Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2018
or
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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)
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Delaware | 13-2670991 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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 every Interactive Data File required to be submitted 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 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.
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| | | |
| Large accelerated filer x | | Accelerated filer o |
| Non-accelerated filer o | | 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
Number of shares of the registrant’s common stock outstanding at January 23, 2019: 509,510,446.
INDEX TO FORM 10-Q
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| | | |
| | Page |
| Financial Information | |
| Item 1. | Financial Statements (unaudited) | |
| | | 3 |
| | | 4 |
| | | 5 |
| | | 6 |
| | | 7 |
| | | 8 |
| Item 2. | | 21 |
| Item 3. | | 43 |
| Item 4. | | 43 |
| | | |
| Other Information | |
| Item 1. | | 44 |
| Item 1A. | | 44 |
| Item 2. | | 44 |
| Item 6. | | 44 |
| | | |
| 45 |
| 46 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME Unaudited |
| | | | | | | | |
| | Three Months Ended December 31, |
(in millions, except per share data) | | 2018 | | 2017 |
Operating Revenues | | | | |
Investment management fees | | $ | 971.8 |
| | $ | 1,113.6 |
|
Sales and distribution fees | | 354.8 |
| | 417.8 |
|
Shareholder servicing fees | | 55.1 |
| | 54.9 |
|
Other | | 29.8 |
| | 29.2 |
|
Total operating revenues | | 1,411.5 |
| | 1,615.5 |
|
Operating Expenses | | | | |
Sales, distribution and marketing | | 444.5 |
| | 528.7 |
|
Compensation and benefits | | 355.0 |
| | 332.5 |
|
Information systems and technology | | 60.9 |
| | 55.0 |
|
Occupancy | | 31.2 |
| | 29.4 |
|
General, administrative and other | | 108.4 |
| | 88.8 |
|
Total operating expenses | | 1,000.0 |
| | 1,034.4 |
|
Operating Income | | 411.5 |
| | 581.1 |
|
Other Income (Expenses) | | | | |
Investment and other income (losses), net | | (59.1 | ) | | 81.3 |
|
Interest expense | | (6.4 | ) | | (10.8 | ) |
Other income (expenses), net | | (65.5 | ) | | 70.5 |
|
Income before taxes | | 346.0 |
| | 651.6 |
|
Taxes on income | | 86.0 |
| | 1,223.5 |
|
Net income (loss) | | 260.0 |
| | (571.9 | ) |
Less: net income (loss) attributable to | | | | |
Nonredeemable noncontrolling interests | | (0.5 | ) | | (0.1 | ) |
Redeemable noncontrolling interests | | (15.4 | ) | | 11.5 |
|
Net Income (Loss) Attributable to Franklin Resources, Inc. | | $ | 275.9 |
| | $ | (583.3 | ) |
| | | | |
Earnings (Loss) per Share | | | | |
Basic | | $ | 0.54 |
| | $ | (1.06 | ) |
Diluted | | 0.54 |
| | (1.06 | ) |
See Notes to Consolidated Financial Statements.
3
FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Unaudited |
| | | | | | | | |
(in millions) | | Three Months Ended December 31, |
| 2018 | | 2017 |
Net Income (Loss) | | $ | 260.0 |
| | $ | (571.9 | ) |
Other Comprehensive Income (Loss) | | | | |
Currency translation adjustments, net of tax | | (14.6 | ) | | 15.8 |
|
Net unrealized losses on defined benefit plans, net of tax | | (0.4 | ) | | (1.1 | ) |
Net unrealized gains on investments, net of tax | | — |
| | 3.5 |
|
Total other comprehensive income (loss) | | (15.0 | ) | | 18.2 |
|
Total comprehensive income (loss) | | 245.0 |
| | (553.7 | ) |
Less: comprehensive income (loss) attributable to | | | | |
Nonredeemable noncontrolling interests | | (0.5 | ) | | (0.1 | ) |
Redeemable noncontrolling interests | | (15.4 | ) | | 11.5 |
|
Comprehensive Income (Loss) Attributable to Franklin Resources, Inc. | | $ | 260.9 |
| | $ | (565.1 | ) |
See Notes to Consolidated Financial Statements.
4
FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS Unaudited |
| | | | | | | | |
(in millions, except share and per share data) | | December 31, 2018 | | September 30, 2018 |
Assets | | | | |
Cash and cash equivalents | | $ | 6,430.7 |
| | $ | 6,610.8 |
|
Receivables | | 723.9 |
| | 733.7 |
|
Investments (including $522.4 and $551.6 at fair value at December 31, 2018 and September 30, 2018) | | 1,385.9 |
| | 1,426.5 |
|
Assets of consolidated investment products | | | | |
Cash and cash equivalents | | 228.2 |
| | 299.8 |
|
Receivables | | 81.7 |
| | 114.2 |
|
Investments, at fair value | | 2,040.2 |
| | 2,109.4 |
|
Property and equipment, net | | 541.3 |
| | 535.0 |
|
Goodwill and other intangible assets, net | | 2,326.2 |
| | 2,333.4 |
|
Other | | 192.5 |
| | 220.7 |
|
Total Assets | | $ | 13,950.6 |
| | $ | 14,383.5 |
|
| | | | |
Liabilities | | | | |
Compensation and benefits | | $ | 218.9 |
| | $ | 405.6 |
|
Accounts payable and accrued expenses | | 180.5 |
| | 158.9 |
|
Dividends | | 139.2 |
| | 127.7 |
|
Commissions | | 259.4 |
| | 297.9 |
|
Income taxes | | 1,071.9 |
| | 1,034.8 |
|
Debt | | 697.7 |
| | 695.9 |
|
Liabilities of consolidated investment products | | | | |
Accounts payable and accrued expenses | | 28.9 |
| | 68.0 |
|
Debt | | 32.7 |
|
| 32.6 |
|
Deferred taxes | | 132.6 |
| | 126.5 |
|
Other | | 179.8 |
| | 184.1 |
|
Total liabilities | | 2,941.6 |
| | 3,132.0 |
|
Commitments and Contingencies (Note 10) | |
| |
|
Redeemable Noncontrolling Interests | | 932.3 |
| | 1,043.6 |
|
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; 511,482,401 and 519,122,574 shares issued and outstanding at December 31, 2018 and September 30, 2018 | | 51.1 |
| | 51.9 |
|
Retained earnings | | 10,087.9 |
| | 10,217.9 |
|
Accumulated other comprehensive loss | | (393.6 | ) | | (370.6 | ) |
Total Franklin Resources, Inc. stockholders’ equity | | 9,745.4 |
| | 9,899.2 |
|
Nonredeemable noncontrolling interests | | 331.3 |
| | 308.7 |
|
Total stockholders’ equity | | 10,076.7 |
| | 10,207.9 |
|
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | | $ | 13,950.6 |
| | $ | 14,383.5 |
|
See Notes to Consolidated Financial Statements.
5
FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Unaudited |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Franklin Resources, Inc. | | Non- redeemable Non- controlling Interests | | Total Stockholders’ Equity |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accum- ulated Other Compre- hensive Loss | | Stockholders’ Equity |
(in millions) |
for the three months ended December 31, 2018 | Shares | | Amount |
Balance at October 1, 2018 | | 519.1 |
| | $ | 51.9 |
| | $ | — |
| | $ | 10,217.9 |
| | $ | (370.6 | ) | | $ | 9,899.2 |
| | $ | 308.7 |
| | $ | 10,207.9 |
|
Adoption of new accounting guidance | | | | | | | | 22.9 |
| | (8.0 | ) | | 14.9 |
| | | | 14.9 |
|
Net income (loss) | | |
| | |
| | |
| | 275.9 |
| | |
| | 275.9 |
| | (0.5 | ) | | 275.4 |
|
Other comprehensive loss | | |
| | |
| | |
| | |
| | (15.0 | ) | | (15.0 | ) | | |
| | (15.0 | ) |
Dividends declared on common stock ($0.26 per share) | | | | | | | | (133.8 | ) | | |
| | (133.8 | ) | | |
| | (133.8 | ) |
Repurchase of common stock | | (10.7 | ) | | (1.1 | ) | | (30.8 | ) | | (295.0 | ) | | |
| | (326.9 | ) | | |
| | (326.9 | ) |
Issuance of common stock | | 3.1 |
| | 0.3 |
| | 33.6 |
| | |
| | |
| | 33.9 |
| | |
| | 33.9 |
|
Stock-based compensation | | |
| | |
| | (2.8 | ) | | |
| | |
| | (2.8 | ) | | |
| | (2.8 | ) |
Net subscriptions and other | | |
| | |
| | |
| | |
| | |
| | |
| | 23.1 |
| | 23.1 |
|
Balance at December 31, 2018 | | 511.5 |
| | $ | 51.1 |
| | $ | — |
| | $ | 10,087.9 |
| | $ | (393.6 | ) | | $ | 9,745.4 |
| | $ | 331.3 |
| | $ | 10,076.7 |
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Franklin Resources, Inc. | | Non- redeemable Non- controlling Interests | | Total Stockholders’ Equity |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accum- ulated Other Compre- hensive Loss | | Stockholders’ Equity |
(in millions) |
for the three months ended December 31, 2017 | Shares | | Amount |
Balance at October 1, 2017 | | 554.9 |
| | $ | 55.5 |
| | $ | — |
| | $ | 12,849.3 |
| | $ | (284.8 | ) | | $ | 12,620.0 |
| | $ | 315.8 |
| | $ | 12,935.8 |
|
Adoption of new accounting guidance | | | | | | 2.1 |
| | (1.7 | ) | | | | 0.4 |
| | | | 0.4 |
|
Net loss | | |
| | |
| | |
| | (583.3 | ) | | |
| | (583.3 | ) | | (0.1 | ) | | (583.4 | ) |
Other comprehensive income | | |
| | |
| | |
| | |
| | 18.2 |
| | 18.2 |
| | |
| | 18.2 |
|
Dividends declared on common stock ($0.23 per share) | | | | | | | | (127.4 | ) | | |
| | (127.4 | ) | | |
| | (127.4 | ) |
Repurchase of common stock | | (4.6 | ) | | (0.5 | ) | | (32.1 | ) | | (167.4 | ) | | |
| | (200.0 | ) | | |
| | (200.0 | ) |
Issuance of common stock | | 2.1 |
| | 0.2 |
| | 27.6 |
| | |
| | |
| | 27.8 |
| | |
| | 27.8 |
|
Stock-based compensation | | |
| | |
| | 2.4 |
| | |
| | |
| | 2.4 |
| | |
| | 2.4 |
|
Net subscriptions and other | | |
| | |
| | |
| | |
| | |
| | |
| | 7.0 |
| | 7.0 |
|
Deconsolidation of investment product | | | | | | | | | | | | | | (0.3 | ) | | (0.3 | ) |
Balance at December 31, 2017 | | 552.4 |
| | $ | 55.2 |
| | $ | — |
| | $ | 11,969.5 |
| | $ | (266.6 | ) | | $ | 11,758.1 |
| | $ | 322.4 |
| | $ | 12,080.5 |
|
See Notes to Consolidated Financial Statements.
6
FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited |
| | | | | | | | |
| | Three Months Ended December 31, |
(in millions) | | 2018 | | 2017 |
Net Income (Loss) | | $ | 260.0 |
| | $ | (571.9 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Amortization of deferred sales commissions | | 21.7 |
| | 19.1 |
|
Depreciation and other amortization | | 20.3 |
| | 20.9 |
|
Stock-based compensation | | 31.2 |
| | 30.3 |
|
Losses (income) from investments in equity method investees | | 37.6 |
| | (35.2 | ) |
Net gains on investments of consolidated investment products | | (2.0 | ) | | (4.7 | ) |
Deferred income taxes | | 11.5 |
| | (49.9 | ) |
Other | | 8.7 |
| | 5.3 |
|
Changes in operating assets and liabilities: | | | | |
Decrease (increase) in receivables and other assets | | 43.1 |
| | (33.8 | ) |
Decrease (increase) in receivables of consolidated investment products | | 19.5 |
| | (94.8 | ) |
Decrease in trading securities, net | | 105.8 |
| | 18.6 |
|
Increase in trading securities of consolidated investment products, net | | (88.7 | ) | | (187.1 | ) |
Decrease in accrued compensation and benefits | | (186.0 | ) | | (186.1 | ) |
Increase (decrease) in commissions payable | | (38.5 | ) | | 9.1 |
|
Increase in income taxes payable | | 37.1 |
| | 1,232.0 |
|
Increase in accounts payable, accrued expenses and other liabilities | | 15.4 |
| | 1.5 |
|
Increase (decrease) in accounts payable and accrued expenses of consolidated investment products | | (30.7 | ) | | 147.1 |
|
Net cash provided by operating activities | | 266.0 |
| | 320.4 |
|
Purchase of investments | | (115.7 | ) | | (39.7 | ) |
Liquidation of investments | | 73.2 |
| | 33.9 |
|
Purchase of investments by consolidated investment products | | (18.2 | ) | | (11.0 | ) |
Liquidation of investments by consolidated investment products | | 7.0 |
| | 22.5 |
|
Additions of property and equipment, net | | (25.7 | ) | | (19.2 | ) |
Net deconsolidation of investment products | | (30.9 | ) | | (45.1 | ) |
Net cash used in investing activities | | (110.3 | ) | | (58.6 | ) |
Dividends paid on common stock | | (122.3 | ) | | (111.7 | ) |
Repurchase of common stock | | (321.4 | ) | | (198.7 | ) |
Proceeds from loan | | 1.7 |
| | — |
|
Payments on debt by consolidated investment products | | — |
| | (2.4 | ) |
Noncontrolling interests | | 45.9 |
| | 261.7 |
|
Net cash used in financing activities | | (396.1 | ) | | (51.1 | ) |
Effect of exchange rate changes on cash and cash equivalents | | (11.3 | ) | | 10.0 |
|
Increase (decrease) in cash and cash equivalents | | (251.7 | ) | | 220.7 |
|
Cash and cash equivalents, beginning of period | | 6,910.6 |
| | 8,749.7 |
|
Cash and Cash Equivalents, End of Period | | $ | 6,658.9 |
| | $ | 8,970.4 |
|
| | | | |
Supplemental Disclosure of Cash Flow Information | | | | |
Cash paid for income taxes | | $ | 35.8 |
| | $ | 38.8 |
|
Cash paid for interest | | 6.0 |
| | 14.1 |
|
Cash paid for interest by consolidated investment products | | 0.5 |
| | 0.7 |
|
See Notes to Consolidated Financial Statements.
7
FRANKLIN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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, 2018 (“fiscal year 2018”). Certain comparative amounts for the prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended December 31, 2018.
Note 2 – New Accounting Guidance
On October 1, 2018, the Company adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) 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 Company adopted the new guidance using the modified retrospective approach which did not require the restatement of prior periods, and recognized a cumulative effect adjustment resulting in decreases in total assets, total liabilities and retained earnings of $9.1 million, $2.2 million and $6.9 million.
The adoption of the guidance had no impact on operating income or net income. Individual line items in the consolidated statement of income were impacted as follows:
|
| | | | | | | | | | | | |
(in millions) | | As Reported | | Adoption Impact | | Amount Without Adoption |
for the three months ended December 31, 2018 | | | |
Operating Revenues | | | | | | |
Investment management fees | | $ | 971.8 |
| | $ | 15.5 |
| | $ | 987.3 |
|
Sales and distribution fees | | 354.8 |
| | (15.5 | ) | | 339.3 |
|
Shareholder servicing fees | | 55.1 |
| | (2.2 | ) | | 52.9 |
|
| | | | | | |
Operating Expenses | | | | | | |
General, administrative and other | | $ | 108.4 |
| | $ | (2.2 | ) | | $ | 106.2 |
|
On October 1, 2018, the Company adopted an amendment to the financial instruments guidance issued by the FASB that 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 impacted all equity securities previously classified as available-for-sale and investments in fund products for which fair value was estimated using net asset value (“NAV”) as a practical expedient. The amendment also provides an election to measure equity investments that do not have a readily determinable fair value at cost adjusted for observable price changes and impairment, if any, which the Company made. The Company adopted the amendment using the modified retrospective approach and recognized a cumulative effect adjustment resulting in increases in investments, retained earnings and accumulated other comprehensive loss of $21.8 million, $29.8 million and $8.0 million.
There were no significant updates to the new accounting guidance that the Company has not yet adopted as disclosed in its Form 10-K for fiscal year 2018.
Note 3 – Earnings (Loss) per Share
The components of basic and diluted earnings (loss) per share were as follows:
|
| | | | | | | | |
(in millions, except per share data) | | Three Months Ended December 31, |
| 2018 | | 2017 |
Net income (loss) attributable to Franklin Resources, Inc. | | $ | 275.9 |
| | $ | (583.3 | ) |
Less: allocation of earnings to participating nonvested stock and stock unit awards | | 2.5 |
| | 1.0 |
|
Net Income (Loss) Available to Common Stockholders | | $ | 273.4 |
| | $ | (584.3 | ) |
| | | | |
Weighted-average shares outstanding – basic | | 510.3 |
| | 550.7 |
|
Dilutive effect of nonparticipating nonvested stock unit awards | | 0.5 |
| | — |
|
Weighted-Average Shares Outstanding – Diluted | | 510.8 |
| | 550.7 |
|
| | | | |
Earnings (Loss) per Share | | | | |
Basic | | $ | 0.54 |
| | $ | (1.06 | ) |
Diluted | | 0.54 |
| | (1.06 | ) |
Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive were 0.3 million and 1.9 million for the three months ended December 31, 2018 and 2017.
Note 4 – Revenues
The Company earns revenue primarily from providing investment management and related services to its customers, which are generally investment products or investors in separate accounts. Related services include fund administration, sales and distribution, and shareholder servicing. Revenues are recognized when the Company’s obligations related to the services are satisfied and it is probable that a significant reversal of the revenue amount would not occur in future periods. The obligations are satisfied over time as the services are rendered, except for the sales and distribution obligations for the sale of shares of sponsored funds which are satisfied on trade date. Multiple services included in customer contracts are accounted for separately when the obligations are determined to be distinct.
Fees from providing investment management and fund administration services (“investment management fees”), other than performance-based investment management fees, are determined based on a percentage of assets under management (“AUM”), primarily on a monthly basis using daily average AUM, and are recognized as the services are performed over time. Performance-based investment management fees are generated when investment products’ performance exceeds targets established in customer contracts. These fees are recognized when the amount is no longer probable of significant reversal and may relate to investment management services that were provided in prior periods.
Sales and distribution fees primarily consist of upfront sales commissions and ongoing distribution fees. Sales commissions are based on contractual rates for sales of certain classes of sponsored funds and are recognized on trade date. Distribution service fees are determined based on a percentage of AUM, primarily on a monthly basis using daily average AUM. As the fee amounts are uncertain on trade date, they are recognized over time as the amounts become known and may relate to sales and distribution services provided in prior periods.
Shareholder servicing fees are primarily determined based on a percentage of AUM on a monthly basis using daily average AUM and either the number of transactions in shareholder accounts or the number of shareholder accounts, while fees from certain investment products are based only on AUM. The fees are recognized as the services are performed over time.
AUM is generally based on the fair value of the underlying securities held by investment products and is calculated using fair value methods derived primarily from unadjusted quoted market prices, unadjusted independent third-party broker or dealer price quotes in active markets, or market prices or price quotes adjusted for observable price movements after the close of the primary market in accordance with the Company’s global valuation and pricing policy. The fair values of the underlying securities for which market prices are not readily available are valued internally using various methodologies which incorporate significant unobservable inputs as appropriate for each security type and represent an insignificant percentage of total AUM.
Revenue is recorded gross of payments made to third-party service providers in the Company’s role as principal as it controls the delegated services provided to customers.
Operating revenues by geographic area were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Earned From Contracts With Customers | | Not Earned From Contracts With Customers 1 | | Total |
(in millions) | United States | | Luxembourg | | Americas Excluding United States | | Asia-Pacific | | Europe, Middle East and Africa, Excluding Luxembourg |
for the three months ended December 31, 2018 |
Investment management fees | | $ | 533.1 |
| | $ | 267.7 |
| | $ | 85.6 |
| | $ | 61.4 |
| | $ | 24.0 |
| | $ | — |
| | $ | 971.8 |
|
Sales and distribution fees | | 233.0 |
| | 104.3 |
| | 16.6 |
| | 0.5 |
| | 0.4 |
| | — |
| | 354.8 |
|
Shareholder servicing fees | | 44.9 |
| | 7.7 |
| | — |
| | 2.5 |
| | — |
| | — |
| | 55.1 |
|
Other | | 3.0 |
| | 0.3 |
| | — |
| | 0.1 |
| | 0.3 |
| | 26.1 |
| | 29.8 |
|
Total | | $ | 814.0 |
| | $ | 380.0 |
|
| $ | 102.2 |
|
| $ | 64.5 |
|
| $ | 24.7 |
| | $ | 26.1 |
| | $ | 1,411.5 |
|
__________________
| |
1 | Consists of interest and dividend income from consolidated investment products. |
Operating revenues are attributed to geographic areas based on the locations of the Company’s subsidiaries that provide the services, which may differ from the regions in which the related investment products are sold.
Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated investment products. See Note 7 – Consolidated Investment Products for information related to the investments held by these entities.
The Company adopted new accounting guidance on October 1, 2018 that 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. The new guidance did not change the accounting for investments in non-equity securities.
Investments consisted of the following:
|
| | | | |
(in millions) | | December 31, 2018 |
Equity securities, at fair value | | |
Sponsored funds | | $ | 309.7 |
|
Other equity securities | | 110.0 |
|
Total equity securities, at fair value | | 419.7 |
|
Debt securities | | |
Trading | | 79.8 |
|
Available-for-sale | | 11.0 |
|
Total debt securities | | 90.8 |
|
Investments in equity method investees | | 819.8 |
|
Other investments | | 55.6 |
|
Total | | $ | 1,385.9 |
|
|
| | | | |
(in millions) | | September 30, 2018 |
Investment securities, trading | | |
Sponsored funds | | $ | 248.1 |
|
Debt and other equity securities | | 97.6 |
|
Total investment securities, trading | | 345.7 |
|
Investment securities, available-for-sale | | |
Sponsored funds | | 178.6 |
|
Debt and other equity securities | | 15.5 |
|
Total investment securities, available-for-sale | | 194.1 |
|
Investments in equity method investees | | 780.8 |
|
Other investments | | 105.9 |
|
Total | | $ | 1,426.5 |
|
Equity securities, at fair value include trading investment securities and investments that were classified as available-for-sale or carried at cost prior to adoption of the new guidance. Changes in the fair value of the investments are recognized as gains and losses in earnings. The fair value of funds is determined based on their published NAV or estimated using NAV as a practical expedient. The fair value of equity securities other than funds is determined using independent third-party broker or dealer price quotes or based on discounted cash flows using significant unobservable inputs.
As of October 1, 2018, equity investments that do not have a readily determinable fair value are measured at cost adjusted for observable price changes and impairment, if any, which are recognized in earnings. The impairment assessment for these investments considers qualitative factors, including the financial condition and specific events related to the investee, that may indicate the fair value of the investment is less than its carrying value.
Investment balances and related changes for the prior year have not been reclassified to conform to the financial statement presentation as of and for the period ended December 31, 2018.
Investment securities with aggregate carrying amounts of $1.2 million were pledged as collateral at December 31, 2018 and September 30, 2018.
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 December 31, 2018 | | | | | | | | |
Debt securities | | $ | 13.0 |
| | $ | — |
| | $ | (2.0 | ) | | $ | 11.0 |
|
| | | | | | | | |
as of September 30, 2018 | | | | | | | | |
Sponsored funds | | $ | 172.9 |
| | $ | 8.3 |
| | $ | (2.6 | ) | | $ | 178.6 |
|
Debt and other equity securities | | 16.8 |
| | 0.5 |
| | (1.8 | ) | | 15.5 |
|
Total | | $ | 189.7 |
| | $ | 8.8 |
| | $ | (4.4 | ) | | $ | 194.1 |
|
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 December 31, 2018 | | | | | | | | | | | | |
Debt securities | | $ | 10.7 |
| | $ | (2.0 | ) | | $ | — |
| | $ | — |
| | $ | 10.7 |
| | $ | (2.0 | ) |
| | | | | | | | | | | | |
as of September 30, 2018 | | | | | | | | | | | | |
Sponsored funds | | $ | 48.8 |
| | $ | (2.1 | ) | | $ | 21.0 |
| | $ | (0.5 | ) | | $ | 69.8 |
| | $ | (2.6 | ) |
Debt and other equity securities | | 10.9 |
| | (1.8 | ) | | — |
| | — |
| | 10.9 |
| | (1.8 | ) |
Total | | $ | 59.7 |
| | $ | (3.9 | ) | | $ | 21.0 |
| | $ | (0.5 | ) | | $ | 80.7 |
| | $ | (4.4 | ) |
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 7 – 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 | | NAV as a Practical Expedient | | Total |
as of December 31, 2018 | | | | | |
Assets | | | | | | | | | | |
Equity securities, at fair value | | | | | | | | | | |
Sponsored funds | | $ | 286.2 |
| | $ | — |
| | $ | — |
| | $ | 23.5 |
| | $ | 309.7 |
|
Other equity securities | | 21.2 |
| | 0.3 |
| | 0.7 |
| | 87.8 |
| | 110.0 |
|
Debt securities | | | | | | | | | |
|
Trading | | 2.5 |
| | 61.2 |
| | 16.1 |
| | — |
| | 79.8 |
|
Available-for-sale | | — |
| | 10.7 |
| | 0.3 |
| | — |
| | 11.0 |
|
Life settlement contracts | | — |
| | — |
| | 11.9 |
| | — |
| | 11.9 |
|
Total Assets Measured at Fair Value | | $ | 309.9 |
| | $ | 72.2 |
| | $ | 29.0 |
|
| $ | 111.3 |
| | $ | 522.4 |
|
| | | | | | | | | | |
Liability | | | | | | | | | | |
Contingent consideration liability | | $ | — |
| | $ | — |
| | $ | 40.0 |
| | $ | — |
| | $ | 40.0 |
|
|
| | | | | | | | | | | | | | | | |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
as of September 30, 2018 | | | | |
Assets | | | | | | | | |
Investment securities, trading | | | | | | | | |
Sponsored funds | | $ | 248.1 |
| | $ | — |
| | $ | — |
| | $ | 248.1 |
|
Debt and other equity securities | | 26.6 |
| | 50.5 |
| | 20.5 |
| | 97.6 |
|
Investment securities, available-for-sale | | | | | | | | |
Sponsored funds | | 178.6 |
| | — |
| | — |
| | 178.6 |
|
Debt and other equity securities | | 4.4 |
| | 10.8 |
| | 0.3 |
| | 15.5 |
|
Life settlement contracts | | — |
| | — |
| | 11.8 |
| | 11.8 |
|
Total Assets Measured at Fair Value | | $ | 457.7 |
| | $ | 61.3 |
| | $ | 32.6 |
| | $ | 551.6 |
|
| | | | | | | | |
Liability | | | | | | | | |
Contingent consideration liability | | $ | — |
| | $ | — |
| | $ | 38.7 |
| | $ | 38.7 |
|
Level 1 assets consist primarily of sponsored funds and other equity securities for which the fair values are based on published 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 debt and equity 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 the net present value of anticipated future cash flows based on estimated future revenue and profits and timing of payments.
Investments for which fair value was estimated using reported NAV as a practical expedient primarily consist of nonredeemable private debt, equity and infrastructure funds. These investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets. The expected weighted-average life for $54.1 million of the investments was 2.1 years at December 31, 2018. The liquidation period for a $50.0 million investment in a nonredeemable private debt fund is unknown. The Company’s unfunded commitments to these funds totaled $5.0 million at December 31, 2018.
Changes in the Level 3 assets and liability were as follows:
|
| | | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
(in millions) | | Investments | | Contingent Consideration Liability | | Investments | | Contingent Consideration Liability |
for the three months ended December 31, | | | | |
Balance at beginning of period | | $ | 32.6 |
| | $ | (38.7 | ) | | $ | 199.9 |
| | $ | (51.0 | ) |
Total realized and unrealized gains (losses) | | | | | | | | |
Included in investment and other income (losses), net | | 2.8 |
| | — |
| | 1.2 |
| | — |
|
Included in general, administrative and other expense | | — |
| | (1.3 | ) | | — |
| | (4.0 | ) |
Purchases | | — |
| | — |
| | 5.3 |
| | — |
|
Sales | | (4.3 | ) | | — |
| | — |
| | — |
|
Transfers out of Level 3 | | (2.1 | ) | | — |
| | — |
| | — |
|
Foreign exchange revaluation and other | | — |
| | — |
| | 3.7 |
| | (7.0 | ) |
Balance at End of Period | | $ | 29.0 |
| | $ | (40.0 | ) | | $ | 210.1 |
| | $ | (62.0 | ) |
Change in unrealized gains (losses) included in net income (loss) relating to assets and liability held at end of period | | $ | 2.8 |
| | $ | (1.3 | ) | | $ | 1.2 |
| | $ | (4.0 | ) |
There were no transfers into Level 3 during the three months ended December 31, 2018 and 2017.
Valuation techniques and significant unobservable inputs used in the Level 3 fair value measurements were as follows:
|
| | | | | | | | | | |
(in millions) | | | | | | | | |
as of December 31, 2018 | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range (Weighted Average 1) |
Debt securities, trading | | $ | 16.1 |
| | Discounted cash flow | | Discount rate | | 4.0%–12.7% (6.3%) |
Risk premium | | 2.0%–6.0% (2.9%) |
| | | | | | | | |
Life settlement contracts | | 11.9 |
| | Discounted cash flow | | Life expectancy | | 20–113 months (59) |
Discount rate | | 8.0%–20.0% (13.2%) |
| | | | | | | | |
Contingent consideration liability | | 40.0 |
| | Discounted cash flow | | Discount rate | | 12.3% |
__________________
| |
1 | Based on the relative fair value of the instruments. |
|
| | | | | | | | | | |
(in millions) | | | | | | | | |
as of September 30, 2018 | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range (Weighted Average) |
Investment securities, trading – debt and other equity securities | | $ | 20.5 |
| | Discounted cash flow | | Discount rate | | 4.1%–12.3% (5.8%) |
Risk premium | | 2.0%–6.7% (3.6%) |
| | | | | | | | |
Life settlement contracts | | 11.8 |
| | Discounted cash flow | | Life expectancy | | 20–115 months (61) |
Discount rate | | 8.0%–20.0% (13.1%) |
| | | | | | | | |
Contingent consideration liability | | 38.7 |
| | Discounted cash flow | | Discount rate | | 13.0% |
If the relevant significant inputs used in the discounted cash flow valuations were independently higher (lower) as of December 31, 2018, the resulting fair value of the assets or liability would be lower (higher).
Financial instruments that were not measured at fair value were as follows:
|
| | | | | | | | | | | | | | | | | | |
(in millions) | | Fair Value Level | | December 31, 2018 | | September 30, 2018 |
| | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
Financial Assets | | | | | | | | | | |
Cash and cash equivalents | | 1 | | $ | 6,430.7 |
| | $ | 6,430.7 |
| | $ | 6,610.8 |
| | $ | 6,610.8 |
|
Other investments | | | | | | | | | | |
Time deposits | | 2 | | 15.1 |
| | 15.1 |
| | 12.3 |
| | 12.3 |
|
Equity securities | | 3 | | 28.6 |
| | 28.6 |
| | 81.8 |
| | 103.6 |
|
| | | | | | | | | | |
Financial Liability | | | | | | | | | | |
Debt | | 2 | | $ | 697.7 |
| | $ | 675.2 |
| | $ | 695.9 |
| | $ | 671.1 |
|
Note 7 – 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 57 and 53 CIPs as of December 31, 2018 and September 30, 2018.
The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:
|
| | | | | | | | |
(in millions) | | December 31, 2018 | | September 30, 2018 |
Assets | | | | |
Cash and cash equivalents | | $ | 228.2 |
| | $ | 299.8 |
|
Receivables | | 81.7 |
| | 114.2 |
|
Investments, at fair value | | 2,040.2 |
| | 2,109.4 |
|
Other assets | | — |
| | 1.0 |
|
Total Assets | | $ | 2,350.1 |
| | $ | 2,524.4 |
|
| | | | |
Liabilities | | | | |
Accounts payable and accrued expenses | | $ | 28.9 |
| | $ | 68.0 |
|
Debt | | 32.7 |
| | 32.6 |
|
Other liabilities | | — |
| | 9.3 |
|
Total liabilities | | 61.6 |
| | 109.9 |
|
Redeemable Noncontrolling Interests | | 932.3 |
| | 1,043.6 |
|
Stockholders’ Equity | | | | |
Franklin Resources, Inc.’s interests | | 1,052.1 |
| | 1,092.6 |
|
Nonredeemable noncontrolling interests | | 304.1 |
| | 278.3 |
|
Total stockholders’ equity | | 1,356.2 |
| | 1,370.9 |
|
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | | $ | 2,350.1 |
| | $ | 2,524.4 |
|
The CIPs did not have a significant impact on net income (loss) attributable to the Company during the three months ended December 31, 2018 and 2017.
The Company has no right to the CIPs’ assets, other than its direct equity investments in them and investment management and other 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 either equity method investments or equity securities measured at fair value with changes recognized in earnings 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) | | December 31, 2018 | | September 30, 2018 |
Investment securities, trading | | $ | 1,570.5 |
| | $ | 1,651.8 |
|
Other equity securities | | 329.6 |
| | 311.0 |
|
Other debt securities | | 140.1 |
| | 146.6 |
|
Total | | $ | 2,040.2 |
| | $ | 2,109.4 |
|
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.
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 December 31, 2018 | | | | | |
Assets | | | | | | | | | | |
Investments | | | | | | | | | | |
Equity securities | | $ | 155.4 |
| | $ | 233.8 |
| | $ | 193.6 |
| | $ | 137.5 |
| | $ | 720.3 |
|
Debt securities | | 0.3 |
| | 1,179.5 |
| | 140.1 |
| | — |
| | 1,319.9 |
|
Total Assets Measured at Fair Value | | $ | 155.7 |
| | $ | 1,413.3 |
| | $ | 333.7 |
| | $ | 137.5 |
| | $ | 2,040.2 |
|
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | NAV as a Practical Expedient | | Total |
as of September 30, 2018 | | | | | |
Assets | | | | | | | | | | |
Investments | | | | | | | | | | |
Equity securities | | $ | 270.7 |
| | $ | 154.8 |
| | $ | 199.7 |
| | $ | 113.8 |
| | $ | 739.0 |
|
Debt securities | | 0.6 |
| | 1,219.5 |
| | 150.3 |
| | — |
| | 1,370.4 |
|
Total Assets Measured at Fair Value | | $ | 271.3 |
| | $ | 1,374.3 |
| | $ | 350.0 |
| | $ | 113.8 |
| | $ | 2,109.4 |
|
| | | | | | | | | | |
Liabilities | | | | | | | | | | |
Other liabilities | | $ | 0.6 |
| | $ | 8.7 |
| | $ | — |
| | $ | — |
| | $ | 9.3 |
|
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.
Investments for which fair value was estimated using reported NAV as a practical expedient consist of nonredeemable real estate and private equity funds. These investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets over a weighted-average period of 4.0 years and 3.5 years at December 31, 2018 and September 30, 2018. The CIPs’ unfunded commitments to these funds totaled $62.8 million and $1.9 million, of which the Company was contractually obligated to fund $19.0 million and $0.4 million based on its ownership percentage in the CIPs, at December 31, 2018 and September 30, 2018.
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 December 31, | | | | | |
Balance at beginning of period | | $ | 199.7 |
| | $ | 150.3 |
| | $ | 350.0 |
| | $ | 160.7 |
| | $ | 135.4 |
| | $ | 296.1 |
|
Realized and unrealized gains (losses) included in investment and other income (losses), net | 11.4 |
| | (8.2 | ) | | 3.2 |
| | 1.9 |
| | 0.1 |
| | 2.0 |
|
Purchases | | 9.7 |
| | 8.2 |
| | 17.9 |
| | 11.1 |
| | — |
| | 11.1 |
|
Sales | | (0.1 | ) | | (6.2 | ) | | (6.3 | ) | | (14.9 | ) | | — |
| | (14.9 | ) |
Settlements | | (1.0 | ) | | (0.1 | ) | | (1.1 | ) | | — |
| | — |
| | — |
|
Transfers into Level 3 | | 0.1 |
| | — |
| | 0.1 |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 | | (25.4 | ) | | (3.6 | ) | | (29.0 | ) | | — |
| | — |
| | — |
|
Foreign exchange revaluation | | (0.8 | ) | | (0.3 | ) | | (1.1 | ) | | 0.8 |
| | 0.7 |
| | 1.5 |
|
Balance at End of Period | | $ | 193.6 |
| | $ | 140.1 |
| | $ | 333.7 |
| | $ | 159.6 |
| | $ | 136.2 |
| | $ | 295.8 |
|
Change in unrealized gains (losses) included in net income (loss) relating to assets held at end of period | | $ | 11.7 |
| | $ | (1.4 | ) | | $ | 10.3 |
| | $ | 1.0 |
| | $ | 0.1 |
| | $ | 1.1 |
|
Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:
|
| | | | | | | | | | |
(in millions) | | | | | | | | |
as of December 31, 2018 | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range (Weighted Average 1) |
Equity securities | | $ | 165.3 |
| | Market comparable companies | | EBITDA multiple | | 5.0–13.6 (9.1) |
28.3 |
| Discounted cash flow | Discount rate | 8.0%–16.5% (13.8%) |
| | | | | | | | |
Debt securities | | 116.6 |
| | Discounted cash flow | | Discount rate | | 7.0%–14.8% (10.8%) |
Loss-adjusted discount rate | 3.0%–22.7% (13.2%) |
23.5 |
| Comparable trading multiple | Price-to-earnings ratio | 10.0 |
Enterprise value/ EBITDA multiple | 20.9 |
__________________
| |
1 | Based on the relative fair value of the instruments. |
|
| | | | | | | | | | |
(in millions) | | | | | | | | |
as of September 30, 2018 | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range (Weighted Average) |
Equity securities | | $ | 171.9 |
| | Market comparable companies | | EBITDA multiple | | 5.0–13.6 (9.3) |
27.8 |
| Discounted cash flow | Discount rate | 8.0%–16.5% (14.1%) |
| | | | | | | | |
Debt securities | | 111.0 |
| | Discounted cash flow | | Discount rate | | 7.0%–14.8% (10.8%) |
Loss-adjusted discount rate | 3.0%–22.7% (12.0%) |
33.9 |
| Comparable trading multiple | Price-to-earnings ratio | 10.0 |
Enterprise value/ EBITDA multiple | 20.9 |
5.4 |
| Market pricing | Private sale pricing | $42 per $100 of par |
If the relevant significant inputs used in the market-based valuations were independently higher (lower) as of December 31, 2018, the resulting fair value of the securities would be higher (lower). If the relevant significant inputs used in the discounted cash flow valuations were independently higher (lower) as of December 31, 2018, the resulting fair value of the securities would be lower (higher).
Financial instruments of CIPs that were not measured at fair value were as follows:
|
| | | | | | | | | | | | | | | | | | |
(in millions) | | Fair Value Level | | December 31, 2018 | | September 30, 2018 |
| | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
Financial Asset | | | | | | | | | | |
Cash and cash equivalents | | 1 | | $ | 228.2 |
| | $ | 228.2 |
| | $ | 299.8 |
| | $ | 299.8 |
|
Financial Liability | | | | | | | | | | |
Debt | | 3 | | $ | 32.7 |
| | $ | 32.6 |
| | $ | 32.6 |
| | $ | 32.4 |
|
Debt
Debt of CIPs totaled $32.7 million and $32.6 million at December 31, 2018 and September 30, 2018. The debt had fixed and floating interest rates ranging from 3.07% to 7.90% with a weighted-average effective interest rate of 6.81% at December 31, 2018, and from 3.07% to 7.88% with a weighted-average effective interest rate of 6.79% at September 30, 2018. The debt matures in fiscal year 2019.
Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests of CIPs were as follows:
|
| | | | | | | | |
(in millions) | | | | |
for the three months ended December 31, | | 2018 | | 2017 |
Balance at beginning of period | | $ | 1,043.6 |
| | $ | 1,941.9 |
|
Net income (loss) | | (15.4 | ) | | 11.5 |
|
Net subscriptions and other | | 22.8 |
| | 254.7 |
|
Net deconsolidations | | (118.7 | ) | | — |
|
Balance at End of Period | | $ | 932.3 |
| | $ | 2,208.1 |
|
Note 8 – Nonconsolidated Variable Interest Entities
Variable interest entities (“VIEs”) for which the Company is not the primary beneficiary consist of sponsored funds and other investment products in which the Company has an equity ownership interest. The Company’s maximum exposure to loss from these VIEs consists of equity investments and investment management and other fee receivables as follows:
|
| | | | | | | | |
(in millions) | | December 31, 2018 | | September 30, 2018 |
Investments | | $ | 228.0 |
| | $ | 161.8 |
|
Receivables | | 133.1 |
| | 140.1 |
|
Total | | $ | 361.1 |
| | $ | 301.9 |
|
While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. The Company also may voluntarily elect to provide its sponsored funds with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its sponsored funds during the three months ended December 31, 2018. During fiscal year 2018, the Company purchased $32.6 million of certain equity and debt securities from two sponsored funds. None of the purchases occurred during the three months ended December 31, 2017.
Note 9 – Taxes on Income
The Tax Cuts and Jobs Act (the “Tax Act”), which was enacted into law in the U.S. in December 2017, includes various changes to the tax law, including a permanent reduction in the corporate income tax rate to 21% and assessment of a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. The Company completed its analysis of the Tax Act impact during the quarter ended December 31, 2018 with no significant adjustment to the provisional amounts previously recorded. The transition tax liability of $982.8 million at December 31, 2018 is net of an $87.6 million tax benefit related to U.S. taxation of deemed foreign dividends. This benefit may be reduced or eliminated by future regulation or legislation. The transition tax liability may also be adjusted in the future upon issuance of state legislative updates on tax reform and the completion of the Company’s tax return filings for fiscal year 2018.
Note 10 – Commitments and Contingencies
Legal Proceedings
In July 2016, a former employee filed a class action lawsuit captioned Cryer v. Franklin Resources, Inc., et al. in the United States District Court for the Northern District of California against Franklin, the Franklin Templeton 401(k) Retirement Plan (“Plan”) Investment Committee (“Investment Committee”), and unnamed Investment Committee members. The plaintiff asserts a claim for breach of fiduciary duty under the Employee Retirement Income Security Act (“ERISA”), alleging that the defendants selected mutual funds sponsored and managed by the Company (the “Funds”) as investment options for the Plan when allegedly lower-cost and better performing non-proprietary investment vehicles were available. The plaintiff also claims that the total Plan costs, inclusive of investment management and administrative fees, are excessive. The plaintiff alleges that Plan losses exceed $79.0 million and seeks, among other things, damages, disgorgement, rescission of the Plan’s investments in the Funds, attorneys’ fees and costs, and pre- and post-judgment interest.
In November 2017, a second former employee, represented by the same law firm, filed another class action lawsuit relating to the Plan in the same court, captioned Fernandez v. Franklin Resources, Inc., et al. The plaintiff filed an amended complaint in February 2018, naming the same defendants as those named in the Cryer action, as well as the Franklin Board of Directors, the Plan Administrative Committee, individual current and former Franklin directors, and individual current and former Investment Committee members. The plaintiff in this second lawsuit asserts the same ERISA breach of fiduciary duty claim asserted in the Cryer action, as well as claims for alleged prohibited transactions by virtue of the Plan’s investments in the Funds and for an alleged failure to monitor the performance of the Investment Committee. The plaintiff alleges that Plan losses exceed $60.0 million and seeks the same relief sought in the Cryer action. In April 2018, the court consolidated the Fernandez action with the existing Cryer action.
While management strongly believes that the claims asserted in the consolidated litigation are without merit, in order to avoid protracted litigation, on December 3, 2018, Franklin elected to enter into an agreement-in-principle to resolve the matter for a cash payment of $13.9 million, which the Company accrued as of December 31, 2018. In addition, Franklin agreed, among other Plan changes, to increase its existing matching contributions from 75% to 85% for eligible participant salary deferrals for a period of three years. The agreement is subject to court approval.
The Company is from time to time involved in other litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business, financial position, results of operations or liquidity. In management’s opinion, an adequate accrual has been made as of December 31, 2018 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.
Other Commitments and Contingencies
At December 31, 2018, there were no material changes in the other commitments and contingencies as reported in the Company’s Form 10-K for fiscal year 2018.
Note 11 – Stock-Based Compensation
Stock and stock unit award activity was as follows:
|
| | | | | | | | | | | | | |
(shares in thousands) | | Time-Based Shares | | Performance- Based Shares | | Total Shares | | Weighted-Average Grant-Date Fair Value |
for the three months ended December 31, 2018 | | | | |
Nonvested balance at October 1, 2018 | | 2,678 |
| | 1,813 |
| | 4,491 |
| | $ | 39.08 |
|
Granted | | 3,305 |
| | 890 |
| | 4,195 |
| | 30.79 |
|
Vested | | (251 | ) | | (606 | ) | | (857 | ) | | 38.07 |
|
Forfeited/canceled | | (51 | ) | | (163 | ) | | (214 | ) | | 39.86 |
|
Nonvested Balance at December 31, 2018 | | 5,681 |
| | 1,934 |
| | 7,615 |
| | $ | 34.61 |
|
Total unrecognized compensation expense related to nonvested stock and stock unit awards was $211.0 million at December 31, 2018. This expense is expected to be recognized over a remaining weighted-average vesting period of 2.1 years.
Note 12 – Other Income (Expenses)
Other income (expenses) consisted of the following: