Form 10Q 12.31.2014
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, 2014
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: 621,826,792 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of January 23, 2015.

Table of Contents


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

 
 
4

 
 
5

 
 
6

 
 
8

 
Item 2.
22

 
Item 3.
43

 
Item 4.
44

 
 
 
 
Other Information
 
 
Item 1.
45

 
Item 1A.
45

 
Item 2.
45

 
Item 6.
46

 
 
 
 
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)
 
2014
 
2013
Operating Revenues
 
 
 
 
Investment management fees
 
$
1,382.4

 
$
1,373.8

Sales and distribution fees
 
595.0

 
636.7

Shareholder servicing fees
 
65.8

 
76.1

Other
 
21.1

 
22.9

Total operating revenues
 
2,064.3

 
2,109.5

Operating Expenses
 
 
 
 
Sales, distribution and marketing
 
731.5

 
776.7

Compensation and benefits
 
375.5

 
349.0

Information systems and technology
 
51.2

 
50.2

Occupancy
 
34.3

 
33.1

General, administrative and other
 
89.8

 
87.4

Total operating expenses
 
1,282.3

 
1,296.4

Operating Income
 
782.0

 
813.1

Other Income (Expenses)
 
 
 
 
Investment and other income, net
 
51.7

 
48.2

Interest expense
 
(11.3
)
 
(12.6
)
Other income, net
 
40.4

 
35.6

Income before taxes
 
822.4

 
848.7

Taxes on income
 
256.1

 
252.7

Net income
 
566.3

 
596.0

Less: Net income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
6.7

 
(17.2
)
Redeemable noncontrolling interests
 
(6.8
)
 
9.4

Net Income Attributable to Franklin Resources, Inc.
 
$
566.4

 
$
603.8

Earnings per Share
 
 
 
 
Basic
 
$
0.91

 
$
0.96

Diluted
 
0.91

 
0.96

Dividends per Share
 
$
0.65

 
$
0.12








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,
 
2014
 
2013
Net Income
 
$
566.3

 
$
596.0

Other Comprehensive Income (Loss)
 
 
 
 
Net unrealized losses on investments, net of tax
 
(0.2
)
 
(10.0
)
Currency translation adjustments, net of tax
 
(61.5
)
 
8.1

Net unrealized gains (losses) on defined benefit plans, net of tax
 
1.0

 
(1.3
)
Total other comprehensive loss
 
(60.7
)
 
(3.2
)
Total comprehensive income
 
505.6

 
592.8

Less: Comprehensive income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
6.7

 
(17.2
)
Redeemable noncontrolling interests
 
(6.8
)
 
9.4

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
505.7

 
$
600.6






















See Notes to Condensed Consolidated Financial Statements.

4
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
(in millions, except share and per share data)
 
December 31,
2014
 
September 30,
2014
Assets
 
 
 
 
Cash and cash equivalents
 
$
7,758.0

 
$
7,476.8

Receivables
 
926.7

 
950.0

Investments (including $1,859.4 and $1,845.6 at fair value at December 31, 2014 and September 30, 2014)
 
2,653.1

 
2,516.1

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
60.6

 
44.9

Investments, at fair value
 
996.8

 
1,373.7

Assets of consolidated variable interest entities
 
 
 
 
Cash and cash equivalents
 
66.6

 
74.3

Investments, at fair value
 
754.1

 
788.4

Deferred taxes, net
 
77.6

 
98.1

Property and equipment, net
 
523.4

 
530.7

Goodwill and other intangible assets, net
 
2,307.9

 
2,325.9

Other
 
172.0

 
178.2

Total Assets
 
$
16,296.8

 
$
16,357.1

Liabilities
 
 
 
 
Compensation and benefits
 
$
238.9

 
$
465.1

Accounts payable and accrued expenses
 
194.2

 
237.5

Dividends
 
406.7

 
76.9

Commissions
 
419.4

 
440.3

Income taxes
 
192.6

 
23.4

Debt
 
1,198.3

 
1,198.2

Debt of consolidated sponsored investment products
 
105.7

 
122.3

Debt of consolidated variable interest entities (at fair value at September 30, 2014)
 
795.5

 
828.5

Deferred taxes
 
259.7

 
259.3

Other
 
257.3

 
258.4

Total liabilities
 
4,068.3

 
3,909.9

Commitments and Contingencies (Note 9)
 

 

Redeemable Noncontrolling Interests
 
74.0

 
234.8

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; 622,426,648 and 622,893,090 shares issued and outstanding at December 31, 2014 and September 30, 2014
 
62.2

 
62.3

Retained earnings
 
11,672.0

 
11,625.6

Appropriated retained earnings of consolidated variable interest entities
 
—

 
13.9

Accumulated other comprehensive loss
 
(178.4
)
 
(117.7
)
Total Franklin Resources, Inc. stockholders’ equity
 
11,555.8

 
11,584.1

Nonredeemable noncontrolling interests
 
598.7

 
628.3

Total stockholders’ equity
 
12,154.5

 
12,212.4

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
16,296.8

 
$
16,357.1

See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Three Months Ended
December 31,
(in millions)
 
2014
 
2013
Net Income
 
$
566.3

 
$
596.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
30.2

 
34.2

Depreciation and other amortization
 
24.9

 
25.1

Stock-based compensation
 
35.4

 
30.9

Excess tax benefit from stock-based compensation
 
(1.9
)
 
(2.8
)
Gains on sale of assets
 
(9.5
)
 
(20.2
)
Income from investments in equity method investees
 
(6.7
)
 
(24.9
)
Net (gains) losses on other investments of consolidated sponsored investment products
 
(5.9
)
 
16.2

Net gains of consolidated variable interest entities
 
(1.6
)
 
(6.6
)
Deferred income taxes
 
23.8

 
(10.4
)
Other
 
10.5

 
8.2

Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(6.7
)
 
(126.2
)
Decrease (increase) in trading securities, net
 
5.2

 
(36.8
)
Decrease (increase) in trading securities of consolidated sponsored investment products, net
 
16.0

 
(230.4
)
Decrease in accrued compensation and benefits
 
(220.6
)
 
(193.9
)
Increase (decrease) in commissions payable
 
(20.9
)
 
16.4

Increase in income taxes payable
 
171.7

 
194.5

Increase (decrease) in other liabilities
 
(37.8
)
 
55.4

Net cash provided by operating activities
 
572.4

 
324.7

Purchase of investments
 
(71.7
)
 
(80.1
)
Liquidation of investments
 
69.4

 
194.1

Purchase of investments by consolidated sponsored investment products
 
(51.5
)
 
(95.2
)
Liquidation of investments by consolidated sponsored investment products
 
122.5

 
32.1

Purchase of investments by consolidated variable interest entities
 
(88.8
)
 
(45.0
)
Liquidation of investments by consolidated variable interest entities
 
126.8

 
128.0

Decrease in loans receivable, net
 
—

 
30.9

Additions of property and equipment, net
 
(16.1
)
 
(15.0
)
Decrease in cash and cash equivalents from net deconsolidation of sponsored investment products
 
(0.1
)
 
(34.0
)
Net cash provided by investing activities
 
90.5

 
115.8

Increase (decrease) in deposits
 
(0.3
)
 
66.5

Issuance of common stock
 
—

 
7.2

Dividends paid on common stock
 
(75.8
)
 
(64.1
)
Repurchase of common stock
 
(151.2
)
 
(137.1
)
Excess tax benefit from stock-based compensation
 
1.9

 
2.8

Proceeds from issuance of debt by consolidated sponsored investment products
 
218.5

 
190.3

Payments on debt by consolidated sponsored investment products
 
(234.5
)
 
(176.8
)
Payments on debt by consolidated variable interest entities
 
(44.1
)
 
(60.0
)
Payments on contingent consideration liabilities
 
(7.1
)
 
(2.7
)
[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.

6
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)
 
2014
 
2013
Noncontrolling interests
 
(35.3
)
 
101.4

Net cash used in financing activities
 
(327.9
)
 
(72.5
)
Effect of exchange rate changes on cash and cash equivalents
 
(45.8
)
 
8.6

Increase in cash and cash equivalents
 
289.2

 
376.6

Cash and cash equivalents, beginning of period
 
7,596.0

 
6,323.1

Cash and Cash Equivalents, End of Period
 
$
7,885.2

 
$
6,699.7

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
57.0

 
$
68.0

Cash paid for interest
 
12.9

 
14.2

Cash paid for interest by consolidated variable interest entities and consolidated sponsored investment products
 
9.0

 
11.9





















See Notes to Condensed Consolidated Financial Statements.

7
Table of Contents

FRANKLIN RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2014
(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, 2014 (“fiscal year 2014”). 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, 2014.
Note 2 – New Accounting Guidance
On October 1, 2014, the Company adopted new Financial Accounting Standards Board guidance that provides an entity the election to measure the financial assets and financial liabilities of a consolidated collateralized financing entity using the more observable fair value of either the financial assets or financial liabilities, and elected this measurement alternative for its consolidated collateralized loan obligations (“CLOs”). The adoption resulted in a $14.2 million increase in debt of consolidated variable interest entities (“VIEs”), a $13.9 million reduction in appropriated retained earnings of consolidated VIEs and a $0.3 million reduction in retained earnings as of October 1, 2014. The Company’s subsequent earnings from the consolidated CLOs reflect changes in fair value of its own economic interests in the CLOs, and no longer include gains or losses on assets and liabilities of the CLOs, which were primarily attributable to noncontrolling interests.
There were no significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for fiscal year 2014.
Note 3 – Stockholders’ Equity
The changes in total stockholders’ equity were as follows:
(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the three months ended December 31, 2014
 
 
 
Balance at October 1, 2014
 
$
11,584.1

 
$
628.3

 
$
12,212.4

Adjustment for adoption of new accounting guidance
 
(14.2
)
 
 
 
(14.2
)
Net income
 
566.4

 
6.7

 
573.1

Other comprehensive loss
 
(60.7
)
 
 
 
(60.7
)
Cash dividends on common stock
 
(405.6
)
 
 
 
(405.6
)
Repurchase of common stock
 
(151.2
)
 
 
 
(151.2
)
Net distributions
 
 
 
(36.3
)
 
(36.3
)
Other1
 
37.0

 
 
 
37.0

Balance at December 31, 2014
 
$
11,555.8

 
$
598.7

 
$
12,154.5

__________________ 
1 
Primarily relates to stock-based compensation plans.

8
Table of Contents

(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the three months ended December 31, 2013
 
 
 
Balance at October 1, 2013
 
$
10,073.1

 
$
612.4

 
$
10,685.5

Net income (loss)
 
603.8

 
(17.2
)
 
586.6

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
)
Net distributions
 
 
 
(13.1
)
 
(13.1
)
Other1
 
41.6

 
 
 
41.6

Balance at December 31, 2013
 
$
10,507.1

 
$
577.3

 
$
11,084.4

__________________ 
1 
Primarily relates to stock-based compensation plans.
During the three months ended December 31, 2014 and 2013, the Company repurchased 2.7 million and 2.5 million shares of its common stock at a cost of $151.2 million and $137.1 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, 2014, 27.1 million shares remained available for repurchase under the 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,
 
2014
 
2013
Net Income Attributable to Franklin Resources, Inc.
 
$
566.4

 
$
603.8

Less: Allocation of earnings to participating nonvested stock and stock unit awards
 
3.6

 
3.5

Net Income Available to Common Stockholders
 
$
562.8

 
$
600.3

 
 
 
 
 
Weighted-average shares outstanding – basic
 
620.1

 
628.1

Effect of non-participating nonvested stock unit awards and dilutive common stock options
 
0.1

 
0.4

Weighted-Average Shares Outstanding – Diluted
 
620.2

 
628.5

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
0.91

 
$
0.96

Diluted
 
0.91

 
0.96

Non-participating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive were 0.6 million and 0.1 million for the three months ended December 31, 2014 and 2013.

9
Table of Contents

Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated sponsored investment products (“SIPs”) and consolidated VIEs. 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,
2014
 
September 30,
2014
Investment securities, trading
 
$
1,270.4

 
$
1,277.5

Investment securities, available-for-sale
 
 
 
 
SIPs
 
541.9

 
517.6

Securities of U.S. states and political subdivisions
 
8.7

 
11.3

Securities of the U.S. Treasury and federal agencies
 
0.7

 
0.7

Mortgage-backed securities – agency residential1
 
17.2

 
17.9

Other equity securities
 
6.3

 
6.6

Total investment securities, available-for-sale
 
574.8

 
554.1

Investments in equity method investees
 
652.1

 
594.9

Other investments
 
155.8

 
89.6

Total
 
$
2,653.1

 
$
2,516.1

__________________ 
1 
Consist of U.S. government-sponsored enterprise obligations.
At December 31, 2014 and September 30, 2014, investment securities with aggregate carrying amounts of $5.7 million and $6.1 million were pledged as collateral.
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, 2014
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
504.4

 
$
41.9

 
$
(4.4
)
 
$
541.9

Securities of U.S. states and political subdivisions
 
8.5

 
0.2

 
—

 
8.7

Securities of the U.S. Treasury and federal agencies
 
0.7

 
—

 
—

 
0.7

Mortgage-backed securities – agency residential
 
17.1

 
0.1

 
—

 
17.2

Other equity securities
 
5.6

 
0.7

 
—

 
6.3

Total
 
$
536.3

 
$
42.9

 
$
(4.4
)
 
$
574.8

(in millions)
 
 
 
Gross Unrealized
 
 
as of September 30, 2014
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
477.0

 
$
43.5

 
$
(2.9
)
 
$
517.6

Securities of U.S. states and political subdivisions
 
11.0

 
0.3

 
—

 
11.3

Securities of the U.S. Treasury and federal agencies
 
0.7

 
—

 
—

 
0.7

Mortgage-backed securities – agency residential
 
18.0

 
—

 
(0.1
)
 
17.9

Other equity securities
 
6.3

 
0.3

 
—

 
6.6

Total
 
$
513.0

 
$
44.1

 
$
(3.0
)
 
$
554.1

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, 2014
 
 
 
 
 
SIPs
 
$
112.1

 
$
(4.2
)
 
$
1.7

 
$
(0.2
)
 
$
113.8

 
$
(4.4
)


10
Table of Contents

 
 
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, 2014
 
 
 
 
 
SIPs
 
$
156.4

 
$
(2.7
)
 
$
1.5

 
$
(0.2
)
 
$
157.9

 
$
(2.9
)
Mortgage-backed securities – agency residential

 
4.0

 
—

 
11.6

 
(0.1
)
 
15.6

 
(0.1
)
Total
 
$
160.4

 
$
(2.7
)
 
$
13.1

 
$
(0.3
)
 
$
173.5

 
$
(3.0
)
The Company recognized $1.0 million and $0.6 million of other-than-temporary impairment during the three months ended December 31, 2014 and 2013, all of which related to available-for-sale SIPs, except for $0.2 million related to other investments during the 2013 period.
At December 31, 2014, contractual maturities of available-for-sale debt securities were as follows: 
(in millions)
 
Cost Basis
 
Fair Value
Due in one year or less
 
$
2.6

 
$
2.6

Due after one year through five years
 
6.6

 
6.8

Total
 
$
9.2

 
$
9.4

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 SIPs and consolidated VIEs. 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.

11
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, 2014
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,189.1

 
$
81.3

 
$
—

 
$
1,270.4

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
541.9

 
—

 
—

 
541.9

Securities of U.S. states and political subdivisions
 
—

 
8.7

 
—

 
8.7

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

 
0.7

 
—

 
0.7

Mortgage-backed securities – agency residential
 
—

 
17.2

 
—

 
17.2

Other equity securities
 
1.2

 
5.1

 
—

 
6.3

Life settlement contracts
 
—

 
—

 
14.2

 
14.2

Total Assets Measured at Fair Value
 
$
1,732.2

 
$
113.0

 
$
14.2

 
$
1,859.4

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
—

 
$
—

 
$
100.7

 
$
100.7

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2014
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,196.1

 
$
81.4

 
$
—

 
$
1,277.5

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
517.6

 
—

 
—

 
517.6

Securities of U.S. states and political subdivisions
 
—

 
11.3

 
—

 
11.3

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

 
0.7

 
—

 
0.7

Mortgage-backed securities – agency residential
 
—

 
17.9

 
—

 
17.9

Other equity securities
 
1.7

 
4.9

 
—

 
6.6

Life settlement contracts
 
—

 
—

 
14.0

 
14.0

Total Assets Measured at Fair Value
 
$
1,715.4

 
$
116.2

 
$
14.0

 
$
1,845.6

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
—

 
$
—

 
$
98.5

 
$
98.5

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, 2014 and 2013.

12
Table of Contents

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
 
 
2014
 
2013
(in millions)
 
Life Settlement Contracts
 
Contingent
Consideration
Liabilities
 
Life Settlement Contracts
 
Contingent
Consideration
Liabilities
for the three months ended December 31,
 
 
 
 
Balance at beginning of period
 
$
14.0

 
$
(98.5
)
 
$
13.8

 
$
(97.7
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
0.6

 
—

 
0.7

 
—

Included in general, administrative and other expense
 
—

 
(9.4
)
 
—

 
(5.9
)
Other
 
—

 
(0.1
)
 
—

 
(0.3
)
Purchases
 
0.1

 
—

 
0.1

 
—

Sales
 
—

 
—

 
(0.7
)
 
—

Settlements
 
(0.5
)
 
7.1

 
—

 
2.7

Effect of exchange rate changes
 
—

 
0.2

 
—

 
—

Balance at End of Period
 
$
14.2

 
$
(100.7
)
 
$
13.9

 
$
(101.2
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
0.3

 
$
(9.5
)
 
$
0.3

 
$
(6.2
)
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2014
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
14.2

 
Discounted cash flow
 
Life expectancy
 
22–148 months (71)
Discount rate
 
3.3%–19.0% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
100.7

 
Discounted cash flow
 
AUM growth rate
 
2.9%–19.8% (11.3%)
EBITDA margin
 
21.7% - 29.6% (28.0%)
Discount rate
 
14.0%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2014
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
14.0

 
Discounted cash flow
 
Life expectancy
 
23–150 months (71)
Discount rate
 
3.3%–21.7% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
98.5

 
Discounted cash flow
 
AUM growth rate
 
3.4%–20.2% (12.8%)
EBITDA margin
 
21.9%–30.4% (28.2%)
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.
Financial instruments that were not measured at fair value were as follows:
(in millions)
 
 
 
December 31, 2014
 
September 30, 2014
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
7,758.0

 
$
7,758.0

 
$
7,476.8

 
$
7,476.8

Other investments1
 
2 or 3
 
141.6

 
150.4

 
75.6

 
87.8

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt
 
2
 
1,198.3

 
1,239.5

 
1,198.2

 
1,235.8

_________________
1     Primarily consist of Level 3 assets.

13
Table of Contents

Note 7 – Debt
The disclosures below include details of the Company’s debt, excluding that of consolidated SIPs and consolidated VIEs. 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:
(in millions)
 
December 31,
2014
 
September 30, 2014
 
Effective
Interest Rate   
$250 million 3.125% notes due May 2015
 
$
250.0

 
$
250.0

 
3.32
%
$300 million 1.375% notes due September 2017
 
299.1

 
299.0

 
1.66
%
$350 million 4.625% notes due May 2020
 
349.8

 
349.8

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

 
299.4

 
2.93
%
Total Debt
 
$
1,198.3

 
$
1,198.2

 
 
At December 31, 2014, 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, 2014, the Company was in compliance with the covenants of the notes.
At December 31, 2014, maturities for debt were as follows: 
(in millions)
 
Amount
for the fiscal years ending September 30,
2015
 
$
250.0

2016
 
—

2017
 
299.1

2018
 
—

2019
 
—

Thereafter
 
649.2

Total
 
$
1,198.3

At December 31, 2014, 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.
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.

14
Table of Contents

The balances of consolidated SIPS and consolidated VIEs included in the Company’s condensed consolidated balance sheets were as follows:
 
 
December 31, 2014
 
September 30, 2014
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
60.6

 
$
66.6

 
$
127.2

 
$
44.9

 
$
74.3

 
$
119.2

Receivables
 
14.6

 
9.0

 
23.6

 
16.2

 
23.0

 
39.2

Investments, at fair value
 
996.8

 
754.1

 
1,750.9

 
1,373.7

 
788.4

 
2,162.1

Other assets
 
0.6

 
—

 
0.6

 
0.7

 
—

 
0.7

Total Assets
 
$
1,072.6

 
$
829.7

 
$
1,902.3

 
$
1,435.5

 
$
885.7

 
$
2,321.2

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
16.2

 
$
22.8

 
$
39.0

 
$
18.5

 
$
35.3

 
$
53.8

Debt (at fair value at September 30, 2014)
 
—

 
795.5

 
795.5

 
—

 
828.5

 
828.5

Debt
 
105.7

 
—

 
105.7

 
122.3

 
—

 
122.3

Other liabilities
 
12.3

 
—

 
12.3

 
12.4

 
—

 
12.4

Total liabilities
 
134.2

 
818.3

 
952.5

 
153.2

 
863.8

 
1,017.0

Redeemable Noncontrolling Interests
 
74.0

 
—

 
74.0

 
234.8

 
—

 
234.8

Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
Franklin Resources, Inc.’s interests
 
285.0

 
11.4

 
296.4

 
436.5

 
21.9

 
458.4

Nonredeemable noncontrolling interests
 
579.4

 
—

 
579.4

 
611.0

 
—

 
611.0

Total stockholders’ equity
 
864.4

 
11.4

 
875.8

 
1,047.5

 
21.9

 
1,069.4

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
1,072.6

 
$
829.7

 
$
1,902.3

 
$
1,435.5

 
$
885.7

 
$
2,321.2

The consolidated SIPs and consolidated VIEs did not have a significant impact on net income attributable to the Company during the three months ended December 31, 2014 and 2013.
Consolidated SIPs
Consolidated SIPs consist of 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 29 SIPs as of December 31, 2014, and 30 SIPs as of September 30, 2014. 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.
Consolidated VIEs
Consolidated VIEs consist of sponsored CLOs, which are asset-backed financing entities collateralized by a pool of corporate debt securities.
The assets and liabilities of the CLOs were both carried at fair value through September 30, 2014. The Company adopted new accounting guidance on October 1, 2014 under which the liabilities are measured based on the fair value of the assets. Changes in the fair values of the assets and liabilities prior to the adoption of the new accounting guidance were as follows:
(in millions)
 
 
for the three months ended December 31, 2013
 
Amount
Net gains from changes in fair value of assets
 
$
13.4

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


15
Table of Contents

During the three months ended December 31, 2014, the Company recognized $5.3 million of net gains related to its own economic interests in the CLOs. There was no net gain or loss resulting from changes in the values of the assets and liabilities of the CLOs as a result of the new accounting guidance.
The following tables present information on the investments and debt of the CLOs:
(in millions)
 
Investments
as of December 31, 2014
 
Unpaid principal balance
 
$
759.6

Difference between unpaid principal balance and fair value
 
(5.5
)
Fair Value
 
$
754.1

(in millions)
 
Investments
 
Debt
as of September 30, 2014
 
 
Unpaid principal balance
 
$
787.1

 
$
861.9

Difference between unpaid principal balance and fair value
 
1.3

 
(33.4
)
Fair Value
 
$
788.4

 
$
828.5

The unpaid principal balance of the debt of the CLOs was $825.5 million at December 31, 2014. There were no investments 90 days or more past due at December 31, 2014 or September 30, 2014.
Investments
Investments of consolidated SIPs and consolidated VIEs consisted of the following:
 
 
December 31, 2014
 
September 30, 2014
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Investment securities, trading
 
$
214.5

 
$
—

 
$
214.5

 
$
249.6

 
$
—

 
$
249.6

Other debt securities
 
151.6

 
754.1

 
905.7

 
205.6

 
788.4

 
994.0

Other equity securities
 
630.7

 
—

 
630.7

 
918.5

 
—

 
918.5

Total Investments
 
$
996.8

 
$
754.1

 
$
1,750.9

 
$
1,373.7

 
$
788.4

 
$
2,162.1

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. Investments of consolidated VIEs consist of corporate debt securities.
Debt
Debt of consolidated SIPs and consolidated VIEs consisted of the following:
 
 
December 31,
2014
 
Effective
Interest
Rate
 
September 30,
2014
 
Effective
Interest
Rate
(in millions)
 
 
 
 
Debt of consolidated SIPs due fiscal years 2015-2019
 
$
105.7

 
4.10
%
 
$
122.3

 
3.87
%
Debt of consolidated VIEs due fiscal years 2018-2024
 
795.5

 
1.48
%
 
828.5

 
1.43
%
Total Debt
 
$
901.2

 
 
 
$
950.8

 
 
The debt of consolidated SIPs had both fixed and floating interest rates ranging from 2.19% to 5.81% at December 31, 2014, and from 2.19% to 5.89% at September 30, 2014. 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.
The debt of consolidated VIEs had floating interest rates ranging from 0.46% to 9.73% at December 31, 2014 and September 30, 2014.

16
Table of Contents

At December 31, 2014, contractual maturities for debt of consolidated SIPs and consolidated VIEs were as follows: 
(in millions)
 
Amount
for the fiscal years ending September 30,
2015
 
$
34.0

2016
 
—

2017
 
28.4

2018
 
224.9

2019
 
330.6

Thereafter
 
283.3

Total
 
$
901.2

Fair Value Measurements
The tables below present the balances of assets and liabilities of consolidated SIPs and consolidated VIEs 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, 2014
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
66.6

 
$
—

 
$
—

 
$
66.6

Receivables of consolidated VIEs
 
—

 
9.0

 
—

 
9.0

Investments of consolidated VIEs
 
—

 
753.7

 
0.4

 
754.1

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Equity securities
 
131.8

 
26.2

 
602.8

 
760.8

Debt securities
 
2.4

 
82.0

 
151.6

 
236.0

Total Assets Measured at Fair Value
 
$
200.8

 
$
870.9

 
$
754.8

 
$
1,826.5

Liabilities
 
 
 
 
 
 
 
 
Other liabilities of consolidated SIPs
 
$
4.7

 
$
—

 
$
—

 
$
4.7

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2014
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
74.3

 
$
—

 
$
—

 
$
74.3

Receivables of consolidated VIEs
 
—

 
23.0

 
—

 
23.0

Investments of consolidated VIEs
 
—

 
787.9

 
0.5

 
788.4

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Equity securities
 
149.9

 
304.0

 
614.3

 
1,068.2

Debt securities
 
2.4

 
96.8

 
206.3

 
305.5

Total Assets Measured at Fair Value
 
$
226.6

 
$
1,211.7

 
$
821.1

 
$
2,259.4

Liabilities
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses of consolidated VIEs
 
$
—

 
$
35.3

 
$
—

 
$
35.3

Debt of consolidated VIEs
 
—

 
781.3

 
47.2

 
828.5

Other liabilities of consolidated SIPs
 
4.0

 
0.6

 
—

 
4.6

Total Liabilities Measured at Fair Value
 
$
4.0

 
$
817.2

 
$
47.2

 
$
868.4


17
Table of Contents

The investments in fund products for which fair value was estimated using reported net asset value (“NAV”) as a practical expedient consisted of the following:
(in millions)
 
Redemption Frequency
 
Fair Value Level
 
December 31,
2014
 
September 30,
2014
Global fixed-income fund
 
Monthly
 
2
 
$
—

 
$
275.1

Hedge funds
 
Monthly or quarterly
 
2
 
26.1

 
27.2

Real estate and private equity funds
 
Nonredeemable
 
3
 
409.6

 
392.3

Hedge funds
 
Triennially
 
3
 
1.1

 
1.2

Total
 
 
 

 
$
436.8

 
$
695.8

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 3.6 years and 3.9 years at December 31, 2014 and September 30, 2014. The consolidated SIPs’ unfunded commitments to these funds totaled $128.0 million and $139.2 million at December 31, 2014 and September 30, 2014, of which the Company was contractually obligated to fund $2.8 million and $3.1 million based on its ownership percentage in the SIPs.
There were no transfers between Level 1 and Level 2 during the three months ended December 31, 2014. There were no transfers into Level 2 from Level 1, and transfers into Level 1 from Level 2 were $0.1 million during the three months ended December 31, 2013.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
(in millions)
 
Investments of
Consolidated SIPs
 
Investments of
Consolidated
VIEs
 
Total 
Level 3
Assets
 
Debt of
Consolidated
VIEs
for the three months ended December 31, 2014
 
Equity
 
Debt
 
 
Balance at October 1, 2014
 
$
614.3

 
$
206.3

 
$
0.5

 
$
821.1

 
$
(47.2
)
Adjustment for adoption of new accounting guidance
 
—

 
—

 
—

 
—

 
47.2

Realized and unrealized gains (losses) included in investment and other income, net
 
8.3

 
3.9

 
(0.1
)
 
12.1

 
—

Purchases
 
47.3

 
1.7

 
—

 
49.0

 
—

Sales
 
(65.1
)
 
(57.2
)
 
—

 
(122.3
)
 
—

Settlements
 
—

 
(0.6
)
 
—

 
(0.6
)
 
—

Effect of exchange rate changes
 
(2.0
)
 
(2.5
)
 
—

 
(4.5
)
 
—

Balance at December 31, 2014
 
$
602.8

 
$
151.6

 
$
0.4

 
$
754.8

 
$
—

Change in unrealized gains (losses) included in net income relating to assets and liabilities held at December 31, 2014
 
$
2.6

 
$
3.6

 
$
(0.1
)
 
$
6.1

 
$
—



(in millions)
 
Investments of
Consolidated SIPs
 
Investments of Consolidated VIEs
 
Total 
Level 3
Assets
 
Debt of
Consolidated
VIEs
for the three months ended December 31, 2013
 
Equity
 
Debt
 
 
Balance at October 1, 2013
 
$
470.9

 
$
272.3

  
$
0.5

 
$
743.7

 
$
(59.7
)
Realized and unrealized gains (losses) included in investment and other income, net
 
(3.7
)
 
(27.7
)
  
—

 
(31.4
)
 
7.5

Purchases
 
50.2

 
22.2

  
—

 
72.4

 
—

Sales
 
(15.6
)
 
(13.9
)
 
—

 
(29.5
)
 
—

Effect of exchange rate changes
 
0.8

 
1.5

  
—

 
2.3

 
—

Balance at December 31, 2013
 
$
502.6

 
$
254.4

  
$
0.5

 
$
757.5

 
$
(52.2
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at December 31, 2013
 
$
(3.3
)
 
$
(28.8
)
 
$
—

 
$
(32.1
)
 
$
7.5

There were no transfers into or out of Level 3 during the three months ended December 31, 2014 and 2013.

18
Table of Contents

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2014
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Debt securities
 
$
151.6

 
Discounted cash flow
 
Discount rate
 
3.6%–18.0% (10.1%)
Risk premium
 
0.0%–8.0% (2.4%)