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, 2017
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 (§232.405 of this chapter) 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer     x
Accelerated filer     o
Non-accelerated filer  o  (Do not check if a smaller reporting company)
Smaller reporting company    o
 
Emerging growth company    o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).    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: 557,701,394 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of July 21, 2017.

Table of Contents


INDEX TO FORM 10-Q
 
 
Page
Financial Information
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
3
 
 
4
 
 
5
 
 
6
 
 
8
 
Item 2.
23
 
Item 3.
46
 
Item 4.
46
 
 
 
 
Other Information
 
 
Item 1.
47
 
Item 1A.
47
 
Item 2.
47
 
Item 6.
47
 
 
 
 
48
49


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)
 
2017
 
2016
 
2017
 
2016
Operating Revenues
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,097.0

 
$
1,093.5

 
$
3,249.4

 
$
3,375.4

Sales and distribution fees
 
433.3

 
450.2

 
1,283.8

 
1,365.6

Shareholder servicing fees
 
56.7

 
61.5

 
169.7

 
185.2

Other
 
26.9

 
29.1

 
72.4

 
80.0

Total operating revenues
 
1,613.9

 
1,634.3

 
4,775.3

 
5,006.2

Operating Expenses
 
 
 
 
 
 
 
 
Sales, distribution and marketing
 
541.2

 
553.4

 
1,596.0

 
1,673.7

Compensation and benefits
 
342.7

 
326.9

 
997.6

 
1,043.7

Information systems and technology
 
54.1

 
50.5

 
159.8

 
151.3

Occupancy
 
30.2

 
33.1

 
88.3

 
96.8

General, administrative and other
 
81.5

 
75.0

 
227.0

 
254.4

Total operating expenses
 
1,049.7

 
1,038.9

 
3,068.7

 
3,219.9

Operating Income
 
564.2

 
595.4

 
1,706.6

 
1,786.3

Other Income (Expenses)
 
 
 
 
 
 
 
 
Investment and other income, net
 
92.2

 
65.8

 
222.9

 
113.7

Interest expense
 
(12.9
)
 
(12.3
)
 
(38.8
)
 
(36.5
)
Other income, net
 
79.3

 
53.5

 
184.1

 
77.2

Income before taxes
 
643.5

 
648.9

 
1,890.7

 
1,863.5

Taxes on income
 
184.1

 
187.4

 
577.5

 
578.8

Net income
 
459.4


461.5

 
1,313.2

 
1,284.7

Less: net income attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
12.5

 
14.2

 
8.6

 
29.7

Redeemable noncontrolling interests
 
36.3

 
0.9

 
33.1

 
0.4

Net Income Attributable to Franklin Resources, Inc.
 
$
410.6

 
$
446.4

 
$
1,271.5

 
$
1,254.6

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.73

 
$
0.77

 
$
2.25

 
$
2.12

Diluted
 
0.73

 
0.77

 
2.25

 
2.12

Dividends Declared per Share
 
$
0.20

 
$
0.18

 
$
0.60

 
$
0.54





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,
 
2017
 
2016
 
2017
 
2016
Net Income
 
$
459.4

 
$
461.5

 
$
1,313.2

 
$
1,284.7

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on investments, net of tax
 
(1.6
)
 
(4.1
)
 
1.4

 
(16.4
)
Currency translation adjustments, net of tax
 
54.0

 
(30.8
)
 
32.3

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

 
(0.2
)
 
0.8

Total other comprehensive income (loss)
 
52.2

 
(34.7
)
 
33.5

 
(38.3
)
Total comprehensive income
 
511.6

 
426.8

 
1,346.7

 
1,246.4

Less: comprehensive income attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
12.5

 
14.2

 
8.6

 
29.7

Redeemable noncontrolling interests
 
36.3

 
0.9

 
33.1

 
0.4

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
462.8

 
$
411.7

 
$
1,305.0

 
$
1,216.3



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,
2017
 
September 30,
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
8,564.8

 
$
8,247.1

Receivables
 
978.6

 
794.3

Investments (including $469.9 and $1,437.6 at fair value at June 30, 2017 and September 30, 2016)
 
1,455.7

 
2,416.6

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
221.4

 
236.2

Investments, at fair value
 
3,373.0

 
1,513.4

Property and equipment, net
 
508.8

 
523.2

Goodwill and other intangible assets, net
 
2,228.0

 
2,211.3

Other
 
145.9

 
156.7

Total Assets
 
$
17,476.2

 
$
16,098.8

 
 
 
 
 
Liabilities
 
 
 
 
Compensation and benefits
 
$
359.8

 
$
357.4

Accounts payable and accrued expenses
 
275.0

 
233.3

Dividends
 
113.7

 
104.6

Commissions
 
313.0

 
302.0

Debt
 
1,374.7

 
1,401.2

Debt of consolidated sponsored investment products
 
53.1


682.2

Deferred taxes
 
156.5

 
161.5

Other
 
294.7

 
267.3

Total liabilities
 
2,940.5

 
3,509.5

Commitments and Contingencies (Note 9)
 

 

Redeemable Noncontrolling Interests
 
1,830.6

 
61.1

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; 557,960,048 and 570,345,156 shares issued and outstanding at June 30, 2017 and September 30, 2016
 
55.8

 
57.0

Retained earnings
 
12,665.2

 
12,226.2

Accumulated other comprehensive loss
 
(321.0
)
 
(347.4
)
Total Franklin Resources, Inc. stockholders’ equity
 
12,400.0

 
11,935.8

Nonredeemable noncontrolling interests
 
305.1

 
592.4

Total stockholders’ equity
 
12,705.1

 
12,528.2

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
17,476.2

 
$
16,098.8




See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

FRANKLIN RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
 
 
Nine Months Ended
June 30,
(in millions)
 
2017
 
2016
Net Income
 
$
1,313.2

 
$
1,284.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
52.9

 
57.8

Depreciation and other amortization
 
62.3

 
65.8

Impairment of intangible assets
 
4.6

 
28.2

Stock-based compensation
 
95.0

 
104.0

Excess tax benefit from stock-based compensation
 
(0.6
)
 
(0.6
)
Gains on sale of assets
 
(5.4
)
 
(26.5
)
Income from investments in equity method investees
 
(88.4
)
 
(19.6
)
Net (gains) losses on other investments of consolidated sponsored investment products
 
(15.7
)
 
13.3

Deferred income taxes
 
(7.0
)
 
(8.0
)
Other
 
(17.1
)
 
0.5

Changes in operating assets and liabilities:
 
 
 
 
Decrease (increase) in receivables, prepaid expenses and other
 
(84.7
)
 
3.7

Decrease (increase) in trading securities, net
 
68.6

 
(106.1
)
Increase in trading securities of consolidated sponsored investment products, net
 
(528.9
)
 
(118.9
)
Increase (decrease) in accrued compensation and benefits
 
2.0

 
(78.4
)
Increase (decrease) in commissions payable
 
11.0

 
(52.4
)
Increase in income taxes payable
 
68.8

 
24.5

Increase (decrease) in other liabilities
 
27.7

 
(6.6
)
Net cash provided by operating activities
 
958.3

 
1,165.4

Purchase of investments
 
(336.2
)
 
(309.0
)
Liquidation of investments
 
271.3

 
330.5

Purchase of other investments by consolidated sponsored investment products
 
(114.3
)
 
(238.4
)
Liquidation of other investments by consolidated sponsored investment products
 
333.9

 
382.2

Additions of property and equipment, net
 
(49.0
)
 
(61.4
)
Adoption of new accounting guidance
 
(49.2
)
 
—

Acquisition of business
 
(14.0
)
 
—

Net consolidation (deconsolidation) of sponsored investment products
 
22.4

 
(11.9
)
Net cash provided by investing activities
 
64.9

 
92.0

Issuance of common stock
 
13.0

 
13.5

Dividends paid on common stock
 
(329.4
)
 
(304.6
)
Repurchase of common stock
 
(600.6
)
 
(1,057.0
)
Excess tax benefit from stock-based compensation
 
0.6

 
0.6

Proceeds from loan
 
—

 
93.4

Payment on loan
 
(22.5
)
 
—

Proceeds from debt of consolidated sponsored investment products
 
0.7

 
30.5

Payments on debt by consolidated sponsored investment products
 
(288.3
)
 
(127.0
)
Payments on contingent consideration liabilities
 
(31.7
)
 
(3.2
)
Noncontrolling interests
 
527.4

 
(21.9
)
Net cash used in financing activities
 
(730.8
)
 
(1,375.7
)

[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]
 
 
Nine Months Ended
June 30,
(in millions)
 
2017
 
2016
Effect of exchange rate changes on cash and cash equivalents
 
$
10.5

 
$
(7.7
)
Increase (decrease) in cash and cash equivalents
 
302.9

 
(126.0
)
Cash and cash equivalents, beginning of period
 
8,483.3

 
8,368.1

Cash and Cash Equivalents, End of Period
 
$
8,786.2

 
$
8,242.1

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
520.5

 
$
560.3

Cash paid for interest
 
34.4

 
33.0

Cash paid for interest by consolidated sponsored investment products
 
10.3

 
20.6





See Notes to Condensed Consolidated Financial Statements.

7
Table of Contents

FRANKLIN RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(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, 2016 (“fiscal year 2016”). 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, 2017.
Note 2 – New Accounting Guidance
Recently Adopted Accounting Guidance
On October 1, 2016, the Company adopted an amendment to the consolidation guidance issued by the Financial Accounting Standards Board (“FASB”) using the modified retrospective approach which did not require the restatement of prior year periods. 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 and results in a lower consolidation threshold for variable interest entities (“VIEs”). The adoption caused the consolidation of 24 sponsored investment products (“SIPs”) that changed from voting interest entities (“VOEs”) to VIEs and three other SIPs that are VIEs. In addition, two collateralized loan obligations (“CLOs”) for which the Company was previously the primary beneficiary and five limited partnerships were deconsolidated. The adoption resulted in net increases in total assets, redeemable noncontrolling interests and retained earnings of $180.9 million, $824.7 million and $5.8 million, and net decreases in total liabilities, nonredeemable noncontrolling interests and other equity of $317.9 million, $324.6 million and $7.1 million as of October 1, 2016.
Accounting Guidance Not Yet Adopted
The FASB issued an amendment to the existing stock-based compensation guidance in March 2016. The amendment requires all income tax effects of stock-based awards to be recognized as income tax expense when the awards vest or settle and clarifies the classification of these transactions within the statement of cash flows. The amendment also provides an election to account for forfeitures as they occur, which the Company expects to take. 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 expects the adoption to increase the volatility of income tax expense as a result of fluctuations in its stock price.
The FASB issued new guidance in May 2014 that requires use of a single principles-based model for recognition of revenue from contracts with customers. The core principle of the model is that revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. The guidance also changes the accounting for certain contract costs and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The guidance is effective for the Company on October 1, 2018 and allows for either a full retrospective or modified approach at adoption. While the Company’s implementation efforts are ongoing, it does not expect adoption of the guidance to have a significant impact on the timing of recognition for the majority of its operating revenue. The Company is evaluating certain costs to determine if they should be capitalized or expensed based on the criteria in the guidance for costs to obtain or fulfill a contract. Additionally, it is assessing certain arrangements to determine whether it continues to act as a principal and present the related revenue gross of associated expenses. The overall impact upon adoption may differ based on further evaluation and additional facts and circumstances identified during implementation. The Company has not yet determined its transition approach.

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Table of Contents

The FASB issued an amendment to the existing financial instruments guidance in January 2016. The amendment requires substantially all equity investments in nonconsolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting, which will impact all equity securities currently classified as available-for-sale. 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, which the Company expects to take. The amendment is effective for the Company on October 1, 2018 and requires a cumulative effect adjustment to retained earnings at adoption. The Company does not expect the adoption to have a material impact on its consolidated financial statements; however, this could be affected by market volatility as well as additional facts and circumstances identified during implementation.
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 2016.
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, 2017
 
 
 
Balance at October 1, 2016
 
$
11,935.8

 
$
592.4

 
$
12,528.2

Adoption of new accounting guidance
 
(1.3
)
 
(324.6
)
 
(325.9
)
Net income
 
1,271.5

 
8.6

 
1,280.1

Other comprehensive income
 
33.5

 
 
 
33.5

Cash dividends declared on common stock
 
(338.5
)
 
 
 
(338.5
)
Repurchase of common stock
 
(603.1
)
 
 
 
(603.1
)
Stock-based compensation
 
102.1

 
 
 
102.1

Net subscriptions and other
 
 
 
38.0

 
38.0

Deconsolidation of sponsored investment product
 
 
 
(9.3
)
 
(9.3
)
Balance at June 30, 2017
 
$
12,400.0

 
$
305.1

 
$
12,705.1

(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 declared on common stock
 
(317.6
)
 
 
 
(317.6
)
Repurchase of common stock
 
(1,068.1
)
 
 
 
(1,068.1
)
Stock-based compensation
 
110.5

 
 
 
110.5

Net distributions and other
 
 
 
(95.1
)
 
(95.1
)
Balance at June 30, 2016
 
$
11,782.1

 
$
589.4

 
$
12,371.5

During the three and nine months ended June 30, 2017, the Company repurchased 4.1 million and 15.2 million shares of its common stock at a cost of $174.6 million and $603.1 million under its stock repurchase program. At June 30, 2017, 35.5 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, 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.

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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,
 
2017
 
2016
 
2017
 
2016
Net income attributable to Franklin Resources, Inc.
 
$
410.6

 
$
446.4

 
$
1,271.5

 
$
1,254.6

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

 
3.2

 
9.9

 
8.5

Net Income Available to Common Stockholders
 
$
407.1

 
$
443.2

 
$
1,261.6

 
$
1,246.1

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
556.2

 
578.9

 
560.5

 
587.9

Dilutive effect of nonparticipating nonvested stock unit awards
 
0.5

 
—

 
0.3

 
—

Weighted-Average Shares Outstanding – Diluted
 
556.7

 
578.9

 
560.8

 
587.9

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.73

 
$
0.77

 
$
2.25

 
$
2.12

Diluted
 
0.73

 
0.77

 
2.25

 
2.12

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 0.2 million and 0.7 million for the three and nine months ended June 30, 2017, and 1.3 million for both the three and nine months ended June 30, 2016.
Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated SIPs. See Note 7 – Consolidated Sponsored Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions)
 
June 30,
2017
 
September 30,
2016
Investment securities, trading
 
 
 
 
SIPs
 
$
91.2

 
$
844.4

Debt and other equity securities
 
286.6

 
277.5

Total investment securities, trading
 
377.8

 
1,121.9

Investment securities, available-for-sale
 
 
 
 
SIPs
 
77.1

 
297.7

Debt and other equity securities
 
1.7

 
3.7

Total investment securities, available-for-sale
 
78.8

 
301.4

Investments in equity method investees
 
878.4

 
797.4

Other investments
 
120.7

 
195.9

Total
 
$
1,455.7

 
$
2,416.6

Debt and other equity trading securities consist primarily of corporate debt.
Investment securities with aggregate carrying amounts of $38.7 million and $117.3 million were pledged as collateral at June 30, 2017 and September 30, 2016.

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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
 
 
 
Cost Basis
 
Gains
 
Losses
 
Fair Value
as of June 30, 2017
 
 
 
 
 
 
 
 
SIPs
 
$
74.9

 
$
8.3

 
$
(6.1
)
 
$
77.1

Debt and other equity securities
 
1.6

 
0.1

 
—

 
1.7

Total
 
$
76.5

 
$
8.4

 
$
(6.1
)
 
$
78.8

 
 
 
 
 
 
 
 
 
as of September 30, 2016
 
 
 
 
 
 
 
 
SIPs
 
$
289.6

 
$
13.7

 
$
(5.6
)
 
$
297.7

Debt and other equity securities
 
3.6

 
0.1

 
—

 
3.7

Total
 
$
293.2

 
$
13.8

 
$
(5.6
)
 
$
301.4

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, 2017
 
 
 
 
 
 
 
 
 
 
 
 
SIPs
 
$
23.0

 
$
(5.8
)
 
$
3.8

 
$
(0.3
)
 
$
26.8

 
$
(6.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
as of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
SIPs
 
$
75.8

 
$
(4.3
)
 
$
18.0

 
$
(1.3
)
 
$
93.8

 
$
(5.6
)
The Company recognized $0.5 million and $0.8 million of other-than-temporary impairment during the three and nine months ended June 30, 2017. During the three and nine months ended June 30, 2016, the Company recognized other-than-temporary impairment of $2.2 million and $7.0 million. The amount for the three-month period was all related to available-for-sale SIPs and the amount for the nine-month period included $5.9 million 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. See Note 7 – Consolidated Sponsored Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liability measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of June 30, 2017
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
SIPs
 
$
91.2

 
$
—

 
$
—

 
$
91.2

Debt and other equity securities
 
6.7

 
78.7

 
201.2

 
286.6

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
77.1

 
—

 
—

 
77.1

Debt and other equity securities
 
0.8

 
0.6

 
0.3

 
1.7

Life settlement contracts
 
—

 
—

 
13.3

 
13.3

Total Assets Measured at Fair Value
 
$
175.8

 
$
79.3

 
$
214.8

 
$
469.9

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
54.8

 
$
54.8


11
Table of Contents

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2016
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
SIPs
 
$
844.4

 
$
—

 
$
—

 
$
844.4

Debt and other equity securities
 
2.6

 
84.1

 
190.8

 
277.5

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
297.7

 
—

 
—

 
297.7

Debt and other equity securities
 
1.6

 
2.1

 
—

 
3.7

Life settlement contracts
 
—

 
—

 
14.3

 
14.3

Total Assets Measured at Fair Value
 
$
1,146.3

 
$
86.2

 
$
205.1

 
$
1,437.6

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
98.1

 
$
98.1

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, except for the fair value of certain debt securities which was determined using market pricing as of June 30, 2017; both techniques use significant unobservable inputs and the assets are classified as Level 3.
The fair value of the contingent consideration liability, which is 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 Level 3, during the nine months ended June 30, 2017 and 2016.
Changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
 
 
2017
 
2016
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
 
Contingent
Consideration
Liability
for the three months ended June 30,
 
 
 
 
Balance at beginning of period
 
$
211.0

 
$
(60.4
)
 
$
211.1

 
$
(96.2
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
1.7

 
—

 
11.9

 
—

Included in general, administrative and other expense
 
—

 
5.6

 
—

 
(1.2
)
Purchases
 
1.3

 
—

 
3.4

 
—

Settlements
 
(0.1
)
 
—

 
—

 
0.5

Foreign exchange revaluation
 
0.9

 
—

 
(3.5
)
 
—

Balance at End of Period
 
$
214.8

 
$
(54.8
)
 
$
222.9

 
$
(96.9
)
Change in unrealized gains (losses) included in net income relating to assets and liability held at end of period
 
$
2.2

 
$
(0.1
)
 
$
11.9

 
$
(1.2
)

12
Table of Contents

 
 
2017
 
2016
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
 
Contingent
Consideration
Liability
for the nine months ended June 30,
 
 
 
 
Balance at beginning of period
 
$
205.1

 
$
(98.1
)
 
$
20.7

 
$
(102.9
)
Acquisition
 
—

 
(5.7
)
 
—

 
—

Total realized and unrealized gains
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
7.3

 
—

 
13.4

 
—

Included in general, administrative and other expense
 
—

 
13.6

 
—

 
2.2

Purchases
 
2.1

 
—

 
189.9

 
—

Sales
 
(2.4
)
 
—

 
—

 
—

Settlements
 
(2.6
)
 
35.4

 
(1.7
)
 
3.8

Transfers out of Level 3
 
(0.4
)
 
—

 
—

 
—

Foreign exchange revaluation
 
5.7

 
—

 
0.6

 
—

Balance at End of Period
 
$
214.8

 
$
(54.8
)
 
$
222.9

 
$
(96.9
)
Change in unrealized gains included in net income relating to assets and liability held at end of period
 
$
6.2

 
$
7.9

 
$
12.7

 
$
2.2

Valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of June 30, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
193.2

 
Market pricing
 
Indicative bid
 
$73 per $100 of par
 
 
 
Discount rate
 
18.4%
 
8.0

 
Discounted cash flow
 
Discount rate
 
6.6%–6.7% (6.6%)
 
 
 
Risk premium
 
2.0%–2.5% (2.2%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
13.3

 
Discounted cash flow
 
Life expectancy
 
20–125 months (62)
Discount rate
 
8.0%–20.0% (13.2%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
54.8

 
Discounted cash flow
 
AUM growth rate
 
1.4%–4.9% (3.1%)
EBITDA margin
 
8.3%–8.5% (8.4%)
Discount rate
 
14.0%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2016
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
190.8

 
Discounted cash flow
 
Discount rate
 
3.6%–6.9% (6.7%)
 
 
 
Risk premium
 
2.0%–17.9% (16.5%)
 
 
 
Liquidity discount
 
0.0%–10.0% (9.6%)
 
 
 
 
 
 
 
 
Life settlement contracts
 
14.3

 
Discounted cash flow
 
Life expectancy
 
20–132 months (65)
Discount rate
 
3.3%–18.0% (11.5%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
98.1

 
Discounted cash flow
 
AUM growth rate
 
2.4%–11.5% (5.9%)
EBITDA margin
 
14.3%
Discount rate
 
13.2%
For investment securities, trading – debt and other equity securities using the market pricing technique, a significant increase (decrease) in the indicative bid in isolation would result in a significantly higher (lower) fair value measurement, while a significant increase (decrease) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement.
For investment securities, trading – debt and other equity securities using the discounted cash flow technique, 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.

13
Table of Contents

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 assets under management (“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, 2017
 
September 30, 2016
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
8,564.8

 
$
8,564.8

 
$
8,247.1

 
$
8,247.1

Other investments
 
 
 
 
 
 
 
 
 
 
Time deposits
 
2
 
52.8

 
52.8

 
131.6

 
131.6

Cost method investments
 
3
 
54.6

 
73.9

 
50.0

 
61.3

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt
 
 
 
 
 
 
 
 
 
 
Senior notes
 
2
 
1,343.8

 
1,373.8

 
1,348.5

 
1,412.5

Loan
 
2
 
30.9

 
30.9

 
52.7

 
52.7

Note 7 – Consolidated Sponsored Investment Products
The Company consolidates SIPs, which consist of both VOEs and VIEs, when it has a controlling financial interest. The Company has a controlling financial interest when it owns a majority of the voting interest in a VOE or when it is the primary beneficiary of a VIE. A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or they do not have defined rights and obligations normally associated with an equity investment. The Company’s VIEs are all investment entities, and its variable interests consist of its equity ownership interest in and certain investment management fees earned from these entities.
The Company adopted new accounting guidance on October 1, 2016 that modifies the consolidation framework for certain investment entities and all limited partnerships. As a result of the modifications, certain SIPs changed from VOEs to VIEs and became subject to a lower threshold for consolidation. Additionally, there is now a single model to determine whether the Company is the primary beneficiary of a VIE. The Company is the primary beneficiary if it has the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. Investment management fees earned from VIEs are excluded from the primary beneficiary determination if they are deemed to be at market and commensurate with service. The key estimates and assumptions used in the analyses include the amount of AUM, investment management fee rates, the life of the investment product, prepayment rates and the discount rate. The new guidance did not change the consolidation framework for VOEs.
Consolidated SIPs consist of mutual and other investment funds, limited partnerships and similar structures and CLOs, which are asset-backed financing entities collateralized by a pool of corporate debt securities. The Company consolidated 59 SIPs, none of which are CLOs, as of June 30, 2017 and 40 SIPs, including three CLOs, as of September 30, 2016. The CLO consolidated as of March 31, 2017 was fully liquidated as of June 30, 2017. Amounts for prior periods have been reclassified to combine amounts previously presented separately as consolidated SIPs and consolidated VIEs.

14
Table of Contents

The balances of consolidated SIPs included in the Company’s condensed consolidated balance sheets were as follows:
(in millions)
 
June 30,
2017
 
September 30,
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
221.4

 
$
236.2

Receivables
 
224.2

 
47.9

Investments, at fair value
 
3,373.0

 
1,513.4

Other assets
 
0.9

 
1.4

Total Assets
 
$
3,819.5

 
$
1,798.9

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
123.7

 
$
65.2

Debt
 
53.1

 
682.2

Other liabilities
 
8.0

 
8.5

Total liabilities
 
184.8

 
755.9

Redeemable Noncontrolling Interests
 
1,830.6

 
61.1

Stockholders’ Equity
 
 
 
 
Franklin Resources, Inc.’s interests
 
1,525.3

 
414.1

Nonredeemable noncontrolling interests
 
278.8

 
567.8

Total stockholders’ equity
 
1,804.1

 
981.9

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
3,819.5

 
$
1,798.9

The consolidated SIPs did not have a significant impact on net income attributable to the Company during the three and nine months ended June 30, 2017 and 2016.
The Company has no right to the consolidated SIPs’ assets, other than its direct equity investments in them and investment management fees earned from them. The debt holders of the consolidated SIPs 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 SIPs’ liabilities.
SIPs are typically consolidated when the Company makes an initial investment in a newly launched investment entity. They are typically deconsolidated when the Company no longer has a controlling financial interest due to redemptions of its investment or increases in third-party investments. 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 structure of the SIP and the Company’s role and level of ownership.
Investments
Investments of consolidated SIPs consisted of the following:
(in millions)
 
June 30,
2017
 
September 30,
2016
Investment securities, trading
 
$
2,936.5

 
$
287.8

Other equity securities
 
291.4

 
607.3

Other debt securities
 
145.1

 
618.3

Total
 
$
3,373.0

 
$
1,513.4

Investment securities, trading consist of debt and equity securities that are traded in active markets. Other equity securities consist of equity securities of entities in emerging markets and fund products. Other debt securities consist of debt securities of entities in emerging markets and also included corporate debt securities held by CLOs at September 30, 2016.

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
 
June 30,
2017
 
September 30,
2016
Real estate and private equity funds
 
Nonredeemable
 
$
155.4

 
$
444.2

Hedge funds
 
Monthly, quarterly or triennially
 
—

 
1.8

Total
 
 
 
$
155.4

 
$
446.0

The investments in real estate and private equity funds are expected to be returned through distributions as a result of liquidations of the funds’ underlying assets over a weighted-average period of 4.7 years and 3.2 years at June 30, 2017 and September 30, 2016. The consolidated SIPs’ unfunded commitments to these funds totaled $1.1 million and $74.4 million at June 30, 2017 and September 30, 2016, of which the Company was contractually obligated to fund $0.1 million and $2.2 million based on its ownership percentage in the SIPs.
Fair Value Measurements
Assets and liabilities of consolidated SIPs measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of June 30, 2017
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
333.2

 
$
111.7

 
$
137.0

 
$
155.4

 
$
737.3

Debt securities
 
2.2

 
2,488.2

 
145.3

 
—

 
2,635.7

Total Assets Measured at Fair Value
 
$
335.4

 
$
2,599.9

 
$
282.3

 
$
155.4

 
$
3,373.0

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.2

 
$
7.8

 
$
—

 
$
—

 
$
8.0

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of September 30, 2016
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents of CLOs
 
$
146.4

 
$
—

 
$
—

 
$
—

 
$
146.4

Receivables of CLOs
 
—

 
23.6

 
—

 
—

 
23.6

Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
155.4

 
0.5

 
160.3

 
446.0

 
762.2

Debt securities
 
—

 
618.9

 
132.3

 
—

 
751.2

Total Assets Measured at Fair Value
 
$
301.8

 
$
643.0

 
$
292.6

 
$
446.0

 
$
1,683.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.1

 
$
8.4

 
$
—

 
$
—

 
$
8.5

Investments in fund products for which fair value was estimated using NAV as a practical expedient are not classified in the fair value hierarchy. There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the nine months ended June 30, 2017 and 2016.

16
Table of Contents

Changes in Level 3 assets measured at fair value on a recurring basis were as follows: 
 
 
2017
 
2016
(in millions)
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
for the three months ended June 30,
 
 
 
 
 
Balance at beginning of period
 
$
140.7

 
$
114.4

 
$
255.1

 
$
166.8

 
$
125.4

 
$
292.2

Realized and unrealized gains (losses) included in investment and other income, net
 
(10.3
)
 
18.3

 
8.0

 
(3.3
)
 
(6.3
)
 
(9.6
)
Purchases
 
4.7

 
15.5

 
20.2

 
—

 
2.6

 
2.6

Sales
 
(0.5
)
 
(4.7
)
 
(5.2
)
 
(3.8
)
 
(2.0
)
 
(5.8
)
Settlements
 
—

 
(0.6
)
 
(0.6
)
 
—

 
—

 
—

Foreign exchange revaluation
 
2.4

 
2.4

 
4.8

 
(0.3
)
 
(1.2
)
 
(1.5
)
Balance at End of Period
 
$
137.0

 
$
145.3

 
$
282.3

 
$
159.4

 
$
118.5

 
$
277.9

Change in unrealized gains (losses) included in net income relating to assets held at end of period
 
$
(10.3
)
 
$
18.2

 
$
7.9

 
$
(3.0
)
 
$
(6.5
)
 
$
(9.5
)
 
 
2017
 
2016
(in millions)
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
for the nine months ended June 30,
 
 
 
 
 
Balance at beginning of period
 
$
160.3

 
$
132.3

 
$
292.6

 
$
191.6

 
$
130.2

 
$
321.8

Adoption of new accounting guidance
(45.4
)
 
(0.5
)
 
(45.9
)
 
—

 
—

 
—

Realized and unrealized gains (losses) included in investment and other income, net
 
(9.4
)
 
3.8

 
(5.6
)
 
1.7

 
(8.2
)
 
(6.5
)
Purchases
 
30.2

 
23.3

 
53.5

 
0.3

 
12.1

 
12.4

Sales
 
(0.6
)
 
(13.0
)
 
(13.6
)
 
(33.9
)
 
(16.1
)
 
(50.0
)
Settlements
 
—

 
(0.6
)
 
(0.6
)
 
—

 
—

 
—

Foreign exchange revaluation
 
1.9

 
—

 
1.9

 
(0.3
)
 
0.5

 
0.2

Balance at End of Period
 
$
137.0

 
$
145.3

 
$
282.3

 
$
159.4

 
$
118.5

 
$
277.9

Change in unrealized gains (losses) included in net income relating to assets held at end of period
 
$
0.7

 
$
3.2

 
$
3.9

 
$
(0.3
)
 
$
(9.4
)
 
$
(9.7
)
Valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of June 30, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
99.8

 
Market comparable companies
 
EBITDA multiple
 
6.0–12.3 (9.9)
22.8

Discounted cash flow
Discount rate
5.7%–19.8% (15.0%)
14.4

Market pricing
Price to earnings ratio
10.0
 
 
 
 
 
 
 
 
 
Debt securities
 
130.2

 
Discounted cash flow
 
Discount rate
 
5.0%–50.0% (13.4%)
Risk premium
0.0%–25.0% (8.1%)
 
15.1

 
Market pricing
 
Private sale pricing
 
$57 per $100 of par

17
Table of Contents

(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2016
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
113.1

 
Market comparable companies
 
EBITDA multiple
 
5.0–14.2 (10.3)
Discount for lack of marketability
25.0%–50.0% (36.6%)
24.3

Discounted cash flow
Discount rate
5.0%–19.0% (13.7%)
22.9

Market pricing
Price to book value ratio
1.8–2.3 (2.0)
 
 
 
 
 
 
 
 
 
Debt securities
 
119.7

 
Discounted cash flow
 
Discount rate
 
6.0%–15.0% (10.4%)
Risk premium
0.0%–28.0% (9.7%)
EBITDA multiple
5.5
12.6

Market pricing
Private sale pricing
$57 per $100 of par
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 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 the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the discount rate is accompanied by a directionally similar change in the risk premium. A significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement.
For securities utilizing a market pricing valuation technique, a significant increase (decrease) in the price to earnings ratio, private sale pricing or price to book value ratio would result in a significantly higher (lower) fair value measurement.
Financial instruments of consolidated SIPs that were not measured at fair value were as follows:
(in millions)
 
Fair Value
Level
 
June 30, 2017
 
September 30, 2016
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
221.4

 
$
221.4

 
$
89.8

 
$
89.8

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt, excluding CLOs
 
3
 
53.1

 
53.0

 
75.0

 
74.6

Debt of CLOs1
 
2 or 3
 
—

 
—

 
607.2

 
594.5

_________________
1    Substantially all was Level 2.
Debt
Debt of consolidated SIPs consisted of the following:
 
 
June 30, 2017
 
September 30, 2016
(in millio