Form 10Q 6.30.2015
Table of Contents

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, 2015
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: 613,818,029 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of July 22, 2015.

Table of Contents


INDEX TO FORM 10-Q
 
 
Page
Financial Information
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
3

 
 
4

 
 
5

 
 
6

 
 
8

 
Item 2.
25

 
Item 3.
49

 
Item 4.
50

 
 
 
 
Other Information
 
 
Item 1.
51

 
Item 1A.
51

 
Item 2.
51

 
Item 6.
52

 
 
 
 
53

54



2
Table of Contents

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)
 
2015
 
2014
 
2015
 
2014
Operating Revenues
 
 
 
 
 
 
 
 
Investment management fees
 
$
1,340.9

 
$
1,393.2

 
$
4,070.9

 
$
4,135.0

Sales and distribution fees
 
566.8

 
643.7

 
1,741.8

 
1,919.0

Shareholder servicing fees
 
66.5

 
69.0

 
198.4

 
212.8

Other
 
26.6

 
24.6

 
63.8

 
69.1

Total operating revenues
 
2,000.8

 
2,130.5

 
6,074.9

 
6,335.9

Operating Expenses
 
 
 
 
 
 
 
 
Sales, distribution and marketing
 
694.0

 
789.3

 
2,136.0

 
2,332.3

Compensation and benefits
 
363.5

 
380.7

 
1,116.5

 
1,102.0

Information systems and technology
 
58.3

 
54.3

 
159.4

 
155.5

Occupancy
 
30.7

 
34.1

 
97.1

 
101.0

General, administrative and other
 
84.5

 
85.3

 
256.4

 
259.2

Total operating expenses
 
1,231.0

 
1,343.7

 
3,765.4

 
3,950.0

Operating Income
 
769.8

 
786.8

 
2,309.5

 
2,385.9

Other Income (Expenses)
 
 
 
 
 
 
 
 
Investment and other income (losses), net
 
(4.7
)
 
107.6

 
149.9

 
172.8

Interest expense
 
(13.7
)
 
(10.9
)
 
(26.7
)
 
(34.9
)
Other income (expenses), net
 
(18.4
)
 
96.7

 
123.2

 
137.9

Income before taxes
 
751.4

 
883.5

 
2,432.7

 
2,523.8

Taxes on income
 
217.4

 
251.4

 
709.5

 
742.9

Net income
 
534.0

 
632.1

 
1,723.2

 
1,780.9

Less: Net income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
28.6

 
47.4

 
49.4

 
23.0

Redeemable noncontrolling interests
 
1.2

 
5.8

 
(3.3
)
 
14.2

Net Income Attributable to Franklin Resources, Inc.
 
$
504.2

 
$
578.9

 
$
1,677.1

 
$
1,743.7

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.82

 
$
0.92

 
$
2.70

 
$
2.77

Diluted
 
0.82

 
0.92

 
2.70

 
2.77

Dividends per Share
 
$
0.15

 
$
0.12

 
$
0.95

 
$
0.36







See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
(in millions)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Net Income
 
$
534.0

 
$
632.1

 
$
1,723.2

 
$
1,780.9

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on investments, net of tax
 
(8.7
)
 
2.5

 
—

 
(6.0
)
Currency translation adjustments, net of tax
 
42.2

 
17.2

 
(138.8
)
 
25.2

Net unrealized gains (losses) on defined benefit plans, net of tax
 
(0.1
)
 
0.1

 
0.9

 
(1.1
)
Total other comprehensive income (loss)
 
33.4

 
19.8

 
(137.9
)
 
18.1

Total comprehensive income
 
567.4

 
651.9

 
1,585.3

 
1,799.0

Less: Comprehensive income (loss) attributable to
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
28.6

 
47.4

 
49.4

 
23.0

Redeemable noncontrolling interests
 
1.2

 
5.8

 
(3.3
)
 
14.2

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
537.6

 
$
598.7

 
$
1,539.2

 
$
1,761.8





















See Notes to Condensed Consolidated Financial Statements.

4
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Balance Sheets
Unaudited
(in millions, except share and per share data)
 
June 30,
2015
 
September 30,
2014
Assets
 
 
 
 
Cash and cash equivalents
 
$
8,262.6

 
$
7,476.8

Receivables
 
899.0

 
950.0

Investments (including $1,772.2 and $1,845.6 at fair value at June 30, 2015 and September 30, 2014)
 
2,549.1

 
2,516.1

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
81.2

 
44.9

Investments, at fair value
 
1,026.6

 
1,373.7

Assets of consolidated variable interest entities
 
 
 
 
Cash and cash equivalents
 
82.6

 
74.3

Investments, at fair value
 
709.4

 
788.4

Deferred taxes, net
 
106.3

 
98.1

Property and equipment, net
 
510.1

 
530.7

Goodwill and other intangible assets, net
 
2,285.8

 
2,325.9

Other
 
157.6

 
178.2

Total Assets
 
$
16,670.3

 
$
16,357.1

Liabilities
 
 
 
 
Compensation and benefits
 
$
428.8

 
$
465.1

Accounts payable and accrued expenses
 
225.7

 
237.5

Dividends
 
94.2

 
76.9

Commissions
 
403.3

 
440.3

Debt
 
1,347.9

 
1,198.2

Debt of consolidated sponsored investment products
 
90.8

 
122.3

Debt of consolidated variable interest entities (at fair value at September 30, 2014)
 
764.8

 
828.5

Deferred taxes
 
261.1

 
259.3

Other
 
268.1

 
281.8

Total liabilities
 
3,884.7

 
3,909.9

Commitments and Contingencies (Note 9)
 

 

Redeemable Noncontrolling Interests
 
71.7

 
234.8

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; 614,813,951 and 622,893,090 shares issued and outstanding at June 30, 2015 and September 30, 2014
 
61.5

 
62.3

Retained earnings
 
12,279.6

 
11,625.6

Appropriated retained earnings of consolidated variable interest entities
 
—

 
13.9

Accumulated other comprehensive loss
 
(255.6
)
 
(117.7
)
Total Franklin Resources, Inc. stockholders’ equity
 
12,085.5

 
11,584.1

Nonredeemable noncontrolling interests
 
628.4

 
628.3

Total stockholders’ equity
 
12,713.9

 
12,212.4

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
16,670.3

 
$
16,357.1


See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
 
 
Nine Months Ended
June 30,
(in millions)
 
2015
 
2014
Net Income
 
$
1,723.2

 
$
1,780.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
87.2

 
97.2

Depreciation and other amortization
 
72.6

 
72.9

Stock-based compensation
 
106.5

 
96.9

Excess tax benefit from stock-based compensation
 
(8.1
)
 
(8.1
)
Gains on sale of assets
 
(25.2
)
 
(40.0
)
Income from investments in equity method investees
 
(9.3
)
 
(68.2
)
Net gains on other investments of consolidated sponsored investment products
 
(30.9
)
 
(18.2
)
Net gains of consolidated variable interest entities
 
(4.5
)
 
(8.1
)
Deferred income taxes
 
(4.5
)
 
(22.3
)
Other
 
14.1

 
7.9

Changes in operating assets and liabilities:
 
 
 
 
Decrease (increase) in receivables, prepaid expenses and other
 
4.1

 
(133.7
)
Decrease (increase) in trading securities, net
 
5.6

 
(77.6
)
Increase in trading securities of consolidated sponsored investment products, net
 
(49.8
)
 
(448.9
)
Originations of loans held for sale
 
—

 
(38.3
)
Proceeds from sale of loans originated for resale
 
—

 
38.4

Decrease in accrued compensation and benefits
 
(24.5
)
 
(11.6
)
Increase (decrease) in commissions payable
 
(37.0
)
 
20.3

Increase in income taxes payable
 
28.4

 
3.4

Increase (decrease) in other liabilities
 
(33.0
)
 
168.0

Net cash provided by operating activities
 
1,814.9

 
1,410.9

Purchase of investments
 
(190.7
)
 
(205.4
)
Liquidation of investments
 
296.4

 
410.4

Purchase of investments by consolidated sponsored investment products
 
(127.5
)
 
(261.2
)
Liquidation of investments by consolidated sponsored investment products
 
179.4

 
125.1

Purchase of investments by consolidated variable interest entities
 
(214.3
)
 
(162.1
)
Liquidation of investments by consolidated variable interest entities
 
315.0

 
340.2

Decrease in loans receivable, net
 
—

 
36.8

Decrease in loans transferred to held for sale
 
—

 
8.2

Proceeds from sale of loans transferred to held for sale
 
—

 
181.3

Additions of property and equipment, net
 
(43.5
)
 
(38.2
)
Increase (decrease) in cash and cash equivalents from net consolidation (deconsolidation) of sponsored investment products
 
20.5

 
(150.8
)
Net cash provided by investing activities
 
235.3

 
284.3

Increase (decrease) in deposits
 
(0.3
)
 
76.3

Issuance of common stock
 
13.6

 
20.4

Dividends paid on common stock
 
(574.0
)
 
(215.3
)
Repurchase of common stock
 
(559.5
)
 
(444.4
)
Excess tax benefit from stock-based compensation
 
8.1

 
8.1

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

6
Table of Contents

FRANKLIN RESOURCES, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
[Table continued from previous page]
 
 
Nine Months Ended
June 30,
(in millions)
 
2015
 
2014
Proceeds from issuance of debt
 
$
395.7

 
$
—

Payments on debt
 
(250.0
)
 
—

Proceeds from issuance of debt by consolidated sponsored investment products
 
454.0

 
601.6

Payments on debt by consolidated sponsored investment products
 
(483.7
)
 
(571.9
)
Payments on debt by consolidated variable interest entities
 
(87.8
)
 
(160.6
)
Payments on contingent consideration liabilities
 
(7.7
)
 
(4.8
)
Noncontrolling interests
 
(5.6
)
 
358.3

Net cash used in financing activities
 
(1,097.2
)
 
(332.3
)
Effect of exchange rate changes on cash and cash equivalents
 
(122.6
)
 
11.6

Increase in cash and cash equivalents
 
830.4

 
1,374.5

Cash and cash equivalents, beginning of period
 
7,596.0

 
6,323.1

Cash and Cash Equivalents, End of Period
 
$
8,426.4

 
$
7,697.6

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
706.1

 
$
767.3

Cash paid for interest
 
32.1

 
33.1

Cash paid for interest by consolidated variable interest entities and consolidated sponsored investment products
 
25.0

 
34.3

















See Notes to Condensed Consolidated Financial Statements.

7
Table of Contents

FRANKLIN RESOURCES, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2015
(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, 2014 (“fiscal year 2014”). 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, 2015.
Note 2 – New Accounting Guidance
Recently Adopted Accounting Guidance
On October 1, 2014, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance that provides an entity the election to measure the financial assets and financial liabilities of a consolidated collateralized financing entity using the more observable fair value of either the financial assets or financial liabilities, and elected this measurement alternative for its consolidated collateralized loan obligations (“CLOs”). The adoption resulted in a $14.2 million increase in debt of consolidated variable interest entities (“VIEs”), a $13.9 million reduction in appropriated retained earnings of consolidated VIEs and a $0.3 million reduction in retained earnings as of October 1, 2014. The Company’s subsequent earnings from the consolidated CLOs reflect changes in fair value of its own economic interests in the CLOs, and no longer include gains or losses on assets and liabilities of the CLOs, which were primarily attributable to noncontrolling interests.
New Accounting Guidance Not Yet Adopted
In February 2015, the FASB issued an amendment to the existing consolidation guidance. The amendment modifies the consolidation framework for certain investment entities and all limited partnerships. It also eliminates certain criteria used to determine whether fees paid to a decision maker are a variable interest. The amendment allows for either a full retrospective or modified approach at adoption, and is effective for the Company in the first quarter of the fiscal year ending September 30, 2017. The Company is currently evaluating the impact that the adoption of the amendment will have on its consolidated financial statements.
There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for fiscal year 2014.

8
Table of Contents

Note 3 – Stockholders’ Equity
The changes in total stockholders’ equity were as follows:
(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the nine months ended June 30, 2015
 
 
 
Balance at October 1, 2014
 
$
11,584.1

 
$
628.3

 
$
12,212.4

Adjustment for adoption of new accounting guidance
 
(14.2
)
 
 
 
(14.2
)
Net income
 
1,677.1

 
49.4

 
1,726.5

Other comprehensive loss
 
(137.9
)
 
 
 
(137.9
)
Cash dividends on common stock
 
(591.3
)
 
 
 
(591.3
)
Repurchase of common stock
 
(559.5
)
 
 
 
(559.5
)
Net distributions
 
 
 
(49.3
)
 
(49.3
)
Other1
 
127.2

 
 
 
127.2

Balance at June 30, 2015
 
$
12,085.5

 
$
628.4

 
$
12,713.9

__________________ 
1 
Primarily relates to stock-based compensation plans.
(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the nine months ended June 30, 2014
 
 
 
Balance at October 1, 2013
 
$
10,073.1

 
$
612.4

 
$
10,685.5

Net income
 
1,743.7

 
23.0

 
1,766.7

Net income reclassified to appropriated retained earnings
 
4.4

 
(4.4
)
 
—

Other comprehensive income
 
18.1

 
 
 
18.1

Cash dividends on common stock
 
(226.7
)
 
 
 
(226.7
)
Repurchase of common stock
 
(444.4
)
 
 
 
(444.4
)
Net distributions
 
 
 
(5.4
)
 
(5.4
)
Other1
 
127.1

 
 
 
127.1

Balance at June 30, 2014
 
$
11,295.3

 
$
625.6

 
$
11,920.9

__________________ 
1 
Primarily relates to stock-based compensation plans.
During the three and nine months ended June 30, 2015, the Company repurchased 4.3 million and 10.6 million shares of its common stock at a cost of $218.3 million and $559.5 million under its stock repurchase program. Effective March 19, 2015, the Company adopted a stock trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934 to facilitate the ongoing repurchase of its common stock under the stock repurchase program. In December 2013, the Company’s Board of Directors authorized the repurchase of up to 30.0 million additional shares of its common stock under the stock repurchase program. At June 30, 2015, 19.2 million shares remained available for repurchase under the program, which is not subject to an expiration date. During the three and nine months ended June 30, 2014, the Company repurchased 2.4 million and 8.3 million shares of its common stock at a cost of $128.5 million and $444.4 million.

9
Table of Contents

Note 4 – 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,
 
2015
 
2014
 
2015
 
2014
Net Income Attributable to Franklin Resources, Inc.
 
$
504.2

 
$
578.9

 
$
1,677.1

 
$
1,743.7

Less: Allocation of earnings to participating nonvested stock and stock unit awards
 
3.4

 
3.9

 
10.5

 
11.2

Net Income Available to Common Stockholders
 
$
500.8

 
$
575.0

 
$
1,666.6

 
$
1,732.5

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
614.1

 
623.2

 
617.3

 
625.8

Dilutive effect of nonparticipating nonvested stock unit awards and common stock options
 
0.1

 
0.4

 
0.1

 
0.5

Weighted-Average Shares Outstanding – Diluted
 
614.2

 
623.6

 
617.4

 
626.3

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
0.82

 
$
0.92

 
$
2.70

 
$
2.77

Diluted
 
0.82

 
0.92

 
2.70

 
2.77

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 1.0 million and 0.9 million for the three and nine months ended June 30, 2015, and 0.1 million for the three and nine months ended June 30, 2014.
Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated sponsored investment products (“SIPs”) and consolidated VIEs. See Note 8 – 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)
 
June 30,
2015
 
September 30,
2014
Investment securities, trading
 
$
1,270.1

 
$
1,277.5

Investment securities, available-for-sale
 
 
 
 
SIPs
 
453.0

 
517.6

Securities of U.S. states and political subdivisions
 
6.6

 
11.3

Securities of the U.S. Treasury and federal agencies
 
0.7

 
0.7

Mortgage-backed securities – agency residential1
 
22.9

 
17.9

Other equity securities
 
4.2

 
6.6

Total investment securities, available-for-sale
 
487.4

 
554.1

Investments in equity method investees
 
686.5

 
594.9

Other investments
 
105.1

 
89.6

Total
 
$
2,549.1

 
$
2,516.1

__________________ 
1 
Consist of U.S. government-sponsored enterprise obligations.
At June 30, 2015 and September 30, 2014, investment securities with aggregate carrying amounts of $4.5 million and $6.1 million were pledged as collateral.

10
Table of Contents

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, 2015
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
413.8

 
$
42.6

 
$
(3.4
)
 
$
453.0

Securities of U.S. states and political subdivisions
 
6.6

 
—

 
—

 
6.6

Securities of the U.S. Treasury and federal agencies
 
0.7

 
—

 
—

 
0.7

Mortgage-backed securities – agency residential
 
22.8

 
0.1

 
—

 
22.9

Other equity securities
 
4.1

 
0.1

 
—

 
4.2

Total
 
$
448.0

 
$
42.8

 
$
(3.4
)
 
$
487.4

(in millions)
 
 
 
Gross Unrealized
 
 
as of September 30, 2014
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
477.0

 
$
43.5

 
$
(2.9
)
 
$
517.6

Securities of U.S. states and political subdivisions
 
11.0

 
0.3

 
—

 
11.3

Securities of the U.S. Treasury and federal agencies
 
0.7

 
—

 
—

 
0.7

Mortgage-backed securities – agency residential
 
18.0

 
—

 
(0.1
)
 
17.9

Other equity securities
 
6.3

 
0.3

 
—

 
6.6

Total
 
$
513.0

 
$
44.1

 
$
(3.0
)
 
$
554.1

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, 2015
 
 
 
 
 
SIPs
 
$
71.3

 
$
(3.3
)
 
$
0.6

 
$
(0.1
)
 
$
71.9

 
$
(3.4
)
 
 
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, 2014
 
 
 
 
 
SIPs
 
$
156.4

 
$
(2.7
)
 
$
1.5

 
$
(0.2
)
 
$
157.9

 
$
(2.9
)
Mortgage-backed securities – agency residential
 
4.0

 
—

 
11.6

 
(0.1
)
 
15.6

 
(0.1
)
Total
 
$
160.4

 
$
(2.7
)
 
$
13.1

 
$
(0.3
)
 
$
173.5

 
$
(3.0
)
The Company recognized $3.5 million and $5.5 million of other-than-temporary impairment during the three and nine months ended June 30, 2015, of which $1.7 million and $3.7 million related to available-for-sale SIPs. The Company did not recognize any other-than-temporary impairment of investments during the three months ended June 30, 2014. During the nine months ended June 30, 2014, the Company recognized $0.6 million of other-than-temporary impairment, of which $0.4 million related to available-for-sale SIPs.
At June 30, 2015, contractual maturities of available-for-sale debt securities were as follows: 
(in millions)
 
Cost Basis
 
Fair Value
Due in one year or less
 
$
0.6

 
$
0.6

Due after one year through five years
 
6.7

 
6.7

Total
 
$
7.3

 
$
7.3

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.

11
Table of Contents

Note 6 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated SIPs and consolidated VIEs. See Note 8 – 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. Quoted prices are validated through price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of third-party vendors.
 
 
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 June 30, 2015
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,180.3

 
$
85.8

 
$
4.0

 
$
1,270.1

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
453.0

 
—

 
—

 
453.0

Securities of U.S. states and political subdivisions
 
—

 
6.6

 
—

 
6.6

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

 
0.7

 
—

 
0.7

Mortgage-backed securities – agency residential
 
—

 
22.9

 
—

 
22.9

Other equity securities
 
1.3

 
2.9

 
—

 
4.2

Life settlement contracts
 
—

 
—

 
14.7

 
14.7

Total Assets Measured at Fair Value
 
$
1,634.6

 
$
118.9

 
$
18.7

 
$
1,772.2

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
—

 
$
—

 
$
98.4

 
$
98.4

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2014
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,196.1

 
$
81.4

 
$
—

 
$
1,277.5

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
517.6

 
—

 
—

 
517.6

Securities of U.S. states and political subdivisions
 
—

 
11.3

 
—

 
11.3

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

 
0.7

 
—

 
0.7

Mortgage-backed securities – agency residential
 
—

 
17.9

 
—

 
17.9

Other equity securities
 
1.7

 
4.9

 
—

 
6.6

Life settlement contracts
 
—

 
—

 
14.0

 
14.0

Total Assets Measured at Fair Value
 
$
1,715.4

 
$
116.2

 
$
14.0

 
$
1,845.6

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
—

 
$
—

 
$
98.5

 
$
98.5


12
Table of Contents

The fair values of substantially all trading investments, all available-for-sale SIPs and certain other equity securities are determined based on their published net asset values. The fair values of certain trading investments, all available-for-sale debt securities and certain other equity 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 values of certain other trading investments and life settlement contracts are determined using discounted cash flow valuation techniques.
The fair value of 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 Advisors Holdings, LLC.
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, 2015 and 2014.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows: 
 
 
2015
 
2014
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
 
Contingent
Consideration
Liabilities
for the three months ended June 30,
 
 
 
 
Balance at beginning of period
 
$
18.6

 
$
(98.7
)
 
$
13.6

 
$
(104.2
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income (losses), net
 
0.3

 
—

 
0.7

 
—

Included in general, administrative and other expense
 
—

 
(0.2
)
 
—

 
3.3

Other
 
—

 
—

 
—

 
0.1

Settlements
 
(0.2
)
 
0.5

 
(0.5
)
 
2.0

Balance at End of Period
 
$
18.7

 
$
(98.4
)
 
$
13.8

 
$
(98.8
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
0.2

 
$
(0.2
)
 
$
0.3

 
$
3.4

 
 
2015
 
2014
(in millions)
 
Investments
 
Contingent
Consideration
Liabilities
 
Investments
 
Contingent
Consideration
Liabilities
for the nine months ended June 30,
 
 
 
 
Balance at beginning of period
 
$
14.0

 
$
(98.5
)
 
$
13.8

 
$
(97.7
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income (losses), net
 
1.4

 
—

 
2.4

 
—

Included in general, administrative and other expense
 
—

 
(7.7
)
 
—

 
(5.6
)
Other
 
—

 
(0.1
)
 
—

 
(0.3
)
Purchases
 
4.3

 
—

 
0.1

 
—

Sales
 
—

 
—

 
(0.7
)
 
—

Settlements
 
(1.0
)
 
7.7

 
(1.8
)
 
4.8

Effect of exchange rate changes
 
—

 
0.2

 
—

 
—

Balance at End of Period
 
$
18.7

 
$
(98.4
)
 
$
13.8

 
$
(98.8
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period
 
$
0.8

 
$
(7.8
)
 
$
0.9

 
$
(5.9
)

13
Table of Contents

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of June 30, 2015
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading
 
$
4.0

 
Discounted cash flow
 
Discount rate
 
5.2%–6.0% (5.4%)
 
 
 
 
Risk premium
 
2.7%–2.8% (2.8%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
14.7

 
Discounted cash flow
 
Life expectancy
 
20–143 months (68)
Discount rate
 
3.3%–19.0% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
98.4

 
Discounted cash flow
 
AUM growth rate
 
(2.4)% – 13.9% (9.0%)
EBITDA margin
 
24.6%–27.6% (25.3%)
Discount rate
 
14.0%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2014
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
14.0

 
Discounted cash flow
 
Life expectancy
 
23–150 months (71)
Discount rate
 
3.3%–21.7% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
98.5

 
Discounted cash flow
 
AUM growth rate
 
3.4%–20.2% (12.8%)
EBITDA margin
 
21.9%–30.4% (28.2%)
Discount rate
 
14.0%
For investment securities, trading, a significant increase (decrease) in the discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement.
For life settlement contracts, a significant increase (decrease) in the life expectancy or the discount rate in isolation would result in a significantly lower (higher) fair value measurement.
For 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, 2015
 
September 30, 2014
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
8,262.6

 
$
8,262.6

 
$
7,476.8

 
$
7,476.8

Other investments1
 
2 or 3
 
90.4

 
100.7

 
75.6

 
87.8

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt
 
2
 
1,347.9

 
1,368.7

 
1,198.2

 
1,235.8

_________________
1     Primarily consist of Level 3 assets.

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Table of Contents

Note 7 – Debt
The disclosures below include details of the Company’s debt, excluding that of consolidated SIPs and consolidated VIEs. See Note 8 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the debt of these entities.
Debt consisted of the following:
(in millions)
 
June 30,
2015
 
Effective
Interest Rate   
 
September 30,
2014
 
Effective
Interest Rate   
$250 million 3.125% notes due May 2015
 
$
—

 
N/A

 
$
250.0

 
3.32
%
$300 million 1.375% notes due September 2017
 
299.3

 
1.66
%
 
299.0

 
1.66
%
$350 million 4.625% notes due May 2020
 
349.8

 
4.74
%
 
349.8

 
4.74
%
$300 million 2.800% notes due September 2022
 
299.5

 
2.93
%
 
299.4

 
2.93
%
$400 million 2.850% notes due March 2025
 
399.3

 
2.97
%
 
—

 
N/A

Total Debt
 
$
1,347.9

 
 
 
$
1,198.2

 
 
In March 2015, the Company issued senior unsecured and unsubordinated notes with a total face value of $400.0 million due in March 2025. The Company incurred $3.6 million in debt issuance costs, which are included in other assets in the condensed consolidated balance sheet, and the notes were issued at a discount of $0.7 million. The debt issuance costs and discount are being amortized over the term of the notes. Net proceeds from the issuance of the notes were used to repay the $250.0 million 3.125% notes upon maturity in May 2015 and for general corporate purposes.
At June 30, 2015, the Company’s outstanding senior unsecured and unsubordinated notes had an aggregate face value of $1.4 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. 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, 2015, the Company was in compliance with the covenants of the notes.
At June 30, 2015, maturities for debt were as follows: 
(in millions)
 
Carrying Amount
for the fiscal years ending September 30,
2015
 
$
—

2016
 
—

2017
 
299.3

2018
 
—

2019
 
—

Thereafter
 
1,048.6

Total
 
$
1,347.9

At June 30, 2015, 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.

15
Table of Contents

Note 8 – 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 VIE products for which it is the primary beneficiary and the non-VIE products which it controls. 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 SIPs and consolidated VIEs included in the Company’s condensed consolidated balance sheets were as follows:
 
 
June 30, 2015
 
September 30, 2014
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
81.2

 
$
82.6

 
$
163.8

 
$
44.9

 
$
74.3

 
$
119.2

Receivables
 
12.2

 
3.6

 
15.8

 
16.2

 
23.0

 
39.2

Investments, at fair value
 
1,026.6

 
709.4

 
1,736.0

 
1,373.7

 
788.4

 
2,162.1

Other assets
 
0.6

 
—

 
0.6

 
0.7

 
—

 
0.7

Total Assets
 
$
1,120.6

 
$
795.6

 
$
1,916.2

 
$
1,435.5

 
$
885.7

 
$
2,321.2

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
24.3

 
$
22.3

 
$
46.6

 
$
18.5

 
$
35.3

 
$
53.8

Debt (at fair value at September 30, 2014)
 
—

 
764.8

 
764.8

 
—

 
828.5

 
828.5

Debt
 
90.8

 
—

 
90.8

 
122.3

 
—

 
122.3

Other liabilities
 
12.5

 
—

 
12.5

 
12.4

 
—

 
12.4

Total liabilities
 
127.6

 
787.1

 
914.7

 
153.2

 
863.8

 
1,017.0

Redeemable Noncontrolling Interests
 
71.7

 
—

 
71.7

 
234.8

 
—

 
234.8

Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
Franklin Resources, Inc.’s interests
 
313.9

 
8.5

 
322.4

 
436.5

 
21.9

 
458.4

Nonredeemable noncontrolling interests
 
607.4

 
—

 
607.4

 
611.0

 
—

 
611.0

Total stockholders’ equity
 
921.3

 
8.5

 
929.8

 
1,047.5

 
21.9

 
1,069.4

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
1,120.6

 
$
795.6

 
$
1,916.2

 
$
1,435.5

 
$
885.7

 
$
2,321.2

The consolidated SIPs and consolidated VIEs did not have a significant impact on net income attributable to the Company during the three and nine months ended June 30, 2015 and 2014.
Consolidated SIPs
Consolidated SIPs consist of 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 35 SIPs as of June 30, 2015, and 30 SIPs as of September 30, 2014. 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.

16
Table of Contents

Consolidated VIEs
Consolidated VIEs consist of sponsored CLOs, which are asset-backed financing entities collateralized by a pool of corporate debt securities.
The assets and liabilities of the CLOs were both carried at fair value through September 30, 2014. The Company adopted new accounting guidance on October 1, 2014 under which the liabilities are measured based on the fair value of the assets. Changes in the fair values of the assets and liabilities prior to the adoption of the new accounting guidance were as follows:
(in millions)
 
Three Months Ended
June 30, 2014
 
Nine Months Ended
June 30, 2014
Net gains from changes in fair value of assets
 
$
7.1

 
$
31.5

Net losses from changes in fair value of liabilities
 
(7.6
)
 
(24.1
)
Total Net Gains (Losses)
 
$
(0.5
)
 
$
7.4

During the three and nine months ended June 30, 2015, the Company recognized $2.4 million and $7.5 million of net gains related to its own economic interests in the CLOs. There was no net gain or loss resulting from changes in the values of the assets and liabilities of the CLOs due to the new accounting guidance.
The following tables present information on the investments and debt of the CLOs:
(in millions)
 
Investments
as of June 30, 2015
 
Unpaid principal balance
 
$
718.4

Difference between unpaid principal balance and fair value
 
(9.0
)
Fair Value
 
$
709.4

(in millions)
 
Investments
 
Debt
as of September 30, 2014
 
 
Unpaid principal balance
 
$
787.1

 
$
861.9

Difference between unpaid principal balance and fair value
 
1.3

 
(33.4
)
Fair Value
 
$
788.4

 
$
828.5

The unpaid principal balance of the debt of the CLOs was $795.7 million at June 30, 2015. There were no investments 90 days or more past due at June 30, 2015 or September 30, 2014.
Investments
Investments of consolidated SIPs and consolidated VIEs consisted of the following:
 
 
June 30, 2015
 
September 30, 2014
 
 
Consolidated
 
 
 
Consolidated
 
 
(in millions)
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Investment securities, trading
 
$
202.2

 
$
—

 
$
202.2

 
$
249.6

 
$
—

 
$
249.6

Other debt securities
 
151.0

 
709.4

 
860.4

 
205.6

 
788.4

 
994.0

Other equity securities
 
673.4

 
—

 
673.4

 
918.5

 
—

 
918.5

Total Investments
 
$
1,026.6

 
$
709.4

 
$
1,736.0

 
$
1,373.7

 
$
788.4

 
$
2,162.1

Investment securities, trading held by consolidated SIPs consist of debt and equity securities that are traded in active markets. Other debt and equity securities held by 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. Investments of consolidated VIEs consist of corporate debt securities.

17
Table of Contents

Debt
Debt of consolidated SIPs and consolidated VIEs consisted of the following:
 
 
June 30,
2015
 
Effective
Interest
Rate
 
September 30,
2014
 
Effective
Interest
Rate
(in millions)
 
 
 
 
Debt of consolidated SIPs due fiscal years 2015-2019
 
$
90.8

 
4.44
%
 
$
122.3

 
3.87
%
Debt of consolidated VIEs due fiscal years 2018-2024
 
764.8

 
1.56
%
 
828.5

 
1.43
%
Total Debt
 
$
855.6

 
 
 
$
950.8

 
 
The debt of consolidated SIPs had both fixed and floating interest rates ranging from 2.30% to 5.75% at June 30, 2015, and from 2.19% to 5.89% at September 30, 2014. The repayment of amounts outstanding under the debt agreements is secured by the assets of the consolidated SIPs or a pledge of the right to call capital.
The debt of consolidated VIEs had floating interest rates ranging from 0.51% to 9.77% at June 30, 2015, and from 0.46% to 9.73% at September 30, 2014.
At June 30, 2015, contractual maturities for debt of consolidated SIPs and consolidated VIEs were as follows: 
(in millions)
 
Carrying Amount
for the fiscal years ending September 30,
2015
 
$
30.0

2016
 
—

2017
 
18.7

2018
 
195.3

2019
 
327.5

Thereafter
 
284.1

Total
 
$
855.6

Fair Value Measurements
The tables below present the balances of assets and liabilities of consolidated SIPs and consolidated VIEs measured at fair value on a recurring basis. See Note 6 – 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 June 30, 2015
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
82.6

 
$
—

 
$
—

 
$
82.6

Receivables of consolidated VIEs
 
—

 
3.6

 
—

 
3.6

Investments of consolidated VIEs
 
—

 
709.0

 
0.4

 
709.4

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Equity securities
 
91.4

 
29.3

 
643.1

 
763.8

Debt securities
 
0.6

 
110.6

 
151.6

 
262.8

Total Assets Measured at Fair Value
 
$
174.6

 
$
852.5

 
$
795.1

 
$
1,822.2

Liabilities
 
 
 
 
 
 
 
 
Other liabilities of consolidated SIPs
 
$
4.0

 
$
0.8

 
$
—

 
$
4.8


18
Table of Contents

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2014
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
74.3

 
$
—

 
$
—

 
$
74.3

Receivables of consolidated VIEs
 
—

 
23.0

 
—

 
23.0

Investments of consolidated VIEs
 
—

 
787.9

 
0.5

 
788.4

Investments of consolidated SIPs