Form 10Q 06.30.2013


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
(MARK ONE)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
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: 635,201,922 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of July 22, 2013 (as adjusted on a post-split basis to reflect the issuer's three-for-one split of common stock in the form of a stock dividend distributed on July 25, 2013, based on 211,733,974 pre-split shares outstanding on July 22, 2013).



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Income
Unaudited
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
(in millions, except per share data)
 
2013
 
2012
 
2013
 
2012
Operating Revenues
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,318.3

 
$
1,114.4

 
$
3,785.7

 
$
3,315.9

Sales and distribution fees
 
664.5

 
569.2

 
1,911.3

 
1,679.4

Shareholder servicing fees
 
77.5

 
77.3

 
228.5

 
229.4

Other, net
 
24.5

 
22.7

 
74.7

 
60.1

Total operating revenues
 
2,084.8

 
1,783.6

 
6,000.2

 
5,284.8

Operating Expenses
 
 
 
 
 
 
 
 
Sales, distribution and marketing
 
812.8

 
692.0

 
2,324.5

 
2,038.1

Compensation and benefits
 
345.5

 
314.6

 
1,035.7

 
938.0

Information systems and technology
 
44.4

 
44.1

 
132.8

 
128.8

Occupancy
 
33.9

 
31.5

 
99.2

 
95.2

General, administrative and other
 
76.5

 
58.4

 
221.8

 
192.2

Total operating expenses
 
1,313.1

 
1,140.6

 
3,814.0

 
3,392.3

Operating Income
 
771.7

 
643.0

 
2,186.2

 
1,892.5

Other Income (Expenses)
 
 
 
 
 
 
 
 
Investment and other income (losses), net
 
10.3

 
(18.0
)
 
152.3

 
135.6

Interest expense
 
(10.0
)
 
(10.1
)
 
(35.4
)
 
(28.3
)
Other income (expenses), net
 
0.3

 
(28.1
)
 
116.9

 
107.3

Income before taxes
 
772.0

 
614.9

 
2,303.1

 
1,999.8

Taxes on income
 
209.9

 
184.9

 
642.9

 
588.3

Net income
 
562.1

 
430.0

 
1,660.2

 
1,411.5

Less: Net income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
8.0

 
(24.2
)
 
13.1

 
(30.0
)
Redeemable noncontrolling interests
 
1.8

 
(1.1
)
 
5.9

 
2.2

Net Income Attributable to Franklin Resources, Inc.
 
$
552.3

 
$
455.3

 
$
1,641.2

 
$
1,439.3

Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.87

 
$
0.71

 
$
2.57

 
$
2.22

Diluted
 
0.86

 
0.71

 
2.57

 
2.22

Dividends per Share
 
$
0.097

 
$
0.090

 
$
1.29

 
$
0.94

See Notes to Condensed Consolidated Financial Statements.

2


FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
(in millions)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net Income
 
$
562.1

 
$
430.0

 
$
1,660.2

 
$
1,411.5

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Net unrealized losses on investments, net of tax
 
(9.0
)
 
(20.3
)
 
(28.0
)
 
(2.6
)
Currency translation adjustments
 
(47.7
)
 
(64.6
)
 
(82.7
)
 
(46.2
)
Net unrealized gains (losses) on defined benefit plans, net of tax
 
(0.4
)
 
—

 
0.3

 
(0.2
)
Total comprehensive income
 
505.0

 
345.1

 
1,549.8

 
1,362.5

Less: Comprehensive income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
8.0

 
(24.2
)
 
13.1

 
(30.0
)
Redeemable noncontrolling interests
 
1.8

 
(1.1
)
 
5.9

 
2.2

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
495.2

 
$
370.4

 
$
1,530.8

 
$
1,390.3

See Notes to Condensed Consolidated Financial Statements.

3


FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
(in millions)
 
June 30,
2013
 
September 30,
2012
Assets
 
 
 
 
Cash and cash equivalents
 
$
6,069.0

 
$
5,784.3

Receivables
 
947.6

 
850.2

Investments (including $1,916.2 and $2,012.7 at fair value at June 30, 2013 and September 30, 2012)
 
2,495.4

 
2,583.8

Loans receivable, net
 
247.3

 
254.4

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
48.4

 
42.8

Investments, at fair value
 
1,227.5

 
1,046.6

Assets of consolidated variable interest entities
 
 
 
 
Cash and cash equivalents
 
114.7

 
224.3

Investments, at fair value
 
977.3

 
984.1

Deferred taxes
 
103.1

 
94.9

Property and equipment, net
 
563.2

 
582.7

Goodwill and other intangible assets, net
 
2,358.8

 
2,141.9

Other
 
164.9

 
161.5

Total Assets
 
$
15,317.2

 
$
14,751.5

Liabilities
 
 
 
 
Compensation and benefits
 
$
388.6

 
$
400.5

Accounts payable and accrued expenses
 
272.7

 
241.6

Commissions
 
434.7

 
383.9

Deposits
 
714.2

 
671.7

Debt
 
1,252.1

 
1,566.1

Debt of consolidated sponsored investment products
 
92.3

 
110.2

Liabilities of consolidated variable interest entities
 
 
 
 
Debt, at fair value
 
1,045.1

 
1,100.9

Other, at fair value
 
54.0

 
61.9

Deferred taxes
 
284.6

 
276.3

Other
 
255.8

 
151.2

Total liabilities
 
4,794.1

 
4,964.3

Commitments and Contingencies (Note 11)
 

 

Redeemable Noncontrolling Interests
 
120.8

 
26.7

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; 635,717,838 and 636,626,871 shares issued and outstanding at June 30, 2013 and September 30, 2012
 
63.6

 
63.7

Retained earnings
 
9,763.2

 
9,041.9

Appropriated retained earnings of consolidated variable interest entities
 
1.4

 
33.7

Accumulated other comprehensive income (loss)
 
(48.4
)
 
62.0

Total Franklin Resources, Inc. stockholders’ equity
 
9,779.8

 
9,201.3

Nonredeemable noncontrolling interests
 
622.5

 
559.2

Total stockholders’ equity
 
10,402.3

 
9,760.5

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
15,317.2

 
$
14,751.5

See Notes to Condensed Consolidated Financial Statements.

4


FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Nine Months Ended
June 30,
(in millions)
 
2013
 
2012
Net Income
 
$
1,660.2

 
$
1,411.5

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
102.8

 
99.1

Depreciation and other amortization
 
70.5

 
63.4

Stock-based compensation
 
86.2

 
77.4

Excess tax benefit from stock-based compensation
 
(16.0
)
 
(18.7
)
Gains on sale of assets
 
(36.8
)
 
(34.7
)
Income from investments in equity method investees
 
(54.3
)
 
(50.3
)
Net (gains) losses on other investments of consolidated sponsored investment products
 
(59.7
)
 
26.4

Net (gains) losses of consolidated variable interest entities
 
30.3

 
(15.7
)
Other
 
15.6

 
21.9

Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(188.2
)
 
(160.6
)
Increase in trading securities, net
 
(70.0
)
 
(291.3
)
Increase in trading securities of consolidated sponsored investment products, net
 
(101.9
)
 
(148.0
)
Decrease in accrued compensation and benefits
 
(8.1
)
 
(21.0
)
Increase (decrease) in commissions payable
 
50.8

 
(1.4
)
Increase (decrease) in income taxes payable
 
26.7

 
(61.7
)
Increase (decrease) in other liabilities
 
19.5

 
(10.5
)
Net cash provided by operating activities
 
1,527.6

 
885.8

Purchase of investments
 
(222.2
)
 
(186.4
)
Liquidation of investments
 
444.5

 
744.7

Purchase of investments by consolidated sponsored investment products
 
(177.7
)
 
(153.9
)
Liquidation of investments by consolidated sponsored investment products
 
129.1

 
35.7

Purchase of investments by consolidated variable interest entities
 
(488.9
)
 
(337.1
)
Liquidation of investments by consolidated variable interest entities
 
519.0

 
404.8

Decrease in loans receivable, net
 
7.5

 
14.4

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

 
54.5

Decrease in loans held for sale
 
—

 
24.9

Proceeds from sale of loans held for sale
 
—

 
70.0

Additions of property and equipment, net
 
(41.6
)
 
(61.9
)
Acquisitions of subsidiaries, net of cash acquired
 
3.9

 
—

Cash and cash equivalents recognized due to consolidation of sponsored investment products
 
4.0

 
—

Net cash provided by investing activities
 
177.6

 
609.7

Increase in deposits
 
42.5

 
35.4

Issuance of common stock
 
28.8

 
31.3

Dividends paid on common stock
 
(821.1
)
 
(605.5
)
Repurchase of common stock
 
(226.4
)
 
(698.8
)
Excess tax benefit from stock-based compensation
 
16.0

 
18.7

Decrease in commercial paper, net
 
—

 
(30.0
)
Payments on debt
 
(490.9
)
 
—

[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]
 
 
Nine Months Ended
June 30,
(in millions)
 
2013
 
2012
Proceeds from issuance of debt by consolidated sponsored investment products
 
$
404.8

 
$
42.8

Payments on debt by consolidated sponsored investment products
 
(423.1
)
 
(88.5
)
Payments on debt by consolidated variable interest entities
 
(143.3
)
 
(194.0
)
Noncontrolling interests
 
104.9

 
197.9

Net cash used in financing activities
 
(1,507.8
)
 
(1,290.7
)
Effect of exchange rate changes on cash and cash equivalents
 
(16.7
)
 
(18.3
)
Increase in cash and cash equivalents
 
180.7

 
186.5

Cash and cash equivalents, beginning of period
 
6,051.4

 
5,198.6

Cash and Cash Equivalents, End of Period
 
$
6,232.1

 
$
5,385.1

 
 
 
 
 
Supplemental Disclosure of Non-Cash Activities
 
 
 
 
Decrease in noncontrolling interests due to net deconsolidation of sponsored investment products
 
$
(10.7
)
 
$
(167.6
)
Increase in noncontrolling interests due to acquisition
 
38.2

 
—

Contingent consideration liabilities recognized due to acquisitions
 
92.0

 
—

Transfers of loans receivable, net to loans held for sale
 
—

 
117.5

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

 
37.4

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
622.7

 
$
637.0

Cash paid for interest
 
40.1

 
38.2

Cash paid for interest by consolidated sponsored investment products and consolidated variable interest entities
 
42.0

 
39.0

See Notes to Condensed Consolidated Financial Statements.

6


FRANKLIN RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2013
(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 June 30, 2013.
On June 13, 2013, the Company's Board of Directors declared a three-for-one split of common stock in the form of a stock dividend to common stockholders of record as of July 12, 2013, distributed on July 25, 2013. The par value of the Company's common stock was maintained at $0.10 per share. The condensed consolidated financial statements and notes thereto, including all share and per share data, have been adjusted retroactively to reflect the stock split.
Note 2 – New Accounting Guidance
Recently Adopted 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.
New Accounting Guidance Not Yet Adopted
In February 2013, the FASB issued new guidance requiring an entity to report significant reclassifications out of accumulated other comprehensive income by component either on the face of the financial statements or in the notes. The adoption of the guidance in the first quarter of the fiscal year ending September 30, 2014 will result in additional disclosures of the changes in the various components of the Company's accumulated other comprehensive income balances.
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.

7


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”).
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 nine months ended June 30, 2013
 
 
 
 
Balance at October 1, 2012
 
$
9,201.3

 
$
559.2

 
$
9,760.5

 
$
26.7

Net income
 
1,641.2

 
13.1

 
1,654.3

 
5.9

Net loss reclassified to appropriated retained earnings
 
(32.3
)
 
32.3

 
—

 
 
Other comprehensive loss
 
(110.4
)
 
 
 
(110.4
)
 
 
Cash dividends on common stock
 
(825.5
)
 
 
 
(825.5
)
 
 
Repurchase of common stock
 
(226.4
)
 
 
 
(226.4
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 
 
 
65.1

 
65.1

 
39.8

Net consolidation (deconsolidation) of sponsored investment products
 
 
 
4.4

 
4.4

 
(41.4
)
Acquisition
 
 
 
5.4

 
5.4

 
32.8

Reclassification
 
 
 
(57.0
)
 
(57.0
)
 
57.0

Other1
 
131.9

 
 
 
131.9

 
 
Balance at June 30, 2013
 
$
9,779.8

 
$
622.5

 
$
10,402.3

 
$
120.8

________________
1 
Primarily relates to stock-based compensation plans.

8


(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Redeemable
Noncontrolling
Interests
for the nine months ended June 30, 2012
 
 
 
 
Balance at October 1, 2011
 
$
8,524.7

 
$
579.2

 
$
9,103.9

 
$
18.6

Net income (loss)
 
1,439.3

 
(30.0
)
 
1,409.3

 
2.2

Net income reclassified to appropriated retained earnings
 
13.0

 
(13.0
)
 
—

 
 
Other comprehensive loss
 
(49.0
)
 
 
 
(49.0
)
 
 
Cash dividends on common stock
 
(609.2
)
 
 
 
(609.2
)
 
 
Repurchase of common stock
 
(698.8
)
 
 
 
(698.8
)
 
 
Noncontrolling interests
 
 
 
 
 
 
 
 
Net subscriptions
 
 
 
138.9

 
138.9

 
59.0

Net deconsolidation of sponsored investment products
 
 
 
(117.5
)
 
(117.5
)
 
(50.1
)
Other1
 
129.3

 
 
 
129.3

 
 
Balance at June 30, 2012
 
$
8,749.3

 
$
557.6

 
$
9,306.9

 
$
29.7

________________
1 
Primarily relates to stock-based compensation plans.
The reclassification of $57.0 million of noncontrolling interests from nonredeemable to redeemable during the nine months ended June 30, 2013 relates to a consolidated sponsored investment product (“SIP”) which is redeemable on a monthly basis without restriction.
During the three and nine months ended June 30, 2013, the Company repurchased 2.2 million and 4.9 million shares of its common stock at a cost of $105.1 million and $226.4 million under its stock repurchase program. At June 30, 2013, approximately 16.8 million shares of common stock remained available for repurchase under the stock repurchase program, which is not subject to an expiration date. During the three and nine months ended June 30, 2012, the Company repurchased approximately 7.9 million and 20.0 million shares of its common stock at a cost of $282.0 million and $698.8 million.
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
June 30,
 
Nine Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Net Income Attributable to Franklin Resources, Inc.
 
$
552.3

 
$
455.3

 
$
1,641.2

 
$
1,439.3

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

 
3.1

 
11.2

 
9.2

Net Income Available to Common Stockholders
 
$
548.3

 
$
452.2

 
$
1,630.0

 
$
1,430.1

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
633.6

 
639.3

 
634.0

 
643.8

Effect of dilutive common stock options and non-participating nonvested stock unit awards
 
0.7

 
1.6

 
0.9

 
1.8

Weighted-Average Shares Outstanding – Diluted
 
634.3

 
640.9

 
634.9

 
645.6

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.87

 
$
0.71

 
$
2.57

 
$
2.22

Diluted
 
0.86

 
0.71

 
2.57

 
2.22

Non-participating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive were nil for the three and nine months ended June 30, 2013, and 0.4 million for the three and nine months ended June 30, 2012.
Note 6 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated variable interest entities (“VIEs”) and consolidated SIPs. See Note 10 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the investments held by these entities.

9


Investments consisted of the following:
(in millions)
 
June 30, 2013
 
September 30, 2012
Investment securities, trading
 
$
1,200.2

 
$
1,130.6

Investment securities, available-for-sale
 
 
 
 
SIPs
 
523.3

 
587.2

Securities of U.S. states and political subdivisions
 
23.2

 
26.8

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

 
2.4

Corporate debt securities
 
—

 
70.3

Mortgage-backed securities – agency residential1
 
107.0

 
169.3

Other equity securities
 
23.8

 
14.0

Total investment securities, available-for-sale
 
702.5

 
870.0

Investments in equity method investees
 
511.4

 
489.0

Other investments
 
81.3

 
94.2

Total
 
$
2,495.4

 
$
2,583.8

________________
1 
Consist of U.S. government-sponsored enterprise obligations.
At June 30, 2013 and September 30, 2012, investment securities with aggregate carrying amounts of $101.2 million and $120.4 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank, $38.1 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 $7.0 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).
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 June 30, 2013
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
467.8

 
$
61.6

 
$
(6.1
)
 
$
523.3

Securities of U.S. states and political subdivisions
 
22.4

 
0.8

 
—

 
23.2

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

 
—

 
—

 
25.2

Mortgage-backed securities – agency residential
 
104.6

 
2.4

 
—

 
107.0

Other equity securities
 
23.2

 
0.6

 
—

 
23.8

Total
 
$
643.2

 
$
65.4

 
$
(6.1
)
 
$
702.5

(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 (losses) on available-for-sale securities included in accumulated other comprehensive income (loss) were $(2.4) million and $21.3 million for the three and nine months ended June 30, 2013, and $(23.0) million and $21.1 million for the three and nine months ended June 30, 2012.

10


The following tables show the gross unrealized losses and fair values of available-for-sale securities 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 June 30, 2013
 
 
 
 
 
SIPs
 
$
87.6

 
$
(5.9
)
 
$
1.5

 
$
(0.2
)
 
$
89.1

 
$
(6.1
)

 
 
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 $0.8 million and $1.8 million of other-than-temporary impairment of investments for the three and nine months ended June 30, 2013, all of which related to available-for-sale investments in SIPs, except for $0.7 million during the nine-month period which related to other investments. For the three and nine months ended June 30, 2012, the Company recognized $8.3 million of other-than-temporary impairment of investments, all of which related to available-for-sale investments in SIPs.
At June 30, 2013, contractual maturities of available-for-sale debt securities were as follows: 
(in millions)
 
Cost Basis
 
Fair Value
Due in one year or less
 
$
28.2

 
$
28.2

Due after one year through five years
 
17.7

 
18.5

Due after five years through ten years
 
0.1

 
0.1

Due after ten years
 
1.6

 
1.6

Total
 
$
47.6

 
$
48.4

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.

11


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 June 30, 2013
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,115.8

 
$
84.2

 
$
0.2

 
$
1,200.2

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
523.3

 
—

 
—

 
523.3

Securities of U.S. states and political subdivisions
 
—

 
23.2

 
—

 
23.2

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

 
25.2

 
—

 
25.2

Corporate debt securities
 
—

 
—

 
—

 
—

Mortgage-backed securities – agency residential
 
—

 
107.0

 
—

 
107.0

Other equity securities
 
23.8

 
—

 
—

 
23.8

Life settlement contracts
 
—

 
—

 
13.5

 
13.5

Total Assets Measured at Fair Value
 
$
1,662.9

 
$
239.6

 
$
13.7

 
$
1,916.2

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
—

 
$
—

 
$
96.8

 
$
96.8


(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 fair value of the contingent consideration liabilities is determined using an income-based method which considers the net present value of anticipated future cash flows. Substantially all of the balance relates to the Company's commitment to acquire the remaining interests in K2.
There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three and nine months ended June 30, 2013 and 2012.

12


The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
 
 
2013
 
2012
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
for the three months ended June 30,
 
 
 
Balance at beginning of period
 
$
13.4

 
$
(90.0
)
 
$
11.6

Acquisition
 
—

 
(1.4
)
 
—

Total realized and unrealized gains (losses)
 
 
 
 
 
 
Included in investment and other income (losses), net
 
0.7

 
—

 
0.6

Included in general, administrative and other expense
 
—

 
(5.1
)
 
—

Other
 
—

 
(0.3
)
 
—

Purchases
 
0.4

 
—

 
0.2

Settlements
 
(0.8
)
 
—

 
(0.5
)
Balance at End of Period
 
$
13.7

 
$
(96.8
)
 
$
11.9

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

 
$
(5.4
)
 
$
0.1

 
 
2013
 
2012
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
for the nine months ended June 30,
 
 
 
Balance at beginning of period
 
$
14.8

 
$
—

 
$
10.9

Acquisitions
 
—

 
(92.0
)
 
—

Total realized and unrealized gains (losses)
 
 
 
 
 
 
Included in investment and other income (losses), net
 
1.6

 
—

 
2.4

Included in general, administrative and other expense
 
—

 
(7.3
)
 
—

Other
 
—

 
(0.5
)
 
—

Purchases
 
1.1

 
—

 
1.1

Sales
 
(1.6
)
 
—

 
—

Settlements
 
(2.2
)
 
3.0

 
(2.5
)
Balance at End of Period
 
$
13.7

 
$
(96.8
)
 
$
11.9

Change in unrealized gains (losses) included in net income relating to assets and liabilities held at period end
 
$
1.0

 
$
(7.8
)
 
$
1.0

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of June 30, 2013
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
13.5

 
Discounted cash flow
 
Life expectancy
 
26–163 months (77)
Internal rate of return
 
1.5%–21.7% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
96.8

 
Discounted cash flow
 
AUM growth rate
 
6.0%–18.5% (11.8%)
EBITDA margin
 
30.1% - 40.3% (37.0%)
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.

13


For the contingent consideration liabilities, a significant increase (decrease) in the AUM growth rate or EBITDA margin, 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)
 
 
 
June 30, 2013
 
September 30, 2012
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
6,069.0

 
$
6,069.0

 
$
5,784.3

 
$
5,784.3

Other investments1
 
2 or 3
 
67.0

 
74.8

 
80.2

 
85.1

Loans receivable, net
 
2
 
247.3

 
249.5

 
254.4

 
258.7

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
2
 
714.2

 
714.4

 
671.7

 
672.4

Debt
 
 
 
 
 
 
 
 
 
 
FHLB advances
 
2
 
54.5

 
56.1

 
69.0

 
74.5

Senior notes
 
2
 
1,197.6

 
1,214.0

 
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 nine months ended June 30,
 
2013
 
2012
Balance at beginning of period
 
$
1,540.8

 
$
1,536.2

Acquisitions
 
114.1

 
—

Foreign exchange and other
 
(22.2
)
 
(7.9
)
Balance at End of Period
 
$
1,632.7

 
$
1,528.3

Intangible assets were as follows:
 
 
June 30, 2013
 
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
 
$
166.0

 
$
(142.1
)
 
$
23.9

 
$
166.6

 
$
(135.9
)
 
$
30.7

Management contracts and other
 
91.5

 
(41.6
)
 
49.9

 
49.3

 
(36.0
)
 
13.3

 
 
257.5

 
(183.7
)
 
73.8

 
215.9

 
(171.9
)
 
44.0

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 

 
 

 
 

Management contracts
 
652.3

 
—

 
652.3

 
557.1

 
—

 
557.1

Total
 
$
909.8

 
$
(183.7
)
 
$
726.1

 
$
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 $4.4 million and $12.7 million for the three and nine months ended June 30, 2013, and $2.6 million and $7.9 million for the three and nine months ended June 30, 2012. No impairment loss in the value of goodwill and other intangible assets was recognized during these periods.

14


The estimated remaining amortization expense related to definite-lived intangible assets as of June 30, 2013 was as follows:
(in millions)
 
 
for the fiscal years ending September 30,
 
Amount
2013
 
$
4.5

2014
 
17.6

2015
 
17.4

2016
 
12.7

2017
 
8.6

Thereafter
 
13.0

Total
 
$
73.8

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)
 
June 30,
2013
 
Effective
Interest  Rate  
 
September 30,
2012
 
Effective
Interest Rate   
FHLB advances
 
$
54.5

 
3.65
%
 
$
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
 
298.6

 
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
 
299.4

 
2.93
%
 
299.2

 
2.93
%
 
 
1,197.6

 
 
 
1,497.1

 
 
Total Debt
 
$
1,252.1

 
 
 
$
1,566.1

 
 
At June 30, 2013, 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 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 June 30, 2013, the Company was in compliance with the covenants of the notes.
At June 30, 2013, maturities for debt were as follows: 
(in millions)
 
 
for the fiscal years ending September 30,
2013
 
$
7.0

2014
 
—

2015
 
260.4

2016
 
8.0

2017
 
298.6

Thereafter
 
678.1

Total
 
$
1,252.1


15


At June 30, 2013, 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, $89.8 million available through the secured Federal Reserve Bank short-term discount window, $14.3 million available in uncommitted short-term bank lines of credit and $9.7 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.
The balances of consolidated VIEs and consolidated SIPs included in the Company's condensed consolidated balance sheets were as follows:
 
 
June 30, 2013
 
September 30, 2012
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
VIEs
 
SIPs
 
Total
 
VIEs
 
SIPs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
114.7

 
$
48.4

 
$
163.1

 
$
224.3

 
$
42.8

 
$
267.1

Receivables
 
22.1

 
28.6

 
50.7

 
2.7

 
23.7

 
26.4

Investments
 
977.3

 
1,227.5

 
2,204.8

 
984.1

 
1,046.6

 
2,030.7

Other assets
 
—

 
0.7

 
0.7

 
—

 
0.7

 
0.7

Total Assets
 
$
1,114.1

 
$
1,305.2

 
$
2,419.3

 
$
1,211.1

 
$
1,113.8

 
$
2,324.9

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
—

 
$
27.8

 
$
27.8

 
$
—

 
$
21.8

 
$
21.8

Debt, at fair value
 
1,045.1

 
—

 
1,045.1

 
1,100.9

 
—

 
1,100.9

Debt
 
—

 
92.3

 
92.3

 
—

 
110.2

 
110.2

Other liabilities
 
54.0

 
8.5

 
62.5

 
61.9

 
8.5

 
70.4

Total liabilities
 
1,099.1

 
128.6

 
1,227.7

 
1,162.8

 
140.5

 
1,303.3

Redeemable Noncontrolling Interests
 
—

 
120.8

 
120.8

 
—

 
26.7

 
26.7

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
—

 
607.6

 
607.6

 
—

 
556.8

 
556.8

Other equity
 
15.0

 
448.2

 
463.2

 
48.3

 
389.8

 
438.1

Total stockholders' equity
 
15.0

 
1,055.8

 
1,070.8

 
48.3

 
946.6

 
994.9

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders' Equity
 
$
1,114.1

 
$
1,305.2

 
$
2,419.3

 
$
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 and nine months ended June 30, 2013 and 2012.
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
June 30,
 
Nine Months Ended
June 30,
(in millions)
 
2013
 
2012
 
2013
 
2012
Net gains from changes in fair value of assets
 
$
17.2

 
$
9.8

 
$
58.3

 
$
67.2

Net losses from changes in fair value of liabilities
 
(18.1
)
 
(11.3
)
 
(86.0
)
 
(50.4
)
Total net gains (losses)
 
$
(0.9
)
 
$
(1.5
)
 
$
(27.7
)
 
$
16.8


16


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 June 30, 2013
 
 
 
Unpaid principal balance
 
$
973.7

 
$
8.1

 
$
1,059.0

Difference between unpaid principal and fair value
 
3.6

 
(7.7
)
 
(13.9
)
Fair value
 
$
977.3

 
$
0.4

 
$
1,045.1

(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

Difference between unpaid principal and fair value
 
(12.0
)
 
(6.7
)
 
(85.6
)
Fair value
 
$
984.1

 
$
0.5

 
$
1,100.9

Consolidated SIPs
Consolidated SIPs consist of non-VIE limited partnerships and similar structures that the Company controls and other fund products in which the Company has a controlling financial interest. The Company consolidated 34 SIPs as of June 30, 2013. SIPs are typically consolidated when the Company makes an initial investment in a newly launched fund or limited partnership entity. They are deconsolidated when the Company redeems its investment in the SIP or its voting interests decrease to a minority percentage. The Company's investments in SIPs subsequent to deconsolidation are accounted for as trading or available-for-sale investment securities, or equity method or cost method investments depending on the nature of the SIP and the Company's level of ownership.
Investments
Investments of consolidated VIEs and consolidated SIPs consisted of the following: