Form 10Q 12.31.2012


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 December 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: 212,528,109 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of January 25, 2013.



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Income
Unaudited
 
 
Three Months Ended
December 31,
(in millions, except per share data)
 
2012
 
2011
Operating Revenues
 
 
 
 
Investment management fees
 
$
1,199.9

 
$
1,075.1

Sales and distribution fees
 
604.1

 
524.3

Shareholder servicing fees
 
74.4

 
75.4

Other, net
 
23.4

 
27.1

Total operating revenues
 
1,901.8

 
1,701.9

Operating Expenses
 
 
 
 
Sales, distribution and marketing
 
730.9

 
630.6

Compensation and benefits
 
335.1

 
300.4

Information systems and technology
 
43.6

 
41.4

Occupancy
 
33.4

 
31.8

General, administrative and other
 
73.7

 
65.3

Total operating expenses
 
1,216.7

 
1,069.5

Operating Income
 
685.1

 
632.4

Other Income (Expenses)
 
 
 
 
Investment and other income, net
 
45.5

 
71.2

Interest expense
 
(14.5
)
 
(8.6
)
Other income, net
 
31.0

 
62.6

Income before taxes
 
716.1

 
695.0

Taxes on income
 
211.4

 
201.3

Net income
 
504.7

 
493.7

Less: Net income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
(12.7
)
 
10.1

Redeemable noncontrolling interests
 
1.3

 
2.8

Net Income Attributable to Franklin Resources, Inc.
 
$
516.1

 
$
480.8

Earnings per Share
 
 
 
 
Basic
 
$
2.42

 
$
2.21

Diluted
 
2.42

 
2.20

Dividends per Share
 
$
3.29

 
$
2.27

See Notes to Condensed Consolidated Financial Statements.

2


FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
(in millions)
 
Three Months Ended
December 31,
 
2012
 
2011
Net Income
 
$
504.7

 
$
493.7

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
Net unrealized losses on investments
 
(2.1
)
 
(4.8
)
Currency translation adjustments
 
3.9

 
(22.5
)
Net unrealized losses on defined benefit plans
 
—

 
(0.2
)
Total comprehensive income
 
506.5

 
466.2

Less: Comprehensive income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
(12.7
)
 
10.1

Redeemable noncontrolling interests
 
1.3

 
2.8

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
517.9

 
$
453.3

See Notes to Condensed Consolidated Financial Statements.

3


FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
(in millions)
 
December 31,
2012
 
September 30,
2012
Assets
 
 
 
 
Cash and cash equivalents
 
$
5,086.8

 
$
5,784.3

Receivables
 
908.0

 
850.2

Investments (including $1,944.4 and $2,012.7 at fair value at December 31, 2012 and September 30, 2012)
 
2,524.6

 
2,583.8

Loans receivable, net
 
279.4

 
254.4

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
75.1

 
42.8

Investments
 
1,104.9

 
1,046.6

Assets of consolidated variable interest entities
 
 
 
 
Cash and cash equivalents
 
80.8

 
224.3

Investments, at fair value
 
1,062.0

 
984.1

Deferred taxes
 
94.7

 
94.9

Property and equipment, net
 
578.0

 
582.7

Goodwill and other intangible assets, net
 
2,392.3

 
2,141.9

Other
 
167.6

 
161.5

Total Assets
 
$
14,354.2

 
$
14,751.5

Liabilities
 
 
 
 
Compensation and benefits
 
$
242.1

 
$
400.5

Accounts payable and accrued expenses
 
194.1

 
241.6

Commissions
 
274.6

 
383.9

Deposits
 
885.2

 
671.7

Income taxes
 
151.0

 
11.4

Debt
 
1,263.3

 
1,566.1

Debt of consolidated sponsored investment products
 
97.8

 
110.2

Liabilities of consolidated variable interest entities
 
 
 
 
Debt, at fair value
 
1,101.4

 
1,100.9

Other, at fair value
 
49.7

 
61.9

Deferred taxes
 
263.0

 
276.3

Other
 
231.0

 
139.8

Total liabilities
 
4,753.2

 
4,964.3

Commitments and Contingencies (Note 11)
 
 
 
 
Redeemable Noncontrolling Interests
 
66.2

 
26.7

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

4


FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
[Table continued from previous page]
(dollars in millions, except per share data)
 
December 31,
2012
 
September 30,
2012
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; 212,524,001 and 212,208,957 shares issued and outstanding at December 31, 2012 and September 30, 2012
 
21.3

 
21.2

Retained earnings
 
8,847.5

 
9,084.4

Appropriated retained earnings of consolidated variable interest entities
 
15.2

 
33.7

Accumulated other comprehensive income
 
63.8

 
62.0

Total Franklin Resources, Inc. stockholders’ equity
 
8,947.8

 
9,201.3

Nonredeemable noncontrolling interests
 
587.0

 
559.2

Total stockholders’ equity
 
9,534.8

 
9,760.5

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
14,354.2

 
$
14,751.5

See Notes to Condensed Consolidated Financial Statements.

5


FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Three Months Ended
December 31,
(in millions)
 
2012
 
2011
Net Income
 
$
504.7

 
$
493.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
53.9

 
52.6

Stock-based compensation
 
27.6

 
25.7

Excess tax benefit from stock-based compensation
 
(5.7
)
 
(17.4
)
Gains on sale of assets
 
(20.6
)
 
(13.2
)
Income from investments in equity method investees, net of tax
 
(21.8
)
 
(22.5
)
Net (gains) losses on other investments of consolidated sponsored investment products
 
(14.1
)
 
10.1

Net (gains) losses of consolidated variable interest entities
 
17.5

 
(22.3
)
Other
 
3.6

 
6.7

Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(56.1
)
 
(27.9
)
Increase in trading securities, net
 
(66.4
)
 
(58.7
)
Increase in trading securities of consolidated sponsored investment products, net
 
(10.5
)
 
(88.4
)
Decrease in accrued compensation and benefits
 
(162.7
)
 
(173.0
)
Decrease in commissions payable
 
(109.3
)
 
(25.6
)
Increase in income taxes payable
 
149.4

 
98.4

Decrease in other liabilities
 
(3.1
)
 
(70.5
)
Net cash provided by operating activities
 
286.4

 
167.7

Purchase of investments
 
(78.4
)
 
(51.9
)
Liquidation of investments
 
237.5

 
294.4

Purchase of investments by consolidated sponsored investment products
 
(41.8
)
 
(43.7
)
Liquidation of investments by consolidated sponsored investment products
 
48.6

 
4.0

Purchase of investments by consolidated variable interest entities
 
(243.1
)
 
(73.2
)
Liquidation of investments by consolidated variable interest entities
 
140.6

 
95.8

Decrease (increase) in loans receivable, net
 
(24.9
)
 
13.2

Decrease in loans receivable held by consolidated variable interest entities, net
 
—

 
24.6

Additions of property and equipment, net
 
(12.3
)
 
(26.8
)
Acquisition of subsidiary, net of cash acquired
 
5.7

 
—

Cash and cash equivalents recognized due to consolidation of sponsored investment products
 
2.6

 
—

Net cash provided by investing activities
 
34.5

 
236.4

Increase in deposits
 
213.5

 
138.2

Issuance of common stock
 
11.4

 
12.8

Dividends paid on common stock
 
(757.9
)
 
(546.9
)
Repurchase of common stock
 
(98.0
)
 
(290.9
)
Excess tax benefit from stock-based compensation
 
5.7

 
17.4

Decrease in commercial paper, net
 
—

 
(5.0
)
Payments on debt
 
(479.4
)
 
—

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

6


FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
[Table continued from previous page]
 
 
Three Months Ended
December 31,
(in millions)
 
2012
 
2011
Proceeds from issuance of debt by consolidated sponsored investment products
 
$
133.5

 
$
6.6

Payments on debt by consolidated sponsored investment products
 
(146.7
)
 
(61.8
)
Payments on debt by consolidated variable interest entities
 
(40.4
)
 
(54.1
)
Noncontrolling interests
 
17.9

 
102.3

Net cash used in financing activities
 
(1,140.4
)
 
(681.4
)
Effect of exchange rate changes on cash and cash equivalents
 
10.8

 
(9.4
)
Decrease in cash and cash equivalents
 
(808.7
)
 
(286.7
)
Cash and cash equivalents, beginning of period
 
6,051.4

 
5,198.6

Cash and Cash Equivalents, End of Period
 
$
5,242.7

 
$
4,911.9

 
 
 
 
 
Supplemental Disclosure of Non-Cash Activities
 
 
 
 
Increase (decrease) in noncontrolling interests due to net consolidation (deconsolidation) of certain sponsored investment products
 
$
4.1

 
$
(5.1
)
Increase in noncontrolling interests due to acquisition
 
38.2

 
—

Contingent consideration liability recognized due to acquisition
 
90.6

 
—

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
61.6

 
$
94.6

Cash paid for interest
 
19.4

 
16.8

Cash paid for interest by consolidated sponsored investment products and consolidated variable interest entities
 
11.4

 
12.9

See Notes to Condensed Consolidated Financial Statements.

7


FRANKLIN RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements
December 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 (“U.S. GAAP”) 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, 2012 (“fiscal year 2012”). 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 December 31, 2012.
Note 2 – New Accounting Guidance
On October 1, 2012, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance that requires the components of net income and other comprehensive income to be presented in one continuous statement or in two separate but consecutive statements. The Company elected to present the components of comprehensive income in two separate but consecutive statements. See the consolidated statements of comprehensive income in the condensed consolidated financial statements.
On October 1, 2012, the Company adopted new FASB amendments to the existing impairment guidance for goodwill and indefinite-lived intangible assets. The amendments permit a reporting entity to first assess qualitative factors to determine whether it is necessary to perform the annual quantitative impairment tests for goodwill and indefinite-lived intangible assets. The adoption of these amendments did not have a material impact on the Company's consolidated financial statements.
There is no new applicable accounting guidance not yet adopted by the Company.
Note 3 – Acquisition
On November 1, 2012, the Company acquired approximately 69% of the equity of K2 Advisors Holdings LLC (“K2”), a fund of hedge funds solutions provider. The acquisition was transacted through a $182.9 million cash investment in K2. The Company also agreed to acquire K2's remaining equity interests over a multi-year period beginning in fiscal year 2017, resulting in the conversion of this equity to a liability. The amount of the liability is contingent on K2's future revenue and profits and had an estimated fair value of $90.6 million on November 1, 2012. As a result of the conversion, the Company owns 100% of K2's outstanding equity for U.S. GAAP purposes.
The estimated fair values of the assets acquired and liabilities and noncontrolling interests assumed were as follows:
(in millions)
 
Estimated
Fair Value
As of November 1, 2012
 
Cash, including cash invested
 
$
191.6

Investments of consolidated sponsored investment products
 
31.1

Indefinite-lived intangible assets
 
105.2

Definite-lived intangible assets
 
43.8

Goodwill
 
110.1

Other assets
 
28.0

Debt
 
(176.5
)
Other liabilities
 
(21.6
)
Noncontrolling interests
 
(38.2
)
Total Identifiable Net Assets
 
$
273.5

The intangible assets relate to management contracts. The definite-lived intangible assets will be amortized over a period of six years. The debt was retired immediately following the acquisition. At acquisition date, K2 had $8.7 billion in assets under management (“AUM”).

8


The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying condensed consolidated statements of income would not have been materially different.
Note 4 – Stockholders' Equity and Redeemable Noncontrolling Interests
The changes in total stockholders’ equity and redeemable noncontrolling interests were as follows:
(in millions)
 
Franklin
Resources,  Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the three months ended December 31, 2012
 
 
 
 
Balance at October 1, 2012
 
$
9,201.3

 
$
559.2

 
$
9,760.5

 
$
26.7

Net income (loss)
 
516.1

 
(12.7
)
 
503.4

 
1.3

Net loss reclassified to appropriated retained earnings
 
(18.5
)
 
18.5

 
—

 
 
Other comprehensive income
 
1.8

 
 
 
1.8

 
 
Cash dividends on common stock
 
(702.0
)
 
 
 
(702.0
)
 
 
Repurchase of common stock
 
(98.0
)
 
 
 
(98.0
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 
 
 
12.5

 
12.5

 
5.4

Net consolidation of certain sponsored investment products
 
 
 
4.1

 
4.1

 
—

Acquisition
 
 
 
5.4

 
5.4

 
32.8

Other1
 
47.1

 
 
 
47.1

 
 
Balance at December 31, 2012
 
$
8,947.8

 
$
587.0

 
$
9,534.8

 
$
66.2

________________
1 
Primarily relates to stock-based compensation plans.
(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the three months ended December 31, 2011
 
 
 
 
Balance at October 1, 2011
 
$
8,524.7

 
$
579.2

 
$
9,103.9

 
$
18.6

Net income
 
480.8

 
10.1

 
490.9

 
2.8

Net income reclassified to appropriated retained earnings
 
21.6

 
(21.6
)
 
—

 
 
Other comprehensive loss
 
(27.5
)
 
 
 
(27.5
)
 
 
Cash dividends on common stock
 
(493.3
)
 
 
 
(493.3
)
 
 
Repurchase of common stock
 
(290.9
)
 
 
 
(290.9
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 
 
 
92.1

 
92.1

 
10.2

Net deconsolidation of certain sponsored investment products
 
 
 
—

 
—

 
(5.1
)
Other1
 
58.2

 
 
 
58.2

 
 
Balance at December 31, 2011
 
$
8,273.6

 
$
659.8

 
$
8,933.4

 
$
26.5

________________
1 
Primarily relates to stock-based compensation plans.
During the three months ended December 31, 2012 and 2011, the Company repurchased 0.8 million and 3.0 million shares of its common stock at a cost of $98.0 million and $290.9 million under its stock repurchase program. At December 31, 2012, approximately 6.5 million shares of common stock remained available for repurchase under the stock repurchase program, which is not subject to an expiration date.

9


Note 5 – Earnings per Share
The components of basic and diluted earnings per share were as follows: 
(in millions, except per share data)
 
Three Months Ended
December 31,
 
2012
 
2011
Net Income Attributable to Franklin Resources, Inc.
 
$
516.1

 
$
480.8

Less: Allocation of earnings to participating nonvested stock and stock unit awards
 
4.0

 
3.4

Net Income Available to Common Stockholders
 
$
512.1

 
$
477.4

 
 
 
 
 
Weighted-average shares outstanding – basic
 
211.5

 
216.1

Effect of dilutive common stock options and non-participating nonvested stock unit awards
 
0.3

 
0.6

Weighted-Average Shares Outstanding – Diluted
 
211.8

 
216.7

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
2.42

 
$
2.21

Diluted
 
2.42

 
2.20

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 months ended December 31, 2012 and 2011.
Note 6 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated variable interest entities (“VIEs”) and consolidated sponsored investment products (“SIPs”). See Note 10 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions)
 
December 31,
2012
 
September 30,
2012
Investment securities, trading
 
$
1,198.2

 
$
1,130.6

Investment securities, available-for-sale
 
 
 
 
SIPs
 
524.5

 
587.2

Securities of U.S. states and political subdivisions
 
26.8

 
26.8

Securities of the U.S. Treasury and federal agencies
 
25.3

 
2.4

Corporate debt securities1
 
20.0

 
70.3

Mortgage-backed securities – agency residential2
 
127.0

 
169.3

Other equity securities
 
9.8

 
14.0

Total investment securities, available-for-sale
 
733.4

 
870.0

Investments in equity method investees
 
498.7

 
489.0

Other investments
 
94.3

 
94.2

Total
 
$
2,524.6

 
$
2,583.8

________________
1 
Corporate debt securities are insured by non-U.S. government agencies or the Federal Deposit Insurance Corporation.
2 
Consist of U.S. government-sponsored enterprise obligations.
At December 31, 2012 and September 30, 2012, investment securities with aggregate carrying amounts of $102.7 million and $120.4 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank, and $47.3 million and $45.2 million were pledged as collateral for outstanding Federal Home Loan Bank (“FHLB”) borrowings and amounts available in secured FHLB short-term borrowing capacity, and $7.2 million and $7.3 million were pledged as collateral for the ability to borrow from uncommitted short-term bank lines of credit (see Note 9 - Debt).

10


A summary of the gross unrealized gains and losses relating to investment securities, available-for-sale is as follows:
(in millions)
 
 
 
Gross Unrealized
 
 
as of December 31, 2012
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
454.6

 
$
71.1

 
$
(1.2
)
 
$
524.5

Securities of U.S. states and political subdivisions
 
25.6

 
1.2

 
—

 
26.8

Securities of the U.S. Treasury and federal agencies
 
25.2

 
0.1

 
—

 
25.3

Corporate debt securities
 
20.0

 
—

 
—

 
20.0

Mortgage-backed securities – agency residential
 
124.2

 
2.8

 
—

 
127.0

Other equity securities
 
9.7

 
0.1

 
—

 
9.8

Total
 
$
659.3

 
$
75.3

 
$
(1.2
)
 
$
733.4

(in millions)
 
 
 
Gross Unrealized
 
 
as of September 30, 2012
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
516.8

 
$
72.1

 
$
(1.7
)
 
$
587.2

Securities of U.S. states and political subdivisions
 
25.6

 
1.2

 
—

 
26.8

Securities of the U.S. Treasury and federal agencies
 
2.4

 
—

 
—

 
2.4

Corporate debt securities
 
70.0

 
0.3

 
—

 
70.3

Mortgage-backed securities – agency residential
 
164.8

 
4.5

 
—

 
169.3

Other equity securities
 
13.5

 
0.6

 
(0.1
)
 
14.0

Total
 
$
793.1

 
$
78.7

 
$
(1.8
)
 
$
870.0

The net unrealized holding gains on investment securities, available-for-sale included in accumulated other comprehensive income (loss) were $18.4 million and $7.8 million for the three months ended December 31, 2012 and 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 millions)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of December 31, 2012
 
 
 
 
 
SIPs
 
$
6.0

 
$
(1.1
)
 
$
6.1

 
$
(0.1
)
 
$
12.1

 
$
(1.2
)

 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in millions)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
as of September 30, 2012
 
 
 
 
 
SIPs
 
$
30.0

 
$
(0.7
)
 
$
21.7

 
$
(1.0
)
 
$
51.7

 
$
(1.7
)
Other equity securities
 
4.4

 
(0.1
)
 
—

 
—

 
4.4

 
(0.1
)
Total
 
$
34.4

 
$
(0.8
)
 
$
21.7

 
$
(1.0
)
 
$
56.1

 
$
(1.8
)

The Company recognized $0.3 million of other-than-temporary impairment of available-for-sale investments for the three months ended December 31, 2012, all of which related to SIPs. The Company did not recognize any other-than-temporary impairment of investments for the three months ended December 31, 2011.
At December 31, 2012, contractual maturities of available-for-sale debt securities were as follows: 
(in millions)
 
Cost Basis
 
Fair Value
Due in one year or less
 
$
47.9

 
$
48.0

Due after one year through five years
 
19.7

 
20.7

Due after five years through ten years
 
1.6

 
1.7

Due after ten years
 
1.6

 
1.7

Total
 
$
70.8

 
$
72.1


11


Mortgage-backed securities are not included in the table above as their actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Note 7 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated VIEs and consolidated SIPs. See Note 10 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. The three levels of fair value hierarchy are set forth below. The Company's assessment of the hierarchy level of the assets and liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
Observable inputs other than Level 1 quoted prices, such as non-binding quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or corroborated by observable market data. Level 2 quoted prices are generally obtained from two independent third-party brokers or dealers, including prices derived from model-based valuation techniques for which the significant assumptions are observable in the market or corroborated by observable market data.
 
 
Level 3
Unobservable inputs that are supported by little or no market activity. These inputs require significant management judgment and reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability.
Assets and liabilities measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of December 31, 2012
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,121.2

 
$
76.8

 
$
0.2

 
$
1,198.2

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
524.5

 
—

 
—

 
524.5

Securities of U.S. states and political subdivisions
 
—

 
26.8

 
—

 
26.8

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

 
25.3

 
—

 
25.3

Corporate debt securities
 
—

 
20.0

 
—

 
20.0

Mortgage-backed securities – agency residential
 
—

 
127.0

 
—

 
127.0

Other equity securities
 
9.8

 
—

 
—

 
9.8

Life settlement contracts
 
—

 
—

 
12.8

 
12.8

Total Assets Measured at Fair Value
 
$
1,655.5

 
$
275.9

 
$
13.0

 
$
1,944.4

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
90.3

 
$
90.3



12


(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2012
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,058.6

 
$
69.3

 
$
2.7

 
$
1,130.6

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
587.2

 
—

 
—

 
587.2

Securities of U.S. states and political subdivisions
 
—

 
26.8

 
—

 
26.8

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

 
2.4

 
—

 
2.4

Corporate debt securities
 
—

 
70.3

 
—

 
70.3

Mortgage-backed securities – agency residential
 
—

 
169.3

 
—

 
169.3

Other equity securities
 
14.0

 
—

 
—

 
14.0

Life settlement contracts
 
—

 
—

 
12.1

 
12.1

Total Assets Measured at Fair Value
 
$
1,659.8

 
$
338.1

 
$
14.8

 
$
2,012.7

The fair values of substantially all trading investments and of available-for-sale SIPs and other equity securities are determined based on their published net asset values. The fair values of certain trading investments and of available-for-sale debt securities are determined using quoted market prices, if available, or independent third-party broker or dealer price quotes, which are evaluated for reasonableness. The fair value of life settlement contracts is determined using a discounted cash flow valuation technique.
The contingent consideration liability relates to the Company's commitment to acquire the remaining interests in K2. The fair value is determined using an income-based method which considers the net present value of anticipated future cash flows.
There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three months ended December 31, 2012 and 2011.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
(in millions)
 
Investments
 
Contingent
Consideration
Liability
for the three months ended December 31, 2012
 
 
Balance at October 1, 2012
 
$
14.8

 
$
—

Acquisition
 
—

 
(90.6
)
Total realized and unrealized gains (losses)
 
 
 
 
Included in investment and other income, net
 
0.4

 
—

Included in general, administrative and other expense
 
—

 
(2.4
)
Other
 
—

 
(0.3
)
Purchases
 
0.6

 
—

Sales
 
(1.6
)
 
—

Settlements
 
(1.2
)
 
3.0

Balance at December 31, 2012
 
$
13.0

 
$
(90.3
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at December 31, 2012
 
$
0.4

 
$
(2.7
)

(in millions)
 
Investments
for the three months ended December 31, 2011
 
Balance at October 1, 2011
 
$
10.9

Realized and unrealized gains included in investment and other income, net
 
0.9

Purchases
 
0.5

Settlements
 
(1.1
)
Balance at December 31, 2011
 
$
11.2

Change in unrealized gains included in net income relating to assets held at December 31, 2011
 
$
0.3


13


The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2012
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
12.8

 
Discounted cash flow
 
Life expectancy
 
22–168 months (80)
Internal rate of return
 
1.5%–22.3% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
90.3

 
Discounted cash flow
 
AUM growth rate
 
6.0%–13.8% (10.6%)
Discount rate
 
14.0%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2012
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
12.1

 
Discounted cash flow
 
Life expectancy
 
22–171 months (82)
Internal rate of return
 
1.5%–22.3% (11.7%)
For life settlement contracts, a significant increase (decrease) in the life expectancy or the internal rate of return in isolation would result in a significantly lower (higher) fair value measurement.
For the contingent consideration liability, a significant increase (decrease) in the AUM growth rate or decrease (increase) in the discount rate in isolation would result in a significantly higher (lower) fair value measurement.
Financial instruments that were not measured at fair value were as follows:
(in millions)
 
 
 
December 31, 2012
 
September 30, 2012
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
5,086.8

 
$
5,086.8

 
$
5,784.3

 
$
5,784.3

Other investments1
 
2 or 3
 
79.5

 
85.6

 
80.2

 
85.1

Loans receivable, net
 
2
 
279.4

 
283.0

 
254.4

 
258.7

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
2
 
885.2

 
886.0

 
671.7

 
672.4

Debt
 
 
 
 
 
 
 
 
 
 
FHLB advances
 
2
 
66.0

 
70.1

 
69.0

 
74.5

Senior notes
 
2
 
1,197.3

 
1,271.0

 
1,497.1

 
1,571.2

_________________
1    Primarily consist of Level 3 assets.
Note 8 – Goodwill and Other Intangible Assets
Changes in the carrying value of goodwill were as follows:
(in millions)
 
 
 
 
for the three months ended December 31,
 
2012
 
2011
Balance at beginning of period
 
$
1,540.8

 
$
1,536.2

Acquisition
 
110.1

 
—

Foreign exchange and other
 
(3.2
)
 
(0.6
)
Balance at End of Period
 
$
1,647.7

 
$
1,535.6


14


Intangible assets were as follows:
 
 
December 31, 2012
 
September 30, 2012
 
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net
Carrying
Value
(in millions)
 
 
 
 
 
 
Definite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Customer base
 
$
166.5

 
$
(138.1
)
 
$
28.4

 
$
166.6

 
$
(135.9
)
 
$
30.7

Management contracts and other
 
93.1

 
(37.6
)
 
55.5

 
49.3

 
(36.0
)
 
13.3

 
 
259.6

 
(175.7
)
 
83.9

 
215.9

 
(171.9
)
 
44.0

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 

 
 

 
 

Management contracts
 
660.7

 
—

 
660.7

 
557.1

 
—

 
557.1

Total
 
$
920.3

 
$
(175.7
)
 
$
744.6

 
$
773.0

 
$
(171.9
)
 
$
601.1

The Company acquired $43.8 million of definite-lived intangible assets and $105.2 million of indefinite-lived intangible assets on November 1, 2012 in the acquisition of K2. Amortization expense related to definite-lived intangible assets was $3.8 million and $2.6 million for the three months ended December 31, 2012 and 2011. No impairment loss in the value of goodwill and other intangible assets was recognized during these periods.
The estimated remaining amortization expense related to definite-lived intangible assets as of December 31, 2012 was as follows:
(in millions)
 
 
for the fiscal years ending September 30,
 
Amount
2013
 
$
13.3

2014
 
17.8

2015
 
17.6

2016
 
12.9

2017
 
8.7

Thereafter
 
13.6

Total
 
$
83.9

Note 9 – Debt
The disclosures below include details of the Company’s debt, excluding that of consolidated VIEs and consolidated SIPs. See Note 10 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the debt of these entities.
Debt consisted of the following:
(dollars in millions)
 
December 31,
2012
 
Effective
Interest  Rate  
 
September 30,
2012
 
Effective
Interest Rate   
FHLB advances
 
$
66.0

 
3.23
%
 
$
69.0

 
3.30
%
Senior notes
 
 
 
 
 
 
 
 
$300 million 2.000% notes due May 2013
 
—

 
N/A

 
299.9

 
2.28
%
$250 million 3.125% notes due May 2015
 
249.9

 
3.32
%
 
249.9

 
3.32
%
$300 million 1.375% notes due September 2017
 
298.5

 
1.66
%
 
298.4

 
1.66
%
$350 million 4.625% notes due May 2020
 
349.7

 
4.74
%
 
349.7

 
4.74
%
$300 million 2.800% notes due September 2022
 
299.2

 
2.93
%
 
299.2

 
2.93
%
 
 
1,197.3

 
 
 
1,497.1

 
 
Total Debt
 
$
1,263.3

 
 
 
$
1,566.1

 
 
In prior years, the Company secured advances from the FHLB to fund its banking services. The outstanding advances are subject to collateralization requirements.
At December 31, 2012, the Company’s outstanding senior unsecured and unsubordinated notes had an aggregate face value of $1.2 billion. The notes have fixed interest rates with interest payable semi-annually and contain an optional redemption feature that allows the Company to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption

15


price. In October 2012, the Company redeemed its outstanding 2.000% notes due in May 2013 at a make-whole redemption price of $305.4 million. The indentures governing the notes contain limitations on the Company’s ability and the ability of its subsidiaries to pledge voting stock or profit participating equity interests in its subsidiaries to secure other debt without similarly securing the notes equally and ratably. The indentures also include requirements that must be met if the Company consolidates or merges with, or sells all or substantially all of its assets to, another entity. At December 31, 2012, the Company was in compliance with the covenants of the notes.
At December 31, 2012, contractual maturities for debt were as follows: 
(in millions)
 
 
for the fiscal years ending September 30,
2013
 
$
18.5

2014
 
—

2015
 
260.4

2016
 
8.0

2017
 
298.5

Thereafter
 
677.9

Total
 
$
1,263.3

At December 31, 2012, the Company had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since April 2012, $260.0 million available in uncommitted short-term bank lines of credit under the Federal Reserve system, $100.5 million available through the secured Federal Reserve Bank short-term discount window, $15.1 million available in uncommitted short-term bank lines of credit and $12.0 million available in secured FHLB short-term borrowing capacity.
Note 10 – Variable Interest Entities and Consolidated Sponsored Investment Products
The Company sponsors and manages various types of investment products, which consist of both VIEs and non-VIEs. The Company consolidates the non-VIE products which it controls and the VIE products for which it is the primary beneficiary. The Company has no right to the consolidated products' assets, other than its direct equity investment in them, and/or investment management fees earned from them. The debt holders of these consolidated entities 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 entities' liabilities.

16


The balances of consolidated VIEs and consolidated SIPs included in the Company's condensed consolidated balance sheets were as follows:
 
 
December 31, 2012
 
September 30, 2012
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
VIEs
 
SIPs
 
Total
 
VIEs
 
SIPs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
80.8

 
$
75.1

 
$
155.9

 
$
224.3

 
$
42.8

 
$
267.1

Receivables
 
36.8

 
21.7

 
58.5

 
2.7

 
23.7

 
26.4

Investments
 
1,062.0

 
1,104.9

 
2,166.9

 
984.1

 
1,046.6

 
2,030.7

Other assets
 
—

 
0.7

 
0.7

 
—

 
0.7

 
0.7

Total Assets
 
$
1,179.6

 
$
1,202.4

 
$
2,382.0

 
$
1,211.1

 
$
1,113.8

 
$
2,324.9

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
—

 
$
27.3

 
$
27.3

 
$
—

 
$
21.8

 
$
21.8

Debt, at fair value
 
1,101.4

 
—

 
1,101.4

 
1,100.9

 
—

 
1,100.9

Debt
 
—

 
97.8

 
97.8

 
—

 
110.2

 
110.2

Other liabilities
 
49.7

 
8.5

 
58.2

 
61.9

 
8.5

 
70.4

Total liabilities
 
1,151.1

 
133.6

 
1,284.7

 
1,162.8

 
140.5

 
1,303.3

Redeemable Noncontrolling Interests
 
—

 
66.2

 
66.2

 
—

 
26.7

 
26.7

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
—

 
572.2

 
572.2

 
—

 
556.8

 
556.8

Other equity
 
28.5

 
430.4

 
458.9

 
48.3

 
389.8

 
438.1

Total stockholders' equity
 
28.5

 
1,002.6

 
1,031.1

 
48.3

 
946.6

 
994.9

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity
 
$
1,179.6

 
$
1,202.4

 
$
2,382.0

 
$
1,211.1

 
$
1,113.8

 
$
2,324.9

The consolidated VIEs and consolidated SIPs did not have a significant impact on net income attributable to the Company during the three months ended December 31, 2012 and 2011.
Consolidated VIEs
Consolidated VIEs consist of sponsored collateralized loan obligations (“CLOs”), which are asset-backed financing entities collateralized by a pool of corporate debt securities.
The assets and liabilities of the CLOs are carried at fair value. Changes in the fair values were as follows:
 
 
Three Months Ended
December 31,
(in millions)
 
2012
 
2011
Net gains from changes in fair value of assets
 
$
22.2

 
$
27.7

Net losses from changes in fair value of liabilities
 
(41.3
)
 
(5.0
)
Total net gains (losses)
 
$
(19.1
)
 
$
22.7

The following tables present the unpaid principal balance and fair value of investments, including investments 90 days or more past due, and debt of the CLOs:
(in millions)
 
Total Investments
 
Investments
90 Days or More
Past Due
 
Debt
as of December 31, 2012
 
 
 
Unpaid principal balance
 
$
1,069.9

 
$
7.4

 
$
1,156.8

Excess unpaid principal over fair value
 
(7.9
)
 
(6.8
)
 
(55.4
)
Fair value
 
$
1,062.0

 
$
0.6

 
$
1,101.4


17


(in millions)
 
Total Investments
 
Investments
90 Days or More
Past Due
 
Debt
as of September 30, 2012
 
 
 
Unpaid principal balance
 
$
996.1

 
$
7.2

 
$
1,186.5

Excess unpaid principal over fair value
 
(12.0
)
 
(6.7
)
 
(85.6
)
Fair value
 
$
984.1

 
$
0.5

 
$
1,100.9

Consolidated SIPs
Consolidated SIPs consist of limited partnerships and similar structures and other fund products.
Investments
Investments of consolidated VIEs and consolidated SIPs consisted of the following:
 
 
December 31, 2012
 
September 30, 2012
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
VIEs
 
SIPs
 
Total
 
VIEs
 
SIPs
 
Total
Investment securities, trading
 
$
—

 
$
203.8

 
$
203.8

 
$
—

 
$
194.4

 
$
194.4

Other debt securities
 
1,062.0

 
326.2

 
1,388.2

 
984.1

 
317.5

 
1,301.6

Other equity securities
 
—

 
574.9

 
574.9

 
—

 
534.7

 
534.7

Total Investments
 
$
1,062.0

 
$
1,104.9

 
$
2,166.9

 
$
984.1

 
$
1,046.6

 
$
2,030.7

Investments of consolidated VIEs consist of corporate debt securities. Other debt and equity securities of consolidated SIPs primarily consist of direct investments in secured and unsecured debt securities and equity securities of entities in emerging markets, which are generally not traded in active markets. Other equity securities also include investments in funds that are not traded in active markets.
Debt
Debt of consolidated VIEs and consolidated SIPs consisted of the following:
 
 
December 31,
2012
 
Effective
Interest
Rate
 
September 30,
2012
 
Effective
Interest
Rate
(dollars in millions)
 
 
 
 
Debt of CLOs, at fair value, due fiscal years 2016-2024
 
$
1,101.4

 
1.42
%
 
$
1,100.9

 
1.48
%
Debt of consolidated SIPs due fiscal years 2013-2018
 
97.8

 
3.95
%
 
110.2

 
4.20
%
Total Debt
 
$
1,199.2

 
 
 
$
1,211.1

 
 
The debt of CLOs had floating interest rates ranging from 0.54% to 9.98% at December 31, 2012, and from 0.67% to 9.98% at September 30, 2012.
The debt of consolidated SIPs had both fixed and floating interest rates ranging from 2.47% to 6.28% at December 31, 2012, and from 1.98% to 7.03% at September 30, 2012. The repayment of amounts outstanding under certain debt agreements is secured by the assets of the consolidated SIPs and, in some cases, a pledge of the right to call capital.
At December 31, 2012, contractual maturities for debt of consolidated VIEs and consolidated SIPs were as follows: 
(in millions)
 
 
for the fiscal years ending September 30,
2013
 
$
45.3

2014
 
—

2015
 
—

2016
 
18.0

2017
 
14.9

Thereafter
 
1,121.0

Total
 
$
1,199.2


18


Fair Value Measurements
The tables below present the balances of assets and liabilities of consolidated VIEs and consolidated SIPs measured at fair value on a recurring basis. See Note 7 – Fair Value Measurements for information related to the three levels of fair value hierarchy.
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of December 31, 2012
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
—

 
$
80.8

 
$
—

 
$
80.8

Receivables of consolidated VIEs
 
—

 
36.8

 
—

 
36.8

Investments of consolidated VIEs
 
—

 
1,062.0

 
—

 
1,062.0

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Debt securities
 
7.6

 
53.1

 
326.2

 
386.9

Equity securities
 
101.0

 
79.4

 
537.6

 
718.0

Total Assets Measured at Fair Value
 
$
108.6

 
$
1,312.1

 
$
863.8

 
$
2,284.5

Liabilities
 
 
 
 
 
 
 
 
Debt of consolidated VIEs
 
$
—

 
$
1,023.1

 
$
78.3

 
$
1,101.4

Other liabilities of consolidated VIEs
 
—

 
49.7

 
—

 
49.7

Total Liabilities Measured at Fair Value
 
$
—

 
$
1,072.8

 
$
78.3

 
$
1,151.1

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2012
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
—

 
$
224.3

 
$
—

 
$
224.3

Receivables of consolidated VIEs
 
—

 
2.7

 
—

 
2.7

Investments of consolidated VIEs
 
—

 
984.1

 
—

 
984.1

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Debt securities
 
6.3

 
49.3

 
317.5

 
373.1

Equity securities
 
145.9

 
0.6

 
527.0

 
673.5

Total Assets Measured at Fair Value
 
$
152.2

 
$
1,261.0

 
$
844.5