What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-01 compared with 2023-01-30 · 213 added, 121 removed, 395 unchanged (46% of the section changed)

14 unchanged sentences

(“Franklin”) and its subsidiaries (collectively, the “Company”).

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year 2022 filed with the U.S.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for fiscal year 2022 filed with the U.S.

Securities and Exchange Commission, and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

11 unchanged sentences

These arrangements could change in the future.

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.

During our second fiscal quarter, global equity markets provided positive returns as indications that interest rate increases by central banks may soon end, declines in inflation and receding concerns about a recession outweighed the impact of regional bank failures and concerns about a potential banking crisis.

The S&P 500 Index and MSCI World Index increased 7.5% and 7.9% for the quarter and 15.6% and 18.5% for the fiscal year to date.

The global bond markets remained positive as the Bloomberg Global Aggregate Index increased 3.0% during the quarter and 7.7% for the fiscal year to date, reflecting declines in inflation and expectations of easing monetary policy.

Our total AUM at March 31, 2023 was $1,422.1 billion, 10% higher than at September 30, 2022 and 4% lower than at March 31, 2022.

Monthly average AUM (“average AUM”) for the three and six months ended March 31, 2023 decreased 6% and 9% from the same periods 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;

Total purchase price included cash consideration of $ 594.1 million, which includes $188.3 million for certain securities held in Alcentra’s collateralized loan obligations;

deferred consideration of $ 62.0 million due November 1, 2023;

10 unchanged sentences

Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions, except per share data) 2023 2022 2023 2022

2 unchanged sentences

Operating margin 1

13.2 % 22.2 % 11.5 % 23.7 %

Net income attributable to Franklin Resources, Inc.

12 unchanged sentences

AUM by asset class was as follows:

(in billions) December 31,

2022 December 31,

(in billions) March 31,

2023 March 31,

Fixed Income $ 510.1 $ 595.0 (14 %)

7 unchanged sentences

Change Mix of Average AUM

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

for the three months ended March 31, 2023 2022 2023 2022

Fixed Income $ 504.9 $ 619.0 (18 %) 36 % 41 %

4 unchanged sentences

Total $ 1,419.5 $ 1,516.1 (6 %) 100 % 100 %

(in billions) Average AUM Percent

Change Mix of Average AUM

for the six months ended March 31, 2023 2022 2023 2022

Fixed Income $ 498.0 $ 629.0 (21 %) 36 % 41 %

Equity 426.3 535.5 (20 %) 31 % 35 %

Alternative 247.7 152.2 63 % 18 % 10 %

Multi-Asset 141.7 151.3 (6 %) 10 % 10 %

Cash Management 72.7 61.0 19 % 5 % 4 %

Total $ 1,386.4 $ 1,529.0 (9 %) 100 % 100 %

Components of the change in AUM are shown below.

1 unchanged sentence

(in billions) Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

2023 2022 2023 2022

Beginning AUM $ 1,387.7 $ 1,578.1 (12 %) $ 1,297.4 $ 1,530.1 (15 %)

2 unchanged sentences

Long-term net flows (3.7) (11.7) (68 %) (14.6) 12.4 NM

Cash management net flows (4.3) (7.1) (39 %) 13.2 (1.3) NM

Total net flows (8.0) (18.8) (57 %) (1.4) 11.1 NM

Acquisitions — — NM 34.9 7.7 353%

Net market change, distributions and other 42.4 (81.8) NM 91.2 (71.4) NM

Ending AUM $ 1,422.1 $ 1,477.5 (4 %) $ 1,422.1 $ 1,477.5 (4 %)

Components of the change in AUM by asset class were as follows:

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

Management Total

for the three months ended

March 31, 2023

AUM at January 1, 2023 $ 494.8 $ 419.1 $ 257.4 $ 141.4 $ 75.0 $ 1,387.7

Long-term inflows 31.5 17.1 4.9 8.3 — 61.8

Long-term outflows (29.7) (25.4) (3.6) (6.8) — (65.5)

Long-term net flows 1.8 (8.3) 1.3 1.5 — (3.7)

Cash management net flows — — — — (4.3) (4.3)

Total net flows 1.8 (8.3) 1.3 1.5 (4.3) (8.0)

Acquisitions 34.9 7.7 353%

Net market change, distributions and other

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

Components of the change in AUM by asset class were as follows:

13.5 26.3 (0.5) 3.2 (0.1) 42.4

AUM at March 31, 2023 $ 510.1 $ 437.1 $ 258.2 $ 146.1 $ 70.6 $ 1,422.1

AUM increased $34.4 billion or 2% during the three months ended March 31, 2023 due to the positive impact of $42.4 billion of net market change, distributions and other, partially offset by $4.3 billion of cash management net outflows and $3.7 billion of long-term net outflows.

Fixed income net inflows included the funding of a $7.5 billion institutional mandate invested across fixed income strategies.

Net market change, distributions and other primarily consists of $48.1 billion of market appreciation and a $0.9 billion increase from foreign exchange revaluation, partially offset by $6.6 billion of long-term distributions.

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

AUM decreased $55.4 billion or 4%, as compared to the prior year period.

Long-term inflows decreased 19% to $61.8 billion, driven by lower inflows in equity and fixed income open end funds, equity separately managed accounts, and fixed income institutional separate accounts.

Long-term outflows decreased 25% to $65.5 billion driven by lower redemptions in fixed income and equity open end funds, equity separately managed accounts and fixed income institutional separate accounts.

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

1 unchanged sentence

for the three months ended

December 31, 2022

March 31, 2022

AUM at January 1, 2022 $ 642.1 $ 563.4 $ 154.3 $ 154.0 $ 64.3 $ 1,578.1

Long-term inflows 33.3 29.8 4.6 8.4 — 76.1

Long-term outflows (41.2) (35.9) (4.6) (6.1) — (87.8)

Long-term net flows (7.9) (6.1) — 2.3 — (11.7)

Cash management net flows — — — — (7.1) (7.1)

Total net flows (7.9) (6.1) — 2.3 (7.1) (18.8)

Net market change, distributions and other

(39.2) (41.9) 3.6 (4.4) 0.1 (81.8)

AUM at March 31, 2022 $ 595.0 $ 515.4 $ 157.9 $ 151.9 $ 57.3 $ 1,477.5

AUM decreased $100.6 billion or 6% during the three months ended March 31, 2022 due to the negative impact of $81.8 billion of net market change, distributions and other, $11.7 billion of long-term net outflows and $7.1 billion of cash management net outflows.

Net market change, distributions and other primarily consists of $77.0 billion of market depreciation and $4.6 billion of long-term distributions.

The market depreciation occurred primarily in the equity and fixed income asset classes.

AUM decreased $21.4 billion or 1%, as compared to the prior year period.

Long-term inflows decreased 25% to $76.1 billion, driven by lower inflows in fixed income institutional separate accounts and equity and fixed income open end funds.

Long-term outflows decreased 17% to $87.8 billion driven by lower redemptions in fixed income institutional separate accounts related to a single fixed income institutional redemption of nearly $6 billion and $1.3 billion of outflows from our India credit funds that did not earn management fees and are in the process of winding up.

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

Management Total

for the six months ended

March 31, 2023

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

7 unchanged sentences

30.7 52.8 (2.8) 10.7 (0.2) 91.2

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.

AUM at March 31, 2023 $ 510.1 $ 437.1 $ 258.2 $ 146.1 $ 70.6 $ 1,422.1

AUM increased $124.7 billion, or 10%, during the six months ended March 31, 2023 due to the positive impact of $91.2 billion of net market change, distributions and other, $34.9 billion from an acquisition, and $13.2 billion of cash management net inflows, partially offset by $14.6 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.

Net market change, distributions and other primarily consists of $106.6 billion of market appreciation, a $9.7 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 fixed income asset classes 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 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.

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

Long-term inflows decreased 28% to $132.3 billion, as compared to the prior year period, driven by lower inflows in equity, fixed income, and multi-asset open end funds, fixed income institutional separate accounts and sub-advised CITs, and equity retail separate accounts.

Decreased inflows for open end mutual funds include the impact of lower reinvested distributions, which were $14.4 billion in the current year period, as compared to $32.0 billion in the prior year period.

Long-term outflows decreased 14% to $146.9 billion due to lower outflows in equity and fixed income open end funds, multi-asset sub-advised mutual funds and equity separately managed accounts, partially offset by higher outflows in fixed income institutional separate accounts.

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

Management Total

for the three months ended

December 31, 2021

for the six months ended

March 31, 2022

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

7 unchanged sentences

(55.5) (19.4) 8.9 (5.4) — (71.4)

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 at March 31, 2022 $ 595.0 $ 515.4 $ 157.9 $ 151.9 $ 57.3 $ 1,477.5

AUM decreased $52.6 billion or 3% during the six months ended March 31, 2022 due to the negative impact of $71.4 billion of net market change, distributions and other and $1.3 billion of cash management net outflows, partially offset by $12.4 billion of long-term net inflows and $7.7 billion from acquisitions.

Net market change, distributions and other primarily consists of $35.2 billion of market depreciation, $34.7 billion of long-term distributions.

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

Long-term inflows decreased 7% to $183.1 billion, as compared to the prior year period, driven by lower inflows in the equity and fixed income asset classes related to decreased sales in institutional separate accounts and open end funds, partially offset by higher reinvested distributions in equity and multi-asset open end funds.

Long-term outflows decreased 17% to $170.7 billion due to lower outflows in fixed income institutional separate accounts.

AUM by sales region was as follows:

(in billions) December 31,

2022 December 31,

(in billions) March 31,

2023 March 31,

United States $ 1,017.1 $ 1,107.2 (8 %)

International

Asia-Pacific 123.4 155.0 (20 %)

Europe, Middle East and Africa 159.9 143.4 12 %

Asia-Pacific 127.7 148.3 (14 %)

Americas, excl.

12 unchanged sentences

Exceeding Benchmark

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

as of March 31, 2023 1-Year 3-Year 5-Year 10-Year 1-Year 3-Year 5-Year 10-Year

Fixed Income 46 % 39 % 39 % 69 % 24 % 90 % 61 % 89 %

3 unchanged sentences

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 35%, 35%, 35% and 33% of our total AUM as of December 31, 2022.

Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 36%, 36%, 35% and 33% of our total AUM as of March 31, 2023.

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 56%, 56%, 55% and 47% of our total AUM as of December 31, 2022.

Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 51%, 51%, 50% and 47% of our total AUM as of March 31, 2023.

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 19% and 10% of our total AUM at December 31, 2022.

Alternative and multi-asset AUM represent 18% and 10% of our total AUM at March 31, 2023.

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 January 10, 2023, and are subject to revision.

These results assume the reinvestment of dividends and are subject to revision.

Past performance is not indicative of future results.

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 strategy composite 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.

5 unchanged sentences

(in millions) Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

2023 2022 2023 2022

Investment management fees $ 1,573.3 $ 1,649.2 (5 %) $ 3,205.1 $ 3,409.7 (6 %)

4 unchanged sentences

Investment Management Fees

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.

Investment management fees decreased $75.9 million and $204.6 million for the three and six months ended March 31, 2023 primarily due to a 6% and 9% 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.

Our effective investment management fee rate excluding performance fees (annualized investment management fees excluding performance fees divided by average AUM) increased to 41.8 and 41.7 basis points for the three and six months ended March 31, 2023, from 41.3 and 41.5 basis points for the same period in the prior fiscal year.

Performance fees were $111.2 million and $320.2 million for the three and six months ended March 31, 2023, and $105.1 million and $245.0 million for the same periods in the prior fiscal year.

The increase for both periods was primarily due to $8.0 million and $152.5 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 for the six months ended March 31, 2023.

Sales and Distribution Fees

1 unchanged sentence

(in millions) Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

2023 2022 2023 2022

Asset-based fees $ 247.7 $ 296.1 (16 %) $ 492.7 $ 618.0 (20 %)

1 unchanged sentence

Sales and Distribution Fees $ 301.4 $ 370.2 (19 %) $ 593.3 $ 768.4 (23 %)

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.

Asset-based distribution fees decreased $48.4 million and $125.3 million for the three and six months ended March 31, 2023 primarily due decreases of 15% and 18% in the related average AUM and a higher mix of lower-fee assets.

Sales-based fees decreased $20.4 million and $49.8 million for the three and six months ended March 31, 2023 primarily due to decreases of 24% and 32% 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.

Shareholder servicing fees decreased $8.9 million and $23.2 million for the three and six months ended March 31, 2023 primarily due to a reduction in fee rates charged for transfer agency services in the U.S., lower levels of related AUM, and fewer transactions.

Other revenue decreased $0.2 million and $7.8 million for the three and six months ended March 31, 2023 primarily due to lower real estate transaction fees earned by certain of our alternative asset managers.

OPERATING EXPENSES

1 unchanged sentence

Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions) 2023 2022 2023 2022

9 unchanged sentences

Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions) 2023 2022 2023 2022

2 unchanged sentences

Acquisition-related retention 23.2 34.2 (32 %) 86.8 74.2 17 %

Acquisition-related performance fee pass through 144.5 0.4 NM

26.6 6.9 286 %

Acquisition-related performance fee pass through 8.0 — NM 152.5 0.4 NM

52.8 (10.9) NM 79.4 (4.0) NM

Compensation and Benefits Expenses $ 847.3 $ 752.5 13 % $ 1,826.5 $ 1,555.1 17 %

_______________

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;

1 Includes impact of gains and losses on investments related to deferred compensation plans, 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.

Salaries, wages and benefits increased $34.5 million and $45.3 million for the three and six months ended March 31, 2023, primarily due to the recent acquisitions and annual salary increases, partially offset by the impact of headcount reductions.

Incentive compensation remained flat for the three months ended March 31, 2023 and decreased $22.0 million for the six months ended March 31, 2023 primarily due to lower incentive compensation at specialist investment managers and lower expectations of our annual performance.

These decreases were partially offset 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 in the six-month period.

Acquisition-related retention expenses decreased $11.0 million for the three months ended March 31, 2023 primarily due to lower costs from the acquisition of Lexington, partially offset by an increase due to the acquisition of Alcentra.

Acquisition-related retention expenses increased $12.6 million for the six months ended March 31, 2023, primarily due to the acquisition of Alcentra.

Acquisition-related performance fee pass through increased $8.0 million and $152.1 million for the three and six months ended March 31, 2023, due to higher performance fees earned by Lexington.

Other compensation and benefits were $52.8 million and $(10.9) million for the three months ended March 31, 2023 and 2022 and $79.4 million and $(4.0) million for the six months ended March 31, 2023 and 2022.

Special termination benefits increased $27.4 million and $35.6 million for the three and six months ended March 31, 2023 primarily due to workforce optimization initiatives and the acquisition of Alcentra.

The three and six months ended March 31, 2023 include the impact of $10.6 million and $16.2 million of market gains on investments related to our deferred compensation plans and $10.4 million and $20.5 million of compensation related to minority interests, while the three and six months ended March 31, 2022 include the impact of $15.3 million and $11.1 million of losses on investments related to our deferred compensation plans.

We expect to incur additional acquisition-related retention expenses of approximately $130 million during the remainder of the current fiscal year, and annual amounts beginning at approximately $230 million in the fiscal year ending September 30, 2024 and decreasing over the following two fiscal years by approximately $80 million and $20 million.

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

At March 31, 2023, our global workforce had decreased to approximately 9,200 employees from approximately 9,500 at March 31, 2022.

Sales, Distribution and Marketing

1 unchanged sentence

Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions) 2023 2022 2023 2022

3 unchanged sentences

Sales, Distribution and Marketing $ 406.6 $ 482.4 (16 %) $ 795.2 $ 992.5 (20 %)

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.

Asset-based expenses decreased $53.2 million and $140.9 million for the three and six months ended March 31, 2023 primarily due to decreases of 12% and 16% in the 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 $27.8 million for the three months ended December 31, 2022 substantially due to a 40% decrease in commissionable sales.

Sales-based expenses decreased $18.6 million and $46.4 million for the three and six months ended March 31, 2023 due to lower commissionable sales.

Amortization of deferred sales commissions decreased $4.0 million and $10.0 million for the three and six months ended March 31, 2023, primarily due to lower sales of shares sold without a front-end sales charge.

Occupancy expenses increased $6.7 million and $4.9 million for the three and six months ended March 31, 2023, primarily due to lease charges for vacated office space for the three months ended March 31, 2023 and higher utility costs and leasehold depreciation for both the three and six months ended March 31, 2023.

Information Systems and Technology

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

Information systems and technology expenses increased $1.1 million for the three months ended March 31, 2023 primarily due to higher consulting and software costs and decreased $1.3 million for the six months ended March 31, 2023 primarily due to lower outsourced data services.

Amortization of intangible assets

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.

Amortization of intangible assets increased $25.6 million and $50.5 million for the three and six months ended March 31, 2023, primarily due to intangible assets recognized as part of the acquisition of Lexington and Alcentra.

General, Administrative and Other

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.

General, administrative and other operating expenses increased $1.7 million and $32.7 million for the three and six months ended March 31, 2023, primarily due to $12.1 million and $21.0 million increases in travel and entertainment and conference costs as activity has resumed post-pandemic, and a $10.3 million credit adjustment to increase the fair value of a contingent consideration asset in the prior year quarter.

The increases in the three months ended March 31, 2023 were substantially offset by a $13.1 million decrease in acquisition-related costs, primarily due to costs associated with our global brand campaign in the prior year quarter, and a $6.2 million decrease in professional fees.

OTHER INCOME (EXPENSES)

1 unchanged sentence

Three Months Ended

December 31, Percent

March 31, Percent

Change Six Months Ended

March 31, Percent

(in millions) 2023 2022 2023 2022

1 unchanged sentence

Interest expense (33.5) (22.9) 46 % (64.4) (42.2) 53 %

Investment and other income (losses) of consolidated investment products, net (13.6) 104.7 NM

Investment and other income of consolidated investment products, net 87.2 3.0 NM 73.6 107.7 (32 %)

Expenses of consolidated investment products (3.4) (4.6) (26 %) (14.9) (8.8) 69 %

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.

Other Income, Net $ 175.9 $ 3.2 NM $ 211.0 $ 141.4 49 %

Investment and other income, net increased $97.9 million and $132.0 million for the three and six months ended March 31, 2023 primarily due to an increase in dividend and interest income and higher gains on investments, partially offset by foreign currency exchange losses in each current year period.

Investments held by the Company generated net gains of $3.0 million and net losses of $23.1 million for the three months ended March 31, 2023 and 2022.

The net gains in the current year period were primarily from assets invested for deferred compensation plans, partially offset by net losses on investments in nonconsolidated funds and separate accounts and net losses from investments measured at cost adjusted for observable price changes.

The net losses in the prior year period were primarily from net losses on assets invested for deferred compensation plans and investments in nonconsolidated funds and separate accounts.

Investments held by the Company generated net gains of $48.5 million and $2.7 million for the six months ended March 31, 2023 and 2022.

The net gains in the current year were 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 and in the prior year were primarily from net gains on investments measured at cost adjusted for observable price changes, partially offset by net losses on assets invested for deferred compensation plans and investments in nonconsolidated funds and separate accounts.

Equity method investees generated income of $85.6 million and $118.8 million for the three and six months ended March 31, 2023, $65.8 million of which was fully offset in noncontrolling interest, primarily related to various alternative and global equity funds, as compared to income of $27.0 million and $51.7 million in the prior year, primarily related to a $52.6 million gain recognized on the sale of our investment in Embark.

The gain on sale in the prior year was partially offset by losses from various global equity and alternative funds.

Net foreign currency exchange losses were $6.5 million and $33.6 million for the three and six months ended March 31, 2023, as compared to net gains of $5.8 million and $9.7 million for the three and six months ended March 31, 2022.

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

1 unchanged sentence

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:

Dividend and interest income increased $27.2 million and $57.6 million for the three and six months ended March 31, 2023, as compared to the prior year periods, primarily due to higher yields.

Interest expense increased $10.6 million and $22.2 million for the three and six months ended March 31, 2023 primarily due to accretion on Lexington deferred consideration and, for the six-month period, an increase in interest recognized on tax reserves.

Investments held by consolidated investment products (“CIPs”) generated investment gains and other income of $87.2 million and $73.6 million in the three and six months ended March 31, 2023, largely related to gains on holdings of various equity and fixed income funds.

Investments held by CIPs generated investment gains and other income of $3.0 million and $107.7 million during the three and six months ended March 31, 2022, largely related to gains on holdings of various alternative funds, partially offset by losses on holdings of various equity funds and fixed income funds.

Expenses of consolidated investments products decreased $1.2 million and increased $6.1 million for the three and six months ended March 31, 2023, due to activity of the funds.

Our cash, cash equivalents and investments portfolio by asset class and accounting classification at March 31, 2023, excluding third-party assets of CIPs, was as follows:

Accounting Classification 1

16 unchanged sentences

TAXES ON INCOME

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 was 21.6% and 23.2% for the three and six months ended March 31, 2023, as compared to 23.0% and 22.2% for the three and six months ended March 31, 2022.

The rate decrease for three-month period was primarily due to activity of CIPs for which there is no related tax impact, partially offset by an increase in tax audit settlements.

The rate increase for the six-month period was primarily due to tax audit settlements, state tax provision to return adjustments, and tax expenses related to stock-based compensation, offset by activity of CIPs for which there is no related tax impact.

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

51 unchanged sentences

(in millions) Three Months Ended

March 31, Six Months Ended

2023 2022 2023 2022

Operating income $ 255.1 $ 463.0 $ 449.1 $ 1,020.7

1 unchanged sentence

Elimination of operating revenues upon consolidation of investment products 1

9.1 17.2 14.2 25.5

Acquisition-related retention

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

23.2 34.2 86.8 74.2

Compensation and benefits expense from gains (losses) on deferred compensation, net 10.6 (15.3) 16.2 (11.1)

Other acquisition-related expenses 14.0 12.7 36.6 27.4

Amortization of intangible assets

86.0 60.4 169.2 118.7

Special termination benefits

31.8 4.4 42.7 7.1

Compensation and benefits expense related to minority interests in certain subsidiaries 10.4 — 20.5 —

9 unchanged sentences

Elimination of operating revenues upon consolidation of investment products 1

9.1 17.2 14.2 25.5

Adjusted operating revenues $ 1,521.7 $ 1,615.8 $ 2,960.8 $ 3,337.6

2 unchanged sentences

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

March 31, Six Months Ended

2023 2022 2023 2022

Net income attributable to Franklin Resources, Inc.

1 unchanged sentence

Add (subtract):

Net (income) loss of consolidated investment products 1

Net loss of consolidated investment products 1

8.5 0.1 4.9 10.1

Acquisition-related retention

23.2 34.2 86.8 74.2

Other acquisition-related expenses 20.1 12.7 48.8 27.8

Amortization of intangible assets

86.0 60.4 169.2 118.7

Special termination benefits

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

31.8 4.4 42.7 7.1

Net (gains) losses on deferred compensation plan investments not offset by compensation and benefits expense (6.0) 2.8 (13.6) 2.5

Unrealized investment (gains) losses (1.9) 70.3 (32.6) 72.1

Interest expense for amortization of debt premium (6.4) (6.3) (12.7) (12.6)

7 unchanged sentences

(in millions) Three Months Ended

March 31, Six Months Ended

2023 2022 2023 2022

Elimination of operating revenues upon consolidation $ (9.1) $ (17.2) $ (14.2) $ (25.5)

Other income (expenses), net (2.8) 72.5

Other income, net 62.9 9.9 60.1 82.4

income (loss) attributable to noncontrolling interests 62.3 (7.2) 50.8 67.0

Net income (loss) $ 3.6 $ (10.0)

Net loss $ (8.5) $ (0.1) $ (4.9) $ (10.1)

LIQUIDITY AND CAPITAL RESOURCES

Cash flows were as follows:

Three Months Ended

Six Months Ended

(in millions) 2023 2022

2 unchanged sentences

Financing cash flows 1,920.6 1,275.9

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.

Net cash used by operating activities during the six months ended March 31, 2023 as compared to net cash provided in the prior year was primarily due to lower net income, higher net purchases of investments by CIPs, and higher payments of accrued compensation and benefits, partially offset by increases of accounts payable, accrued expenses and other liabilities and adjustments for losses of CIPs as compared to gains in the prior year.

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

Net cash provided by financing activities increased primarily due to higher net subscriptions in CIPs by noncontrolling interests, proceeds from repurchase agreements, and higher net proceeds on debt of consolidated investment products.

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

3 unchanged sentences

Our liquid assets and debt consisted of the following:

(in millions) December 31,

(in millions) March 31,

2023 September 30,

5 unchanged sentences

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

Cash and cash equivalents at December 31, 2022 primarily consist of money market funds and deposits with financial institutions.

Cash and cash equivalents at March 31, 2023 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.

6 unchanged sentences

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

At December 31, 2022, Franklin’s outstanding senior notes had an aggregate principal amount due of $1,600.0 million.

At March 31, 2023, 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 $1,594.7 million.

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.

At March 31, 2023, 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 $1,480.5 million at March 31, 2023.

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

6 unchanged sentences

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.

We were in compliance with all debt covenants at March 31, 2023.

At March 31, 2023, 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.

4 unchanged sentences

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

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 declared regular dividends of $0.60 per share during the six months ended March 31, 2023 and $0.58 per share during the six months ended March 31, 2022.

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.

2 unchanged sentences

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

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.

During the three and six months ended March 31, 2023, we repurchased 0.1 million and 0.6 million shares of our common stock at a cost of $3.6 million and $17.8 million.

At March 31, 2023, 23.7 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 six months ended March 31, 2022, we repurchased 2.7 million and 3.4 million shares of our common stock at a cost of $80.8 million and $102.5 million.

We invested $242.0 million, net of redemptions, into our sponsored products during the six months ended March 31, 2023 and redeemed $122.6 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.

1 unchanged sentence

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”);

from The Bank of New York Mellon Corporation.

Total purchase consideration consisted of cash consideration of approximately $594.1 million, which includes $188.3 million for certain securities held in Alcentra’s collateralized loan obligations (“CLOs”);

deferred consideration of $62.0 million;

2 unchanged sentences

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 first additional payment of $250 million was made during the third 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.

1 unchanged sentence

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.

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

We did not provide financial or other support to our sponsored funds during the six months ended March 31, 2023.

CRITICAL ACCOUNTING POLICIES

8 unchanged sentences

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

As of March 31, 2023, we were the primary beneficiary of 59 investment product VIEs.

Business Combinations

5 unchanged sentences

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 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.

During the six months ended March 31, 2023, 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.

Fair Value Measurements

A substantial amount of our investments are recorded at fair value or amounts that approximate fair value on a recurring basis.

Our investments are primarily recorded at fair value or amounts that approximate fair value on a recurring basis.

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 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.

As of March 31, 2023, Level 3 assets represented 6% 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 six months ended March 31, 2023.

Quantitative and Qualitative Disclosures About Market Risk.

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.

During the six months ended March 31, 2023, 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