Document
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 June 30, 2016
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: 576,121,369 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of July 21, 2016.

Table of Contents


INDEX TO FORM 10-Q
 
 
Page
Financial Information
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
3
 
 
4
 
 
5
 
 
6
 
 
8
 
Item 2.
25
 
Item 3.
48
 
Item 4.
48
 
 
 
 
Other Information
 
 
Item 1.
48
 
Item 1A.
48
 
Item 2.
49
 
Item 6.
50
 
 
 
 
51
52


2
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
(in millions, except per share data)
 
2016
 
2015
 
2016
 
2015
Operating Revenues
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,093.5

 
$
1,340.9

 
$
3,375.4

 
$
4,070.9

Sales and distribution fees
 
450.2

 
566.8

 
1,365.6

 
1,741.8

Shareholder servicing fees
 
61.5

 
66.5

 
185.2

 
198.4

Other
 
29.1

 
26.6

 
80.0

 
63.8

Total operating revenues
 
1,634.3

 
2,000.8

 
5,006.2

 
6,074.9

Operating Expenses
 
 
 
 
 
 
 
 
Sales, distribution and marketing
 
553.4

 
694.0

 
1,673.7

 
2,136.0

Compensation and benefits
 
326.9

 
363.5

 
1,043.7

 
1,116.5

Information systems and technology
 
50.5

 
58.3

 
151.3

 
159.4

Occupancy
 
33.1

 
30.7

 
96.8

 
97.1

General, administrative and other
 
75.0

 
84.5

 
254.4

 
256.4

Total operating expenses
 
1,038.9

 
1,231.0

 
3,219.9

 
3,765.4

Operating Income
 
595.4

 
769.8

 
1,786.3

 
2,309.5

Other Income (Expenses)
 
 
 
 
 
 
 
 
Investment and other income (losses), net
 
65.8

 
(4.7
)
 
113.7

 
149.9

Interest expense
 
(12.3
)
 
(13.7
)
 
(36.5
)
 
(26.7
)
Other income (expenses), net
 
53.5

 
(18.4
)
 
77.2

 
123.2

Income before taxes
 
648.9

 
751.4

 
1,863.5

 
2,432.7

Taxes on income
 
187.4

 
217.4

 
578.8

 
709.5

Net income
 
461.5

 
534.0

 
1,284.7

 
1,723.2

Less: net income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
14.2

 
28.6

 
29.7

 
49.4

Redeemable noncontrolling interests
 
0.9

 
1.2

 
0.4

 
(3.3
)
Net Income Attributable to Franklin Resources, Inc.
 
$
446.4

 
$
504.2

 
$
1,254.6

 
$
1,677.1

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.77

 
$
0.82

 
$
2.12

 
$
2.70

Diluted
 
0.77

 
0.82

 
2.12

 
2.70

Dividends Declared per Share
 
$
0.18

 
$
0.15

 
$
0.54

 
$
0.95














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
June 30,
 
Nine Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net Income
 
$
461.5

 
$
534.0

 
$
1,284.7

 
$
1,723.2

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Net unrealized losses on investments, net of tax
 
(4.1
)
 
(8.7
)
 
(16.4
)
 
—

Currency translation adjustments, net of tax
 
(30.8
)
 
42.2

 
(22.7
)
 
(138.8
)
Net unrealized gains (losses) on defined benefit plans, net of tax
 
0.2

 
(0.1
)
 
0.8

 
0.9

Total other comprehensive income (loss)
 
(34.7
)
 
33.4

 
(38.3
)
 
(137.9
)
Total comprehensive income
 
426.8

 
567.4

 
1,246.4

 
1,585.3

Less: comprehensive income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
14.2

 
28.6

 
29.7

 
49.4

Redeemable noncontrolling interests
 
0.9

 
1.2

 
0.4

 
(3.3
)
Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
411.7

 
$
537.6

 
$
1,216.3

 
$
1,539.2





































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)
 
June 30,
2016
 
September 30,
2015
Assets
 
 
 
 
Cash and cash equivalents
 
$
8,115.8

 
$
8,184.9

Receivables
 
812.6

 
838.0

Investments (including $1,617.1 and $1,712.3 at fair value at June 30, 2016 and September 30, 2015)
 
2,604.3

 
2,459.2

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
61.0

 
108.5

Investments, at fair value
 
897.9

 
977.4

Assets of consolidated variable interest entities
 
 
 
 
Cash and cash equivalents
 
65.3

 
74.7

Investments, at fair value
 
568.8

 
672.5

Property and equipment, net
 
508.4

 
510.1

Goodwill and other intangible assets, net
 
2,213.5

 
2,257.0

Other
 
149.9

 
253.4

Total Assets
 
$
15,997.5

 
$
16,335.7

Liabilities
 
 
 
 
Compensation and benefits
 
$
355.0

 
$
433.2

Accounts payable and accrued expenses
 
193.0

 
232.1

Dividends
 
105.6

 
92.6

Commissions
 
307.5

 
359.9

Debt
 
1,441.0

 
1,348.0

Debt of consolidated sponsored investment products
 
80.3

 
81.2

Debt of consolidated variable interest entities
 
642.5

 
726.1

Deferred taxes
 
140.8

 
241.4

Other
 
320.9

 
265.8

Total liabilities
 
3,586.6

 
3,780.3

Commitments and Contingencies (Note 10)
 

 

Redeemable Noncontrolling Interests
 
39.4

 
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; 576,780,254 and 603,517,181 shares issued and outstanding at June 30, 2016 and September 30, 2015
 
57.7

 
60.4

Retained earnings
 
12,076.9

 
12,094.8

Accumulated other comprehensive loss
 
(352.5
)
 
(314.2
)
Total Franklin Resources, Inc. stockholders’ equity
 
11,782.1

 
11,841.0

Nonredeemable noncontrolling interests
 
589.4

 
654.8

Total stockholders’ equity
 
12,371.5

 
12,495.8

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
15,997.5

 
$
16,335.7





See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

FRANKLIN RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
 
 
Nine Months Ended
June 30,
(in millions)
 
2016
 
2015
Net Income
 
$
1,284.7

 
$
1,723.2

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
57.8

 
87.2

Depreciation and other amortization
 
65.8

 
72.6

Impairment of intangible assets
 
28.2

 
0.8

Stock-based compensation
 
104.0

 
106.5

Excess tax benefit from stock-based compensation
 
(0.6
)
 
(8.1
)
Gains on sale of assets
 
(26.5
)
 
(25.2
)
Income from investments in equity method investees
 
(19.6
)
 
(9.3
)
Net losses (gains) on other investments of consolidated sponsored investment products
 
13.3

 
(30.9
)
Net gains of consolidated variable interest entities
 
(4.3
)
 
(4.5
)
Deferred income taxes
 
(8.0
)
 
(4.5
)
Other
 
4.8

 
13.3

Changes in operating assets and liabilities:
 
 
 
 
Decrease in receivables, prepaid expenses and other
 
3.7

 
4.1

Decrease (increase) in trading securities, net
 
(106.1
)
 
5.6

Increase in trading securities of consolidated sponsored investment products, net
 
(118.9
)
 
(49.8
)
Decrease in accrued compensation and benefits
 
(78.4
)
 
(24.5
)
Decrease in commissions payable
 
(52.4
)
 
(37.0
)
Increase in income taxes payable
 
24.5

 
28.4

Decrease in other liabilities
 
(6.6
)
 
(33.0
)
Net cash provided by operating activities
 
1,165.4

 
1,814.9

Purchase of investments
 
(309.0
)
 
(190.7
)
Liquidation of investments
 
330.5

 
296.4

Purchase of investments by consolidated sponsored investment products
 
(62.0
)
 
(127.5
)
Liquidation of investments by consolidated sponsored investment products
 
115.0

 
179.4

Purchase of investments by consolidated variable interest entities
 
(176.4
)
 
(214.3
)
Liquidation of investments by consolidated variable interest entities
 
267.2

 
315.0

Additions of property and equipment, net
 
(61.4
)
 
(43.5
)
Net (deconsolidation) consolidation of sponsored investment products
 
(11.9
)
 
20.5

Net cash provided by investing activities
 
92.0

 
235.3

Decrease in deposits
 
—

 
(0.3
)
Issuance of common stock
 
13.5

 
13.6

Dividends paid on common stock
 
(304.6
)
 
(574.0
)
Repurchase of common stock
 
(1,057.0
)
 
(559.5
)
Excess tax benefit from stock-based compensation
 
0.6

 
8.1

Proceeds from loan
 
93.4

 
—

Proceeds from issuance of debt
 
—

 
395.7

Payment on debt
 
—

 
(250.0
)
Proceeds from debt of consolidated sponsored investment products
 
30.5

 
454.0

Payments on debt by consolidated sponsored investment products
 
(31.3
)
 
(483.7
)
Payments on debt by consolidated variable interest entities
 
(95.7
)
 
(87.8
)
[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

FRANKLIN RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
[Table continued from previous page]
 
 
Nine Months Ended
June 30,
(in millions)
 
2016
 
2015
Payments on contingent consideration liabilities
 
$
(3.2
)
 
$
(7.7
)
Noncontrolling interests
 
(21.9
)
 
(5.6
)
Net cash used in financing activities
 
(1,375.7
)
 
(1,097.2
)
Effect of exchange rate changes on cash and cash equivalents
 
(7.7
)
 
(122.6
)
Increase (decrease) in cash and cash equivalents
 
(126.0
)
 
830.4

Cash and cash equivalents, beginning of period
 
8,368.1

 
7,596.0

Cash and Cash Equivalents, End of Period
 
$
8,242.1

 
$
8,426.4

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
560.3

 
$
706.1

Cash paid for interest
 
33.0

 
32.1

Cash paid for interest by consolidated variable interest entities and consolidated sponsored investment products
 
20.6

 
25.0




































See Notes to Condensed Consolidated Financial Statements.

7
Table of Contents

FRANKLIN RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(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 June 30, 2016.
Note 2 – New Accounting Guidance

In June 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance for the accounting for credit losses. The new guidance requires the application of a current expected credit loss model for financial assets measured at amortized cost and an allowance for credit loss model for available-for-sale debt securities. The guidance is effective for the Company on October 1, 2020 and requires a cumulative effect adjustment to retained earnings at adoption. The Company is currently evaluating the impact of adopting the guidance.
In March 2016, the FASB issued an amendment to the existing stock-based compensation guidance. The amendment requires all income tax effects of stock-based awards to be recognized as income tax expense when the awards vest or settle, provides an election to account for forfeitures as they occur and clarifies the classification of these transactions within the statement of cash flows. The amendment is effective for the Company on October 1, 2017 and requires varying transition approaches for the different changes to the guidance. The Company is currently evaluating the impact of adopting the amendment.
In February 2016, the FASB issued new guidance for the accounting for leases. The new guidance requires lessees to recognize assets and liabilities arising from substantially all leases. The guidance is effective for the Company on October 1, 2019 and requires a modified retrospective approach at adoption. The Company is currently evaluating the impact of adopting the guidance.
In January 2016, the FASB 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 is effective for the Company on October 1, 2018 and requires a cumulative effect adjustment to retained earnings at adoption. The Company is currently evaluating the impact of adopting the amendment.
In February 2015, the FASB issued an amendment to the existing consolidation guidance. The amendment modifies the consolidation framework for certain investment entities and all limited partnerships. It also eliminates certain criteria used to determine whether fees paid to a decision maker are a variable interest. The Company will adopt the amended guidance on October 1, 2016 and recognize a cumulative effect adjustment to retained earnings. The adoption is expected to result in the consolidation of sponsored investment products (“SIPs”) that will change from voting interest entities to variable interest entities (“VIEs”) and become subject to a lower threshold for consolidation. In addition, certain collateralized loan obligations (“CLOs”) for which the Company will no longer be the primary beneficiary and several limited partnerships are expected to be deconsolidated upon adoption of the amendment.
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.

8
Table of Contents

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 nine months ended June 30, 2016
 
 
 
Balance at October 1, 2015
 
$
11,841.0

 
$
654.8

 
$
12,495.8

Net income
 
1,254.6

 
29.7

 
1,284.3

Other comprehensive loss
 
(38.3
)
 
 
 
(38.3
)
Cash dividends on common stock
 
(317.6
)
 
 
 
(317.6
)
Repurchase of common stock
 
(1,068.1
)
 
 
 
(1,068.1
)
Net distributions
 
 
 
(95.1
)
 
(95.1
)
Other1
 
110.5

 
 
 
110.5

Balance at June 30, 2016
 
$
11,782.1

 
$
589.4

 
$
12,371.5

__________________ 
1 
Primarily relates to stock-based compensation plans.
(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the nine months ended June 30, 2015
 
 
 
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
 
1,677.1

 
49.4

 
1,726.5

Other comprehensive loss
 
(137.9
)
 
 
 
(137.9
)
Cash dividends on common stock
 
(591.3
)
 
 
 
(591.3
)
Repurchase of common stock
 
(559.5
)
 
 
 
(559.5
)
Net distributions
 
 
 
(49.3
)
 
(49.3
)
Other1
 
127.2

 
 
 
127.2

Balance at June 30, 2015
 
$
12,085.5

 
$
628.4

 
$
12,713.9

__________________ 
1 
Primarily relates to stock-based compensation plans.
During the three and nine months ended June 30, 2016, the Company repurchased 9.3 million and 29.4 million shares of its common stock at a cost of $326.7 million and $1,068.1 million under its stock repurchase program. In June 2016 and October 2015, the Company’s Board of Directors authorized the repurchase of up to 50.0 million and 30.0 million additional shares of its common stock under the stock repurchase program. At June 30, 2016, 57.9 million shares remained available for repurchase under the program, which is not subject to an expiration date. During the three and nine months ended June 30, 2015, the Company repurchased 4.3 million and 10.6 million shares of its common stock at a cost of $218.3 million and $559.5 million.

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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
June 30,
 
Nine Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income attributable to Franklin Resources, Inc.
 
$
446.4

 
$
504.2

 
$
1,254.6

 
$
1,677.1

Less: allocation of earnings to participating nonvested stock and stock unit awards
 
3.2

 
3.4

 
8.5

 
10.5

Net Income Available to Common Stockholders
 
$
443.2

 
$
500.8

 
$
1,246.1

 
$
1,666.6

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
578.9

 
614.1

 
587.9

 
617.3

Dilutive effect of nonparticipating nonvested stock unit awards
 
—

 
0.1

 
—

 
0.1

Weighted-Average Shares Outstanding – Diluted
 
578.9

 
614.2

 
587.9

 
617.4

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.77

 
$
0.82

 
$
2.12

 
$
2.70

Diluted
 
0.77

 
0.82

 
2.12

 
2.70

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 1.3 million for both the three and nine months ended June 30, 2016, and 1.0 million and 0.9 million for the three and nine months ended June 30, 2015.
Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated SIPs and consolidated VIEs. See Note 9 – 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)
 
June 30,
2016
 
September 30,
2015
Investment securities, trading
 
 
 
 
SIPs
 
$
1,051.7

 
$
1,166.0

Debt and other equity securities
 
292.9

 
85.2

Total investment securities, trading
 
1,344.6

 
1,251.2

Investment securities, available-for-sale
 
 
 
 
SIPs
 
254.5

 
408.3

Debt securities
 
2.1

 
23.0

Other equity securities
 
1.4

 
15.1

Total investment securities, available-for-sale
 
258.0

 
446.4

Investments in equity method investees
 
790.3

 
655.3

Other investments
 
211.4

 
106.3

Total
 
$
2,604.3

 
$
2,459.2

Debt and other equity trading securities consist primarily of corporate debt.
At June 30, 2016 and September 30, 2015, investments with aggregate carrying amounts of $124.6 million and $4.3 million were pledged as collateral.

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Table of Contents

Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:
(in millions)
 
 
 
Gross Unrealized
 
 
as of June 30, 2016
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
249.3

 
$
10.2

 
$
(5.0
)
 
$
254.5

Debt securities
 
2.1

 
—

 
—

 
2.1

Other equity securities
 
1.4

 
—

 
—

 
1.4

Total
 
$
252.8

 
$
10.2

 
$
(5.0
)
 
$
258.0

(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 June 30, 2016
 
 
 
 
 
SIPs
 
$
49.7

 
$
(3.3
)
 
$
18.9

 
$
(1.7
)
 
$
68.6

 
$
(5.0
)
 
 
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
)
The Company recognized $2.2 million and $7.0 million of other-than-temporary impairment during the three and nine months ended June 30, 2016. The amount for the three-month period related to available-for-sale SIPs and the amount for the nine-month period consisted of $5.9 million related to available-for-sale SIPs and $1.1 million related to cost method investments. During the three and nine months ended June 30, 2015, the Company recognized other-than-temporary impairment of $3.5 million and $5.5 million, of which $1.7 million and $3.7 million related to available-for-sale SIPs and $1.8 million related to cost method investments.

11
Table of Contents

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 9 – 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 June 30, 2016
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
SIPs
 
$
1,051.7

 
$
—

 
$
—

 
$
1,051.7

Debt and other equity securities
 
2.7

 
81.8

 
208.4

 
292.9

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
254.5

 
—

 
—

 
254.5

Debt securities
 
—

 
2.1

 
—

 
2.1

Other equity securities
 
1.4

 
—

 
—

 
1.4

Life settlement contracts
 
—

 
—

 
14.5

 
14.5

Total Assets Measured at Fair Value
 
$
1,310.3

 
$
83.9

 
$
222.9

 
$
1,617.1

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
96.9

 
$
96.9

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2015
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
SIPs
 
$
1,166.0

 
$
—

 
$
—

 
$
1,166.0

Debt and other equity securities
 
2.2

 
77.0

 
6.0

 
85.2

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 all SIPs and certain other equity securities are determined based on their published net asset values and they are classified as Level 1. The fair values of certain debt and 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, and they are classified as Level 2. The fair values of other debt securities and all life settlement contracts are determined using discounted cash flow valuation techniques using significant unobservable inputs and they are classified as Level 3.
The fair value of contingent consideration liabilities, which are classified as Level 3, 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 nine months ended June 30, 2016 and 2015.

12
Table of Contents

Changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
 
 
2016
 
2015
(in millions)
 
Investments
 
Contingent
Consideration
Liability
 
Investments
 
Contingent
Consideration
Liabilities
for the three months ended June 30,
 
 
 
 
Balance at beginning of period
 
$
211.1

 
$
(96.2
)
 
$
18.6

 
$
(98.7
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income (losses), net
 
11.9

 
—

 
0.3

 
—

Included in general, administrative and other expense
 
—

 
(1.2
)
 
—

 
(0.2
)
Purchases
 
3.4

 
—

 
—

 
—

Settlements
 
—

 
0.5

 
(0.2
)
 
0.5

Foreign exchange revaluation
 
(3.5
)
 
—

 
—

 
—

Balance at End of Period
 
$
222.9

 
$
(96.9
)
 
$
18.7

 
$
(98.4
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
11.9

 
$
(1.2
)
 
$
0.2

 
$
(0.2
)
 
 
2016
 
2015
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
 
Contingent
Consideration
Liabilities
for the nine months ended June 30,
 
 
 
 
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 (losses), net
 
13.4

 
—

 
1.4

 
—

Included in general, administrative and other expense
 
—

 
2.2

 
—

 
(7.7
)
Other
 
—

 
—

 
—

 
(0.1
)
Purchases
 
189.9

 
—

 
4.3

 
—

Settlements
 
(1.7
)
 
3.8

 
(1.0
)
 
7.7

Foreign exchange revaluation
 
0.6

 
—

 
—

 
0.2

Balance at End of Period
 
$
222.9

 
$
(96.9
)
 
$
18.7

 
$
(98.4
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
12.7

 
$
2.2

 
$
0.8

 
$
(7.8
)
Valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of June 30, 2016
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
208.4

 
Discounted cash flow
 
Discount rate
 
4.2%–8.5% (7.1%)
 
 
 
Risk premium
 
2.8%–13.1% (12.3%)
 
 
 
Liquidity discount
 
0.0%–10.0% (9.4%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
14.5

 
Discounted cash flow
 
Life expectancy
 
20–134 months (66)
Discount rate
 
3.3%–18.0% (11.5%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
96.9

 
Discounted cash flow
 
AUM growth rate
 
2.5%–10.4% (5.1%)
EBITDA margin
 
12.4%
Discount rate
 
14.0%

13
Table of Contents

(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2015
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
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 – debt and other equity securities, a significant increase (decrease) in the discount rate, risk premium or liquidity discount 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.
Financial instruments that were not measured at fair value were as follows:
(in millions)
 
 
 
June 30, 2016
 
September 30, 2015
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
8,115.8

 
$
8,115.8

 
$
8,184.9

 
$
8,184.9

Other investments
 
 
 
 
 
 
 
 
 
 
Time deposits
 
2
 
146.6

 
146.6

 
37.0

 
37.0

Cost method investments
 
3
 
50.3

 
61.4

 
54.6

 
60.1

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt
 
 
 
 
 
 
 
 
 
 
Senior notes
 
2
 
1,348.4

 
1,413.1

 
1,348.0

 
1,374.9

Loan
 
2
 
92.6

 
92.6

 
—

 
—



14
Table of Contents

Note 7 – Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net consisted of the following:
(in millions)
 
June 30,
2016
 
September 30,
2015
Goodwill
 
$
1,661.4

 
$
1,661.2

Indefinite-lived intangible assets
 
531.9

 
538.3

Definite-lived intangible assets, net
 
20.2

 
57.5

Total
 
$
2,213.5

 
$
2,257.0

The change in the carrying value of goodwill during the nine months ended June 30, 2016 resulted from foreign exchange revaluation. Indefinite-lived intangible assets consist of management contracts. No impairment of goodwill or indefinite-lived intangible assets was recognized during the nine months ended June 30, 2016 and fiscal year 2015.
Definite-lived intangible assets were as follows:
 
 
June 30, 2016
 
September 30, 2015
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Management contracts
 
$
60.4

 
$
(40.2
)
 
$
20.2

 
$
89.5

 
$
(36.2
)
 
$
53.3

Customer base
 
—

 
—

 
—

 
164.5

 
(160.3
)
 
4.2

Total
 
$
60.4

 
$
(40.2
)
 
$
20.2

 
$
254.0

 
$
(196.5
)
 
$
57.5

Amortization expense related to definite-lived intangible assets was $0.3 million and $9.4 million for the three and nine months ended June 30, 2016, and $5.1 million and $15.3 million for the same periods in the prior fiscal year.
The Company recognized impairment of $28.2 million of management contract definite-lived intangible assets, primarily related to the K2 Advisors Holdings, LLC acquisition, during the nine months ended June 30, 2016 due to increased investor redemptions, lower estimates of future sales and renegotiations of certain investment management fees. No impairment was recognized during the three months ended June 30, 2016. Impairment of management contract definite-lived intangible assets of $8.2 million was recognized during fiscal year 2015, of which $0.8 million was recognized during the three and nine months ended June 30, 2015.
Definite-lived intangible assets had a weighted-average remaining useful life of 7.7 years at June 30, 2016, with estimated remaining amortization expense as follows:
(in millions)
 
 
for the fiscal years ending September 30,
 
Amount
2016
 
$
1.1

2017
 
4.4

2018
 
4.4

2019
 
1.6

2020
 
1.3

Thereafter
 
7.4

Total
 
$
20.2



15
Table of Contents

Note 8 – Debt
The disclosures below include details of the Company’s debt, excluding that of consolidated SIPs and consolidated VIEs. See Note 9 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the debt of these entities.
Debt consisted of the following:
(in millions)
 
June 30,
2016
 
Effective
Interest Rate
 
September 30,
2015
 
Effective
Interest Rate
Senior notes
 
 
 
 
 
 
 
 
$300 million 1.375% notes due September 2017
 
$
299.6

 
1.66
%
 
$
299.4

 
1.66
%
$350 million 4.625% notes due May 2020
 
349.9

 
4.74
%
 
349.8

 
4.74
%
$300 million 2.800% notes due September 2022
 
299.5

 
2.93
%
 
299.5

 
2.93
%
$400 million 2.850% notes due March 2025
 
399.4

 
2.97
%
 
399.3

 
2.97
%
 
 
1,348.4

 
 
 
1,348.0

 
 
Other
 
 
 
 
 
 
 
 
Loan due March 2017
 
92.6

 
9.89
%
 
—

 
N/A

Total
 
$
1,441.0

 
 
 
$
1,348.0

 
 
At June 30, 2016, the Company’s outstanding senior unsecured and unsubordinated notes had an aggregate face value of $1.4 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.
In March 2016, the Company borrowed 6.3 billion Indian Rupees at a fixed interest rate of 9.89% to purchase certain securities from SIPs domiciled in India. Interest on the loan is payable monthly, and the loan may be prepaid without penalty after six months. To secure the loan, the Company concurrently entered into a standby letter of credit for 6.5 billion Indian Rupees collateralized by a $116.0 million time deposit. The loan agreement requires that the borrowing entity, a subsidiary of the Company located in India, maintain a specified minimum level of capital.
The Company was in compliance with all debt covenants at June 30, 2016.
At June 30, 2016, maturities for debt were as follows: 
(in millions)
 
Carrying Amount
for the fiscal years ending September 30,
2016
 
$
—

2017
 
392.2

2018
 
—

2019
 
—

2020
 
349.9

Thereafter
 
698.9

Total
 
$
1,441.0

At June 30, 2016, 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 2012.

16
Table of Contents

Note 9 – 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:
 
 
June 30, 2016
 
September 30, 2015
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
61.0

 
$
65.3

 
$
126.3

 
$
108.5

 
$
74.7

 
$
183.2

Receivables
 
17.6

 
34.3

 
51.9

 
10.0

 
11.5

 
21.5

Investments, at fair value
 
897.9

 
568.8

 
1,466.7

 
977.4

 
672.5

 
1,649.9

Other assets
 
1.5

 
—

 
1.5

 
0.7

 
—

 
0.7

Total Assets
 
$
978.0

 
$
668.4

 
$
1,646.4

 
$
1,096.6

 
$
758.7

 
$
1,855.3

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
16.8

 
$
21.5

 
$
38.3

 
$
10.8

 
$
25.3

 
$
36.1

Debt
 
80.3

 
642.5

 
722.8

 
81.2

 
726.1

 
807.3

Other liabilities
 
5.1

 
—

 
5.1

 
6.3

 
—

 
6.3

Total liabilities
 
102.2

 
664.0

 
766.2

 
98.3

 
751.4

 
849.7

Redeemable Noncontrolling Interests
 
39.4

 
—

 
39.4

 
59.6

 
—

 
59.6

Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
Franklin Resources, Inc.’s interests
 
271.3

 
4.4

 
275.7

 
308.8

 
7.3

 
316.1

Nonredeemable noncontrolling interests
 
565.1

 
—

 
565.1

 
629.9

 
—

 
629.9

Total stockholders’ equity
 
836.4

 
4.4

 
840.8

 
938.7

 
7.3

 
946.0

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
978.0

 
$
668.4

 
$
1,646.4

 
$
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 and nine months ended June 30, 2016 and 2015.
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 34 SIPs as of June 30, 2016 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.

17
Table of Contents

Consolidated VIEs
Consolidated VIEs consist of sponsored CLOs, which are asset-backed financing entities collateralized by a pool of corporate debt securities.
The Company recognized $2.2 million and $3.0 million of net gains related to its own economic interests in the CLOs during the three and nine months ended June 30, 2016, and $2.4 million and $7.5 million of net gains during the three and nine months ended June 30, 2015.
The unpaid principal balance and fair value of the investments of the CLOs were as follows:
(in millions)
 
June 30,
2016
 
September 30,
2015
Unpaid principal balance
 
$
581.0

 
$
694.5

Difference between unpaid principal balance and fair value
 
(12.2
)
 
(22.0
)
Fair Value
 
$
568.8

 
$
672.5

There were no investments 90 days or more past due at June 30, 2016 or September 30, 2015.
The unpaid principal balance of the debt of the CLOs was $691.7 million and $769.3 million at June 30, 2016 and September 30, 2015.
Investments
Investments of consolidated SIPs and consolidated VIEs consisted of the following:
 
 
June 30, 2016
 
September 30, 2015
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Investment securities, trading
 
$
160.8

 
$
—

 
$
160.8

 
$
180.5

 
$
—

 
$
180.5

Other debt securities
 
117.1

 
568.8

 
685.9

 
129.2

 
672.5

 
801.7

Other equity securities
 
620.0

 
—

 
620.0

 
667.7

 
—

 
667.7

Total
 
$
897.9

 
$
568.8

 
$
1,466.7

 
$
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:
 
 
June 30,
2016
 
Effective
Interest
Rate
 
September 30,
2015
 
Effective
Interest
Rate
(in millions)
 
 
 
 
Debt of consolidated SIPs due fiscal years 2016-2019
 
$
80.3

 
4.74
%
 
$
81.2

 
4.71
%
Debt of consolidated VIEs due fiscal years 2018-2024
 
642.5

 
2.09
%
 
726.1

 
1.62
%
Total
 
$
722.8

 
 
 
$
807.3

 
 
The debt of consolidated SIPs had fixed and floating interest rates ranging from 2.36% to 6.19% at June 30, 2016, and from 2.30% to 5.81% at 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 0.86% to 10.13% at June 30, 2016, and from 0.54% to 9.79% at September 30, 2015.

18
Table of Contents

At June 30, 2016, 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
 
$
22.9

2017
 
19.3

2018
 
109.1

2019
 
291.3

2020
 
—

Thereafter
 
280.2

Total
 
$
722.8

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 June 30, 2016
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
65.3

 
$
—

 
$
—

 
$
65.3

Receivables of consolidated VIEs
 
—

 
34.3

 
—

 
34.3

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Equity securities
 
29.0

 
3.2

 
616.8

 
649.0

Debt securities
 
—

 
131.2

 
117.7

 
248.9

Investments of consolidated VIEs
 
—

 
568.0

 
0.8

 
568.8

Total Assets Measured at Fair Value
 
$
94.3

 
$