Company Quick10K Filing
Quick10K
Franklin Resources
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.62 510 $16,620
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
8-K 2019-02-12 Shareholder Vote
8-K 2019-01-30 Earnings, Exhibits
8-K 2018-10-25 Earnings, Other Events, Exhibits
8-K 2018-10-24 Amend Bylaw, Exhibits
8-K 2018-07-27 Earnings, Exhibits
8-K 2018-04-11 Other Events, Exhibits
8-K 2018-02-14 Shareholder Vote
AMP Ameriprise Financial
IVZ Invesco
JHG Janus Henderson Group
HLI Houlihan Lokey
FOCS Focus Financial Partners
PJT PJT Partners
VRTS Virtus Investment Partners
DHIL Diamond Hill Investment Group
WHG Westwood Holdings
VALU Value Line
BEN 2018-12-31
Part I - Financial Information
Item 1. Financial Statements.
Note 1 - Basis of Presentation
Note 2 - New Accounting Guidance
Note 3 - Earnings (Loss) per Share
Note 4 - Revenues
Note 5 - Investments
Note 6 - Fair Value Measurements
Note 7 - Consolidated Investment Products
Note 8 - Nonconsolidated Variable Interest Entities
Note 9 - Taxes on Income
Note 10 - Commitments and Contingencies
Note 11 - Stock-Based Compensation
Note 12 - Other Income (Expenses)
Note 13 - Accumulated Other Comprehensive Income (Loss)
Note 14 - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-10.1 exhibit101123118.htm
EX-10.2 exhibit102123118.htm
EX-10.3 exhibit103123118.htm
EX-31.1 exhibit311q12019.htm
EX-31.2 exhibit312q12019.htm
EX-32.1 exhibit321q12019.htm
EX-32.2 exhibit322q12019.htm

Franklin Resources Earnings 2018-12-31

BEN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q12312018.htm FORM 10-Q Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-09318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter) 
Delaware
13-2670991
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
One Franklin Parkway, San Mateo, CA
94403
(Address of principal executive offices)
(Zip Code)
(650) 312-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    o  NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    x  YES    o  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer     x
 
Accelerated filer     o
 
Non-accelerated filer  o
 
Smaller reporting company    o
 
 
 
Emerging growth company    o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act).    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o  YES    x  NO
Number of shares of the registrant’s common stock outstanding at January 23, 2019: 509,510,446.




INDEX TO FORM 10-Q


2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
 
 
Three Months Ended
December 31,
(in millions, except per share data)
 
2018
 
2017
Operating Revenues
 
 
 
 
Investment management fees
 
$
971.8

 
$
1,113.6

Sales and distribution fees
 
354.8

 
417.8

Shareholder servicing fees
 
55.1

 
54.9

Other
 
29.8

 
29.2

Total operating revenues
 
1,411.5

 
1,615.5

Operating Expenses
 
 
 
 
Sales, distribution and marketing
 
444.5

 
528.7

Compensation and benefits
 
355.0

 
332.5

Information systems and technology
 
60.9

 
55.0

Occupancy
 
31.2

 
29.4

General, administrative and other
 
108.4

 
88.8

Total operating expenses
 
1,000.0

 
1,034.4

Operating Income
 
411.5

 
581.1

Other Income (Expenses)
 
 
 
 
Investment and other income (losses), net
 
(59.1
)
 
81.3

Interest expense
 
(6.4
)
 
(10.8
)
Other income (expenses), net
 
(65.5
)
 
70.5

Income before taxes
 
346.0

 
651.6

Taxes on income
 
86.0

 
1,223.5

Net income (loss)
 
260.0

 
(571.9
)
Less: net income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
(0.5
)
 
(0.1
)
Redeemable noncontrolling interests
 
(15.4
)
 
11.5

Net Income (Loss) Attributable to Franklin Resources, Inc.
 
$
275.9

 
$
(583.3
)
 
 
 
 
 
Earnings (Loss) per Share
 
 
 
 
Basic
 
$
0.54

 
$
(1.06
)
Diluted
 
0.54

 
(1.06
)




See Notes to Consolidated Financial Statements.

3


FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(in millions)
 
Three Months Ended
December 31,
 
2018
 
2017
Net Income (Loss)
 
$
260.0

 
$
(571.9
)
Other Comprehensive Income (Loss)
 
 
 
 
Currency translation adjustments, net of tax
 
(14.6
)
 
15.8

Net unrealized losses on defined benefit plans, net of tax
 
(0.4
)
 
(1.1
)
Net unrealized gains on investments, net of tax
 

 
3.5

Total other comprehensive income (loss)
 
(15.0
)
 
18.2

Total comprehensive income (loss)
 
245.0

 
(553.7
)
Less: comprehensive income (loss) attributable to
 
 
 
 
Nonredeemable noncontrolling interests
 
(0.5
)
 
(0.1
)
Redeemable noncontrolling interests
 
(15.4
)
 
11.5

Comprehensive Income (Loss) Attributable to Franklin Resources, Inc.
 
$
260.9

 
$
(565.1
)

See Notes to Consolidated Financial Statements.

4


FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited
(in millions, except share and per share data)
 
December 31,
2018
 
September 30,
2018
Assets
 
 
 
 
Cash and cash equivalents
 
$
6,430.7

 
$
6,610.8

Receivables
 
723.9

 
733.7

Investments (including $522.4 and $551.6 at fair value at December 31, 2018 and September 30, 2018)
 
1,385.9

 
1,426.5

Assets of consolidated investment products
 
 
 
 
Cash and cash equivalents
 
228.2

 
299.8

Receivables
 
81.7

 
114.2

Investments, at fair value
 
2,040.2

 
2,109.4

Property and equipment, net
 
541.3

 
535.0

Goodwill and other intangible assets, net
 
2,326.2

 
2,333.4

Other
 
192.5

 
220.7

Total Assets
 
$
13,950.6

 
$
14,383.5

 
 
 
 
 
Liabilities
 
 
 
 
Compensation and benefits
 
$
218.9

 
$
405.6

Accounts payable and accrued expenses
 
180.5

 
158.9

Dividends
 
139.2

 
127.7

Commissions
 
259.4

 
297.9

Income taxes
 
1,071.9

 
1,034.8

Debt
 
697.7

 
695.9

Liabilities of consolidated investment products
 
 
 
 
Accounts payable and accrued expenses
 
28.9

 
68.0

Debt
 
32.7


32.6

Deferred taxes
 
132.6

 
126.5

Other
 
179.8

 
184.1

Total liabilities
 
2,941.6

 
3,132.0

Commitments and Contingencies (Note 10)
 

 

Redeemable Noncontrolling Interests
 
932.3

 
1,043.6

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; 511,482,401 and 519,122,574 shares issued and outstanding at December 31, 2018 and September 30, 2018
 
51.1

 
51.9

Retained earnings
 
10,087.9

 
10,217.9

Accumulated other comprehensive loss
 
(393.6
)
 
(370.6
)
Total Franklin Resources, Inc. stockholders’ equity
 
9,745.4

 
9,899.2

Nonredeemable noncontrolling interests
 
331.3

 
308.7

Total stockholders’ equity
 
10,076.7

 
10,207.9

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
13,950.6

 
$
14,383.5




See Notes to Consolidated Financial Statements.

5


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 three months ended
December 31, 2018
Shares
 
Amount
Balance at October 1, 2018
 
519.1

 
$
51.9

 
$

 
$
10,217.9

 
$
(370.6
)
 
$
9,899.2

 
$
308.7

 
$
10,207.9

Adoption of new accounting guidance
 
 
 
 
 
 
 
22.9

 
(8.0
)
 
14.9

 
 
 
14.9

Net income (loss)
 
 

 
 

 
 

 
275.9

 
 

 
275.9

 
(0.5
)
 
275.4

Other comprehensive loss
 
 

 
 

 
 

 
 

 
(15.0
)
 
(15.0
)
 
 

 
(15.0
)
Dividends declared on common stock ($0.26 per share)
 
 
 
 
 
 
 
(133.8
)
 
 

 
(133.8
)
 
 

 
(133.8
)
Repurchase of common stock
 
(10.7
)
 
(1.1
)
 
(30.8
)
 
(295.0
)
 
 

 
(326.9
)
 
 

 
(326.9
)
Issuance of common stock
 
3.1

 
0.3

 
33.6

 
 

 
 

 
33.9

 
 

 
33.9

Stock-based compensation
 
 

 
 

 
(2.8
)
 
 

 
 

 
(2.8
)
 
 

 
(2.8
)
Net subscriptions and other
 
 

 
 

 
 

 
 

 
 

 
 

 
23.1

 
23.1

Balance at December 31, 2018
 
511.5

 
$
51.1

 
$

 
$
10,087.9

 
$
(393.6
)
 
$
9,745.4

 
$
331.3

 
$
10,076.7


 
 
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 three months ended
December 31, 2017
Shares
 
Amount
Balance at October 1, 2017
 
554.9

 
$
55.5

 
$

 
$
12,849.3

 
$
(284.8
)
 
$
12,620.0

 
$
315.8

 
$
12,935.8

Adoption of new accounting guidance
 
 
 
 
 
2.1

 
(1.7
)
 
 
 
0.4

 
 
 
0.4

Net loss
 
 

 
 

 
 

 
(583.3
)
 
 

 
(583.3
)
 
(0.1
)
 
(583.4
)
Other comprehensive income
 
 

 
 

 
 

 
 

 
18.2

 
18.2

 
 

 
18.2

Dividends declared on common stock ($0.23 per share)
 
 
 
 
 
 
 
(127.4
)
 
 

 
(127.4
)
 
 

 
(127.4
)
Repurchase of common stock
 
(4.6
)
 
(0.5
)
 
(32.1
)
 
(167.4
)
 
 

 
(200.0
)
 
 

 
(200.0
)
Issuance of common stock
 
2.1

 
0.2

 
27.6

 
 

 
 

 
27.8

 
 

 
27.8

Stock-based compensation
 
 

 
 

 
2.4

 
 

 
 

 
2.4

 
 

 
2.4

Net subscriptions and other
 
 

 
 

 
 

 
 

 
 

 
 

 
7.0

 
7.0

Deconsolidation of investment product
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.3
)
 
(0.3
)
Balance at December 31, 2017
 
552.4

 
$
55.2

 
$

 
$
11,969.5

 
$
(266.6
)
 
$
11,758.1

 
$
322.4

 
$
12,080.5



See Notes to Consolidated Financial Statements.

6


FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
 
 
Three Months Ended
December 31,
(in millions)
 
2018
 
2017
Net Income (Loss)
 
$
260.0

 
$
(571.9
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Amortization of deferred sales commissions
 
21.7

 
19.1

Depreciation and other amortization
 
20.3

 
20.9

Stock-based compensation
 
31.2

 
30.3

Losses (income) from investments in equity method investees
 
37.6

 
(35.2
)
Net gains on investments of consolidated investment products
 
(2.0
)
 
(4.7
)
Deferred income taxes
 
11.5

 
(49.9
)
Other
 
8.7

 
5.3

Changes in operating assets and liabilities:
 
 
 
 
Decrease (increase) in receivables and other assets
 
43.1

 
(33.8
)
Decrease (increase) in receivables of consolidated investment products
 
19.5

 
(94.8
)
Decrease in trading securities, net
 
105.8

 
18.6

Increase in trading securities of consolidated investment products, net
 
(88.7
)
 
(187.1
)
Decrease in accrued compensation and benefits
 
(186.0
)
 
(186.1
)
Increase (decrease) in commissions payable
 
(38.5
)
 
9.1

Increase in income taxes payable
 
37.1

 
1,232.0

Increase in accounts payable, accrued expenses and other liabilities
 
15.4

 
1.5

Increase (decrease) in accounts payable and accrued expenses of consolidated investment products
 
(30.7
)
 
147.1

Net cash provided by operating activities
 
266.0

 
320.4

Purchase of investments
 
(115.7
)
 
(39.7
)
Liquidation of investments
 
73.2

 
33.9

Purchase of investments by consolidated investment products
 
(18.2
)
 
(11.0
)
Liquidation of investments by consolidated investment products
 
7.0

 
22.5

Additions of property and equipment, net
 
(25.7
)
 
(19.2
)
Net deconsolidation of investment products
 
(30.9
)
 
(45.1
)
Net cash used in investing activities
 
(110.3
)
 
(58.6
)
Dividends paid on common stock
 
(122.3
)
 
(111.7
)
Repurchase of common stock
 
(321.4
)
 
(198.7
)
Proceeds from loan
 
1.7

 

Payments on debt by consolidated investment products
 

 
(2.4
)
Noncontrolling interests
 
45.9

 
261.7

Net cash used in financing activities
 
(396.1
)
 
(51.1
)
Effect of exchange rate changes on cash and cash equivalents
 
(11.3
)
 
10.0

Increase (decrease) in cash and cash equivalents
 
(251.7
)
 
220.7

Cash and cash equivalents, beginning of period
 
6,910.6

 
8,749.7

Cash and Cash Equivalents, End of Period
 
$
6,658.9

 
$
8,970.4

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
35.8

 
$
38.8

Cash paid for interest
 
6.0

 
14.1

Cash paid for interest by consolidated investment products
 
0.5

 
0.7


See Notes to Consolidated Financial Statements.

7


FRANKLIN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(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 by the Company 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. These financial statements should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended September 30, 2018 (“fiscal year 2018”). Certain comparative amounts for the prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended December 31, 2018.
Note 2 New Accounting Guidance
On October 1, 2018, the Company adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) that requires use of a single principles-based model for recognition of revenue from contracts with customers. The core principle of the model is that revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. The guidance also changes the accounting for certain contract costs and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The Company adopted the new guidance using the modified retrospective approach which did not require the restatement of prior periods, and recognized a cumulative effect adjustment resulting in decreases in total assets, total liabilities and retained earnings of $9.1 million, $2.2 million and $6.9 million.
The adoption of the guidance had no impact on operating income or net income. Individual line items in the consolidated statement of income were impacted as follows:
(in millions)
 
As
Reported
 
Adoption
Impact
 
Amount
Without
Adoption
for the three months ended December 31, 2018
 
 
 
Operating Revenues
 
 
 
 
 
 
Investment management fees
 
$
971.8

 
$
15.5

 
$
987.3

Sales and distribution fees
 
354.8

 
(15.5
)
 
339.3

Shareholder servicing fees
 
55.1

 
(2.2
)
 
52.9

 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
General, administrative and other
 
$
108.4

 
$
(2.2
)
 
$
106.2

On October 1, 2018, the Company adopted an amendment to the financial instruments guidance issued by the FASB that requires substantially all equity investments in nonconsolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting, which impacted all equity securities previously classified as available-for-sale and investments in fund products for which fair value was estimated using net asset value (“NAV”) as a practical expedient. The amendment also provides an election to measure equity investments that do not have a readily determinable fair value at cost adjusted for observable price changes and impairment, if any, which the Company made. The Company adopted the amendment using the modified retrospective approach and recognized a cumulative effect adjustment resulting in increases in investments, retained earnings and accumulated other comprehensive loss of $21.8 million, $29.8 million and $8.0 million.
There were no significant updates to the new accounting guidance that the Company has not yet adopted as disclosed in its Form 10-K for fiscal year 2018.

8


Note 3 Earnings (Loss) per Share
The components of basic and diluted earnings (loss) per share were as follows: 
(in millions, except per share data)
 
Three Months Ended
December 31,
 
2018
 
2017
Net income (loss) attributable to Franklin Resources, Inc.
 
$
275.9

 
$
(583.3
)
Less: allocation of earnings to participating nonvested stock and stock unit awards
 
2.5

 
1.0

Net Income (Loss) Available to Common Stockholders
 
$
273.4

 
$
(584.3
)
 
 
 
 
 
Weighted-average shares outstanding – basic
 
510.3

 
550.7

Dilutive effect of nonparticipating nonvested stock unit awards
 
0.5

 

Weighted-Average Shares Outstanding – Diluted
 
510.8

 
550.7

 
 
 
 
 
Earnings (Loss) per Share
 
 
 
 
Basic
 
$
0.54

 
$
(1.06
)
Diluted
 
0.54

 
(1.06
)
Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings (loss) per share because their effect would have been antidilutive were 0.3 million and 1.9 million for the three months ended December 31, 2018 and 2017.
Note 4 Revenues
The Company earns revenue primarily from providing investment management and related services to its customers, which are generally investment products or investors in separate accounts. Related services include fund administration, sales and distribution, and shareholder servicing. Revenues are recognized when the Company’s obligations related to the services are satisfied and it is probable that a significant reversal of the revenue amount would not occur in future periods. The obligations are satisfied over time as the services are rendered, except for the sales and distribution obligations for the sale of shares of sponsored funds which are satisfied on trade date. Multiple services included in customer contracts are accounted for separately when the obligations are determined to be distinct.
Fees from providing investment management and fund administration services (“investment management fees”), other than performance-based investment management fees, are determined based on a percentage of assets under management (“AUM”), primarily on a monthly basis using daily average AUM, and are recognized as the services are performed over time. Performance-based investment management fees are generated when investment products’ performance exceeds targets established in customer contracts. These fees are recognized when the amount is no longer probable of significant reversal and may relate to investment management services that were provided in prior periods.
Sales and distribution fees primarily consist of upfront sales commissions and ongoing distribution fees. Sales commissions are based on contractual rates for sales of certain classes of sponsored funds and are recognized on trade date. Distribution service fees are determined based on a percentage of AUM, primarily on a monthly basis using daily average AUM. As the fee amounts are uncertain on trade date, they are recognized over time as the amounts become known and may relate to sales and distribution services provided in prior periods.
Shareholder servicing fees are primarily determined based on a percentage of AUM on a monthly basis using daily average AUM and either the number of transactions in shareholder accounts or the number of shareholder accounts, while fees from certain investment products are based only on AUM. The fees are recognized as the services are performed over time.
AUM is generally based on the fair value of the underlying securities held by investment products and is calculated using fair value methods derived primarily from unadjusted quoted market prices, unadjusted independent third-party broker or dealer price quotes in active markets, or market prices or price quotes adjusted for observable price movements after the close of the primary market in accordance with the Company’s global valuation and pricing policy. The fair values of the underlying securities for which market prices are not readily available are valued internally using various methodologies which incorporate significant unobservable inputs as appropriate for each security type and represent an insignificant percentage of total AUM.

9


Revenue is recorded gross of payments made to third-party service providers in the Company’s role as principal as it controls the delegated services provided to customers.
Operating revenues by geographic area were as follows:
 
 
Earned From Contracts With Customers
 
Not Earned From
Contracts With Customers 1
 
Total
(in millions)
United States
 
Luxembourg
 
Americas
Excluding United States
 
Asia-Pacific
 
Europe, Middle East and Africa, Excluding Luxembourg
for the three months ended
December 31, 2018
Investment management fees
 
$
533.1

 
$
267.7

 
$
85.6

 
$
61.4

 
$
24.0

 
$

 
$
971.8

Sales and distribution fees
 
233.0

 
104.3

 
16.6

 
0.5

 
0.4

 

 
354.8

Shareholder servicing fees
 
44.9

 
7.7

 

 
2.5

 

 

 
55.1

Other
 
3.0

 
0.3

 

 
0.1

 
0.3

 
26.1

 
29.8

Total
 
$
814.0

 
$
380.0


$
102.2


$
64.5


$
24.7

 
$
26.1

 
$
1,411.5

__________________ 
1 
Consists of interest and dividend income from consolidated investment products.
Operating revenues are attributed to geographic areas based on the locations of the Company’s subsidiaries that provide the services, which may differ from the regions in which the related investment products are sold.
Note 5 Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated investment products. See Note 7 Consolidated Investment Products for information related to the investments held by these entities.
The Company adopted new accounting guidance on October 1, 2018 that requires substantially all equity investments in nonconsolidated entities to be measured at fair value with changes recognized in earnings, except for those accounted for using the equity method of accounting. The new guidance did not change the accounting for investments in non-equity securities.
Investments consisted of the following:
(in millions)
 
December 31,
2018
Equity securities, at fair value
 
 
Sponsored funds
 
$
309.7

Other equity securities
 
110.0

Total equity securities, at fair value
 
419.7

Debt securities
 
 
Trading
 
79.8

Available-for-sale
 
11.0

Total debt securities
 
90.8

Investments in equity method investees
 
819.8

Other investments
 
55.6

Total
 
$
1,385.9


10


(in millions)
 
September 30,
2018
Investment securities, trading
 
 
Sponsored funds
 
$
248.1

Debt and other equity securities
 
97.6

Total investment securities, trading
 
345.7

Investment securities, available-for-sale
 
 
Sponsored funds
 
178.6

Debt and other equity securities
 
15.5

Total investment securities, available-for-sale
 
194.1

Investments in equity method investees
 
780.8

Other investments
 
105.9

Total
 
$
1,426.5

Equity securities, at fair value include trading investment securities and investments that were classified as available-for-sale or carried at cost prior to adoption of the new guidance. Changes in the fair value of the investments are recognized as gains and losses in earnings. The fair value of funds is determined based on their published NAV or estimated using NAV as a practical expedient. The fair value of equity securities other than funds is determined using independent third-party broker or dealer price quotes or based on discounted cash flows using significant unobservable inputs.
As of October 1, 2018, equity investments that do not have a readily determinable fair value are measured at cost adjusted for observable price changes and impairment, if any, which are recognized in earnings. The impairment assessment for these investments considers qualitative factors, including the financial condition and specific events related to the investee, that may indicate the fair value of the investment is less than its carrying value. 
Investment balances and related changes for the prior year have not been reclassified to conform to the financial statement presentation as of and for the period ended December 31, 2018.
Investment securities with aggregate carrying amounts of $1.2 million were pledged as collateral at December 31, 2018 and September 30, 2018.
Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:
(in millions)
 
Cost Basis
 
Gross Unrealized
 
Fair Value
 
Gains
 
Losses
 
as of December 31, 2018
 
 
 
 
 
 
 
 
Debt securities
 
$
13.0

 
$

 
$
(2.0
)
 
$
11.0

 
 
 
 
 
 
 
 
 
as of September 30, 2018
 
 
 
 
 
 
 
 
Sponsored funds
 
$
172.9

 
$
8.3

 
$
(2.6
)
 
$
178.6

Debt and other equity securities
 
16.8

 
0.5

 
(1.8
)
 
15.5

Total
 
$
189.7

 
$
8.8

 
$
(4.4
)
 
$
194.1


11


Gross unrealized losses relating to investment securities, available-for-sale aggregated by length of time that individual securities have been in a continuous unrealized loss position were as follows:
(in millions)
 
Less Than 12 Months
 
12 Months or Greater
 
Total
Fair Value
 
Gross
Unrealized
Losses
Fair Value
 
Gross
Unrealized
Losses
Fair Value
 
Gross
Unrealized
Losses
 
 
 
as of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
 
$
10.7

 
$
(2.0
)
 
$

 
$

 
$
10.7

 
$
(2.0
)
 
 
 
 
 
 
 
 
 
 
 
 
 
as of September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Sponsored funds
 
$
48.8

 
$
(2.1
)
 
$
21.0

 
$
(0.5
)
 
$
69.8

 
$
(2.6
)
Debt and other equity securities
 
10.9

 
(1.8
)
 

 

 
10.9

 
(1.8
)
Total
 
$
59.7

 
$
(3.9
)
 
$
21.0

 
$
(0.5
)
 
$
80.7

 
$
(4.4
)
Note 6 Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated investment products. See Note 7 – Consolidated Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liability 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 December 31, 2018
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Equity securities, at fair value
 
 
 
 
 
 
 
 
 
 
Sponsored funds
 
$
286.2

 
$

 
$

 
$
23.5

 
$
309.7

Other equity securities
 
21.2

 
0.3

 
0.7

 
87.8

 
110.0

Debt securities
 
 
 
 
 
 
 
 
 

Trading
 
2.5

 
61.2

 
16.1

 

 
79.8

Available-for-sale
 

 
10.7

 
0.3

 

 
11.0

Life settlement contracts
 

 

 
11.9

 

 
11.9

Total Assets Measured at Fair Value
 
$
309.9

 
$
72.2

 
$
29.0


$
111.3

 
$
522.4

 
 
 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$
40.0

 
$

 
$
40.0


12


(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2018
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
 
 
 
 
 
 
 
Sponsored funds
 
$
248.1

 
$

 
$

 
$
248.1

Debt and other equity securities
 
26.6

 
50.5

 
20.5

 
97.6

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
Sponsored funds
 
178.6

 

 

 
178.6

Debt and other equity securities
 
4.4

 
10.8

 
0.3

 
15.5

Life settlement contracts
 

 

 
11.8

 
11.8

Total Assets Measured at Fair Value
 
$
457.7

 
$
61.3

 
$
32.6

 
$
551.6

 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$

 
$

 
$
38.7

 
$
38.7

Level 1 assets consist primarily of sponsored funds and other equity securities for which the fair values are based on published NAV or quoted market prices. Level 2 assets consist of debt and equity securities for which the fair values are determined using independent third-party broker or dealer price quotes. Level 3 assets consist of debt and equity securities and life settlement contracts for which the fair values are based on discounted cash flows using significant unobservable inputs.
The fair value of the contingent consideration liability is determined using the net present value of anticipated future cash flows based on estimated future revenue and profits and timing of payments.
Investments for which fair value was estimated using reported NAV as a practical expedient primarily consist of nonredeemable private debt, equity and infrastructure funds. These investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets. The expected weighted-average life for $54.1 million of the investments was 2.1 years at December 31, 2018. The liquidation period for a $50.0 million investment in a nonredeemable private debt fund is unknown. The Company’s unfunded commitments to these funds totaled $5.0 million at December 31, 2018.
Changes in the Level 3 assets and liability were as follows: 
 
 
2018
 
2017
(in millions)
 
Investments
 
Contingent
Consideration
Liability
 
Investments
 
Contingent
Consideration
Liability
for the three months ended December 31,
 
 
 
 
Balance at beginning of period
 
$
32.6

 
$
(38.7
)
 
$
199.9

 
$
(51.0
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income (losses), net
 
2.8

 

 
1.2

 

Included in general, administrative and other expense
 

 
(1.3
)
 

 
(4.0
)
Purchases
 

 

 
5.3

 

Sales
 
(4.3
)
 

 

 

Transfers out of Level 3
 
(2.1
)
 

 

 

Foreign exchange revaluation and other
 

 

 
3.7

 
(7.0
)
Balance at End of Period
 
$
29.0

 
$
(40.0
)
 
$
210.1

 
$
(62.0
)
Change in unrealized gains (losses) included in net income (loss) relating to assets and liability held at end of period
 
$
2.8

 
$
(1.3
)
 
$
1.2

 
$
(4.0
)
There were no transfers into Level 3 during the three months ended December 31, 2018 and 2017.

13


Valuation techniques and significant unobservable inputs used in the Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2018
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average 1)
Debt securities, trading
 
$
16.1

 
Discounted cash flow
 
Discount rate
 
4.0%–12.7% (6.3%)
Risk premium
 
2.0%–6.0% (2.9%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
11.9

 
Discounted cash flow
 
Life expectancy
 
20–113 months (59)
Discount rate
 
8.0%–20.0% (13.2%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
40.0

 
Discounted cash flow
 
Discount rate
 
12.3%
__________________ 
1 
Based on the relative fair value of the instruments.
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2018
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Investment securities, trading – debt and other equity securities
 
$
20.5

 
Discounted cash flow
 
Discount rate
 
4.1%–12.3% (5.8%)
Risk premium
 
2.0%–6.7% (3.6%)
 
 
 
 
 
 
 
 
 
Life settlement contracts
 
11.8

 
Discounted cash flow
 
Life expectancy
 
20–115 months (61)
Discount rate
 
8.0%–20.0% (13.1%)
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
38.7

 
Discounted cash flow
 
Discount rate
 
13.0%
If the relevant significant inputs used in the discounted cash flow valuations were independently higher (lower) as of December 31, 2018, the resulting fair value of the assets or liability would be lower (higher).
Financial instruments that were not measured at fair value were as follows:
(in millions)
 
Fair Value
Level
 
December 31, 2018
 
September 30, 2018
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
6,430.7

 
$
6,430.7

 
$
6,610.8

 
$
6,610.8

Other investments
 
 
 
 
 
 
 
 
 
 
Time deposits
 
2
 
15.1

 
15.1

 
12.3

 
12.3

Equity securities
 
3
 
28.6

 
28.6

 
81.8

 
103.6

 
 
 
 
 
 
 
 
 
 
 
Financial Liability
 
 
 
 
 
 
 
 
 
 
Debt
 
2
 
$
697.7

 
$
675.2

 
$
695.9

 
$
671.1


14


Note 7 Consolidated Investment Products
Consolidated investment products (“CIPs”) consist of mutual and other investment funds, limited partnerships and similar structures, substantially all of which are sponsored by the Company, and include both voting interest entities and variable interest entities. The Company had 57 and 53 CIPs as of December 31, 2018 and September 30, 2018.
The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:
(in millions)
 
December 31,
2018
 
September 30,
2018
Assets
 
 
 
 
Cash and cash equivalents
 
$
228.2

 
$
299.8

Receivables
 
81.7

 
114.2

Investments, at fair value
 
2,040.2

 
2,109.4

Other assets
 

 
1.0

Total Assets
 
$
2,350.1

 
$
2,524.4

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable and accrued expenses
 
$
28.9

 
$
68.0

Debt
 
32.7

 
32.6

Other liabilities
 

 
9.3

Total liabilities
 
61.6

 
109.9

Redeemable Noncontrolling Interests
 
932.3

 
1,043.6

Stockholders Equity
 
 
 
 
Franklin Resources, Inc.’s interests
 
1,052.1

 
1,092.6

Nonredeemable noncontrolling interests
 
304.1

 
278.3

Total stockholders’ equity
 
1,356.2

 
1,370.9

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders Equity
 
$
2,350.1

 
$
2,524.4

The CIPs did not have a significant impact on net income (loss) attributable to the Company during the three months ended December 31, 2018 and 2017.
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.
Investment products are typically consolidated when the Company makes an initial investment in a newly launched investment entity. They are typically deconsolidated when the Company no longer has a controlling financial interest due to redemptions of its investment or increases in third-party investments. The Company’s investments in these products subsequent to deconsolidation are accounted for as either equity method investments or equity securities measured at fair value with changes recognized in earnings depending on the structure of the product and the Company’s role and level of ownership.

15


Investments
Investments of CIPs consisted of the following:
(in millions)
 
December 31,
2018
 
September 30,
2018
Investment securities, trading
 
$
1,570.5

 
$
1,651.8

Other equity securities
 
329.6

 
311.0

Other debt securities
 
140.1

 
146.6

Total
 
$
2,040.2

 
$
2,109.4

Investment securities, trading consist of debt and equity securities that are traded in active markets. Other equity securities consist of equity securities of entities in emerging markets and fund products. Other debt securities consist of debt securities of entities in emerging markets and other debt instruments.
Fair Value Measurements
Assets and liabilities 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 December 31, 2018
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
155.4

 
$
233.8

 
$
193.6

 
$
137.5

 
$
720.3

Debt securities
 
0.3

 
1,179.5

 
140.1

 

 
1,319.9

Total Assets Measured at Fair Value
 
$
155.7

 
$
1,413.3

 
$
333.7

 
$
137.5

 
$
2,040.2

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
NAV as a
Practical
Expedient
 
Total
as of September 30, 2018
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
Equity securities
 
$
270.7

 
$
154.8

 
$
199.7

 
$
113.8

 
$
739.0

Debt securities
 
0.6

 
1,219.5

 
150.3

 

 
1,370.4

Total Assets Measured at Fair Value
 
$
271.3

 
$
1,374.3

 
$
350.0

 
$
113.8

 
$
2,109.4

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
$
0.6

 
$
8.7

 
$

 
$

 
$
9.3

Level 1 assets consist of equity and debt securities for which the fair values are based on quoted market prices. Level 2 assets consist of debt and equity securities for which the fair values are determined using independent third-party broker or dealer price quotes. Level 3 assets consist of equity and debt securities of entities in emerging markets and other debt instruments for which the fair values are determined using significant unobservable inputs in either a market-based or income-based approach.
Investments for which fair value was estimated using reported NAV as a practical expedient consist of nonredeemable real estate and private equity funds. These investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets over a weighted-average period of 4.0 years and 3.5 years at December 31, 2018 and September 30, 2018. The CIPs’ unfunded commitments to these funds totaled $62.8 million and $1.9 million, of which the Company was contractually obligated to fund $19.0 million and $0.4 million based on its ownership percentage in the CIPs, at December 31, 2018 and September 30, 2018.

16


Changes in Level 3 assets were as follows: 
 
 
2018
 
2017
(in millions)
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
 
Equity
Securities
 
Debt
Securities
 
Total 
Level 3
Assets
for the three months ended December 31,
 
 
 
 
 
Balance at beginning of period
 
$
199.7

 
$
150.3

 
$
350.0

 
$
160.7

 
$
135.4

 
$
296.1

Realized and unrealized gains (losses) included in investment and other income (losses), net
11.4

 
(8.2
)
 
3.2

 
1.9

 
0.1

 
2.0

Purchases
 
9.7

 
8.2

 
17.9

 
11.1

 

 
11.1

Sales
 
(0.1
)
 
(6.2
)
 
(6.3
)
 
(14.9
)
 

 
(14.9
)
Settlements
 
(1.0
)
 
(0.1
)
 
(1.1
)
 

 

 

Transfers into Level 3
 
0.1

 

 
0.1

 

 

 

Transfers out of Level 3
 
(25.4
)
 
(3.6
)
 
(29.0
)
 

 

 

Foreign exchange revaluation
 
(0.8
)
 
(0.3
)
 
(1.1
)
 
0.8

 
0.7

 
1.5

Balance at End of Period
 
$
193.6

 
$
140.1

 
$
333.7

 
$
159.6

 
$
136.2

 
$
295.8

Change in unrealized gains (losses) included in net income (loss) relating to assets held at end of period
 
$
11.7

 
$
(1.4
)
 
$
10.3

 
$
1.0

 
$
0.1

 
$
1.1

Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of December 31, 2018
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average 1)
Equity securities
 
$
165.3

 
Market comparable companies
 
EBITDA multiple
 
5.0–13.6 (9.1)
28.3

Discounted cash flow
Discount rate
8.0%–16.5% (13.8%)
 
 
 
 
 
 
 
 
 
Debt securities
 
116.6

 
Discounted cash flow
 
Discount rate
 
7.0%–14.8% (10.8%)
Loss-adjusted discount rate
3.0%–22.7% (13.2%)
23.5

Comparable trading multiple
Price-to-earnings ratio
10.0
Enterprise value/
EBITDA multiple
20.9
__________________ 
1 
Based on the relative fair value of the instruments.

(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2018
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Equity securities
 
$
171.9

 
Market comparable companies
 
EBITDA multiple
 
5.0–13.6 (9.3)
27.8

Discounted cash flow
Discount rate
8.0%–16.5% (14.1%)
 
 
 
 
 
 
 
 
 
Debt securities
 
111.0

 
Discounted cash flow
 
Discount rate
 
7.0%–14.8% (10.8%)
Loss-adjusted discount rate
3.0%–22.7% (12.0%)
33.9

Comparable trading multiple
Price-to-earnings ratio
10.0
Enterprise value/
EBITDA multiple
20.9
5.4

Market pricing
Private sale pricing
$42 per $100 of par

If the relevant significant inputs used in the market-based valuations were independently higher (lower) as of December 31, 2018, the resulting fair value of the securities would be higher (lower). If the relevant significant inputs used in the discounted cash flow valuations were independently higher (lower) as of December 31, 2018, the resulting fair value of the securities would be lower (higher).

17


Financial instruments of CIPs that were not measured at fair value were as follows:
(in millions)
 
Fair Value
Level
 
December 31, 2018
 
September 30, 2018
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Asset
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
228.2

 
$
228.2

 
$
299.8

 
$
299.8

Financial Liability
 
 
 
 
 
 
 
 
 
 
Debt
 
3
 
$
32.7

 
$
32.6

 
$
32.6

 
$
32.4

Debt
Debt of CIPs totaled $32.7 million and $32.6 million at December 31, 2018 and September 30, 2018. The debt had fixed and floating interest rates ranging from 3.07% to 7.90% with a weighted-average effective interest rate of 6.81% at December 31, 2018, and from 3.07% to 7.88% with a weighted-average effective interest rate of 6.79% at September 30, 2018. The debt matures in fiscal year 2019. 
Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests of CIPs were as follows:
(in millions)
 
 
 
 
for the three months ended December 31,
 
2018
 
2017
Balance at beginning of period
 
$
1,043.6

 
$
1,941.9

Net income (loss)
 
(15.4
)
 
11.5

Net subscriptions and other
 
22.8

 
254.7

Net deconsolidations
 
(118.7
)
 

Balance at End of Period
 
$
932.3

 
$
2,208.1

Note 8 Nonconsolidated Variable Interest Entities
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 and investment management and other fee receivables as follows: 
(in millions)
 
December 31,
2018
 
September 30,
2018
Investments
 
$
228.0

 
$
161.8

Receivables
 
133.1

 
140.1

Total