What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-11-14 compared with 2021-11-19 · 181 added, 231 removed, 563 unchanged (42% of the section changed)

27 unchanged sentences

We deliver our investment capabilities through a variety of investment products, which include our sponsored funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products, and other investment vehicles.

In addition to investment management, our services include fund administration, sales and distribution, and shareholder servicing.

Related services include fund administration, sales and distribution, and shareholder servicing.

We may perform services directly or through third parties.

We offer our services and products under our various distinct brand names, including, but not limited to, Franklin ® , Templeton ® , Legg Mason ® , Benefit Street Partners ® , Brandywine Global Investment Management ® , Clarion Partners ® , ClearBridge Investments ® , Fiduciary Trust International™, Franklin Bissett ® , Franklin Mutual Series ® , K2 ® , LibertyShares ® , Martin Currie ® , Royce ® Investment Partners and Western Asset Management Company ® .

We offer a broad product mix of fixed income, equity, multi-asset, alternative and cash management asset classes and solutions that meet a wide variety of specific investment goals and needs for individual and institutional investors.

We offer our services and products under our various distinct brand names, including, but not limited to, Franklin ® , Templeton ® , Legg Mason ® , Alcentra ® , Benefit Street Partners ® , Brandywine Global Investment Management ® , Clarion Partners ® , ClearBridge Investments ® , Fiduciary Trust International™, Franklin Bissett ® , Franklin Mutual Series ® , K2 ® , Lexington Partners ® , Martin Currie ® , O’Shaughnessy ® Asset Management, Royce ® Investment Partners and Western Asset Management Company ® .

We offer a broad product mix of fixed income, equity, alternative, multi-asset, and cash management asset classes and solutions that meet a wide variety of specific investment goals and needs for 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.

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These arrangements could change in the future.

As further noted in the “Risk Factors” section, the outbreak and spread of contagious diseases such as the coronavirus disease 2019 (“COVID-19”), a highly transmissible and pathogenic disease, has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations.

Ongoing global health concerns, and uncertainty regarding the impact of COVID-19, could lead to further and/or increased volatility in global capital and credit markets, adversely affect our key executives and other personnel, clients, investors, providers, suppliers, lessees, and other third parties, and negatively impact our AUM, revenues, income, business and operations.

As of the time of this filing, as the COVID-19 pandemic continues to evolve, it is not possible to predict the full extent to which the pandemic may adversely impact our business, liquidity, capital resources, financial results and operations, which impacts will depend on numerous developing factors that remain uncertain and subject to change.

During the fiscal year ended September 30, 2021 (“fiscal year 2021”), the global equity markets continued to provide strong positive returns, reflecting among other things, an accelerated rollout of COVID-19 vaccines in most developed economies, government stimulus and other support in many countries, and a decline in U.S.

10-year treasury yields.

The S&P 500 Index and MSCI World Index increased 30.0% and 29.4% for the fiscal year.

The global bond markets declined as the Bloomberg Barclays Global Aggregate Index decreased 0.9% for the fiscal year.

Our total AUM was $1,530.1 billion at September 30, 2021, which was 8% higher than at September 30, 2020 driven by $148.0 billion from net market change, distributions and other, and $3.5 billion from an acquisition, partially offset by $25.2 billion of long-term net outflows and $15.1 billion of cash management net outflows.

Simple monthly average AUM (“average AUM”) increased 81% during fiscal year 2021, reflecting a full year of AUM from the acquisition of Legg Mason.

During the fiscal year ended September 30, 2022 (“fiscal year 2022”), global equity markets experienced significant declines driven by the economic impacts of inflationary pressures, interest rate increases by the Federal Reserve and other developed market central banks in an effort to combat inflation, central banks’ tightened monetary policies, the Russian invasion of Ukraine, and concerns about the risk of recession.

The S&P 500 Index and MSCI World Index decreased 15.5% and 19.3% for the fiscal year.

The global bond markets also declined as the Bloomberg Barclays Global Aggregate Index decreased 20.4% for the fiscal year driven by the interest rate increases.

Our total AUM was $1,297.4 billion at September 30, 2022, which was 15% lower than at September 30, 2021 driven by the negative impact of $269.0 billion of net market change, distributions and other, $27.8 billion of long-term net outflows and $0.8 billion of cash management net outflows, partially offset by $64.9 billion from acquisitions.

Simple monthly average AUM (“average AUM”) decreased 2% during fiscal year 2022.

On April 1, 2022, we acquired all of the outstanding ownership interests in Lexington Partners L.P.

(“Lexington”), a leading global manager of secondary private equity and co-investment funds, for cash consideration of $1.0 billion and additional payments totaling $750.0 million to be paid in cash over the next three years.

In connection with the acquisition, we granted a 25% ownership stake in Lexington and performance-based cash retention awards to certain employees that vest over approximately five years.

On December 31, 2021, we acquired all of the outstanding ownership interest in O’Shaughnessy Asset Management, LLC (“OSAM”), a leading quantitative asset management firm, for cash consideration paid of approximately $300 million, excluding future payments to be made subject to the attainment of certain performance measures.

The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change.

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See “Supplemental Non-GAAP Financial Measures” for definitions and reconciliations of these measures.

Operating income increased $826.1 million in fiscal year 2021 as a 51% increase in operating revenues was partially offset by a 45% increase in operating expenses.

The increase in operating revenues and operating expenses was primarily due to the acquisition of Legg Mason.

Net income attributable to Franklin Resources, Inc.

increased $1,032.3 million due to the increase in operating income and higher other income, net, less the portion attributable to noncontrolling interests, partially offset by higher taxes on income.

The Company acquired Legg Mason effective July 31, 2020 , and the results of operations for the fiscal year ended September 30, 2020 (“fiscal year 2020”) include two months of Legg Mason’s results.

Operating income decreased $418.0 million in fiscal year 2020 due to a 2% decrease in operating revenues and a 7% increase in operating expenses which reflected higher levels of compensation and benefits expense, including acquisition-related retention costs, other acquisition-related expenses, and amortization and impairments of intangible assets and goodwill.

Net income attributable to Franklin Resources, Inc.

decreased $396.8 million primarily due to the decrease in operating income, as the impact of declines in market valuations amid global concerns about the COVID-19 pandemic resulted in net investment and other losses of $38.4 million, as compared to net gains of $141.4 million in the prior year, less the portion attributable to noncontrolling interests, which was largely offset by lower taxes on income.

Diluted earnings per share increased in fiscal year 2021 and decreased in fiscal year 2020, consistent with the changes in net income attributable to Franklin Resources, Inc.

Adjusted operating income increased $888.2 million in fiscal year 2021 primarily due to a 66% increase in investment management fees, partially offset by a 69% increase in compensation and benefits expense.

The increase in investment management fees and compensation and benefits expenses was primarily due to the acquisition of Legg Mason.

Adjusted net income increased $604.2 million primarily due to the increase in adjusted operating income, partially offset by lower other income, net, less the portion attributable to noncontrolling interests.

Adjusted operating income decreased $163.1 million in fiscal year 2020 primarily due to a 10% increase in compensation and benefits expense, excluding non-GAAP adjustments.

Adjusted net income decreased $20.3 million primarily due to the decrease in adjusted operating income substantially offset by lower taxes on income, excluding the net income tax expense of non-GAAP adjustments.

Adjusted diluted earnings per share increased in fiscal year 2021 and decreased in fiscal year 2020, consistent with the changes in adjusted net income.

ASSETS UNDER MANAGEMENT

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Equity 392.3 523.6 438.1 (25 %) 20 %

Multi-Asset 152.4 129.4 123.6 18 % 5 %

Alternative 225.1 145.2 122.1 55 % 19 %

Multi-Asset 131.5 152.4 129.4 (14 %) 18 %

Cash Management 57.6 58.6 72.4 (2 %) (19 %)

Total $ 1,297.4 $ 1,530.1 $ 1,418.9 (15 %) 8 %

Average for the Year $ 1,504.1 $ 832.9 $ 697.0 81 % 19 %

In the first quarter of the fiscal year 2021, we revised our presentation of AUM to reflect changes in asset class of certain legacy Legg Mason AUM as part of our post-acquisition onboarding process.

Changes in average AUM are generally more indicative of trends in revenue for providing investment management services than the year-over-year change in ending AUM.

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Equity 491.3 502.9 290.8 (2 %) 73 %

Multi-Asset 146.4 122.7 122.2 19 % 0 %

Alternative 185.1 132.6 63.7 40 % 108 %

Multi-Asset 146.1 146.4 122.7 0 % 19 %

Cash Management 60.2 64.7 25.2 (7 %) 157 %

4 unchanged sentences

Equity 33 % 33 % 35 %

Multi-Asset 10 % 15 % 17 %

Alternative 13 % 9 % 8 %

Multi-Asset 10 % 10 % 15 %

Cash Management 4 % 4 % 3 %

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Long-term net flows (27.8) (25.2) (61.6) 10 % (59 %)

Cash management net flows (15.1) (9.9) 0.9 53 % NM

Cash management net flows (0.8) (15.1) (9.9) (95 %) 53%

Total net flows (28.6) (40.3) (71.5) (29 %) (44 %)

Acquisitions 64.9 3.5 806.5 NM (100 %)

Net market change, distributions and other 148.0 (8.7) (20.0) NM (57 %)

Net market change, distributions and other (269.0) 148.0 (8.7) NM NM

Ending AUM $ 1,297.4 $ 1,530.1 $ 1,418.9 (15 %) 8 %

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September 30, 2022 Fixed

Income Equity Multi-Asset Alternative Cash

Income Equity Alternative Multi-Asset Cash

Management Total

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(30.2) (8.6) 6.3 4.7 (0.8) (28.6)

Acquisition 3.5 — — — — 3.5

Acquisitions — 4.6 58.0 2.3 — 64.9

Net market change, distributions and other

1 unchanged sentence

AUM at September 30, 2022 $ 490.9 $ 392.3 $ 225.1 $ 131.5 $ 57.6 $ 1,297.4

AUM increased $111.2 billion or 8% during fiscal year 2021 due to $148.0 billion of net market change, distributions and other, and $3.5 billion from an acquisition, partially offset by $25.2 billion of long-term net outflows and $15.1 billion of cash management net outflows.

Net market change, distributions and other primarily consists of $176.3 billion of market appreciation, partially offset by $29.1 billion of long-term distributions.

The market appreciation occurred in all asset classes, most significantly in the equity and multi-asset asset classes and reflected positive returns in global equity markets.

Long-term inflows increased 100% to $364.7 billion, as compared to the prior year, and long-term outflows increased 60% to $389.9 billion due to higher inflows and outflows in all long-term asset classes primarily due to the acquisition of Legg Mason.

Long-term net outflows included outflows of $35.7 billion from sixteen institutional products, including two fixed income redemptions of $5.9 billion and $2.0 billion and two equity redemptions of $3.7 billion and $2.2 billion, $12.5 billion from seven fixed income funds, including $3.3 billion from five India credit funds that were non-management fee earning which are in the process of winding up, $5.4 billion from a 529 plan redemption, $3.9 billion from two equity funds and $3.1 billion from a multi-asset fund, partially offset by inflows of $12.3 billion in three fixed income funds, $6.7 billion in three institutional products, $3.7 billion in an equity fund, $3.1 billion in a multi-asset fund and $3.0 billion in two alternative funds.

AUM decreased $232.7 billion or 15% during fiscal year 2022 due to the negative impact of $269.0 billion of net market change, distributions and other, $27.8 billion of long-term net outflows and $0.8 billion of cash management net outflows, partially offset by acquisitions of $64.9 billion.

Net market change, distributions and other primarily consists of $199.2 billion of market depreciation, $48.7 billion of long-term distributions and a $21.1 billion decrease from foreign exchange revaluation.

The market depreciation occurred in all asset classes with the exception of the alternative asset class.

Foreign exchange revaluation from AUM in products that are not U.S.

dollar denominated was primarily due to a stronger U.S.

dollar compared to the Japanese Yen, Euro, Pound Sterling and Australian dollar.

Long-term inflows decreased 12% to $320.4 billion, as compared to the prior year, driven by lower inflows in fixed income institutional separate accounts, open-end funds, and retail separately managed accounts, as well as equity open-end funds, partially offset by higher alternative inflows for private funds.

Long-term outflows decreased 11% to $348.2 billion due to lower outflows in fixed income institutional separate accounts, equity and multi-asset open-end funds, and equity sub-advised mutual funds, partially offset by higher equity outflows in retail separately managed accounts and multi-asset sub-advised mutual funds.

(in billions)

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September 30, 2021 Fixed

Income Equity Multi-Asset Alternative Cash

Income Equity Alternative Multi-Asset Cash

Management Total

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AUM at September 30, 2021 $ 650.3 $ 523.6 $ 145.2 $ 152.4 $ 58.6 $ 1,530.1

AUM increased $726.3 billion or 105% during fiscal year 2020 as $806.5 billion from acquisitions was partially offset by $61.6 billion of long-term net outflows, $9.9 billion of cash management net outflows and $8.7 billion of net market change, distributions and other.

Acquisitions included $797.4 billion from the acquisition of Legg Mason and $9.1 billion from other acquisitions.

Long-term inflows increased 4% to $182.4 billion due to higher inflows in all the long-term asset classes except multi-asset.

Long-term outflows increased 18% to $244.0 billion due to higher outflows in all long-term asset classes except multi-asset, most significantly in fixed income products.

Long-term net outflows included outflows of $27.6 billion from six fixed income funds, $7.3 billion from seven institutional products, $6.2 billion from three equity funds, and $3.6 billion from a multi-asset fund, partially offset by inflows of $6.0 billion in two equity funds, $4.0 billion in three fixed income funds, $2.0 billion in two institutional products and $1.3 billion in a private open-end product.

Net market change, distributions and other primarily consists of $24.8 billion of long-term distributions, partially offset by $15.8 billion of market appreciation.

The market appreciation occurred primarily in the equity asset class and reflected positive returns in global equity markets.

AUM increased $111.2 billion or 8% during fiscal year 2021 due to the positive impact of $148.0 billion of net market change, distributions and other, and $3.5 billion from an acquisition, partially offset by $25.2 billion of long-term net outflows and $15.1 billion of cash management net outflows.

Net market change, distributions and other primarily consists of $176.3 billion of market appreciation, partially offset by $29.1 billion of long-term distributions.

The market appreciation occurred in all asset classes, most significantly in the equity and multi-asset classes and reflected positive returns in global equity markets.

$2.2 billion, $12.5 billion from seven fixed income funds, including $3.3 billion from five India credit funds that were non-management fee earning which are in the process of winding up, $5.4 billion from a 529 plan redemption, $3.9 billion from two equity funds and $3.1 billion from a multi-asset fund, partially offset by inflows of $12.3 billion in three fixed income funds, $6.7 billion in three institutional products, $3.7 billion in an equity fund, $3.1 billion in a multi-asset fund and $3.0 billion in two alternative funds.

(in billions)

1 unchanged sentence

September 30, 2020 Fixed

Income Equity Multi-Asset Alternative Cash

Income Equity Alternative Multi-Asset Cash

Management Total

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Europe, Middle East and Africa 126.6 153.9 141.8 (18 %) 9 %

Latin America 53.5 59.4 13.5 (10 %) 340 %

Canada 26.9 25.1 24.3 7 % 3 %

Total international $ 389.9 $ 394.9 $ 214.7 (1 %) 84 %

Total $ 1,530.1 $ 1,418.9 $ 692.6 8 % 105 %

Average AUM by sales region was as follows:

(in billions) 2021 vs.

2020 2020 vs.

for the fiscal years ended September 30, 2021 2020 2019

United States $ 1,103.6 $ 587.2 $ 473.3 88 % 24 %

International

Asia-Pacific 165.9 102.4 90.4 62 % 13 %

Europe, Middle East and Africa 151.7 97.8 91.5 55 % 7 %

Latin America 56.6 23.1 14.6 145 % 58 %

Canada 26.3 22.4 27.2 17 % (18 %)

Americas, excl.

81.1 80.4 84.5 1 % (5 %)

Total international $ 326.1 $ 389.9 $ 394.9 (16 %) (1 %)

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We compare the relative performance of our mutual funds against peers, and of our strategy composites against benchmarks.

Higher long-term relative performance of our mutual fund AUM during fiscal year 2021 resulted in a significant increase from September 30, 2020 to the peer group comparison for the one-, three- and five-year periods.

Approximately half of our mutual fund AUM and at least 69% of our strategy composite AUM exceeded the peer group median comparisons for all periods presented, primarily driven by the performance of our fixed income products.

The performance of our mutual fund products against peer group medians and of our strategy composites against benchmarks is presented in the table below.

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Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 64%, 63%, 63% and 59% of our total AUM as of September 30, 2022.

3 Total mutual fund AUM includes performance of our multi-asset and alternative AUM, and total strategy composite AUM includes performance of our alternative AUM.

Multi-asset and alternative AUM represent 10% and 9% of our total AUM at September 30, 2021.

3 Total mutual fund AUM includes performance of our alternative and multi-asset funds, and total strategy composite AUM includes performance of our alternative composites.

Alternative and multi-asset AUM represent 17% and 10% of our total AUM at September 30, 2022.

Mutual fund performance data includes U.S.

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These results assume the reinvestment of dividends, are based on data available as of October 7, 2022 and are subject to revision.

While we remain focused on achieving strong long-term performance, our future peer group and benchmarking rankings may vary from our past performance.

Past performance is not indicative of future results.

For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance.

For AUM included in institutional and retail separately managed accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance.

For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance.

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Total Operating Revenues $ 8,275.3 $ 8,425.5 $ 5,566.5 (2 %) 51 %

The Legg Mason acquisition had a significant impact on operating revenues in fiscal year 2021;

however, due to the continued integration of the combined businesses, it is no longer practicable to separately quantify the impact of the legacy Legg Mason business.

Investment Management Fees

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are generally higher than for U.S.

Investment management fees increased $75.2 million in fiscal year 2022 primarily due to higher performance fees, partially offset by a 2% decrease in average AUM.

The decrease in average AUM occurred primarily in the fixed income and equity asset classes, partially offset by an increase in the alternative asset class that includes the acquisition of Lexington.

Investment management fees increased $2,559.9 million in fiscal year 2021 primarily due to the acquisition of Legg Mason, a 5% increase in average AUM and higher performance fees.

The increase in average AUM occurred primarily in the equity and multi-asset asset classes, partially offset by decreases in the fixed income asset class.

The increase occurred primarily in U.S.

sales regions, partially offset by a decline in Asia-Pacific sales region.

Investment management fees decreased $3.5 million in fiscal year 2020 primarily due to a 7% decrease in average AUM, lower effective investment management fee rate and lower performance fees of the legacy Franklin business, largely offset by $427.6 million of revenue earned by Legg Mason subsequent to the acquisition.

The decrease in average AUM of the legacy Franklin business occurred primarily in the fixed income and equity asset classes, partially offset by an increase in the alternative asset class, and across all sales regions except Europe, Middle East and Africa.

The increase in average AUM occurred primarily in the equity and multi-asset asset classes, partially offset by a decrease in the fixed income asset class.

Our effective investment management fee rate excluding performance fees (investment management fees excluding performance fees divided by average AUM) was 41.6, 41.8 and 47.3 basis points for fiscal years 2022, 2021 and 2020.

The rate decrease in fiscal year 2022 was primarily due to a shift in assets from higher-fee products to lower-fee products in the fixed income and equity asset classes.

The rate decrease in fiscal year 2021 was primarily due to the Legg Mason acquisition, as Legg Mason generally had a lower overall effective fee rate due to a higher mix of institutional and fixed income AUM.

Performance-based investment management fees were $498.2 million, $258.6 million and $44.0 million for fiscal years 2022, 2021 and 2020.

The increase in fiscal year 2021 was primarily due to the acquisition of Legg Mason as well as strong performance, while the decrease in fiscal year 2020 was primarily due to the lower performance fees earned from a private debt fund, separate accounts and a real estate fund, partially offset by $15.0 million of performance fees earned by Legg Mason subsequent to the acquisition.

industry asset-weighted average management fee rates were as follows:

(in basis points) Industry Average 1

for the fiscal years ended September 30, 2021 2020 2019

Fixed Income 2

Multi-Asset 37 37 38

Alternative 4

Cash Management 13 16 16

________________

industry asset-weighted average management fee rates were calculated using information available from Lipper, a Refinitiv Company, as of September 30, 2021, 2020 and 2019 and include all U.S.-registered open-end funds and exchange traded funds that reported expense data to Lipper as of the funds’ most recent annual report date, and for which expenses were equal to or greater than zero.

As defined by Lipper, management fees include fees from providing advisory and fund administration services.

The averages combine retail and institutional funds data and include all share classes and distribution channels, without exception.

Variable annuity and fund of fund products are not included.

2 The decreases in the average rate in fiscal years 2021 and 2020 reflect higher weightings of two large low-fee passive funds and lower weightings of two large higher-fee actively managed funds for fiscal year 2020.

3 The decreases in the average rate in fiscal years 2021 and 2020 reflect higher weightings of two large low-fee passive funds.

4 The increase in the average rate in fiscal year 2021 reflect higher weightings of one large actively managed fund and lower weightings of one large low-fee passive fund, while decrease in the average rate in fiscal year 2020 reflect higher weightings of one large low-fee passive fund.

The declines in U.S.

industry average management fee rates for long-term asset classes generally reflect increased investor demand for lower-fee passive funds.

Our actual effective investment management fee rates are generally higher than the U.S.

industry average rates as we actively manage substantially all of our products and have a significant amount of international AUM, both of which generate higher fees.

Our fiscal year 2021 effective fee rates in the U.S.

generally decreased to a greater extent than the average industry rates due to the acquisition of Legg Mason, as Legg Mason generally had a lower overall effective fee rate due to a higher mix of institutional and fixed income AUM .

The increase in fiscal year 2022 was primarily due to strong performance by our alternative specialist investment managers, while the increase in fiscal year 2021 was primarily due to the acquisition of Legg Mason as well as strong performance.

Our product offerings and global operations are diverse.

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The Rule 12b-1 Plans permit the funds to pay us for marketing, marketing support, advertising, printing and sales promotion services relating to the distribution of their shares, subject to the Rule 12b-1 Plans’ limitations on amounts based on daily average AUM.

We earn distribution fees from our non-U.S.

earn distribution fees from our non-U.S.

funds based on daily average AUM.

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Sales and Distribution Fees $ 1,415.0 $ 1,635.5 $ 1,362.0 (13 %) 20 %

Asset-based distribution fees decreased $152.1 million in fiscal year 2022 primarily due to a 12% decrease in the related average AUM.

Asset-based distribution fees increased $206.0 million in fiscal year 2021 primarily due to the acquisition of Legg Mason and $53.1 million from a 5% increase in the related average AUM, partially offset by $33.2 million from a higher mix of lower-fee U.S.

Asset-based distribution fees decreased $91.9 million in fiscal year 2020 primarily due to decreases of $79.2 million from a 7% decrease in the related average AUM and $38.6 million from a higher mix of lower-fee U.S.

assets, partially offset by $35.3 million from fees earned by Legg Mason subsequent to the acquisition.

Sales-based fees decreased $63.5 million in fiscal year 2022 primarily due to a 20% decrease in commissionable sales.

Sales-based fees increased $68.7 million in fiscal year 2021 primarily due to the acquisition of Legg Mason and $13.0 million from higher commissionable sales.

Sales-based fees increased $1.9 million in fiscal year 2020 primarily due to increases of $9.8 million from fees earned by Legg Mason subsequent to the acquisition, $7.2 million from higher U.S.

product commissionable sales and, $2.9 million from a higher mix of equity sales, which typically generate higher sales fees than fixed income products.

The increases were substantially offset by a decrease of $18.7 million from lower non-U.S.

product commissionable sales.

Shareholder Servicing Fees

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Shareholder servicing fees also include fund reimbursements of expenses incurred while providing transfer agency services.

Shareholder servicing fees increased $16.1 million in fiscal year 2021 primarily due to the acquisition of Legg Mason and higher levels of related AUM, partially offset by lower levels of transactions.

Shareholder servicing fees decreased $18.2 million in fiscal year 2022 primarily due to lower levels of related AUM and transactions.

Other revenue increased $9.5 million and $4.4 million in fiscal years 2021 and 2020 primarily due to higher miscellaneous fee revenues.

Other revenue increased $13.3 million and increased $9.5 million in fiscal years 2022 and 2021 primarily due to higher real estate transaction fees earned by certain of our alternative asset managers.

OPERATING EXPENSES

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Total Operating Expenses $ 6,501.4 $ 6,550.5 $ 4,517.6 (1 %) 45 %

The Legg Mason acquisition had a significant impact on operating expenses in fiscal year 2021;

however, due to the continued integration of the combined businesses, it is no longer practicable to separately quantify the impact of the legacy Legg Mason business.

Compensation and Benefits

4 unchanged sentences

Salaries, wages and benefits $ 1,426.4 $ 1,428.6 $ 1,062.7 0 % 34 %

Variable compensation 1,365.0 571.6 504.9 139 % 13 %

Incentive compensation 1,500.5 1,303.9 550.0 15 % 137 %

Acquisition-related retention 167.2 163.7 195.8 2 % (16 %)

Special termination benefits 27.1 54.8 55.5 (51 %) (1 %)

(4.3) 75.1 65.4 NM 15 %

Compensation and Benefits Expenses $ 3,089.8 $ 2,971.3 $ 1,873.9 4 % 59 %

_______________

1 Includes impact of gains and losses on investments related to deferred compensation plans and seed investments, which is offset in investment and other income (losses), net;

minority interests in certain subsidiaries, which is offset in net income (loss) attributable to redeemable noncontrolling interests;

special termination benefits;

and acquisition-related performance-based investment management fees which are passed through as compensation and benefits expense.

Salaries, wages and benefits decreased $2.2 million in fiscal year 2022 primarily due to a $16.8 million decrease in termination benefits and the impact of headcount reductions which were substantially offset by increases due to annual salary adjustments and the acquisitions of Lexington and OSAM.

Salaries, wages and benefits increased $365.9 million in fiscal year 2021, primarily due to the acquisition of Legg Mason.

Salaries, wages and benefits increased $91.1 million in fiscal year 2020, primarily due to increases of $56.9 million from higher average staffing levels primarily resulting from acquisitions, $19.3 million for an annual salary increase that was effective December 1 of the fiscal year and $16.2 million related to other termination benefits, partially offset by a decrease of $5.9 million from favorable foreign currency impacts.

Variable compensation increased $793.4 million in fiscal year 2021, primarily due to the acquisition of Legg Mason, which includes $25.3 million from acquisition-related pass through performance fees.

Variable compensation increased $66.7 million in fiscal year 2020, primarily due to increases of $67.7 million related to acquired firms’ bonus plans and $10.0 million related to private equity and other product performance fees, partially offset by decreases of $11.3 million related to unvested mutual fund awards and $9.6 million related to bonus expense primarily due to lower expectations of our annual performance.

Acquisition-related retention expenses decreased $32.1 million in fiscal year 2021 and increased $132.1 million in fiscal year 2020 primarily due to the acquisition of Legg Mason.

Special termination benefits primarily relate to workforce optimization initiatives related to the acquisition of Legg Mason in fiscal years 2021 and 2020, and voluntary separation and workforce reduction initiatives of 4.5% of our global workforce in the fiscal year ended September 30, 2019 (“fiscal year 2019”).

Incentive compensation increased $196.6 million in fiscal year 2022, primarily due to higher performance fees and the acquisition of Lexington.

Incentive compensation increased $753.9 million in fiscal year 2021, primarily due to the acquisition of Legg Mason.

Acquisition-related retention expenses increased $3.5 million in fiscal year 2022, primarily due to acquisition of Lexington and decreased $32.1 million in fiscal year 2021 primarily due to lower costs associated with the acquisition of Legg Mason.

Other compensation and benefits were $(4.3) million, $75.1 million, and $65.4 million for fiscal years 2022, 2021, and 2020.

The changes for fiscal years 2022 and 2021 were primarily related to market adjustments on investments related to our deferred compensation plans and compensation related to minority interests.

Special termination benefits also decreased $18.9 million and $27.7 million in fiscal years 2022 and 2021 primarily due to workforce optimization initiatives related to the acquisition of Legg Mason.

We expect to incur acquisition-related retention expenses of approximately $230 million during the fiscal year ending September 30, 2023 (“fiscal year 2023”), and decreasing over the following two fiscal years by approximately $30 million and $70 million.

18 unchanged sentences

Sales, Distribution and Marketing $ 1,845.6 $ 2,105.8 $ 1,703.1 (12 %) 24 %

Asset-based expenses decreased $182.1 million in fiscal year 2022 primarily due to an 11% decrease in the related average AUM.

Asset-based expenses increased $345.7 million in fiscal year 2021 primarily due to the acquisition of Legg Mason and $59.7 million from a 5% increase in the related average AUM.

Asset-based expenses decreased $107.0 million in fiscal year 2020 primarily due to decreases of $107.4 million from an 8% decrease in the related average AUM and $53.4 million from a higher mix of lower-fee U.S.

assets, partially offset by a $58.6 million increase in expenses incurred by Legg Mason subsequent to the acquisition.

Distribution expenses are generally not directly correlated with distribution fee revenues due to certain fee structures that do not provide full recovery of distribution costs.

Sales-based expenses decreased $64.7 million in fiscal year 2022 primarily due to a 20% decrease in commissionable sales.

Sales-based expenses increased $59.1 million in fiscal year 2021 primarily due to the acquisition of Legg Mason and $12.1 million from higher commissionable sales.

Sales-based expenses decreased $4.0 million in fiscal year 2020 primarily due to a $20.3 million decrease from lower non-U.S.

product commissionable sales, largely offset by an $8.6 million increase in expenses incurred by Legg Mason subsequent to the acquisition and a $7.5 million increase from higher U.S.

product commissionable sales.

products typically generate higher sales commissions than non-U.S.

Information Systems and Technology

Information systems and technology expenses increased $14.1 million in fiscal year 2022 primarily due to higher costs incurred for technology consulting, software and external data services offset in part by lower technology depreciation.

Information systems and technology expenses increased $197.7 million in fiscal year 2021 primarily due to higher external data service and software costs and technology consulting as a result of the Legg Mason acquisition.

Information systems and technology expenses increased $29.9 million in fiscal year 2020 primarily due to expenses of Legg Mason subsequent to closing of the acquisition.

Occupancy expenses increased $70.2 million and $14.3 million in fiscal years 2021 and 2020 primarily due to an increase in leased office space as a result of the Legg Mason acquisition.

Occupancy expenses remained relatively flat in fiscal year 2022 and increased $70.2 million in fiscal year 2021.

The increase in fiscal year 2021 was primarily due to an increase in leased office space as a result of the Legg Mason acquisition.

Amortization of intangible assets

Amortization of intangible assets increased $178.0 million and $39.3 million in fiscal years 2021 and 2020 primarily related to the intangible assets recognized as part of the acquisition of Legg Mason.

See Note 9 – Goodwill and Other Intangible Assets in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for information on definite-lived intangible assets.

Amortization of intangible assets increased $50.0 million in fiscal year 2022, primarily due to intangible assets recognized as part of the acquisition of Lexington Partners, and increased $178.0 million in fiscal year 2021 primarily due to intangible assets recognized as part of the acquisition of Legg Mason.

General, Administrative and Other

General, administrative and other operating expenses primarily consist of professional fees, fund-related service fees payable to external parties, advertising and promotion, travel and entertainment, and other miscellaneous expenses.

General, administrative and other expenses primarily consist of professional fees, fund-related service fees payable to external parties, advertising and promotion, travel and entertainment, and other miscellaneous expenses.

General, administrative and other operating expenses increased $27.7 million in fiscal year 2022, primarily due to increases of $27.1 million in advertising and promotion expenses, due in part to our global brand campaign, $25.7 million in professional fees, largely related to acquisition-costs, and $24.0 million in travel and entertainment expenses.

Fiscal year 2022 also included $20.3 million of non-recurring costs incurred in connection with the outsourcing of our transfer agent functions.

These increases were partially offset by $43.0 million of closed-end fund product launch costs incurred in the prior year.

Fiscal year 2022 also included net credits of $19.2 million to adjust the fair values of our contingent consideration asset and liabilities, as compared to $4.1 million of expense recognized in the prior year.

General, administrative and other operating expenses increased $86.9 million in fiscal year 2021, primarily due to the acquisition of Legg Mason and $43.0 million of closed-end fund product launch costs.

The increase was also due to increases of $35.0 million third-party fund administration and sub-advisory service fees and $12.9 million placement and platform fees.

The increases were partially offset by $55.4 million prior year impairments of intangible assets and goodwill primarily related to assets recognized from the acquisitions of Benefit Street Partners, L.L.C.

(“BSP”) and Onsa, Inc., (formally known as TokenVault, Inc).

General, administrative and other operating expenses increased $58.9 million in fiscal year 2020, primarily due to increases of $48.0 million in acquisition-related professional fees and $19.3 million of post-acquisition general and administrative expenses, both related to Legg Mason.

Additionally, impairments of intangible assets and goodwill increased $42.1 million primarily related to assets recognized from the acquisitions of BSP and Onsa, Inc., (formally known as TokenVault, Inc.).

The increases were partially offset by decreases of $24.6 million in travel and entertainment expenses and $13.8 million in advertising and promotion expenses, both primarily due to lower activity levels, and by a prior year litigation settlement.

The increase was also due to increases of $35.0 million in third-party fund administration and sub-advisory service fees and $12.9 million in placement and platform fees.

The increases were partially offset by $55.4 million of prior year impairments of intangible assets and goodwill primarily related to assets recognized from the acquisitions of Benefit Street Partners, L.L.C.

and Onsa, Inc., (formally known as TokenVault, Inc.).

OTHER INCOME (EXPENSES)

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for the fiscal years ended September 30, 2022 2021 2020

Investment and other income (losses), net $ 264.7 $ (38.4) $ 141.4 NM NM

Investment and other income (losses), net $ 91.1 $ 264.7 $ (38.4) (66 %) NM

Interest expense (98.2) (85.4) (33.4) 15 % 156 %

Investment and other income of consolidated investment products, net

421.1 70.2 78.8 500 % (11 %)

Investment and other income (losses) of consolidated investment products, net (17.7) 421.1 70.2 NM 500 %

Expenses of consolidated investment products (19.7) (31.2) (29.4) (37 %) 6 %

Other Income (Expenses), Net $ (44.5) $ 569.2 $ (31.0) NM NM

Investment and other income (losses), net consists primarily of income (losses) from equity method investees, gains (losses) on investments held by the Company, rental income from excess owned space in our San Mateo, California corporate headquarters and other office buildings which we lease to third parties, gains (losses) on derivatives, foreign currency exchange gains (losses) and dividend income.

Investment and other income (losses), net consists primarily of gains (losses) on investments held by the Company, income (losses) from equity method investees, foreign currency exchange gains (losses), rental income from excess owned space which we lease to third parties, gains (losses) on derivatives, and dividend income.

Investment and other income (losses), net decreased $173.6 million in fiscal year 2022 primarily due to the impact of market declines in the current year.

Investment and other income (losses), net increased $303.1 million in fiscal year 2021 primarily due to income from equity method investees and gains on investments held by the Company, partially offset by a decrease in dividend income and losses on derivatives.

Investment and other income (losses), net decreased $179.8 million in fiscal year 2020 primarily due to the impact of steep declines in market valuations on investment income, lower dividend and interest income, and foreign exchange losses, partially offset by an increase in rental income.

Equity method investees generated income of $154.3 million, as compared to losses of $98.1 million in the prior year.

The current year reflects continued recovery in market valuations of investments held by various global equity funds.

Losses from equity method investees increased $87.7 million in fiscal year 2020, primarily related to investments in two global equity funds.

Investments held by the Company generated net gains of $90.9 million, as compared to net losses of $16.8 million in the prior year, primarily from various nonconsolidated funds, and in the current year, assets invested for Legg Mason deferred compensation plans.

Dividend income decreased $40.1 million in fiscal year 2021 and $48.1 million in fiscal year 2020 primarily due to lower yields on money market funds.

Income from equity method investees decreased $118.1 million in fiscal year 2022.

The current year included a $52.6 million gain recognized on the sale of our investment in Embark, offset in part by losses from equity method investees, largely related to declines in market valuations of investments held by various global equity and alternative funds, while the prior year included gains from equity method investees.

Equity method investees generated income of $154.3 million in fiscal year 2021, as compared to losses of $98.1 million in fiscal year 2020, reflecting recovery in market valuations of investments held by various global equity funds.

Investments held by the Company generated net losses of $75.4 million, as compared to net gains of $90.9 million in the prior year, primarily from investments in nonconsolidated funds and separate accounts and assets invested for deferred compensation plans, partially offset by net gains from investments measured at cost adjusted for observable price change.

Investments held by the Company generated net gains of $90.9 million in fiscal year 2021, as compared to net losses of $16.8 million in fiscal year 2020, primarily from various nonconsolidated funds, and in fiscal year 2021, assets invested for Legg Mason deferred compensation plans.

Net foreign currency exchange gains were $40.6 million in fiscal year 2022, as compared to net losses of $11.9 million in the prior year.

The increases were primarily due to the impact of the strengthening of the U.S.

dollar against the Euro and British Pound.

Derivatives generated gains of $20.9 million in fiscal year 2022, losses of $23.2 million in fiscal 2021, and gains of $3.0 million in fiscal 2020.

Dividend and interest income increased $20.3 million in fiscal year 2022, primarily due to higher yields on money market funds, and decreased $45.6 million in fiscal year 2021 primarily due to lower dividend yields on money market funds.

Interest expense increased $12.8 million in fiscal year 2022 primarily due to accretion on Lexington deferred consideration.

Interest expense increased $52.0 million in fiscal year 2021 primarily due to interest expense recognized on debt of Legg Mason and on the senior unsecured unsubordinated notes issued during fiscal year 2021, partially offset by the redemption of the junior notes issued by Legg Mason.

Interest expense increased $11.0 million in fiscal year 2020 primarily due to interest expense recognized on debt of Legg Mason subsequent to the acquisition.

Investment and other income of consolidated investment products, net consists of dividend and interest income and investment gains (losses) on investments held by CIPs.

Investment and other income (loss) of consolidated investment products, net consists of investment gains (losses) on investments held by consolidated investment products (“CIPs”) and dividend and interest income.

Expenses of consolidated investment products primarily consists of fund-related expenses, including professional fees and other administrative expenses, and interest expense.

Significant portions of the investment and other income of consolidated investment products, net and expenses of consolidated investment products are offset in noncontrolling interests in our consolidated statements of income.

Investments held by CIPs generated losses of $66.9 million in fiscal year 2022, as compared to gains of $324.6 million in the prior year, largely related to net losses on holdings of various equity and fixed income funds and lower gains on holdings of various alternative funds.

Dividend and interest income of CIPs was $49.2 million in fiscal year 2022, as compared to $96.5 million in the prior year.

Investment and other income of consolidated investment products, net increased $350.9 million in fiscal year 2021 primarily due to net gains on investments held by various alternative funds.

Investment and other income of consolidated investment products, net decreased $8.6 million in fiscal year 2020 primarily due to net losses on investments held by various alternative funds, partially offset by net gains from holdings of various equity funds and a U.S.

fixed income fund and an increase in dividend and interest income of CIPs.

Expenses of consolidated investment products increased $1.8 million in fiscal year 2021 and $12.5 million in fiscal year 2020, primarily due to activity of the funds.

Expenses of consolidated investment products decreased $11.5 million in fiscal year 2022 and increased $1.8 million in fiscal year 2021, due to activity of the funds.

Our investments in sponsored funds include initial cash investments made in the course of launching mutual fund and other investment product offerings, as well as investments for other business reasons.

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Accounting Classification 1

Total Direct Portfolio

(in millions) Cash and Cash Equivalents Investments,

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Cash and Cash Equivalents $ 4,134.9 $ — $ — $ — $ — $ 4,134.9

Fixed Income — 229.4 66.4 37.7 247.0 580.5

Alternative — 167.2 510.9 78.3 580.3 1,336.7

Equity — 229.8 235.5 152.0 82.9 700.2

Fixed Income — 172.7 10.2 36.0 232.4 451.3

Multi-Asset — 43.8 14.9 — 71.6 130.3

Alternative — 110.3 320.9 27.2 424.0 882.4

Total investments — 613.5 771.5 266.3 967.2 2,618.5

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1 See Note 1 – Significant Accounting Policies and Note 5 – Investments in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for information on investment accounting classifications.

2 Total cash and cash equivalents and investments includes $3,602.0 million held for operational activities, including investments in sponsored funds and other products, and $216.4 million necessary to comply with regulatory requirements.

3 Total cash and cash equivalents and investments includes $296.3 million attributable to employee-owned and other third-party investments made through partnerships which are offset in nonredeemable noncontrolling interests.

TAXES ON INCOME

Our effective income tax rate for fiscal year 2022 was 22.9% as compared to 14.3% in fiscal year 2021 and 22.7% in fiscal year 2020.

The rate decrease in fiscal year 2021 was primarily due to the release of a tax reserve following the close of an IRS audit of the U.S.

taxation of deemed foreign dividends (“Transition Tax”) for fiscal year 2018 and net income attributable to noncontrolling interests as compared to a net loss in the prior fiscal year.

The rate decrease in fiscal year 2020 was primarily due to the prior-year reversal of the tax benefit included in the Transition Tax upon issuance of final regulations by the U.S.

Department of Treasury for the Tax Cuts and Jobs Act (“Tax Act”), tax benefits from capital losses subsequent to the change in corporate tax structure of a foreign holding company to a U.S.

branch, and a statutory rate reduction enacted in India in December 2019.

These decreases were partially offset by an increase in the tax rate due to a lower mix of earnings in lower tax jurisdictions.

Our effective income tax rate excluding the one-time impact of the Tax Act was 21.6% for fiscal year 2019.

The rate increase in fiscal year 2022 was primarily due to the release of a tax reserve in the prior year following the close of an IRS audit of the U.S.

taxation of deemed foreign dividends for fiscal year 2018, net losses on investments held by CIPs for which there are no related tax benefits, as compared to net gains in fiscal year 2021, and a decrease in foreign earnings.

The rate decrease in fiscal year 2021 was primarily due the release of the tax reserve mentioned above and net income attributable to noncontrolling interests as compared to a net loss in fiscal year 2020.

Our effective income tax rate reflects the relative contributions of earnings in the jurisdictions in which we operate, which have varying tax rates.

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As supplemental information, we are providing performance measures for “adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share,” each of which is based on methodologies other than generally accepted accounting principles (“non-GAAP measures”).

Management believes these non-GAAP measures are useful indicators of our financial performance and may be helpful to investors in evaluating our relative performance against industry peers as these measures exclude the impact of CIPs and mitigate the margin variability related to sales and distribution revenues and expenses across multiple distribution channels globally.

These measures also exclude performance-based investment management fees which are fully passed through as compensation and benefits expense per the terms of a previous acquisition by Legg Mason and have no impact on net income.

These non-GAAP measures also exclude acquisition-related expenses, certain items which management considers to be nonrecurring, unrealized investment gains and losses included in investment and other income (losses), net, and the related income tax effect of these adjustments, as applicable.

These non-GAAP measures also exclude the impact on compensation and benefits expense from gains and losses on investments made to fund deferred compensation plans and on seed investments under certain historical revenue sharing arrangements, which is offset in investment and other income (losses), net.

Management believes these non-GAAP measures are useful indicators of our financial performance and may be helpful to investors in evaluating our relative performance against industry peers.

“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are defined below, followed by reconciliations of operating income, operating margin, net income attributable to Franklin Resources, Inc.

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• Elimination of operating revenues upon consolidation of investment products.

• Acquisition-related items:

◦ Acquisition-related retention compensation.

• Impact on compensation and benefits expense from gains and losses on investments related to Legg Mason deferred compensation plans and seed investments, which is offset in investment and other income (losses), net.

• Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration liabilities.

• Amortization and impairment of intangible assets and goodwill.

• Special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company.

◦ Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities.

◦ Amortization of intangible assets.

◦ Impairment of intangible assets and goodwill, if any.

• Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company.

• Impact on compensation and benefits expense from gains and losses on investments related to deferred compensation plans, which is offset in investment and other income (losses), net.

• Impact on compensation and benefits expense related to minority interests in certain subsidiaries, which is offset in net income (loss) attributable to redeemable noncontrolling interests.

Adjusted Operating Margin

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We define adjusted operating revenues as operating revenues adjusted to exclude the following:

• Elimination of operating revenues upon consolidation of investment products.

• Acquisition-related performance-based investment management fees which are passed through as compensation and benefits expense.

• Sales and distribution fees and a portion of investment management fees allocated to cover sales, distribution and marketing expenses paid to the financial advisers and other intermediaries who sell our funds on our behalf.

• Elimination of operating revenues upon consolidation of investment products.

Adjusted Net Income

Adjusted Net Income and Adjusted Diluted Earnings Per Share

We define adjusted net income as net income attributable to Franklin Resources, Inc.

adjusted to exclude the following:

• Activities of CIPs, including investment and other income (losses), net, and income (loss) attributable to noncontrolling interests, net of revenues eliminated upon consolidation of investment products.

• Activities of CIPs.

• Acquisition-related items:

◦ Acquisition-related retention compensation.

• Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration liabilities.

• Amortization and impairment of intangible assets.

• Impairment of goodwill and write off of noncontrolling interests related to the wind down of an acquired business.

• Special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company.

• Net gains or losses on investments related to Legg Mason deferred compensation plans which are not offset by compensation and benefits expense.

• Unrealized investment gains and losses other than those that are offset by compensation and benefits expense.

◦ Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities.

◦ Amortization of intangible assets.

◦ Impairment of intangible assets and goodwill, if any.

◦ Write off of noncontrolling interests related to the wind down of an acquired business.

◦ Interest expense for amortization of Legg Mason debt premium from acquisition-date fair value adjustment.

• Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company.

• Net gains or losses on investments related to deferred compensation plans which are not offset by compensation and benefits expense.

• Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests.

• Unrealized investment gains and losses.

• Net income tax expense of the above adjustments based on the respective blended rates applicable to the adjustments.

Adjusted Diluted Earnings Per Share

We define adjusted diluted earnings per share as diluted earnings per share adjusted to exclude the per share impacts of the adjustments applied to net income in calculating adjusted net income.

In calculating adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share, we adjust for activities of CIPs because the impact of consolidated products is not considered reflective of the underlying results of our operations.

We adjust for acquisition-related retention compensation, other acquisition-related expenses, amortization and impairment of intangible assets and goodwill, the write-off of noncontrolling interests, and interest expense for amortization of the Legg Mason debt premium to facilitate comparability of our operating results with the results of other asset management firms.

We adjust for special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company because these items are deemed nonrecurring.

In calculating adjusted net income and adjusted diluted earnings per share, we adjust for unrealized investment gains and losses included in investment and other income (losses), net and net gains or losses on investments related to Legg Mason deferred compensation plans which are not offset by compensation and benefits expense because these items primarily relate to seed and strategic investments which have been and are generally expected to be held long term.

In calculating our non-GAAP measures, we adjust for the impact of CIPs because it is not considered reflective of our underlying results of operations.

Acquisition-related items and special termination benefits are excluded to facilitate comparability to other asset management firms.

We adjust for compensation and benefits expense related to funded deferred compensation plans because it is partially offset in other income (expense), net.

We adjust for compensation and benefits expense and net income (loss) attributable to redeemable noncontrolling interests to reflect the economics of certain profits interest arrangements.

Sales and distribution fees and a portion of investment management fees generally cover sales, distribution and marketing expenses and, therefore, are excluded from adjusted operating revenues.

In addition, when calculating adjusted net income and adjusted diluted earnings per share we exclude unrealized investment gains and losses included in investment and other income (losses) because the related investments are generally expected to be held long term.

The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows:

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167.2 163.7 195.8

Compensation and benefits expense from gains on deferred compensation and seed investments, net 22.7 1.2 —

Compensation and benefits expense from gains (losses) on deferred compensation and seed investments, net (36.7) 22.7 1.2

Other acquisition-related expenses 60.7 36.0 57.4

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8.2 27.1 54.8

Compensation and benefits expense related to minority interests in certain subsidiaries 20.0 — —

Adjusted operating income $ 2,323.5 $ 2,379.3 $ 1,491.1

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8.2 27.1 54.8

Net gains on deferred compensation plan investments not offset by compensation and benefits expense

(1.2) (0.1) —

Net losses (gains) on deferred compensation plan investments not offset by compensation and benefits expense 9.0 (1.2) (0.1)

Unrealized investment losses (gains) 191.9 (285.7) 221.0

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Write-off of noncontrolling interests — — (16.7)

Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests 1.4 — —

Net income tax expense of adjustments (143.9) (31.7) (101.4)

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Other income, net 24.2 207.4 33.6

income attributable to noncontrolling interests 181.8 5.4 5.4

income (loss) attributable to noncontrolling interests (24.2) 181.8 5.4

Net income $ 0.2 $ 2.8 $ 4.6

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Financing cash flows 1,585.0 2,030.1 734.4

Net cash provided by operating activities increased in fiscal year 2021 primarily due to higher net income, a higher adjustment for amortization of intangible assets and increases in accrued compensation and benefits, partially offset by a lower change in investments, net, adjustments for gains of CIPs as compared to losses in the prior year, increases in receivables and other assets and income from investments in equity method investees as compared to losses in the prior year.

Net cash provided by operating activities increased in fiscal year 2022 primarily due to lower net purchases of investments by CIPs, higher net income adjusted for non-cash items and timing differences in the cash settlement of operating assets and liabilities.

Net cash used in investing activities increased as compared to the prior year primarily due to cash paid for acquisitions in the current year, partially offset by net liquidations of our investments as compared to net purchases in the prior year.

Net cash provided by financing activities decreased as compared to the prior year primarily due to proceeds from issuance of debt in the prior year, partially offset by higher net proceeds from debt of CIPs.

Net cash provided by operating activities increased in fiscal year 2021 primarily due to higher net income, a higher

adjustment for amortization of intangible assets and increases in accrued compensation and benefits, partially offset by a lower change in investments, net, adjustments for gains of CIPs as compared to losses in the prior year, increases in receivables and other assets and income from investments in equity method investees as compared to losses in the prior year.

Net cash used in investing activities decreased as compared to the prior year primarily due to lower cash paid for acquisitions, partially offset by net deconsolidation of CIPs as compared to net consolidation in the prior year, higher net purchases of investments by CLOs and net purchases of investments as compared to net liquidations in the prior year.

Net cash provided by financing activities increased as compared to the prior year primarily due to proceeds from debt of CIPs, proceeds from issuance of debt and higher net subscriptions in CIPs by noncontrolling interests, partially offset by higher payments on debt by CIPs and debt.

Net cash provided by operating activities increased in fiscal year 2020 primarily due to lower net purchases of investments by CIPs, decreases in investments, net, decreases in receivables and other assets, and a smaller decline in taxes payable, partially offset by decreases in net income and decreases in accounts payable and accrued expenses.

Net cash used in investing activities increased as compared to the prior year primarily due to higher cash paid for acquisitions, and net purchases of investments by CLOs, partially offset by net consolidation of CIPs as compared to net deconsolidation in the prior year, higher net liquidation of our investments as compared to the prior year, and lower net additions of property, plant and equipment.

Net cash provided by financing activities, as compared to net cash used in the prior year, primarily resulted from proceeds from debt of CIPs and lower repurchases of stock, partially offset by lower net subscriptions in CIPs by noncontrolling interests and payments on debt by CIPs.

The assets and liabilities of CIPs attributable to third-party investors do not impact our liquidity and capital resources.

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Liquid assets consist of cash and cash equivalents, receivables and certain investments.

Cash and cash equivalents at September 30, 2021 primarily consist of deposits with financial institutions and money market funds.

Cash and cash equivalents at September 30, 2022 primarily consist of money market funds and deposits with financial institutions.

Liquid investments consist of investments in sponsored and other funds, direct investments in redeemable CIPs, other equity and debt securities, and time deposits with maturities greater than three months.

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Certain of our subsidiaries are required by our internal policy or regulation to maintain minimum levels of cash and/or capital, and may be restricted in their ability to transfer cash to their parent companies.

Liquid assets used to satisfy these purposes were $4,059.6 million at September 30, 2021 and $3,290.9 million at September 30, 2020, including $262.6 million and $316.6 million that was restricted by regulatory requirements.

Should we require more capital than is available for use, we could elect to reduce the level of discretionary activities, such as share repurchases or investments in sponsored and other products, or we could raise capital through debt or equity issuance.

Should we require more capital than is available for use, we could elect to reduce the level of discretionary activities, such as share repurchases or investments in sponsored and other products, we could raise capital through debt or equity issuances, or utilize existing or new credit facilities.

These alternatives could result in increased interest expense, decreased dividend or interest income, or other dilution to our earnings.

Capital Resources

We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations, the ability to issue debt or equity securities and borrowing capacity under our uncommitted commercial paper private placement program.

On September 15, 2021, we redeemed all of the outstanding $500.0 million 5.450% junior notes due in September 2056 issued by Legg Mason at the principal amount plus accrued and unpaid interest of $6.8 million.

On August 12, 2021, we completed the offering and sale of the 2.950% senior unsecured unsubordinated notes due 2051 with an aggregate principal amount of $350.0 million.

On March 15, 2021, we redeemed all of the outstanding $250.0 million 6.375% junior notes due in March 2056 issued by Legg Mason at the principal amount plus accrued and unpaid interest of $4.0 million.

On October 19, 2020, we completed the offering and sale of the 1.600% senior unsecured unsubordinated notes due 2030 with a principal amount of $750.0 million.

On August 12, 2021, the Company issued an additional $100.0 million in aggregate principal amount of 1.600% senior notes due October 2030.

The notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price.

Prior to fiscal year 2021, we issued senior unsecured unsubordinated notes for general corporate purposes, to redeem outstanding notes and to finance an acquisition.

At September 30, 2021, $699.6 million of the notes issued by Franklin in prior fiscal years were outstanding with an aggregate principal amount due of $700.0 million.

The notes were issued at fixed interest rates and consist of $300.0 million at 2.800% per annum which mature in 2022, $400.0 million at 2.850% per annum which mature in 2025.

At September 30, 2021, a total of $1,893.7 million of the notes issued by Franklin were outstanding with an aggregate principal amount due of $1,900.0 million.

At September 30, 2021, Legg Mason’s outstanding senior unsecured unsubordinated notes had an aggregate principal amount due of $1,250.0 million.

The notes have fixed interest rates from 3.950% to 5.625% with interest payable semi-annually and have an aggregate carrying value, inclusive of unamortized premium, of $1,518.3 million at September 30, 2021.

Effective August 2, 2021, Franklin has agreed to unconditionally and irrevocably guarantee all of the outstanding notes issued by Legg Mason.

The Franklin and Legg Mason senior notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price.

We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations, amounts available under the credit facility discussed below, the ability to issue debt or equity securities and borrowing capacity under our uncommitted commercial paper private placement program.

On September 15, 2022, we repaid all of the outstanding $300.0 million 2.800% senior notes due in September 2022 issued by Franklin Resources, Inc.

at the principal amount plus accrued and unpaid interest of $4.2 million.

On September 8, 2022, we entered into a term loan credit agreement with several financial institutions to establish a 3-year term loan with an aggregate commitment of $300.0 million.

On January 10, 2022, we entered into a bi-lateral credit agreement with Bank of America, N.A.

to establish a 364- day revolving credit facility with an aggregate commitment of $500.0 million.

On September 8, 2022, we amended and restated the credit facility to, among other things, extend its maturity to September 7, 2023.

As of the time of this filing, there were no amounts outstanding.

In prior fiscal years, we issued senior unsecured unsubordinated notes for general corporate purposes and to redeem outstanding notes.

At September 30, 2022, Franklin’s outstanding senior notes had an aggregate principal amount due of $1,600.0 million.

The notes have fixed interest rates from 1.600% to 2.950% with interest paid semi-annually and have an aggregate carrying value, inclusive of unamortized discounts and debt issuance costs, of $1,583.3 million.

At September 30, 2022, Legg Mason’s outstanding senior notes had an aggregate principal amount due of $1,250.0 million.

The notes have fixed interest rates from 3.950% to 5.625% with interest paid semi-annually and have an aggregate carrying value, inclusive of unamortized premium, of $1,493.1 million.

Effective August 2, 2021, Franklin agreed to unconditionally and irrevocably guarantee all of the outstanding notes issued by Legg Mason.

The senior notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price.

The indentures governing the senior notes contain limitations on our ability and the ability of our subsidiaries to pledge voting stock or profit participating equity interests in our subsidiaries to secure other debt without similarly securing the notes equally and ratably.

In addition, the indentures include requirements that must be met if we consolidate or merge with, or sell all of our assets to, another entity.

The 364-day revolving credit facility and term loan credit agreement contain a financial performance covenant requiring that the Company maintains a consolidated net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 3.00 to 1.00.

We were in compliance with all debt covenants at September 30, 2022.

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We expect that our main uses of cash will be to invest in and grow our business including through acquisitions, pay stockholder dividends, invest in our products, pay income taxes and operating expenses of the business, enhance technology infrastructure and business processes, repurchase shares of our common stock, and repay and service debt.

While we expect to continue to repurchase shares to offset dilution from share-based compensation, and expect to continue to repurchase shares opportunistically from time to time, we will likely spend more of our post-dividend free cash flow investing in our business, including seed capital and acquiring resources to help grow our investment teams and operations.

While we expect to continue to repurchase shares to offset dilution from stock-based compensation, and expect to continue to repurchase shares opportunistically from time to time, we will likely spend more of our post-dividend free cash flow investing in our business, including seed capital and acquiring resources to help grow our investment teams and operations.

In the ordinary course of business, we enter into contracts or purchase obligations with third parties whereby the third parties provide goods or services to or on behalf of the Company.

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We maintain a stock repurchase program to manage our equity capital with the objective of maximizing shareholder value.

Our stock repurchase program is effected through regular open-market purchases and private transactions in accordance with applicable laws and regulations, and is not subject to an expiration date.

Our stock repurchase program is effected through open-market purchases and private transactions in accordance with applicable laws and regulations, and is not subject to an expiration date.

The size and timing of these purchases will depend on business conditions, price, market and other factors.

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These unfunded commitments are not recorded in the consolidated balance sheet.

We invested $182.2 million, net of redemptions, in our sponsored products during fiscal year 2021, and redeemed $636.6 million, net of investments, during fiscal year 2020.

On November 1, 2021, we entered into an acquisition agreement to acquire all of the outstanding ownership interests in Lexington Partners L.P.

for cash consideration of approximately $1.0 billion to be paid at closing and additional cash payments totaling $750.0 million to be paid over the next three years.

The acquisition is expected to be completed in the second quarter of the fiscal year 2022 and is expected to be funded from available cash.

On September 29, 2021, we entered into an acquisition agreement to acquire all of the outstanding ownership interests in O'Shaughnessy Asset Management for cash consideration of approximately $300.0 million, excluding future payments to be made upon the attainment of certain performance measures.

The acquisition is expected to be completed in the first quarter of fiscal year 2022 and is expected to be funded from available cash.

We invested $109.2 million, net of redemptions, into our sponsored products during fiscal year 2022, and invested $182.2 million, net of redemptions, during fiscal year 2021.

On September 27, 2022 we entered into a lease agreement for office space in New York City located at One Madison Avenue with occupancy expected to begin in early fiscal year 2024 with an aggregate expected commitment of $766.7 million over 16 years.

This is part of an initiative to consolidate our existing office space in New York City.

On November 1, 2022, we acquired all of the outstanding ownership interests in BNY Alcentra Group Holdings, Inc.

from The Bank of New York Mellon Corporation for cash consideration of approximately $587.3 million paid at closing, including $188.3 million related to investments, and up to $350.0 million in contingent consideration to be paid upon on the achievement of certain performance thresholds over the next four years.

We paid the purchase price from our existing cash.

On April 1, 2021, we acquired all of the outstanding ownership interests in Lexington, a leading global manager of secondary private equity and co-investment funds, for cash consideration of approximately $1.0 billion and additional payments totaling $750.0 million to be paid in cash over the next three years.

In connection with the acquisition, we granted a 25% profits interest in Lexington and performance-based cash retention awards to certain employees that vest over approximately five years.

We paid the purchase price from our existing cash.

On December 31, 2021, we acquired all of the outstanding ownership interests in OSAM, a leading quantitative asset

management firm, for cash consideration of approximately $300.0 million, excluding future payments to be made subject to the attainment of certain performance measures.

We paid the purchase price from our existing cash.

The funds that we manage have their own resources available for purposes of providing liquidity to meet shareholder redemptions, including securities that can be sold or provided to investors as in-kind redemptions, and lines of credit.

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While we have no legal or contractual obligation to do so, we have in certain instances voluntarily elected to provide the funds with direct or indirect financial support based on our business objectives.

In April 2020, we authorized loans aggregating up to 5.0 billion Indian Rupees (approximately $66.2 million) to certain sponsored funds in India that had experienced increased liquidity risks and redemptions and are in the process of winding up.

The loans were fully repaid during the second quarter of fiscal year 2021.

See Note 16 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for further information.

We did not provide financial or other support to our sponsored funds during fiscal year 2022 or 2021.

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These estimates, judgments and assumptions are affected by our application of accounting policies.

Further, global concerns about the COVID-19 pandemic have adversely affected and may continue to adversely affect, our business, financial condition and results of operations including the estimates and assumptions made by management.

Further, concerns about the global economic outlook and the risk of recession as well as the ongoing COVID-19 pandemic have adversely affected and may continue to adversely affect, our business, financial condition and results of operations including the estimates and assumptions made by management.

Actual results could differ from the estimates.

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Our estimates are based on assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, may differ from actual results.

Our management contract intangible assets are amortized over their estimated useful lives, which range from three to fifteen years, using the straight-line method, unless the asset is determined to have an indefinite useful life.

Our management contract intangible assets are amortized over their estimated useful lives, which range from three to sixteen years, using the straight-line method, unless the asset is determined to have an indefinite useful life.

Indefinite-lived intangible assets represent contracts to manage investment assets for which there is no foreseeable limit on the contract period.

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The fair values of the investments are determined based on the fund products’ published NAV or estimated using NAV as a practical expedient.

Other equity and debt securities consist of other equity investment securities and trading debt securities.

Other equity and debt securities consist of other equity investment securities and debt securities carried at fair value.

Changes in the fair value are recognized as gains and losses in earnings.

The fair values of equity securities other than fund products are determined using independent third-party broker or dealer price quotes or based on discounted cash flows using

significant unobservable inputs.

The fair values of debt securities are determined using independent third-party broker or dealer price quotes or based on discounted cash flows using significant unobservable inputs.

The fair values of equity securities, excluding fund products, and debt securities are determined using independent third-party broker or dealer price quotes or based on either a

market-based or income-based approach using significant unobservable inputs.

The fair values of fund products are determined based on their published NAV or estimated using NAV as a practical expedient.

Investments of CIPs consist of marketable debt and equity securities and other investments that are not generally traded in active markets.

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The fair value of third-party equity interests in CIPs are determined based on the published NAV or estimated using NAV a practical expedient.

The fair value of redeemable noncontrolling interests related to minority interest in certain subsidiaries are derived using discounted cash flows and guideline public company methodology, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate and operating income multiples.

We earn revenue primarily from providing investment management and related services to our customers.

In addition to investment management, services include fund administration, sales and distribution, and shareholder servicing.

The fair values of redeemable noncontrolling interests related to minority interest in certain subsidiaries are determined using discounted cash flows and guideline public company methods, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate and public company earnings multiples.

We earn revenue primarily from providing investment management and related services to our customers, which are generally investment products or investors in separate accounts.

Related services include fund administration, sales and distribution, and shareholder servicing.

Revenues are recognized when our obligations related to the services are satisfied and it is probable that a significant reversal of the revenue amount would not occur in future periods.

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Multiple services included in customer contracts are accounted for separately when the obligations are determined to be distinct.

Management judgment is involved in assessing the probability of significant revenue reversal and in the identification of distinct services.

Fees from providing investment management and fund administration services (“investment management fees”), other than performance-based investment management fees, are determined based on a percentage of AUM, primarily on a monthly basis using daily average AUM, and are recognized as the services are performed over time.

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See also Note 15 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report.

NEW ACCOUNTING GUIDANCE

See Note 2 – New Accounting Guidance in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity