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, 2018
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: 527,058,253 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of July 20, 2018.

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.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
(in millions, except per share data)
 
2018
 
2017
 
2018
 
2017
Operating Revenues
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,077.9

 
$
1,097.0

 
$
3,308.6

 
$
3,249.4

Sales and distribution fees
 
391.4

 
433.3

 
1,219.0

 
1,283.8

Shareholder servicing fees
 
53.9

 
56.7

 
170.1

 
169.7

Other
 
35.4

 
26.9

 
94.2

 
72.4

Total operating revenues
 
1,558.6

 
1,613.9

 
4,791.9

 
4,775.3

Operating Expenses
 
 
 
 
 
 
 
 
Sales, distribution and marketing
 
499.8

 
541.2

 
1,550.0

 
1,596.0

Compensation and benefits
 
357.5

 
342.7

 
1,045.5

 
997.6

Information systems and technology
 
62.5

 
54.1

 
175.6

 
159.8

Occupancy
 
30.5

 
30.2

 
94.0

 
88.3

General, administrative and other
 
105.2

 
81.5

 
286.9

 
227.0

Total operating expenses
 
1,055.5

 
1,049.7

 
3,152.0

 
3,068.7

Operating Income
 
503.1

 
564.2

 
1,639.9

 
1,706.6

Other Income (Expenses)
 
 
 
 
 
 
 
 
Investment and other income (losses), net
 
(33.8
)
 
92.2

 
134.9

 
222.9

Interest expense
 
(22.1
)
 
(12.9
)
 
(42.9
)
 
(38.8
)
Other income (expenses), net
 
(55.9
)
 
79.3

 
92.0

 
184.1

Income before taxes
 
447.2

 
643.5

 
1,731.9

 
1,890.7

Taxes on income
 
91.8

 
184.1

 
1,465.5

 
577.5

Net income
 
355.4


459.4

 
266.4

 
1,313.2

Less: net income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
(1.6
)
 
12.5

 
22.8

 
8.6

Redeemable noncontrolling interests
 
(45.0
)
 
36.3

 
(18.3
)
 
33.1

Net Income Attributable to Franklin Resources, Inc.
 
$
402.0

 
$
410.6

 
$
261.9

 
$
1,271.5

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.75

 
$
0.73

 
$
0.45

 
$
2.25

Diluted
 
0.75

 
0.73

 
0.45

 
2.25

Dividends Declared per Share
 
$
0.23

 
$
0.20

 
$
3.69

 
$
0.60





See Notes to Consolidated Financial Statements.

3
Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited

(in millions)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net Income
 
$
355.4

 
$
459.4

 
$
266.4

 
$
1,313.2

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on investments, net of tax
 
3.3

 
(1.6
)
 
6.6

 
1.4

Currency translation adjustments, net of tax
 
(86.7
)
 
54.0

 
(64.1
)
 
32.3

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

 
(0.2
)
 
(0.5
)
 
(0.2
)
Total other comprehensive income (loss)
 
(83.2
)
 
52.2

 
(58.0
)
 
33.5

Total comprehensive income
 
272.2

 
511.6

 
208.4

 
1,346.7

Less: comprehensive income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
(1.6
)
 
12.5

 
22.8

 
8.6

Redeemable noncontrolling interests
 
(45.0
)
 
36.3

 
(18.3
)
 
33.1

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
318.8

 
$
462.8

 
$
203.9

 
$
1,305.0


See Notes to Consolidated Financial Statements.

4
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FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited
(in millions, except share and per share data)
 
June 30,
2018
 
September 30,
2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
6,422.6

 
$
8,523.3

Receivables
 
814.9

 
767.8

Investments (including $587.0 and $440.0 at fair value at June 30, 2018 and September 30, 2017)
 
1,509.5

 
1,393.6

Assets of consolidated investment products
 
 
 
 
Cash and cash equivalents
 
231.6

 
226.4

Receivables
 
132.0

 
234.1

Investments, at fair value
 
3,331.1

 
3,467.4

Property and equipment, net
 
522.4

 
517.2

Goodwill and other intangible assets, net
 
2,352.9

 
2,227.7

Other
 
211.0

 
176.5

Total Assets
 
$
15,528.0

 
$
17,534.0

 
 
 
 
 
Liabilities
 
 
 
 
Compensation and benefits
 
$
405.9

 
$
396.6

Accounts payable and accrued expenses
 
177.5

 
167.4

Dividends
 
130.1

 
113.3

Commissions
 
291.3

 
313.3

Income taxes
 
1,176.2

 
74.7

Debt
 
695.7

 
1,044.2

Liabilities of consolidated investment products
 
 
 
 
Accounts payable and accrued expenses
 
76.3

 
124.1

Debt
 
34.1


53.4

Deferred taxes
 
128.0

 
170.6

Other
 
190.9

 
198.7

Total liabilities
 
3,306.0

 
2,656.3

Commitments and Contingencies (Note 11)
 

 

Redeemable Noncontrolling Interests
 
2,031.6

 
1,941.9

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; 529,106,446 and 554,865,343 shares issued and outstanding at June 30, 2018 and September 30, 2017
 
52.9

 
55.5

Retained earnings
 
10,153.5

 
12,849.3

Accumulated other comprehensive loss
 
(342.9
)
 
(284.8
)
Total Franklin Resources, Inc. stockholders’ equity
 
9,863.5

 
12,620.0

Nonredeemable noncontrolling interests
 
326.9

 
315.8

Total stockholders’ equity
 
10,190.4

 
12,935.8

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
15,528.0

 
$
17,534.0




See Notes to Consolidated Financial Statements.

5
Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
 
 
Nine Months Ended
June 30,
(in millions)
 
2018
 
2017
Net Income
 
$
266.4

 
$
1,313.2

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
60.5

 
52.9

Depreciation and other amortization
 
58.7

 
62.3

Stock-based compensation
 
89.5

 
95.0

Income from investments in equity method investees
 
(41.8
)
 
(88.4
)
Net gains on investments of consolidated investment products
 
(35.1
)
 
(15.7
)
Deferred income taxes
 
(54.5
)
 
(7.0
)
Other
 
28.3

 
(18.5
)
Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables and other assets
 
(79.2
)
 
(39.0
)
Decrease (increase) in receivables of consolidated investment products
 
97.1

 
(45.7
)
Decrease (increase) in trading securities, net
 
(165.7
)
 
68.6

Decrease (increase) in trading securities of consolidated investment products, net
 
235.6

 
(528.9
)
Increase (decrease) in accrued compensation and benefits
 
(18.6
)
 
2.0

Increase (decrease) in commissions payable
 
(22.0
)
 
11.0

Increase in income taxes payable
 
1,106.6

 
68.8

Decrease in accounts payable, accrued expenses and other liabilities
 
(18.4
)
 
(26.3
)
Increase in accounts payable and accrued expenses of consolidated investment products
 
1.1

 
54.0

Net cash provided by operating activities
 
1,508.5

 
958.3

Purchase of investments
 
(250.0
)
 
(336.2
)
Liquidation of investments
 
127.5

 
271.3

Purchase of investments by consolidated investment products
 
(46.1
)
 
(114.3
)
Liquidation of investments by consolidated investment products
 
72.3

 
333.9

Additions of property and equipment, net
 
(71.5
)
 
(49.0
)
Adoption of new accounting guidance
 
—

 
(49.2
)
Acquisitions, net of cash acquired
 
(97.0
)
 
(14.0
)
Net (deconsolidation) consolidation of investment products
 
(8.0
)
 
22.4

Net cash provided by (used in) investing activities
 
(272.8
)
 
64.9

Issuance of common stock
 
13.6

 
13.0

Dividends paid on common stock
 
(1,994.9
)
 
(329.4
)
Repurchase of common stock
 
(1,056.0
)
 
(600.6
)
Excess tax benefit from stock-based compensation
 
—

 
0.6

Payment on debt
 
(361.9
)
 
—

Payment on loan
 
—

 
(22.5
)
Proceeds from debt of consolidated investment products
 
—

 
0.7

Payments on debt by consolidated investment products
 
(19.6
)
 
(288.3
)
Payments on contingent consideration liability
 
(21.6
)
 
(31.7
)
Noncontrolling interests
 
123.7

 
527.4

Net cash used in financing activities
 
(3,316.7
)
 
(730.8
)
Effect of exchange rate changes on cash and cash equivalents
 
(14.5
)
 
10.5


[Table continued on next page]

See Notes to Consolidated Financial Statements.

6
Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited

[Table continued from previous page]
 
 
Nine Months Ended
June 30,
(in millions)
 
2018
 
2017
Increase (decrease) in cash and cash equivalents
 
$
(2,095.5
)
 
$
302.9

Cash and cash equivalents, beginning of period
 
8,749.7

 
8,483.3

Cash and Cash Equivalents, End of Period
 
$
6,654.2

 
$
8,786.2

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
414.9

 
$
520.5

Cash paid for interest
 
34.2

 
34.4

Cash paid for interest by consolidated investment products
 
1.9

 
10.3




See Notes to Consolidated Financial Statements.

7
Table of Contents

FRANKLIN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(Unaudited)
Note 1 – Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. (“Franklin”) and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission. 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, 2017 (“fiscal year 2017”). 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, 2018.
Note 2 – New Accounting Guidance
Recently Adopted Accounting Guidance
On October 1, 2017, the Company adopted an amendment to the existing stock-based compensation guidance issued by the Financial Accounting Standards Board (“FASB”). 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 made using the modified retrospective approach which did not require the restatement of prior-year periods and did not result in a material impact on retained earnings. The income tax effect and statement of cash flow changes were adopted on a prospective basis. The adoption of the amendment will increase the volatility of income tax expense as a result of fluctuations in the Company’s stock price.
Accounting Guidance Not Yet Adopted
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 or modified retrospective 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 or presentation for substantially all of its operating revenue or the accounting for its contract costs. The impact upon adoption may differ based on further evaluation of the Company’s arrangements. The Company will elect the modified retrospective approach and recognize a cumulative effect adjustment to retained earnings at adoption.
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 2017.

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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, 2018
 
 
 
Balance at October 1, 2017
 
$
12,620.0

 
$
315.8

 
$
12,935.8

Adoption of new accounting guidance
 
0.4

 
—

 
0.4

Net income
 
261.9

 
22.8

 
284.7

Other comprehensive loss
 
(58.0
)
 
 
 
(58.0
)
Cash dividends declared on common stock
 
(2,011.7
)
 
 
 
(2,011.7
)
Repurchase of common stock
 
(1,078.8
)
 
 
 
(1,078.8
)
Stock-based compensation
 
102.7

 
 
 
102.7

Acquisition
 
27.0

 
 
 
27.0

Net redemptions and other
 
 
 
(14.1
)
 
(14.1
)
Net consolidation of investment products
 
 
 
2.4

 
2.4

Balance at June 30, 2018
 
$
9,863.5

 
$
326.9

 
$
10,190.4

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

 
$
305.1

 
$
12,705.1

During the three and nine months ended June 30, 2018, the Company repurchased 13.4 million and 29.1 million shares of its common stock at a cost of $446.2 million and $1,078.8 million under its stock repurchase program. At June 30, 2018, 82.5 million shares remained available for repurchase under the program, which is not subject to an expiration date. On April 11, 2018, the Company’s Board of Directors authorized the Company to repurchase, from time to time, up to an additional 80.0 million shares of its common stock in either open market or private transactions. Shares repurchased under the stock repurchase program are retired. 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.

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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,
 
2018
 
2017
 
2018
 
2017
Net income attributable to Franklin Resources, Inc.
 
$
402.0

 
$
410.6

 
$
261.9

 
$
1,271.5

Less: allocation of earnings to participating nonvested stock and stock unit awards
 
3.3

 
3.5

 
17.1

 
9.9

Net Income Available to Common Stockholders
 
$
398.7

 
$
407.1

 
$
244.8

 
$
1,261.6

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
533.0

 
556.2

 
542.9

 
560.5

Dilutive effect of nonparticipating nonvested stock unit awards
 
0.5

 
0.5

 
0.7

 
0.3

Weighted-Average Shares Outstanding – Diluted
 
533.5

 
556.7

 
543.6

 
560.8

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.75

 
$
0.73

 
$
0.45

 
$
2.25

Diluted
 
0.75

 
0.73

 
0.45

 
2.25

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 0.8 million and 0.3 million for the three and nine months ended June 30, 2018, and 0.2 million and 0.7 million for the three and nine months ended June 30, 2017.
Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated investment products. See Note 8 – Consolidated Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions)
 
June 30,
2018
 
September 30,
2017
Investment securities, trading
 
 
 
 
Sponsored funds
 
$
203.7

 
$
31.1

Debt and other equity securities
 
269.6

 
283.4

Total investment securities, trading
 
473.3

 
314.5

Investment securities, available-for-sale
 
 
 
 
Sponsored funds
 
100.9

 
110.8

Debt and other equity securities
 
1.0

 
1.9

Total investment securities, available-for-sale
 
101.9

 
112.7

Investments in equity method investees
 
858.8

 
893.5

Other investments
 
75.5

 
72.9

Total
 
$
1,509.5

 
$
1,393.6

Debt and other equity trading securities consist primarily of corporate debt.
Investment securities with aggregate carrying amounts of $1.2 million and $0.8 million were pledged as collateral at June 30, 2018 and September 30, 2017.

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Table of Contents

Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:
(in millions)
 
Cost Basis
 
Gross Unrealized
 
Fair Value
 
Gains
 
Losses
 
as of June 30, 2018
 
 
 
 
 
 
 
 
Sponsored funds
 
$
93.0

 
$
9.7

 
$
(1.8
)
 
$
100.9

Debt and other equity securities
 
1.0

 
—

 
—

 
1.0

Total
 
$
94.0

 
$
9.7

 
$
(1.8
)
 
$
101.9

 
 
 
 
 
 
 
 
 
as of September 30, 2017
 
 
 
 
 
 
 
 
Sponsored funds
 
$
107.9

 
$
9.4

 
$
(6.5
)
 
$
110.8

Debt and other equity securities
 
1.9

 
—

 
—

 
1.9

Total
 
$
109.8

 
$
9.4

 
$
(6.5
)
 
$
112.7

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:
(in millions)
 
Less Than 12 Months
 
12 Months or Greater
 
Total
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
 
 
 
 
as of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Sponsored funds
 
$
20.3

 
$
(1.3
)
 
$
21.3

 
$
(0.5
)
 
$
41.6

 
$
(1.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
as of September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Sponsored funds
 
$
28.4

 
$
(6.3
)
 
$
2.4

 
$
(0.2
)
 
$
30.8

 
$
(6.5
)
The Company recognized other-than-temporary impairment of $0.3 million and $0.9 million during the three and nine months ended June 30, 2018, and $0.5 million and $0.8 million during the three and nine months ended June 30, 2017.
Note 6 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated investment products. See Note 8 – Consolidated 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, 2018
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
Sponsored funds
 
$
203.7

 
$
—

 
$
—

 
$
203.7

Debt and other equity securities
 
19.4

 
58.1

 
192.1

 
269.6

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored funds
 
100.9

 
—

 
—

 
100.9

Debt and other equity securities
 
0.2

 
0.5

 
0.3

 
1.0

Life settlement contracts
 
—

 
—

 
11.8

 
11.8

Total Assets Measured at Fair Value
 
$
324.2

 
$
58.6

 
$
204.2

 
$
587.0

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
35.6

 
$
35.6


11
Table of Contents

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2017
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
Sponsored funds
 
$
31.1

 
$
—

 
$
—

 
$
31.1

Debt and other equity securities
 
18.2

 
78.4

 
186.8

 
283.4

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored funds
 
110.8

 
—

 
—

 
110.8

Debt and other equity securities
 
1.0

 
0.6

 
0.3

 
1.9

Life settlement contracts
 
—

 
—

 
12.8

 
12.8

Total Assets Measured at Fair Value
 
$
161.1

 
$
79.0

 
$
199.9

 
$
440.0

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
51.0

 
$
51.0

Level 1 assets consist primarily of sponsored funds and other equity securities for which the fair values are based on published net asset values (“NAV”) or quoted market prices. Level 2 assets consist of debt and equity securities for which the fair values are determined using independent third-party broker or dealer price quotes. Level 3 assets consist of corporate debt securities for which the fair value is determined using market pricing, and other debt securities and life settlement contracts for which the fair values are based on discounted cash flows using significant unobservable inputs.
The fair value of the contingent consideration liability is determined using an income-based method which considers the net present value of anticipated future cash flows.
Transfers into Level 2 from Level 1 were nil and $0.5 million for the three and nine months ended June 30, 2018, and transfers into Level 1 from Level 2 were $0.5 million for both periods. The transfers into Level 2 from Level 1 were securities for which the quoted market prices were adjusted as of March 31, 2018 due to significant price changes in U.S.-traded market proxies resulting from global market volatility. The adjustments were made after the close of foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. The transfers into Level 1 from Level 2 were securities that were valued using unadjusted quoted market prices. There were no transfers between Level 1 and Level 2 during the nine months ended June 30, 2017. There were no transfers into or out of Level 3 during the nine months ended June 30, 2018, and there were no transfers into Level 3 for the nine months ended June 30, 2017.
Changes in the Level 3 assets and liabilities were as follows: 
 
 
2018
 
2017
(in millions)
 
Investments
 
Contingent
Consideration
Liability
 
Investments
 
Contingent
Consideration
Liabilities
for the three months ended June 30,
 
 
 
 
Balance at beginning of period
 
$
208.1

 
$
(31.2
)
 
$
211.0

 
$
(60.4
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
1.0

 
—

 
1.7

 
—

Included in general, administrative and other expense
 
—

 
(4.4
)
 
—

 
5.6

Purchases
 
5.4

 
—

 
1.3

 
—

Sales
 
(0.4
)
 
—

 
—

 
—

Settlements
 
(1.1
)
 
—

 
(0.1
)
 
—

Foreign exchange revaluation and other
 
(8.8
)
 
—

 
0.9

 
—

Balance at End of Period
 
$
204.2

 
$
(35.6
)
 
$
214.8

 
$
(54.8
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
0.4

 
$
(4.4
)
 
$
2.2

 
$
(0.1
)

12
Table of Contents

 
 
2018
 
2017
(in millions)
 
Investments
 
Contingent
Consideration
Liability
 
Investments
 
Contingent
Consideration
Liabilities
for the nine months ended June 30,
 
 
 
 
Balance at beginning of period
 
$
199.9

 
$
(51.0
)
 
$
205.1

 
$
(98.1
)
Acquisition
 
—

 
—

 
—

 
(5.7
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
4.0

 
—

 
7.3

 
—

Included in general, administrative and other expense
 
—

 
(10.0
)
 
—

 
13.6

Purchases
 
12.1

 
—

 
2.1

 
—

Sales
 
(0.4
)
 
—

 
(2.4
)
 
—

Settlements
 
(3.0
)
 
32.4

 
(2.6
)
 
35.4

Transfers out of Level 3
 
—

 
—

 
(0.4
)
 
—

Foreign exchange revaluation and other
 
(8.4
)
 
(7.0
)
 
5.7

 
—

Balance at End of Period
 
$
204.2

 
$
(35.6
)
 
$
214.8

 
$
(54.8
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
2.4

 
$
(10.0
)
 
$
6.2

 
$
7.9

Valuation techniques and significant unobservable inputs used in the Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of June 30, 2018
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
171.3

 
Market pricing
 
Redemption price
 
$73 per $100 of par
Discount rate
 
18.7%
 
20.8

 
Discounted cash flow
 
Discount rate
 
3.4%–6.6% (5.4%)
Risk premium
 
2.0%–4.7% (3.1%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
11.8

 
Discounted cash flow
 
Life expectancy
 
20–117 months (62)
Discount rate
 
8.0%–20.0% (13.1%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
35.6

 
Discounted cash flow
 
AUM growth rate
 
(3.4%)
Discount rate
 
13.8%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
175.7

 
Market pricing
 
Redemption price
 
$73 per $100 of par
Discount rate
 
18.6%
 
11.1

 
Discounted cash flow
 
Discount rate
 
4.1%–6.7% (5.7%)
Risk premium
 
2.0%–4.1% (2.9%)
 
 
 
 
 
 
 
 
Life settlement contracts
 
12.8

 
Discounted cash flow
 
Life expectancy
 
20–123 months (62)
Discount rate
 
8.0%–20.0% (13.2%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
51.0

 
Discounted cash flow
 
AUM growth rate
 
1.3%–9.4% (5.3%)
Discount rate
 
14.6%
For investment securities, trading – debt and other equity securities using the market pricing technique, a significant increase (decrease) in the redemption price 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 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.

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Table of Contents

For the contingent consideration liability, a significant increase (decrease) in the assets under management (“AUM”) growth rate, 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)
 
Fair Value
Level
 
June 30, 2018
 
September 30, 2017
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
6,422.6

 
$
6,422.6

 
$
8,523.3

 
$
8,523.3

Other investments
 
 
 
 
 
 
 
 
 
 
Time deposits
 
2
 
12.2

 
12.2

 
13.4

 
13.4

Cost method investments
 
3
 
51.5

 
73.7

 
46.7

 
67.7

 
 
 
 
 
 
 
 
 
 
 
Financial Liability
 
 
 
 
 
 
 
 
 
 
Debt
 
2
 
$
695.7

 
$
685.0

 
$
1,044.2

 
$
1,073.5

Note 7 – Debt
The disclosures below include details of the Company’s debt, excluding that of consolidated investment products. See Note 8 – Consolidated Investment Products for information related to the debt of these entities.
Debt consisted of the following:
 
 
June 30,
2018
 
Effective
Interest Rate
 
September 30,
2017
 
Effective
Interest Rate
(in millions)
Senior Notes
 
 
 
 
 
 
 
 
$350 million 4.625% notes due May 2020
 
$
—

 
N/A

 
$
349.9

 
4.74
%
$300 million 2.800% notes due September 2022
 
299.7

 
2.93
%
 
299.6

 
2.93
%
$400 million 2.850% notes due March 2025
 
399.5

 
2.97
%
 
399.5

 
2.97
%
Total senior notes
 
699.2

 
 
 
1,049.0

 
 
Debt issuance costs
 
(3.5
)
 
 
 
(4.8
)
 
 
Total
 
$
695.7

 
 
 
$
1,044.2

 
 
At June 30, 2018, the Company’s outstanding senior unsecured unsubordinated notes had an aggregate face value of $700.0 million. 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.
On May 21, 2018, the Company redeemed its outstanding 4.625% notes due in May 2020 at a make-whole redemption price of $361.9 million, which resulted in the recognition of $12.5 million of accelerated interest expense.
The Company was in compliance with all debt covenants at June 30, 2018.
At June 30, 2018, 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.

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Table of Contents

Note 8 – Consolidated Investment Products
Consolidated investment products (“CIPs”) consist of mutual and other investment funds, limited partnerships and similar structures, substantially all of which are sponsored by the Company, and include both voting interest entities and variable interest entities. The Company had 55 and 58 CIPs as of June 30, 2018 and September 30, 2017.
The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:
(in millions)
 
June 30,
2018
 
September 30,
2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
231.6

 
$
226.4

Receivables
 
132.0

 
234.1

Investments, at fair value
 
3,331.1

 
3,467.4

Other assets
 
1.0

 
0.9

Total Assets
 
$
3,695.7

 
$
3,928.8

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
76.3

 
$
124.1

Debt
 
34.1

 
53.4

Other liabilities
 
8.9

 
8.7

Total liabilities
 
119.3

 
186.2

Redeemable Noncontrolling Interests
 
2,031.6

 
1,941.9

Stockholders’ Equity
 
 
 
 
Franklin Resources, Inc.’s interests
 
1,244.2

 
1,511.8

Nonredeemable noncontrolling interests
 
300.6

 
288.9

Total stockholders’ equity
 
1,544.8

 
1,800.7

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
3,695.7

 
$
3,928.8

The CIPs did not have a significant impact on net income attributable to the Company during the three and nine months ended June 30, 2018 and 2017.
The Company has no right to the CIPs’ assets, other than its direct equity investments in them and investment management fees earned from them. The debt holders of the CIPs 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 CIPs’ liabilities.
Investment products 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 these products 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 product and the Company’s role and level of ownership.
Investments
Investments of CIPs consisted of the following:
(in millions)
 
June 30,
2018
 
September 30,
2017
Investment securities, trading
 
$
2,861.3

 
$
3,017.2

Other equity securities
 
346.9

 
306.9

Other debt securities
 
122.9

 
143.3

Total
 
$
3,331.1

 
$
3,467.4

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 other debt instruments.

15
Table of Contents

Fair Value Measurements
Assets and liabilities of CIPs 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, 2018
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
307.1

 
$
307.1

 
$
187.5

 
$
160.8

 
$
962.5

Debt securities
 
3.4

 
2,242.3

 
122.9

 
—

 
2,368.6

Total Assets Measured at Fair Value
 
$
310.5

 
$
2,549.4

 
$
310.4

 
$
160.8

 
$
3,331.1

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.6

 
$
8.3

 
$
—

 
$
—

 
$
8.9

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of September 30, 2017
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
331.4

 
$
128.1

 
$
160.7

 
$
155.2

 
$
775.4

Debt securities
 
1.4

 
2,555.2

 
135.4

 
—

 
2,692.0

Total Assets Measured at Fair Value
 
$
332.8

 
$
2,683.3

 
$
296.1

 
$
155.2

 
$
3,467.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.4

 
$
8.3

 
$
—

 
$
—

 
$
8.7

Level 1 assets consist of equity and debt securities for which the fair values are based on quoted market prices. Level 2 assets consist of debt and equity securities for which the fair values are determined using independent third-party broker or dealer price quotes. Level 3 assets consist of equity and debt securities of entities in emerging markets and other debt instruments for which the fair values are determined using significant unobservable inputs in either a market-based or income-based approach.
The fair value of other liabilities, which consist of short positions in debt and equity securities, is determined based on the fair value of the underlying securities using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.
Transfers into Level 2 from Level 1 were nil and $3.5 million for the three and nine months ended June 30, 2018, and transfers into Level 1 from Level 2 were $2.8 million for both periods. The transfers into Level 2 from Level 1 were securities for which the quoted market prices were adjusted as of March 31, 2018 due to significant price changes in U.S.-traded market proxies resulting from global market volatility. The impacted securities trade in 11 different countries in Asia-Pacific, Europe and Latin America. The adjustments were made after the close of the foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. The transfers into Level 1 from Level 2 were securities that were valued using unadjusted quoted market prices. There were no transfers between Level 1 and Level 2 during the nine months ended June 30, 2017. There were no transfers into or out of Level 3 during the nine months ended June 30, 2018 and 2017.
Investments for which fair value was estimated using reported NAV as a practical expedient consisted of nonredeemable real estate and private equity funds. These investments are expected to be returned through distributions as a result of liquidations of the funds’ underlying assets over a weighted-average period of 3.7 years and 4.4 years at June 30, 2018 and September 30, 2017. The CIPs’ unfunded commitments to these funds totaled $1.9 million, of which the Company was contractually obligated to fund $0.4 million based on its ownership percentage in the CIPs, at both June 30, 2018 and September 30, 2017.

16
Table of Contents

Changes in Level 3 assets were as follows: 
 
 
2018
 
2017
(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
 
$
188.4

 
$
112.2

 
$
300.6

 
$
140.7

 
$
114.4

 
$
255.1

Realized and unrealized gains (losses) included in investment and other income, net
5.4

 
0.3

 
5.7

 
(10.3
)
 
18.3

 
8.0

Purchases
 
0.1

 
5.0

 
5.1

 
4.7

 
15.5

 
20.2

Sales
 
(2.6
)
 
(0.1
)
 
(2.7
)
 
(0.5
)
 
(4.7
)
 
(5.2
)
Settlements
 
—

 
(0.5
)
 
(0.5
)
 
—

 
(0.6
)
 
(0.6
)
Consolidation
 
—

 
7.0

 
7.0

 
—

 
—

 
—

Foreign exchange revaluation
 
(3.8
)
 
(1.0
)
 
(4.8
)
 
2.4

 
2.4

 
4.8

Balance at End of Period
 
$
187.5

 
$
122.9

 
$
310.4

 
$
137.0

 
$
145.3

 
$
282.3

Change in unrealized gains (losses) included in net income relating to assets held at end of period
 
$
0.9

 
$
0.2

 
$
1.1

 
$
(10.3
)
 
$
18.2

 
$
7.9

 
 
2018
 
2017
(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
 
$
160.7

 
$
135.4

 
$
296.1

 
$
160.3

 
$
132.3

 
$
292.6

Adoption of new accounting guidance
—

 
—

 
—

 
(45.4
)
 
(0.5
)
 
(45.9
)
Realized and unrealized gains (losses) included in investment and other income, net
22.9

 
2.4

 
25.3

 
(9.4
)
 
3.8

 
(5.6
)
Purchases
 
22.7

 
15.5

 
38.2

 
30.2

 
23.3

 
53.5

Sales
 
(17.5
)
 
(37.8
)
 
(55.3
)
 
(0.6
)
 
(13.0
)
 
(13.6
)
Settlements
 
—

 
(0.5
)
 
(0.5
)
 
—

 
(0.6
)
 
(0.6
)
Consolidation
 
—

 
7.0

 
7.0

 
—

 
—

 
—

Foreign exchange revaluation
 
(1.3
)
 
0.9

 
(0.4
)
 
1.9

 
—

 
1.9

Balance at End of Period
 
$
187.5

 
$
122.9

 
$
310.4

 
$
137.0

 
$
145.3

 
$
282.3

Change in unrealized gains (losses) included in net income relating to assets held at end of period
 
$
17.5

 
$
(2.1
)
 
$
15.4

 
$
0.7

 
$
3.2

 
$
3.9

Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of June 30, 2018
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
159.8

 
Market comparable companies
 
EBITDA multiple
 
5.9–13.6 (9.4)
27.7

Discounted cash flow
Discount rate
8.1%–16.5% (14.1%)
 
 
 
 
 
 
 
 
 
Debt securities
 
76.9

 
Discounted cash flow
 
Discount rate
 
7.0%–14.8% (10.7%)
30.9

Comparable trading multiple
Price to earnings ratio
10.0
Enterprise value/
EBITDA multiple
20.9
12.0

Discounted cash flow
Loss-adjusted discount rate
3.0%–62.3% (10.7%)
3.1

Market pricing
Private sale pricing
$33 per $100 of par

17
Table of Contents

(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
101.9

 
Market comparable companies
 
EBITDA multiple
 
5.5–12.3 (9.0)
44.4

Discounted cash flow
Discount rate
5.7%–17.9% (14.3%)
14.4

Market pricing
Price to earnings ratio
10.0
 
 
 
 
 
 
 
 
 
Debt securities
 
112.7

 
Discounted cash flow
 
Discount rate
 
5.0%–33.0% (9.5%)
Risk premium
0.0%–25.0% (8.4%)
22.7

Market pricing
Private sale pricing
$33–$57 ($52) per $100 of par
For securities using 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.
For securities using the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, loss-adjusted discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement.
For securities using the comparable trading multiple valuation technique, a significant increase (decrease) in the price to earnings ratio or enterprise value/EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement.
For securities using the market pricing valuation technique, a significant increase (decrease) in the private sale pricing or price to earnings ratio in isolation would result in a significantly higher (lower) fair value measurement.
Financial instruments of CIPs that were not measured at fair value were as follows:
(in millions)
 
Fair Value
Level