Item 1. Financial Statements
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
Three Months Ended
March 31, Six Months Ended
March 31,
(in millions, except per share data) 2023 2022 2023 2022
Operating Revenues
Investment management fees $ 1,573.3 $ 1,649.2 $ 3,205.1 $ 3,409.7
Sales and distribution fees 301.4 370.2 593.3 768.4
Shareholder servicing fees 43.3 52.2 76.7 99.9
Other 9.2 9.4 19.2 27.0
Total operating revenues 1,927.2 2,081.0 3,894.3 4,305.0
Operating Expenses
Compensation and benefits 847.3 752.5 1,826.5 1,555.1
Sales, distribution and marketing 406.6 482.4 795.2 992.5
Information systems and technology 128.0 126.9 249.4 250.7
Occupancy 59.7 53.0 114.2 109.3
Amortization of intangible assets 86.0 60.4 169.2 118.7
General, administrative and other 144.5 142.8 290.7 258.0
Total operating expenses 1,672.1 1,618.0 3,445.2 3,284.3
Operating Income 255.1 463.0 449.1 1,020.7
Other Income (Expenses)
Investment and other income, net 125.6 27.7 216.7 84.7
Interest expense ( 33.5 ) ( 22.9 ) ( 64.4 ) ( 42.2 )
Investment and other income of consolidated investment products, net 87.2 3.0 73.6 107.7
Expenses of consolidated investment products ( 3.4 ) ( 4.6 ) ( 14.9 ) ( 8.8 )
Other income, net 175.9 3.2 211.0 141.4
Income before taxes 431.0 466.2 660.1 1,162.1
Taxes on income 92.9 107.1 153.2 258.2
Net income 338.1 359.1 506.9 903.9
Less: net income (loss) attributable to
Redeemable noncontrolling interests 83.2 ( 57.2 ) 81.7 ( 49.7 )
Nonredeemable noncontrolling interests 60.7 66.7 65.4 150.8
Net Income Attributable to Franklin Resources, Inc. $ 194.2 $ 349.6 $ 359.8 $ 802.8
Earnings per Share
Basic $ 0.38 $ 0.68 $ 0.70 $ 1.57
Diluted 0.38 0.68 0.70 1.57
See Notes to Consolidated Financial Statements.
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FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in millions) Three Months Ended
March 31, Six Months Ended
March 31,
2023 2022 2023 2022
Net Income $ 338.1 $ 359.1 $ 506.9 $ 903.9
Other Comprehensive Income (Loss)
Currency translation adjustments, net of tax 15.9 ( 16.3 ) 143.2 ( 23.2 )
Net unrealized gains (losses) on defined benefit plans, net of tax 1.8 5.3 ( 0.8 ) 0.2
Net unrealized gains on investments, net of tax 0.2 — 0.2 —
Total other comprehensive income (loss) 17.9 ( 11.0 ) 142.6 ( 23.0 )
Total comprehensive income 356.0 348.1 649.5 880.9
Less: comprehensive income (loss) attributable to
Redeemable noncontrolling interests 83.2 ( 57.2 ) 81.7 ( 49.7 )
Nonredeemable noncontrolling interests 60.7 66.7 65.4 150.8
Comprehensive Income Attributable to Franklin Resources, Inc. $ 212.1 $ 338.6 $ 502.4 $ 779.8
See Notes to Consolidated Financial Statements.
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FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited
(in millions, except share and per share data) March 31,
2023 September 30,
2022
Assets
Cash and cash equivalents $ 3,471.3 $ 4,134.9
Receivables 1,300.8 1,264.8
Investments (including $ 987.1 and $ 613.5 at fair value at March 31, 2023 and September 30, 2022)
2,378.0 1,651.3
Assets of consolidated investment products
Cash and cash equivalents 807.3 647.6
Investments, at fair value 8,421.3 7,898.1
Property and equipment, net 749.8 743.3
Goodwill 6,007.2 5,778.6
Intangible assets, net 5,070.4 5,082.1
Operating lease right-of-use assets 454.1 464.5
Other 425.5 395.4
Total Assets $ 29,085.7 $ 28,060.6
Liabilities
Compensation and benefits $ 1,206.3 $ 1,464.4
Accounts payable and accrued expenses 501.2 466.2
Income taxes 486.9 523.1
Debt 3,364.6 3,376.4
Liabilities of consolidated investment products
Accounts payable and accrued expenses 478.0 646.9
Debt 7,153.1 5,457.7
Deferred tax liabilities 339.6 347.8
Operating lease liabilities 522.6 528.4
Other 1,630.3 1,425.0
Total liabilities 15,682.6 14,235.9
Commitments and Contingencies (Note 10)
Redeemable Noncontrolling Interests 960.5 1,525.8
Stockholders’ Equity
Preferred stock, $ 1.00 par value, 1,000,000 shares authorized; none issued
— —
Common stock, $ 0.10 par value, 1,000,000,000 shares authorized; 500,912,066 and 499,575,175 shares issued and outstanding at March 31, 2023 and September 30, 2022
50.1 50.0
Retained earnings 12,260.1 12,045.6
Accumulated other comprehensive loss ( 478.4 ) ( 621.0 )
Total Franklin Resources, Inc. stockholders’ equity 11,831.8 11,474.6
Nonredeemable noncontrolling interests 610.8 824.3
Total stockholders’ equity 12,442.6 12,298.9
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity $ 29,085.7 $ 28,060.6
See Notes to Consolidated Financial Statements.
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FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY
Unaudited
Franklin Resources, Inc. Non-
redeemable
Non-
controlling
Interests Total
Stockholders’
Equity
Common Stock Capital
in
Excess
of Par
Value Retained
Earnings Accum-
ulated
Other
Compre-
hensive
Loss Stockholders’
Equity
(in millions)
for the six months ended
March 31, 2023 Shares Amount
Balance at October 1, 2022 499.6 $ 50.0 $ — $ 12,045.6 $ ( 621.0 ) $ 11,474.6 $ 824.3 $ 12,298.9
Net income 165.6 165.6 4.7 170.3
Other comprehensive income 124.7 124.7 124.7
Dividends declared on common stock ($ 0.30 per share)
( 153.6 ) ( 153.6 ) ( 153.6 )
Repurchase of common stock
( 0.5 ) ( 0.1 ) ( 69.1 ) 55.0 ( 14.2 ) ( 14.2 )
Issuance of common stock
1.2 0.1 33.5 33.6 33.6
Stock-based compensation
35.6 35.6 35.6
Net subscriptions and other 95.9 95.9
Net deconsolidation of investment products ( 35.7 ) ( 35.7 )
Balance at December 31, 2022 500.3 $ 50.0 $ — $ 12,112.6 $ ( 496.3 ) $ 11,666.3 $ 889.2 $ 12,555.5
Net income 194.2 194.2 60.7 254.9
Other comprehensive income 17.9 17.9 17.9
Dividends declared on common stock ($ 0.30 per share)
( 153.8 ) ( 153.8 ) ( 153.8 )
Repurchase of common stock ( 0.1 ) — ( 66.0 ) 62.4 ( 3.6 ) ( 3.6 )
Issuance of common stock 0.7 0.1 25.2 25.3 25.3
Stock-based compensation 40.8 40.8 40.8
Net distributions and other ( 14.9 ) ( 14.9 )
Net deconsolidation of investment products ( 324.2 ) ( 324.2 )
Adjustment to fair value of redeemable noncontrolling interests 44.7 44.7 44.7
Balance at March 31, 2023 500.9 $ 50.1 $ — $ 12,260.1 $ ( 478.4 ) $ 11,831.8 $ 610.8 $ 12,442.6
See Notes to Consolidated Financial Statements.
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Franklin Resources, Inc. Non-
redeemable
Non-
controlling
Interests Total
Stockholders’
Equity
Common Stock Capital
in
Excess
of Par
Value Retained
Earnings Accum-
ulated
Other
Compre-
hensive
Loss Stockholders’
Equity
(in millions)
for the six months ended
March 31, 2022 Shares Amount
Balance at October 1, 2021 501.8 $ 50.2 $ — $ 11,550.8 $ ( 377.6 ) $ 11,223.4 $ 587.2 $ 11,810.6
Net income 453.2 453.2 84.1 537.3
Other comprehensive loss ( 12.0 ) ( 12.0 ) ( 12.0 )
Dividends declared on common stock ($ 0.29 per share)
( 148.9 ) ( 148.9 ) ( 148.9 )
Repurchase of common stock ( 0.7 ) — ( 58.8 ) 37.1 ( 21.7 ) ( 21.7 )
Issuance of common stock 1.4 0.1 47.6 47.7 47.7
Stock-based compensation 11.2 11.2 11.2
Net distributions and other ( 27.8 ) ( 27.8 )
Balance at December 31, 2021 502.5 $ 50.3 $ — $ 11,892.2 $ ( 389.6 ) $ 11,552.9 $ 643.5 $ 12,196.4
Net income 349.6 349.6 66.7 416.3
Other comprehensive loss ( 11.0 ) ( 11.0 ) ( 11.0 )
Dividends declared on common stock ($ 0.29 per share)
( 148.3 ) ( 148.3 ) ( 148.3 )
Repurchase of common stock ( 2.7 ) ( 0.4 ) ( 66.7 ) ( 13.7 ) ( 80.8 ) ( 80.8 )
Issuance of common stock 0.6 0.1 18.5 18.6 18.6
Stock-based compensation 48.2 48.2 48.2
Net distributions and other ( 21.7 ) ( 21.7 )
Net deconsolidation of investment products ( 39.6 ) ( 39.6 )
Adjustment to fair value of redeemable noncontrolling interests
( 188.5 ) ( 188.5 ) ( 188.5 )
Balance at March 31, 2022 500.4 $ 50.0 $ — $ 11,891.3 $ ( 400.6 ) $ 11,540.7 $ 648.9 $ 12,189.6
See Notes to Consolidated Financial Statements.
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FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
March 31,
(in millions) 2023 2022
Net Income $ 506.9 $ 903.9
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Stock-based compensation 122.0 112.5
Amortization of deferred sales commissions 25.0 35.0
Depreciation and other amortization 52.9 42.7
Amortization of intangible assets 169.2 118.7
Net gains on investments ( 48.5 ) ( 2.7 )
Income from investments in equity method investees ( 118.8 ) ( 51.7 )
Net losses (gains) on investments of consolidated investment products 57.5 ( 62.6 )
Net purchase of investments by consolidated investment products ( 613.0 ) ( 321.8 )
Deferred income taxes ( 55.7 ) 3.3
Other 68.7 10.0
Changes in operating assets and liabilities:
Increase in receivables and other assets ( 144.4 ) ( 121.6 )
Increase in investments, net ( 36.0 ) ( 21.3 )
Decrease in accrued compensation and benefits ( 336.1 ) ( 162.2 )
Decrease in income taxes payable ( 28.5 ) ( 104.9 )
Increase (decrease) in accounts payable, accrued expenses and other liabilities 85.4 ( 90.0 )
Increase (decrease) in accounts payable and accrued expenses of consolidated investment products 3.7 ( 16.8 )
Net cash (used in) provided by operating activities ( 289.7 ) 270.5
Purchase of investments ( 504.7 ) ( 375.9 )
Liquidation of investments 411.7 726.0
Purchase of investments by consolidated collateralized loan obligations ( 2,097.6 ) ( 2,170.2 )
Liquidation of investments by consolidated collateralized loan obligations 618.8 1,058.8
Additions of property and equipment, net ( 42.8 ) ( 42.5 )
Acquisitions, net of cash acquired ( 500.5 ) ( 372.3 )
Payments of contingent consideration asset 5.5 12.6
Net (deconsolidation) consolidation of investment products ( 85.4 ) 12.2
Net cash used in investing activities ( 2,195.0 ) ( 1,151.3 )
[Table continued on next page]
See Notes to Consolidated Financial Statements.
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FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
[Table continued from previous page]
Six Months Ended
March 31,
(in millions) 2023 2022
Issuance of common stock $ 13.4 $ 13.6
Dividends paid on common stock ( 301.8 ) ( 290.5 )
Repurchase of common stock ( 17.8 ) ( 104.3 )
Proceeds from repurchase agreement 174.8 —
Proceeds from debt of consolidated investment products 2,258.7 3,016.9
Payments on debt of consolidated investment products ( 688.3 ) ( 1,609.9 )
Payments on contingent consideration liabilities ( 4.2 ) ( 4.1 )
Noncontrolling interests 485.8 254.2
Net cash provided by financing activities 1,920.6 1,275.9
Effect of exchange rate changes on cash and cash equivalents 60.2 ( 27.6 )
Increase (decrease) in cash and cash equivalents ( 503.9 ) 367.5
Cash and cash equivalents, beginning of period 4,782.5 4,647.2
Cash and Cash Equivalents, End of Period $ 4,278.6 $ 5,014.7
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes $ 204.6 $ 350.1
Cash paid for interest 47.1 54.7
Cash paid for interest by consolidated investment products
128.6 65.7
See Notes to Consolidated Financial Statements.
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FRANKLIN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(Unaudited)
Note 1 – Basis of Presentation
The unaudited interim financial statements of Franklin Resources, Inc. (“Franklin”) and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission. Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. Management also believes that the accounting estimates are appropriate, and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates, actual amounts may differ from these estimates. These financial statements should be read together with the Company’s audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2022 (“fiscal year 2022”).
Note 2 – Acquisition
BNY Alcentra Group Holdings, Inc.
On November 1, 2022, the Company acquired all of the outstanding ownership interests in BNY Alcentra Group Holdings, Inc. (together with its subsidiaries “Alcentra”) from The Bank of New York Mellon Corporation. Total purchase price consisted of cash consideration of $ 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 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 has an acquisition-date fair value of $ 24.6 million. The consideration paid was funded from existing cash. During the quarter ended March 31, 2023, cash consideration increased by $ 6.8 million due to a net working capital adjustment and deferred consideration increased by $ 1.6 million.
The following table summarizes the initial and revised estimated fair value amounts recognized for the assets acquired and liabilities assumed and resulting goodwill as of the acquisition date:
(in millions) Initial Estimated Fair Value Adjustments Revised Estimated Fair Value
as of November 1, 2022
Cash and cash equivalents $ 93.6 $ — $ 93.6
Receivables 57.2 ( 8.8 ) 48.4
Investments 285.3 1.6 286.9
Goodwill 152.6 52.7 205.3
Indefinite-lived intangible assets 89.9 — 89.9
Definite-lived intangible assets 55.7 — 55.7
Other assets 9.0 3.1 12.1
Deferred tax liabilities — ( 36.7 ) ( 36.7 )
Compensation and benefits and other liabilities ( 71.0 ) ( 3.5 ) ( 74.5 )
Total Identifiable Net Assets $ 672.3 $ 8.4 $ 680.7
The adjustments to the initial estimated fair values are a result of new information obtained about the facts that existed as of the acquisition date. The purchase price allocation is preliminary and subject to change during the measurement period, which is not to exceed one year from the acquisition date. At this time, the Company does not expect material changes to the assets acquired or liabilities assumed.
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The goodwill is primarily attributable to expected growth opportunities from the combined operations and is not deductible for tax purposes. The definite-lived intangible assets relate to acquired investment management contracts and trade names, which are amortized over their estimated useful lives ranging from 3.0 years to 10.0 years. Amortization expense related to the definite-lived intangible assets was $ 3.5 million and $ 5.8 million for the three and six months ended March 31, 2023. These assets had a weighted-average remaining useful life of 4.9 years at March 31, 2023, with estimated remaining amortization expense as follows:
(in millions)
for the fiscal years ending September 30, Amount
2023 (remainder of year) $ 7.0
2024 14.0
2025 14.0
2026 3.9
2027 2.9
Thereafter 8.1
Total $ 49.9
Costs incurred in connection with the acquisition were $ 14.1 million for the six months ended March 31, 2023.
Alcentra contributed $ 71.4 million of revenue and did not have a material impact to net income attributable to Franklin Resources, Inc. for the six months ended March 31, 2023. Consequently, the Company has not presented pro forma combined results of operations for this acquisition.
In connection with the acquisition, the Company on December 15, 2022 entered into repurchase agreements with a third-party financing company for certain securities held by the Company in Alcentra’s CLOs. As of March 31, 2023, other liabilities includes repurchase agreements of €125.5 million (equivalent to $ 136.1 million at March 31, 2023) and $ 40.8 million with maturity values of € 132.3 million and $ 42.4 million, respectively. The Company has pledged Alcentra investments with a carrying value of $ 201.4 million as collateral as of March 31, 2023. The repurchase agreements have contractual maturity dates ranging between 2029 to 2034.
Note 3 – Earnings per Share
The components of basic and diluted earnings per share were as follows:
(in millions, except per share data) Three Months Ended
March 31, Six Months Ended
March 31,
2023 2022 2023 2022
Net income attributable to Franklin Resources, Inc. $ 194.2 $ 349.6 $ 359.8 $ 802.8
Less: allocation of earnings to participating nonvested stock and stock unit awards
9.0 15.1 16.7 34.3
Net Income Available to Common Stockholders $ 185.2 $ 334.5 $ 343.1 $ 768.5
Weighted-average shares outstanding – basic 490.7 490.0 490.1 489.9
Dilutive effect of nonparticipating nonvested stock unit awards
0.7 0.5 0.7 0.6
Weighted-Average Shares Outstanding – Diluted 491.4 490.5 490.8 490.5
Earnings per Share
Basic $ 0.38 $ 0.68 $ 0.70 $ 1.57
Diluted 0.38 0.68 0.70 1.57
Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were insignificant for the three and six months ended March 31, 2023 and 2022.
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Note 4 – Revenues
Operating revenues by geographic area were as follows:
(in millions) United States Luxembourg Asia-Pacific Americas
Excluding
United
States Europe,
Middle East
and Africa,
Excluding
Luxembourg Total
for the three months ended March 31, 2023
Investment management fees
$ 1,165.8 $ 196.6 $ 82.5 $ 56.3 $ 72.1 $ 1,573.3
Sales and distribution fees
212.4 73.6 5.0 10.4 — 301.4
Shareholder servicing fees
34.6 7.8 0.7 0.2 — 43.3
Other
8.5 0.3 0.1 — 0.3 9.2
Total
$ 1,421.3 $ 278.3 $ 88.3 $ 66.9 $ 72.4 $ 1,927.2
(in millions) United States Luxembourg Asia-Pacific Americas
Excluding
United
States Europe,
Middle East
and Africa,
Excluding
Luxembourg Total
for the six months ended March 31, 2023
Investment management fees
$ 2,440.6 $ 378.4 $ 150.1 $ 108.1 $ 127.9 $ 3,205.1
Sales and distribution fees
420.6 142.0 10.0 20.7 — 593.3
Shareholder servicing fees
59.9 15.5 1.1 0.2 — 76.7
Other
18.2 0.3 0.4 — 0.3 19.2
Total
$ 2,939.3 $ 536.2 $ 161.6 $ 129.0 $ 128.2 $ 3,894.3
(in millions) United States Luxembourg Asia-Pacific Americas
Excluding
United
States Europe,
Middle East
and Africa,
Excluding
Luxembourg Total
for the three months ended March 31, 2022
Investment management fees
$ 1,202.1 $ 237.2 $ 89.5 $ 64.6 $ 55.8 $ 1,649.2
Sales and distribution fees
261.6 89.3 6.6 12.7 — 370.2
Shareholder servicing fees
42.1 9.3 0.3 — 0.5 52.2
Other
9.1 0.2 0.1 — — 9.4
Total
$ 1,514.9 $ 336.0 $ 96.5 $ 77.3 $ 56.3 $ 2,081.0
(in millions) United States Luxembourg Asia-Pacific Americas
Excluding
United
States Europe,
Middle East
and Africa,
Excluding
Luxembourg Total
for the six months ended March 31, 2022
Investment management fees
$ 2,486.1 $ 495.6 $ 171.3 $ 134.9 $ 121.8 $ 3,409.7
Sales and distribution fees
540.0 188.1 14.2 26.1 — 768.4
Shareholder servicing fees
78.9 19.4 0.7 0.1 0.8 99.9
Other
26.2 0.5 0.3 — — 27.0
Total
$ 3,131.2 $ 703.6 $ 186.5 $ 161.1 $ 122.6 $ 4,305.0
Operating revenues are attributed to geographic areas based on the locations of the subsidiaries that provide the services, which may differ from the regions in which the related investment products are sold.
Revenues earned from sponsored funds were 83 % of the Company’s total operating revenues for the three and six months ended March 31, 2023 and 79 % and 80 % for the three and six months ended March 31, 2022.
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Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated investment products (“CIPs”). See Note 7 – Consolidated Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions) March 31,
2023 September 30,
2022
Investments, at fair value
Sponsored funds and separate accounts $ 721.5 $ 413.0
Investments related to long-term incentive plans 214.9 143.3
Other equity and debt investments 50.7 57.2
Total investments, at fair value 987.1 613.5
Investments in equity method investees 1,138.1 771.5
Other investments 252.8 266.3
Total $ 2,378.0 $ 1,651.3
Note 6 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of CIPs. See Note 7 – Consolidated Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liabilities measured at fair value on a recurring basis were as follows:
(in millions) Level 1 Level 2 Level 3 NAV as a
Practical
Expedient Total
as of March 31, 2023
Assets
Investments, at fair value
Sponsored funds and separate accounts $ 466.1 $ 192.6 $ 19.1 $ 43.7 $ 721.5
Investments related to long-term incentive plans 190.1 — — 24.8 214.9
Other equity and debt investments 3.1 13.7 — 33.9 50.7
Contingent consideration asset — — 4.4 — 4.4
Total Assets Measured at Fair Value $ 659.3 $ 206.3 $ 23.5 $ 102.4 $ 991.5
Liabilities
Securities sold short $ 211.2 $ — $ — $ — $ 211.2
Contingent consideration liabilities — — 51.7 — 51.7
Total Liabilities Measured at Fair Value $ 211.2 $ — $ 51.7 $ — $ 262.9
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(in millions) Level 1 Level 2 Level 3 NAV as a
Practical
Expedient Total
as of September 30, 2022
Assets
Investments, at fair value
Sponsored funds and separate accounts $ 289.5 $ 55.4 $ 14.1 $ 54.0 $ 413.0
Investments related to long-term incentive plans 143.3 — — — 143.3
Other equity and debt investments 3.1 19.4 2.7 32.0 57.2
Contingent consideration asset — — 9.8 — 9.8
Total Assets Measured at Fair Value $ 435.9 $ 74.8 $ 26.6 $ 86.0 $ 623.3
Liabilities
Contingent consideration liabilities $ — $ — $ 31.6 $ — $ 31.6
Investments for which fair value was estimated using reported NAV as a practical expedient primarily consist of nonredeemable private debt, equity and infrastructure funds, and redeemable global equity and private real estate funds. These investments were as follows:
(in millions) March 31,
2023 September 30,
2022
Nonredeemable investments 1
Investments with known liquidation periods $ 33.0 $ 32.8
Investments with unknown liquidation periods 17.4 29.4
Redeemable investments 2
52.0 23.8
Unfunded commitments 45.6 51.4
_______________
1 The investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets. Investments with known liquidation periods have an expected weighted-average life of 3.3 years and 3.4 years at March 31, 2023 and September 30, 2022.
2 Investments are redeemable on a semi-monthly, monthly and quarterly basis.
Financial instruments that were not measured at fair value were as follows:
(in millions) Fair Value
Level March 31, 2023 September 30, 2022
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
Financial Assets
Cash and cash equivalents 1 $ 3,471.3 $ 3,471.3 $ 4,134.9 $ 4,134.9
Other investments
Time deposits 2 10.6 10.6 9.4 9.4
Equity securities 3 242.2 242.2 256.9 256.9
Financial Liability
Debt 2 $ 3,364.6 $ 2,834.8 $ 3,376.4 $ 2,750.1
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Note 7 – Consolidated Investment Products
CIPs consist of mutual and other investment funds, limited partnerships and similar structures and CLOs, all of which are sponsored by the Company, and include both voting interest entities and variable interest entities (“VIEs”). The Company had 64 CIPs, including 18 CLOs, as of March 31, 2023 and 59 CIPs, including 15 CLOs, as of September 30, 2022.
The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:
(in millions) March 31,
2023 September 30,
2022
Assets
Cash and cash equivalents $ 807.3 $ 647.6
Receivables 71.4 134.0
Investments, at fair value 8,421.3 7,898.1
Total Assets $ 9,300.0 $ 8,679.7
Liabilities
Accounts payable and accrued expenses $ 478.0 $ 646.9
Debt 7,153.1 5,457.7
Other liabilities 26.6 175.0
Total liabilities 7,657.7 6,279.6
Redeemable Noncontrolling Interests 445.6 942.2
Stockholders ’ Equity
Franklin Resources, Inc.’s interests 909.5 960.8
Nonredeemable noncontrolling interests 287.2 497.1
Total stockholders’ equity 1,196.7 1,457.9
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders ’ Equity
$ 9,300.0 $ 8,679.7
The CIPs did not have a significant impact on net income attributable to the Company during the three and six months ended March 31, 2023 and 2022.
The Company has no right to the CIPs’ assets, other than its direct equity investments in them and investment management and other fees earned from them. The debt holders of the CIPs have no recourse to the Company’s assets beyond the level of its direct investment, therefore the Company bears no other risks associated with the CIPs’ liabilities.
Fair Value Measurements
Assets of CIPs measured at fair value on a recurring basis were as follows:
(in millions) Level 1 Level 2 Level 3 NAV as a
Practical
Expedient Total
as of March 31, 2023
Assets
Cash and cash equivalents of CLOs $ 507.6 $ — $ — $ — $ 507.6
Receivables of CLOs — 29.6 — — 29.6
Investments
Equity and debt securities 63.2 551.2 539.0 146.4 1,299.8
Loans — 7,118.4 3.1 — 7,121.5
Total Assets Measured at Fair Value $ 570.8 $ 7,699.2 $ 542.1 $ 146.4 $ 8,958.5
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(in millions) Level 1 Level 2 Level 3 NAV as a
Practical
Expedient Total
as of September 30, 2022
Assets
Cash and cash equivalents of CLOs $ 269.1 $ — $ — $ — $ 269.1
Receivables of CLOs — 67.4 — — 67.4
Investments
Equity and debt securities 75.4 881.0 555.8 173.5 1,685.7
Loans — 5,704.4 239.4 — 5,943.8
Real estate — — 268.6 — 268.6
Total Assets Measured at Fair Value $ 344.5 $ 6,652.8 $ 1,063.8 $ 173.5 $ 8,234.6
Investments for which fair value was estimated using reported NAV as a practical expedient consist of a redeemable global hedge fund, a redeemable U.S. equity fund and nonredeemable private equity funds. These investments were as follows:
(in millions) March 31,
2023 September 30,
2022
Nonredeemable investments 1
Investments with known liquidation periods $ — $ 19.5
Investments with unknown liquidation periods 19.9 12.0
Redeemable investments 2
126.5 142.0
Unfunded commitments 3
— 0.2
_______________
1 The investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets. As of March 31, 2023, there were no investments with known liquidation periods. Investments with known liquidation periods have an expected weighted-average life of 0.3 years at September 30, 2022.
2 Investments are redeemable on a monthly basis and liquidation periods are unknown.
3 As of March 31, 2023, there were no investments with unfunded commitments. Of the total unfunded commitments, the Company was contractually obligated to fund $ 0.1 million based on its ownership percentage in the CIPs, at September 30, 2022.
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Changes in Level 3 assets were as follows:
(in millions) Equity and Debt
Securities Real Estate Loans Total
Level 3
Assets
for the three months ended March 31, 2023
Balance at January 1, 2023 $ 555.8 $ 358.0 $ 64.7 $ 978.5
Losses included in investment and other income of consolidated investment products, net ( 18.4 ) ( 12.7 ) — ( 31.1 )
Purchases 13.5 0.4 31.1 45.0
Sales and settlements ( 19.4 ) — — ( 19.4 )
Net (deconsolidations) consolidations 7.5 ( 345.7 ) ( 90.5 ) ( 428.7 )
Transfers into Level 3 — — 3.1 3.1
Transfers out of Level 3 — — ( 5.3 ) ( 5.3 )
Balance at March 31, 2023 $ 539.0 $ — $ 3.1 $ 542.1
Change in unrealized losses included in net income relating to assets held at March 31, 2023 $ ( 25.0 ) $ — $ — $ ( 25.0 )
(in millions) Equity and Debt
Securities Real Estate Loans Total
Level 3
Assets
for the six months ended March 31, 2023
Balance at October 1, 2022 $ 555.8 $ 268.6 $ 239.4 $ 1,063.8
Gains (losses) included in investment and other income of consolidated investment products, net ( 24.7 ) ( 9.0 ) 0.1 ( 33.6 )
Purchases 22.5 86.1 58.6 167.2
Sales and settlements ( 25.0 ) — ( 0.2 ) ( 25.2 )
Net (deconsolidations) consolidations 10.4 ( 345.7 ) ( 292.6 ) ( 627.9 )
Transfers into Level 3 — — 3.1 3.1
Transfers out of Level 3 — — ( 5.3 ) ( 5.3 )
Balance at March 31, 2023 $ 539.0 $ — $ 3.1 $ 542.1
Change in unrealized losses included in net income relating to assets held at March 31, 2023 $ ( 22.3 ) $ — $ — $ ( 22.3 )
(in millions) Equity and Debt
Securities Real Estate Loans Total
Level 3
Assets
for the three months ended March 31, 2022
Balance at January 1, 2022 $ 539.0 $ 98.9 $ 34.2 $ 672.1
Gains (losses) included in investment and other income of consolidated investment products, net 78.0 5.7 ( 0.3 ) 83.4
Purchases 115.3 70.8 0.1 186.2
Sales and settlements ( 81.9 ) — ( 0.4 ) ( 82.3 )
Net deconsolidations ( 55.0 ) — — ( 55.0 )
Balance at March 31, 2022 $ 595.4 $ 175.4 $ 33.6 $ 804.4
Change in unrealized gains (losses) included in net income relating to assets held at March 31, 2022 $ 73.6 $ 5.7 $ ( 0.3 ) $ 79.0
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(in millions) Equity and Debt
Securities Real Estate Loans Total
Level 3
Assets
for the six months ended March 31, 2022
Balance at October 1, 2021 $ 453.3 $ 89.4 $ 20.5 $ 563.2
Gains included in investment and other income of consolidated investment products, net 170.3 14.3 — 184.6
Purchases 133.5 71.7 14.1 219.3
Sales and settlements ( 105.8 ) — ( 1.0 ) ( 106.8 )
Net deconsolidations ( 55.0 ) — — ( 55.0 )
Transfers into Level 3 0.1 — — 0.1
Transfers out of Level 3 ( 1.0 ) — — ( 1.0 )
Balance at March 31, 2022 $ 595.4 $ 175.4 $ 33.6 $ 804.4
Change in unrealized gains included in net income relating to assets held at March 31, 2022 $ 166.1 $ 14.3 $ — $ 180.4
Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:
(in millions)
as of March 31, 2023 Fair Value Valuation Technique Significant Unobservable Inputs Range (Weighted Average 1 )
Equity and debt securities $ 539.0 Market pricing Private sale pricing $ 0.01 –$ 1,000.00 ($ 45.98 ) per share
Discount for lack of liquidity 13.0 %– 25.1 % ( 23.2 %)
(in millions)
as of September 30, 2022 Fair Value Valuation Technique Significant Unobservable Inputs Range (Weighted Average 1 )
Equity and debt securities $ 555.8 Market pricing Private sale pricing $ 0.01 -$ 558.45 ($ 33.31 ) per share
Discount for lack of liquidity 23.5 %– 25.1 % ( 24.9 %)
Real estate 268.6 Discounted cash flow Discount rate 4.5 %– 6.3 % ( 5.1 %)
Exit capitalization rate 5.5 %– 6.8 % ( 6.0 %)
Loans 147.2 Market pricing Price $ 0.97 –$ 0.98 ($ 0.98 )
60.4 Discounted cash flow Discount rate 9.9 %
31.9 Yield capitalization Credit spread 6.3 %
Loan-to-value ratio 79.1 %– 88.1 % ( 83.1 %)
__________________
1 Based on the relative fair value of the instruments.
If the relevant significant inputs used in the market-based valuations, other than discount for lack of liquidity, were independently higher (lower) as of March 31, 2023, the resulting fair value of the assets would be higher (lower). If the relevant significant inputs used in the discounted cash flow valuations, as well as the discount for lack of liquidity used in the market-based valuations, were independently higher (lower) as of March 31, 2023, the resulting fair value of the assets would be lower (higher).
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Financial instruments of CIPs that were not measured at fair value were as follows:
(in millions) Fair Value
Level March 31, 2023 September 30, 2022
Carrying
Value Estimated
Fair Value Carrying
Value Estimated
Fair Value
Financial Asset
Cash and cash equivalents 1 $ 299.7 $ 299.7 $ 378.5 $ 378.5
Financial Liabilities
Debt of CLOs 1
2 or 3 $ 7,131.4 $ 7,402.0 $ 5,408.0 $ 5,548.8
Other debt 3 21.7 11.1 49.7 42.4
__________________
1 Substantially all was Level 2.
Debt
Debt of CIPs consisted of the following:
March 31, 2023 September 30, 2022
(in millions) Amount Weighted-
Average
Effective
Interest Rate Amount Weighted-
Average
Effective
Interest Rate
Debt of CLOs
$ 7,131.4 6.01 % $ 5,408.0 2.78 %
Other debt
21.7 6.00 % 49.7 5.19 %
Total
$ 7,153.1 $ 5,457.7
The debt of CIPs had fixed and floating interest rates ranging from 2.39 % to 13.73 % at March 31, 2023, and from 1.42 % to 8.51 % at September 30, 2022. The floating rates were based on the London Interbank Offered Rate and Secured Overnight Financing Rate.
The contractual maturities for the debt of CIPs at March 31, 2023 were as follows:
(in millions)
for the fiscal years ending September 30, Amount
2023 (remainder of year) $ 25.0
2024 —
2025 —
2026 —
2027 —
Thereafter 7,128.1
Total $ 7,153.1
Collateralized Loan Obligations
The unpaid principal balance and fair value of the investments of CLOs were as follows:
(in millions) March 31,
2023 September 30,
2022
Unpaid principal balance $ 7,487.5 $ 6,118.4
Difference between unpaid principal balance and fair value ( 282.2 ) ( 356.1 )
Fair Value $ 7,205.3 $ 5,762.3
Investments 90 days or more past due were immaterial at March 31, 2023 and September 30, 2022.
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The Company recognized $ 4.8 million and $ 2.5 million of net gains during the three and six months ended March 31, 2023 and $ 7.6 million and $ 12.9 million of net gains during the three and six months ended March 31, 2022, related to its own economic interests in the CLOs. The aggregate principal amount due of the debt of CLOs was $ 7,401.4 million and $ 5,781.3 million at March 31, 2023 and September 30, 2022.
Note 8 – Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests were as follows:
(in millions) 2023 2022
CIPs Minority Interests Total CIPs Minority Interests Total
for the three months ended March 31,
Balance at beginning of period $ 1,379.7 $ 599.5 $ 1,979.2 $ 662.5 $ 320.9 $ 983.4
Net income (loss) 70.2 13.0 83.2 ( 69.6 ) 12.4 ( 57.2 )
Net subscriptions (distributions) and other 289.6 ( 52.9 ) 236.7 148.3 ( 9.0 ) 139.3
Net deconsolidations ( 1,293.9 ) — ( 1,293.9 ) ( 115.9 ) — ( 115.9 )
Adjustment to fair value — ( 44.7 ) ( 44.7 ) — 188.5 188.5
Balance at End of Period $ 445.6 $ 514.9 $ 960.5 $ 625.3 $ 512.8 $ 1,138.1
(in millions) 2023 2022
CIPs Minority Interests Total CIPs Minority Interests Total
for the six months ended March 31,
Balance at beginning of period $ 942.2 $ 583.6 $ 1,525.8 $ 622.5 $ 310.5 $ 933.0
Net income (loss) 58.0 23.7 81.7 ( 74.4 ) 24.7 ( 49.7 )
Net subscriptions (distributions) and other 468.0 ( 47.7 ) 420.3 314.6 ( 10.9 ) 303.7
Net deconsolidations ( 1,022.6 ) — ( 1,022.6 ) ( 237.4 ) — ( 237.4 )
Adjustment to fair value — ( 44.7 ) ( 44.7 ) — 188.5 188.5
Balance at End of Period $ 445.6 $ 514.9 $ 960.5 $ 625.3 $ 512.8 $ 1,138.1
Note 9 – Nonconsolidated Variable Interest Entities
VIEs for which the Company is not the primary beneficiary consist of sponsored funds and other investment products in which the Company has an equity ownership interest. The Company’s maximum exposure to loss from these VIEs consists of equity investments, investment management and other fee receivables as follows:
(in millions) March 31,
2023 September 30,
2022
Investments $ 1,105.3 $ 718.0
Receivables 230.1 165.4
Total $ 1,335.4 $ 883.4
While the Company has no legal or contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. As it has done in the past, the Company also may voluntarily elect to provide its sponsored funds with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its sponsored funds assessed as VIEs during the six months ended March 31, 2023 or fiscal year 2022.
Note 10 – Commitments and Contingencies
Legal Proceedings
India Credit Fund Closure Matters . During the six months ended March 31, 2023, there were no significant changes from the disclosure in the Form 10‑K for the fiscal year ended September 30, 2022. As of March 31, 2023, the amount reported as distributed to fund unitholders in the aggregate is INR 26,931.3 crore (approximately $ 3.3 billion).
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Other Litigation Matters. The Company is from time to time involved in other litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business, financial position, results of operations or liquidity. In management’s opinion, an adequate accrual has been made as of March 31, 2023 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.
Indemnifications and Guarantees
In the ordinary course of business or in connection with certain acquisition agreements, the Company enters into contracts that provide for indemnifications by the Company in certain circumstances. In addition, certain Company entities guarantee certain financial and performance-related obligations of various Franklin subsidiaries. The Company is also subject to certain legal requirements and agreements providing for indemnifications of directors, officers and personnel against liabilities and expenses they may incur under certain circumstances in connection with their service. The terms of these indemnities and guarantees vary pursuant to applicable facts and circumstances, and from agreement to agreement. Future payments for claims against the Company under these indemnities or guarantees could negatively impact the Company’s financial condition. In management’s opinion, no material loss was deemed probable or reasonably possible pursuant to such indemnification agreements and/or guarantees as of March 31, 2023.
Other Commitments and Contingencies
At March 31, 2023, there were no material changes in the other commitments and contingencies as reported in the Company’s Annual Report on Form 10-K for fiscal year 2022.
Note 11 – Stock-Based Compensation
Stock and stock unit award activity was as follows:
(shares in thousands) Time-Based
Shares Performance-
Based Shares Total
Shares Weighted-
Average
Grant-Date
Fair Value
for the six months ended March 31, 2023
Nonvested balance at October 1, 2022 13,492 3,401 16,893 $ 24.04
Granted 6,907 271 7,178 22.66
Vested ( 1,628 ) ( 138 ) ( 1,766 ) 24.40
Forfeited/canceled ( 284 ) ( 90 ) ( 374 ) 25.66
Nonvested Balance at March 31, 2023 18,487 3,444 21,931 $ 23.53
Total unrecognized compensation expense related to nonvested stock and stock unit awards was $ 281.9 million at March 31, 2023. This expense is expected to be recognized over a remaining weighted-average vesting period of 1.8 years.
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Note 12 – Investment and Other Income, Net
Investment and other income, net consisted of the following:
Three Months Ended
March 31, Six Months Ended
March 31,
(in millions) 2023 2022 2023 2022
Dividend and interest income $ 32.3 $ 5.1 $ 68.8 $ 11.2
Gains (losses) on investments, net 3.0 ( 23.1 ) 48.5 2.7
Income from investments in equity method investees 85.6 27.0 118.8 51.7
Rental income 13.4 8.6 24.0 18.3
Foreign currency exchange (losses) gains, net ( 6.5 ) 5.8 ( 33.6 ) 9.7
Other, net ( 2.2 ) 4.3 ( 9.8 ) ( 8.9 )
Investment and other income, net $ 125.6 $ 27.7 $ 216.7 $ 84.7
Net gains (losses) recognized on equity securities measured at fair value and trading debt securities that were held by the Company were $ 13.1 million and $ 78.2 million for the three and six months ended March 31, 2023 and $( 29.2 ) million and $( 34.5 ) million for the three and six months ended March 31, 2022.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.