Document
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 December 31, 2017
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 (§232.405 of this chapter) 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer     x
Accelerated filer     o
Non-accelerated filer  o  (Do not check if a smaller reporting company)
Smaller reporting company    o
 
Emerging growth company    o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding: 551,703,549 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of January 23, 2018.

Table of Contents


INDEX TO FORM 10-Q
 
 
Page
Financial Information
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
3
 
 
4
 
 
5
 
 
6
 
 
8
 
Item 2.
20
 
Item 3.
42
 
Item 4.
42
 
 
 
 
Other Information
 
 
Item 1.
43
 
Item 1A.
43
 
Item 2.
43
 
Item 6.
43
 
 
 
 
44
45


2
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
 
 
Three Months Ended
December 31,
(in millions, except per share data)
 
2017
 
2016
Operating Revenues
 
 
 
 
Investment management fees
 
$
1,113.6

 
$
1,063.2

Sales and distribution fees
 
417.8

 
419.3

Shareholder servicing fees
 
54.9

 
56.6

Other
 
29.2

 
21.7

Total operating revenues
 
1,615.5

 
1,560.8

Operating Expenses
 
 
 
 
Sales, distribution and marketing
 
528.7

 
520.0

Compensation and benefits
 
332.5

 
311.5

Information systems and technology
 
55.0

 
51.7

Occupancy
 
29.4

 
29.1

General, administrative and other
 
88.8

 
61.6

Total operating expenses
 
1,034.4

 
973.9

Operating Income
 
581.1

 
586.9

Other Income (Expenses)
 
 
 
 
Investment and other income, net
 
81.3

 
46.1

Interest expense
 
(10.8
)
 
(13.3
)
Other income, net
 
70.5

 
32.8

Income before taxes
 
651.6

 
619.7

Taxes on income
 
1,223.5

 
200.9

Net income (loss)
 
(571.9
)
 
418.8

Less: net income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
(0.1
)
 
2.1

Redeemable noncontrolling interests
 
11.5

 
(23.5
)
Net Income (Loss) Attributable to Franklin Resources, Inc.
 
$
(583.3
)
 
$
440.2

 
 
 
 
 
Earnings (Loss) per Share
 
 
 
 
Basic
 
$
(1.06
)
 
$
0.77

Diluted
 
(1.06
)
 
0.77

Dividends Declared per Share
 
$
0.23

 
$
0.20





See Notes to Consolidated Financial Statements.

3
Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited

(in millions)
 
Three Months Ended
December 31,
 
2017
 
2016
Net Income (Loss)
 
$
(571.9
)
 
$
418.8

Other Comprehensive Income (Loss)
 
 
 
 
Net unrealized gains (losses) on investments, net of tax
 
3.5

 
(2.4
)
Currency translation adjustments, net of tax
 
15.8

 
(60.9
)
Net unrealized losses on defined benefit plans, net of tax
 
(1.1
)
 
—

Total other comprehensive income (loss)
 
18.2

 
(63.3
)
Total comprehensive income (loss)
 
(553.7
)
 
355.5

Less: comprehensive income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
(0.1
)
 
2.1

Redeemable noncontrolling interests
 
11.5

 
(23.5
)
Comprehensive Income (Loss) Attributable to Franklin Resources, Inc.
 
$
(565.1
)
 
$
376.9



See Notes to Consolidated Financial Statements.

4
Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited
(in millions, except share and per share data)
 
December 31,
2017
 
September 30,
2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
8,707.5

 
$
8,523.3

Receivables
 
769.7

 
767.8

Investments (including $426.9 and $440.0 at fair value at December 31, 2017 and September 30, 2017)
 
1,413.5

 
1,393.6

Assets of consolidated investment products
 
 
 
 
Cash and cash equivalents
 
262.9

 
226.4

Receivables
 
328.8

 
234.1

Investments, at fair value
 
3,649.2

 
3,467.4

Property and equipment, net
 
516.6

 
517.2

Goodwill and other intangible assets, net
 
2,235.1

 
2,227.7

Other
 
191.1

 
176.5

Total Assets
 
$
18,074.4

 
$
17,534.0

 
 
 
 
 
Liabilities
 
 
 
 
Compensation and benefits
 
$
211.1

 
$
396.6

Accounts payable and accrued expenses
 
165.3

 
167.4

Dividends
 
129.0

 
113.3

Commissions
 
322.4

 
313.3

Income taxes
 
1,306.7

 
74.7

Debt
 
1,044.5

 
1,044.2

Liabilities of consolidated investment products
 
 
 
 
Accounts payable and accrued expenses
 
215.6

 
124.1

Debt
 
51.0


53.4

Deferred taxes
 
125.3

 
170.6

Other
 
214.9

 
198.7

Total liabilities
 
3,785.8

 
2,656.3

Commitments and Contingencies (Note 10)
 

 

Redeemable Noncontrolling Interests
 
2,208.1

 
1,941.9

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; 552,406,256 and 554,865,343 shares issued and outstanding at December 31, 2017 and September 30, 2017
 
55.2

 
55.5

Retained earnings
 
11,969.5

 
12,849.3

Accumulated other comprehensive loss
 
(266.6
)
 
(284.8
)
Total Franklin Resources, Inc. stockholders’ equity
 
11,758.1

 
12,620.0

Nonredeemable noncontrolling interests
 
322.4

 
315.8

Total stockholders’ equity
 
12,080.5

 
12,935.8

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
18,074.4

 
$
17,534.0




See Notes to Consolidated Financial Statements.

5
Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
 
 
Three Months Ended
December 31,
(in millions)
 
2017
 
2016
Net Income (Loss)
 
$
(571.9
)
 
$
418.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
19.1

 
17.1

Depreciation and other amortization
 
20.9

 
19.9

Stock-based compensation
 
30.3

 
30.4

Income from investments in equity method investees
 
(35.2
)
 
(34.2
)
Net gains on investments of consolidated investment products
 
(4.7
)
 
(2.0
)
Deferred income taxes
 
(49.9
)
 
(6.9
)
Other
 
5.3

 
(12.9
)
Changes in operating assets and liabilities:
 
 
 
 
Increase in receivables and other assets
 
(33.8
)
 
(11.8
)
Increase in receivables of consolidated investment products
 
(94.8
)
 
(7.5
)
Decrease in trading securities, net
 
18.6

 
27.9

Decrease (increase) in trading securities of consolidated investment products, net
 
(187.1
)
 
43.9

Decrease in accrued compensation and benefits
 
(186.1
)
 
(161.9
)
Increase (decrease) in commissions payable
 
9.1

 
(9.6
)
Increase in income taxes payable
 
1,232.0

 
167.1

Increase (decrease) in accounts payable, accrued expenses and other liabilities
 
1.5

 
(25.9
)
Increase (decrease) in accounts payable and accrued expenses of consolidated investment products
 
147.1

 
(6.2
)
Net cash provided by operating activities
 
320.4

 
446.2

Purchase of investments
 
(39.7
)
 
(28.8
)
Liquidation of investments
 
33.9

 
35.2

Purchase of investments by consolidated investment products
 
(11.0
)
 
(69.4
)
Liquidation of investments by consolidated investment products
 
22.5

 
72.7

Additions of property and equipment, net
 
(19.2
)
 
(12.8
)
Adoption of new accounting guidance
 
—

 
(49.2
)
Net deconsolidation of investment products
 
(45.1
)
 
(6.1
)
Net cash used in investing activities
 
(58.6
)
 
(58.4
)
Dividends paid on common stock
 
(111.7
)
 
(103.4
)
Repurchase of common stock
 
(198.7
)
 
(256.2
)
Proceeds from debt of consolidated investment products
 
—

 
0.4

Payments on debt by consolidated investment products
 
(2.4
)
 
(3.2
)
Payments on contingent consideration liability
 
—

 
(2.2
)
Noncontrolling interests
 
261.7

 
(1.3
)
Net cash used in financing activities
 
(51.1
)
 
(365.9
)
Effect of exchange rate changes on cash and cash equivalents
 
10.0

 
(50.4
)
Increase (decrease) in cash and cash equivalents
 
220.7

 
(28.5
)
Cash and cash equivalents, beginning of period
 
8,749.7

 
8,483.3

Cash and Cash Equivalents, End of Period
 
$
8,970.4

 
$
8,454.8

 
 
 
 
 

[Table continued on next page]

See Notes to Consolidated Financial Statements.

6
Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited

[Table continued from previous page]
 
 
Three Months Ended
December 31,
(in millions)
 
2017
 
2016
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
38.8

 
$
33.1

Cash paid for interest
 
14.1

 
10.1

Cash paid for interest by consolidated investment products
 
0.7

 
3.3




See Notes to Consolidated Financial Statements.

7
Table of Contents

FRANKLIN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(Unaudited)
Note 1 – Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission. Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. These financial statements should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended September 30, 2017 (“fiscal year 2017”). Certain comparative amounts for the prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended December 31, 2017.
Note 2 – New Accounting Guidance
Recently Adopted Accounting Guidance
On October 1, 2017, the Company adopted an amendment to the existing stock-based compensation guidance issued by the Financial Accounting Standards Board (“FASB”). The amendment requires all income tax effects of stock-based awards to be recognized as income tax expense when the awards vest or settle and clarifies the classification of these transactions within the statement of cash flows. The amendment also provides an election to account for forfeitures as they occur, which the Company made using the modified retrospective approach which did not require the restatement of prior-year periods and did not result in a material impact on retained earnings. The income tax effect and statement of cash flow changes were adopted on a prospective basis. The adoption of the amendment will increase the volatility of income tax expense as a result of fluctuations in the Company’s stock price.
Accounting Guidance Not Yet Adopted
The FASB issued new guidance in May 2014 that requires use of a single principles-based model for recognition of revenue from contracts with customers. The core principle of the model is that revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. The guidance also changes the accounting for certain contract costs and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The guidance is effective for the Company on October 1, 2018 and allows for either a full retrospective or modified approach at adoption. While the Company’s implementation efforts are ongoing, it does not expect adoption of the guidance to have a significant impact on the timing of recognition for substantially all of its operating revenue or the accounting for its contract costs. The Company continues to assess certain arrangements to determine whether it continues to act as a principal and present the related revenue gross of associated expenses. The overall impact upon adoption may differ based on further evaluation of the Company’s arrangements and other facts and circumstances identified during implementation. The Company has not yet determined its transition approach.
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 2017.

8
Table of Contents

Note 3 – Stockholders’ Equity
Changes in total stockholders’ equity were as follows:
(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the three months ended December 31, 2017
 
 
 
Balance at October 1, 2017
 
$
12,620.0

 
$
315.8

 
$
12,935.8

Adoption of new accounting guidance
 
0.4

 
—

 
0.4

Net loss
 
(583.3
)
 
(0.1
)
 
(583.4
)
Other comprehensive income
 
18.2

 
 
 
18.2

Cash dividends declared on common stock
 
(127.4
)
 
 
 
(127.4
)
Repurchase of common stock
 
(200.0
)
 
 
 
(200.0
)
Stock-based compensation
 
30.2

 
 
 
30.2

Net subscriptions and other
 
 
 
7.0

 
7.0

Deconsolidation of investment product
 
 
 
(0.3
)
 
(0.3
)
Balance at December 31, 2017
 
$
11,758.1

 
$
322.4

 
$
12,080.5

(in millions)
 
Franklin
Resources, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
for the three months ended December 31, 2016
 
 
 
Balance at October 1, 2016
 
$
11,935.8

 
$
592.4

 
$
12,528.2

Adoption of new accounting guidance
 
(1.3
)
 
(324.6
)
 
(325.9
)
Net income
 
440.2

 
2.1

 
442.3

Other comprehensive loss
 
(63.3
)
 
 
 
(63.3
)
Cash dividends declared on common stock
 
(113.4
)
 
 
 
(113.4
)
Repurchase of common stock
 
(261.7
)
 
 
 
(261.7
)
Stock-based compensation
 
28.5

 
 
 
28.5

Net subscriptions and other
 
 
 
12.3

 
12.3

Balance at December 31, 2016
 
$
11,964.8

 
$
282.2

 
$
12,247.0

During the three months ended December 31, 2017 and 2016, the Company repurchased 4.6 million and 7.1 million shares of its common stock at a cost of $200.0 million and $261.7 million under its stock repurchase program. At December 31, 2017, 27.0 million shares remained available for repurchase under the program, which is not subject to an expiration date.
Note 4 – Earnings (Loss) per Share
The components of basic and diluted earnings (loss) per share were as follows: 
(in millions, except per share data)
 
Three Months Ended
December 31,
 
2017
 
2016
Net income (loss) attributable to Franklin Resources, Inc.
 
$
(583.3
)
 
$
440.2

Less: allocation of earnings to participating nonvested stock and stock unit awards
 
1.0

 
3.0

Net Income (Loss) Available to Common Stockholders
 
$
(584.3
)
 
$
437.2

 
 
 
 
 
Weighted-average shares outstanding – basic
 
550.7

 
565.1

Dilutive effect of nonparticipating nonvested stock unit awards
 
—

 
0.1

Weighted-Average Shares Outstanding – Diluted
 
550.7

 
565.2

 
 
 
 
 
Earnings (Loss) per Share
 
 
 
 
Basic
 
$
(1.06
)
 
$
0.77

Diluted
 
(1.06
)
 
0.77


9
Table of Contents

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive were 1.9 million and 0.7 million for the three months ended December 31, 2017 and 2016.
Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated investment products. See Note 7 – Consolidated Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions)
 
December 31,
2017
 
September 30,
2017
Investment securities, trading
 
 
 
 
Sponsored funds
 
$
17.7

 
$
31.1

Debt and other equity securities
 
281.9

 
283.4

Total investment securities, trading
 
299.6

 
314.5

Investment securities, available-for-sale
 
 
 
 
Sponsored funds
 
112.5

 
110.8

Debt and other equity securities
 
1.8

 
1.9

Total investment securities, available-for-sale
 
114.3

 
112.7

Investments in equity method investees
 
922.0

 
893.5

Other investments
 
77.6

 
72.9

Total
 
$
1,413.5

 
$
1,393.6

Debt and other equity trading securities consist primarily of corporate debt.
Investment securities with aggregate carrying amounts of $1.3 million and $0.8 million were pledged as collateral at December 31, 2017 and September 30, 2017.
Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:
 
 
 
 
Gross Unrealized
 
 
(in millions)
Cost Basis
 
Gains
 
Losses
 
Fair Value
as of December 31, 2017
 
 
 
 
 
 
 
 
Sponsored funds
 
$
106.6

 
$
12.0

 
$
(6.1
)
 
$
112.5

Debt and other equity securities
 
1.7

 
0.1

 
—

 
1.8

Total
 
$
108.3

 
$
12.1

 
$
(6.1
)
 
$
114.3

 
 
 
 
 
 
 
 
 
as of September 30, 2017
 
 
 
 
 
 
 
 
Sponsored funds
 
$
107.9

 
$
9.4

 
$
(6.5
)
 
$
110.8

Debt and other equity securities
 
1.9

 
—

 
—

 
1.9

Total
 
$
109.8

 
$
9.4

 
$
(6.5
)
 
$
112.7

Gross unrealized losses relating to investment securities, available-for-sale aggregated by length of time that individual securities have been in a continuous unrealized loss position were as follows:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
(in millions)
 
 
 
 
 
as of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Sponsored funds
 
$
31.2

 
$
(5.9
)
 
$
2.4

 
$
(0.2
)
 
$
33.6

 
$
(6.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
as of September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Sponsored funds
 
$
28.4

 
$
(6.3
)
 
$
2.4

 
$
(0.2
)
 
$
30.8

 
$
(6.5
)

10
Table of Contents

The Company recognized $0.5 million and $0.3 million of other-than-temporary impairment during the three months ended December 31, 2017 and 2016.
Note 6 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated investment products. See Note 7 – Consolidated Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liability measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of December 31, 2017
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
Sponsored funds
 
$
17.7

 
$
—

 
$
—

 
$
17.7

Debt and other equity securities
 
20.0

 
65.1

 
196.8

 
281.9

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored funds
 
112.5

 
—

 
—

 
112.5

Debt and other equity securities
 
0.9

 
0.6

 
0.3

 
1.8

Life settlement contracts
 
—

 
—

 
13.0

 
13.0

Total Assets Measured at Fair Value
 
$
151.1

 
$
65.7

 
$
210.1

 
$
426.9

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
62.0

 
$
62.0

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2017
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
Sponsored funds
 
$
31.1

 
$
—

 
$
—

 
$
31.1

Debt and other equity securities
 
18.2

 
78.4

 
186.8

 
283.4

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored funds
 
110.8

 
—

 
—

 
110.8

Debt and other equity securities
 
1.0

 
0.6

 
0.3

 
1.9

Life settlement contracts
 
—

 
—

 
12.8

 
12.8

Total Assets Measured at Fair Value
 
$
161.1

 
$
79.0

 
$
199.9

 
$
440.0

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
—

 
$
—

 
$
51.0

 
$
51.0

Level 1 assets consist primarily of sponsored funds and other equity securities for which the fair values are based on published net asset values or quoted market prices. Level 2 assets consist of debt and equity securities for which the fair values are determined using independent third-party broker or dealer price quotes. Level 3 assets consist of corporate debt securities for which the fair value is determined using market pricing, and other debt securities and life settlement contracts for which the fair values are based on discounted cash flows using significant unobservable inputs.
The fair value of the contingent consideration liability 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, 2017 and 2016.

11
Table of Contents

Changes in the Level 3 assets and liability were as follows: 
 
 
2017
 
2016
(in millions)
 
Investments
 
Contingent
Consideration
Liability
 
Investments
 
Contingent
Consideration
Liability
for the three months ended December 31,
 
 
 
 
Balance at beginning of period
 
$
199.9

 
$
(51.0
)
 
$
205.1

 
$
(98.1
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
1.2

 
—

 
0.6

 
—

Included in general, administrative and other expense
 
—

 
(4.0
)
 
—

 
12.2

Purchases
 
5.3

 
—

 
0.5

 
—

Sales
 
—

 
—

 
(2.4
)
 
—

Settlements
 
—

 
—

 
(1.7
)
 
2.2

Foreign exchange revaluation and other
 
3.7

 
(7.0
)
 
(3.4
)
 
—

Balance at End of Period
 
$
210.1

 
$
(62.0
)
 
$
198.7

 
$
(83.7
)
Change in unrealized gains (losses) included in net income relating to assets and liability held at end of period
 
$
1.2

 
$
(4.0
)
 
$
(0.1
)
 
$
12.2

Valuation techniques and significant unobservable inputs used in the Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
180.3

 
Market pricing
 
Redemption price
 
$73 per $100 of par
Discount rate
 
18.6%
 
16.5

 
Discounted cash flow
 
Discount rate
 
4.3%–6.7% (5.8%)
Risk premium
 
2.0%–4.7% (3.1%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
13.0

 
Discounted cash flow
 
Life expectancy
 
19–121 months (61)
Discount rate
 
8.0%–20.0% (13.2%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
62.0

 
Discounted cash flow
 
AUM growth rate
 
2.1%
Discount rate
 
14.8%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
175.7

 
Market pricing
 
Redemption price
 
$73 per $100 of par
Discount rate
 
18.6%
 
11.1

 
Discounted cash flow
 
Discount rate
 
4.1%–6.7% (5.7%)
Risk premium
 
2.0%–4.1% (2.9%)
 
 
 
 
 
 
 
 
Life settlement contracts
 
12.8

 
Discounted cash flow
 
Life expectancy
 
20–123 months (62)
Discount rate
 
8.0%–20.0% (13.2%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
51.0

 
Discounted cash flow
 
AUM growth rate
 
1.3%–9.4% (5.3%)
Discount rate
 
14.6%
For investment securities, trading – debt and other equity securities using the market pricing technique, a significant increase (decrease) in the redemption price in isolation would result in a significantly higher (lower) fair value measurement, while a significant increase (decrease) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement.
For investment securities, trading – debt and other equity securities using the discounted cash flow technique, 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.

12
Table of Contents

For the contingent consideration liability, a significant increase (decrease) in the assets under management (“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, 2017
 
September 30, 2017
 
Fair Value
Level
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
8,707.5

 
$
8,707.5

 
$
8,523.3

 
$
8,523.3

Other investments
 
 
 
 
 
 
 
 
 
 
Time deposits
 
2
 
10.6

 
10.6

 
13.4

 
13.4

Cost method investments
 
3
 
54.0

 
74.6

 
46.7

 
67.7

 
 
 
 
 
 
 
 
 
 
 
Financial Liability
 
 
 
 
 
 
 
 
 
 
Debt
 
2
 
$
1,044.5

 
$
1,068.7

 
$
1,044.2

 
$
1,073.5

Note 7 – Consolidated Investment Products
Consolidated investment products (“CIPs”) consist of mutual and other investment funds, limited partnerships and similar structures, substantially all of which are sponsored by the Company, and include both voting interest entities and variable interest entities. The Company had 52 and 58 CIPs as of December 31, 2017 and September 30, 2017.
The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:
(in millions)
 
December 31,
2017
 
September 30,
2017
Assets
 
 
 
 
Cash and cash equivalents
 
$
262.9

 
$
226.4

Receivables
 
328.8

 
234.1

Investments, at fair value
 
3,649.2

 
3,467.4

Other assets
 
1.0

 
0.9

Total Assets
 
$
4,241.9

 
$
3,928.8

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
215.6

 
$
124.1

Debt
 
51.0

 
53.4

Other liabilities
 
10.5

 
8.7

Total liabilities
 
277.1

 
186.2

Redeemable Noncontrolling Interests
 
2,208.1

 
1,941.9

Stockholders’ Equity
 
 
 
 
Franklin Resources, Inc.’s interests
 
1,460.9

 
1,511.8

Nonredeemable noncontrolling interests
 
295.8

 
288.9

Total stockholders’ equity
 
1,756.7

 
1,800.7

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
4,241.9

 
$
3,928.8

The CIPs did not have a significant impact on net income (loss) attributable to the Company during the three months ended December 31, 2017 and 2016.
The Company has no right to the CIPs’ assets, other than its direct equity investments in them and investment management fees earned from them. The debt holders of the CIPs 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 CIPs’ liabilities.

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Table of Contents

Investment products are typically consolidated when the Company makes an initial investment in a newly launched investment entity. They are typically deconsolidated when the Company no longer has a controlling financial interest due to redemptions of its investment or increases in third-party investments. The Company’s investments in these products subsequent to deconsolidation are accounted for as trading or available-for-sale investment securities, or equity method or cost method investments depending on the structure of the product and the Company’s role and level of ownership.
Investments
Investments of CIPs consisted of the following:
(in millions)
 
December 31,
2017
 
September 30,
2017
Investment securities, trading
 
$
3,204.3

 
$
3,017.2

Other equity securities
 
308.9

 
306.9

Other debt securities
 
136.0

 
143.3

Total
 
$
3,649.2

 
$
3,467.4

Investment securities, trading consist of debt and equity securities that are traded in active markets. Other equity securities consist of equity securities of entities in emerging markets and fund products. Other debt securities consist of debt securities of entities in emerging markets.
Fair Value Measurements
Assets and liabilities of CIPs measured at fair value on a recurring basis were as follows: 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of December 31, 2017
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
313.0

 
$
249.4

 
$
159.6

 
$
150.7

 
$
872.7

Debt securities
 
2.6

 
2,637.7

 
136.2

 
—

 
2,776.5

Total Assets Measured at Fair Value
 
$
315.6

 
$
2,887.1

 
$
295.8

 
$
150.7

 
$
3,649.2

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.6

 
$
9.9

 
$
—

 
$
—

 
$
10.5

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a Practical Expedient
 
Total
as of September 30, 2017
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
331.4

 
$
128.1

 
$
160.7

 
$
155.2

 
$
775.4

Debt securities
 
1.4

 
2,555.2

 
135.4

 
—

 
2,692.0

Total Assets Measured at Fair Value
 
$
332.8

 
$
2,683.3

 
$
296.1

 
$
155.2

 
$
3,467.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.4

 
$
8.3

 
$
—

 
$
—

 
$
8.7

Level 1 assets consist of equity and debt securities for which the fair values are based on quoted market prices. Level 2 assets consist of debt and equity securities for which the fair values are determined using independent third-party broker or dealer price quotes. Level 3 assets consist of equity and debt securities of entities in emerging markets for which the fair values are determined using significant unobservable inputs in either a market-based or income-based approach.
The fair value of other liabilities, which consist of short positions in debt and equity securities, is determined based on the fair value of the underlying securities using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.

14
Table of Contents

There were no transfers between Level 1 and Level 2, or into or out of Level 3, during the three months ended December 31, 2017 and 2016.
Investments for which fair value was estimated using reported net asset value (“NAV”) as a practical expedient consisted of nonredeemable real estate and private equity funds. These investments are expected to be returned through distributions as a result of liquidations of the funds’ underlying assets over a weighted-average period of 4.2 years and 4.4 years at December 31, 2017 and September 30, 2017. The CIPs’ unfunded commitments to these funds totaled $1.9 million, of which the Company was contractually obligated to fund $0.4 million based on its ownership percentage in the CIPs, at both December 31, 2017 and September 30, 2017.
Changes in Level 3 assets were as follows: 
 
 
2017
 
2016
(in millions)
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
for the three months ended December 31,
 
 
 
 
 
Balance at beginning of period
 
$
160.7

 
$
135.4

 
$
296.1

 
$
160.3

 
$
132.3

 
$
292.6

Adoption of new accounting guidance
—

 
—

 
—

 
(45.4
)
 
(0.5
)
 
(45.9
)
Realized and unrealized gains (losses) included in investment and other income, net
 
1.9

 
0.1

 
2.0

 
(3.3
)
 
(0.3
)
 
(3.6
)
Purchases
 
11.1

 
—

 
11.1

 
21.0

 
2.2

 
23.2

Sales
 
(14.9
)
 
—

 
(14.9
)
 
(0.1
)
 
(6.4
)
 
(6.5
)
Foreign exchange revaluation
 
0.8

 
0.7

 
1.5

 
(0.9
)
 
(2.9
)
 
(3.8
)
Balance at End of Period
 
$
159.6

 
$
136.2

 
$
295.8

 
$
131.6

 
$
124.4

 
$
256.0

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

 
$
0.1

 
$
1.1

 
$
(3.4
)
 
$
(0.2
)
 
$
(3.6
)
Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
133.3

 
Market comparable companies
 
EBITDA multiple
 
5.5–12.3 (8.9)
26.3

Discounted cash flow
Discount rate
5.7%–17.9% (14.3%)
 
 
 
 
 
 
 
 
 
Debt securities
 
114.1

 
Discounted cash flow
 
Discount rate
 
5.0%–33.0% (9.4%)
Risk premium
0.0%–25.0% (8.4%)
 
22.1

 
Market pricing
 
Private sale pricing
 
$33–$57 ($53) per $100 of par
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2017
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
101.9

 
Market comparable companies
 
EBITDA multiple
 
5.5–12.3 (9.0)
44.4

Discounted cash flow
Discount rate
5.7%–17.9% (14.3%)
14.4

Market pricing
Price to earnings ratio
10.0
 
 
 
 
 
 
 
 
 
Debt securities
 
112.7

 
Discounted cash flow
 
Discount rate
 
5.0%–33.0% (9.5%)
Risk premium
0.0%–25.0% (8.4%)
22.7

Market pricing
Private sale pricing
$33–$57 ($52) per $100 of par
For securities using the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement.

15
Table of Contents

For securities using the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement.
For securities using the market pricing valuation technique, a significant increase (decrease) in the private sale pricing or price to earnings ratio would result in a significantly higher (lower) fair value measurement.
Financial instruments of CIPs that were not measured at fair value were as follows:
(in millions)
 
Fair Value
Level
 
December 31, 2017
 
September 30, 2017
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Asset
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
262.9

 
$
262.9

 
$
226.4

 
$
226.4

Financial Liability
 
 
 
 
 
 
 
 
 
 
Debt
 
3
 
$
51.0

 
$
50.7

 
$
53.4

 
$
53.1

Debt
Debt of CIPs totaled $51.0 million and $53.4 million at December 31, 2017 and September 30, 2017. The debt had fixed and floating interest rates ranging from 2.84% to 6.88% with a weighted-average effective interest rate of 5.19% at December 31, 2017, and from 2.84% to 6.75% with a weighted-average effective interest rate of 5.15% at September 30, 2017.
At December 31, 2017, maturities for debt of CIPs were as follows: 
(in millions)
 
Carrying Amount
for the fiscal years ending September 30,
2018
 
$
4.1

2019
 
46.9

Total
 
$
51.0

Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests of CIPs were as follows:
(in millions)
 
 
 
 
for the three months ended December 31,
 
2017
 
2016
Balance at beginning of period
 
$
1,941.9

 
$
61.1

Adoption of new accounting guidance
 
—

 
824.7

Net income (loss)
 
11.5

 
(23.5
)
Net subscriptions (distributions) and other
 
254.7

 
(13.6
)
Net deconsolidations
 
—

 
(7.5
)
Balance at End of Period
 
$
2,208.1

 
$
841.2

Note 8 – Nonconsolidated Variable Interest Entities
Variable interest entities (“VIEs”) for which the Company is not the primary beneficiary consist of sponsored funds and other investment products in which the Company has an equity ownership interest. The Company’s maximum exposure to loss from these VIEs consists of investment management fee receivables and equity investments as follows: 
(in millions)
 
December 31,
2017
 
September 30,
2017
Receivables
 
$
161.6

 
$
155.6

Investments
 
97.7

 
129.3

Total
 
$
259.3

 
$
284.9


16
Table of Contents

While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. The Company also may voluntarily elect to provide its sponsored funds with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its sponsored funds during the three months ended December 31, 2017 or fiscal year 2017.
Note 9 – Taxes on Income
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law in the U.S. on December 22, 2017. The Tax Act includes various changes to the tax law, including a permanent reduction in the corporate income tax rate. The Company recognized the effects of the changes in the tax rate and laws resulting from the Tax Act during the quarter ended December 31, 2017.
The Tax Act imposes a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. Based on the information available as of December 31, 2017, the Company estimated its transition tax expense to be $1,120.7 million. The expense may be adjusted in future quarters upon issuance of additional technical guidance from the Department of Treasury and the completion of the Company’s tax return filings. The federal portion of the transition tax liability, estimated to be $1,101.5 million, will be paid over eight years beginning in January 2019, with 8% of the liability payable in each of the first five years, 15% in year six, 20% in year seven and 25% in year eight.
The Tax Act reduces the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company’s federal statutory rate for the fiscal year ending September 30, 2018 is a blended rate of 24.5%, based on the pre- and post-Tax Act rates, and will be 21% for future fiscal years. The Company estimated the related changes in its deferred tax assets and deferred tax liabilities, which resulted in a $35.7 million decrease in deferred tax assets, an $88.8 million decrease in deferred tax liabilities and a $53.1 million net tax benefit. The net tax benefit may be revised in future quarters as the related temporary differences are realized or settled.
Deferred tax assets and deferred tax liabilities were as follows:
(in millions)
 
December 31,
2017
 
September 30,
2017
Deferred tax assets, net of valuation allowance
 
$
99.9

 
$
141.3

Deferred tax liabilities
 
204.3

 
296.1

Net Deferred Tax Liability
 
$
104.4

 
$
154.8

Deferred income tax assets and liabilities that relate to the same tax jurisdiction are presented net on the consolidated balance sheets. The components of the net deferred tax liability were classified in the consolidated balance sheets as follows:
(in millions)
 
December 31,
2017
 
September 30,
2017
Other assets
 
$
20.9

 
$
15.8

Deferred tax liabilities
 
125.3

 
170.6

Net Deferred Tax Liability
 
$
104.4

 
$
154.8

 
Prior to the Tax Act, the Company indefinitely reinvested the undistributed earnings of all its foreign subsidiaries, except for income previously taxed in the U.S. or subject to regulatory or legal repatriation restrictions or requirements. The Company is currently reconsidering its repatriation policy in light of the changes contained in the Tax Act.
The Company’s effective income tax rate was 187.8% for the three months ended December 31, 2017, and is expected to be approximately 70% for the full fiscal year 2018.
Taxes on income and the related impact on the effective income tax rate for the three months ended December 31, 2017 were as follows:
(in millions)
 
Amount
 
Percentage of Income Before Taxes
Tax expense before one-time charges
 
$
154.6

 
23.7
%
Transition tax on deemed repatriation of undistributed foreign earnings
 
1,120.7

 
172.0
%
Revaluation of net deferred tax liabilities
 
(53.1
)
 
(8.1
%)
Other Tax Act impacts
 
1.3

 
0.2
%
Total
 
$
1,223.5

 
187.8
%

17
Table of Contents

Note 10 – Commitments and Contingencies
Legal Proceedings
On July 28, 2016, a former employee filed a class action lawsuit captioned Cryer v. Franklin Resources, Inc., et al. in the United States District Court for the Northern District of California against Franklin, the Franklin Templeton 401(k) Retirement Plan (“Plan”) Investment Committee (“Investment Committee”), and unnamed Investment Committee members. The plaintiff asserts a claim for breach of fiduciary duty under the Employee Retirement Income Security Act (“ERISA”), alleging that the defendants selected mutual funds sponsored and managed by the Company (the “Funds”) as investment options for the Plan when allegedly lower-cost and better performing non-proprietary investment vehicles were available. The plaintiff also claims that the total Plan costs, inclusive of investment management and administrative fees, are excessive. The plaintiff alleges that Plan losses exceed $79.0 million and seeks, among other things, damages, disgorgement, rescission of the Plan’s investments in the Funds, attorneys’ fees and costs, and pre- and post-judgment interest.
On November 2, 2017, a second former employee, represented by the same law firm, filed another putative class action lawsuit relating to the Plan in the same court, captioned Fernandez v. Franklin Resources Inc., et al. This second action names the same defendants as those named in the Cryer action, but also includes as defendants the Franklin Board of Directors, individual current and former Franklin directors, and individual current and former Investment Committee members. The plaintiff in this second lawsuit seeks to assert the same ERISA breach of fiduciary duty claim asserted in the Cryer action, as well as claims for alleged prohibited transactions by virtue of the Plan's investments in the Funds and for an alleged failure to monitor the performance of the Investment Committee. The plaintiff alleges that Plan losses exceed $60.0 million and seeks the same relief sought in the Cryer action.
Management strongly believes that the claims made in these lawsuits are without merit. Discovery is continuing in the Cryer action and the Fernandez action is at the pleadings stage. Franklin will defend against both actions vigorously. Franklin cannot at this time predict the eventual outcome of the lawsuits or whether they will have a material negative impact on the Company, or reasonably estimate the possible loss or range of loss that may arise from any negative outcome.
The Company is from time to time involved in other litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business, financial position, results of operations or liquidity. In management’s opinion, an adequate accrual has been made as of December 31, 2017 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.
Other Commitments and Contingencies
At December 31, 2017, there were no material changes in the other commitments and contingencies as reported in the Company’s Form 10-K for fiscal year 2017.
Note 11 – Stock-Based Compensation
Stock and stock unit award activity was as follows:
(shares in thousands)
 
Time-Based
Shares
 
Performance-
Based Shares
 
Total Shares
 
Weighted-Average
Grant-Date
Fair Value
for the three months ended December 31, 2017
 
 
 
 
Nonvested balance at October 1, 2017
 
2,783

 
1,761

 
4,544

 
$
37.23

Granted
 
2,144

 
708

 
2,852

 
42.90

Vested
 
(125
)
 
(512
)
 
(637
)
 
39.19

Forfeited/canceled
 
(46
)
 
(120
)
 
(166
)
 
50.86

Nonvested Balance at December 31, 2017
 
4,756

 
1,837

 
6,593

 
$
39.15

Total unrecognized compensation expense related to nonvested stock and stock unit awards was $203.1 million at December 31, 2017. This expense is expected to be recognized over a remaining weighted-average vesting period of 2.0 years.

18
Table of Contents

Note 12 – Other Income (Expenses)
Other income (expenses) consisted of the following: 
 
 
Three Months Ended
December 31,
(in millions)
 
2017
 
2016
Investment and Other Income, Net
 
 
 
 
Interest income
 
$
23.8

 
$
13.6

Dividend income
 
4.7

 
2.4

Gains on trading investment securities, net
 
0.7

 
2.0

Realized gains on sale of investment securities, available-for-sale
 
—

 
0.6

Realized losses on sale of investment securities, available-for-sale
 
—

 
(0.7
)
Income from investments in equity method investees
 
35.2

 
34.2

Other-than-temporary impairment of investments
 
(0.5
)
 
(0.3
)
Gains (losses) on investments of CIPs, net
 
16.0

 
(29.9
)
Foreign currency exchange gains (losses), net
 
(2.9
)
 
19.8

Other, net
 
4.3

 
4.4

Total
 
81.3

 
46.1

Interest Expense
 
(10.8
)
 
(13.3
)
Other Income, Net
 
$
70.5

 
$
32.8

Interest income was primarily generated by cash equivalents and trading investment securities. Substantially all of the dividend income was generated by investments in nonconsolidated funds. Proceeds from the sale of available-for-sale securities were $16.0 million and $8.6 million for the three months ended December 31, 2017 and 2016.
Net gains recognized on the Company’s trading investment securities that were held at December 31, 2017 and 2016 were $1.3 million and $0.2 million. Net gains (losses) recognized on trading investment securities of CIPs that were held at December 31, 2017 and 2016 were $20.0 million and $(18.5) million.
Note 13 – Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component were as follows:
(in millions)
 
Unrealized
Gains on
Investments
 
Currency
Translation
Adjustments
 
Unrealized
Losses on
Defined Benefit
Plans
 
Total
for the three months ended December 31, 2017
 
 
 
 
Balance at October 1, 2017
 
$
2.2

 
$
(281.0
)
 
$
(6.0
)
 
$
(284.8
)
Other comprehensive income (loss)
 
3.5

 
15.8

 
(1.1
)
 
18.2

Balance at December 31, 2017
 
$
5.7


$
(265.2
)

$
(7.1
)

$
(266.6
)
(in millions)
 
Unrealized
Gains (Losses) on
Investments
 
Currency
Translation
Adjustments
 
Unrealized
Losses on
Defined Benefit
Plans
 
Total
for the three months ended December 31, 2016
 
 
 
 
Balance at October 1, 2016
 
$
6.8

 
$
(346.1
)
 
$
(8.1
)
 
$
(347.4
)
Adoption of new accounting guidance
 
(6.8
)
 
(0.3
)
 
—

 
(7.1
)
Other comprehensive loss
 
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications, net of tax
 
(2.6
)
 
(60.9
)
 
—

 
(63.5
)
Reclassifications to net investment and other income, net of tax
 
0.2

 
—

 
—

 
0.2

Total other comprehensive loss
 
(2.4
)

(60.9
)

—


(63.3
)
Balance at December 31, 2016
 
$
(2.4
)

$
(407.3
)

$
(8.1
)

$
(417.8
)

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There were no reclassifications from accumulated other comprehensive income (loss) for the three months ended December 31, 2017.
Note 14 – Subsequent Event
On January 17, 2018, the Company entered into an agreement to acquire all of the outstanding shares of Edinburgh Partners Limited, a global value investment manager based in the United Kingdom.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
In this section, we discuss and analyze the results of operations and financial condition of Franklin Resources, Inc. (“Franklin”) and its subsidiaries (collectively, the “Company”). In addition to historical information, we also make statements relating to the future, called “forward-looking” statements, which are provided under the “safe harbor” protection of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “could,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “seek,” “estimate” or other similar words. Moreover, statements that speculate about future events are forward-looking statements. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. You should carefully review the “Risk Factors” section set forth below, which describes these risks, uncertainties and other important factors in more detail.
While forward-looking statements are our best prediction at the time that they are made, you should not rely on them and are cautioned against doing so. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They are neither statements of historical fact nor guarantees or assurances of future performance. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. If a circumstance occurs after the date of this Form 10-Q that causes any of our forward-looking statements to be inaccurate, whether as a result of new information, future developments or otherwise, we do not have an obligation, and we undertake no obligation, to announce publicly the change to our expectations, or to make any revision to our forward-looking statements, unless required by law.
The following discussion should be read in conjunction with our Form 10-K for the fiscal year ended September 30, 2017 (“fiscal year 2017”) filed with the U.S. Securities and Exchange Commission, and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.
OVERVIEW
We are a global investment management organization and derive our operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide through our investment products that include our sponsored funds, as well as institutional and high net-worth separate accounts. In addition to investment management, our services include fund administration, sales, distribution, marketing, shareholder servicing, and other services. Our products and investment management and related services are distributed or marketed to investors globally under nine distinct brand names: Franklin®, Templeton®, Franklin Mutual Series®, Franklin Bissett®, Fiduciary Trust™, Darby®, Balanced Equity Management®, K2® and LibertyShares®. We offer a broad range of products under equity, multi-asset/balanced, fixed income and cash management funds and accounts, including alternative investment products, that meet a wide variety of specific investment needs of individual and institutional investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to investors under the brand names of those other companies or on a co-branded basis.
The level of our revenues depends largely on the level and relative mix of assets under management (“AUM”). As noted in the “Risk Factors” section set forth below, the amount and mix of our AUM are subject to significant fluctuations and can negatively impact our revenues and income. The level of our revenues also depends on mutual fund sales, the number of shareholder transactions and accounts, and the fees charged for our services, which are based on contracts with our funds or our clients. These arrangements could change in the future.

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During our first fiscal quarter, the global equity markets continued to provide positive returns, reflecting, among other things, generally positive global economic data and U.S. tax reform, as the S&P 500 Index and MSCI World Index increased 6.6% and 5.6%. The global bond markets were also positive as the Bloomberg Barclays Global Aggregate Index increased 1.1% during the quarter.
Our total AUM at December 31, 2017 was $753.8 billion, comparable to September 30, 2017 and 5% higher than at December 31, 2016. Simple monthly average AUM (“average AUM”) for the three months ended December 31, 2017 increased 4% from the same period in the prior fiscal year.
Uncertainties regarding the global economy remain for the foreseeable future. As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our products and on providing high quality customer service to our clients. We continuously perform reviews of our business model. While we remain focused on expense management, we will also seek to attract, retain and develop employees and invest strategically in systems and technology that will provide a secure and stable environment. We will continue to seek to protect and further our brand recognition while developing and maintaining broker-dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed in the “Risk Factors” section set forth below.
RESULTS OF OPERATIONS
 
 
Three Months Ended
December 31,
 
Percent
Change
(in millions, except per share data)
 
2017
 
2016
 
Operating revenues
 
$
1,615.5

 
$
1,560.8

 
4
%
Operating income
 
581.1

 
586.9

 
(1
%)
Net income (loss) attributable to Franklin Resources, Inc.
 
(583.3
)
 
440.2

 
NM

Diluted earnings (loss) per share
 
$
(1.06
)
 
$
0.77

 
NM

Operating margin 1
 
36.0
%
 
37.6
%
 
 
___________________ 
1 
Defined as operating income divided by total operating revenues.
Operating income decreased $5.8 million for the three months ended December 31, 2017, as compared to the same period in the prior fiscal year, as operating revenues increased 4% and operating expenses increased 6%. The net loss attributable to Franklin Resources, Inc. for the three months ended December 31, 2017 includes the impact of an estimated income tax charge of $1.1 billion resulting from enactment of the Tax Cuts and Jobs Act of 2017.
The diluted loss per share for the three months ended December 31, 2017 reflects the $1.94 per share impact of the estimated income tax charge and also includes the impact of a 3% decrease in diluted average common shares outstanding primarily resulting from repurchases of shares of our common stock during the twelve-month period ended December 31, 2017.

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ASSETS UNDER MANAGEMENT
AUM by investment objective was as follows:
(in billions)
 
December 31,
2017
 
December 31,
2016
 
Percent
Change
Equity
 
 
 
 
 
 
Global/international
 
$
212.0

 
$