0000038777-19-000119.txt : 20190426 0000038777-19-000119.hdr.sgml : 20190426 20190426083635 ACCESSION NUMBER: 0000038777-19-000119 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 84 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190426 DATE AS OF CHANGE: 20190426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN RESOURCES INC CENTRAL INDEX KEY: 0000038777 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 132670991 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09318 FILM NUMBER: 19769478 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY STREET 2: BUILDING 920 CITY: SAN MATEO STATE: CA ZIP: 94403 BUSINESS PHONE: 650-312-2000 MAIL ADDRESS: STREET 1: FRANKLIN RESOURCES INC STREET 2: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403 10-Q 1 form10q33119.htm FORM 10-Q Document

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, 2019
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 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.
 
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 April 18, 2019: 507,559,742.




INDEX TO FORM 10-Q


2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
 
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
(in millions, except per share data)
 
2019
 
2018
 
2019
 
2018
Operating Revenues
 
 
 
 
 
 
 
 
Investment management fees
 
$
992.4

 
$
1,117.1

 
$
1,964.2

 
$
2,230.7

Sales and distribution fees
 
358.5

 
409.8

 
713.3

 
827.6

Shareholder servicing fees
 
57.1

 
61.3

 
112.2

 
116.2

Other
 
25.8

 
29.6

 
55.6

 
58.8

Total operating revenues
 
1,433.8

 
1,617.8

 
2,845.3

 
3,233.3

Operating Expenses
 
 
 
 
 
 
 
 
Sales, distribution and marketing
 
449.4

 
521.5

 
893.9

 
1,050.2

Compensation and benefits
 
409.6

 
355.5

 
764.6

 
688.0

Information systems and technology
 
62.1

 
58.1

 
123.0

 
113.1

Occupancy
 
31.4

 
34.1

 
62.6

 
63.5

General, administrative and other
 
101.8

 
92.9

 
210.2

 
181.7

Total operating expenses
 
1,054.3

 
1,062.1

 
2,054.3

 
2,096.5

Operating Income
 
379.5

 
555.7

 
791.0

 
1,136.8

Other Income (Expenses)
 
 
 
 
 
 
 
 
Investment and other income, net
 
118.7

 
87.4

 
59.6

 
168.7

Interest expense
 
(5.7
)
 
(10.0
)
 
(12.1
)
 
(20.8
)
Other income, net
 
113.0

 
77.4

 
47.5

 
147.9

Income before taxes
 
492.5

 
633.1

 
838.5

 
1,284.7

Taxes on income
 
110.9

 
150.2

 
196.9

 
1,373.7

Net income (loss)
 
381.6


482.9

 
641.6

 
(89.0
)
Less: net income (loss) attributable to
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
21.5

 
15.2

 
6.1

 
26.7

Nonredeemable noncontrolling interests
 
(7.4
)
 
24.5

 
(7.9
)
 
24.4

Net Income (Loss) Attributable to Franklin Resources, Inc.
$
367.5

 
$
443.2

 
$
643.4

 
$
(140.1
)
 
 
 
 
 
 
 
 
 
Earnings (Loss) per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.72

 
$
0.79

 
$
1.26

 
$
(0.29
)
Diluted
 
0.72

 
0.78

 
1.25

 
(0.29
)




See Notes to Consolidated Financial Statements.

3


FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in millions)
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2019
 
2018
 
2019
 
2018
Net Income (Loss)
 
$
381.6

 
$
482.9

 
$
641.6

 
$
(89.0
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Currency translation adjustments, net of tax
 
7.9

 
6.8

 
(6.7
)
 
22.6

Net unrealized gains (losses) on defined benefit plans, net of tax
 
(0.7
)
 
0.4

 
(1.1
)
 
(0.7
)
Net unrealized gains (losses) on investments, net of tax
 
(0.1
)
 
(0.2
)
 
(0.1
)
 
3.3

Total other comprehensive income (loss)
 
7.1

 
7.0

 
(7.9
)
 
25.2

Total comprehensive income (loss)
 
388.7

 
489.9

 
633.7

 
(63.8
)
Less: comprehensive income (loss) attributable to
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
21.5

 
15.2

 
6.1

 
26.7

Nonredeemable noncontrolling interests
 
(7.4
)
 
24.5

 
(7.9
)
 
24.4

Comprehensive Income (Loss) Attributable to Franklin Resources, Inc.
 
$
374.6

 
$
450.2

 
$
635.5

 
$
(114.9
)

See Notes to Consolidated Financial Statements.

4


FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited
(in millions, except share and per share data)
 
March 31,
2019
 
September 30,
2018
Assets
 
 
 
 
Cash and cash equivalents
 
$
5,680.6

 
$
6,610.8

Receivables
 
747.5

 
733.7

Investments (including $502.9 and $551.6 at fair value at March 31, 2019 and September 30, 2018)
 
1,515.5

 
1,426.5

Assets of consolidated investment products
 
 
 
 
Cash and cash equivalents
 
265.4

 
299.8

Receivables
 
93.5

 
114.2

Investments, at fair value
 
2,139.6

 
2,109.4

Property and equipment, net
 
576.6

 
535.0

Goodwill and other intangible assets, net
 
3,027.9

 
2,333.4

Other
 
192.4

 
220.7

Total Assets
 
$
14,239.0

 
$
14,383.5

 
 
 
 
 
Liabilities
 
 
 
 
Compensation and benefits
 
$
342.1

 
$
405.6

Accounts payable and accrued expenses
 
210.1

 
158.9

Dividends
 
138.7

 
127.7

Commissions
 
267.4

 
297.9

Income taxes
 
915.9

 
1,034.8

Debt
 
697.9

 
695.9

Liabilities of consolidated investment products
 
 
 
 
Accounts payable and accrued expenses
 
44.9

 
68.0

Debt
 
32.8


32.6

Deferred taxes
 
130.2

 
126.5

Other
 
140.6

 
184.1

Total liabilities
 
2,920.6

 
3,132.0

Commitments and Contingencies (Note 11)
 

 

Redeemable Noncontrolling Interests
 
819.3

 
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; 507,714,184 and 519,122,574 shares issued and outstanding at March 31, 2019 and September 30, 2018
 
50.8

 
51.9

Retained earnings
 
10,219.5

 
10,217.9

Accumulated other comprehensive loss
 
(386.5
)
 
(370.6
)
Total Franklin Resources, Inc. stockholders’ equity
 
9,883.8

 
9,899.2

Nonredeemable noncontrolling interests
 
615.3

 
308.7

Total stockholders’ equity
 
10,499.1

 
10,207.9

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
14,239.0

 
$
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 six months ended
March 31, 2019
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

Net income (loss)
 
 
 
 
 
 
 
367.5

 
 
 
367.5

 
(7.4
)
 
360.1

Other comprehensive income
 
 
 
 
 
 
 
 
 
7.1

 
7.1

 
 
 
7.1

Dividends declared on common stock ($0.26 per share)
 
 
 
 
 
 
 
(132.6
)
 
 
 
(132.6
)
 
 
 
(132.6
)
Repurchase of common stock
 
(4.6
)
 
(0.4
)
 
(41.0
)
 
(103.3
)
 
 
 
(144.7
)
 
 
 
(144.7
)
Issuance of common stock
 
0.8

 
0.1

 
13.3

 
 
 
 
 
13.4

 
 
 
13.4

Stock-based compensation
 
 
 
 
 
27.7

 
 
 
 
 
27.7

 
 
 
27.7

Net subscriptions and other
 
 
 
 
 
 
 
 
 
 
 
 
 
51.0

 
51.0

Consolidation of investment product
 
 
 
 
 
 
 
 
 
 
 
 
 
24.3

 
24.3

Acquisition
 
 
 
 
 
 
 
 
 
 
 
 
 
216.1

 
216.1

Balance at March 31, 2019
 
507.7


$
50.8


$


$
10,219.5


$
(386.5
)

$
9,883.8


$
615.3


$
10,499.1


See Notes to Consolidated Financial Statements.

6


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 six months ended
March 31, 2018
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

Adoption of new accounting guidance
 
 
 
 
 
 
 
0.1

 
(0.1
)
 

 
 
 

Net income
 
 
 
 
 
 
 
443.2

 
 
 
443.2

 
24.5

 
467.7

Other comprehensive income
 
 
 
 
 
 
 
 
 
7.0

 
7.0

 
 
 
7.0

Dividends declared on common stock ($3.23 per share)
 
 
 
 
 
 
 
(1,762.0
)
 
 
 
(1,762.0
)
 
 
 
(1,762.0
)
Repurchase of common stock
 
(11.1
)
 
(1.1
)
 
(44.6
)
 
(386.9
)
 
 
 
(432.6
)
 
 
 
(432.6
)
Issuance of common stock
 
0.4

 
0.1

 
13.7

 
 
 
 
 
13.8

 
 
 
13.8

Stock-based compensation
 
 
 
 
 
30.9

 
 
 
 
 
30.9

 
 
 
30.9

Net distributions and other
 
 
 
 
 
 
 
 
 
 
 
 
 
(1.3
)
 
(1.3
)
Deconsolidation of investment product
 
 
 
 
 
 
 
 
 
 
 
 
 
(1.8
)
 
(1.8
)
Balance at March 31, 2018
 
541.7


$
54.2


$


$
10,263.9


$
(259.7
)

$
10,058.4


$
343.8


$
10,402.2



See Notes to Consolidated Financial Statements.

7


FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
 
 
Six Months Ended
March 31,
(in millions)
 
2019
 
2018
Net Income (Loss)
 
$
641.6

 
$
(89.0
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
39.8

 
40.5

Depreciation and other amortization
 
41.8

 
38.3

Stock-based compensation
 
59.4

 
61.2

Income from investments in equity method investees
 
(9.6
)
 
(45.9
)
Net losses (gains) on investments of consolidated investment products
 
17.2

 
(54.5
)
Net purchase of investments by consolidated investment products
 
(240.3
)
 
(28.3
)
Deferred income taxes
 
7.5

 
(44.7
)
Other
 
17.0

 
7.1

Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables and other assets
 
(3.7
)
 
(59.3
)
Decrease in receivables of consolidated investment products
 
0.1

 
100.3

Decrease (increase) in investments, net
 
128.4

 
(34.6
)
Decrease in accrued compensation and benefits
 
(72.2
)
 
(107.0
)
Decrease in commissions payable
 
(30.5
)
 
(2.6
)
Increase (decrease) in income taxes payable
 
(118.9
)
 
1,103.6

Increase (decrease) in accounts payable, accrued expenses and other liabilities
 
(23.0
)
 
11.3

Increase (decrease) in accounts payable and accrued expenses of consolidated investment products
 
(10.4
)
 
0.6

Net cash provided by operating activities
 
444.2

 
897.0

Purchase of investments
 
(105.4
)
 
(182.6
)
Liquidation of investments
 
134.3

 
74.5

Purchase of investments by consolidated investment products
 

 
(40.3
)
Liquidation of investments by consolidated investment products
 

 
68.6

Additions of property and equipment, net
 
(72.2
)
 
(43.7
)
Acquisitions, net of cash acquired
 
(684.2
)
 
(9.7
)
Net deconsolidation of investment products
 
(6.7
)
 
(48.3
)
Net cash used in investing activities
 
(734.2
)
 
(181.5
)
Issuance of common stock
 
12.8

 
13.6

Dividends paid on common stock
 
(255.4
)
 
(239.0
)
Repurchase of common stock
 
(469.4
)
 
(619.4
)
Proceeds from loan
 
1.7

 

Payments on debt by consolidated investment products
 

 
(19.6
)
Payments on contingent consideration liability
 
(20.4
)
 
(21.6
)
Noncontrolling interests
 
67.9

 
121.5

Net cash used in financing activities
 
(662.8
)
 
(764.5
)
Effect of exchange rate changes on cash and cash equivalents
 
(11.8
)
 
25.8

Decrease in cash and cash equivalents
 
(964.6
)
 
(23.2
)
Cash and cash equivalents, beginning of period
 
6,910.6

 
8,749.7

Cash and Cash Equivalents, End of Period
 
$
5,946.0

 
$
8,726.5


[Table continued on next page]

See Notes to Consolidated Financial Statements.

8


FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited

[Table continued from previous page]
 
 
Six Months Ended
March 31,
(in millions)
 
2019
 
2018
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
303.3

 
$
310.9

Cash paid for interest
 
10.4

 
24.1

Cash paid for interest by consolidated investment products
 
1.1

 
1.5




See Notes to Consolidated Financial Statements.

9


FRANKLIN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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 March 31, 2019.
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 statements of income were impacted as follows:
 
 
Three Months Ended March 31, 2019
 
Six Months Ended March 31, 2019
 
 
As
Reported
 
Adoption
Impact
 
Amount
Without
Adoption
 
As
Reported
 
Adoption
Impact
 
Amount
Without
Adoption
(in millions)
 
 
 
 
 
 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Investment management fees
 
$
992.4

 
$
14.9

 
$
1,007.3

 
$
1,964.2

 
$
30.4

 
$
1,994.6

Sales and distribution fees
 
358.5

 
(14.9
)
 
343.6

 
713.3

 
(30.4
)
 
682.9

Shareholder servicing fees
 
57.1

 
(1.5
)
 
55.6

 
112.2

 
(3.7
)
 
108.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
General, administrative and other
 
$
101.8

 
$
(1.5
)
 
$
100.3

 
$
210.2

 
$
(3.7
)
 
$
206.5

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.

10


Note 3 Acquisition
On February 1, 2019, the Company acquired all of the outstanding ownership interests in Benefit Street Partners L.L.C., a U.S. alternative credit manager, for a purchase consideration of $717.4 million in cash, of which $135.0 million was used to retire debt. The acquisition provides the Company private credit capabilities that complement its alternative and fixed income strategies available to clients.
The preliminary allocation of estimated fair values of the assets acquired and liabilities and noncontrolling interests assumed was as follows:
(in millions)
 
Estimated
 Fair Value
as of February 1, 2019
 
Cash
 
$
33.2

Investments
 
138.8

Investments of consolidated investment products
 
84.9

Indefinite-lived intangible assets
 
307.5

Definite-lived intangible assets
 
75.8

Goodwill
 
315.8

Other assets
 
35.7

Other liabilities
 
(58.2
)
Nonredeemable noncontrolling interests
 
(216.1
)
Total Identifiable Net Assets
 
$
717.4

The goodwill is primarily attributable to expected growth from the private credit asset class. The amount of goodwill expected to be deductible for tax purposes is $423.3 million, which includes deferred payments that are recognized as compensation expense for accounting purposes.
The intangible assets relate to acquired investment management contracts. Indefinite-lived intangible assets represent contracts for which there is no foreseeable limit on the contract period. Definite-lived intangible assets are amortized over their estimated useful lives, which range from four to six years. Amortization expense related to the definite-lived intangible assets was $3.1 million for the period ended March 31, 2019. These assets had a weighted-average remaining useful life of 4.4 years at March 31, 2019, with estimated remaining amortization expense as follows:
(in millions)
 
 
for the fiscal years ending September 30,
 
Amount
2019
 
$
8.4

2020
 
17.2

2021
 
17.2

2022
 
17.2

2023
 
8.0

Thereafter
 
4.7

Total
 
$
72.7

Costs incurred in connection with the acquisition were $6.8 million for the six months ended March 31, 2019.
The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying consolidated statements of income would have not have been materially different.

11


Note 4 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
March 31,
 
Six Months Ended
March 31,
 
2019
 
2018
 
2019
 
2018
Net income (loss) attributable to Franklin Resources, Inc.
 
$
367.5

 
$
443.2

 
$
643.4

 
$
(140.1
)
Less: allocation of earnings to participating nonvested stock and stock unit awards
 
3.8

 
15.2

 
6.0

 
16.3

Net Income (Loss) Available to Common Stockholders
 
$
363.7

 
$
428.0

 
$
637.4

 
$
(156.4
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
504.7

 
545.0

 
507.6

 
547.9

Dilutive effect of nonparticipating nonvested stock unit awards
 
0.4

 
0.5

 
0.4

 

Weighted-Average Shares Outstanding – Diluted
 
505.1

 
545.5

 
508.0

 
547.9

 
 
 
 
 
 
 
 
 
Earnings (Loss) per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.72

 
$
0.79

 
$
1.26

 
$
(0.29
)
Diluted
 
0.72

 
0.78

 
1.25

 
(0.29
)
Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive were 0.2 million and 0.3 million for the three and six months ended March 31, 2019, and 0.0 million and 1.9 million for the three and six months ended March 31, 2018.
Note 5 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.

12


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
March 31, 2019
Investment management fees
 
$
565.6

 
$
263.4

 
$
82.9

 
$
56.9

 
$
23.6

 
$

 
$
992.4

Sales and distribution fees
 
228.6

 
113.5

 
15.8

 
0.2

 
0.4

 

 
358.5

Shareholder servicing fees
 
47.1

 
7.4

 
0.1

 
2.5

 

 

 
57.1

Other
 
4.2

 
0.3

 

 
0.2

 
0.1

 
21.0

 
25.8

Total
 
$
845.5

 
$
384.6


$
98.8


$
59.8


$
24.1

 
$
21.0

 
$
1,433.8

 
 
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 six months ended
March 31, 2019
Investment management fees
 
$
1,098.7

 
$
531.1

 
$
168.5

 
$
118.3

 
$
47.6

 
$

 
$
1,964.2

Sales and distribution fees
 
461.6

 
217.8

 
32.4

 
0.7

 
0.8

 

 
713.3

Shareholder servicing fees
 
92.0

 
15.1

 
0.1

 
5.0

 

 

 
112.2

Other
 
7.2

 
0.6

 

 
0.3

 
0.4

 
47.1

 
55.6

Total
 
$
1,659.5

 
$
764.6

 
$
201.0

 
$
124.3

 
$
48.8

 
$
47.1

 
$
2,845.3

__________________ 
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.

13


Note 6 Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated investment products. See Note 8 Consolidated Investment Products for information related to the investments held by these entities.
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)
 
March 31,
2019
Equity securities, at fair value
 
 
Sponsored funds
 
$
354.3

Other equity securities
 
68.8

Total equity securities, at fair value
 
423.1

Debt securities
 
 
Trading
 
57.1

Available-for-sale
 
11.0

Total debt securities
 
68.1

Investments in equity method investees
 
982.8

Other investments
 
41.5

Total
 
$
1,515.5

(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 investments that were classified as trading or 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.
Effective 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 March 31, 2019.
Investment securities with aggregate carrying amounts of $1.2 million were pledged as collateral at both March 31, 2019 and September 30, 2018.

14


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 March 31, 2019
 
 
 
 
 
 
 
 
Debt securities
 
$
13.1

 
$

 
$
(2.1
)
 
$
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 March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
 
$
10.2

 
$
(2.1
)
 
$
0.6

 
$

 
$
10.8

 
$
(2.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
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 7 Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated investment products. See Note 8 – Consolidated Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liability measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a
Practical
Expedient
 
Total
as of March 31, 2019
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Equity securities, at fair value
 
 
 
 
 
 
 
 
 
 
Sponsored funds
 
$
281.4

 
$

 
$

 
$
72.9

 
$
354.3

Other equity securities
 
23.4

 
0.9

 
5.7

 
38.8

 
68.8

Debt securities
 
 
 
 
 
 
 
 
 

Trading
 
2.6

 
38.3

 
16.2

 

 
57.1

Available-for-sale
 

 
10.7

 
0.3

 

 
11.0

Life settlement contracts
 

 

 
11.7

 

 
11.7

Total Assets Measured at Fair Value
 
$
307.4

 
$
49.9

 
$
33.9


$
111.7

 
$
502.9


15


(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 primarily based on discounted cash flows using significant unobservable inputs.
The fair value of the contingent consideration liability was 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, infrastructure and real estate 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 $54.2 million of the investments was 1.8 years at March 31, 2019. The liquidation periods for a $47.7 million investment in a nonredeemable private debt fund and $1.9 million of investments in real estate funds are unknown. The Company’s unfunded commitments to the funds totaled $4.9 million at March 31, 2019.
Changes in the Level 3 assets and liability were as follows: 
 
 
2019
 
2018
(in millions)
 
Investments
 
Contingent
Consideration
Liability
 
Investments
 
Contingent
Consideration
Liability
for the three months ended March 31,
 
 
 
 
Balance at beginning of period
 
$
29.0

 
$
(40.0
)
 
$
210.1

 
$
(62.0
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
0.8

 

 
1.8

 

Included in general, administrative and other expense
 

 
(0.7
)
 

 
(1.6
)
Purchases
 
5.0

 

 
1.4

 

Settlements
 
(0.9
)
 
40.7

 
(1.9
)
 
32.4

Foreign exchange revaluation
 

 

 
(3.3
)
 

Balance at End of Period
 
$
33.9

 
$

 
$
208.1

 
$
(31.2
)
Change in unrealized gains (losses) included in net income (loss) relating to assets and liability held at end of period
 
$
0.3

 
$

 
$
0.8

 
$
(1.6
)

16


 
 
2019
 
2018
(in millions)
 
Investments
 
Contingent
Consideration
Liability
 
Investments
 
Contingent
Consideration
Liability
for the six months ended March 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, net
 
3.6

 

 
3.0

 

Included in general, administrative and other expense
 

 
(2.0
)
 

 
(5.6
)
Purchases
 
5.0

 

 
6.7

 

Sales
 
(4.3
)
 

 

 

Settlements
 
(0.9
)
 
40.7

 
(1.9
)
 
32.4

Transfers out of Level 3
 
(2.1
)
 

 

 

Foreign exchange revaluation and other
 

 

 
0.4

 
(7.0
)
Balance at End of Period
 
$
33.9

 
$

 
$
208.1

 
$
(31.2
)
Change in unrealized gains (losses) included in net income (loss) relating to assets and liability held at end of period
 
$
3.0

 
$

 
$
2.0

 
$
(5.6
)
There were no transfers out of Level 3 during the three months ended March 31, 2019 and 2018, or into Level 3 during the six months ended March 31, 2019 and 2018.
Valuation techniques and significant unobservable inputs used in the Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of March 31, 2019
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average 1)
Debt securities, trading
 
$
16.2

 
Discounted cash flow
 
Discount rate
 
3.2%–12.2% (6.2%)
Risk premium
 
2.0%–6.0% (2.7%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
11.7

 
Discounted cash flow
 
Life expectancy
 
20–111 months (58)
Discount rate
 
8.0%–20.0% (13.3%)
__________________ 
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 March 31, 2019, the resulting fair value of the assets or liability would be lower (higher).

17


Financial instruments that were not measured at fair value were as follows:
(in millions)
 
Fair Value
Level
 
March 31, 2019
 
September 30, 2018
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
5,680.6

 
$
5,680.6

 
$
6,610.8

 
$
6,610.8

Other investments
 
 
 
 
 
 
 
 
 
 
Time deposits
 
2
 
14.9

 
14.9

 
12.3

 
12.3

Equity securities
 
3
 
14.9

 
15.1

 
81.8

 
103.6