
1,148.7

 
23.4

 
1,051.7

 
1,075.1

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity
 
$
979.6

 
$
1,477.2

 
$
2,456.8

 
$
1,022.8

 
$
1,316.1

 
$
2,338.9

The consolidated VIEs and consolidated SIPs did not have a significant impact on net income attributable to the Company during the three months ended December 31, 2013 and 2012.
Consolidated VIEs
Consolidated VIEs consist of sponsored collateralized loan obligations (“CLOs”), which are asset-backed financing entities collateralized by a pool of corporate debt securities.
The assets and liabilities of the CLOs are carried at fair value. Changes in the fair values were as follows:
 
 
Three Months Ended
December 31,
(in millions)
 
2013
 
2012
Net gains from changes in fair value of assets
 
$
13.4

 
$
22.2

Net losses from changes in fair value of liabilities
 
(7.7
)
 
(41.3
)
Total Net Gains (Losses)
 
$
5.7

 
$
(19.1
)

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Table of Contents

The following tables present the unpaid principal balance and fair value of investments, including investments 90 days or more past due, and debt of the CLOs:
(in millions)
 
Total Investments
 
Investments
90 Days or More
Past Due
 
Debt
as of December 31, 2013
 
 
 
Unpaid principal balance
 
$
910.2

 
$
7.9

 
$
968.5

Difference between unpaid principal balance and fair value
 
(1.4
)
 
(7.7
)
 
(31.9
)
Fair Value
 
$
908.8

 
$
0.2

 
$
936.6

(in millions)
 
Total Investments
 
Investments
90 Days or More
Past Due
 
Debt
as of September 30, 2013
 
 
 
Unpaid principal balance
 
$
943.6

 
$
7.9

 
$
1,017.8

Difference between unpaid principal balance and fair value
 
(2.5
)
 
(7.7
)
 
(29.3
)
Fair Value
 
$
941.1

 
$
0.2

 
$
988.5

Consolidated SIPs
Consolidated SIPs consist of non-VIE limited partnerships and similar structures that the Company controls and other fund products in which the Company has a controlling financial interest. The Company consolidated 32 SIPs as of December 31, 2013, and 36 SIPs as of September 30, 2013. SIPs are typically consolidated when the Company makes an initial investment in a newly launched fund or limited partnership entity. They are deconsolidated when the Company redeems its investment in the SIP or its voting interests decrease to a minority percentage. The Company's investments in SIPs subsequent to deconsolidation are accounted for as trading or available-for-sale investment securities, or equity method or cost method investments depending on the nature of the SIP and the Company's level of ownership.
Investments
Investments of consolidated VIEs and consolidated SIPs consisted of the following:
 
 
December 31, 2013
 
September 30, 2013
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
VIEs
 
SIPs
 
Total
 
VIEs
 
SIPs
 
Total
Investment securities, trading
 
$
—

 
$
359.0

 
$
359.0

 
$
—

 
$
244.1

 
$
244.1

Other debt securities
 
908.8

 
254.4

 
1,163.2

 
941.1

 
272.3

 
1,213.4

Other equity securities
 
—

 
756.0

 
756.0

 
—

 
686.8

 
686.8

Total Investments
 
$
908.8

 
$
1,369.4

 
$
2,278.2

 
$
941.1

 
$
1,203.2

 
$
2,144.3

Investments of consolidated VIEs consist of corporate debt securities. Investment securities, trading held by consolidated SIPs consist of debt and equity securities that are traded in active markets. Other debt and equity securities held by consolidated SIPs primarily consist of direct investments in secured and unsecured debt securities and equity securities of entities in emerging markets, which are generally not traded in active markets. Other equity securities also include investments in funds that are not traded in active markets.
Debt
Debt of consolidated VIEs and consolidated SIPs consisted of the following:
 
 
December 31,
2013
 
Effective
Interest
Rate
 
September 30,
2013
 
Effective
Interest
Rate
(dollars in millions)
 
 
 
 
Debt of consolidated VIEs, at fair value, due fiscal years 2018-2024
 
$
936.6

 
1.34
%
 
$
988.5

 
1.32
%
Debt of consolidated SIPs due fiscal years 2014-2019
 
122.8

 
3.83
%
 
108.9

 
4.08
%
Total Debt
 
$
1,059.4

 
 
 
$
1,097.4

 
 
The debt of consolidated VIEs had floating interest rates ranging from 0.47% to 9.75% at December 31, 2013, and from 0.50% to 9.77% at September 30, 2013.

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Table of Contents

The debt of consolidated SIPs had both fixed and floating interest rates ranging from 2.30% to 5.83% at December 31, 2013, and from 2.45% to 5.83% at September 30, 2013. The repayment of amounts outstanding under the debt agreements is secured by the assets of the consolidated SIPs or a pledge of the right to call capital.
At December 31, 2013, contractual maturities for debt of consolidated VIEs and consolidated SIPs were as follows: 
(in millions)
 
 
for the fiscal years ending September 30,
2014
 
$
55.9

2015
 
—

2016
 
—

2017
 
27.8

2018
 
321.5

Thereafter
 
654.2

Total
 
$
1,059.4

Fair Value Measurements
The tables below present the balances of assets and liabilities of consolidated VIEs and consolidated SIPs measured at fair value on a recurring basis. See Note 6 – Fair Value Measurements for information related to the three levels of fair value hierarchy.
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of December 31, 2013
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
65.3

 
$
—

 
$
—

 
$
65.3

Receivables of consolidated VIEs
 
—

 
5.5

 
—

 
5.5

Investments of consolidated VIEs
 
—

 
908.3

 
0.5

 
908.8

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Debt securities
 
0.8

 
122.0

 
254.4

 
377.2

Equity securities
 
217.9

 
271.7

 
502.6

 
992.2

Total Assets Measured at Fair Value
 
$
284.0

 
$
1,307.5

 
$
757.5

 
$
2,349.0

Liabilities
 
 
 
 
 
 
 
 
Debt of consolidated VIEs
 
$
—

 
$
884.4

 
$
52.2

 
$
936.6

Other liabilities of consolidated VIEs
 
—

 
16.3

 
—

 
16.3

Other liabilities of consolidated SIPs
 
17.5

 
19.3

 
—

 
36.8

Total Liabilities Measured at Fair Value
 
$
17.5

 
$
920.0

 
$
52.2

 
$
989.7

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2013
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
44.0

 
$
—

 
$
—

 
$
44.0

Receivables of consolidated VIEs
 
—

 
37.7

 
—

 
37.7

Investments of consolidated VIEs
 
—

 
940.6

 
0.5

 
941.1

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Debt securities
 
4.5

 
83.8

 
272.3

 
360.6

Equity securities
 
158.1

 
213.6

 
470.9

 
842.6

Total Assets Measured at Fair Value
 
$
206.6

 
$
1,275.7

 
$
743.7

 
$
2,226.0

Liabilities
 
 
 
 
 
 
 
 
Debt of consolidated VIEs
 
$
—

 
$
928.8

 
$
59.7

 
$
988.5

Other liabilities of consolidated VIEs
 
—

 
10.9

 
—

 
10.9

Total Liabilities Measured at Fair Value
 
$
—

 
$
939.7

 
$
59.7

 
$
999.4

The fair value of cash and cash equivalents of consolidated VIEs is based on quoted market prices. The fair values of the other assets and liabilities of consolidated VIEs are primarily obtained from independent third-party broker or dealer price quotes.

18
Table of Contents

The fair value of a portion of the debt of consolidated VIEs is determined using significant unobservable inputs in a market-based approach.
Investments of consolidated SIPs consist of trading securities and other investments that are not generally traded in active markets. The fair value of the trading securities is determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available. The fair value of debt and equity securities not traded in active markets, other than fund products, is determined using significant unobservable inputs in either a market-based or income-based approach. The fair value of fund products not traded in active markets is determined using net asset value (“NAV”) as a practical expedient.
Other liabilities of consolidated SIPs consist primarily of short positions in debt and equity securities and are measured at fair value. The fair value of the liabilities is determined based on the fair value of the underlying securities using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices securities are not available. 
The investments in fund products for which fair value was estimated using NAV as a practical expedient consisted of the following:
(in millions)
 
Redemption Frequency
 
Fair Value Level
 
December 31,
2013
 
September 30,
2013
Hedge funds
 
Monthly or quarterly
 
2
 
$
22.3

 
$
6.6

Global fixed-income fund
 
Monthly
 
2
 
227.6

 
191.8

Hedge funds
 
Annually or triennially
 
3
 
2.1

 
1.5

Real estate and private equity funds
 
Nonredeemable
 
3
 
255.3

 
242.1

Total
 
 
 

 
$
507.3

 
$
442.0

The investments in real estate and private equity funds are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over a weighted-average period of 4.5 years and 4.7 years at December 31, 2013 and September 30, 2013. The consolidated SIPs' unfunded commitments to these funds totaled $148.6 million and $135.5 million at December 31, 2013 and September 30, 2013, of which the Company was contractually obligated to fund $3.5 million and $2.8 million based on its ownership percentage in the SIPs.
Transfers into Level 2 from Level 1 were nil and $47.0 million, and transfers into Level 1 from Level 2 were $0.1 million and nil during the three months ended December 31, 2013 and 2012. The transfers into Level 2 from Level 1 during the prior year consisted of securities for which the quoted market prices were adjusted as of December 31, 2012 due to significant price changes in U.S.-traded market proxies resulting from the resolution of U.S. fiscal cliff negotiations. The impacted securities trade in 16 different countries in Europe, Asia and Latin America. The adjustments were made after the close of the foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. The transfers into Level 1 from Level 2 were securities that were valued using unadjusted quoted market prices.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
(in millions)
 
Investments of
Consolidated
VIEs
 
Investments of
Consolidated SIPs
 
Total 
Level 3
Assets
 
Debt of
Consolidated
VIEs
for the three months ended December 31, 2013
 
 
Debt
 
Equity
 
 
Balance at October 1, 2013
 
$
0.5

 
$
272.3

 
$
470.9

  
$
743.7

 
$
(59.7
)
Realized and unrealized gains (losses) included in investment and other income, net
 
—

 
(27.7
)
 
(3.7
)
  
(31.4
)
 
7.5

Purchases
 
—

 
22.2

 
50.2

  
72.4

 
—

Sales
 
—

 
(13.9
)
 
(15.6
)
 
(29.5
)
 
—

Effect of exchange rate changes
 
—

 
1.5

 
0.8

  
2.3

 
—

Balance at December 31, 2013