10-Q
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, 2015
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: 592,645,982 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of January 27, 2016.

Table of Contents


INDEX TO FORM 10-Q
 
 
Page
Financial Information
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
3
 
 
4
 
 
5
 
 
6
 
 
8
 
Item 2.
20
 
Item 3.
40
 
Item 4.
40
 
 
 
 
Other Information
 
 
Item 1.
41
 
Item 1A.
41
 
Item 2.
41
 
Item 6.
42
 
 
 
 
43
44


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)
 
2015
 
2014
Operating Revenues
 
 
 
 
Investment management fees
 
$
1,186.7

 
$
1,382.4

Sales and distribution fees
 
478.4

 
595.0

Shareholder servicing fees
 
61.9

 
65.8

Other
 
31.0

 
21.1

Total operating revenues
 
1,758.0

 
2,064.3

Operating Expenses
 
 
 
 
Sales, distribution and marketing
 
588.6

 
731.5

Compensation and benefits
 
342.5

 
375.5

Information systems and technology
 
51.2

 
51.2

Occupancy
 
30.7

 
34.3

General, administrative and other
 
91.4

 
89.8

Total operating expenses
 
1,104.4

 
1,282.3

Operating Income
 
653.6

 
782.0

Other Income (Expenses)
 
 
 
 
Investment and other income, net
 
30.5

 
51.7

Interest expense
 
(12.0
)
 
(11.3
)
Other income, net
 
18.5

 
40.4

Income before taxes
 
672.1

 
822.4

Taxes on income
 
209.7

 
256.1

Net income
 
462.4

 
566.3

Less: net income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
13.6

 
6.7

Redeemable noncontrolling interests
 
1.0

 
(6.8
)
Net Income Attributable to Franklin Resources, Inc.
 
$
447.8

 
$
566.4

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
0.74

 
$
0.91

Diluted
 
0.74

 
0.91

Dividends per Share
 
$
0.18

 
$
0.65









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,
 
2015
 
2014
Net Income
 
$
462.4

 
$
566.3

Other Comprehensive Income (Loss)
 
 
 
 
Net unrealized losses on investments, net of tax
 
(5.9
)
 
(0.2
)
Currency translation adjustments, net of tax
 
(23.6
)
 
(61.5
)
Net unrealized gains on defined benefit plans, net of tax
 
0.6

 
1.0

Total other comprehensive loss
 
(28.9
)
 
(60.7
)
Total comprehensive income
 
433.5

 
505.6

Less: comprehensive income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
13.6

 
6.7

Redeemable noncontrolling interests
 
1.0

 
(6.8
)
Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
418.9

 
$
505.7























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,
2015
 
September 30,
2015
Assets
 
 
 
 
Cash and cash equivalents
 
$
8,125.0

 
$
8,184.9

Receivables
 
863.7

 
838.0

Investments (including $1,626.5 and $1,712.3 at fair value at December 31, 2015 and September 30, 2015)
 
2,422.8

 
2,459.2

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
92.0

 
108.5

Investments, at fair value
 
956.0

 
977.4

Assets of consolidated variable interest entities
 
 
 
 
Cash and cash equivalents
 
52.0

 
74.7

Investments, at fair value
 
649.6

 
672.5

Deferred taxes, net
 
100.4

 
100.7

Property and equipment, net
 
507.1

 
510.1

Goodwill and other intangible assets, net
 
2,247.7

 
2,257.0

Other
 
139.2

 
152.7

Total Assets
 
$
16,155.5

 
$
16,335.7

Liabilities
 
 
 
 
Compensation and benefits
 
$
209.8

 
$
433.2

Accounts payable and accrued expenses
 
229.2

 
232.1

Dividends
 
108.7

 
92.6

Commissions
 
336.1

 
359.9

Income taxes
 
193.5

 
32.5

Debt
 
1,348.1

 
1,348.0

Debt of consolidated sponsored investment products
 
81.8

 
81.2

Debt of consolidated variable interest entities
 
690.4

 
726.1

Deferred taxes
 
237.0

 
241.4

Other
 
246.8

 
233.3

Total liabilities
 
3,681.4

 
3,780.3

Commitments and Contingencies (Note 8)
 

 

Redeemable Noncontrolling Interests
 
53.2

 
59.6

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; 595,228,556 and 603,517,181 shares issued and outstanding at December 31, 2015 and September 30, 2015
 
59.5

 
60.4

Retained earnings
 
12,064.8

 
12,094.8

Accumulated other comprehensive loss
 
(343.1
)
 
(314.2
)
Total Franklin Resources, Inc. stockholders’ equity
 
11,781.2

 
11,841.0

Nonredeemable noncontrolling interests
 
639.7

 
654.8

Total stockholders’ equity
 
12,420.9

 
12,495.8

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
16,155.5

 
$
16,335.7



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)
 
2015
 
2014
Net Income
 
$
462.4

 
$
566.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
22.8

 
30.2

Depreciation and other amortization
 
22.6

 
24.9

Stock-based compensation
 
34.0

 
35.4

Excess tax benefit from stock-based compensation
 
—

 
(1.9
)
Gains on sale of assets
 
(7.2
)
 
(9.5
)
Income from investments in equity method investees
 
(24.8
)
 
(6.7
)
Net losses (gains) on other investments of consolidated sponsored investment products
 
7.6

 
(5.9
)
Net gains of consolidated variable interest entities
 
(1.7
)
 
(1.6
)
Deferred income taxes
 
(1.8
)
 
23.8

Other
 
16.6

 
10.5

Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(42.5
)
 
(6.7
)
Decrease in trading securities, net
 
1.5

 
5.2

Decrease (increase) in trading securities of consolidated sponsored investment products, net
 
(102.5
)
 
16.0

Decrease in accrued compensation and benefits
 
(221.5
)
 
(220.6
)
Decrease in commissions payable
 
(23.8
)
 
(20.9
)
Increase in income taxes payable
 
160.4

 
171.7

Decrease in other liabilities
 
(6.9
)
 
(37.8
)
Net cash provided by operating activities
 
295.2

 
572.4

Purchase of investments
 
(20.9
)
 
(71.7
)
Liquidation of investments
 
128.3

 
69.4

Purchase of investments by consolidated sponsored investment products
 
(27.6
)
 
(51.5
)
Liquidation of investments by consolidated sponsored investment products
 
33.7

 
122.5

Purchase of investments by consolidated variable interest entities
 
(64.0
)
 
(88.8
)
Liquidation of investments by consolidated variable interest entities
 
71.0

 
126.8

Additions of property and equipment, net
 
(19.1
)
 
(16.1
)
Decrease in cash and cash equivalents due to net deconsolidation of sponsored investment products
 
(12.2
)
 
(0.1
)
Net cash provided by investing activities
 
89.2

 
90.5

Decrease in deposits
 
—

 
(0.3
)
Dividends paid on common stock
 
(91.5
)
 
(75.8
)
Repurchase of common stock
 
(381.5
)
 
(151.2
)
Excess tax benefit from stock-based compensation
 
—

 
1.9

Proceeds from issuance of debt by consolidated sponsored investment products
 
1.0

 
218.5

Payments on debt by consolidated sponsored investment products
 
—

 
(234.5
)
Payments on debt by consolidated variable interest entities
 
(27.9
)
 
(44.1
)
Payments on contingent consideration liabilities
 
(2.8
)
 
(7.1
)
Noncontrolling interests
 
39.3

 
(35.3
)
Net cash used in financing activities
 
(463.4
)
 
(327.9
)
Effect of exchange rate changes on cash and cash equivalents
 
(20.1
)
 
(45.8
)
[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)
 
2015
 
2014
Increase (decrease) in cash and cash equivalents
 
$
(99.1
)
 
$
289.2

Cash and cash equivalents, beginning of period
 
8,368.1

 
7,596.0

Cash and Cash Equivalents, End of Period
 
$
8,269.0

 
$
7,885.2

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
48.1

 
$
57.0

Cash paid for interest
 
8.8

 
12.9

Cash paid for interest by consolidated variable interest entities and consolidated sponsored investment products
 
6.7

 
9.0




























See Notes to Condensed Consolidated Financial Statements.

7
Table of Contents

FRANKLIN RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(Unaudited)
Note 1 – Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. 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. 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, 2015 (“fiscal year 2015”). Certain comparative amounts for the prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended December 31, 2015.
Note 2 – New Accounting Guidance
In January 2016, the Financial Accounting Standards Board issued an amendment to the existing financial instruments guidance. The amendment requires substantially all equity investments in nonconsolidated entities to be measured at fair value with changes recognized in net income, except for those accounted for using the equity method of accounting. The amendment also provides an election to measure equity investments that do not have a readily determinable fair value at cost less impairment, if any. The amendment requires a cumulative-effect adjustment to the balance sheet at adoption, and is effective for the Company in the first quarter of the fiscal year ending September 30, 2019. The Company is currently evaluating the impact that the adoption of the amendment will have on its consolidated financial statements.
There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for fiscal year 2015.
Note 3 – Stockholders’ Equity
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, 2015
 
 
 
Balance at October 1, 2015
 
$
11,841.0

 
$
654.8

 
$
12,495.8

Net income
 
447.8

 
13.6

 
461.4

Other comprehensive loss
 
(28.9
)
 
 
 
(28.9
)
Cash dividends on common stock
 
(107.6
)
 
 
 
(107.6
)
Repurchase of common stock
 
(404.1
)
 
 
 
(404.1
)
Net distributions
 
 
 
(28.7
)
 
(28.7
)
Other1
 
33.0

 
 
 
33.0

Balance at December 31, 2015
 
$
11,781.2

 
$
639.7

 
$
12,420.9

__________________ 
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, 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.
During the three months ended December 31, 2015 and 2014, the Company repurchased 10.5 million and 2.7 million shares of its common stock at a cost of $404.1 million and $151.2 million under its stock repurchase program. In October 2015, 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, 2015, 26.7 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,
 
2015
 
2014
Net income attributable to Franklin Resources, Inc.
 
$
447.8

 
$
566.4

Less: allocation of earnings to participating nonvested stock and stock unit awards
 
2.7

 
3.6

Net Income Available to Common Stockholders
 
$
445.1

 
$
562.8

 
 
 
 
 
Weighted-average shares outstanding – basic
 
597.6

 
620.1

Dilutive effect of nonparticipating nonvested stock unit awards and common stock options
 
0.1

 
0.1

Weighted-Average Shares Outstanding – Diluted
 
597.7

 
620.2

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
0.74

 
$
0.91

Diluted
 
0.74

 
0.91

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 1.4 million and 0.6 million for the three months ended December 31, 2015 and 2014.

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 variable interest entities (“VIEs”). See Note 7 – 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,
2015
 
September 30,
2015
Investment securities, trading
 
$
1,249.0

 
$
1,251.2

Investment securities, available-for-sale
 
 
 
 
SIPs
 
358.0

 
408.3

Debt securities
 
1.7

 
23.0

Other equity securities
 
3.3

 
15.1

Total investment securities, available-for-sale
 
363.0

 
446.4

Investments in equity method investees
 
701.7

 
655.3

Other investments
 
109.1

 
106.3

Total
 
$
2,422.8

 
$
2,459.2

At December 31, 2015 and September 30, 2015, investment securities with aggregate carrying amounts of $11.8 million and $4.3 million were pledged as collateral.
Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:
(in millions)
 
 
 
Gross Unrealized
 
 
as of December 31, 2015
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
339.4

 
$
29.4

 
$
(10.8
)
 
$
358.0

Debt securities
 
1.6

 
0.1

 
—

 
1.7

Other equity securities
 
3.3

 
—

 
—

 
3.3

Total
 
$
344.3

 
$
29.5

 
$
(10.8
)
 
$
363.0

(in millions)
 
 
 
Gross Unrealized
 
 
as of September 30, 2015
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
382.6

 
$
32.4

 
$
(6.7
)
 
$
408.3

Debt securities
 
22.8

 
0.2

 
—

 
23.0

Other equity securities
 
15.1

 
0.2

 
(0.2
)
 
15.1

Total
 
$
420.5

 
$
32.8

 
$
(6.9
)
 
$
446.4

Gross unrealized losses relating to investment securities, available-for-sale aggregated by length of time that individual securities have been in a continuous unrealized loss position were as follows:
 
 
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, 2015
 
 
 
 
 
SIPs
 
$
117.3

 
$
(8.6
)
 
$
22.2

 
$
(2.2
)
 
$
139.5

 
$
(10.8
)
 
 
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, 2015
 
 
 
 
 
SIPs
 
$
99.8

 
$
(5.6
)
 
$
21.0

 
$
(1.1
)
 
$
120.8

 
$
(6.7
)
Other equity securities
 
10.9

 
(0.2
)
 
—

 
—

 
10.9

 
(0.2
)
Total
 
$
110.7

 
$
(5.8
)
 
$
21.0

 
$
(1.1
)
 
$
131.7

 
$
(6.9
)

10
Table of Contents

The Company recognized $0.4 million and $1.0 million of other-than-temporary impairment during the three months ended December 31, 2015 and 2014, all of which related to available-for-sale SIPs.
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 7 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
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, 2015
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,164.2

 
$
75.5

 
$
9.3

 
$
1,249.0

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
358.0

 
—

 
—

 
358.0

Debt securities
 
—

 
1.7

 
—

 
1.7

Other equity securities
 
0.5

 
2.8

 
—

 
3.3

Life settlement contracts
 
—

 
—

 
14.5

 
14.5

Total Assets Measured at Fair Value
 
$
1,522.7

 
$
80.0

 
$
23.8

 
$
1,626.5

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
115.8

 
$
115.8

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2015
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,168.2

 
$
77.0

 
$
6.0

 
$
1,251.2

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
408.3

 
—

 
—

 
408.3

Debt securities
 
—

 
23.0

 
—

 
23.0

Other equity securities
 
12.2

 
2.9

 
—

 
15.1

Life settlement contracts
 
—

 
—

 
14.7

 
14.7

Total Assets Measured at Fair Value
 
$
1,588.7

 
$
102.9

 
$
20.7

 
$
1,712.3

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
—

 
$
—

 
$
102.9

 
$
102.9

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 values of certain other trading investments and life settlement contracts are determined using discounted cash flow valuation techniques.
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.
There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three months ended December 31, 2015 and 2014.

11
Table of Contents

Changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
 
 
2015
 
2014
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
 
Contingent
Consideration
Liabilities
for the three months ended December 31,
 
 
 
 
Balance at beginning of period
 
$
20.7

 
$
(102.9
)
 
$
14.0

 
$
(98.5
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
0.6

 
—

 
0.6

 
—

Included in general, administrative and other expense
 
—

 
(16.2
)
 
—

 
(9.4
)
Other
 
—

 
—

 
—

 
(0.1
)
Purchases
 
3.3

 
—

 
0.1

 
—

Settlements
 
(0.8
)
 
3.3

 
(0.5
)
 
7.1

Foreign exchange revaluation
 
—

 
—

 
—

 
0.2

Balance at End of Period
 
$
23.8

 
$
(115.8
)
 
$
14.2

 
$
(100.7
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
0.2

 
$
(16.2
)
 
$
0.3

 
$
(9.5
)
Valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2015
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading
 
$
9.3

 
Discounted cash flow
 
Discount rate
 
4.9%–8.5% (6.5%)
 
 
 
Risk premium
 
0.0%–2.8% (1.8%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
14.5

 
Discounted cash flow
 
Life expectancy
 
21–139 months (68)
Discount rate
 
3.3%–19.0% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
115.8

 
Discounted cash flow
 
AUM growth rate
 
6.1%–22.1% (11.5%)
EBITDA margin
 
21.3%
Discount rate
 
13.0%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2015
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading
 
$
6.0

 
Discounted cash flow
 
Discount rate
 
5.2%–6.1% (5.7%)
 
 
 
Risk premium
 
2.7%–2.8% (2.8%)
Life settlement contracts
 
14.7

 
Discounted cash flow
 
Life expectancy
 
21–141 months (68)
Discount rate
 
3.3%–19.0% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
102.9

 
Discounted cash flow
 
AUM growth rate
 
0.5%–5.8% (4.4%)
EBITDA margin
 
19.3%–22.9% (22.0%)
Discount rate
 
14.0%
For investment securities, trading, a significant increase (decrease) in the discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement.
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 the contingent consideration liability, 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.

12
Table of Contents

Financial instruments that were not measured at fair value were as follows:
(in millions)
 
 
 
December 31, 2015
 
September 30, 2015
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
8,125.0

 
$
8,125.0

 
$
8,184.9

 
$
8,184.9

Other investments1
 
2 or 3
 
94.6

 
104.7

 
91.6

 
97.1

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt
 
2
 
1,348.1

 
1,350.8

 
1,348.0

 
1,374.9

_________________
1    Primarily consist of Level 3 assets.
Note 7 – 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 SIPs and consolidated VIEs included in the Company’s condensed consolidated balance sheets were as follows:
 
 
December 31, 2015
 
September 30, 2015
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
92.0

 
$
52.0

 
$
144.0

 
$
108.5

 
$
74.7

 
$
183.2

Receivables
 
11.3

 
6.2

 
17.5

 
10.0

 
11.5

 
21.5

Investments, at fair value
 
956.0

 
649.6

 
1,605.6

 
977.4

 
672.5

 
1,649.9

Other assets
 
0.6

 
—

 
0.6

 
0.7

 
—

 
0.7

Total Assets
 
$
1,059.9

 
$
707.8

 
$
1,767.7

 
$
1,096.6

 
$
758.7

 
$
1,855.3

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
12.4

 
$
12.1

 
$
24.5

 
$
10.8

 
$
25.3

 
$
36.1

Debt
 
81.8

 
690.4

 
772.2

 
81.2

 
726.1

 
807.3

Other liabilities
 
6.4

 
—

 
6.4

 
6.3

 
—

 
6.3

Total liabilities
 
100.6

 
702.5

 
803.1

 
98.3

 
751.4

 
849.7

Redeemable Noncontrolling Interests
 
53.2

 
—

 
53.2

 
59.6

 
—

 
59.6

Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
Franklin Resources, Inc.’s interests
 
291.4

 
5.3

 
296.7

 
308.8

 
7.3

 
316.1

Nonredeemable noncontrolling interests
 
614.7

 
—

 
614.7

 
629.9

 
—

 
629.9

Total stockholders’ equity
 
906.1

 
5.3

 
911.4

 
938.7

 
7.3

 
946.0

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
1,059.9

 
$
707.8

 
$
1,767.7

 
$
1,096.6

 
$
758.7

 
$
1,855.3

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, 2015 and 2014.

13
Table of Contents

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 33 SIPs as of December 31, 2015, and 32 SIPs as of September 30, 2015. 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 collateralized loan obligations (“CLOs”), which are asset-backed financing entities collateralized by a pool of corporate debt securities.
The Company recognized $0.1 million and $5.3 million of net gains related to its own economic interests in the CLOs during the three months ended December 31, 2015 and 2014.
The unpaid principal balance and fair value of the investments of the CLOs were as follows:
(in millions)
 
December 31,
2015
 
September 30,
2015
Unpaid principal balance
 
$
678.2

 
$
694.5

Difference between unpaid principal balance and fair value
 
(28.6
)
 
(22.0
)
Fair Value
 
$
649.6

 
$
672.5

There were no investments 90 days or more past due at December 31, 2015 or September 30, 2015.
The unpaid principal balance of the debt of the CLOs was $747.3 million and $769.3 million at December 31, 2015 and September 30, 2015.
Investments
Investments of consolidated SIPs and consolidated VIEs consisted of the following:
 
 
December 31, 2015
 
September 30, 2015
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Investment securities, trading
 
$
173.3

 
$
—

 
$
173.3

 
$
180.5

 
$
—

 
$
180.5

Other debt securities
 
123.0

 
649.6

 
772.6

 
129.2

 
672.5

 
801.7

Other equity securities
 
659.7

 
—

 
659.7

 
667.7

 
—

 
667.7

Total
 
$
956.0

 
$
649.6

 
$
1,605.6

 
$
977.4

 
$
672.5

 
$
1,649.9

Investment securities, trading held by consolidated SIPs consist of equity and debt securities that are traded in active markets. Other equity and debt securities held by consolidated SIPs primarily consist of direct investments in equity securities and secured and unsecured debt 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,
2015
 
Effective
Interest
Rate
 
September 30,
2015
 
Effective
Interest
Rate
(in millions)
 
 
 
 
Debt of consolidated SIPs due fiscal years 2016-2019
 
$
81.8

 
4.67
%
 
$
81.2

 
4.71
%
Debt of consolidated VIEs due fiscal years 2018-2024
 
690.4

 
1.70
%
 
726.1

 
1.62
%
Total
 
$
772.2

 
 
 
$
807.3

 
 

14
Table of Contents

The debt of consolidated SIPs had fixed and floating interest rates ranging from 2.30% to 5.81% at both December 31, 2015 and September 30, 2015. 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 0.57% to 9.84% at December 31, 2015, and from 0.54% to 9.79% at September 30, 2015.
At December 31, 2015, contractual maturities for debt of consolidated SIPs and consolidated VIEs were as follows: 
(in millions)
 
Carrying Amount
for the fiscal years ending September 30,
2016
 
$
21.0

2017
 
19.0

2018
 
148.5

2019
 
307.0

2020
 
—

Thereafter
 
276.7

Total
 
$
772.2

Fair Value Measurements
Assets and liabilities of consolidated SIPs and consolidated VIEs measured at fair value on a recurring basis were as follows. 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of December 31, 2015
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
52.0

 
$
—

 
$
—

 
$
52.0

Receivables of consolidated VIEs
 
—

 
6.2

 
—

 
6.2

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Equity securities
 
64.1

 
4.3

 
653.6

 
722.0

Debt securities
 
—

 
110.4

 
123.6

 
234.0

Investments of consolidated VIEs
 
—

 
649.3

 
0.3

 
649.6

Total Assets Measured at Fair Value
 
$
116.1

 
$
770.2

 
$
777.5

 
$
1,663.8

Liabilities
 
 
 
 
 
 
 
 
Other liabilities of consolidated SIPs
 
$
3.2

 
$
3.2

 
$
—

 
$
6.4

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2015
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
74.7

 
$
—

 
$
—

 
$
74.7

Receivables of consolidated VIEs
 
—

 
11.5

 
—

 
11.5

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Equity securities
 
88.9

 
8.5

 
656.4

 
753.8

Debt securities
 
—

 
93.8

 
129.8

 
223.6

Investments of consolidated VIEs
 
—

 
672.1

 
0.4

 
672.5

Total Assets Measured at Fair Value
 
$
163.6

 
$
785.9

 
$
786.6

 
$
1,736.1

Liabilities
 
 
 
 
 
 
 
 
Other liabilities of consolidated SIPs
 
$
3.3

 
$
3.0

 
$
—

 
$
6.3


15
Table of Contents

Investments in fund products for which fair value was estimated using reported net asset value (“NAV”) as a practical expedient were as follows:
(in millions)
 
Redemption Frequency
 
Fair Value Level
 
December 31,
2015
 
September 30,
2015
Hedge funds
 
Monthly or quarterly
 
2
 
$
3.4

 
$
8.0

Real estate and private equity funds
 
Nonredeemable
 
3
 
464.4

 
463.6

Hedge funds
 
Triennially
 
3
 
1.1

 
1.2

Total
 
 
 

 
$
468.9

 
$
472.8

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 3.8 years and 3.9 years at December 31, 2015 and September 30, 2015. The consolidated SIPs’ unfunded commitments to these funds totaled $91.6 million and $94.5 million at December 31, 2015 and September 30, 2015, of which the Company was contractually obligated to fund $2.6 million and $2.4 million based on its ownership percentage in the SIPs.
There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three months ended December 31, 2015 and 2014.
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
for the three months ended December 31, 2015
 
Equity
 
Debt
 
Balance at October 1, 2015
 
$
656.4

 
$
129.8

 
$
0.4

 
$
786.6

Realized and unrealized gains (losses) included in investment and other income, net
 
(7.8
)
 
1.2

 
(0.1
)
 
(6.7
)
Purchases
 
27.4

 
2.5

 
—

 
29.9

Sales
 
(20.0
)
 
(9.6
)
 
—

 
(29.6
)
Foreign exchange revaluation
 
(2.4
)
 
(0.3
)
 
—

 
(2.7
)
Balance at December 31, 2015
 
$
653.6

 
$
123.6

 
$
0.3

 
$
777.5

Change in unrealized gains (losses) included in net income relating to assets and liabilities held at December 31, 2015
 
$
(7.8
)
 
$
0.4

 
$
(0.1
)
 
$
(7.5
)
(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
)
 
—

Foreign exchange revaluation
 
(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

 
$
—


16
Table of Contents

Valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2015
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
126.4

 
Market comparable companies
 
EBITDA multiple
 
4.2–10.7 (8.7)
Discount for lack of marketability
 
25.0%–50.0% (34.9%)
46.9

 
Market pricing
 
Price to book value ratio
 
1.8–2.8 (2.3)
14.8

 
Discounted cash flow
 
Discount rate
 
6.3%–19.0% (12.8%)
 
 
 
 
 
 
 
 
 
Debt securities
 
123.6

 
Discounted cash flow
 
Discount rate
 
3.5%–17.0% (9.6%)
 
 
 
Risk premium
 
0.3%–18.0% (5.3%)
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2015
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
128.8

 
Market comparable companies
 
EBITDA multiple
 
4.2–10.7 (8.8)
Discount for lack of marketability
 
25.0%–50.0% (34.9%)
47.7

 
Market pricing
 
Price to book value ratio
 
1.8–2.8 (2.3)
 
15.1

 
Discounted cash flow
 
Discount rate
 
6.3%–19.0% (12.8%)
 
 
 
 
 
 
 
 
 
Debt securities
 
129.8

 
Discounted cash flow
 
Discount rate
 
3.5%–17.0% (9.4%)
 
 
 
Risk premium
 
0.0%–18.0% (4.6%)
Level 3 equity securities held by consolidated SIPs consisted primarily of common and preferred shares, and debt securities consisted of corporate loans and notes and mezzanine loans at December 31, 2015 and September 30, 2015.
The fair values of Level 3 assets and liabilities that were determined based on NAV or third-party pricing information are excluded from the above two tables. At December 31, 2015 and September 30, 2015, the asset exclusions consisted of $465.5 million and $464.8 million of investments in various funds held by consolidated SIPs for which fair value was estimated using NAV as a practical expedient.
Following are descriptions of the sensitivity of the Level 3 recurring fair value measurements to changes in the significant unobservable inputs presented in the above tables.
For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk. Generally, a change in the discount rate is accompanied by a directionally similar change in the risk premium and discount for lack of marketability.
For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount for lack of marketability in isolation would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk.
For securities utilizing a market pricing valuation technique, a significant increase (decrease) in the price to book value ratio would result in a significantly higher (lower) fair value measurement.
Financial instruments of consolidated SIPs and consolidated VIEs that were not measured at fair value were as follows:
(in millions)
 
 
 
December 31, 2015
 
September 30, 2015
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated SIPs
 
1
 
$
92.0

 
$
92.0

 
$
108.5

 
$
108.5

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt of consolidated SIPs
 
3
 
81.8

 
79.2

 
81.2

 
77.9

Debt of consolidated VIEs1
 
2 or 3
 
690.4

 
689.7

 
726.1

 
719.3

_________________
1    Substantially all is Level 2.

17
Table of Contents

Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests of consolidated SIPs were as follows:
(in millions)
 
 
 
 
for the three months ended December 31,
 
2015
 
2014
Balance at beginning of period
 
$
59.6

 
$
234.8

Net income (loss)
 
1.0

 
(6.8
)
Net subscriptions and other
 
68.0

 
1.0

Net deconsolidations
 
(75.4
)
 
(155.0
)
Balance at End of Period
 
$
53.2

 
$
74.0

Nonconsolidated VIEs
VIEs for which the Company is not the primary beneficiary consist of sponsored and other investment products from which the Company earns investment management fees and/or in which it has an equity ownership interest.
The carrying values of the investment management fees receivable from and the equity ownership interests in these VIEs included 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 millions)
 
December 31,
2015
 
September 30,
2015
Receivables
 
$
35.7

 
$
35.5

Investments
 
178.3

 
236.6

Total
 
$
214.0

 
$
272.1

While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching SIPs. The Company also may voluntarily elect to provide its SIPs with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its SIPs during fiscal year 2015 or the three months ended December 31, 2015.
Note 8 – Commitments and Contingencies
Legal Proceedings
The Company is from time to time involved in litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business, financial position, results of operations or liquidity. In management’s opinion, an adequate accrual has been made as of December 31, 2015 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.
Other Commitments and Contingencies
At December 31, 2015, there were no material changes in the other commitments and contingencies as reported in the Company’s Form 10-K for fiscal year 2015.

18
Table of Contents

Note 9 – Stock-Based Compensation
Stock awards generally entitle holders to the right to sell the underlying shares of the Company’s common stock once the awards vest. Stock unit awards generally entitle holders to receive the underlying shares of common stock once the awards vest. Awards generally vest based on the passage of time or the achievement of predetermined Company financial performance goals. In the event a performance measure is not achieved at or above a specified threshold level, the portion of the award tied to such performance measure is forfeited.
Stock and stock unit award activity was as follows:
(shares in thousands)
 
Time-Based
Shares
 
Performance-
Based Shares
 
Total Shares
 
Weighted-Average
Grant-Date
Fair Value
for the three months ended December 31, 2015
 
 
 
 
Nonvested balance at October 1, 2015
 
2,085

 
1,173

 
3,258

 
$
53.97

Granted
 
2,631

 
639

 
3,270

 
41.04

Vested
 
(15
)
 
(396
)
 
(411
)
 
50.21

Forfeited/canceled
 
(46
)
 
(60
)
 
(106
)
 
46.15

Nonvested Balance at December 31, 2015
 
4,655

 
1,356

 
6,011

 
$
47.33

Total unrecognized compensation cost related to nonvested stock and stock unit awards, net of estimated forfeitures, was $219.4 million at December 31, 2015. This cost is expected to be recognized over a remaining weighted-average vesting period of 2.0 years.
Note 10 – Other Income (Expenses)
Other income (expenses) consisted of the following: 
 
 
Three Months Ended
December 31,
(in millions)
 
2015
 
2014
Investment and Other Income, Net
 
 
 
 
Dividend income
 
$
2.8