10-Q 1 d10q.htm FORM 10-Q Form 10Q 3.31.2012


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 March 31, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-09318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter) 
 
Delaware
 
13-2670991
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
One Franklin Parkway, San Mateo, CA
 
94403
(Address of principal executive offices)
 
(Zip Code)
(650) 312-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    o  NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  YES    o  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     x
  
Accelerated filer     o
Non-accelerated filer  o  (Do not check if a smaller reporting company)
  
Smaller reporting company    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding: 215,185,362 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of April 25, 2012.




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Income
Unaudited
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
(in thousands, except per share data)
 
2012
 
2011
 
2012
 
2011
Operating Revenues
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,126,320

 
$
1,102,732

 
$
2,201,457

 
$
2,169,239

Sales and distribution fees
 
585,945

 
561,127

 
1,110,249

 
1,113,330

Shareholder servicing fees
 
76,739

 
75,750

 
152,144

 
147,805

Other, net
 
10,345

 
9,954

 
37,375

 
19,502

Total operating revenues
 
1,799,349

 
1,749,563

 
3,501,225

 
3,449,876

Operating Expenses
 
 
 
 
 
 
 
 
Sales, distribution and marketing
 
715,443

 
676,935

 
1,346,061

 
1,324,088

Compensation and benefits
 
323,031

 
315,810

 
623,443

 
608,204

Information systems and technology
 
43,292

 
41,477

 
84,726

 
81,844

Occupancy
 
31,894

 
32,703

 
63,736

 
63,571

General, administrative and other
 
68,532

 
53,156

 
133,722

 
83,453

Total operating expenses
 
1,182,192

 
1,120,081

 
2,251,688

 
2,161,160

Operating Income
 
617,157

 
629,482

 
1,249,537

 
1,288,716

Other Income (Expenses)
 
 
 
 
 
 
 
 
Investment and other income, net
 
82,411

 
57,451

 
153,587

 
103,779

Interest expense
 
(9,633
)
 
(8,364
)
 
(18,198
)
 
(16,259
)
Other income, net
 
72,778

 
49,087

 
135,389

 
87,520

Income before taxes
 
689,935

 
678,569

 
1,384,926

 
1,376,236

Taxes on income
 
202,151

 
183,004

 
403,416

 
390,554

Net income
 
487,784

 
495,565

 
981,510

 
985,682

Less: Net income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
(15,965
)
 
(7,577
)
 
(5,818
)
 
(19,454
)
Redeemable noncontrolling interests
 
530

 
42

 
3,324

 
879

Net Income Attributable to Franklin Resources, Inc.
 
$
503,219

 
$
503,100

 
$
984,004

 
$
1,004,257

Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
2.33

 
$
2.26

 
$
4.54

 
$
4.49

Diluted
 
2.32

 
2.25

 
4.53

 
4.47

Dividends per Share
 
$
0.27

 
$
0.25

 
$
2.54

 
$
0.50

See Notes to Condensed Consolidated Financial Statements.

2



FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
(in thousands)
 
March 31,
2012
 
September 30,
2011
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
4,541,927

 
$
4,699,994

Cash and cash equivalents of consolidated variable interest entities
 
55,064

 
88,238

Receivables
 
850,370

 
772,475

Investment securities, trading
 
1,185,291

 
889,686

Investment securities, available-for-sale
 
724,061

 
990,976

Investments of consolidated variable interest entities, at fair value
 
490

 
10,994

Investments in equity method investees and other
 
72,374

 
21,861

Deferred taxes
 
102,784

 
107,898

Prepaid expenses and other
 
36,268

 
34,646

Total current assets
 
7,568,629

 
7,616,768

Banking/Finance Assets
 
 
 
 
Cash and cash equivalents
 
482,150

 
410,381

Investment securities, available-for-sale
 
279,787

 
345,486

Loans held for sale
 
157,777

 
21,525

Loans receivable, net
 
262,965

 
401,860

Loans receivable of consolidated variable interest entities, net
 
68,684

 
149,386

Other
 
21,421

 
29,485

Total banking/finance assets
 
1,272,784

 
1,358,123

Non-Current Assets
 
 
 
 
Investments of consolidated sponsored investment products
 
635,894

 
584,608

Investments of consolidated variable interest entities, at fair value
 
852,416

 
811,618

Investments in equity method investees and other
 
488,999

 
535,509

Property and equipment, net
 
594,797

 
589,748

Goodwill
 
1,537,819

 
1,536,212

Other intangible assets, net
 
607,540

 
611,979

Other
 
103,930

 
131,278

Total non-current assets
 
4,821,395

 
4,800,952

Total Assets
 
$
13,662,808

 
$
13,775,843

[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.

3



FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
[Table continued from previous page]
(dollars in thousands, except per share data)
 
March 31,
2012
 
September 30,
2011
Liabilities and Stockholders’ Equity
 
 
 
 
Current Liabilities
 
 
 
 
Compensation and benefits
 
$
301,799

 
$
400,885

Commercial paper
 
24,998

 
29,997

Current maturities of long-term debt
 
20,489

 
29,656

Current maturities of long-term debt of consolidated variable interest entities, at fair value
 
171

 
24,858

Accounts payable, accrued expenses and other
 
341,475

 
328,303

Commissions
 
380,862

 
369,539

Income taxes
 
46,910

 
128,826

Total current liabilities
 
1,116,704

 
1,312,064

Banking/Finance Liabilities
 
 
 
 
Deposits
 
837,068

 
890,189

Long-term debt of consolidated variable interest entities
 
76,088

 
164,176

Federal Home Loan Bank advances
 
69,000

 
69,000

Other
 
825

 
970

Total banking/finance liabilities
 
982,981

 
1,124,335

Non-Current Liabilities
 
 
 
 
Long-term debt
 
964,863

 
1,004,381

Long-term debt of consolidated variable interest entities, at fair value
 
837,257

 
846,369

Deferred taxes
 
285,357

 
274,435

Other
 
99,397

 
91,789

Total non-current liabilities
 
2,186,874

 
2,216,974

Total liabilities
 
4,286,559

 
4,653,373

Commitments and Contingencies (Note 10)
 
 
 
 
Redeemable Noncontrolling Interests
 
22,913

 
18,611

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; 215,125,221 and 217,693,435 shares issued and outstanding, at March 31, 2012 and September 30, 2011
 
21,513

 
21,769

Retained earnings
 
8,557,557

 
8,443,531

Appropriated retained earnings of consolidated variable interest entities
 
34,366

 
18,969

Accumulated other comprehensive income
 
76,343

 
40,462

Total Franklin Resources, Inc. stockholders’ equity
 
8,689,779

 
8,524,731

Nonredeemable noncontrolling interests
 
663,557

 
579,128

Total stockholders’ equity
 
9,353,336

 
9,103,859

Total Liabilities and Stockholders’ Equity
 
$
13,662,808

 
$
13,775,843

See Notes to Condensed Consolidated Financial Statements.


4



FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Six Months Ended
March 31,
(in thousands)
 
2012
 
2011
Net Income
 
$
981,510

 
$
985,682

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
108,350

 
123,627

Stock-based compensation
 
50,298

 
44,479

Excess tax benefit from stock-based compensation
 
(17,598
)
 
(13,023
)
Net gains on sale of assets
 
(21,400
)
 
(55,198
)
Net losses on non-current investments of consolidated sponsored investment products
 
27,408

 

Net (gains) losses of consolidated variable interest entities
 
(17,728
)
 
17,736

Equity in net income of affiliated companies
 
(61,619
)
 
(43,426
)
Other-than-temporary impairment of investments
 

 
13,606

Provision for loan losses
 
5,056

 
3,603

Deferred income taxes
 
15,909

 
2,718

Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(98,661
)
 
(153,461
)
Increase in trading securities, net
 
(321,494
)
 
(412,124
)
Decrease in income taxes payable
 
(55,760
)
 
(46,270
)
Increase in commissions payable
 
11,323

 
60,678

Increase (decrease) in other liabilities
 
(25,787
)
 
13,330

Decrease in accrued compensation and benefits
 
(101,458
)
 
(53,613
)
Net cash provided by operating activities
 
478,349

 
488,344

Purchase of investments
 
(213,052
)
 
(124,720
)
Purchase of investments by consolidated variable interest entities
 
(174,955
)
 
(394,888
)
Liquidation of investments
 
517,728

 
461,004

Liquidation of investments by consolidated variable interest entities
 
233,659

 
568,572

Liquidation of banking/finance investments
 
64,163

 
76,180

Decrease (increase) in loans receivable, net
 
17,888

 
(41,233
)
Decrease in loans receivable held by consolidated variable interest entities, net
 
41,472

 
85,695

Additions of property and equipment, net
 
(45,285
)
 
(65,148
)
Acquisition of subsidiaries, net of cash acquired
 

 
(57,606
)
Cash and cash equivalents recognized due to adoption of new consolidation guidance
 

 
45,841

Net cash provided by investing activities
 
441,618

 
553,697

Increase (decrease) in deposits
 
(53,121
)
 
129,891

Issuance of common stock
 
28,184

 
28,915

Dividends paid on common stock
 
(547,368
)
 
(105,683
)
Repurchase of common stock
 
(416,783
)
 
(413,538
)
Excess tax benefit from stock-based compensation
 
17,598

 
13,023

Decrease in commercial paper, net
 
(5,017
)
 
(32
)
Proceeds from issuance of debt
 
22,746

 

Payments on debt
 
(71,514
)
 

Payments on debt by consolidated variable interest entities
 
(159,030
)
 
(180,168
)
Noncontrolling interests
 
137,556

 
13,771

Net cash used in financing activities
 
$
(1,046,749
)
 
$
(513,821
)
[Table continued on next page]
See Notes to Condensed Consolidated Financial Statements.

5



FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
[Table continued from previous page]
 
 
Six Months Ended
March 31,
(in thousands)
 
2012
 
2011
Effect of exchange rate changes on cash and cash equivalents
 
$
7,310

 
$
16,507

Increase (decrease) in cash and cash equivalents
 
(119,472
)
 
544,727

Cash and cash equivalents, beginning of period
 
5,198,613

 
4,123,716

Cash and Cash Equivalents, End of Period
 
$
5,079,141

 
$
4,668,443

 
 
 
 
 
Components of Cash and Cash Equivalents
 
 
 
 
Cash and cash equivalents, beginning of period
 
 
 
 
Current assets
 
$
4,699,994

 
$
3,985,312

Current assets of consolidated variable interest entities
 
88,238

 

Banking/finance assets
 
410,381

 
138,404

Total
 
$
5,198,613

 
$
4,123,716

Cash and cash equivalents, end of period
 
 
 
 
Current assets
 
$
4,541,927

 
$
4,234,894

Current assets of consolidated variable interest entities
 
55,064

 
119,077

Banking/finance assets
 
482,150

 
314,472

Total
 
$
5,079,141

 
$
4,668,443

 
 
 
 
 
Supplemental Disclosure of Non-Cash Information
 
 
 
 
Decrease in noncontrolling interests due to net deconsolidation of certain sponsored investment products
 
$
(30,934
)
 
$
(1,674
)
Increase in assets, net of liabilities, related to consolidation of variable interest entities
 

 
60,760

Increase (decrease) in receivables of consolidated variable interest entities related to investment trades pending settlement
 
(6,261
)
 
65,865

Increase in other liabilities of consolidated variable interest entities related to investment trades pending settlement
 
(9,534
)
 
(139,614
)
Transfers of loans receivable, net to loans held for sale
 
117,463

 

Transfers of loans receivable of consolidated variable interest entities, net to loans held for sale
 
37,423

 

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
442,113

 
$
434,777

Cash paid for interest
 
23,815

 
20,207

Cash paid for interest by consolidated variable interest entities
 
24,114

 
23,066

See Notes to Condensed Consolidated Financial Statements.

6



FRANKLIN RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 2012
(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 (the “SEC”). 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, 2011 (“fiscal year 2011”). Certain amounts for the comparative prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended March 31, 2012.
In the quarter ended September 30, 2011, the Company discontinued the classification of a portion of the investment management fees earned by certain of its non-U.S. subsidiaries as sales and distribution fees. Amounts for the comparative prior fiscal year period have been reclassified to conform to the current year presentation. This reclassification had no impact on previously reported net income or financial position and does not represent a restatement of any previously published financial results. See Note 1 – Significant Accounting Policies in the Company's Form 10-K for fiscal year 2011.
The following table presents the effects of the changes in the presentation of operating revenues to the Company’s previously-reported condensed consolidated statement of income:
(in thousands)
 
Three Months Ended
March 31, 2011
 
Six Months Ended
March 31, 2011
 
As Reported    
 
Adjustments    
 
As Amended    
 
As Reported    
 
Adjustments    
 
As Amended    
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,076,716

 
$
26,016

 
$
1,102,732

 
$
2,117,594

 
$
51,645

 
$
2,169,239

Sales and distribution fees
 
587,143

 
(26,016
)
 
561,127

 
1,164,975

 
(51,645
)
 
1,113,330

Shareholder servicing fees
 
75,750

 

 
75,750

 
147,805

 

 
147,805

Other, net
 
9,954

 

 
9,954

 
19,502

 

 
19,502

Total operating revenues
 
$
1,749,563

 
$

 
$
1,749,563

 
$
3,449,876

 
$

 
$
3,449,876

Note 2 New Accounting Guidance
On October 1, 2011, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance that requires separate disclosures about purchases, sales, issuances and other settlements in the rollforward of activity in Level 3 fair value measurements.
On January 1, 2012, the Company adopted new FASB guidance that requires additional qualitative discussion for the sensitivity of recurring Level 3 fair value measurements to changes in the unobservable inputs, quantitative disclosure about the significant unobservable inputs used for all Level 3 measurements, and the categorization by level of the fair value hierarchy for financial instruments that are not measured at fair value.
See Note 7 - Fair Value Measurements for the expanded disclosures.
There were no significant updates to new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for fiscal year 2011.

7



Note 3 Stockholders' Equity, Redeemable Noncontrolling Interests and Comprehensive Income
The changes in total stockholders’ equity and redeemable noncontrolling interests were as follows:
(in thousands)
 
Franklin
Resources,  Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the six months ended March 31, 2012
 
 
 
 
Balance at October 1, 2011
 
$
8,524,731

 
$
579,128

 
$
9,103,859

 
$
18,611

Net income (loss)
 
984,004

 
(5,818
)
 
978,186

 
3,324

Net income reclassified to appropriated retained earnings
 
15,397

 
(15,397
)
 

 
 
Other comprehensive income
 
 
 
 
 
 
 
 
Net unrealized gains on investments, net of tax
 
17,671

 
 
 
17,671

 
 
Currency translation adjustments
 
18,389

 
 
 
18,389

 
 
Net unrealized losses on defined benefit plans, net of tax
 
(178
)
 
 
 
(178
)
 
 
Cash dividends on common stock
 
(551,632
)
 
 
 
(551,632
)
 
 
Repurchase of common stock
 
(416,783
)
 
 
 
(416,783
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 
 
 
105,644

 
105,644

 
31,912

Net deconsolidation of certain sponsored investment products
 
 
 

 

 
(30,934
)
Other 1
 
98,180

 
 
 
98,180

 
 
Balance at March 31, 2012
 
$
8,689,779

 
$
663,557

 
$
9,353,336

 
$
22,913

________________
1 
Primarily relates to stock-based compensation plans.
(in thousands)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the six months ended March 31, 2011
 
 
 
 
Balance at October 1, 2010
 
$
7,726,994

 
$
3,452

 
$
7,730,446

 
$
19,533

Adjustment for adoption of new consolidation guidance
 
106,601

 
 
 
106,601

 
 
Net income (loss)
 
1,004,257

 
(19,454
)
 
984,803

 
879

Net loss reclassified to appropriated retained earnings
 
(19,932
)
 
19,932

 

 
 
Other comprehensive income
 
 
 
 
 
 
 
 
Net unrealized losses on investments, net of tax
 
(13,032
)
 
 
 
(13,032
)
 
 
Currency translation adjustments
 
45,325

 
 
 
45,325

 
 
Net unrealized gains on defined benefit plans, net of tax
 
232

 
 
 
232

 
 
Cash dividends on common stock
 
(111,599
)
 
 
 
(111,599
)
 
 
Repurchase of common stock
 
(413,538
)
 
 
 
(413,538
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 

 
2,041

 
2,041

 
11,730

Net deconsolidation of certain sponsored investment products
 
 
 

 

 
(1,674
)
Other 1
 
88,200

 
 
 
88,200

 
 
Balance at March 31, 2011
 
$
8,413,508

 
$
5,971

 
$
8,419,479

 
$
30,468

________________
1 
Primarily relates to stock-based compensation plans.

8



The components of comprehensive income, including amounts attributable to noncontrolling interests, were as follows:
(in thousands)
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2012
 
2011
 
2012
 
2011
Net income
 
$
487,784

 
$
495,565

 
$
981,510

 
$
985,682

Net unrealized gains (losses) on investments, net of tax
 
22,468

 
(13,881
)
 
17,671

 
(13,032
)
Currency translation adjustments
 
40,947

 
32,658

 
18,389

 
45,325

Net unrealized gains (losses) on defined benefit plans, net of tax
 
(3
)
 
219

 
(178
)
 
232

Total comprehensive income
 
551,196

 
514,561

 
1,017,392

 
1,018,207

Less: comprehensive income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
(15,965
)
 
(7,577
)
 
(5,818
)
 
(19,454
)
Redeemable noncontrolling interests
 
530

 
42

 
3,324

 
879

Total Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
566,631

 
$
522,096

 
$
1,019,886

 
$
1,036,782

During the three and six months ended March 31, 2012, the Company repurchased approximately 1.0 million and 4.0 million shares of its common stock at a cost of $125.9 million and $416.8 million under its stock repurchase program. In December 2011, the Company’s Board of Directors authorized the repurchase of up to 10.0 million additional shares of its common stock under the stock repurchase program. At March 31, 2012, approximately 10.7 million shares of common stock remained available for repurchase under the stock repurchase program. During the three and six months ended March 31, 2011, the Company repurchased 1.8 million and 3.5 million shares of its common stock at a cost of $215.0 million and $413.5 million. The stock repurchase program is not subject to an expiration date.
Note 4 Earnings per Share
The components of basic and diluted earnings per share were as follows: 
(in thousands, except per share data)
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2012
 
2011
 
2012
 
2011
Net Income Attributable to Franklin Resources, Inc.
 
$
503,219

 
$
503,100

 
$
984,004

 
$
1,004,257

Less: Allocation of earnings to participating nonvested stock and stock unit awards
 
3,429

 
2,762

 
6,255

 
4,803

Net Income Available to Common Stockholders
 
$
499,790

 
$
500,338

 
$
977,749

 
$
999,454

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
214,520

 
221,696

 
215,336

 
222,440

Effect of dilutive common stock options and non-participating nonvested stock unit awards
 
591

 
1,000

 
576

 
1,056

Weighted-Average Shares Outstanding – Diluted
 
215,111

 
222,696

 
215,912

 
223,496

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
2.33

 
$
2.26

 
$
4.54

 
$
4.49

Diluted
 
2.32

 
2.25

 
4.53

 
4.47

Non-participating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive were 0.2 million and 0.5 million for the three and six months ended March 31, 2012, and nil and 0.2 million for the three and six months ended March 31, 2011.

9



Note 5 Variable Interest Entities
The Company has interests in various types of variable interest entities (“VIEs”). It is the primary beneficiary of collateralized loan obligations (“CLOs”) and auto loan securitization trusts (“securitization trusts”) and therefore consolidates these VIEs. Other VIEs, for which the Company is not the primary beneficiary, primarily consist of certain sponsored and other investment products (collectively “other investment products”) from which the Company earns investment management and related services fees and/or has an equity ownership interest in the VIE.
Collateralized Loan Obligations
The Company provides collateral management services to the CLOs, which are asset-backed financing entities collateralized by a pool of assets.
The changes in fair values of the underlying assets and liabilities of the CLOs were as follows:
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
(in thousands)
 
2012
 
2011
 
2012
 
2011
Net gains from changes in fair value of assets
 
$
29,674

 
$
29,783

 
$
57,411

 
$
63,980

Net losses from changes in fair value of liabilities
 
(34,086
)
 
(35,614
)
 
(39,138
)
 
(78,881
)
Total net gains (losses)
 
$
(4,412
)
 
$
(5,831
)
 
$
18,273

 
$
(14,901
)
The following tables present the unpaid principal balance and fair value of investments, including investments 90 days or more past due, and long-term debt of the CLOs:
(in thousands)
 
Total Investments    
 
Investments
90 Days or More
Past Due
 
Long-term Debt    
as of March 31, 2012
 
 
 
Unpaid principal balance
 
$
875,807

 
$
8,473

 
$
977,217

Excess unpaid principal over fair value
 
(22,901
)
 
(2,428
)
 
(139,789
)
Fair value
 
$
852,906

 
$
6,045

 
$
837,428

(in thousands)
 
Total Investments    
 
Investments
90 Days or More
Past Due
 
Long-term Debt    
as of September 30, 2011
 
 
 
Unpaid principal balance
 
$
887,838

 
$
21,577

 
$
1,044,863

Excess unpaid principal over fair value
 
(65,226
)
 
(10,178
)
 
(173,636
)
Fair value
 
$
822,612

 
$
11,399

 
$
871,227

Automobile Loan Securitization Trusts
The Company retained certain interests in and servicing responsibilities for automobile loan securitization trusts, which originated from securitization transactions between the Company and the securitization trusts in previous years. During the quarter ended March 31, 2012, the Company exercised its repurchase rights with respect to the outstanding loans in two of the three remaining securitization trusts and engaged a third party to solicit bids for these loans and related assets.

10



The following table provides details of the loans serviced by the Company that were held by the securitization trusts and the loans that were managed together with them:
(in thousands)
 
March 31,
2012
 
September 30,
2011
Principal amount of loans
 
 
 
 
Loans receivable of consolidated VIEs
 
$
71,559

 
$
155,071

Loans receivable
 

 
83,791

Loans held for sale
 
108,570

 
8,994

Total
 
$
180,129

 
$
247,856

Principal amount of loans 30 days or more past due
 
 
 
 
Loans receivable of consolidated VIEs
 
$
1,451

 
$
3,651

Loans receivable
 

 
1,721

Loans held for sale
 
1,703

 
8,994

Total
 
$
3,154

 
$
14,366

The Company had previously provided a guarantee to cover shortfalls for one of the securitization trusts in amounts due to the holders of the asset-backed securities if the shortfall exceeded cash on deposit. The guarantee was no longer in place as of March 31, 2012 due to the Company's repurchase of the outstanding loans of the related trust. The Company did not provide any additional financial or other support to the securitization trusts or the holders of the asset-backed securities during fiscal year 2011 or the six months ended March 31, 2012.
The original amount of loans serviced for the securitization trusts that were still in existence totaled $0.5 billion and $1.2 billion at March 31, 2012 and September 30, 2011. The securitization trusts had approximately 8,800 and 19,100 loans outstanding, with weighted-average annualized interest rates of 10.52% and 10.55% at March 31, 2012 and September 30, 2011.
Other Investment Products
The carrying values of the Company’s investment management and related service fees receivable from and the equity ownership interests in the other investment product VIEs as recorded in the Company’s condensed consolidated balance sheets are set forth below. These amounts represent the Company’s maximum exposure to loss from these investment products. 
(in thousands)
 
March 31,
2012
 
September 30,
2011
Current Assets
 
 
 
 
Receivables
 
$
45,824

 
$
42,218

Investment securities, available-for-sale
 
120,511

 
139,981

Investments in equity method investees and other
 
32,616

 
154

Total Current
 
198,951

 
182,353

Non-Current Assets
 
 
 
 
Investments in equity method investees and other
 
42,495

 
36,584

Total
 
$
241,446

 
$
218,937

The Company’s total assets under management (“AUM”) of the other investment products was $33.8 billion at March 31, 2012 and $36.1 billion at September 30, 2011.
While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored investment products. The Company also may voluntarily elect to provide its sponsored investment products with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its investment products during fiscal year 2011 or the six months ended March 31, 2012.

11



Note 6 Investments
Investments consisted of the following:
(in thousands)
 
March 31,
2012
 
September 30,
2011
Current
 
 
 
 
Investment securities, trading
 
$
1,185,291

 
$
889,686

Investment securities, available-for-sale
 
 
 
 
Sponsored investment products
 
674,837

 
925,711

Securities of U.S. states and political subdivisions
 
32,896

 
41,199

Securities of the U.S. Treasury and federal agencies
 
601

 
602

Other equity securities
 
15,727

 
23,464

Total investment securities, available-for-sale
 
724,061

 
990,976

Investments of consolidated VIEs, at fair value
 
490

 
10,994

Investments in equity method investees and other
 
72,374

 
21,861

Total Current
 
$
1,982,216

 
$
1,913,517

Banking/Finance
 
 
 
 
Investment securities, available-for-sale
 
 
 
 
Securities of U.S. states and political subdivisions
 
$
56

 
$
311

Securities of the U.S. Treasury and federal agencies
 
1,809

 
1,837

Corporate debt securities1
 
80,791

 
121,634

Mortgage-backed securities – agency residential2
 
197,131

 
221,611

Other equity securities
 

 
93

Total investment securities, available-for-sale
 
279,787

 
345,486

Total Banking/Finance
 
$
279,787

 
$
345,486

Non-Current
 
 
 
 
Investments of consolidated sponsored investment products
 
 
 
 
Debt securities
 
$
317,672

 
$
323,208

Equity securities
 
318,222

 
261,400

Total investments of consolidated sponsored investment products
 
635,894

 
584,608

Investments of consolidated VIEs, at fair value
 
852,416

 
811,618

Investments in equity method investees and other
 
488,999

 
535,509

Total Non-Current
 
$
1,977,309

 
$
1,931,735

________________
1 
Corporate debt securities are insured by the Federal Deposit Insurance Corporation or non-U.S. government agencies.
2 
Consists of U.S. government-sponsored enterprise obligations.
At March 31, 2012 and September 30, 2011, current investment securities, trading included $432.6 million and $361.1 million of investments held by sponsored investment products that were consolidated in the Company’s condensed consolidated financial statements.
At March 31, 2012 and September 30, 2011, banking/finance segment investment securities with aggregate carrying amounts of $139.8 million and $156.4 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank, and $53.3 million and $60.8 million were pledged as collateral for outstanding Federal Home Loan Bank (“FHLB”) borrowings and amounts available in secured FHLB short-term borrowing capacity (see Note 9 – Debt). In addition, investment management and related services segment securities with an aggregate carrying value of $6.8 million and $6.9 million were pledged as collateral primarily for financing arrangements at March 31, 2012 and September 30, 2011.

12



A summary of the gross unrealized gains and losses relating to investment securities, available-for-sale is as follows:
(in thousands)
 
 
 
Gross Unrealized
 
 
as of March 31, 2012
Cost Basis    
 
Gains        
 
Losses        
 
Fair Value    
Sponsored investment products
 
$
602,030

 
$
80,188

 
$
(7,381
)
 
$
674,837

Securities of U.S. states and political subdivisions
 
31,625

 
1,327

 

 
32,952

Securities of the U.S. Treasury and federal agencies
 
2,377

 
33

 

 
2,410

Corporate debt securities
 
80,000

 
791

 

 
80,791

Mortgage-backed securities – agency residential
 
192,951

 
4,180

 

 
197,131

Other equity securities
 
15,213

 
710

 
(196
)
 
15,727

Total
 
$
924,196

 
$
87,229

 
$
(7,577
)
 
$
1,003,848

(in thousands)
 
 
 
Gross Unrealized
 
 
as of September 30, 2011
Cost Basis
 
Gains
 
Losses
 
Fair Value
Sponsored investment products
 
$
877,632

 
$
78,013

 
$
(29,934
)
 
$
925,711

Securities of U.S. states and political subdivisions
 
39,950

 
1,560

 

 
41,510

Securities of the U.S. Treasury and federal agencies
 
2,423

 
16

 

 
2,439

Corporate debt securities
 
120,041

 
1,593

 

 
121,634

Mortgage-backed securities – agency residential
 
216,736

 
4,905

 
(30
)
 
221,611

Other equity securities
 
23,061

 
703

 
(207
)
 
23,557

Total
 
$
1,279,843

 
$
86,790

 
$
(30,171
)
 
$
1,336,462

The net unrealized holding gains on investment securities, available-for-sale included in accumulated other comprehensive income were $36.3 million and $44.1 million for the three and six months ended March 31, 2012, and $12.7 million and $28.0 million for the three and six months ended March 31, 2011.
The following tables show the gross unrealized losses and fair values of investment securities, available-for-sale with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in thousands)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of March 31, 2012
 
 
 
 
 
Sponsored investment products
 
$
119,749

 
$
(7,357
)
 
$
206

 
$
(24
)
 
$
119,955

 
$
(7,381
)
Other equity securities
 

 

 
4,299

 
(196
)
 
4,299

 
(196
)
Total
 
$
119,749

 
$
(7,357
)
 
$
4,505

 
$
(220
)
 
$
124,254

 
$
(7,577
)

 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in thousands)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of September 30, 2011
 
 
 
 
 
Sponsored investment products
 
$
228,926

 
$
(29,731
)
 
$
4,658

 
$
(203
)
 
$
233,584

 
$
(29,934
)
Mortgage-backed securities – agency residential
 
18,305

 
(30
)
 

 

 
18,305

 
(30
)
Other equity securities
 
8

 
(1
)
 
4,116

 
(206
)
 
4,124

 
(207
)
Total
 
$
247,239

 
$
(29,762
)
 
$
8,774

 
$
(409
)
 
$
256,013

 
$
(30,171
)

The Company did not recognize any other-than-temporary impairment of investments for the six months ended March 31, 2012. For the three and six months ended March 31, 2011, the Company recognized $0.4 million and $13.6 million of other-than-temporary impairment of investments, of which nil and $7.3 million related to available-for-sale equity securities and none related to available-for-sale debt securities.

13



At March 31, 2012, contractual maturities of available-for-sale debt securities were as follows: 
(in thousands)
 
Cost Basis  
 
Fair Value    
Due in one year or less
 
$
68,104

 
$
68,943

Due after one year through five years
 
36,469

 
37,252

Due after five years through ten years
 
24,008

 
25,735

Due after ten years
 
178,372

 
181,354

Total
 
$
306,953

 
$
313,284

Note 7 Fair Value Measurements
The Company records the majority of its investments at fair value or amounts that approximate fair value. The tables below present the balances of assets and liabilities measured at fair value on a recurring basis. 
(in thousands)
 
Level 1      
 
Level 2      
 
Level 3      
 
Total        
as of March 31, 2012
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$

 
$
55,064

 
$

 
$
55,064

Receivables of consolidated VIEs
 

 
5,692

 

 
5,692

Investment securities, trading
 
825,940

 
356,998

 
2,353

 
1,185,291

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored investment products
 
674,837

 

 

 
674,837

Securities of U.S. states and political subdivisions
 

 
32,896

 

 
32,896

Securities of the U.S. Treasury and federal agencies
 

 
601

 

 
601

Other equity securities
 
11,445

 
4,282

 

 
15,727

Investments of consolidated VIEs
 

 
490

 

 
490

Banking/Finance Assets
 
 
 
 
 
 
 
 
Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Securities of U.S. states and political subdivisions
 

 
56

 

 
56

Securities of the U.S. Treasury and federal agencies
 

 
1,809

 

 
1,809

Corporate debt securities
 

 
80,791

 

 
80,791

Mortgage-backed securities – agency residential
 

 
197,131

 

 
197,131

Non-Current Assets
 
 
 
 
 
 
 
 
Investments of consolidated sponsored investment products
 
 
 
 
 
 
 
 
Debt securities
 

 

 
317,672

 
317,672

Equity securities
 
8,975

 

 
309,247

 
318,222

Investments of consolidated VIEs
 

 
849,960

 
2,456

 
852,416

Life settlement contracts
 

 

 
11,589

 
11,589

Total Assets Measured at Fair Value
 
$
1,521,197

 
$
1,585,770

 
$
643,317

 
$
3,750,284

Current Liabilities
 
 
 
 
 
 
 
 
Current maturities of long-term debt of consolidated VIEs
 
$

 
$

 
$
171

 
$
171

Other liabilities of consolidated VIEs
 

 
41,600

 

 
41,600

Non-Current Liabilities
 
 
 
 
 
 
 
 
Long-term debt of consolidated VIEs
 

 
772,163

 
65,094

 
837,257

Total Liabilities Measured at Fair Value
 
$

 
$
813,763

 
$
65,265

 
$
879,028



14



(in thousands)
 
Level 1      
 
Level 2      
 
Level 3      
 
Total        
as of September 30, 2011
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
14,700

 
$
73,538

 
$

 
$
88,238

Receivables of consolidated VIEs
 

 
11,953

 

 
11,953

Investment securities, trading
 
579,225

 
279,308

 
31,153

 
889,686

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored investment products
 
925,711

 

 

 
925,711

Securities of U.S. states and political subdivisions
 

 
41,199

 

 
41,199

Securities of the U.S. Treasury and federal agencies
 

 
602

 

 
602

Other equity securities
 
19,365

 
4,099

 

 
23,464

Investments of consolidated VIEs
 

 
10,994

 

 
10,994

Banking/Finance Assets
 
 
 
 
 
 
 
 
Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Securities of U.S. states and political subdivisions
 

 
311

 

 
311

Securities of the U.S. Treasury and federal agencies
 

 
1,837

 

 
1,837

Corporate debt securities
 

 
121,634

 

 
121,634

Mortgage-backed securities – agency residential
 

 
221,611

 

 
221,611

Other equity securities
 

 

 
93

 
93

Non-Current Assets
 
 
 
 
 
 
 
 
Investments of consolidated sponsored investment products
 
 
 
 
 
 
 
 
Debt securities
 

 

 
323,208

 
323,208

Equity securities
 
7,084

 
92

 
254,224

 
261,400

Investments of consolidated VIEs
 

 
809,762

 
1,856

 
811,618

Life settlement contracts
 

 

 
10,813

 
10,813

Total Assets Measured at Fair Value
 
$
1,546,085

 
$
1,576,940

 
$
621,347

 
$
3,744,372

Current Liabilities
 
 
 
 
 
 
 
 
Current maturities of long-term debt of consolidated VIEs
 
$

 
$

 
$
24,858

 
$
24,858

Other liabilities of consolidated VIEs
 

 
32,315

 

 
32,315

Non-Current Liabilities
 
 
 
 
 
 
 
 
Long-term debt of consolidated VIEs
 

 
787,301

 
59,068

 
846,369

Total Liabilities Measured at Fair Value
 
$

 
$
819,616

 
$
83,926

 
$
903,542

Transfers into Level 1 from Level 2 were nil and $25.7 million during the three and six months ended March 31, 2012, and transfers into Level 2 from Level 1 were $0.9 million during both periods. The securities that were transferred into Level 1 had adjustments to the quoted market prices for observable price movements within country-specific market proxies due to after hour trades or decreased liquidity of the market proxies during the previous reporting period but not in the current period. The securities that were transferred into Level 2 were valued based on prices of comparable or similar securities because quoted market prices were not available in the current period. There were no significant transfers between Level 1 and Level 2 during the three and six months ended March 31, 2011.

15



The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
(in thousands)
 
Securities Held by
Consolidated Sponsored
Investment Products
 
Investments of
Consolidated
VIEs
 
Other
 
Total 
Level 3
Assets
 
Long-term
Debt of
Consolidated
VIEs
for the three months ended March 31, 2012
 
Debt
 
Equity
 
 
 
 
Balance at January 1, 2012
 
$
350,003

 
$
325,974

  
$
3,482

  
$
11,205

  
$
690,664

 
$
(85,291
)
Realized and unrealized gains (losses) included in investment and other income, net
 
(25,335
)
 
218

  
(1,026
)
  
943

  
(25,200
)
 
(3,710
)
Purchases
 
11,619

 
40,979

  

  
373

 
52,971

 

Sales
 
(16,076
)
 
(56,378
)
 

 

 
(72,454
)
 

Settlements
 
(92
)
 
(123
)
 

 
(932
)
 
(1,147
)
 
23,507

Effect of exchange rate changes
 
(1,109
)
 
(408
)
  

  

  
(1,517
)
 
229

Balance at March 31, 2012
 
$
319,010

 
$
310,262

  
$
2,456

  
$
11,589

  
$
643,317

 
$
(65,265
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at March 31, 2012
 
$
(14,907
)
 
$
2,315

 
$
(1,026
)
 
$
321

 
$
(13,297
)
 
$
(3,710
)
There were no transfers into or out of Level 3 during the three months ended March 31, 2012.
(in thousands)
 
Securities Held by
Consolidated Sponsored
Investment Products
 
Investments of
Consolidated
VIEs
 
Other
 
Total 
Level 3
Assets
 
Long-term
Debt of
Consolidated
VIEs
for the six months ended March 31, 2012
 
Debt
 
Equity
 
 
 
 
Balance at October 1, 2011
 
$
324,875

 
$
283,710

  
$
1,856

  
$
10,906