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Item 2. Management’s Discussion and Analysis

2023-01-30 compared with 2022-07-28 · 169 added, 254 removed, 347 unchanged (55% of the section changed)

5 unchanged sentences

Forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that may cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements, including pandemic-related risks, market and volatility risks, investment performance and reputational risks, global operational risks, competition and distribution risks, third-party risks, technology and security risks, human capital risks, cash management risks, and legal and regulatory risks.

The forward-looking statements contained in this Form 10-Q or that are incorporated by reference herein are qualified in their entirety by reference to the risks and uncertainties disclosed in this Form 10-Q, including those discussed under the heading “Risk Factors” below, and/or discussed under the headings “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (“fiscal year 2021”).

The forward-looking statements contained in this Form 10-Q or that are incorporated by reference herein are qualified in their entirety by reference to the risks and uncertainties disclosed in this Form 10-Q and/or discussed under the headings “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (“fiscal year 2022”).

While forward-looking statements are our best prediction at the time that they are made, you should not rely on them and are cautioned against doing so.

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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 ® , Lexington Partners ® , LibertyShares ® , Martin Currie ® , O’Shaughnessy ® Asset Management, Royce ® Investment Partners and Western Asset Management Company ® .

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.

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These arrangements could change in the future.

During our third fiscal quarter, global equity markets remained challenged amid continued concerns about further interest rate increases, the global economic growth outlook and the risk of a recession.

The S&P 500 Index and MSCI World Index each decreased 16.1% for the quarter, and decreased 11.1% and 14.0% for the fiscal year to date.

The global bond markets had negative returns, with the Bloomberg Global Aggregate Index decreasing 8.3% during the quarter and 14.5% for the fiscal year to date, as the Federal Reserve and other developed market central banks continued to increase interest rates in an effort to combat inflation.

Our total AUM at June 30, 2022 was $1,379.8 billion, 10% lower than at September 30, 2021 and 11% lower than at June 30, 2021.

Monthly average AUM (“average AUM”) for the three and nine months ended June 30, 2022 decreased 6% and increased 1% from the same periods in the prior fiscal year.

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 that both 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.

During our first fiscal quarter, global equity markets provided positive returns reflecting indications that central banks may begin to slow the pace of monetary policy tightening, signs that elevated inflation could be softening, and strong corporate earnings in certain sectors.

The S&P 500 Index and MSCI World Index increased 7.6% and 9.9% for the quarter.

The global bond markets remained positive as the Bloomberg Global Aggregate Index increased 4.6% during the quarter, reflecting expectations of easing monetary policy.

Our total AUM at December 31, 2022 was $1,387.7 billion, 7% higher than at September 30, 2022 and 12% lower than at December 31, 2021.

Monthly average AUM (“average AUM”) for the three months ended December 31, 2022 decreased 13% from the same period in the prior fiscal year.

On November 1, 2022, we acquired BNY Alcentra Group Holdings, Inc.

(together with its subsidiaries, “Alcentra”), one of the largest European credit and private debt managers, with global expertise in senior secured loans, high yield bonds, private credit, structured credit, special situations and multi-strategy credit strategies, for cash consideration of $ 587.3 million, which includes $188.3 million for certain securities held in Alcentra’s collateralized loan obligations;

deferred consideration of $ 60.4 million due November 1, 2023;

and contingent consideration to be paid upon the achievement of certain performance thresholds over the next four years of up to $ 350.0 million that had an acquisition-date fair value of $ 24.6 million.

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

We are subject to various laws, rules and regulations globally that impose restrictions, limitations, registration, reporting and disclosure requirements on our business, and add complexity to our global compliance operations.

Uncertainties regarding the global economy remain for the foreseeable future.

As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our products and on providing high quality service to our clients.

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We will continue to seek to protect and further our brand recognition while developing and maintaining broker-dealer and client relationships.

The success of these and other strategies may be influenced by the factors discussed under the heading “Risk Factors” below and in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year 2021.

The success of these and other strategies may be influenced by the factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year 2022.

RESULTS OF OPERATIONS

Three Months Ended

June 30, Percent

Change Nine Months Ended

June 30, Percent

December 31, Percent

(in millions, except per share data) 2022 2021

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Operating margin 1

19.9 % 22.0 % 22.5 % 21.5 %

Net income attributable to Franklin Resources, Inc.

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AUM by asset class was as follows:

(in billions) June 30,

2022 June 30,

(in billions) December 31,

2022 December 31,

Fixed Income $ 494.8 $ 642.1 (23 %)

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Change Mix of Average AUM

for the three months ended June 30, 2022 2021 2022 2021

Fixed Income $ 563.4 $ 651.5 (14 %) 39 % 42 %

Equity 467.8 529.0 (12 %) 33 % 35 %

Alternative 205.4 135.3 52 % 14 % 9 %

Multi-Asset 144.4 152.0 (5 %) 10 % 10 %

Cash Management 58.8 63.2 (7 %) 4 % 4 %

Total $ 1,439.8 $ 1,531.0 (6 %) 100 % 100 %

(in billions) Average AUM Percent

Change Mix of Average AUM

for the nine months ended June 30, 2022 2021 2022 2021

for the three months ended December 31, 2022 2021 2022 2021

Fixed Income $ 490.3 $ 642.4 (24 %) 36 % 41 %

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(in billions) Three Months Ended

June 30, Percent

Change Nine Months Ended

June 30, Percent

2022 2021 2022 2021

December 31, Percent

Beginning AUM $ 1,297.4 $ 1,530.1 (15 %)

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Long-term outflows (81.4) (82.9) (2 %)

Long-term net flows (19.8) (6.6) 200 % (7.4) (15.3) (52%)

Cash management net flows 0.4 (2.2) NM (0.9) (11.2) (92%)

Long-term net flows (10.9) 24.1 NM

Cash management net flows 17.5 5.8 202%

Total net flows 6.6 29.9 (78%)

Acquisitions 57.2 — NM 64.9 — NM

Net market change, distributions and other (135.5) 62.0 NM (206.9) 159.7 NM

Acquisitions 34.9 7.7 353%

Net market change, distributions and other 48.8 10.4 369%

Ending AUM $ 1,387.7 $ 1,578.1 (12 %)

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for the three months ended

June 30, 2022

AUM at April 1, 2022 $ 595.0 $ 515.4 $ 157.9 $ 151.9 $ 57.3 $ 1,477.5

December 31, 2022

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

Long-term inflows 28.5 27.2 6.5 8.3 — 70.5

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17.2 26.5 (2.3) 7.5 (0.1) 48.8

AUM at June 30, 2022 $ 536.3 $ 424.9 $ 224.8 $ 136.2 $ 57.6 $ 1,379.8

AUM decreased $97.7 billion, or 7%, during the three months ended June 30, 2022 due to the negative impact of $135.5 billion of net market change, distributions and other and $19.8 billion of long-term net outflows, partially offset by an acquisition of $57.2 billion and $0.4 billion of cash management net inflows.

Net market change, distributions and other primarily consists of $117.3 billion of market depreciation, a $10.3 billion decrease from foreign exchange revaluation and $7.9 billion of long-term distributions.

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

AUM at December 31, 2022 $ 494.8 $ 419.1 $ 257.4 $ 141.4 $ 75.0 $ 1,387.7

AUM increased $90.3 billion, or 7%, during the three months ended December 31, 2022 due to the positive impact of $48.8 billion of net market change, distributions and other, $34.9 billion from an acquisition, and $17.5 billion of cash management net inflows, partially offset by $10.9 billion of long-term net outflows.

Long-term net outflows included a $2.1 billion fixed income institutional redemption that had minimal impact on revenue.

Net market change, distributions and other primarily consists of $58.5 billion of market appreciation, an $8.8 billion increase from foreign exchange revaluation, partially offset by $18.5 billion of long-term distributions.

The market appreciation occurred in all asset classes with the exception of the alternative asset class and reflected positive returns in the global equity and fixed income markets.

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

dollar denominated, which represented 10% of total AUM as of June 30, 2022, was primarily due to a stronger U.S.

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

AUM decreased $172.3 billion, or 11%, as compared to the prior year period.

Long-term inflows decreased 8% to $77.4 billion, driven by lower inflows in fixed income, equity and alternative open-end funds and equity investment trusts,

partially offset by higher inflows in multi-asset open end funds, alternative private closed-end funds and multi-asset and equity sub-advised mutual funds.

Long-term outflows increased 8% to $97.2 billion driven by higher redemptions in fixed income open-end funds and institutional separate accounts, multi-asset sub-advised mutual funds, and equity retail separate accounts, partially offset by lower redemptions in equity sub-advised mutual funds, open-end funds and institutional separate accounts.

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

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

Long-term inflows decreased 34% to $70.5 billion, as compared to the prior year period, driven by lower inflows in equity, multi-asset, and fixed income open end funds, fixed income institutional separate accounts, sub-advised CITs, and equity retail separate accounts.

Decreased inflows for open end mutual funds include the impact of lower reinvested distributions, which were $12.1 billion in the current year quarter, as compared to $23.5 billion in the prior year quarter.

Long-term outflows decreased 2% to $81.4 billion due to lower outflows in equity open end funds and multi-asset and equity sub-advised mutual funds, partially offset by higher outflows in fixed income and alternative institutional separate accounts, fixed income open end funds, and alternative private open end funds.

(in billions) Fixed Income Equity Alternative Multi-Asset Cash

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for the three months ended

June 30, 2021

AUM at April 1, 2021 $ 642.3 $ 511.9 $ 131.1 $ 148.2 $ 65.4 $ 1,498.9

Long-term inflows 40.2 29.1 5.8 8.6 — 83.7

Long-term outflows (38.1) (40.6) (2.7) (8.9) — (90.3)

Long-term net flows 2.1 (11.5) 3.1 (0.3) — (6.6)

Cash management net flows — — — — (2.2) (2.2)

Total net flows 2.1 (11.5) 3.1 (0.3) (2.2) (8.8)

Net market change, distributions and other 13.7 36.5 6.6 5.1 0.1 62.0

AUM at June 30, 2021 $ 658.1 $ 536.9 $ 140.8 $ 153.0 $ 63.3 $ 1,552.1

AUM increased $53.2 billion, or 4%, during the three months ended June 30, 2021 due to $62.0 billion of net market change, distributions and other, partially offset by $6.6 billion of long-term net outflows and $2.2 billion of cash management net outflows.

Net market change, distributions and other consists of $66.1 billion of market appreciation and a $1.5 billion increase from foreign exchange revaluation, partially offset by $5.6 billion of long-term distributions.

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

Foreign exchange revaluation was primarily due to a weaker U.S.

dollar compared to the Brazilian Real, Canadian dollar and Euro, partially offset by a stronger U.S.

dollar compared to the Australian dollar.

Long-term outflows included outflows of $7.0 billion from three institutional products, including two equity redemptions of $3.7 billion and $2.2 billion, and $2.5 billion from six fixed income funds, including $1.2 billion from five India credit funds that were non-management fee earning which are in the process of winding up.

Long-term outflows were partially offset by inflows of $3.8 billion in two fixed income funds, including the $1.0 billion launch of a closed-end fund.

(in billions) Fixed Income Equity Alternative Multi-Asset Cash

Management Total

for the nine months ended

June 30, 2022

December 31, 2021

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

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(16.3) 22.5 5.3 (1.0) (0.1) 10.4

AUM at June 30, 2022 $ 536.3 $ 424.9 $ 224.8 $ 136.2 $ 57.6 $ 1,379.8

AUM decreased $150.3 billion, or 10%, during the nine months ended June 30, 2022 due to the negative impact of $206.9 billion of net market change, distributions and other, $7.4 billion of long-term net outflows and $0.9 billion of cash management net outflows, partially offset by $64.9 billion from acquisitions.

Net market change, distributions and other primarily consists of $152.5 billion of market depreciation, $42.6 billion of long-term distributions and $11.8 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 7% to $260.5 billion, as compared to the prior-year period, driven by lower inflows in fixed income open-end funds and institutional separate accounts, partially offset by higher inflows for alternative private closed end funds.

Long-term outflows decreased 10% to $267.9 billion due to lower outflows in fixed income institutional separate accounts and equity open-end funds, partially offset by higher outflows for multi-asset sub-advised mutual funds.

(in billions) Fixed Income Equity Alternative Multi-Asset Cash

Management Total

for the nine months ended

June 30, 2021

AUM at October 1, 2020 $ 656.9 $ 438.1 $ 122.1 $ 129.4 $ 72.4 $ 1,418.9

Long-term inflows 135.7 103.0 15.3 27.5 — 281.5

Long-term outflows (142.1) (118.8) (8.9) (27.0) — (296.8)

Long-term net flows (6.4) (15.8) 6.4 0.5 — (15.3)

Cash management net flows — — — — (11.2) (11.2)

Total net flows (6.4) (15.8) 6.4 0.5 (11.2) (26.5)

Net market change, distributions and other

7.6 114.6 12.3 23.1 2.1 159.7

AUM at June 30, 2021 $ 658.1 $ 536.9 $ 140.8 $ 153.0 $ 63.3 $ 1,552.1

AUM increased $133.2 billion, or 9%, during the nine months ended June 30, 2021 due to $159.7 billion of net market change, distributions and other, partially offset by $15.3 billion of long-term net outflows and $11.2 billion of cash management net outflows.

Net market change, distributions and other consists of $179.9 billion of market appreciation and a $4.9 billion increase from foreign exchange revaluation, partially offset by $25.1 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.

Foreign exchange revaluation was primarily due to a weaker U.S.

dollar compared to the Canadian dollar, Australian dollar, Pound Sterling and Brazilian Real, partially offset by a stronger U.S.

dollar compared to the Japanese Yen.

Long-term outflows included outflows of $26.9 billion from eleven institutional products, including a single fixed income redemption of $5.9 billion, and two equity redemptions of $3.7 billion and $2.2 billion, $10.2 billion from seven fixed income funds, including $2.5 billion from five India credit funds that were non-management fee earning which are in the process of winding up, $3.6 billion from two equity funds and $3.1 billion from a multi-asset fund.

Long-term outflows were partially offset by inflows of $10.6 billion in three fixed income funds, including the $1.0 billion launch of a closed-end fund, $5.3 billion in two institutional separate accounts, $3.1 billion in a multi-asset fund and $3.0 billion in an equity fund.

Additionally, long-term outflows in the equity asset class included $2.1 billion of exchanges that are included as long-term inflows in the multi-asset asset class.

AUM at December 31, 2021 $ 642.1 $ 563.4 $ 154.3 $ 154.0 $ 64.3 $ 1,578.1

AUM increased $48.0 billion, or 3%, during the three months ended December 31, 2021 due to $24.1 billion of long-term net inflows, the positive impact of $10.4 billion of net market change, distributions and other, $7.7 billion from acquisitions and $5.8 billion of cash management net inflows.

Net market change, distributions and other consists of $41.8 billion of market appreciation, partially offset by $30.1 billion of long-term distributions and a $1.3 billion decrease from foreign exchange revaluation.

The market appreciation occurred primarily in the equity asset class, partially offset by depreciation in the fixed income asset class.

The foreign exchange revaluation resulted from AUM in products that are not U.S.

dollar denominated, which represented 11% of total AUM as of December 31, 2021, and was primarily due to the strengthening of the U.S.

dollar against the Japanese Yen, Euro and Brazilian Real, partially offset by weakening of the U.S.

dollar against the Australian dollar.

Long-term inflows increased 29% to $107.0 billion, as compared to the prior quarter period, due to higher inflows in all long-term asset classes including $7.4 billion in net client accounts related to the newly joined Investment Grade Credit team as well as $23.5 billion of reinvested distributions.

Long-term outflows decreased 11% to $82.9 billion due to lower outflows in the fixed income and equity asset classes.

Long-term outflows in the multi-asset asset class included a $3.6 billion institutional redemption.

AUM by sales region was as follows:

(in billions) June 30,

2022 June 30,

(in billions) December 31,

2022 December 31,

United States $ 993.1 $ 1,186.5 (16 %)

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Exceeding Benchmark

as of June 30, 2022 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year

as of December 31, 2022 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year

Fixed Income 45 % 44 % 39 % 69 % 27 % 40 % 50 % 90 %

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1 Mutual fund performance is sourced from Morningstar and measures the percent of ranked AUM in the top two quartiles versus peers.

Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 37%, 37%, 37% and 35% of our total AUM as of June 30, 2022.

Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 35%, 35%, 35% and 33% of our total AUM as of December 31, 2022.

2 Strategy composite performance measures the percent of composite AUM beating its benchmark.

The benchmark comparisons are based on each account’s/composite’s (strategy composites may include retail separately managed accounts and mutual fund assets managed as part of the same strategy) return as compared to a market index that has been selected to be generally consistent with the asset class of the account/composite.

Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 65%, 64%, 64% and 59% of our total AUM as of June 30, 2022.

Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 56%, 56%, 55% and 47% of our total AUM as of December 31, 2022.

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 16% and 10% of our total AUM at June 30, 2022.

Alternative and multi-asset AUM represent 19% and 10% of our total AUM at December 31, 2022.

Mutual fund performance data includes U.S.

and cross-border domiciled mutual funds and exchange-traded funds, and excludes cash management and fund of funds.

These results assume the reinvestment of dividends, are based on data available as of July 10, 2022, and are subject to revision.

These results assume the reinvestment of dividends, are based on data available as of January 10, 2023, and are subject to revision.

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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(in millions) Three Months Ended

June 30, Percent

Change Nine Months Ended

June 30, Percent

2022 2021 2022 2021

December 31, Percent

Investment management fees $ 1,631.8 $ 1,760.5 (7 %)

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Investment Management Fees

Investment management fees decreased $61.2 million for the three months ended June 30, 2022 primarily due to a 6% decrease in average AUM, partially offset by higher performance fees.

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 $209.7 million for the nine months ended June 30, 2022 primarily due to higher performance fees and a 1% increase in average AUM.

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

Our effective investment management fee rate excluding performance fees (annualized investment management fees excluding performance fees divided by average AUM) increased to 42.3 and 41.8 basis points for the three and nine months ended June 30, 2022, from 41.8 and 41.7 basis points for the same periods in the prior fiscal year.

The increases were primarily due to the acquisition of Lexington, partially offset by a shift in assets from higher-fee products to lower-fee products in the fixed income and equity asset classes.

Performance fees were $119.3 million and $364.3 million for the three and nine months ended June 30, 2022, and $102.6 million and $189.7 million for the same periods in the prior fiscal year, with the increase due to strong performance by our alternative specialist investment managers.

Investment management fees decreased $128.7 million for the three months ended December 31, 2022 primarily due to a 13% decrease in average AUM, partially offset by higher performance fees.

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 Partners L.P.

(“Lexington”) and Alcentra.

Our effective investment management fee rate excluding performance fees (annualized investment management fees excluding performance fees divided by average AUM) increased to 41.7 basis points for the three months ended December 31, 2022, from 41.4 basis points for the same period in the prior fiscal year.

Performance fees were $209.0 million and $139.9 million for the three months ended December 31, 2022 and 2021.

The increase was primarily due to $144.5 million of performance fees earned by Lexington, which were passed through as compensation expense per the terms of the acquisition agreement, partially offset by lower performance fees earned by our other alternative specialist investment managers.

Sales and Distribution Fees

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(in millions) Three Months Ended

June 30, Percent

Change Nine Months Ended

June 30, Percent

2022 2021 2022 2021

December 31, Percent

Asset-based fees $ 245.0 $ 321.9 (24 %)

Sales-based fees 46.9 76.3 (39 %)

Contingent sales charges 3.7 4.0 (8 %) 10.9 15.3 (29 %)

Sales and Distribution Fees $ 291.9 $ 398.2 (27 %)

Asset-based distribution fees decreased $59.5 million and $80.7 million for the three and nine months ended June 30, 2022 primarily due to $44.9 million and $41.2 million from decreases of 15% and 5% in the related average AUM, and $9.4 million and $30.4 million from a higher mix of lower-fee assets.

Sales-based fees decreased $21.5 million and $38.3 million for the three and nine months ended June 30, 2022 primarily due to $22.6 million and $42.3 million from lower commissionable sales, partially offset by $1.2 million and $4.2 million from a higher mix of equity sales, which typically generate higher sales fees than fixed income products.

Other revenue increased $4.5 million and $14.3 million for the three and nine months ended June 30, 2022 primarily due to an increase in real estate transaction fees earned by certain of our alternative asset managers.

Asset-based distribution fees decreased $76.9 million for the three months ended December 31, 2022 primarily due to a 21% decrease in the related average AUM and a higher mix of lower-fee assets.

Sales-based fees decreased $29.4 million for the three months ended December 31, 2022 primarily due to a 40% decrease in commissionable sales.

Shareholder Servicing Fees

Shareholder servicing fees decreased $14.3 million for the three months ended December 31, 2022 primarily due to lower levels of related AUM, a reduction in fee rates charged for transfer agency services in the U.S., and fewer transactions.

Other revenue decreased $7.6 million for the three months ended December 31, 2022 primarily due to lower real estate transaction fees earned by certain of our alternative asset managers.

OPERATING EXPENSES

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Three Months Ended

June 30, Percent

Change Nine Months Ended

June 30, Percent

December 31, Percent

(in millions) 2022 2021

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Three Months Ended

June 30, Percent

Change Nine Months Ended

June 30, Percent

December 31, Percent

(in millions) 2022 2021

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Acquisition-related retention 63.6 40.0 59 %

(8.3) 13.5 NM (12.3) 45.7 NM

Acquisition-related performance fee pass through 144.5 0.4 NM

26.6 6.9 286 %

Compensation and Benefits Expenses $ 979.2 $ 802.6 22 %

_______________

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 and special termination benefits.

Salaries, wages and benefits remained flat for the three months ended June 30, 2022 and decreased $12.2 million for the nine months ended June 30, 2022, as the impact of headcount reductions associated with strategic initiatives and a $15.5 million decrease in termination benefits for the nine-month period, were substantially offset by salaries, wages and benefits expense due to the acquisitions of Lexington and OSAM.

Incentive compensation increased $12.2 million for the three months ended June 30, 2022 primarily due to an increase of approximately $50.0 million at alternative specialist investment managers, including the acquisition of Lexington, partially offset by lower incentive compensation at other specialist investment managers and declines in our sales-based and discretionary incentive expense.

Incentive compensation increased $173.6 million for the nine months ended June 30, 2022 primarily due to a $142.0 million increase related to higher incentive compensation at the specialist investment managers, driven by higher performance fees and the acquisition of Lexington, and an increase of $39.1 million in stock and stock unit award amortization.

Acquisition-related retention expenses increased $5.1 million for the three months ended June 30, 2022, primarily due to the acquisition of Lexington.

Other compensation and benefits was $(8.3) million and $13.5 million for the three months ended June 30, 2022 and 2021, and $(12.3) million and $45.7 million for the nine months ended June 30, 2022 and 2021.

The changes for both periods 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 $3.2 million and $14.0 million for the three and nine months ended ended June 30, 2022 primarily due to workforce optimization initiatives related to the acquisition of Legg Mason, Inc.

(“Legg Mason”) in the prior year periods.

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;

and special termination benefits.

Salaries, wages and benefits increased $10.8 million for the three months ended December 31, 2022, primarily due to the recent acquisitions and a $4.3 million increase in termination benefits, which were substantially offset by the impact of headcount reductions.

Incentive compensation decreased $21.6 million for the three months ended December 31, 2022 primarily due to lower incentive compensation at specialist investment managers and lower expectations of our annual performance, offset in part by the recent acquisitions, and an increase in expense for deferred compensation awards, due in part to an increase in annual acceleration for retirement-eligible employees.

Acquisition-related retention expenses increased $23.6 million for the three months ended December 31, 2022, primarily due to the acquisitions of Lexington and Alcentra.

Acquisition-related performance fee pass through increased $144.1 million due to higher performance fees earned by Lexington.

Other compensation and benefits increased $19.7 million for the three months ended December 31, 2022 primarily due to compensation related to minority interests and an increase in special termination benefits, primarily due to the acquisition of Alcentra and workforce optimization initiatives.

We expect to incur additional acquisition-related retention expenses of approximately $190 million during the remainder of the current fiscal year, and annual amounts beginning at approximately $220 million in the fiscal year ending September 30, 2024 and decreasing over the following two fiscal years by approximately $70 million and $20 million.

At June 30, 2022, our global workforce had decreased to approximately 9,800 employees from approximately 10,600 at June 30, 2021.

At December 31, 2022, our global workforce had decreased to approximately 9,400 employees from approximately 10,400 at December 31, 2021.

Sales, Distribution and Marketing

1 unchanged sentence

Three Months Ended

June 30, Percent

Change Nine Months Ended

June 30, Percent

December 31, Percent

(in millions) 2022 2021

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Sales, Distribution and Marketing $ 388.6 $ 510.1 (24 %)

Asset-based expenses decreased $63.7 million and $99.5 million for the three and nine months ended June 30, 2022 primarily due to $42.0 million and $33.0 million from decreases of 12% and 3% in related average AUM, and $23.7 million and $48.1 million from a higher mix of lower-fee assets.

Asset-based expenses decreased $87.7 million for the three months ended December 31, 2022 primarily due to a 20% decrease in related average AUM and a higher mix of lower-fee assets.

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 $21.2 million and $37.8 million for the three and nine months ended June 30, 2022 substantially all due to lower commissionable sales.

Sales-based expenses decreased $27.8 million for the three months ended December 31, 2022 substantially due to a 40% decrease in commissionable sales.

Information Systems and Technology

Information systems and technology expenses increased $4.1 million and $20.8 million for the three and nine months ended June 30, 2022, primarily due to higher costs incurred for consulting and software.

Information systems and technology expenses decreased $2.4 million for the three months ended December 31, 2022, primarily due to lower technology depreciation.

Amortization of intangible assets

Amortization of intangible assets increased $23.8 million and $26.4 million for the three and nine months ended June 30, 2022, primarily related to intangible assets recognized as part of the acquisition of Lexington.

Amortization of intangible assets increased $24.9 million for the three months ended December 31, 2022, primarily due to intangible assets recognized as part of the acquisition of Lexington.

General, Administrative and Other

General, administrative and other operating expenses increased $0.1 million and $17.6 million for the three and nine months ended June 30, 2022, primarily due increases of $14.1 million and $7.8 million in professional fees, largely related to acquisition-related costs, as well as increases of $10.0 million and $24.3 million in advertising and promotion expenses primarily related to our global brand campaign and $12.2 million and $23.6 million in travel and entertainment expenses.

The nine months ended June 30, 2022, also included $15.7 million of non-recurring costs incurred in connection with the outsourcing of our global transfer agent functions.

The increases for both the three- and nine-month periods were partially offset by $43.0 million of closed-end fund product launch costs incurred in the prior year and the increase for the nine-month period was also partially offset by a net $7.7 million credit to adjust the fair value of our contingent consideration asset and liabilities recognized in the current year.

General, administrative and other operating expenses increased $31.0 million for the three months ended December 31, 2022, primarily due to a $12.4 million increase in acquisition-related expenses, a $10.1 million increase in platform and placement fees and a $6.2 million increase in professional fees.

OTHER INCOME (EXPENSES)

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Three Months Ended

June 30, Percent

Change Nine Months Ended

June 30, Percent

December 31, Percent

(in millions) 2022 2021

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Expenses of consolidated investment products (11.5) (4.2) 174 %

Other Income (Expenses), Net $ (91.6) $ 77.3 NM $ 49.8 $ 362.7 (86 %)

Investment and other income, net decreased $39.9 million and $99.5 million for the three and nine months ended June 30, 2022 primarily due to the impact of market declines in the current year periods.

Equity method investees generated net losses of $0.1 million for the three months ended June 30, 2022, as compared to income of $39.4 million in the prior year, and for the nine-month periods generated income of $51.6 million and $123.8 million, largely related to various global equity and alternative funds.

The nine-month period in the current year also reflects a $52.6 million gain recognized on the sale of our investment in Embark.

Investments held by the Company generated net losses of $35.6 million and $32.9 million for the three and nine months ended June 30, 2022, as compared to net gains of $17.3 million and $76.2 million in the prior year periods, 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 changes.

Net foreign currency exchange gains were $14.5 million and $24.2 million for the three and nine months ended June 30, 2022, as compared to net losses of $7.2 million and $17.2 million for the three and nine months ended June 30, 2021.

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

dollar against the Euro and British Pound.

Derivatives generated $17.5 million and $15.2 million of gains for the three and nine months ended June 30, 2022 as compared to losses of $9.1 million and $25.2 million in the prior year periods.

Interest expense increased $3.2 million for the three months ended June 30, 2022 and decreased $0.2 million for the nine months ended June 30, 2022.

The increase for the three-month period was primarily due to $6.1 million of accretion on the Lexington deferred consideration and $3.1 million of interest expense recognized on the senior unsecured unsubordinated notes issued in August 2021, offset in part by a $6.8 million decrease due to the redemption in September 2021 of the junior notes issued by Legg Mason.

Investments held by consolidated investment products (“CIPs”) generated losses of $78.5 million and $4.0 million in the three and nine months ended June 30, 2022, as compared to gains of $33.2 million and $182.8 million in the prior year periods, largely related to losses on holdings of various equity, fixed income and alternative funds for the three month-period, and losses on holdings of various equity and fixed income funds, partially offset by higher gains on holdings of various alternative funds for the nine-month period.

Dividend and interest income of CIPs was $4.1 million and $37.3 million for the three and nine months ended June 30, 2022, as compared to $27.8 million and $80.5 million in the prior year periods.

Expenses of consolidated investments products decreased $9.6 million and $16.4 million for the three- and nine- months ended June 30, 2022, primarily due to lower expenses incurred by an alternative fund.

Our cash, cash equivalents and investments portfolio by asset class and accounting classification at June 30, 2022, excluding third-party assets of CIPs, was as follows:

Other Income, Net $ 35.1 $ 138.2 (75 %)

Investment and other income, net increased $34.1 million for the three months ended December 31, 2022 primarily due to an increase in dividend and interest income and higher gains on investments, partially offset by foreign currency exchange losses in the current period.

Investments held by the Company generated net gains of $45.5 million for the three months ended December 31, 2022, primarily from investments in nonconsolidated funds and separate accounts and assets invested for deferred compensation plans, partially offset by net losses from investments measured at cost adjusted for observable price changes.

Investments held by the Company generated net gains of $25.8 million in the prior year period, primarily from investments measured at cost adjusted for observable price changes, investments in nonconsolidated funds and separate accounts, and assets invested for deferred compensation plans.

Equity method investees generated income of $33.2 million for the three months ended December 31, 2022, primarily related to various global fixed income and equity funds, as compared to income of $24.7 million in the prior year, primarily related to various global equity funds.

Net foreign currency exchange losses were $27.1 million for the three months ended December 31, 2022, as compared to net gains of $3.9 million for the three months ended December 31, 2021.

The decrease was primarily due to the impact of the weakening of the U.S.

dollar against the Euro and British Pound on cash and cash equivalents denominated in U.S.

dollars held by our European subsidiaries.

Dividend and interest income increased $30.4 million for the three months ended December 31, 2022, as compared to the prior year period, primarily due to higher yields.

Interest expense increased $11.6 million for the three months ended December 31, 2022 primarily due to accretion on Lexington deferred consideration and an increase in interest recognized on tax reserves in the current year period.

Investments held by consolidated investment products (“CIPs”) generated losses of $13.6 million in the three months ended December 31, 2022, largely related to losses on holdings of various equity and fixed income funds, partially offset by

gains on various alternative funds.

Investments held by CIPs generated gains of $104.7 million in the prior year period, primarily related to gains on various holdings of alternative funds, partially offset by losses on holdings of various equity and fixed income funds.

Expenses of consolidated investments products increased $7.3 million for the three months ended December 31, 2022, due to activity of the funds.

Our cash, cash equivalents and investments portfolio by asset class and accounting classification at December 31, 2022, excluding third-party assets of CIPs, was as follows:

Accounting Classification 1

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TAXES ON INCOME

Our effective income tax rate was 28.6% and 23.6% for the three and nine months ended June 30, 2022, as compared to 15.1% and 20.8% for the three and nine months ended June 30, 2021.

The rate increase for three-month period was primarily due to net losses on investments held by CIPs for which there are no related tax benefits, benefits in the prior year from the release of the valuation allowance for interest expense carryforward and a decrease in foreign earnings.

The rate increase for the nine-month period was primarily due to a decrease in foreign earnings.

Our effective income tax rate was 26.3% and 21.7% for the three months ended December 31, 2022, and 2021.

The rate increase for three-month period was primarily due to activity of CIPs for which there is no related tax impact, benefits in the prior year related to the release of tax reserves due to statute of limitation expiration and a decrease in foreign earnings.

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 certain acquisitions and have no impact on net income.

These 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 measures also exclude the impact on compensation and benefits expense from arrangements which are offset in investment and other income (loss), net or net income (loss) attributable to noncontrolling interests.

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 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 assets and liabilities.

• Amortization and impairment of intangible assets, if any.

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

◦ 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.

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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 assets and liabilities.

• Amortization and impairment of intangible assets, if any.

• 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 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.

◦ 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, if any, 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, net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income

(loss) attributable to redeemable noncontrolling interests because these items relate to profits interest shares and net gains or losses on investments related to 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:

(in millions) Three Months Ended

June 30, Nine Months Ended

2022 2021 2022 2021

Operating income $ 194.0 $ 557.7

1 unchanged sentence

Elimination of operating revenues upon consolidation of investment products 1

13.0 5.2 38.5 16.7

Acquisition-related retention

44.2 39.1 118.4 129.2

Compensation and benefits expense from gains (losses) on deferred compensation and seed investments, net (19.3) 9.6 (30.4) 23.9

Compensation and benefits expense from gains on deferred compensation and seed investments, net 5.6 4.2

Other acquisition-related expenses 22.6 14.7

Amortization of intangible assets

81.8 58.0 200.5 174.1

Special termination benefits

0.7 3.9 7.8 21.8

Compensation and benefits expense related to minority interests in certain subsidiaries 10.1 —

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Elimination of operating revenues upon consolidation of investment products 1

13.0 5.2 38.5 16.7

Adjusted operating revenues $ 1,439.1 $ 1,721.8

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(in millions, except per share data) Three Months Ended

June 30, Nine Months Ended

2022 2021 2022 2021

Net income attributable to Franklin Resources, Inc.

2 unchanged sentences

Net (income) loss of consolidated investment products 1

(6.8) (0.6) 3.3 14.3

Acquisition-related retention

44.2 39.1 118.4 129.2

Other acquisition-related expenses 28.7 15.1

Amortization of intangible assets

81.8 58.0 200.5 174.1

Special termination benefits

0.7 3.9 7.8 21.8

Net (gains) losses on deferred compensation plan investments not offset by compensation and benefits expense 6.1 (0.9) 8.6 (2.3)

Net gains on deferred compensation plan investments not offset by compensation and benefits expense (7.6) (0.3)

Unrealized investment losses (gains) (30.7) 1.8

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(in millions) Three Months Ended

June 30, Nine Months Ended

2022 2021 2022 2021

Elimination of operating revenues upon consolidation $ (5.1) $ (8.3)

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Cash flows were as follows:

Nine Months Ended

Three Months Ended

(in millions) 2022 2021

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Financing cash flows 958.9 467.3

Net cash provided by operating activities increased during the nine months ended June 30, 2022 primarily due to adjustments for losses from CIPs as compared to gains in the prior year, increases in acquisition-related accrued compensation and benefits, lower net purchases of investments by CIPs and net losses on investments as compared to net gains in the prior year, partially offset by lower net income.

Net cash used in investing activities increased 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 primarily due to proceeds from the issuance of debt in the prior year, partially offset by higher net proceeds from the debt of CIPs.

Net cash used by operating activities during the three months ended December 31, 2022 as compared to net cash provided in the prior year was primarily due to lower net income, a decrease in accrued compensation and benefits and higher net purchases of investments by CIPs, partially offset by adjustments for losses from CIPs as compared to gains in the prior year and decreases in receivables and other assets.

Net cash used in investing activities increased primarily due to cash paid for acquisitions in the current 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 primarily due to proceeds from repurchase agreements, higher net proceeds from the debt of CIPs and higher net subscriptions in CIPs by noncontrolling interests.

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

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Our liquid assets and debt consisted of the following:

(in millions) June 30,

(in millions) December 31,

2022 September 30,

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

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

Cash and cash equivalents at December 31, 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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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 January 10, 2022, the Company 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.

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 June 30, 2022, Franklin’s outstanding senior notes had an aggregate principal amount due of $1,900.0 million.

At December 31, 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 $1,594.4 million.

We are considering repaying the $300.0 million 2.800% senior notes due September 2022 by refinancing or using existing cash.

At June 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 payable semi-annually for senior notes, and have an aggregate carrying value, inclusive of unamortized premium and debt issuance costs, of $1,499.5 million at June 30, 2022.

At December 31, 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 $1,486.8 million at December 31, 2022.

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

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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.

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

At June 30, 2022, we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012 and is unrated.

We maintain a 364-day revolving credit facility with an aggregate commitment of $500.0 million that matures September 2023.

As of the time of this filing, there are no amounts outstanding with respect to the 364-day revolving credit facility.

We have a 3-year term loan with an aggregate commitment of $300.0 million.

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 December 31, 2022.

At December 31, 2022, we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012 and is unrated.

Our ability to access the capital markets in a timely manner depends on a number of factors, including our credit rating, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets.

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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.

On November 15, 2021, we entered into an agreement with FIS, a financial technology leader, to assume operation of the Company’s global transfer agent function as a sub-agent or delegate, depending on the jurisdiction.

We will incur transfer agent expenses for the services provided by FIS which will be recorded gross of shareholder servicing revenue earned from the funds.

We typically declare cash dividends on a quarterly basis, subject to approval by our Board of Directors.

We declared regular dividends of $0.87 per share during the nine months ended June 30, 2022 and $0.84 per share during the nine months ended June 30, 2021.

We declared regular dividends of $0.30 per share during the three months ended December 31, 2022 and $0.29 per share during the three months ended December 31, 2021.

We currently expect to continue paying comparable regular dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors.

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

During the three and nine months ended June 30, 2022, we repurchased 2.0 million and 5.4 million shares of our common stock at a cost of $51.0 million and $153.5 million.

At June 30, 2022, 25.4 million shares remained available for repurchase under the authorization of 80.0 million shares approved by our Board of Directors in April 2018.

During the three and nine months ended June 30, 2021, we repurchased 1.4 million and 5.2 million shares of our common stock at a cost of $46.4 million and $137.8 million.

We invested $19.7 million and $199.2 million, net of redemptions, into our sponsored products during the nine months ended June 30, 2022 and 2021.

On May 31, 2022, we entered into an acquisition agreement to acquire all of the outstanding ownership interests in BNY Alcentra Group Holdings, Inc.

from BNY Mellon for cash consideration of approximately $350 million to be paid at closing and up to $350 million in contingent consideration to be paid upon on the achievement of certain performance thresholds over the next four years.

The acquisition is expected to be funded from our existing balance sheet resources.

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, excluding future payments to be made subject to the attainment of certain performance measures.

In connection with the acquisition, we granted a 25% profits interest in Lexington and performance-based cash retention awards that both 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 million, excluding future payments to be made subject to the attainment of certain performance measures.

During the three months ended December 31, 2022, we repurchased 0.5 million shares of our common stock at a cost of $14.2 million and we repurchased 0.7 million shares of our common stock at a cost of $21.7 million in the prior year period.

At December 31, 2022, 23.9 million shares remained available for repurchase under the authorization of 80.0 million shares approved by our Board of Directors in April 2018.

We invested $111.0 million, net of redemptions, into our sponsored products during the three months ended December 31, 2022 and redeemed $4.2 million, net of investments, in the prior year period.

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 close, which includes $188.3 million for certain securities held in Alcentra’s collateralized loan obligations (“CLOs”);

deferred consideration of $60.4 million;

and contingent consideration of up to $350.0 million to be paid upon the achievement of certain performance thresholds over the next four years that has an acquisition-date fair value of $24.6 million.

We paid the purchase price from our existing cash.

On December 15, 2022, we entered into repurchase agreements with a third-party financing company for certain securities held in Alcentra’s CLOs.

Under the terms of the repurchase agreements, we received cash proceeds of approximately $175.0 million with pledged collateral consisting of Alcentra investments with a carrying value of $198.9 million at December 31, 2022.

The repurchase agreements have contractual maturity dates ranging between 2029 to 2034.

On April 1, 2022, we acquired all of the outstanding ownership interests in Lexington for cash consideration of approximately $1.0 billion and additional payments of $750 million to be paid in cash over the next three years.

A payment of $250 million is expected to be made during the second quarter of fiscal year 2023 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.

During the fiscal year ended September 30, 2020, the Company authorized loans to certain sponsored funds in India that experienced increased liquidity risks and redemptions.

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 our Annual Report on Form 10-K for fiscal year 2021 for further information.

We did not provide financial or other support to our sponsored funds during the nine months ended June 30, 2022.

We did not provide financial or other support to our sponsored funds during the three months ended December 31, 2022.

CRITICAL ACCOUNTING POLICIES

1 unchanged sentence

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

Further, global concerns about the the global economic growth outlook and the risk of a 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.

Further, concerns about the global economic outlook 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.

The following are updates to our critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year 2021.

Described below are the updates to our critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year 2022.

Consolidation

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Our VIEs are primarily investment products and our variable interests consist of our equity ownership interests in and investment management fees earned from these products.

As of June 30, 2022, we were the primary beneficiary of 51 investment product VIEs.

As of December 31, 2022, we were the primary beneficiary of 56 investment product VIEs.

Business Combinations

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Definite-lived intangible assets are tested for impairment quarterly.

Subsequent to the annual impairment tests performed as of August 1, 2021, we monitored both macroeconomic and entity-specific factors, including changes in our AUM to determine whether circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value or indicate that the indefinite-lived intangible assets might be impaired.

Subsequent to the annual impairment tests performed as of August 1, 2022, we monitored both macroeconomic and entity-specific factors, including changes in our AUM to determine whether circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value or indicate that the other indefinite-lived intangible assets might be impaired.

We also monitored fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole.

During the nine months ended June 30, 2022, there were no events or circumstances which would indicate that goodwill, indefinite-lived intangible assets or definite-lived intangible assets might be impaired.

During the three months ended December 31, 2022, there were no events or circumstances which would indicate that goodwill, indefinite-lived intangible assets or definite-lived intangible assets might be impaired.

While we believe that the assumptions used to estimate fair value in our impairment tests are reasonable and appropriate, future changes in the assumptions could result in recognition of impairment.

2 unchanged sentences

We use a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable.

As of June 30, 2022, Level 3 assets represented 10% of total assets measured at fair value, which primarily related to CIPs’ investments in equity and debt securities.

There were insignificant transfers into and out of Level 3 during the nine months ended June 30, 2022.

As of December 31, 2022, Level 3 assets represented 10% of total assets measured at fair value, which primarily related to CIPs’ investments in equity and debt securities.

There were no transfers into and out of Level 3 during the three months ended December 31, 2022.

Quantitative and Qualitative Disclosures About Market Risk.

During the nine months ended June 30, 2022, there were no material changes from the market risk disclosures in our Form 10‑K for the fiscal year ended September 30, 2021.

During the three months ended December 31, 2022, there were no material changes from the market risk disclosures in our Form 10‑K for the fiscal year ended September 30, 2022.

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-Q

Item 2. Management’s Discussion and Analysis