Edgar Filing: FRANKLIN RESOURCES INC

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018



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: 540,208,274 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of April 19, 2018.

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INDEX TO FORM 10-Q



			Page
PART I		Financial Information
	Item 1.	Financial Statements (unaudited)
		Consolidated Statements of Income	3
		Consolidated Statements of Comprehensive Income	4
		Consolidated Balance Sheets	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4.	Controls and Procedures	46

PART II		Other Information
	Item 1.	Legal Proceedings	47
	Item 1A.	Risk Factors	47
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
	Item 6.	Exhibits	47

Exhibit Index			48
Signature			49

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME Unaudited

	Three Months Ended March 31,						Six Months Ended March 31,
(in millions, except per share data)	2018			2017			2018			2017
Operating Revenues
Investment management fees	$	1,117.1		$	1,089.2		$	2,230.7		$	2,152.4
Sales and distribution fees	409.8			431.2			827.6			850.5
Shareholder servicing fees	61.3			56.4			116.2			113.0
Other	29.6			23.8			58.8			45.5
Total operating revenues	1,617.8			1,600.6			3,233.3			3,161.4
Operating Expenses
Sales, distribution and marketing	521.5			534.8			1,050.2			1,054.8
Compensation and benefits	355.5			343.4			688.0			654.9
Information systems and technology	58.1			54.0			113.1			105.7
Occupancy	34.1			29.0			63.5			58.1
General, administrative and other	92.9			83.9			181.7			145.5
Total operating expenses	1,062.1			1,045.1			2,096.5			2,019.0
Operating Income	555.7			555.5			1,136.8			1,142.4
Other Income (Expenses)
Investment and other income, net	87.4			84.6			168.7			130.7
Interest expense	(10.0		)	(12.6		)	(20.8		)	(25.9		)
Other income, net	77.4			72.0			147.9			104.8
Income before taxes	633.1			627.5			1,284.7			1,247.2
Taxes on income	150.2			192.5			1,373.7			393.4
Net income (loss)	482.9			435.0			(89.0		)	853.8
Less: net income (loss) attributable to
Nonredeemable noncontrolling interests	24.5			(6.0		)	24.4			(3.9		)
Redeemable noncontrolling interests	15.2			20.3			26.7			(3.2		)
Net Income (Loss) Attributable to Franklin Resources, Inc.	$	443.2		$	420.7		$	(140.1	)	$	860.9

Earnings (Loss) per Share
Basic	$	0.79		$	0.74		$	(0.29	)	$	1.52
Diluted	0.78			0.74			(0.29		)	1.52
Dividends Declared per Share	$	3.23		$	0.20		$	3.46		$	0.40

See Notes to Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Unaudited

(in millions)	Three Months Ended March 31,						Six Months Ended March 31,
(in millions)	2018			2017			2018			2017
Net Income (Loss)	$	482.9		$	435.0		$	(89.0	)	$	853.8
Other Comprehensive Income (Loss)
Net unrealized gains (losses) on investments, net of tax	(0.2		)	5.4			3.3			3.0
Currency translation adjustments, net of tax	6.8			39.2			22.6			(21.7		)
Net unrealized gains (losses) on defined benefit plans, net of tax	0.4			—			(0.7		)	—
Total other comprehensive income (loss)	7.0			44.6			25.2			(18.7		)
Total comprehensive income (loss)	489.9			479.6			(63.8		)	835.1
Less: comprehensive income (loss) attributable to
Nonredeemable noncontrolling interests	24.5			(6.0		)	24.4			(3.9		)
Redeemable noncontrolling interests	15.2			20.3			26.7			(3.2		)
Comprehensive Income (Loss) Attributable to Franklin Resources, Inc.	$	450.2		$	465.3		$	(114.9	)	$	842.2

See Notes to Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS Unaudited

(in millions, except share and per share data)	March 31, 2018			September 30, 2017
Assets
Cash and cash equivalents	$	8,545.4		$	8,523.3
Receivables	765.4			767.8
Investments (including $449.5 and $440.0 at fair value at March 31, 2018 and September 30, 2017)	1,579.0			1,393.6
Assets of consolidated investment products
Cash and cash equivalents	181.1			226.4
Receivables	133.6			234.1
Investments, at fair value	3,529.3			3,467.4
Property and equipment, net	517.7			517.2
Goodwill and other intangible assets, net	2,242.3			2,227.7
Other	196.2			176.5
Total Assets	$	17,690.0		$	17,534.0

Liabilities
Compensation and benefits	$	291.7		$	396.6
Accounts payable and accrued expenses	194.6			167.4
Dividends	1,763.7			113.3
Commissions	310.7			313.3
Income taxes	1,178.3			74.7
Debt	1,044.8			1,044.2
Liabilities of consolidated investment products
Accounts payable and accrued expenses	67.9			124.1
Debt	34.0			53.4
Deferred taxes	129.9			170.6
Other	187.8			198.7
Total liabilities	5,203.4			2,656.3
Commitments and Contingencies (Note 10)
Redeemable Noncontrolling Interests	2,084.4			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; 541,695,819 and 554,865,343 shares issued and outstanding at March 31, 2018 and September 30, 2017	54.2			55.5
Retained earnings	10,263.9			12,849.3
Accumulated other comprehensive loss	(259.7		)	(284.8		)
Total Franklin Resources, Inc. stockholders’ equity	10,058.4			12,620.0
Nonredeemable noncontrolling interests	343.8			315.8
Total stockholders’ equity	10,402.2			12,935.8
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity	$	17,690.0		$	17,534.0

See Notes to Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited

	Six Months Ended March 31,
(in millions)	2018			2017
Net Income (Loss)	$	(89.0	)	$	853.8
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of deferred sales commissions	40.5			34.4
Depreciation and other amortization	38.3			40.5
Stock-based compensation	61.2			63.3
Income from investments in equity method investees	(45.9		)	(70.5		)
Net (gains) losses on investments of consolidated investment products	(36.3		)	6.8
Deferred income taxes	(44.7		)	0.6
Other	7.1			(8.1		)
Changes in operating assets and liabilities:
Increase in receivables and other assets	(59.3		)	(16.7		)
Increase (decrease) in receivables of consolidated investment products	100.3			(58.4		)
Increase (decrease) in trading securities, net	(34.6		)	65.8
Increase in trading securities of consolidated investment products, net	(46.5		)	(285.6		)
Decrease in accrued compensation and benefits	(107.0		)	(79.1		)
Decrease in commissions payable	(2.6		)	(8.3		)
Increase in income taxes payable	1,103.6			53.9
Increase (decrease) in accounts payable, accrued expenses and other liabilities	11.3			(26.5		)
Increase in accounts payable and accrued expenses of consolidated investment products	0.6			48.4
Net cash provided by operating activities	897.0			614.3
Purchase of investments	(182.6		)	(292.1		)
Liquidation of investments	74.5			239.5
Purchase of investments by consolidated investment products	(40.3		)	(88.1		)
Liquidation of investments by consolidated investment products	68.6			283.7
Additions of property and equipment, net	(43.7		)	(28.8		)
Adoption of new accounting guidance	—			(49.2		)
Acquisition of businesses	(9.7		)	(14.0		)
Net (deconsolidation) consolidation of investment products	(48.3		)	23.1
Net cash provided by (used in) investing activities	(181.5		)	74.1
Issuance of common stock	13.6			13.0
Dividends paid on common stock	(239.0		)	(216.7		)
Repurchase of common stock	(619.4		)	(425.1		)
Excess tax benefit from stock-based compensation	—			0.3
Payment on loan	—			(22.5		)
Proceeds from debt of consolidated investment products	—			0.7
Payments on debt by consolidated investment products	(19.6		)	(44.7		)
Payments on contingent consideration liability	(21.6		)	(31.7		)
Noncontrolling interests	121.5			364.9
Net cash used in financing activities	(764.5		)	(361.8		)
Effect of exchange rate changes on cash and cash equivalents	25.8			(33.8		)
Increase (decrease) in cash and cash equivalents	(23.2		)	292.8

[Table continued on next page]

See Notes to Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited [Table continued from previous page]

	Six Months Ended March 31,
(in millions)	2018		2017
Cash and cash equivalents, beginning of period	$	8,749.7	$	8,483.3
Cash and Cash Equivalents, End of Period	$	8,726.5	$	8,776.1

Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	310.9	$	332.0
Cash paid for interest	24.1		23.4
Cash paid for interest by consolidated investment products	1.5		7.4

See Notes to Consolidated Financial Statements.

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FRANKLIN RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(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 March 31, 2018.

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.

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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 six months ended March 31, 2018	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity
Balance at October 1, 2017	$	12,620.0		$	315.8		$	12,935.8
Adoption of new accounting guidance	0.4			—			0.4
Net income (loss)	(140.1		)	24.4			(115.7		)
Other comprehensive income	25.2						25.2
Cash dividends declared on common stock	(1,889.4		)				(1,889.4		)
Repurchase of common stock	(632.6		)				(632.6		)
Stock-based compensation	74.9						74.9
Net subscriptions and other				5.7			5.7
Deconsolidation of investment products				(2.1		)	(2.1		)
Balance at March 31, 2018	$	10,058.4		$	343.8		$	10,402.2



(in millions)	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity
for the six months ended March 31, 2017	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity
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 (loss)	860.9			(3.9		)	857.0
Other comprehensive loss	(18.7		)				(18.7		)
Cash dividends declared on common stock	(226.3		)				(226.3		)
Repurchase of common stock	(428.5		)				(428.5		)
Stock-based compensation	71.7						71.7
Net subscriptions and other				15.7			15.7
Balance at March 31, 2017	$	12,193.6		$	279.6		$	12,473.2

During the three and six months ended March 31, 2018, the Company repurchased 11.1 million and 15.7 million shares of its common stock at a cost of $432.6 million and $632.6 million under its stock repurchase program. At March 31, 2018, 15.9 million shares remained available for repurchase under the program, which is not subject to an expiration date. On April 11, 2018, the Company’s Board of Directors authorized the Company to repurchase, from time to time, up to an additional 80.0 million shares of its common stock in either open market or private transactions. Shares repurchased under the stock repurchase program are retired. During the three and six months ended March 31, 2017, the Company repurchased 4.0 million and 11.1 million shares of its common stock at a cost of $166.8 million and $428.5 million.

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Note 4 – Earnings (Loss) per Share

The components of basic and diluted earnings (loss) per share were as follows:



(in millions, except per share data)	Three Months Ended March 31,				Six Months Ended March 31,
(in millions, except per share data)	2018		2017		2018			2017
Net income (loss) attributable to Franklin Resources, Inc.	$	443.2	$	420.7	$	(140.1	)	$	860.9
Less: allocation of earnings to participating nonvested stock and stock unit awards	15.2		3.5		16.3			6.4
Net Income (Loss) Available to Common Stockholders	$	428.0	$	417.2	$	(156.4	)	$	854.5

Weighted-average shares outstanding – basic	545.0		560.3		547.9			562.7
Dilutive effect of nonparticipating nonvested stock unit awards	0.5		0.3		—			0.2
Weighted-Average Shares Outstanding – Diluted	545.5		560.6		547.9			562.9

Earnings (Loss) per Share
Basic	$	0.79	$	0.74	$	(0.29	)	$	1.52
Diluted	0.78		0.74		(0.29		)	1.52

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive were insignificant and 1.9 million for the three and six months ended March 31, 2018, and 0.2 million and 0.7 million for the three and six months ended March 31, 2017.

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)	March 31, 2018		September 30, 2017
Investment securities, trading
Sponsored funds	$	78.6	$	31.1
Debt and other equity securities	271.0		283.4
Total investment securities, trading	349.6		314.5
Investment securities, available-for-sale
Sponsored funds	86.0		110.8
Debt and other equity securities	1.7		1.9
Total investment securities, available-for-sale	87.7		112.7
Investments in equity method investees	1,043.0		893.5
Other investments	98.7		72.9
Total	$	1,579.0	$	1,393.6

Debt and other equity trading securities consist primarily of corporate debt.

Investment securities with aggregate carrying amounts of $1.2 million and $0.8 million were pledged as collateral at March 31, 2018 and September 30, 2017.

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Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:



(in millions)	Cost Basis		Gross Unrealized					Fair Value
(in millions)	Cost Basis		Gains		Losses			Fair Value
as of March 31, 2018
Sponsored funds	$	80.4	$	11.1	$	(5.5	)	$	86.0
Debt and other equity securities	1.6		0.1		—			1.7
Total	$	82.0	$	11.2	$	(5.5	)	$	87.7

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:



(in millions)	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
as of March 31, 2018
Sponsored funds	$	27.3	$	(5.5	)	$	—	$	—		$	27.3	$	(5.5	)

as of September 30, 2017
Sponsored funds	$	28.4	$	(6.3	)	$	2.4	$	(0.2	)	$	30.8	$	(6.5	)

The Company recognized $0.1 million and $0.6 million of other-than-temporary impairment during the three and six months ended March 31, 2018. During the six months ended March 31, 2017, the Company recognized $0.3 million of other-than-temporary impairment, none of which was recognized during the three months ended March 31, 2017.

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 March 31, 2018	Level 1		Level 2		Level 3		Total
Assets
Investment securities, trading
Sponsored funds	$	78.6	$	—	$	—	$	78.6
Debt and other equity securities	20.0		55.4		195.6		271.0
Investment securities, available-for-sale
Sponsored funds	86.0		—		—		86.0
Debt and other equity securities	0.9		0.5		0.3		1.7
Life settlement contracts	—		—		12.2		12.2
Total Assets Measured at Fair Value	$	185.5	$	55.9	$	208.1	$	449.5

Liability
Contingent consideration liability	$	—	$	—	$	31.2	$	31.2

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(in millions)	Level 1		Level 2		Level 3		Total
as of September 30, 2017	Level 1		Level 2		Level 3		Total
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.

Transfers into Level 2 from Level 1 were $0.5 million for the three and six months ended March 31, 2018, and related to securities for which the quoted market prices were adjusted as of March 31, 2018 due to significant price changes in U.S.-traded market proxies resulting from global market volatility. The adjustments were made after the close of foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. There were no transfers into Level 1 from Level 2, or into or out of Level 3, during the six months ended March 31, 2018. There were no transfers between Level 1 and Level 2, or into Level 3, during the six months ended March 31, 2017.

Changes in the Level 3 assets and liabilities were as follows:



	2018						2017
(in millions)	Investments			Contingent Consideration Liability			Investments			Contingent Consideration Liabilities
for the three months ended March 31,	Investments			Contingent Consideration Liability			Investments			Contingent Consideration Liabilities
Balance at beginning of period	$	210.1		$	(62.0	)	$	198.7		$	(83.7	)
Acquisition	—			—			—			(5.7		)
Total realized and unrealized gains (losses)
Included in investment and other income, net	1.8			—			5.0			—
Included in general, administrative and other expense	—			(1.6		)	—			(4.2		)
Purchases	1.4			—			0.3			—
Settlements	(1.9		)	32.4			(0.8		)	33.2
Transfers out of Level 3	—			—			(0.4		)	—
Foreign exchange revaluation and other	(3.3		)	—			8.2			—
Balance at End of Period	$	208.1		$	(31.2	)	$	211.0		$	(60.4	)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period	$	0.8		$	(1.6	)	$	4.4		$	(4.2	)

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	2018						2017
(in millions)	Investments			Contingent Consideration Liability			Investments			Contingent Consideration Liabilities
for the six months ended March 31,	Investments			Contingent Consideration Liability			Investments			Contingent Consideration Liabilities
Balance at beginning of period	$	199.9		$	(51.0	)	$	205.1		$	(98.1	)
Acquisition	—			—			—			(5.7		)
Total realized and unrealized gains (losses)
Included in investment and other income, net	3.0			—			5.6			—
Included in general, administrative and other expense	—			(5.6		)	—			8.0
Purchases	6.7			—			0.8			—
Sales	—			—			(2.4		)	—
Settlements	(1.9		)	32.4			(2.5		)	35.4
Transfers out of Level 3	—			—			(0.4		)	—
Foreign exchange revaluation and other	0.4			(7.0		)	4.8			—
Balance at End of Period	$	208.1		$	(31.2	)	$	211.0		$	(60.4	)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period	$	2.0		$	(5.6	)	$	4.2		$	8.0

Valuation techniques and significant unobservable inputs used in the Level 3 fair value measurements were as follows:



(in millions)
as of March 31, 2018	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range (Weighted Average)
Investment securities, trading – debt and other equity securities	$	178.7	Market pricing	Redemption price	$73 per $100 of par
				Discount rate	18.1%
	16.9		Discounted cash flow	Discount rate	3.0%–6.7% (5.3%)
				Risk premium	2.0%–4.7% (3.2%)

Life settlement contracts	12.2		Discounted cash flow	Life expectancy	21–119 months (62)
				Discount rate	8.0%–20.0% (13.0%)

Contingent consideration liability	31.2		Discounted cash flow	AUM growth rate	(4.0%)
				Discount rate	14.9%



(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.

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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)	Fair Value Level	March 31, 2018				September 30, 2017
(in millions)	Fair Value Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets
Cash and cash equivalents	1	$	8,545.4	$	8,545.4	$	8,523.3	$	8,523.3
Other investments
Time deposits	2	30.9		30.9		13.4		13.4
Cost method investments	3	55.6		78.6		46.7		67.7

Financial Liability
Debt	2	$	1,044.8	$	1,044.0	$	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 54 and 58 CIPs as of March 31, 2018 and September 30, 2017.

The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:



(in millions)	March 31, 2018		September 30, 2017
Assets
Cash and cash equivalents	$	181.1	$	226.4
Receivables	133.6		234.1
Investments, at fair value	3,529.3		3,467.4
Other assets	1.0		0.9
Total Assets	$	3,845.0	$	3,928.8

Liabilities
Accounts payable and accrued expenses	$	67.9	$	124.1
Debt	34.0		53.4
Other liabilities	11.9		8.7
Total liabilities	113.8		186.2
Redeemable Noncontrolling Interests	2,084.4		1,941.9
Stockholders’ Equity
Franklin Resources, Inc.’s interests	1,330.0		1,511.8
Nonredeemable noncontrolling interests	316.8		288.9
Total stockholders’ equity	1,646.8		1,800.7
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity	$	3,845.0	$	3,928.8

The CIPs did not have a significant impact on net income (loss) attributable to the Company during the three and six months ended March 31, 2018 and 2017.

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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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)	March 31, 2018		September 30, 2017
Investment securities, trading	$	3,063.7	$	3,017.2
Other equity securities	353.9		306.9
Other debt securities	111.7		143.3
Total	$	3,529.3	$	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 March 31, 2018	Level 1		Level 2		Level 3		NAV as a Practical Expedient		Total
Assets
Investments
Equity securities	$	312.7	$	266.6	$	188.4	$	167.1	$	934.8
Debt securities	1.3		2,481.0		112.2		—		2,594.5
Total Assets Measured at Fair Value	$	314.0	$	2,747.6	$	300.6	$	167.1	$	3,529.3

Liabilities
Other liabilities	$	0.6	$	11.3	$	—	$	—	$	11.9



(in millions)	Level 1		Level 2		Level 3		NAV as a Practical Expedient		Total
as of September 30, 2017	Level 1		Level 2		Level 3		NAV as a Practical Expedient		Total
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.

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Transfers into Level 2 from Level 1 were $3.5 million for the three and six months ended March 31, 2018, and related to securities for which the quoted market prices were adjusted as of March 31, 2018 due to significant price changes in U.S.-traded market proxies resulting from global market volatility. The impacted securities trade in 11 different countries in Asia-Pacific, Europe and Latin America. The adjustments were made after the close of the foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. There were no transfers into Level 1 from Level 2 during the six months ended March 31, 2018, and there were no transfers between Level 1 and Level 2 during the six months ended March 31, 2017. There were no transfers into or out of Level 3 during the six months ended March 31, 2018 and 2017.

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 4.0 years and 4.4 years at March 31, 2018 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 March 31, 2018 and September 30, 2017.

Changes in Level 3 assets were as follows:



	2018								2017
(in millions)	Equity Securities		Debt Securities			Total Level 3 Assets			Equity Securities		Debt Securities			Total Level 3 Assets
for the three months ended March 31,	Equity Securities		Debt Securities			Total Level 3 Assets			Equity Securities		Debt Securities			Total Level 3 Assets
Balance at beginning of period	$	159.6	$	136.2		$	295.8		$	131.6	$	124.4		$	256.0
Realized and unrealized gains (losses) included in investment and other income, net	15.6		2.0			17.6			4.2		(14.2		)	(10.0		)
Purchases	11.5		10.5			22.0			4.5		5.6			10.1
Sales	—		(37.7		)	(37.7		)	—		(1.9		)	(1.9		)
Foreign exchange revaluation	1.7		1.2			2.9			0.4		0.5			0.9
Balance at End of Period	$	188.4	$	112.2		$	300.6		$	140.7	$	114.4		$	255.1
Change in unrealized gains (losses) included in net income relating to assets held at end of period	$	15.4	$	—		$	15.4		$	4.2	$	(14.3	)	$	(10.1	)



	2018									2017
(in millions)	Equity Securities			Debt Securities			Total Level 3 Assets			Equity Securities			Debt Securities			Total Level 3 Assets
for the six months ended March 31,	Equity Securities			Debt Securities			Total Level 3 Assets			Equity Securities			Debt Securities			Total Level 3 Assets
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	17.5			2.1			19.6			0.9			(14.5		)	(13.6		)
Purchases	22.6			10.5			33.1			25.5			7.8			33.3
Sales	(14.9		)	(37.7		)	(52.6		)	(0.1		)	(8.3		)	(8.4		)
Foreign exchange revaluation	2.5			1.9			4.4			(0.5		)	(2.4		)	(2.9		)
Balance at End of Period	$	188.4		$	112.2		$	300.6		$	140.7		$	114.4		$	255.1
Change in unrealized gains (losses) included in net income relating to assets held at end of period	$	16.3		$	0.1		$	16.4		$	0.8		$	(15.0	)	$	(14.2	)

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Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:



(in millions)
as of March 31, 2018	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range (Weighted Average)
Equity securities	$	160.9	Market comparable companies	EBITDA multiple	5.0–13.6 (9.1)
Equity securities	27.5		Discounted cash flow	Discount rate	5.7%–16.5% (13.5%)

Debt securities	77.8		Discounted cash flow	Discount rate	5.7%–14.6% (10.0%)
	31.1		Comparable trading multiple	Price to earnings ratio	10.0
	31.1		Comparable trading multiple	Enterprise value/ EBITDA multiple	20.9
	3.3		Market pricing	Private sale pricing	$33 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%)
	112.7		Discounted cash flow	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.

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 comparable trading multiple valuation technique, a significant increase (decrease) in the price to earnings ratio or enterprise value/EBITDA multiple in isolation would result in a significantly higher (lower) 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 in isolation 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	March 31, 2018				September 30, 2017
(in millions)	Fair Value Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Asset
Cash and cash equivalents	1	$	181.1	$	181.1	$	226.4	$	226.4
Financial Liability
Debt	3	$	34.0	$	33.7	$	53.4	$	53.1

Debt

Debt of CIPs totaled $34.0 million and $53.4 million at March 31, 2018 and September 30, 2017. The debt had fixed and floating interest rates ranging from 3.07% to 7.13% with a weighted-average effective interest rate of 6.25% at March 31, 2018, and from 2.84% to 6.75% with a weighted-average effective interest rate of 5.15% at September 30, 2017. The debt carried at March 31, 2018 matures in fiscal year 2019.

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Redeemable Noncontrolling Interests

Changes in redeemable noncontrolling interests of CIPs were as follows:



(in millions)
for the six months ended March 31,	2018		2017
Balance at beginning of period	$	1,941.9	$	61.1
Adoption of new accounting guidance	—		824.7
Net income (loss)	26.7		(3.2		)
Net subscriptions and other	115.8		349.2
Net consolidations	—		428.0
Balance at End of Period	$	2,084.4	$	1,659.8

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)	March 31, 2018		September 30, 2017
Receivables	$	156.7	$	155.6
Investments	72.4		129.3
Total	$	229.1	$	284.9

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 six months ended March 31, 2018 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 Tax Act imposes a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. During the quarter ended December 31, 2017, the Company recognized an estimated transition tax expense of $1,120.7 million based on information then available. During the three months ended March 31, 2018, the Company decreased this estimate by $0.5 million as a result of additional technical guidance from the Department of Treasury and information that became available during the quarter. The expense may be further adjusted in future quarters upon issuance of additional technical guidance, legislative updates from states on tax reform, and the completion of the Company’s tax return filings. The federal portion of the transition tax liability, estimated to be $1,101.0 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.