FRANKLIN TEMPLETON INC 10-Q

Item 1. Financial Statements. FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME Unaudited Three Months Ended June 30, Nine Months Ended June 30, (in millions, except per share data) 2023 2022 2023 2022 Operating Revenues Investment management fees $ 1,613.4 $ 1,636.1 $ 4,818.5 $ 5,045.8 Sales and distribution fees 304.0 335.6 897.3 1,104.0 Shareholder servicing fees 38.8 46.9 115.5 146.8 Other 12.8 12.7 32.0 39.7 Total operating revenues 1,969.0 2,031.3 5,863.3 6,336.3 Operating Expenses Compensation and benefits 841.2 766.7 2,667.7 2,321.8 Sales, distribution and marketing 406.8 440.3 1,202.0 1,432.8 Information systems and technology 127.3 125.9 376.7 376.6 Occupancy 56.9 53.8 171.1 163.1 Amortization of intangible assets 85.4 81.8 254.6 200.5 General, administrative and other 136.5 158.1 427.2 416.1 Total operating expenses 1,654.1 1,626.6 5,099.3 4,910.9 Operating Income 314.9 404.7 764.0 1,425.4 Other Income (Expenses) Investment and other income, net 51.2 13.0 267.9 97.7 Interest expense ( 34.9 ) ( 28.9 ) ( 99.3 ) ( 71.1 ) Investment and other income (losses) of consolidated investment products, net 1.7 ( 74.4 ) 75.3 33.3 Expenses of consolidated investment products ( 0.8 ) ( 1.3 ) ( 15.7 ) ( 10.1 ) Other income (expenses), net 17.2 ( 91.6 ) 228.2 49.8 Income before taxes 332.1 313.1 992.2 1,475.2 Taxes on income 84.1 89.5 237.3 347.7 Net income 248.0 223.6 754.9 1,127.5 Less: net income (loss) attributable to Redeemable noncontrolling interests 26.8 ( 0.5 ) 108.5 ( 50.2 ) Nonredeemable noncontrolling interests ( 6.3 ) ( 32.3 ) 59.1 118.5 Net Income Attributable to Franklin Resources, Inc. $ 227.5 $ 256.4 $ 587.3 $ 1,059.2 Earnings per Share Basic $ 0.44 $ 0.50 $ 1.14 $ 2.07 Diluted 0.44 0.50 1.14 2.07 See Notes to Consolidated Financial Statements. 3 Table of Contents FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Unaudited (in millions) Three Months Ended June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Net Income $ 248.0 $ 223.6 $ 754.9 $ 1,127.5 Other Comprehensive Income (Loss) Currency translation adjustments, net of tax 16.5 ( 100.6 ) 159.7 ( 123.8 ) Net unrealized losses on defined benefit plans, net of tax ( 0.6 ) ( 2.4 ) ( 1.4 ) ( 2.2 ) Net unrealized gains on investments, net of tax — — 0.2 — Total other comprehensive income (loss) 15.9 ( 103.0 ) 158.5 ( 126.0 ) Total comprehensive income 263.9 120.6 913.4 1,001.5 Less: comprehensive income (loss) attributable to Redeemable noncontrolling interests 26.8 ( 0.5 ) 108.5 ( 50.2 ) Nonredeemable noncontrolling interests ( 6.3 ) ( 32.3 ) 59.1 118.5 Comprehensive Income Attributable to Franklin Resources, Inc. $ 243.4 $ 153.4 $ 745.8 $ 933.2 See Notes to Consolidated Financial Statements. 4 Table of Contents FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS Unaudited (in millions, except share and per share data) June 30, 2023 September 30, 2022 Assets Cash and cash equivalents $ 3,728.6 $ 4,134.9 Receivables 1,341.9 1,264.8 Investments (including $ 867.3 and $ 613.5 at fair value at June 30, 2023 and September 30, 2022) 2,249.1 1,651.3 Assets of consolidated investment products Cash and cash equivalents 659.0 647.6 Investments, at fair value 9,639.0 7,898.1 Property and equipment, net 806.1 743.3 Goodwill 6,012.3 5,778.6 Intangible assets, net 4,994.9 5,082.1 Operating lease right-of-use assets 431.0 464.5 Other 372.7 395.4 Total Assets $ 30,234.6 $ 28,060.6 Liabilities Compensation and benefits $ 1,461.2 $ 1,464.4 Accounts payable and accrued expenses 563.5 466.2 Income taxes 448.6 523.1 Debt 3,358.7 3,376.4 Liabilities of consolidated investment products Accounts payable and accrued expenses 565.4 646.9 Debt 7,988.7 5,457.7 Deferred tax liabilities 450.7 347.8 Operating lease liabilities 494.8 528.4 Other 1,313.7 1,425.0 Total liabilities 16,645.3 14,235.9 Commitments and Contingencies (Note 10) Redeemable Noncontrolling Interests 1,050.1 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; 499,012,841 and 499,575,175 shares issued and outstanding at June 30, 2023 and September 30, 2022 49.9 50.0 Retained earnings 12,360.7 12,045.6 Accumulated other comprehensive loss ( 462.5 ) ( 621.0 ) Total Franklin Resources, Inc. stockholders’ equity 11,948.1 11,474.6 Nonredeemable noncontrolling interests 591.1 824.3 Total stockholders’ equity 12,539.2 12,298.9 Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity $ 30,234.6 $ 28,060.6 See Notes to Consolidated Financial Statements. 5 Table of Contents 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 nine months ended June 30, 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 Net income (loss) 227.5 227.5 ( 6.3 ) 221.2 Other comprehensive income 15.9 15.9 15.9 Dividends declared on common stock ($ 0.30 per share) ( 152.9 ) ( 152.9 ) ( 152.9 ) Repurchase of common stock ( 2.0 ) ( 0.2 ) ( 15.9 ) ( 34.8 ) ( 50.9 ) ( 50.9 ) Issuance of common stock 0.1 — 3.6 3.6 3.6 Stock-based compensation 12.3 12.3 12.3 Net distributions and other ( 12.7 ) ( 12.7 ) Net deconsolidation of investment products ( 0.7 ) ( 0.7 ) Adjustment to fair value of redeemable noncontrolling interests 60.8 60.8 60.8 Balance at June 30, 2023 499.0 $ 49.9 $ — $ 12,360.7 $ ( 462.5 ) $ 11,948.1 $ 591.1 $ 12,539.2 See Notes to Consolidated Financial Statements. 6 Table of Contents 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 nine months ended June 30, 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 Net income (loss) 256.4 256.4 ( 32.3 ) 224.1 Other comprehensive loss ( 103.0 ) ( 103.0 ) ( 103.0 ) Dividends declared on common stock ($ 0.29 per share) ( 147.7 ) ( 147.7 ) ( 147.7 ) Repurchase of common stock ( 2.0 ) ( 0.2 ) ( 48.3 ) ( 2.5 ) ( 51.0 ) ( 51.0 ) Issuance of common stock — — 1.8 1.8 1.8 Stock-based compensation 46.5 46.5 46.5 Net distributions and other ( 24.8 ) ( 24.8 ) Net deconsolidation of investment products ( 0.3 ) ( 0.3 ) Acquisition 149.9 149.9 Balance at June 30, 2022 498.4 $ 49.8 $ — $ 11,997.5 $ ( 503.6 ) $ 11,543.7 $ 741.4 $ 12,285.1 See Notes to Consolidated Financial Statements. 7 Table of Contents FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Nine Months Ended June 30, (in millions) 2023 2022 Net Income $ 754.9 $ 1,127.5 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 137.9 160.9 Amortization of deferred sales commissions 37.2 49.6 Depreciation and other amortization 78.3 68.8 Amortization of intangible assets 254.6 200.5 Net (gains) losses on investments ( 62.3 ) 32.9 Income from investments in equity method investees ( 111.1 ) ( 51.6 ) Net losses on investments of consolidated investment products 116.0 22.0 Net purchase of investments by consolidated investment products ( 833.2 ) ( 312.2 ) Deferred income taxes 50.8 55.9 Other 99.2 33.0 Changes in operating assets and liabilities: Increase in receivables and other assets ( 69.8 ) ( 97.3 ) Decrease (increase) in investments, net 6.4 ( 33.2 ) Increase (decrease) in accrued compensation and benefits ( 84.3 ) 45.1 Decrease in income taxes payable ( 58.9 ) ( 176.3 ) Increase (decrease) in accounts payable, accrued expenses and other liabilities 48.3 ( 9.1 ) Increase (decrease) in accounts payable and accrued expenses of consolidated investment products 1.3 ( 26.2 ) Net cash provided by operating activities 365.3 1,090.3 Purchase of investments ( 665.1 ) ( 676.5 ) Liquidation of investments 551.3 872.0 Purchase of investments by consolidated collateralized loan obligations ( 3,465.6 ) ( 3,198.4 ) Liquidation of investments by consolidated collateralized loan obligations 1,230.3 1,501.4 Additions of property and equipment, net ( 121.5 ) ( 55.6 ) Acquisitions, net of cash acquired ( 500.5 ) ( 1,354.7 ) Payments of contingent consideration asset 5.5 20.9 Payments of deferred consideration liability ( 241.8 ) — Net (deconsolidation) consolidation of investment products ( 43.8 ) 211.0 Net cash used in investing activities ( 3,251.2 ) ( 2,679.9 ) [Table continued on next page] See Notes to Consolidated Financial Statements. 8 Table of Contents FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited [Table continued from previous page] Nine Months Ended June 30, (in millions) 2023 2022 Issuance of common stock $ 13.4 $ 13.6 Dividends paid on common stock ( 454.8 ) ( 437.1 ) Repurchase of common stock ( 70.0 ) ( 154.0 ) Proceeds from repurchase agreement 174.8 — Proceeds from debt of consolidated investment products 3,213.6 4,345.2 Payments on debt of consolidated investment products ( 926.9 ) ( 2,469.3 ) Payments on contingent consideration liabilities ( 7.6 ) ( 4.1 ) Noncontrolling interests 482.5 194.9 Net cash provided by financing activities 2,425.0 1,489.2 Effect of exchange rate changes on cash and cash equivalents 66.0 ( 68.1 ) Decrease in cash and cash equivalents ( 394.9 ) ( 168.5 ) Cash and cash equivalents, beginning of period 4,782.5 4,647.2 Cash and Cash Equivalents, End of Period $ 4,387.6 $ 4,478.7 Supplemental Disclosure of Cash Flow Information Cash paid for income taxes $ 225.4 $ 456.7 Cash paid for interest 55.5 61.8 Cash paid for interest by consolidated investment products 232.2 107.0 See Notes to Consolidated Financial Statements. 9 Table of Contents FRANKLIN RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 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. 10 Table of Contents 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 $ 9.3 million for the three and nine months ended June 30, 2023. These assets had a weighted-average remaining useful life of 4.8 years at June 30, 2023, with estimated remaining amortization expense as follows: (in millions) for the fiscal years ending September 30, Amount 2023 (remainder of year) $ 3.5 2024 14.0 2025 14.0 2026 3.9 2027 2.9 Thereafter 8.1 Total $ 46.4 Costs incurred in connection with the acquisition were $ 14.1 million for the nine months ended June 30, 2023. Alcentra contributed $ 116.7 million of operating revenue and did not have a material impact to net income attributable to Franklin Resources, Inc. for the nine months ended June 30, 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 June 30, 2023, other liabilities includes repurchase agreements of $ 172.9 million with maturity values of € 132.3 million and $ 42.4 million in local currency. The Company has pledged Alcentra investments with a carrying value of $ 179.3 million as collateral as of June 30, 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 June 30, Nine Months Ended June 30, 2023 2022 2023 2022 Net income attributable to Franklin Resources, Inc. $ 227.5 $ 256.4 $ 587.3 $ 1,059.2 Less: allocation of earnings to participating nonvested stock and stock unit awards 10.2 11.2 26.7 45.6 Net Income Available to Common Stockholders $ 217.3 $ 245.2 $ 560.6 $ 1,013.6 Weighted-average shares outstanding – basic 490.7 487.5 490.3 489.1 Dilutive effect of nonparticipating nonvested stock unit awards 0.7 0.4 0.7 0.6 Weighted-Average Shares Outstanding – Diluted 491.4 487.9 491.0 489.7 Earnings per Share Basic $ 0.44 $ 0.50 $ 1.14 $ 2.07 Diluted 0.44 0.50 1.14 2.07 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 nine months ended June 30, 2023 and 2022. 11 Table of Contents 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 June 30, 2023 Investment management fees $ 1,232.3 $ 192.3 $ 64.3 $ 53.9 $ 70.6 $ 1,613.4 Sales and distribution fees 213.5 75.4 5.1 10.0 — 304.0 Shareholder servicing fees 30.3 8.0 0.5 — — 38.8 Other 11.9 0.5 0.4 — — 12.8 Total $ 1,488.0 $ 276.2 $ 70.3 $ 63.9 $ 70.6 $ 1,969.0 (in millions) United States Luxembourg Asia-Pacific Americas Excluding United States Europe, Middle East and Africa, Excluding Luxembourg Total for the nine months ended June 30, 2023 Investment management fees $ 3,672.9 $ 570.7 $ 214.4 $ 162.0 $ 198.5 $ 4,818.5 Sales and distribution fees 634.1 217.4 15.1 30.7 — 897.3 Shareholder servicing fees 90.2 23.5 1.6 0.2 — 115.5 Other 30.1 0.8 0.8 — 0.3 32.0 Total $ 4,427.3 $ 812.4 $ 231.9 $ 192.9 $ 198.8 $ 5,863.3 (in millions) United States Luxembourg Asia-Pacific Americas Excluding United States Europe, Middle East and Africa, Excluding Luxembourg Total for the three months ended June 30, 2022 Investment management fees $ 1,234.7 $ 211.6 $ 71.2 $ 59.4 $ 59.2 $ 1,636.1 Sales and distribution fees 238.1 80.2 5.8 11.5 — 335.6 Shareholder servicing fees 37.5 8.5 0.4 0.1 0.4 46.9 Other 12.0 0.3 0.2 — 0.2 12.7 Total $ 1,522.3 $ 300.6 $ 77.6 $ 71.0 $ 59.8 $ 2,031.3 (in millions) United States Luxembourg Asia-Pacific Americas Excluding United States Europe, Middle East and Africa, Excluding Luxembourg Total for the nine months ended June 30, 2022 Investment management fees $ 3,720.8 $ 707.2 $ 242.5 $ 194.3 $ 181.0 $ 5,045.8 Sales and distribution fees 778.1 268.3 20.0 37.6 — 1,104.0 Shareholder servicing fees 116.4 27.9 1.1 0.2 1.2 146.8 Other 38.2 0.8 0.5 — 0.2 39.7 Total $ 4,653.5 $ 1,004.2 $ 264.1 $ 232.1 $ 182.4 $ 6,336.3 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 nine months ended June 30, 2023 and 83 % and 81 % for the three and nine months ended June 30, 2022. 12 Table of Contents 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) June 30, 2023 September 30, 2022 Investments, at fair value Sponsored funds and separate accounts $ 616.6 $ 413.0 Investments related to long-term incentive plans 202.3 143.3 Other equity and debt investments 48.4 57.2 Total investments, at fair value 867.3 613.5 Investments in equity method investees 1,118.5 771.5 Other investments 263.3 266.3 Total $ 2,249.1 $ 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 June 30, 2023 Assets Investments, at fair value Sponsored funds and separate accounts $ 333.3 $ 220.7 $ 17.9 $ 44.7 $ 616.6 Investments related to long-term incentive plans 179.9 — — 22.4 202.3 Other equity and debt investments 3.4 7.5 4.3 33.2 48.4 Contingent consideration asset — — 4.4 — 4.4 Total Assets Measured at Fair Value $ 516.6 $ 228.2 $ 26.6 $ 100.3 $ 871.7 Liabilities Securities sold short $ 142.4 $ — $ — $ — $ 142.4 Contingent consideration liabilities — — 55.1 — 55.1 Total Liabilities Measured at Fair Value $ 142.4 $ — $ 55.1 $ — $ 197.5 13 Table of Contents (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) June 30, 2023 September 30, 2022 Nonredeemable investments 1 Investments with known liquidation periods $ 33.2 $ 32.8 Investments with unknown liquidation periods 17.4 29.4 Redeemable investments 2 49.7 23.8 Unfunded commitments 43.2 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 3.2 years and 3.4 years at June 30, 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 June 30, 2023 September 30, 2022 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Financial Assets Cash and cash equivalents 1 $ 3,728.6 $ 3,728.6 $ 4,134.9 $ 4,134.9 Other investments Time deposits 2 10.1 10.1 9.4 9.4 Equity securities 3 253.2 253.2 256.9 256.9 Financial Liability Debt 2 $ 3,358.7 $ 2,804.9 $ 3,376.4 $ 2,750.1 14 Table of Contents 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 69 CIPs, including 19 CLOs, as of June 30, 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) June 30, 2023 September 30, 2022 Assets Cash and cash equivalents $ 659.0 $ 647.6 Receivables 118.3 134.0 Investments, at fair value 9,639.0 7,898.1 Total Assets $ 10,416.3 $ 8,679.7 Liabilities Accounts payable and accrued expenses $ 565.4 $ 646.9 Debt 7,988.7 5,457.7 Other liabilities 26.6 175.0 Total liabilities 8,580.7 6,279.6 Redeemable Noncontrolling Interests 590.9 942.2 Stockholders ’ Equity Franklin Resources, Inc.’s interests 967.9 960.8 Nonredeemable noncontrolling interests 276.8 497.1 Total stockholders’ equity 1,244.7 1,457.9 Total Liabilities, Redeemable Noncontrolling Interests and Stockholders ’ Equity $ 10,416.3 $ 8,679.7 The CIPs did not have a significant impact on net income attributable to the Company during the three and nine months ended June 30, 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 June 30, 2023 Assets Cash and cash equivalents of CLOs $ 457.5 $ — $ — $ — $ 457.5 Receivables of CLOs — 60.3 — — 60.3 Investments Equity and debt securities 201.8 771.4 568.2 150.3 1,691.7 Loans — 7,943.6 3.7 — 7,947.3 Total Assets Measured at Fair Value $ 659.3 $ 8,775.3 $ 571.9 $ 150.3 $ 10,156.8 15 Table of Contents (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) June 30, 2023 September 30, 2022 Nonredeemable investments 1 Investments with known liquidation periods $ — $ 19.5 Investments with unknown liquidation periods 21.9 12.0 Redeemable investments 2 128.4 142.0 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 June 30, 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 June 30, 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. 16 Table of Contents Changes in Level 3 assets were as follows: (in millions) Equity and Debt Securities Loans Total Level 3 Assets for the three months ended June 30, 2023 Balance at April 1, 2023 $ 539.0 $ 3.1 $ 542.1 Gains (losses) included in investment and other income (losses) of consolidated investment products, net ( 31.6 ) 0.1 ( 31.5 ) Purchases 61.2 ( 0.2 ) 61.0 Sales and settlements ( 0.1 ) 0.2 0.1 Transfers into Level 3 — 0.5 0.5 Transfers out of Level 3 ( 0.3 ) — ( 0.3 ) Balance at June 30, 2023 $ 568.2 $ 3.7 $ 571.9 Change in unrealized gains (losses) included in net income relating to assets held at June 30, 2023 $ ( 32.0 ) $ 0.1 $ ( 31.9 ) (in millions) Equity and Debt Securities Real Estate Loans Total Level 3 Assets for the nine months ended June 30, 2023 Balance at October 1, 2022 $ 555.8 $ 268.6 $ 239.4 $ 1,063.8 Gains (losses) included in investment and other income (losses) of consolidated investment products, net ( 56.3 ) ( 9.0 ) 0.2 ( 65.1 ) Purchases 83.7 86.1 58.4 228.2 Sales and settlements ( 25.1 ) — — ( 25.1 ) Net (deconsolidations) consolidations 10.4 ( 345.7 ) ( 292.6 ) ( 627.9 ) Transfers into Level 3 — — 3.6 3.6 Transfers out of Level 3 ( 0.3 ) — ( 5.3 ) ( 5.6 ) Balance at June 30, 2023 $ 568.2 $ — $ 3.7 $ 571.9 Change in unrealized gains (losses) included in net income relating to assets held at June 30, 2023 $ ( 55.0 ) $ — $ 0.1 $ ( 54.9 ) (in millions) Equity and Debt Securities Real Estate Loans Total Level 3 Assets for the three months ended June 30, 2022 Balance at April 1, 2022 $ 595.4 $ 175.4 $ 33.6 $ 804.4 Gains (losses) included in investment and other income (losses) of consolidated investment products, net ( 31.7 ) 4.1 0.2 ( 27.4 ) Purchases 6.5 61.0 ( 0.1 ) 67.4 Sales and settlements ( 13.1 ) — ( 0.1 ) ( 13.2 ) Net deconsolidations — — ( 1.7 ) ( 1.7 ) Transfers into Level 3 — — 5.7 5.7 Transfers out of Level 3 ( 0.1 ) — — ( 0.1 ) Balance at June 30, 2022 $ 557.0 $ 240.5 $ 37.6 $ 835.1 Change in unrealized gains (losses) included in net income relating to assets held at June 30, 2022 $ ( 32.2 ) $ 4.1 $ 0.2 $ ( 27.9 ) 17 Table of Contents (in millions) Equity and Debt Securities Real Estate Loans Total Level 3 Assets for the nine months ended June 30, 2022 Balance at October 1, 2021 $ 453.3 $ 89.4 $ 20.5 $ 563.2 Gains included in investment and other income (losses) of consolidated investment products, net 138.6 18.4 0.2 157.2 Purchases 140.0 132.7 14.0 286.7 Sales and settlements ( 118.9 ) — ( 1.1 ) ( 120.0 ) Net deconsolidations ( 55.0 ) — ( 1.7 ) ( 56.7 ) Transfers into Level 3 0.1 — 5.7 5.8 Transfers out of Level 3 ( 1.1 ) — — ( 1.1 ) Balance at June 30, 2022 $ 557.0 $ 240.5 $ 37.6 $ 835.1 Change in unrealized gains included in net income relating to assets held at June 30, 2022 $ 126.6 $ 18.4 $ — $ 145.0 Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows: (in millions) as of June 30, 2023 Fair Value Valuation Technique Significant Unobservable Inputs Range (Weighted Average 1 ) Equity and debt securities $ 568.2 Market pricing Private sale pricing $ 0.01 –$ 1,000.00 ($ 43.23 ) per share Discount for lack of marketability 12.0 %– 21.8 % ( 16.4 %) (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 marketability 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 June 30, 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 June 30, 2023, the resulting fair value of the assets would be lower (higher). 18 Table of Contents Financial instruments of CIPs that were not measured at fair value were as follows: (in millions) Fair Value Level June 30, 2023 September 30, 2022 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Financial Asset Cash and cash equivalents 1 $ 201.5 $ 201.5 $ 378.5 $ 378.5 Financial Liabilities Debt of CLOs 1 2 or 3 $ 7,967.0 $ 7,845.5 $ 5,408.0 $ 5,548.8 Other debt 3 21.7 11.5 49.7 42.4 __________________ 1 Substantially all was Level 2. Debt Debt of CIPs consisted of the following: June 30, 2023 September 30, 2022 (in millions) Amount Weighted- Average Effective Interest Rate Amount Weighted- Average Effective Interest Rate Debt of CLOs $ 7,967.0 6.48 % $ 5,408.0 2.78 % Other debt 21.7 6.00 % 49.7 5.19 % Total $ 7,988.7 $ 5,457.7 The debt of CIPs had fixed and floating interest rates ranging from 2.39 % to 15.08 % at June 30, 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 June 30, 2023 were as follows: (in millions) for the fiscal years ending September 30, Amount 2023 (remainder of year) $ 178.0 2024 — 2025 — 2026 — 2027 — Thereafter 7,810.7 Total $ 7,988.7 Collateralized Loan Obligations The unpaid principal balance and fair value of the investments of CLOs were as follows: (in millions) June 30, 2023 September 30, 2022 Unpaid principal balance $ 8,300.1 $ 6,118.4 Difference between unpaid principal balance and fair value ( 200.3 ) ( 356.1 ) Fair Value $ 8,099.8 $ 5,762.3 Investments 90 days or more past due were immaterial at June 30, 2023 and September 30, 2022. 19 Table of Contents The Company recognized $ 6.5 million and $ 9.0 million of net gains during the three and nine months ended June 30, 2023 and $ 4.9 million and $ 17.8 million of net gains during the three and nine months ended June 30, 2022, related to its own economic interests in the CLOs. The aggregate principal amount due of the debt of CLOs was $ 8,125.7 million and $ 5,781.3 million at June 30, 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 June 30, Balance at beginning of period $ 445.6 $ 514.9 $ 960.5 $ 625.3 $ 512.8 $ 1,138.1 Net income (loss) 10.5 16.3 26.8 ( 16.5 ) 16.0 ( 0.5 ) Net subscriptions (distributions) and other 30.2 ( 11.2 ) 19.0 5.4 ( 29.6 ) ( 24.2 ) Net consolidations 104.6 — 104.6 380.3 — 380.3 Adjustment to fair value — ( 60.8 ) ( 60.8 ) — — — Balance at End of Period $ 590.9 $ 459.2 $ 1,050.1 $ 994.5 $ 499.2 $ 1,493.7 (in millions) 2023 2022 CIPs Minority Interests Total CIPs Minority Interests Total for the nine months ended June 30, Balance at beginning of period $ 942.2 $ 583.6 $ 1,525.8 $ 622.5 $ 310.5 $ 933.0 Net income (loss) 68.5 40.0 108.5 ( 90.9 ) 40.7 ( 50.2 ) Net subscriptions (distributions) and other 498.2 ( 58.9 ) 439.3 320.0 ( 40.5 ) 279.5 Net consolidations (deconsolidations) ( 918.0 ) — ( 918.0 ) 142.9 — 142.9 Adjustment to fair value — ( 105.5 ) ( 105.5 ) — 188.5 188.5 Balance at End of Period $ 590.9 $ 459.2 $ 1,050.1 $ 994.5 $ 499.2 $ 1,493.7 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) June 30, 2023 September 30, 2022 Investments $ 949.6 $ 718.0 Receivables 216.7 165.4 Total $ 1,166.3 $ 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 nine months ended June 30, 2023 or fiscal year 2022. Note 10 – Commitments and Contingencies Legal Proceedings India Credit Fund Closure Matters . During the nine months ended June 30, 2023, there were no significant changes from the disclosure in the Form 10‑K for the fiscal year ended September 30, 2022. As of June 30, 2023, the amount reported as distributed to fund unitholders in the aggregate is INR 27,109.3 crore (approximately $ 3.3 billion). 20 Table of Contents 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 June 30, 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 June 30, 2023. Other Commitments and Contingencies At June 30, 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 nine months ended June 30, 2023 Nonvested balance at October 1, 2022 13,492 3,401 16,893 $ 24.04 Granted 6,938 271 7,209 22.67 Vested ( 1,799 ) ( 138 ) ( 1,937 ) 24.65 Forfeited/canceled ( 357 ) ( 177 ) ( 534 ) 24.79 Nonvested Balance at June 30, 2023 18,274 3,357 21,631 $ 23.51 Total unrecognized compensation expense related to nonvested stock and stock unit awards was $ 202.3 million at June 30, 2023. This expense is expected to be recognized over a remaining weighted-average vesting period of 1.6 years. 21 Table of Contents Note 12 – Investment and Other Income, Net Investment and other income, net consisted of the following: Three Months Ended June 30, Nine Months Ended June 30, (in millions) 2023 2022 2023 2022 Dividend and interest income $ 42.7 $ 6.3 $ 111.5 $ 17.5 Gains (losses) on investments, net 13.8 ( 35.6 ) 62.3 ( 32.9 ) Income (losses) from investments in equity method investees ( 7.7 ) ( 0.1 ) 111.1 51.6 Gains (losses) on derivatives, net ( 5.1 ) 17.5 ( 19.4 ) 15.2 Rental income 11.1 9.6 35.1 27.9 Foreign currency exchange (losses) gains, net ( 6.6 ) 14.5 ( 40.2 ) 24.2 Other, net 3.0 0.8 7.5 ( 5.8 ) Investment and other income, net $ 51.2 $ 13.0 $ 267.9 $ 97.7 Net gains (losses) recognized on equity securities measured at fair value and trading debt securities that were held by the Company were $ 17.0 million and $ 95.7 million for the three and nine months ended June 30, 2023 and $( 50.3 ) million and $( 79.1 ) million for the three and nine months ended June 30, 2022. Note 13 - Subsequent Event On July 25, 2023, the Company terminated its 364-day $ 500.0 million revolving credit facility and its 3-year $ 300.0 million term loan. On the date of termination, the 364-day revolving credit facility had no amounts outstanding and all amounts outstanding under the term loan were repaid with existing cash. Concurrent with the actions above, the Company entered into a 5-year $ 800.0 million revolving credit facility. As of the time of this filing, there were no borrowings outstanding under the 5-year credit facility. 22 Table of Contents