UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 20182021
or
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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)
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| Delaware | | 13-2670991 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
One Franklin Parkway, San Mateo, California | | 94403 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’sOne Franklin Parkway, San Mateo, CA 94403
(Address of principal executive offices) (Zip code)
(650) 312-2000
(Registrant’s telephone number, including area code: (650) 312-2000code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, par value $.10$0.10 per share | BEN | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x YES o NO☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o YES x NO☐ Yes ☒ No
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☒ Yes ☐ 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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| Large Accelerated Filer | ☒ | | Accelerated Filer | ☐ |
| Non-accelerated Filer | ☐ | | Smaller Reporting Company | ☐ |
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Large accelerated filer x
| Accelerated filer o
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Non-accelerated filer o
Emerging Growth Company | Smaller reporting company o
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| Emerging growth company o
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o YES x NO☐ Yes ☒ No
The aggregate market value of the voting common equity (“common stock”) held by non-affiliates of the registrant, as of March 29, 201831, 2021 (the last business day of registrant’s second quarter of fiscal year 2018)2021), was $11.0$8.5 billion based upon the last sale price reported for such date on the New York Stock Exchange.
Number of shares of the registrant’s common stock outstanding at October 31, 2018: 513,094,888.2021: 501,795,099.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant’s definitive proxy statement for its annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after September 30, 2018,2021, are incorporated by reference into Part III of this report.
INDEX TO ANNUAL REPORT ON FORM 10-K
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FORM 10-K
ITEM | | PAGE
NUMBER |
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| ITEM 1. | | |
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| ITEM 1.1A. | | 3 |
| ITEM 1A. | | 18 |
| ITEM 1B. | | 26 |
| ITEM 2. | | 26 |
| ITEM 3. | | 27 |
| ITEM 4. | | 27 |
| | 27 |
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| ITEM 5. | | 28 |
| ITEM 6. | | 29 |
| ITEM 7. | | 30 |
| ITEM 7A. | | 52 |
| ITEM 8. | | 54 |
| ITEM 9. | | 89 |
| ITEM 9A. | | 89 |
| ITEM 9B. | | 89 |
| ITEM 9C. | | |
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| ITEM 10. | | 89 |
| ITEM 11. | | 89 |
| ITEM 12. | | 90 |
| ITEM 13. | | 90 |
| ITEM 14. | | 90 |
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| ITEM 15. | | 91 |
| ITEM 16. | | 91 |
| 91 |
| 93 |
PART I
Forward-looking StatementsFORWARD-LOOKING STATEMENTS. In addition to historical information, this
This Annual Report on Form 10-K contains10‑K (“Annual Report”) and the documents incorporated by reference herein may include forward-looking statements that reflect our current views with respect to future events and financial performance. Such statements are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and generally can be identified by words or phrases written in the future tense and/or preceded by words such as “anticipate,” “believe,” “could,” “depends,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “potential,” “seek,” “should,” “will,” “would,” or other similar words or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements.
Forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors including the risks and other factors discussed in Item 1A (“Risk Factors”), that couldmay cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. When usedThe forward-looking statements contained in this report, wordsAnnual Report or phrases generally writtenthat are incorporated by reference herein are qualified in their entirety by reference to the future tense and/or preceded by words such as “will,risks and uncertainties disclosed in this Annual Report, including those discussed under the headings “Risk Factors,” “may,” “could,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “seek,” “estimate” or other similar words are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Moreover, statements in Risk Factors, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations,” and elsewhere in this report that speculate about future events are forward-looking statements.“Quantitative and Qualitative Disclosures About Market Risk.”
While forward-looking statements are our best prediction at the time that they are made, you should not rely on them and are cautioned against doing so. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other possible future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They are neither statements of historical fact nor guarantees or assurances of future performance. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them.
If a circumstance occurs after the date of this Annual Report on Form 10-K that causes any of our forward-looking statements to be inaccurate, whether as a result of new information, future developments or otherwise, we do not have an obligation, and we undertake no obligation to announce publicly the change to our expectations, or to make any revision to our forward-looking statements, to reflect any change in assumptions, beliefs or expectations, or any change in events, conditions or circumstances upon which any forward-looking statement is based, unless required by law.
OVERVIEWItem 1.Business.
GENERAL
Franklin Resources, Inc. (“Franklin”) is a holding company that, together with its various subsidiaries (collectively, the “Company”), operates asoperating under our Franklin Templeton Investments®. Theand/or subsidiary brand names. Franklin’s common stock of Franklin is traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “BEN,”“BEN” and is included in the Standard & Poor’s 500 Index. In this report,Annual Report, Franklin and its subsidiaries are collectively referred to as the “Company,” and words such as “we,” “us,” “our” and similar terms refer to the Company. We have one operating segment, investment management and related services.
We offer our services and products under our various distinct brand names, including, but not limited to, Franklin®, Templeton®, Legg Mason®, Benefit Street Partners®, Brandywine Global Investment Management®, Clarion Partners®, ClearBridge Investments®, Fiduciary Trust International™, Franklin Bissett®, Franklin Mutual Series®, Franklin Bissett®, Fiduciary Trust™, Darby®, Balanced Equity Management®, K2®, LibertyShares®, Martin Currie®, Royce® Investment Partners and Edinburgh Partners™ brand names, among others.Western Asset Management Company®. Unless otherwise indicated, our “funds” means the funds offered under our various brand names.
We are a global investment management organization that provideswith $1,530.1 billion in assets under management (“AUM”) as of September 30, 2021. Our mission is to help people all over the world achieve the most important milestones of their lives through investment management expertise, wealth management and technology solutions. Through our specialist investment managers, we bring extensive capabilities in fixed income, equity, multi-asset solutions and alternatives. For more than 70 years, we have been committed to providing clients with exceptional investment management services and have developed a globally diversified business, including through strategic acquisitions.
We provide our investment management and related services to retail, institutional and high net-worth clientshigh-net-worth investors in jurisdictions worldwide throughworldwide. We deliver our investment products. Ascapabilities through a variety of September 30, 2018, we had $717.1 billion in assets under management (“AUM”products and vehicles and multiple points of access, including directly to investors and through financial intermediaries. Our investment products include our sponsored funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. Our funds include registered funds (including exchange-traded funds, or “ETFs”). We take an active approach and unregistered funds. In addition to investment management, which requiresour services include fund administration, sales and distribution, and shareholder servicing. Our sales and distribution services include distribution-related financial technology. We may perform services directly or through third parties. We also provide sub-advisory services to certain investment products sponsored by other companies that may be sold to investors under the brand names of those other companies or on a high degree of active investment analysis conviction, strengthened by robust risk management. We have more than 70 years of experience that informs our perspective. co-branded basis.
We offer our clients the combined experience of our investment professionals with expertise across asset classes and a sharp focus on managing risk. We are committed to delivering strong investment performance for our clients by offering a broad range of strategies and drawing on the extensive experience and perspective gained through our long history in the investment management business. We are committed to achieving the best possible outcomes for our investors over the long term.
Our investment products include our funds, as well as institutional and high net-worth separate accounts. Our funds include U.S.-registered funds (“U.S. Funds”), non-U.S.-registered funds (“Non-U.S. Funds”), and unregistered funds. In addition to investment management, our services include fund administration, sales, distribution, marketing, shareholder servicing, and other services. We offer a broad product mix under our equity, multi-asset/balanced, fixed income and cash management investment objectives and solutions which meet a variety of investment goals and needs for investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to investors under the brand names of those other companies or on a co-branded basis.
We know that success demands smart and effective business innovation, solutions and technologies, and we remain committed to focusingfocused on investment excellence, innovating to meet evolving client goals, and building strong partnerships by delivering superior client service. Since 2016, we have introduced and expanded our Franklin LibertyShares platform of strategic beta and actively managed exchange-traded funds (“ETFs”), as well as additional lower fee passive ETF products. Our ETF platform is designedWe continue to provide investors with additionalfocus on the long-term investment options.
We believe that mutual funds remain a critical tool to make professional investment management affordable for a broad range of investors. Our U.S. Funds and mostperformance of our Non-U.S. Funds operate as independent companies subjectinvestment products and on providing high quality customer service to the supervision and oversight of the funds’ own boards of directors or trustees. Most of our funds are registered open-end mutual funds that continuously offer their shares to investors. We also offer registered closed-end funds that issue a set number of shares to investors in a public offering and the shares are then traded on a public stock exchange. Since the funds themselves do not have direct employees to support their operations, our subsidiaries either provide or arrange for the investment services our funds require. An investment advisory entity manages a fund’s portfolio of securities in accordance with the fund’s stated objectives. Investors may purchase shares of an open-end fund through a broker-dealer, financial adviser, bank or other similar financial intermediary that provides investment advice to the investor, while investors may purchase shares of a closed-end fund on the stock exchange where the fund is traded. Financial intermediaries may earn fees and commissions and receive other compensation with respect to the fund shares managed or sold to investors.clients.
The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change. We are subject to various laws, rules and regulations globally that impose restrictions, limitations, and registration, reporting and disclosure requirements on our business, and add complexity to our global compliance operations.
We continue Incorporated herein by reference is certain financial information about our segment and geographic areas contained in Note 19 – Segment and Geographic Information in the notes to focus on the long-term investment performance of our investment products and on providing high quality customer service to our clients. The success of these and other strategies may be affected by the Risk Factors discussed belowconsolidated financial statements in Item 1A8 of Part III of this Annual Report,Report.
Recent Developments
As previously announced, on November 1, 2021, we entered into a definitive agreement to acquire Lexington Partners L.P. (“Lexington”), a leading global manager of secondary private equity and other factorsco-investment funds. We expect this acquisition to bolster our alternative asset capabilities, complementing our existing strengths in real estate, private credit, and hedge fund strategies. The transaction is structured to provide continuity for Lexington’s experienced team and continued alignment with investors. The transaction is subject to customary closing conditions and is expected to close by the end of the second fiscal quarter of 2022.
On September 30, 2021, we also announced that we will acquire O’Shaughnessy Asset Management, LLC (“OSAM”), a leading quantitative asset management firm. Through this acquisition, we expect to add to our offerings in the separately managed account industry. OSAM’s capabilities are expected to serve as discussedan important expansion and enhancement of our existing strengths in this section.separately managed account and custom solutions capabilities. The transaction is subject to customary closing conditions and is expected to close in the first quarter of fiscal year 2022.
COMPANY HISTORYCompany History
Since 1947, the Company and its predecessors have been engaged in the investment management and related services business. Franklin was incorporated in the State of Delaware in November 1969, and originated our mutual fund business with the initial Franklin family of funds, which is known for its fixed income funds and growth-growth and value-oriented equity funds. Over the years, we have expanded and developed our business to meet evolving investor needs, in part, by acquiring companies engaged in investment management and related services. As a result of these transactions,We have added, among others, we addedothers: (i) the Templeton family of funds, which isinvestment firm, known for its global investing strategies and value style of investing, in 1992;1992, (ii) the Franklin Mutual Series family of funds, which isinvestment firm, known for its value-oriented equity funds, in 1996;1996, (iii) the Franklin Bissett family of funds, which isinvestment firm, known for its Canadian taxable fixed income funds and growth-oriented equity funds, in 2000;2000, (iv) the Fiduciary Trust International investment, management, trust and fiduciary services firm, in 2001; and2001, (v) the Darby family ofK2 Advisors hedge funds which is known for its emerging markets investing strategies,solutions firm, in 2003.
In May 2018, we acquired all of2012, (vi) the outstanding shares of Edinburgh Partners Limited, a global value investment manager based in the United Kingdom (“U.K.”). In October 2018, we entered into an agreement to acquire all of the outstanding ownership interests in Benefit Street Partners L.L.C., a U.S. alternative credit manager.manager firm, in 2019, (vii) the Athena Capital Advisors investment and wealth management firm, in March 2020, (viii) The Pennsylvania Trust Company investment, trust and fiduciary services firm, in May 2020, and (ix) the Legg Mason global investment firm, including certain specialist investment managers, on July 31, 2020.
OUR BUSINESSSTRUCTURE
We believe in the value of active investment managementThrough our subsidiaries, we are committed to helphelping investors navigate global markets, as well as in continuing to evolve and build on our strengths to meet the needs of our clients. Through our investment products, we serve a variety of clients consisting of retail, institutional and high net-worth investors in regions and jurisdictions worldwide. We generally derive our revenues and net income from providing investment management and related services to our products as well as sub-advised products.and the products we sub-advise. Our investment management fees, which represent the majority of our revenues, depend to a large extent on the level and relative mix of our AUM and the types of services provided. Sales and distribution fees, also a significant source of our revenues, consist of sales charges and commissions derived from sales and distribution of our sponsored funds. These fees and arrangements change from timeprovided, which are subject to time.change.
Our business is conducted through our subsidiaries, including thoseour specialist investment managers. Our specialist investment managers include subsidiaries registered with the U.S. Securities and Exchange Commission (the “SEC”) as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”), as well as subsidiaries registered as investment adviser equivalents in jurisdictions including Australia, Brazil, Canada, China, Hong Kong, Ireland, India, Japan, Luxembourg, Malaysia, Mexico, Singapore, Switzerland, South Korea, Commonwealth of The Bahamas, the United Arab Emirates and the United Kingdom (“U.K.,”).
Our U.S.-registered funds and most of our non-U.S.-registered funds operate as independent companies subject to the supervision and oversight of the funds’ own boards of directors or trustees. Most of our funds are registered open-end funds, or mutual funds, that continuously offer their shares to investors. We also offer or manage registered or listed closed-end funds that issue a set number of shares to investors in a public offering which shares are then traded on a public stock exchange. Our specialist investment managers manage a fund’s portfolio of securities in accordance with the fund’s stated objectives. To support the funds’ operations, our subsidiaries either provide or arrange for the investment and other management, shareholder servicing and administrative services required by the funds. We outsource certain administration and other subsidiaries.services for our funds to third-party providers. An investor may purchase shares of a mutual fund directly from us or through a broker-dealer, financial adviser, bank or other similar financial intermediary that provides investment advice to the investor, or an investor may purchase shares of a closed-end fund or ETF on the stock exchange where the fund is traded. Financial intermediaries may earn fees and commissions and receive other compensation with respect to fund shares sold to investors.
Our AUM by Investment ObjectiveAsset Class and Product Type
We offer a broad product mix under our equity, multi-asset/balanced, fixed income, equity, multi-asset, alternative and cash management investment objectivesasset classes and solutions. Our fixed income capabilities include government, municipals, corporate credit, bank loans, securitized, multi-sector, currencies and other investments. Our equity capabilities include value, deep value, core value, blend, growth at a reasonable price (GARP), growth, convertibles, sector, Shariah, smart beta and thematic investments. Our multi-asset solutions includingcapabilities include income, real return, balanced/hybrid, total return, target data/risk, absolute return, tactical asset allocation and managed volatility investments. Our alternative investmentcapabilities include private debt, hedge funds, private equity, real estate and infrastructure investments.
We believe, despite market risks, that we have a competitive advantage as a result of the economic and geographic diversity of our products available to meetour clients. Our U.S. funds include U.S. mutual funds, closed-end funds, ETFs and other products. Our non-U.S. funds include a variety of cross-border funds principally domiciled in Luxembourg or Ireland, registered for sale to non-U.S. investors in certain other countries, and international locally domiciled funds and products for the particular local market. Our institutional separate account services are provided to various institutions for which we serve as an investment goals. adviser. Our retail separately managed accounts, commonly known as managed accounts or wrap programs, are sponsored by various financial institutions. We also offer and serve as investment adviser to various other products.
Our fees for providing investment management services are generally based on a percentage of the market value of AUM in the accounts that we advise, the investment objectivesasset classes of the accounts, and the types of services that we provide for the accounts. Asprovide.
AUM by investment objective on a worldwide basisasset class and product type was as follows:follows (primarily based on where product is domiciled):
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(in billions) as of September 30, 2021 | | U.S. Funds | | Non-U.S. Funds | | Institutional Separate Accounts | | Retail Separately Managed Accounts | | Other | | Total | | Percentage
of Total
AUM |
| Fixed Income | | $ | 206.3 | | | $ | 55.5 | | | $ | 338.6 | | | $ | 34.3 | | | $ | 15.6 | | | $ | 650.3 | | | 43 | % |
| Equity | | 260.1 | | | 87.3 | | | 66.3 | | | 87.8 | | | 22.1 | | | 523.6 | | | 34 | % |
| Multi-Asset | | 96.5 | | | 8.7 | | | 4.3 | | | 2.9 | | | 40.0 | | | 152.4 | | | 10 | % |
| Alternative | | 7.4 | | | 10.8 | | | 34.2 | | | — | | | 92.8 | | | 145.2 | | | 9 | % |
| Cash Management | | 34.9 | | | 22.9 | | | 0.8 | | | — | | | — | | | 58.6 | | | 4 | % |
| Total | | $ | 605.2 | | | $ | 185.2 | | | $ | 444.2�� | | | $ | 125.0 | | | $ | 170.5 | | | $ | 1,530.1 | | | 100 | % |
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| Investment Objective | | Value in Billions | | Percentage of Total AUM |
| Equity | | | | |
| Growth potential, income potential, value or various combinations thereof | | $ | 309.6 |
| | 43 | % |
| Multi-Asset/Balanced | | | | |
| Asset allocation, balanced, flexible, alternative and income-mixed funds | | 138.9 |
| | 20 | % |
| Fixed Income | | | | |
| Global/international, U.S. tax-free and U.S. taxable | | 259.3 |
| | 36 | % |
| Cash Management | | | | |
| Short-term liquid assets | | 9.3 |
| | 1 | % |
| Total | | $ | 717.1 |
| | 100 | % |
See “Assets under Management” under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report for additional information about our AUM. Broadly speaking, the changeother than changes in the net assets ofAUM due to acquisitions or dispositions by us, changes in our products dependsAUM depend primarily upon two factors: (1)(i) the increase or decrease in the market value of the securities and instruments held in the portfolio of investments;investments, and (2)(ii) the level of salesinflows as compared to the level of redemptions. We are subject to the risk of asset volatility resulting from changes in the global capital markets. In addition, changingoutflows. Changing market conditions and the evolving needs of our clients may cause asset volatility and a shift in our asset mix, potentially resulting in an increase or decrease in our revenues and income depending upon the nature of our AUM and the level of management fees we earn based on our AUM. Despite such market risks, we believe that we have
Our Specialist Investment Managers
Our specialist investment managers offer diverse perspectives and specialized expertise across asset classes and strategies. Across our business, our specialist investment managers generally focus on a competitive advantage as a resultportion of the economicasset management industry in terms of the types of assets managed (primarily fixed income, equity or alternatives) and each may differ in the types of products and services offered, the investment styles utilized, and the types and geographic diversitylocations of its clients. Each typically markets its products and services under its own brand name, with certain distribution functions provided by our corporate distribution subsidiaries. We have in place revenue sharing arrangements with certain of our products available to our clients.specialist investment managers.
SummaryOur specialist investment managers include: Benefit Street Partners, Brandywine Global, Clarion Partners, ClearBridge Investments, Fiduciary Trust International, Franklin Templeton Equity, Franklin Templeton Fixed Income, Franklin Templeton Investment Solutions, Martin Currie, Royce Investment Partners, Templeton Global Macro, and Western Asset Management.
Our Broad Range of Services and Capabilities
1. Investment Management Services
Through our specialist investment managers, we offer a broad range of services and capabilities under our fixed income, equity, multi-asset, alternative and cash management asset classes. We also offer diverse strategies across active, smart beta and passive approaches, in a broad range of vehicles. Our investment products are offered globally to retail, institutional and high-net-worth clients, which may include, among others, individual investors, institutional investors, sovereign wealth funds, defined benefit and contribution plans, endowments and charitable foundations, healthcare systems and insurance companies. Our investment products include mutual funds, closed-end funds, private funds, institutional separate accounts, retail separately managed accounts, and other products. Our products and capabilities are designed to accommodate a variety of investment goals and preferences, from capital appreciation to capital preservation, as well as certain environmental, social and governance (“ESG”) preferences.
We are committed to providing activepartnering closely with our clients to understand their challenges and aspirations, and drawing on our investment managementcapabilities and strategic adviceresources to offer and/or design the right investment solutions for them. We distribute and market globally our clients. Our subsidiaries offerdifferent capabilities under our equity, fixed income and alternative strategiesbrand names through various investment vehicles,subsidiaries and multiple points of access, including registered open-enddirectly to investors and closed-end funds, unregisteredthrough financial intermediaries. We primarily engage new institutional business through our relationships with pension, defined contribution and management consultants, direct sales efforts and additional mandates from our existing client relationships, as well as from our responses to requests for proposals. We also market and distribute our products through various subsidiaries to institutional investors with separate accounts. A few of
our subsidiaries also serve as direct marketing broker-dealers for institutional investors for certain of our private funds, and separate accounts. Wesome of our private funds may utilize third-party placement agents. Our services also include management of our ETF platforms. Our ETF platforms include smart beta and actively managed ETFs, as well as additional lower fee passive ETF products. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value.
Our specialist investment managers provide our investment management services pursuant to agreements in effect with each of our investment products and theand/or clients, including products for which we provide sub-advisory services. Investment management fees are generally determined as a percentage of AUM pursuant to such contractual arrangements, as a percentage of the market value of AUM.arrangements. Our investment management services include services to managed accounts for which we have full investment discretion and to advisory accounts for which we have no investment discretion. Advisory accounts for which we have no investment discretion may or may not include the authority to trade for the account. Our services include fundamental investment research and valuation analyses, including original economic, political, industry and company research, and analyses of suppliers, customers and competitors. Our company research utilizes such sources as company public records and other publicly available information, management interviews, company prepared information, and company visits and inspections. Research services provided by brokerage firms are also used to support our findings. Our management fee on an account varies with the types of services that we provide for the account, among other things.
Our subsidiaries that provide discretionary investment management services for our products and sub-advised products either perform or obtain investment research and determine which securities the products will purchase, hold or sell under the supervision and oversight of the funds’ boards of directors or trustees, as applicable. In addition, these subsidiaries may take all appropriate steps to implement such decisions, including arranging for the selection of broker-dealers and the execution and settlement of trades in accordance with applicable criteria set forth in the management agreements, internal policies, and applicable law and practice. Our subsidiaries that provide non-discretionary investment management services perform investment research for our clients and make recommendations as to which securities the clients purchase, hold or sell, and may or may not perform trading activities for the products.
Through our subsidiaries, we compensate the personnel who serve as officers of our funds or of the funds’ management companies, in addition to the personnel necessary to conduct the funds’ day-to-day business operations. The funds themselves do not have direct employees. Our subsidiaries either provide or arrange for the provision of: office space, telephone, office equipment and supplies; trading desk facilities; authorization of expenditures and approval of bills for payment; preparation of registration statements, proxy statements and annual and semi-annual reports to fund shareholders, notices of dividends, capital gains distributions and tax credits, and other regulatory reports; the daily pricing of fund investment portfolios, including collecting quotations from pricing services; accounting services, including preparing and supervising publication of daily net asset value quotations, periodic earnings reports and other financial data; services to ensure compliance with securities regulations, including recordkeeping requirements; preparation and filing of tax reports; the maintenance of accounting systems and controls; and other administrative services. The funds generally pay their own expenses, such as external legal, insurance, custody and independent audit fees, regulatory registration fees, and other related expenses. The funds also share in board and shareholder meeting and reporting costs.
For our U.S. Funds,mutual funds, the board of directors or trustees of each fund and our management personnel regularly review the investment management fee structures for the funds in light of fund performance, the level and range of services provided, industry conditions and other relevant factors. Most of our investment management agreements between our subsidiaries and our U.S. Fundsmutual funds must be renewed each year (afterafter an initial two-year term),term, and must be specifically approved at least annually by a vote of each fund’s board of directors or trustees as a whole and separately by a majority of its directors or trustees who are not interested persons of the fund under the Investment Company Act of 1940 (the “Investment Company Act”), or by a vote of the holders of a majority of the fund’s outstanding voting securities. OurIn addition, our U.S. agreements automatically terminate in the event of their “assignment,” as defined in the Investment Company Act. In addition,generally may be terminated by either party may terminate such an agreement without penalty after prior written notice. If agreements representing a significant portion of our AUM were terminated, it would have a material adverse impact on us.
Under the majority of our investment management agreements globally, the funds pay us a monthly fee in arrears based upon the fund’s average daily net assets. Annual fee rates under our various agreements are often reduced as net assets exceed various threshold levels. Annual rates also vary by investment objective and type of services provided. Our agreements generally permit us to provide services to more than one fund and to other clients so long as our ability to render services to each of the funds is not impaired, and so long as purchases and sales of portfolio securities for various advised funds are made on an equitable basis.
We use a “master/feeder” fund structure in certain situations. This structure allows an investment adviser to manage a single portfolio of securities at the “master fund” level and have multiple “feeder funds” that invest substantially all of their respective assets into the master fund. Individual and institutional shareholders generally invest in the “feeder funds,” which can offer a variety of service and distribution options. A management fee (or performance fee or carried interest as applicable) may be charged either at the master fund level or the feeder fund level depending on the specific requirements of the fund. Administrative, shareholder servicing and custodian fees are often waived at the feeder fund level and only charged at the master fund level, although the feeder funds will indirectly bear their pro-rata share of the expenses of the master fund as an investor in the master fund. Fees and expenses specific to a feeder fund may be charged at the level of that feeder fund.
Our services also include management of our ETFs in the U.S., Canada and the European Union (“EU”). ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value.
Our Non-U.S. Funds, unregisterednon-U.S. mutual funds, private funds, institutional and high net-worthhigh-net-worth separate accounts, and the products for which we provide sub-advisory services, are typically subject to various termination rights and review andand/or renewal provisions.provisions, which often provide for termination upon relatively short notice with little or no penalty. Investment management fees are generallyat times waived or voluntarily reduced when, for example, a new fund or fund/account is established, and then increased to contractual levels within an established timeline or as net asset values reach certain levels.
2. Institutional Investment ManagementRetail Separately Managed Account Programs
WeCertain of our specialist investment managers provide a broad array of investmentasset management services to institutionalretail separately managed account programs sponsored by various financial institutions. These programs typically allow securities brokers or other financial intermediaries to offer their clients which include corporations, endowments, charitable foundations,the opportunity to choose from a number of asset management services pursuing different investment strategies provided by one or more investment managers, and pensiongenerally charge an all-inclusive fee that can cover asset management, trade execution, asset allocation and defined contribution plans. We distributecustodial and market globally our different capabilities under our brand names through various subsidiaries. In the U.S., we generally operate our institutional business under the trade name “Franklin Templeton Institutional.” We primarily attract new institutional business through our relationships with pension, defined contribution and management consultants, direct sales efforts and additional mandates from our existing client relationships, as well as from our responses to requests for proposals. We also market and distribute our products through various subsidiaries to institutional investors with separate accounts. A few of our subsidiaries also serve
as direct marketing broker-dealers for institutional investors for certain of our institutional funds and private equity funds, and some of our private funds may utilize third-party placement agents.administrative services.
3. Alternative Strategies
Certain of our specialist investment advisersmanagers manage alternative investment strategies. These strategies provide our clients with alternatives to traditional equity and fixed income products and services. Our alternative investment products include private credit funds and structured products, business development companies, hedge funds (funds of funds and custom advisory solutions), private equity funds, venture capital funds and real estate funds and commodities funds. These products employ various investment strategies and approaches, including fund-of-fund platforms; custom-tailored investment programs;loan origination, collateralized loan obligations, high-yield credit, hedge fund advisory, private equity private debt and infrastructure transactions in emerging markets;markets, global macro;macro, financial technology, (FinTech); consumer loans, direct real estate investments, and real estate.custom-tailored investment programs.
4. High Net-WorthHigh-Net-Worth Investment Management, Trust and Custody
Through our subsidiary Fiduciary Trust Company International (“Fiduciary Trust”Trust International”), including its trust company and investment adviser subsidiaries, and through certain other of our subsidiaries, we provide investment management and related services to, among others, high net-worthhigh-net-worth individuals and families, family offices, foundations and institutional clients. Similarly, through Fiduciary Trust Company of Canada (“FTCC”), we provide services and offer products to high net-worth individuals and families and institutional clients in Canada. Fiduciary TrustInternational offers investment management and advisory services across different investment styles and asset classes. The majority of Fiduciary Trust’sthese client assets are actively managed by individual portfolio managers, while a significant number of clients also seek multi-manager, multi-asset class solutions. Through our various trust company subsidiaries, including Fiduciary Trust International, we also may also provide separately managed accounts, private funds, and trust, custody and related services, including administration, performance measurement, estate planning and tax planning. In addition, through our subsidiary Fiduciary Trust Company of Canada (“FTCC”), we provide investment management, wealth planning, and trust and estate services, and offer products to high-net-worth individuals and families and institutional clients in Canada.
5. Sales Distribution and MarketingDistribution
Our global distribution framework is organized into two groups. Our global advisory services group is responsible for sales, marketing and business development, and maintains a regional distribution model. Our global alliances and new business strategies group oversees our digital wealth management and distribution-related financial technology, joint ventures, seed capital allocations, and direct-to-consumer initiatives. Our groups work closely together to meet the needs of our advisors, clients and investors. There are many sales channels across each region, which may include retail, institutional, private wealth, retirement, insurance, and other specialty sales. Our global footprint and breadth of investment capability provides the opportunity for us to work with global financial institutions to add value through and beyond investing, including by building business relationships and global economic partnerships.
In addition, certain of our specialist investment managers have their own sales and marketing teams that distribute their products and services, primarily to institutional investors, both directly and through consultants. Consultants play a large role in institutional investment management by helping clients select and retain investment managers. Institutional investment management clients and their consultants tend to be highly sophisticated and investment performance-driven.
Our sales distribution and marketingdistribution capabilities and related efforts are critical components of our business and may be impacted by global distribution trends and changes within the financial services industry. A significant portion of our revenues is generated from providing sales and distribution services, including asset-based fees, sales-based fees and contingent sales charges. We earn fees from the sale of certain classes of our sponsored funds at the time of purchase, with sales commissions reduced or eliminated on some share classes and for some sale transactions depending on the amount invested and the type of investor. Globally, our open-end mutual funds and certain other products generally pay us distribution fees in return for sales, distribution and marketing efforts on their behalf. Fund shares are sold primarily through a large network of independent financial intermediaries, including broker-dealers, financial advisers, banks and other third parties. We pay substantially all of our sales and distribution fees to the financial intermediaries who sell our products on our behalf.
As of September 30, 2018, approximately 1,100 local, regional and national banks, securities firms and financial adviser firms offered shares of our open-end U.S. Funds for sale to the U.S. investing public, and approximately 2,700 banks, securities firms and financial adviser firms offered shares of our cross-border Non-U.S. Funds for sale outside of the U.S.
In the U.S., our subsidiary Franklin/Templeton Distributors, Inc. (“FTDI”) actscorporate distribution subsidiaries generally serve as the principal underwriterunderwriters and distributordistributors of shares of most of our open-end U.S. Funds.mutual funds. Outside the U.S., certain of our non-U.S. subsidiaries provide sales, distribution and marketing services to our Non-U.S. Funds.non-U.S. mutual funds. Some of our Non-U.S. Funds,non-U.S. mutual funds, particularly the Luxembourg-domiciled Franklin Templeton Investment Funds Société d’Investissement à Capital Variable (“SICAV”),our Luxembourg and Irish domiciled fund ranges, are distributed globally on a cross-border basis, while others are distributed exclusively in local markets.
We earn sales and distribution fees primarily by distributing our mutual funds pursuant to distribution agreements between FTDI or our non-U.S. subsidiaries andwith the funds. Under eachour distribution agreementagreements with our open-endU.S. mutual funds, we offer and sell the fund’sfund shares on a continuous basis and pay certain costs associated with selling, marketing and distributing and marketing the fund’sfund shares, including the costs of developing and producing sales literature, shareholder reports and prospectuses.
The Our sales and distribution agreements with our open-end U.S. Funds generally provide for FTDI to pay commission expenses for salesfees primarily consist of our fund shares to qualifying broker-dealers and other independent financial intermediaries. These financial intermediaries receive variousupfront sales commissions and otherongoing distribution fees. Sales commissions are earned from the sale of certain classes of sponsored funds at the time of purchase and may be reduced or eliminated depending on the amount invested and the type of investor. Therefore, our sales fees from FTDIgenerally will change with the overall level of gross sales, the size of individual transactions, and the relative mix of sales between different share classes and types of investors.
Our mutual funds generally pay us distribution fees in return for services in matching investors with funds whose investment objectives match such investors’ goalssales, marketing and risk profiles. Such intermediaries may also receive fees fordistribution efforts on their assistance in explaining the operations of the funds and in servicing and maintaining investors’ accounts, and for reporting and various other distribution services. We are heavily dependent upon these third-party distribution and sales channels and business relationships. FTDI may also make payments to certain broker-dealers who provide marketing support services, as described further below. There is increasing competition for access to these channels, which has caused our distribution costs
to rise and could cause further increases in the future as competition continues and service expectations increase.
Mostbehalf. The majority of our open-end U.S. Funds,mutual funds, with the exception of certain money market mutual funds and certain other funds specifically designed for purchase through separately managed account programs, have adopted distribution plans under Rule 12b-1 (the “Rule 12b-1 Plans”) promulgated under the Investment Company Act (“Rule 12b-1”). In 2010, the SEC proposed changes to Rule 12b-1 which, if adopted, could limit our ability to recover expenses relating to the distribution of our funds.Act. The Rule 12b-1 Plans permit the funds to pay FTDIus for marketing, marketing support, advertising, printing and sales promotion services relating to the distribution of their shares, subject to the Rule 12b-1 Plans’ limitations on amounts based on daily average daily net AUM. Similar arrangements exist for the distribution of non-U.S. mutual funds. The Rule 12b-1 Plans are established for one-year terms and must be approved annually by a vote of each fund’s board of directors or trustees as a whole and separately by a majority of its directors or trustees who are not interested persons of the fund under the Investment Company Act. All of theseThe Rule 12b-1 Plans are subject to termination at any time by a majority vote of the disinterested fund directors or trustees or by the particular fundfund’s shareholders. Fees from
We pay substantially all of our sales and distribution fees earned as revenues, including fees earned under the Rule 12b-1 Plans, that FTDI receives as revenues are paid primarily to third-party broker-dealers whothe financial advisers and other intermediaries that sell our funds on our behalf.
Similar arrangements exist The distribution agreements with our U.S. mutual funds generally provide for us to pay commission expenses for sales of fund shares to qualifying broker-dealers and other independent financial intermediaries. These financial intermediaries receive various sales commissions and other fees for services in matching investors with funds whose asset classes match such investors’ goals and risk profiles. The intermediaries also may receive fees for their assistance in explaining the distributionoperations of our Non-U.S. Funds where, generally, our subsidiary that distributes the funds receives maintenance fees from the funds and pays commissionsin servicing and certain other fees to banks and other intermediaries.
In the U.S., most of our retail funds are distributed with a multi-class share structure which provides investors with more sales charge alternatives for their investments. Class A shares are sold with a front-end sales charge, except for when certain investment criteria or requirements are met. Class C shares have no front-end sales charges, although our distribution subsidiaries pay an up-front commission to financial intermediaries on these sales. Class C shares have a contingent deferred sales charge for redemptions within 12 months from the date of purchase. Although Class C shares are generally more costly to us in the year of sale, they allow us to be more competitive by providing a fixed percentage annual charge option. Class R and Class R6 shares, available in the U.S. as retirement share classes, also have no front-end sales charges. Class R shares are available to certain retirement and health savings planmaintaining investors’ accounts, and Class R6 shares are available to employer sponsored retirement plans where plan level or omnibus accounts are held on the books of our transfer agent. We no longer offer Class B shares to clients in the U.S.
In the U.S., we also offer Advisor Class shares in many of our Franklinfor reporting and Templeton funds, and we offer Class Z shares in the Franklin Mutual Series funds, both of which have no sales charges. Advisor and Class Z shares are offered to certain qualified financial intermediaries, institutions and high net-worth clients (both affiliated and unaffiliated) who have assets held in accounts managed by a subsidiary of Franklin and are also available to our full-time employees, current and former officers, trustees and directors, and certain of their family members. We also offer money market funds to investors in the U.S. without a sales charge. Under the terms and conditions described in the prospectuses or the statements of additional information for some funds, certain investors can purchase shares at net asset value or at reduced sales charges. Our insurance product funds sold in the U.S. offer a multi-class share structure, and are offered at net asset value without a sales charge directly to insurance company separate accounts, certain qualified plans andvarious other funds (funds of funds).
Our U.S. retirement business is conducted through divisions of FTDI that work closely with sponsors, consultants, record keepers and financial advisers of defined contribution plans, including 401(k) plans, variable annuity products and individual retirement accounts (“IRAs”). We offer our capabilities to the U.S. retirement industry through a number of investment options, including sub-advised portfolios, funds, education savings plans and variable insurance product funds.
Outside the U.S., we offer share classes similar to the Advisor Class shares to certain types of investors, although depending upon the fund and the country in which the fund is domiciled, the equivalent share class may be offered on a more restrictive or less restrictive basis than the similar U.S. Advisor Class shares. We also offer additional types of share classes and unit series outside the U.S. in response to local demand based on the needs of investors in particular markets, subject to applicable regulations which may change over time. In the majority of cases, investors in any class of shares may exchange their shares for a like class of shares in another one of our funds, subject to certain fees that may apply. Our Non-U.S. Funds have sales charges and fee structures that vary by region.
FTDI and/or its affiliates may make the following additional payments to broker-dealers that sell shares of our funds:
Marketing support payments. FTDI may make payments to certain broker-dealers who are holders or dealers of record for accounts in one or more of our open-end U.S. Funds. A broker-dealer’s marketing support services may include business planning assistance, advertising, educating broker-dealer personnel about the funds and shareholder financial planning needs, placement on the broker-dealer’s list of offered funds, and access to sales meetings, sales representatives and management
representatives of the broker-dealer. FTDI compensates broker-dealers differently depending upon, among other factors, sales and asset levels, and the level and/or type of marketing and educational activities provided by the broker-dealer. Such compensation may include financial assistance to broker-dealers that enables FTDI to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events and other broker-dealer-sponsored events. These payments may vary depending upon the nature of the event. FTDI periodically reviews its marketing support arrangements to determine whether to continue such payments. The statement of additional information for each retail U.S. Fund, provided to investors in such funds upon request, provides a list of broker-dealers that receive such marketing support payments and the maximum payments received. FTDI may also make marketing support payments to financial intermediaries that serve as plan service providers to certain employer sponsored retirement plans in connection with activities intended to assist in the sale of our open-end U.S. Funds to such plans. Certain of our non-U.S. subsidiaries may also make marketing support or similar payments to intermediaries located outside the U.S. with respect to investments in Non-U.S. Funds.
Transaction support and other payments. FTDI may pay ticket charges per purchase or exchange order placed by a broker-dealer or one-time payments for ancillary services, such as setting up funds on a broker-dealer’s fund trading system. From time to time, FTDI, at its expense, may make additional payments to broker-dealers that sell or arrange for the sale of shares of our U.S. Funds. FTDI routinely sponsors due diligence meetings for registered representatives during which they receive updates on various funds and are afforded the opportunity to speak with portfolio managers. Invitation to these meetings is not conditioned on selling a specific number of shares. Those who have shown an interest in our funds, however, are more likely to be considered. To the extent permitted by their firm’s policies and procedures, registered representatives’ expenses in attending these meetings may be covered by FTDI. Similar payments may be made by our non-U.S. subsidiaries that distribute our Non-U.S. Funds to third-party distributors of such funds.
distribution services. Other compensation may be offered to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the Financial Industry Regulatory Authority (“FINRA”). FTDI makes payments, applicable to our business. We are heavily dependent upon these third-party distribution and sales channels and business relationships. There is increasing competition for events it deems appropriate, subjectaccess to FTDI’s guidelinesthese channels, which has caused our distribution costs to rise and applicable law.could cause further increases in the future as competition continues and service expectations increase.
Similar arrangements exist with the distribution of our non-U.S. mutual funds where, generally, our subsidiary that distributes the funds receives maintenance fees from the funds and pays commissions and certain other fees to financial advisers, banks and other intermediaries.
6. Shareholder Servicing
We earnperform our shareholder servicing services directly or through third parties. Substantially all shareholder servicing fees as compensationare earned from our sponsored funds for providing transfer agency services, which include providing shareholder statements, transaction processing, customer service and tax reporting. Effective November 1, 2017, the feesFees for our U.S. Funds changed to befunds are based on the level of AUM and the number of transactions in shareholder accounts, from the prior structure of a fixed charge per shareholder account that varied by fund type and service provided. Our subsidiary Franklin Templeton Investor Services, LLC (“FTIS”) serves as the shareholder servicing and dividend-paying agent for our open-end U.S. Funds. FTIS is registered with the SEC as a transfer agent under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). Outsidewhile outside of the U.S., certain of our non-U.S. subsidiaries provide similar services to our Non-U.S. Funds, and earnthe fees are based on the level of AUM and/or the number of shareholder accounts.
FTIS may pay servicing fees to third-party intermediaries primarily to help offset costs associated with client account maintenance support, statement preparation and transaction processing. Such third parties maintain omnibus accounts with funds in the institution’s name on behalf of numerous beneficial owners of fund shares, or provide support for fund shareholder accounts by sharing account data with FTIS through the Depository Trust & Clearing Corporation systems. The funds reimburse FTIS for these third-party payments, as well as other out-of-pocket expenses.
Summary of Products
1. Investment Objectives Overview
We offer a broad range of products under our equity, multi-asset/balanced, fixed income and cash management investment objectives and solutions. Our investment products are offered globally to retail, institutional and high net-worth investors, which include individual investors, qualified groups, trustees, tax-deferred plans (such as IRAs in the U.S. and retirement saving plans, or RSPs, in Canada) or money purchase plans, employee benefit and profit sharing plans, trust companies, bank trust departments and institutional investors. Our products include portfolios managed for some of the world’s largest corporations, endowments, charitable foundations and pension funds, as well as wealthy individuals and other institutions. We use various investment techniques to focus on specific client objectives for these specialized portfolios.
The products that we offer accommodate a variety of investment goals, spanning the spectrum of our clients’ risk tolerance from capital appreciation (with our more growth-oriented products) to capital preservation (with our fixed income offerings). In seeking to achieve such objectives, each portfolio emphasizes different strategies and invests in different types of instruments.
Our equity investment products include some that are considered value-oriented, others that are considered growth-oriented, and some that use a combination of growth and value characteristics, generally identified as blend or core products. Value investing focuses on identifying companies that our research analysts and portfolio managers believe are undervalued based on a number of different factors, usually put in the context of historical ratios such as price-to-earnings or price-to-book value; however, we also consider the future earnings potential of each individual company on a multi-year basis. Growth investing focuses on identifying companies that our research analysts and portfolio managers believe have sustainable growth characteristics, meeting our criteria for sustainable growth potential, quality and valuation. In this effort, the key variables we examine include: market opportunity (overall size and growth); competitive positioning of the company; assessment of management (strength, breadth, depth, and integrity) and execution of plans; and the general financial strength and profitability of the enterprise, to determine whether the growth and quality aspects are properly reflected in the current share price. Paramount to all of our different equity products is the incorporation of independent, fundamental research through our own collaborative in-house group of investment professionals. Our approach across the variety of equity products we manage emphasizes bottom-up stock selection within a disciplined portfolio construction process, and is complemented by our ongoing assessment of risk at both the security and portfolio levels.
Portfolios seeking income generally focus on one or more of the following securities: taxable and tax-exempt money market instruments; tax-exempt municipal bonds; global or regional fixed income securities; and fixed income debt securities of corporations, of the U.S. government and its sponsored agencies and instrumentalities (such as the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation) or of the various states in the U.S. Others focus on investments in particular countries and regions.
Our alternative investment strategies, products and solutions provide our clients with alternatives to our traditional equity and fixed income products and services. Our alternative investment products include hedge funds, private equity funds, venture capital funds, real estate funds and commodities funds.
2. Types of Products
As of September 30, 2018, our total AUM was $717.1 billion and the types of investment products we offered were as follows:
U.S. Funds - Our U.S. funds (including U.S. registered open-end and closed-end funds, unregistered funds, exchange-traded funds and our insurance products trust) accounted for $401.2 billion of AUM. Our five largest U.S. funds and their AUM were: FCF-Franklin Income Fund ($76.6 billion), TIT-Templeton Global Bond Fund ($34.9 billion), FMT-Franklin Rising Dividends Fund ($20.1 billion), FMSF-Franklin Mutual Global Discovery Fund ($19.1 billion) and FTF-Franklin Growth Fund ($16.4 billion). These five funds represented, in the aggregate, 23% of total AUM.
Cross-Border Funds - Our cross-border products, which are comprised of a variety of funds principally domiciled in Luxembourg and registered for sale to non-U.S. investors in 45 countries, accounted for $104.7 billion of AUM. Our five largest cross-border funds and their AUM were: FTIF-Templeton Global Total Return Fund ($16.5 billion), FTIF-Templeton Global Bond Fund ($14.8 billion), FTIF-Templeton Emerging Markets Bond Fund ($9.4 billion), FTIF-Templeton Growth (Euro) Fund ($8.8 billion), and FTIF-Franklin U.S. Opportunities Fund ($4.4 billion). These five funds represented, in the aggregate, 8% of total AUM.
Local/Regional Funds - In addition to our cross-border products, in some countries we offer products for the particular local market. These local/regional funds accounted for $46.4 billion of AUM.
Other Managed Accounts, Alternative Investment Products and Trusts - Our other managed accounts, alternative investment products and trusts accounted for $164.8 billion of AUM.
3. AUM by Investment Objective and Types of Products
The following table shows our AUM by investment objective and types of investment products as of September 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
(in billions)
Investment Objective | | U.S. Funds | | Cross-Border Funds | | Local/Regional Funds | | Other Managed Accounts, Alternative Investment Products and Trusts | | Total |
| Equity | | | | | | | | | | |
| Asia-Pacific | | $ | 1.3 |
| | $ | 8.6 |
| | $ | 7.3 |
| | $ | 12.8 |
| | $ | 30.0 |
|
| Canada | | — |
| | — |
| | 4.0 |
| | 5.3 |
| | 9.3 |
|
| Europe, Middle East and Africa | | 2.3 |
| | 3.4 |
| | 3.6 |
| | 1.8 |
| | 11.1 |
|
| U.S. | | 98.9 |
| | 10.8 |
| | 1.6 |
| | 3.9 |
| | 115.2 |
|
Emerging markets 1 | | 3.7 |
| | 4.6 |
| | 5.9 |
| | 4.4 |
| | 18.6 |
|
Global/international 2 | | 57.1 |
| | 12.9 |
| | 4.7 |
| | 50.7 |
| | 125.4 |
|
| Total equity | | 163.3 |
| | 40.3 |
| | 27.1 |
| | 78.9 |
| | 309.6 |
|
| Multi-Asset/Balanced | | | | | | | | | | |
| Asia-Pacific | | — |
| | — |
| | 0.4 |
| | 0.2 |
| | 0.6 |
|
| Canada | | — |
| | — |
| | 0.6 |
| | 0.6 |
| | 1.2 |
|
| U.S. | | 92.9 |
| | 2.0 |
| | 0.2 |
| | 20.5 |
| | 115.6 |
|
Global/international 2 | | 3.1 |
| | 8.1 |
| | 1.3 |
| | 9.0 |
| | 21.5 |
|
| Total multi-asset/balanced | | 96.0 |
| | 10.1 |
| | 2.5 |
| | 30.3 |
| | 138.9 |
|
| Fixed Income | | | | | | | | | | |
| Asia-Pacific | | — |
| | 0.5 |
| | 7.0 |
| | 0.4 |
| | 7.9 |
|
| Canada | | — |
| | — |
| | 3.3 |
| | 2.0 |
| | 5.3 |
|
| Europe, Middle East and Africa | | — |
| | 1.4 |
| | 0.2 |
| | 0.9 |
| | 2.5 |
|
| U.S. tax-free | | 59.8 |
| | — |
| | 0.1 |
| | 4.0 |
| | 63.9 |
|
| U.S. taxable | | 28.2 |
| | 6.5 |
| | 2.1 |
| | 8.0 |
| | 44.8 |
|
Emerging markets 1 | | 1.1 |
| | 11.0 |
| | 0.5 |
| | 13.8 |
| | 26.4 |
|
Global/international 2 | | 44.9 |
| | 34.5 |
| | 2.6 |
| | 26.5 |
| | 108.5 |
|
| Total fixed income | | 134.0 |
| | 53.9 |
| | 15.8 |
| | 55.6 |
| | 259.3 |
|
| Cash Management | | 7.9 |
| | 0.4 |
| | 1.0 |
| | — |
| | 9.3 |
|
| Total | | $ | 401.2 |
| | $ | 104.7 |
| | $ | 46.4 |
| | $ | 164.8 |
| | $ | 717.1 |
|
__________________
| |
1
| Emerging markets include developing countries worldwide. |
| |
2
| Global/international includes products that invest worldwide (including the U.S.) or only outside of the U.S. |
COMPETITION
The financial services industry is a highly competitive global industry. Competition is based on various factors, including, among others, business reputation, investment performance, product mix and offerings, service quality and innovation, distribution relationships, and fees charged. According to data sourced from the Investment Company Institute as of June 30, 2018, there were approximately 11,300 registered open-end funds whose shares were offered to the public in the U.S., and approximately 117,300 registered open-end funds whose shares were offered to the public outside the U.S., in each case including mutual funds, ETFs and funds of funds.
We face strong competition from numerous investment management companies, securities brokerage and investment banking firms, insurance companies, banks and other financial institutions, which offer a wide range of financial and investment management services and products to the same retail, institutional and high net-worthhigh-net-worth investors and accounts that we are
seeking to attract. We offer a broad product mix that meets a variety of investment goals and needs for different investors, and we may periodically introduce new products to provide investors with additional investment options.
Due to our international presence and varied product mix, it is difficult to assess our market position relative to other investment managers on a worldwide basis, but we believe that we are one of the more widely diversified assetinvestment managers based in the U.S. We believe that our equity and fixed income, equity, multi-asset and alternative asset mix, coupled with our global presence, will serve our competitive needs well over the long term. We continue to focus on the long-term performance of our investment products, service to clients and extensive marketing activities through our strong broker-dealer and other financial institution distribution network as well as with high net-worthhigh-net-worth and institutional clients.
The periodic establishment of new investment management firms and continuous development of investment products increases the competition that we face. Many of our competitors have long-standing and established relationships with broker-dealers, investment advisers and their clients.clients, and some have affiliated brokerage businesses. Others have focused on, offer and market specific product lines whichthat provide strong competition to certain of our asset classes. In addition, consolidation in the financial services industry has created stronger competitors, some with greater financial resources and broader distribution channels than our own.
We rely largely on third-party broker-dealers and other similar independent financial intermediaries to distribute and sell our fund shares. We have pursued and continue to pursue sales relationships with all types
We maintain a technology platform to compete with the rapidly developing and evolving marketplace. However, technology is subject to rapid change and we cannot guarantee that our competitors may not implement new technologies or more advanced platforms for their products, which could affect our business.
We believe that we are well positioned to deal with changes in marketing trends as a result of our advertising activities and broad based marketplace recognition. In conjunction with our subsidiaries, we conduct advertising and promotional campaigns through various media sources to promote brand recognition, and advertise in major financial publications, as well as on television and the Internet, to promote brand name recognition and to assist our distribution network. Such activities include purchasing network and cable programming, sponsorship of sporting events, newspaper and magazine advertising, online and paid search advertising and social media marketing.REGULATION
REGULATORY CONSIDERATIONSGeneral
We are subject to extensive regulation. Virtually all aspects of our business are subject to various U.S. federal and state, andand/or international regulation and supervision thatsupervision. Our regulators have broad authority with respect to the regulation of investment management and other financial services, including among other things, the authority to grant or cancel required licenses or registrations, impose net capital and other financial or operational requirements on us, and other enforcement powers described below. The regulations to which we are subject continue to change and evolve over time. Consequently, there is uncertainty associated with the regulatory environments in which we operate. The rules and regulations applicable to investment management organizations are very detailed and technical. Accordingly, the discussion below is general in nature and does not purport to be complete.
With our global operations, certain of our subsidiaries are registered with or licensed by various U.S. and/or non-U.S. regulators, and our funds are subject to various U.S. and/or non-U.S. laws. In particular, we are subject to various securities, compliance, corporate governance, disclosure, privacy, anti-bribery and anti-corruption, anti-money laundering, anti-terrorist financing, and economic, trade and sanctions laws and regulations, both domestically and internationally, as well as to various cross-border rules and regulations, such as the anti-bribery and anti-corruption rules under the Foreign Corrupt Practices Act of 1977 (“FCPA”) and the data protection rules under the General Data Protection Regulation
(“GDPR”) of the European Union (“EU”). We are subject to federalsanctions programs administered by the Office of Foreign Assets Control of the U.S. Department of Treasury (“USDT”), as well as sanctions programs adopted and stateadministered by non-U.S. jurisdictions where our services and products are offered. Our subsidiaries with custody of client assets or accounts are also subject to the applicable laws that includeand regulations of U.S. states and other non-U.S. jurisdictions regarding the reporting and escheatment of unclaimed or abandoned property. We also must comply with complex and changing tax regimes in the jurisdictions where we operate our business.
Failure to comply with applicable U.S. and non-U.S. laws, regulations, rules, codes, notices, directives, guidelines, orders, circulars and/or conditions in the various jurisdictions where we operate could result in a wide range of disciplinary actions against us, our subsidiaries and/or our business. Breaches of applicable laws and rules could result in regulatory enforcement, civil liability, criminal liability and/or the imposition of a range of sanctions or orders against us, including, as applicable, monetary damages, injunctions, disgorgements, fines, penalties, cease and desist orders, censures, reprimands, and the revocation, cancellation, suspension or restriction of licenses, registration status or approvals held by us or our business in a jurisdiction or market. In addition, a public regulatory issue can have a negative impact on our reputation, and as a result have indirect impacts on our business or growth.
See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report, for financial information about our business, including certain regulatory financial impacts disclosed therein.
U.S. Regulation
U.S. Regulatory Framework. As a U.S. reporting company, we are subject to U.S. federal securities laws, state securities and corporate laws, state escheatment laws and regulations, and the rules and regulations promulgated byof certain U.S. regulatory and self-regulatory organizations, such as the SEC and the NYSE. As a U.S. reporting company,In particular, we are subject to various securities, compliance, corporate governance and disclosure rules adopted by the SEC. We are also subject to various other U.S. federal and state laws, including those affecting corporate governance and disclosure, such as the U.S. Securities Act of 1933, the Securities Exchange Act the Sarbanes-Oxley Act of 2002,1934 (“Exchange Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”(“Dodd-Frank”), the Sarbanes-Oxley Act of 2002 and the USA PatriotPATRIOT Act of 2001. As a NYSE-listed company, we are also subject to NYSE listing and disclosure requirements.
As a global investment management organization, certain of our subsidiaries are also subject to the rules and regulations promulgated byof various U.S. regulatory and self-regulatory organizations, including the SEC, FINRA, the U.S. Commodity Futures Trading Commission (“CFTC”), the National Futures Association, the U.S. Department of Justice (“DOJ”), the U.S. Department of Labor, (“DOL”) and the U.S. Department of Treasury, and to various securities, compliance, corporate governance, disclosure, privacy, anti-money laundering, anti-terrorist financing, and economic, trade and sanctions laws and regulations, both domestically and internationally. Given our global operations, our subsidiaries are also subject to applicable securities and other laws of various non-U.S. jurisdictions, and to various non-U.S. and cross-border rules and regulations, such as the data protection rules under the EU’s General Data
Protection Regulation (“GDPR”).USDT. Our non-U.S. operations also may also be subject to regulation by U.S. regulators, including the SEC, the CFTC and the DOJ (for example with respect to the Foreign Corrupt Practices ActFCPA).
Certain of our subsidiaries are registered with the SEC under the Advisers Act and/or the CFTC, and/or registered with or licensed by various non-U.S. regulators. In addition,and many of our funds are registered with the SEC under the Investment Company Act or other non-U.S. laws.Act. These registrations, licenses and authorizations impose numerous obligations, as well as detailed operational requirements, on such subsidiaries and such funds. The Advisers Act imposes numerous obligations on our registered investment adviser subsidiaries, including record keeping, operating and marketing requirements, disclosure obligations and prohibitions onagainst fraudulent activities. The Investment Company Act imposes similar obligations on the registered investment companies advised by our subsidiaries. The SEC is authorized
U.S. Regulatory Reforms. Over the years, the U.S. federal corporate governance and securities laws have been augmented substantially and made significantly more complex by various legislation. As we continue to institute proceedingsaddress our legal and impose sanctions for violations of the Advisers Act and the Investment Company Act, ranging from fines and censureregulatory requirements or focus on meeting new or expanded requirements, we may need to termination of an investment adviser’s registration. Our subsidiaries must also comply with complex tax regimes.
FINRA Conduct Rules limit theexpend a substantial amount of aggregate sales charges thatadditional time, costs and resources.Regulatory reforms may be paid in connection with the purchaseadd further complexity to our business and holding ofoperations and could require us to alter our investment company shares sold through broker-dealers. The effect of the rule is to limit the amount of fees thatmanagement services and related activities, which could be paid pursuant to a fund’s Rule 12b-1 Plan to FTDI,costly, impede our principal salesgrowth and distribution subsidiary in the U.S., which earns distribution fees on the distribution of fund sharesadversely impact our AUM, revenues and income.Certain key regulatory reforms in the U.S. In 2010, the SEC proposed changesthat impact or relate to Rule 12b-1 which, if adopted, could limit our abilitybusiness, and may cause, or continue to recover expenses relatingcause, us to the distribution of our funds.incur additional obligations, include:
TheSystemically Important Financial Institutions. Dodd-Frank Act authorized the establishment of the Financial Stability Oversight Council (“FSOC”), the mandate of which is to identify and respond to threats to U.S. financial stability. Similarly, the U.S. and other members of the G-20 group of nations have empowered the Financial Stability Board (“FSB”) to identify and respond, in a coordinated manner, to threats to global financial stability. The FSOC may designate certain non-bank financial companies as systemically important financial institutions (“SIFIs”), which are subject to supervision and regulation by the Board of Governors of the Federal Reserve System. The FSB may designate certain non-bank financial companies as global systemically important financial institutions (“G-SIFIs”); the additional regulatory requirements triggered by any such designation are not yet established. The FSOC and the FSB, as well as other global regulators, are considering what threats to U.S. and global financial stability, if any, arise from asset management companies and/or the funds that they sponsor or manage, and whether such threats can be mitigated by treating such entities as SIFIs or G-SIFIs and/or subjecting them to additional regulation. To the extent that we or any of our funds are designated as a SIFI or G-SIFI, such designations add additional supervision and/or regulation, which could include requirements related to risk-based capital, leverage, liquidity, credit exposure, stress testing, resolution plans, early remediation, and certain risk management requirements, that could impact our business.
PursuantDerivatives and Other Financial Products. Dodd-Frank, as well as other legislation and regulations, impose restrictions and limitations on us related to our financial services and products, resulting in increased scrutiny and oversight. Regulators continue to review practices and regulations relating to the Dodd-Frank Act,use of futures, swaps and other derivatives, which could result in further restrictions and limitations on the use of such products. In October 2020, the SEC adopted new rules governing the use of derivatives by certain registered investment companies, including certain mutual funds, designed to address investor protection concerns. Subject to its August 2022 compliance date, key aspects of the new framework will include, among other things, value at risk limits on a fund entering into derivatives transactions, required risk management program, and further fund board oversight, reporting and compliance requirements. The EU and other countries have adopted and implemented, or are in the process of adopting or implementing, similar and additional requirements. There is some risk that full mutual recognition may establish different standardsnot be achieved between the various regulators, which may cause us to incur duplicate regulation and transaction costs.
Money Market Funds. SEC rules have changed the structure and operation for broker-dealerscertain types of money market funds, and certain U.S.-registered funds are required to adopt liquidity management programs. In 2016, the regulatory structure governing U.S. money market funds was reformed to address perceived systemic risks of money market funds relating to fund stability and investor risks, including allowing certain funds to impose liquidity fees and redemption gates under certain circumstances. In addition, following market liquidity issues in March 2020 related to the COVID-19 pandemic, regulatory authorities remain focused on whether to implement further reform measures to improve the resiliency of money market funds and the broader short-term funding markets, which, if adopted, could significantly impact the money market fund industry.
Privacy and Data Protection. There also has been increased regulation with respect to the protection of customer privacy and data, and the need to secure sensitive customer, personnel and others’ information. A majority of the jurisdictions where we operate are covered, or we expect will be soon covered, by privacy and data protection laws and regulations. As the regulatory focus on privacy continues to intensify and laws and regulations concerning the management of personal data continue to expand, risks related to privacy and data collection within our business will increase. In addition to the EU’s GDPR data protection rules, we also are or may become subject to or affected by additional country,
federal and state laws, regulations and guidance impacting consumer privacy, such as the California Consumer Privacy Act (“CCPA”) that provides for enhanced consumer protections for California residents, enforcement authority by the California Attorney General for CCPA violations, and the potential for private litigation, including statutory damages for data security breaches. The EU’s GDPR strengthened and unified data protection rules for individuals within the EU and addresses export of personal data outside the EU. The primary objectives of GDPR are to give citizens control of their interactionpersonal data and to simplify the regulatory environment for international business by unifying data protection regulation within the EU. Compliance with retail customers, which could increasethe stringent data protection rules under GDPR requires ongoing review of our sales and/or distribution costs.global data processing systems. There are also new laws that have been adopted in recent years, including, for example, Brazil’s Lei Geral de Proteção de Dados with regulatory enforcement as of August 2021, and the California Privacy Rights Act with an effective date of January 1, 2023.
SEC Regulation Best Interest. In April 2018,June 2019, the SEC proposedadopted a package of new rules, that would applyamendments and interpretations, including Regulation Best Interest and a new form of relationship summary, designed to enhance investor protections for all retail investors and would,customers. Since June 30, 2020, such rules, among other things: (i) require broker-dealers to act in the best interest of their retail customers when recommending securities and account types, (ii) raise the broker-dealer standard of conduct beyond existing suitability obligations, and (iii) require broker-dealers and registered investment advisers to provide additional disclosure about the scope and terms of the relationship; clarify the fiduciary duty that an investment adviser owes to its clients; and requiretheir retail clients with a new short-formrelationship summary disclosure document to inform such clients of the nature of their relationships with the clients’ investment professionals, and investment advisers, including differences in the principal typesa description of services offered, the legal standards of conduct that apply to each,such services, the fees a client might pay, and conflicts of interest that may exist.
U.S. and Global Tax Compliance. Our business may be directly or indirectly affected by tax legislation and regulation, or the modification of existing tax laws, by applicable tax and other governmental authorities. The Dodd-Frank Act, as well as other legislativeOrganization for Economic Co-operation and regulatory changes, impose other restrictionsDevelopment, an intergovernmental organization, has focused on addressing the tax challenges of the digitalization of the economy, which may further impact multinational businesses by allocating a greater share of taxing rights to countries where consumers are located regardless of the current physical presence of a business, and limitations on us, resulting in increased scrutiny and oversight of our financial services and products.by implementing a global minimum tax. We will continue to analyze the impact of the Dodd-Frank Act as further implementing rules are adoptedmonitor developments regarding such matters and become effective. Under the Dodd-Frank Act, which imposes a number of regulations governing derivative transactions, certain categories of swaps are currently required, and further categories of swaps are likely to be required, to be submitted for clearing by a regulated clearing organization and reportedany significant impacts on a swap execution facility. These and other requirements, such as the posting of collateral for uncleared swaps, are likely to impact how we manage our investment strategies because of, among other things, an increase in the costs and expenses of utilizing swaps and other derivatives. In addition to the rulemaking mandated by the Dodd-Frank Act, rules adopted by the CFTC haveremoved or limited previously available exemptions and exclusions from registration and regulation as a commodity pool operator and commodity trading advisor on which we had relied, resulting in the imposition of either additional registration, disclosure, reporting and recordkeeping requirements or more stringent requirements to comply with the remaining exemptions
or exclusions for operators of certain of our registered funds and other pooled vehicles that use or trade in futures, swaps and other derivatives considered commodity interests and subject to regulation by the CFTC. Further, the SEC has adopted rules that have changed the structure and operation for certain types of money market funds, and that will require certain U.S. Funds to adopt liquidity management programs. (Compliance with certain aspects of the latter is required by December 1, 2018, and other aspects are delayed until June 1, 2019, subject to further regulatory update.) The SEC has also proposed a rule that would impose restrictions on the use of derivatives by registered funds. In addition, the Tax Cuts and Jobs Act enacted into law in the U.S. on December 22, 2017 includes various changes to theeffective tax law, including a permanent reduction in the corporate income tax rate and one-time transition tax on certain non-U.S. earnings. We expect that the complex regulatory requirements and developments applicable to us will cause us to incur additional administrative and compliance costs.rate.
Non-U.S. Regulation
Our operations outside the U.S. are subject to the laws and regulations of various non-U.S. jurisdictions and non-U.S. regulatory agencies and bodies. As we continue to expand our international presence, a number of our subsidiaries andOur international operations have becomeare subject to regulatory systems in various jurisdictions, comparable to those covering our operations in the U.S. Regulators in these non-U.S. jurisdictions may have broad authority with respect to the regulation of financial services including, among other things, the authority to grant or cancel required licenses or registrations. In addition, these regulators may subject certain of our subsidiaries to net capital
European Markets and other financial or operational requirements.
In the U.K., the Financial Conduct Authority (the “FCA”) and the Prudential Regulation Authorities (the “PRA”) currently regulate certain of our subsidiaries. Authorization by the FCA and the PRA is required to conduct any financial services related business in the U.K. pursuant to the Financial Services and Markets Act 2000. The FCA’s and PRA’s rules under that act govern a firm’s capital resources requirements, senior management arrangements, conduct of business, interaction with clients, and systems and controls. Breaches of these rules could result in a wide range of disciplinary actions against our U.K.-regulated subsidiaries.
Regulation. In Luxembourg, the Commission de Surveillance du Secteur Financier (“CSSF”) currently regulates our substantial activities in Luxembourg, including our subsidiary Franklin Templeton International Services S.à r.l. (“FTIS Lux”). FTIS Lux is licensed as a management company for both the Undertakings for Collective Investment in Transferable Securities Directive (“UCITS”) and alternative investment funds (“AIFs”) and, as such, it manages our Luxembourg-domiciled UCITS and our EU-domiciled AIFs. FTIS Lux’s license also covers certain MiFID (as defined below) investment services, such as discretionary portfolio management, investment advice and reception and transmission of orders in relation to financial instruments. The CSSF’s rules include capital resource, governance and risk management requirements, business conduct of business rules, remuneration rules and oversight of systems and controls. Breaches
Our international funds include two broad ranges of thesecross-border UCITS that are domiciled in Luxembourg and Ireland, respectively, and thereby subject to regulation by the CSSF and the Central Bank of Ireland. Both UCITS are also registered for public sale in many countries around the world, both in the EU and beyond, and thus are also subject to the laws of, and certain supervision by, the governmental authorities of those countries.
In the U.K., the Financial Conduct Authority (the “FCA”) and the Prudential Regulation Authority (the “PRA”) currently regulate certain of our subsidiaries. Authorization by the FCA and the PRA is required to conduct any financial services-related business in the U.K. pursuant to the Financial Services and Markets Act 2000. The FCA’s and PRA’s rules could result inunder that act govern a wide rangefirm’s capital resources requirements, senior management arrangements, business conduct, interaction with clients, and systems and controls.
In addition to the above, certain of our U.K.-regulated subsidiaries and certain other European subsidiaries and branches, must comply with the pan-European regime established by the EU Markets in Financial Instruments Directive (“MiFID”), which regulates the provision of investment services and conduct of investment activities throughout the European Economic Area (“EEA”). MiFID sets out detailed requirements governing the organization and business conduct of business of investment firms and regulated markets. It also includes pre- and post-trade transparency requirements for equity markets and extensive transaction reporting requirements. TheLuxembourg and the U.K. hashave adopted the MiFID rules into national legislation, via the FCA rules, as have those other EU member states in which we have a presence.
A review of MiFID by the European Commission has led to the creation of a replacement directive and a new regulation (together “MiFID II”), effective as of January 2018, which extends that extend the scope of the original MiFID in response to issues raised by the financial crisis.MiFID. Changes apply to pre- and post-trade reporting obligations and there is an expansion of the types of instruments subject to these requirements, such as bonds, structured products and derivatives. A new concept of trading venue has beenwas created and algorithmic trading is subject to specific regulations. There arewere also changes to business conduct of business requirements, including selling practices, intermediary inducements and client categorization, as well as the provision of investment advice and management within the EU by non-EU advisers, including ours. Powers have also been given to EU national regulators to ban certain services and products and to the European Securities and Markets Authority to restrict temporarily restrict certain financial activities within the EU.
One of the most significant developments in MiFID II is thealso includes a ban on commission and other payments (“inducements”) to independent advisers and discretionary managers, which will result in a major change inhas changed the commercial relationships between fund providers and distributors. Arrangements with non-independent advisers willhave also bebeen affected, as narrower rules around the requirement that any commission reflectsreflect an enhancement of the service to customers come into effect, along with
a prescriptive list of permissible non-monetary benefits. The interpretation of the inducements rules has also resulted in major changes to how fund managers finance investment research with many firms, including ours, opting to pay for third-party investment research for client accounts covered by MiFID II.
The European Market Infrastructure Regulation which sets out the rules in relation to the central clearing of specified derivatives came into effect in 2016 for large derivatives users (including some of our clients). For the smallest counterparties, implementation has been delayed until June 2019.derivatives. Mutual recognition of central counterparties has been achieved between the EU regulatory authorities and other important jurisdictions including the U.S. In addition, there are rules relating to margin requirements for uncleared over-the-counter derivatives came into effect in September 2017.derivatives. Future regulatory policy reviews will decide whether these rules are extended to other types of derivative instruments, which could increase operational costs for our business and transactional costs for our clients.
The EU’s Alternative Investment Fund Managers Directive (“AIFMD”) came into effect in July 2014 and regulates managers of, and service providers to, AIFs that are domiciled and offered in the EU and that are not authorized as retail funds under UCITS. The AIFMD also regulates the marketing within the EU of all AIFs, including those domiciled outside the EU. The introduction of a third-country passport to non-EU AIFs/AIF managers was due to be implemented in 2018 but has been delayed until further positive advice is delivered to the European Commission onregarding a sufficient number of non-EU countries to better evaluate the impact, including with respect to the proposed withdrawal of the U.K. from the EU (“Brexit”) on the U.K.EU. Compliance with the AIFMD’s requirements may restrict AIF marketing and imposes compliance obligations in the form of remuneration policies, capital requirements, reporting requirements, leverage oversight, valuation, stakes in EU companies, the domicile, duties and liability of custodians and liquidity management.
The EU’s Market Abuse Regulation (“MAR”) came into effect in July 2016 and its primary aim is to increase market integrity and investor protection, enhancing the attractiveness of securities markets for raising capital. Under MAR, EU market abuse rules become extra-territorial as long as the instrument has a listing on an EEA regulated market.
As of January 1, 2018, the EU regulation on packaged retail investment and insurance products (“PRIIPs”) imposesimposed new pre-contractual disclosure requirements under the form of a Key Information Document (“KID”) for the benefit of retail investors when they are considering the purchase of packaged retail investment products or insurance basedinsurance-based products. It requires PRIIP manufacturers to draw up a KID whichthat can be no longer than three pages in length and must be written in simple language. The regulation allows UCITS providers, who are already required to produce the UCITS Key Investor Information Document, a transitional period of five years from enactmentuntil July 2022, during which period they will be exempt from its terms.
AsThe EU’s Sustainable Finance Disclosure Regulation (“SFDR”) came into effect in March 2021, imposing mandatory ESG disclosure obligations on asset managers and other financial markets participants. It requires all covered firms to disclose how financial products integrate sustainability risks in the investment process, including whether they consider adverse sustainability impacts, and, for those products promoting sustainable objectives, the provision of May 2018,sustainability-related information. Related amendments to the EU’s GDPR strengthenedMiFID, UCITS and unified data protection rules for individuals withinAIFMD legislation require that all covered investment managers must consider in their investment process any ESG risks which are likely to have a material impact on the EU. The GDPR also addresses export of personal data outside the EU. The primary objectivesvalue of the GDPRinvestment, and require investment advisers to inquire as to the investor’s desire for ESG-focused products in their portfolio when assessing suitability. The availability of these sustainability disclosures may impact the investment decisions of European investors.
British Exit from the EU (“Brexit”). The U.K. withdrew from the EU on January 31, 2020, and a post-Brexit U.K./EU trade agreement was subsequently approved by the EU in April 2021. While we are to give citizens control of their personal data and to simplify the regulatory environment for international business by unifying data protection regulation within the EU. Compliance with the stringent data protection rules under the GDPR requires an extensive review of all of our global data processing systems. The failure to comply timely and properly with GDPR rules and to maintain ongoing compliance with such rules may subject us to enforcement proceedings and significant fines and costs.
Further, pursuant to ongoing efforts to encourage global tax compliance, the Organization for Economic Co-operation and Development has adopted a global common reporting standard for the automatic exchange of financial information among participating countries (“CRS”), aimed at ensuring that persons with financial assets located outside of their tax residence country pay required taxes. In many cases, intergovernmental agreements between the participating countries will govern implementation of the new CRS rules. CRS will be implemented over a multi-year period and we will continuecontinuing to monitor the implementing regulationsimpact and corresponding intergovernmental agreements to determine our requirements. CRS may subject us to additional reporting, compliance and administrative costs and burdens in jurisdictions where we operate as a qualifying financial institution.
Although Brexit negotiations between the U.K. and EU began in June 2017, it is still unclear what terms may be agreed to for the final outcome and for any transitional period. While we are monitoring the consequences very closelyrelated developments for our clients from an investment perspective, we believe that Brexit will not have a majormaterial impact on the way our firm operates in the U.K. or within the EU. Our long-standing U.K. businesses are expected to continue to provide their services to U.K. and certain non-EU customers. Furthermore, we have other regulated subsidiaries and branch offices across continental Europe such that, in the event of a future restriction on cross-border trade in financial services and products between the U.K. and the newto manage our EU it would be likely to have a limited effect on our business. Moreover, our primary cross-border UCITS, the Franklin Templeton Investment Funds Société d’Investissement à Capital Variable, or SICAV, investment fund range, which is the most widely-distributed such range in the world, is based in Luxembourg.Luxembourg, and a smaller cross-border UCITS, also distributed throughout the EU and beyond, is based in Ireland. We have a separate, U.K.-domiciled fund rangeranges that is,are, and will continue to be, distributed mainly in the U.K.
Australia. In Australia, our subsidiaries are subject to various Australian federal and state laws and are regulated by the Australian Securities and Investments Commission (“ASIC”). ASIC regulates companies, financial markets and financial services in Australia. ASIC imposes certain conditions on licensed financial services organizations that apply to our subsidiaries, including requirements relating to capital resources, operational capability and controls.
Canada. In Canada, our subsidiaries are subject to provincial and territorial laws and are registered with and regulated by provincial and territorial securities regulatory authorities. The mandate of Canadian securities regulatory authorities is generally to protect investors and to foster fair and efficient capital markets. Securities regulatory authorities impose certain requirements on registrants, including a standard of conduct, capital and insurance, record keeping, regulatory financial reporting, conflict of interest management, compliance systems and security holder reporting. Failure to comply with applicable securities laws, regulations and rules could result in, among other things, reprimands, suspension of or restrictions on an individual’s or firm’s registration, prohibitions from becoming or acting as a registrant, administrative penalties or disgorgement. In addition, as a federally licensed trust company, FTCC is subject to regulation and supervision by the Office of the Superintendent of Financial Institutions Canada and another subsidiary, FTC Investor Services Inc., is a member of and regulated by the Mutual Fund Dealers Association of Canada. These regulatory bodies have similar requirements to those of the securities regulatory authorities with a view to ensuring the capital adequacy and sound business practices of the subsidiaries and the appropriate treatment of their clients.
In June 2018,December 2019, rule amendments to implement the client focused reforms initiative of the Canadian Securities Administrators (“CSA”), the umbrella organization of provincial and territorial securities regulatory authorities, published proposedbecame effective, with reforms phased in during a two-year transition period. These rule amendments, to their registration rules. The stated purposes of these amendments are to better align the interests of Canadian registrants with the interests of their clients, to improve outcomes for clients and to make clearer to clients the nature and the terms of their relationship with registrants. The amendments would, among other things, enhance current registrant requirements in the areas of know your client, know your product, suitability, and conflicts of interest. At the same time,interest and relationship disclosure information. In addition, the CSA issued a notice providing a status reporthas published final rule amendments to become effective in respect of theirJune 2022 in connection with its mutual fund fee reform project. The reforms being proposed include expanded conflict of interest guidance (in the proposedfinal amendments to registration rules) around the payment of embedded commissions by investment fund managers and the receipt of such commissions by dealers, a prohibition onprohibit: (i) all forms of deferred sales charges in connection with the purchase of mutual fund securities, and a prohibition on(ii) the payment of trailing commissions to discount brokers in respect of their distribution of mutual fund securities.
Cayman Islands. In September 2018, the CSA published draft rule amendments in respectCayman Islands, the Cayman Islands Monetary Authority (“CIMA”) is responsible for the regulation and supervision of their mutual fund fee reform project.
In Singapore, our subsidiaries are subject to, among others,financial services, the Securities and Futures Act (“SFA”), the Financial Advisers Act (“FAA”)monitoring of compliance with anti-money laundering regulations, and the subsidiary legislation promulgated pursuantissuance of statements of principle and guidance. In February 2020, the Cayman Islands enacted the Private Funds Law 2020 (the “Private Funds Law”), which requires private funds that engage in business in or from the Cayman Islands to these Acts, which are administered by the Monetary Authority of Singapore (“MAS”). Our asset management subsidiary and its employees conducting regulated activities specified in the SFA and/or the FAA are requiredregister with CIMA, unless an exemption applies. The Private Funds Law applies to be licensed with the MAS. Failureany Cayman Islands closed-end fund. Open-end funds such as hedge funds continue to comply with applicable laws, regulations, codes, directives, notices and guidelines issued by the MAS may result in penalties including fines, censures and the suspension or revocation of licenses granted by the MAS.
In Australia, our subsidiaries are subject to various Australian federal and state laws and arebe regulated by the Australian Securities and Investments Commission (“ASIC”). ASIC regulates companies, financial markets and financial servicesMutual Funds Law in Australia. ASIC imposes certain conditions on licensed financial services organizations that applythe Cayman Islands. The registration requirements applicable to our subsidiaries, including requirements relatingprivate funds domiciled in the Cayman Islands have posed, and may continue to capital resources, operational capabilitypose, additional compliance costs and controls. Failure to comply with applicable law, regulations or conditions could result in various sanctions being imposed including cancellation, suspension or variation of the licenses held byburdens on our Australian subsidiaries.business.
Hong Kong. In Hong Kong, our subsidiary isapplicable subsidiaries are subject to the Securities and Futures Ordinance (the “SFO”(“SFO”) and its subsidiary legislation, which governs the securities and futures markets and regulates, among others, offers of investments to the public and provides for the licensing of dealing in securities and asset management activities and intermediaries. This legislation is administered by the Securities and Futures Commission (the “SFC”(“SFC”). The SFC is also empowered under the SFO to establish standards for compliance as well as codes and guidelines. Our subsidiarysubsidiaries and its employees conducting any of the regulated activities specified in the SFO are required to be licensed with the SFC, and are subject to the rules, codes and guidelines issued by the SFC from time to time. Failure to comply with the applicable laws, regulations, codes and guidelines could result in various sanctions being imposed, including fines, reprimands and the suspension or revocation of the licenses granted by the SFC.
In India, certain of our subsidiaries are primarily subject to relevant regulations promulgated by theIndia. The Securities and Exchange Board of India, (“SEBI”). Effective May 2018, SEBI reduced the total expense ratio that may be charged to mutual funds. In September 2018, SEBI proposed to further reduce the total expense ratio chargeable to funds with an effective date that is not yet determined. In October 2018, SEBI banned, with some exceptions, upfront commissions payable on sales of funds and mandated that all trail commissions be paid from the funds. These changes may impact the commercial relationships between fund providers and distributors. The Reserve Bank of India, (“RBI”), the Ministry of Corporate Affairs (“MCA”) and the Department of Industrial Policy and Promotion (“DIPP”) are the other major regulatory authorities that are capable of issuing directions of a binding nature to our subsidiaries. A failure to comply with the applicable laws, regulations, codes,
subsidiaries in India.
notices, directives, guidelines, orders, circulars and schemes issued by SEBI, RBI, MCA or DIPP may result in penalties including fines, censures and/or suspension or revocation of licenses, approvals or registration status.
Japan. In Japan, our subsidiaries are subject to the Financial Instruments and Exchange Act (the “FIEL”) and the Act on Investment Trusts and Investment Corporations. These laws are administered and enforced by the Japanese Financial Services Agency, (the “JFSA”), which establishes standards for compliance, including capital adequacy and financial soundness requirements, customer protection requirements, and business conduct rules.
Singapore. In Singapore, our subsidiaries are subject to, among others, the Securities and Futures Act (“SFA”), the Financial Advisers Act (“FAA”) and the subsidiary legislation promulgated pursuant to these Acts, which are administered by the Monetary Authority of business rules. The JFSA is empowered to conduct administrative proceedings that can resultSingapore (“MAS”). Our asset management subsidiaries and their employees conducting regulated activities specified in censure, fine, the issuance of cease and desist orders SFA and/or the suspension or revocation of registrations and licenses granted underFAA are required to be licensed with the FIEL.MAS.
Other Non-U.S. Jurisdictions. There are similar legal and regulatory arrangements in effect in many other non-U.S. jurisdictions where our subsidiaries, branches and representative offices, as well as certain joint ventures or companies in which we own minority stakes, are authorized to conduct business. We are also subject to regulation and supervision by, among others, the Securities Commission of The Bahamas;Bahamas, the Central Bank of Brazil and the Comissão de Valores Mobiliários in Brazil; the Cayman Islands Monetary Authority;Brazil, the China Securities Regulatory Commission in the People’s Republic of China; the Autorité des Marchés Financiers in France; the Federal Financial Supervisory Authority in Germany; the Central Bank of Ireland; the Commissione Nazionale per le Società e la Borsa in Italy;China, the Financial Services Commission and the Financial Supervisory Service in South Korea;Korea, the Securities Commission in Malaysia;Malaysia, the Comision Nacional Bancaria y de Valores in Mexico; the Autoriteit Financiële Markten in the Netherlands;Mexico, the Polish Securities and Exchange Commission;Commission, the Romanian Financial Services Authority; the Comisión Nacional del Mercado de Valores in Spain; the Finansinspektionen in Sweden;Authority, the Swiss Federal Banking Commission;Commission, the Financial Supervisory Commission in the Republic of China;China, the Dubai Financial Services Authority in the United Arab Emirates;Emirates, and the State Securities Commission of Vietnam.
INTELLECTUAL PROPERTY
We have used, registered, and/or applied to register certain trademarks, service marks and trade names to distinguish our sponsored investment products and services from those of our competitors in the U.S. and in other countries and jurisdictions, including, but not limited to, Franklin®, Templeton®, Legg Mason®, Benefit Street Partners®, Brandywine Global Investment Management®, Clarion Partners®, ClearBridge Investments®, Fiduciary Trust International™, Franklin Bissett®, Franklin Mutual Series®, Franklin Bissett®, Fiduciary Trust™, Darby®, Balanced Equity Management®, K2®, LibertyShares®, Martin Currie®, Royce® Investment Partners and Edinburgh Partners™Western Asset Management Company®. Our trademarks, service marks and trade names are important to us and, accordingly, we enforce our trademark, service mark and trade name rights. The Franklin Templeton Investments® brand has been, and continues to be, extremely well received both in our industry and with our clients, reflecting the fact that our brand, like our business, is based in part on trust and confidence. If our brand is harmed, our future business prospects may be adversely affected.
EMPLOYEESHUMAN CAPITAL RESOURCES
As of September 30, 2018,2021, we employed approximately 9,70010,300 employees and operated offices in over 30 countries. We considerdepend upon our relationskey personnel to manage our business, including our portfolio managers, investment analysts, investment advisers, sales and management personnel and other professionals as well as our executive officers and business unit heads. Competition for experienced personnel is significant and from time to time we may experience a loss of valuable personnel. The retention of our key investment personnel is material to the management of our business.
At an enterprise level, we use employee surveys to understand sentiment and engagement in the organization. At a team level, our performance management system supports ongoing, active discussion about goals and objectives. We also host live forums for leaders to engage directly with our employees to be satisfactory.help reinforce our culture of open feedback. Our employees have access to a valuable set of equitable and competitive total rewards, which consists of a mix of monetary and non-monetary rewards designed to recognize their time, talents and results.
We believe that our ability to attract, develop and cultivate a sense of belonging and retain a diverse, highly skilled workforce is important to our long-term success and that creating and maintaining all aspects of diversity, including backgrounds and perspectives, makes us a better place to work and a more resilient business. To accomplish this, we have developed strategies and initiatives to diversify talent within our organization. We consider an inclusive culture that actively leverages the expertise and perspectives of our diverse workforce an important factor in our ability to deliver innovative and relevant client solutions in a dynamic marketplace. AVAILABLE INFORMATION
The SEC maintains an Internet sitea website that contains current and periodic reports, proxy and information statements, and other information regarding issuers, including Franklin, that file electronically with the SEC, at www.sec.gov. Additional information about the Company’sFranklin’s filings can also be obtained atthrough our website at www.franklinresources.com under “Investor Relations.” We make available free of charge on our website ourFranklin’s Annual Report on Form 10-K,10‑K, Quarterly
Reports on Form 10-Q,10‑Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Franklin periodically provides other information for investors on its website, such as press releases, presentations and other information about financial performance. The information on our website is not incorporated by reference into, and is not a part of, this Annual Report.
Corporate Governance Guidelines. The Company has adopted Corporate Governance Guidelines. The Corporate Governance Guidelines are posted on the Company’s website under “Corporate Governance” and are available in print to any stockholder who requests a copy.
Committee Charters. The Company’s Board of Directors has an Audit Committee, Compensation Committee and Corporate Governance Committee. The Board of Directors has adopted written charters for each such committee, which are posted on the Company’s website under “Corporate Governance” and are available in print to any stockholder who requests a copy.
Item 1A.Risk Factors.
PANDEMIC-RELATED RISKS
Our business and operations are subject to adverse effects from the outbreak and spread of contagious diseases such as COVID-19, which adverse effects may continue.
The outbreak and spread of contagious diseases such as COVID-19 has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations. The COVID-19 pandemic has resulted in a widespread global public health crisis. Such infectious illness outbreaks or other adverse public health developments in countries where we operate, as well as local, state and/or national government restrictive measures implemented to control such outbreaks, could adversely affect the economies of many nations or the entire global economy, the financial condition of individual issuers or companies and capital markets, in ways that cannot necessarily be foreseen, and such impacts could be significant and long term. Such extraordinary events and their aftermaths can cause investor fear and panic, which can further adversely affect the operations and performance of companies, sectors, nations, regions and financial markets in general and in ways that cannot necessarily be foreseen. The COVID-19 pandemic has adversely affected global economies and markets, and has resulted in disruptions in commerce that will continue to evolve, including with respect to financial and other economic activities, services, travel and supply chains. Global health concerns and uncertainty regarding the impact of COVID-19 could lead to further and/or increased volatility in global capital and credit markets, adversely affect our key executives and other personnel, clients, investors, providers, suppliers, lessees, and other third parties, and negatively impact our AUM, revenues, income, business and operations.
Our business has been and may continue to be negatively impacted by the current COVID-19 pandemic, including by the potential reoccurrence of periods of increased spread of COVID-19 and/or COVID-19 variants, and ensuing economic downturn in global financial markets. The global spread of COVID-19, and the various governmental actions and economic effects related to the pandemic, have had, and may continue to have, negative impacts on our business and operations, including volatility in asset values, reduced demand for our products and services, concerns for and restrictions on our personnel (including health concerns, quarantines, shelter-in-place orders and restrictions on travel), and increased privacy and cybersecurity risks. Past economic downturns, including in connection with COVID-19, have caused, and future economic downturns may cause, periods of significant volatility in our stock price; fluctuations in our AUM, revenues and income; increased liquidity risks and redemptions from our funds and other products; difficulties obtaining cash to settle redemptions; fund closures; poor investment performance of our products and corporate investments; and reputational harm, legal claims and other factors that may arise or develop. Increased liquidity risks and redemptions in our funds and other products have required, and may at times require, increased cash in the form of loans or other lines of credit for them to draw on to help settle redemptions and for other related purposes. We have in some cases voluntarily determined to, and without obligation could in the future, extend such loans to our products. In addition, such increased liquidity risks and redemptions have caused, and could continue to cause, fund closures and related regulatory and governmental reviews or investigations and legal claims or actions, subjecting us to legal and regulatory risks and potential financial exposure.
Our business operations are complex and conducted in numerous countries around the globe, and in order to remain competitive, we must continue to perform our asset management and related business responsibilities for our clients and investors properly and effectively throughout the course of the COVID-19 pandemic, which, among other matters, is dependent on the health and safety of our personnel, the ability of our personnel to work remotely successfully, and our ability to have our personnel return to work at our offices safely and effectively in compliance with applicable requirements. We have implemented our business continuity plans globally to manage our business during this pandemic, including broad and extended work-from-home capabilities for our personnel where feasible and, as governmental health orders may allow in various jurisdictions based on applicable conditions, we have implemented and are continuing to implement measures for the return of personnel to our offices. We can provide no assurance that our efforts and planning for either environment will be sufficient to protect the health and safety of our personnel and maintain the success of our business. Further, we depend on a number of third-party providers to support our operations, and any failure of our
providers to fulfill their obligations could adversely impact our business. Moreover, since implementing broad work-from-home measures during the pandemic, we have an increased dependency on remote equipment and connectivity infrastructure to access critical business systems that may be subject to failure, disruption or unavailability that could negatively impact our business operations. Additionally, multiple regions in which we operate have had, and as conditions change may again have or continue to have, movement restrictions on our personnel and third-party vendors and service providers that may impact our ability to satisfy or respond timely to potential technology issues or needs impacting our business and operations. Further, we, like many others during this time, have been subject to increased phishing and other social engineering attempts by malicious actors to manipulate individuals into divulging confidential or personal information. If our cybersecurity diligence and efforts to offset the increased risks associated with greater reliance on mobile, collaborative and remote technologies during this pandemic are not effective or successful, we will be at increased risk for cybersecurity or data privacy incidents.
Any inability to recover successfully following the COVID-19 pandemic with respect to the economic, investment or operational impacts to our company or industry could further negatively impact our business and operations. As of the time of this filing, as the COVID-19 pandemic continues to evolve, it is not possible to predict the full extent to which the pandemic may adversely impact our business, liquidity, capital resources, financial results and operations, which impacts will depend on numerous developing factors that remain uncertain and subject to change. The impacts and risks described herein relating to COVID-19 augment the discussion of overlapping risks in our risk factors below, which may be heightened by COVID-19.
MARKET AND VOLATILITY RISKS
Volatility and disruption of the capitalour business and creditfinancial markets and adverse changes in the global economy may significantly affect our results of operations and may put pressure on our financial results.
We derive substantially all of our operating revenues and income from providing investment management and related services to investors in jurisdictions worldwide through our investment products, which include our funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. In addition to investment management, our services include fund administration, sales and distribution, and shareholder servicing. We may perform services directly or through third parties. The capitalasset management industry continues to experience disruption and creditchallenges, including increased fee pressure, regulatory changes, an increasing and changing role of technology in asset management services, the continuous introduction of new products and services, and the consolidation of financial services firms through mergers and acquisitions. Further, financial markets have and may continue, from time to time, to experience volatility and disruption worldwide. Declines in global financial marketeconomic conditions have in the past resulted in significant decreases in our assets under management (“AUM”),AUM, revenues and income, and future declines may further negatively impact our financial results. Such declines have had, and may in the future have, ana material adverse impact on our results of operations.business. We may need to modify our business, strategies or operations and we may be subject to additional constraints or costs in order to compete in a changing global economy and business environment.
The amount and mix of our AUM are subject to significant fluctuations. Fluctuations in the amount and mix of our AUM may be attributable in part to market conditions outside of our control that have had, and in the future could have, a negative impact on our revenues and income. We derive substantially all of our operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide through our investment products which include our sponsored funds, as well as institutional and high net-worth separate accounts. In addition to investment management, our services include fund administration, sales, distribution, marketing, shareholder servicing, and other services. The level of our revenues depends largely on the level and mix of AUM. Our investment management fee revenues are primarily based on a percentage of the value of AUM and vary with the nature and strategies of our products. Any decrease in the value or amount of our AUM because of market volatility or other factors, such as a decline in the price of stocks, in particular market segments or in the securities market generally, negatively impacts our revenues and income. We are subject to significant risk of asset volatility from changes in the global financial, equity, debt and commodity markets. Individual financial, equity, debt and commodity markets may be adversely affected by financial, economic, political, electoral, diplomatic or other instabilities that are particular to the country or region in which a market is located, including without limitation local acts of terrorism, economic crises, political protests, war, insurrection or other business, social or political crises. Global economic conditions, exacerbated by war, terrorism, social, civil or political unrest, natural disasters, public health crises, such as epidemics or pandemics, or financial crises, changes in the equity, debt or commodity marketplaces, changes in currency exchange rates, interest rates, inflation rates, the yield curve, defaults by trading counterparties, bond defaults, revaluation and bond market liquidity risks, geopolitical risks, the imposition of economic sanctions and other factors that are difficult to predict, affect the mix, market values and levels of our AUM. For example, changes in financial market prices, currency exchange rates and/or interest rates have in the past and could in the future cause the value of our AUM to decline, which would result in lower investment management fee revenues. Changing market conditions could also cause an impairment to the value of our goodwill and other intangible assets.
The amount and mix of our AUM are subject to significant fluctuations, and a shift in our asset mix toward lower-fee products may negatively impact our revenues and income.
Fluctuations in the amount and mix of our AUM may be attributable in part to market conditions outside of our control that have had, and in the future could have, a negative impact on our revenues and income. The level of our revenues depends largely on the level and relative mix of AUM. Our investment management fee revenues are based primarily on a percentage of AUM and vary with the nature and strategies of our products. Any decrease in the value or amount of our AUM because of market volatility or other factors, such as asset outflows or a decline in the price of stocks,
in particular market segments or in the securities market generally, negatively impacts our revenues and income. Changing market conditions and investor preferences may cause a shift in our asset mix toward certain lower fee products, such as fixed income products and ETFs, and away from higher fee equity and multi-asset products, which may cause a related decline in our revenues and income. In addition, increases in interest rates, particularly if rapid, as well as uncertainty in the future direction of interest rates, may have a negative impact on our fixed income products and decrease the total return on bond investments due to lower market valuations of existing bonds. Moreover, we generally derive higher investment management and distribution fees from our international products than from our U.S. products, and higher sales fees from our U.S. products than from our international products. Changing market conditions may cause a shift in our asset mix between international and U.S. products, potentially resulting in a decline in our revenues and income depending upon the nature of our AUM and the level of fees we earn on that AUM.
Our funds may be subject to liquidity risks or an unanticipated large number of redemptions as a result of theand fund closures.
Due to market volatility or other events or conditions described above, causing theour funds may need to sell securities or instruments that they hold, possibly at a loss, or draw on any available lines of credit, to obtain cash to maintain sufficient liquidity or settle these redemptions, or settle in-kind with securities held in the applicable fund. WeWhile we have no legal or contractual obligation to do so, we have in the past provided, and may in the future at our discretion provide, financial support to our funds to enable them to maintain sufficient liquidity in any such event. Changes in investor preferences regarding our more popular products have in the past caused, and could in the future cause, sizable redemptions and lower the value of our AUM, which would result in lower revenue and operating results. Moreover, changingIncreased market conditions may cause a shiftvolatility and changes in our asset mix between international and U.S. assets, potentially resulting in a decline in our revenues and income depending upon the nature of our AUM and the level of management fees we earn based on our AUM. We generally derive higher investment management and distribution fees from our international products than from our U.S. products, and higher sales fees from our U.S. products than from our international products. Additionally, changing market conditions may cause a shift in our asset mix towards fixed income products and away from equity and multi-asset/balanced products, and a related decline in our revenues and income, as we generally derive higher fee revenues and income from our equity and certain multi-asset/balanced products than from our fixed income products. Further, changing market conditions and investor preferences also may cause a shift in our asset mix towards lower fee exchange-traded funds. Increases in interest rates, in particular if rapid, as well as any uncertainty inincrease the future directionrisk of interest rates, may have a negative impact on our fixed income products. Although the shorter duration of the bond investments in many of these products may help mitigate the interest rate risk, rising interest rates or interest rate uncertainty typically decrease the total return on many bond investments due to lower market valuations of existing bonds.fund closures. Any decrease in the level of our AUM resulting from market declines, credit or interest rate volatility or uncertainty, increased redemptions or other factors could negatively impact our revenues and income.
We may not effectively manage risks associated with the replacement of benchmark indices.
The withdrawal and replacement of widely used benchmark indices such as the London Interbank Offered Rate (“LIBOR”) with alternative benchmark rates may introduce a number of risks for our business, our clients and the financial services industry more widely. These include financial risks arising from potential changes in the valuation of financial instruments linked to benchmark indices, pricing and operational risks, and legal implementation and revised documentation risks. In March 2021, the FCA in the U.K., which regulates LIBOR, announced that LIBOR will no longer be provided for various currency settings after 2021, including all sterling, euro and certain U.S. dollar settings. Although the Secured Overnight Financing Rate (“SOFR”) has been identified as a recommended alternative reference rate to LIBOR, the selection of SOFR presents certain market concerns because a term structure for SOFR has not yet developed and there is not yet a generally accepted methodology for adjusting SOFR. Accordingly, the withdrawal and replacement of LIBOR may pose financial risks and uncertainties to our business. We also may face operational challenges adopting successor benchmarks.
INVESTMENT PERFORMANCE AND REPUTATIONAL RISKS
Poor investment performance of our products could reduce the level of our AUM or affect our sales, and negatively impact our revenues and income.
Our investment performance, along with achieving and maintaining superior distribution and client service, is critical to the success of our business. Strong investment performance often stimulates sales of our products. Poor investment performance as compared to third-party benchmarks or competitive products has led, and could in the future lead, to a decrease in sales of our products and stimulate redemptions from existing products, generally lowering the overall level of AUM and reducing the management fees we earn. We can provide no assurance that past or present investment performance in our products will be indicative of future performance. If we fail, or appear to fail, to address successfully and promptly the underlying causes of poor investment performance, our future business prospects would likely be negatively affected.
Harm to our reputation may negatively impact our revenues and income.
Our reputation is critical to the success of our business. We believe that our brand names have been, and continue to be, well received both in our industry and with our clients, reflecting the fact that our brands, like our business, are based in part on trust and confidence. If our brands or reputation are harmed, existing clients may reduce amounts held in, or withdraw entirely from, our products, or our clients and products may terminate their management agreements with us,
which could reduce the amount of our AUM and cause us to suffer a corresponding loss in our revenues and income. In addition, reputational harm may prevent us from attracting new clients or developing new business. Moreover, ESG topics and activities have been the subject of increased focus by certain investors and regulators in the asset management industry, and any inability to meet applicable requirements or expectations may adversely impact our reputation and business.
GLOBAL OPERATIONAL RISKS
Our completed acquisition of Legg Mason, Inc. remains subject to integration risks.
On July 31, 2020, we completed our acquisition of Legg Mason, Inc. pursuant to the terms and conditions of an agreement and plan of merger, and Legg Mason became a wholly-owned subsidiary of Franklin. Important ongoing integration-related risks related to our completed acquisition of Legg Mason include the risks that the anticipated benefits of the transaction, including the realization of revenue, tax benefits, financial benefits or returns and expense and other synergies, may not be fully realized, or may take longer to realize than expected, and that the integration may cost more than expected. In addition, the COVID-19 pandemic-related risks may result in unanticipated regulatory, planning and/or operational delays that may adversely impact the anticipated timeline and achievement of our ongoing integration goals. The ongoing integration of Legg Mason is a time-consuming and expensive process that, without adequate planning and effective and timely implementation, could significantly disrupt our business. Our failure to meet the challenges involved in continuing to integrate the operations of Legg Mason or to otherwise realize any of the anticipated benefits of the acquisition could adversely impair our business and operations as noted above.
Our business operations are complex and a failure to perform operational tasks properly or comply with applicable regulatory requirements could have an adverse effect on our revenues and income.
Through our subsidiaries, we provide investment management and related services to investors globally. In order to be competitive and comply with our agreements, we must properly perform our fund and portfolio administration and related responsibilities, including portfolio recordkeeping and accounting, security pricing, corporate actions, investment restrictions compliance, daily net asset value computations, account reconciliations, and required distributions to fund shareholders. Many of our operations are complex and dependent on our ability to process and monitor a large number of transactions effectively, which may occur across numerous markets and currencies at high volumes and frequencies. Although we expend considerable resources on internal controls, supervision, technology and training in an effort to ensure that such transactions do not violate applicable guidelines, rules and regulations or adversely affect our clients, counterparties or us, our operations are ultimately dependent on our personnel, as well as others involved in our business, such as third-party vendors, providers and other intermediaries, and subject to potential human errors. Our personnel and others involved in our business may, from time to time, make mistakes that are not always immediately detected, which may disrupt our operations, cause losses, lead to regulatory fines or sanctions, litigation, or otherwise damage our reputation. In addition, any misrepresentation of our services and products in advertising materials, public relations information, social media or other external communications could also adversely affect our reputation and business prospects. Our investment management fees, which represent the majority of our revenues, are dependent on fees earned under investment management agreements that we have with our products and clients. Our revenues could be adversely affected if such agreements representing a significant portion of our AUM are terminated. Further, certain of our subsidiaries may act as general partner for various investment partnerships, which may subject them to liability for the partnerships’ liabilities. If we fail to perform and monitor our operations properly, our business could suffer and our revenues and income could be adversely affected.
Failure to establish adequate controls and risk management policies, or the circumvention of controls and policies, could have an adverse effect on our global operations, reputation and financial position.
Although we have adopted risk management, operational and financial controls and compliance policies, procedures and programs that are subject to regular review and update, we cannot ensure that these measures will enable us effectively to identify and manage internal and external risks including those related to fraudulent activity and dishonesty. We are subject to extensive, complex, overlappingthe risk that our personnel, contractors, vendors and frequently changing rules, regulations,other third parties may deliberately or recklessly circumvent or violate our controls to commit fraud against our business, products and/or client accounts, pay or solicit bribes, or otherwise act in ways inconsistent with our controls, policies, workplace culture and business principles. Continued attempts to circumvent our policies and legal interpretations. There is uncertainty associated with the regulatory environments in which we operate. As described below,controls or repeated incidents involving violation of controls and policies, fraud or conflicts of interests could negatively impact our business is subject to extensive and complex, overlapping and/or conflicting,reputation and frequently changingresult in adverse publicity, regulatory investigations and increasing rules, regulations, policiesactions, legal proceedings and legal interpretations in the countries in which we operate. Our regulatorylosses and compliance obligations impose significant operationaladversely affect our operations, reputation, AUM and cost burdens on us and cover a broad range of requirements related to securities
financial results.
We face risks, and corresponding potential costs and expenses, associated with conducting operations and growing our business in numerous countries.
We sell our products and other financial instruments, investmentoffer our strategies and advisory matters, accounting, tax, compensation, ethics, data protection, privacy, sanctions programs, and escheatment laws and regulations.
As a U.S. reporting company, we are subject to U.S. federal securities laws, state laws regarding securities fraud, other federal and state laws and rules and regulations of certain regulatory and self-regulatory organizations, including those rules and regulations promulgated by, among others, the U.S. Securities and Exchange Commission (“SEC”) and the New York Stock Exchange. As a global investment management organization, certainand related services in many different regulatory jurisdictions around the world, and intend to continue to expand our operations internationally. As we do so, we will continue to face challenges to the adequacy of our subsidiaries are also subjectresources, procedures and controls to the rulesoperate our business consistently and regulations promulgated by the SEC, the Financial Industry Regulatory Authority, the U.S. Commodity Futures Trading Commission (“CFTC”), the National Futures Association, the U.S. Department of Justice (“DOJ”), the U.S. Department of Labor (“DOL”)effectively. In order to remain competitive, we must be proactive and the U.S. Department of Treasury. Given our global operations, our subsidiaries are also subjectprepared to applicable securities and other laws of various non-U.S. jurisdictions, and to various non-U.S. and cross-border rules and regulations, such as the European Union’s (“EU”) data protection rules under the EU’s General Data Protection Regulation (“GDPR”). Our non-U.S. regulators include, among others, the United Kingdom (“U.K.”) Financial Conduct Authority, the Luxembourg Commission de Surveillance du Secteur Financier, the Canadian provincial and territorial securities regulatory authorities, the Monetary Authority of Singapore, the Australian Securities and Investments Commission, the Hong Kong Securities and Futures Commission, the Securities and Exchange Board of India, the Japanese Financial Services Agency and various international stock exchanges. Our non-U.S. operations may also be subject to regulation by U.S. regulators, including the SEC, the CFTC and the DOJ (for example, with respect to the Foreign Corrupt Practices Act of 1977). We are also subject not only to the sanctions programs administered by the U.S. Department of Treasury’s Office of Foreign Assets Control, but also to sanctions programs adopted and administered by non-U.S. jurisdictions, including the EU, where our services and products are offered. We are also subject to the laws and regulations of states and other jurisdictions regarding the reporting and escheatment of unclaimed or abandoned property. Further, certain federal and state anti-takeover or business combination laws may impose various disclosure and procedural requirements on the ability of a person to acquire control of us, which may discourage potential merger and acquisition proposals and may delay, deter or prevent a change of control, including through transactions that some stockholders may consider desirable.
Certain of our subsidiaries are registered with the SEC under the Investment Advisers Act of 1940, the CFTC and/or registered with or licensed by various non-U.S. regulators. In addition, many of our funds are registered with the SEC under the Investment Company Act of 1940 (the “Investment Company Act”) or authorized by various European and other non-U.S. regulators pursuant to the EU’s Undertakings for Collective Investment in Transferable Securities (“UCITS”) Directive or under other non-U.S. laws in Europe, Middle East and Africa, Asia-Pacific, Canada and Latin America. These registrations, licenses and authorizations impose numerous obligations, as well as detailed operational requirements, on such subsidiaries and such funds. Our subsidiaries must also comply with complex tax regimes.
Financial reporting requirements, and the processes, controls and procedures that have been put in place to address them, are often comprehensive and complex. We may be adversely affectedimplement necessary resources when growth opportunities present themselves, whether as a result of newa business acquisition or revised legislation or regulations or by changesrapidly increasing business activities in the interpretation of existing laws and regulations. Political and electoral changes, developments and conflicts may also introduce additional uncertainty. While management has focused attention and resources on our compliance policies, procedures and practices, non-compliance with applicable laws, rules, regulations, conflicts of interest requirements or fiduciary principles, or our inability to keep up with, or adapt to, an ever changing, complex regulatory environment, could result in civil liability, criminal liability and/or sanctions against us, including fines and censures, injunctive relief, suspension or expulsion from a particular jurisdiction or market or the revocation of licenses or charters, any of which could adversely affect our reputation, prospects, revenues and income. Moreover, any potential accounting or reporting error, whether financial or otherwise, if material, could damage our reputation and adversely affect our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) authorized the establishment of the Financial Stability Oversight Council (“FSOC”), the mandate of which is to identify and respond to threats to U.S. financial stability. Similarly, the U.S. and other members of the G-20 group of nations have empowered the Financial Stability Board (“FSB”) to identify and respond, in a coordinated manner, to threats to global financial stability. The FSOC may designate certain non-bank financial companies as systemically important financial institutions (“SIFIs”), which are subject to supervision and regulation by the Board of Governors of the Federal Reserve System. The FSB may designate certain non-bank financial companies as global systemically important financial institutions (“G-SIFIs”); the additional regulatory requirements triggered by any such designation are not yet established. The FSOC and the FSB, as well as other global regulators including the European Commission, are considering what threats to U.S., EU and global financial stability, if any, arise from asset management companies and/or the funds that they sponsor or manage, and whether such threats can be mitigated by treating such entities as SIFIs or G-SIFIs and/or subjecting them to additional regulation. To the extent that we or any of our funds are designated as a SIFI or G-SIFI, such regulation, which could include requirements
related to risk-based capital, leverage, liquidity, credit exposure, stress testing, resolution plans, early remediation, and certain risk management requirements, could impact our business. The Dodd-Frank Act, as well as other legislative and regulatory changes, impose other restrictions and limitations on us, resulting in increased scrutiny and oversight of our services and products. We continue to analyze the impact of the Dodd-Frank Act as implementing rules are adopted and become effective. Under the Dodd-Frank Act, which imposes a number of regulations governing derivative transactions, certain categories of swaps are currently required, and further categories of swaps are likely to be required, to be submitted for clearing by a regulated clearing organization and reported on a swap execution facility. The EU and other countries are in the process of implementing similar requirements, and there is some risk that full mutual recognition may not be achieved between the various regimes, and duplication of regulation and transaction costs may result. These and other requirements are likely to impact how we manage our investment strategies because of, among other things, an increase in the costs and expenses of utilizing swaps and other derivatives. In addition, the SEC has adopted rules that have changed the structure and operation for certain types of money market funds, and that will require certain registered funds to adopt liquidity management programs. (Compliance with certain aspects of the latter is required by December 1, 2018, and other aspects are delayed until June 1, 2019, subject to further regulatory update.) The SEC has also proposed a rule that would impose restrictions on the use of derivatives by registered funds. We expect that the complex regulatory requirements and developments applicable to us will cause us to incur additional administrative and compliance costs.
The laws and regulations applicable to our business generally involve restrictions and requirements in connection with a variety of technical, specialized, and expanding matters and concerns. For example, compliance with the Bank Secrecy Act of 1970, anti-money laundering and Know Your Customer requirements, and economic, trade and other sanctions, both domestically and internationally, has taken on heightened importance as a result of efforts to, among other things, limit terrorism and actions that undermine the stability, sovereignty and territorial integrity of countries. At the same time, there has been increased regulation with respect to the protection of customer privacy and the need to secure sensitive customer information. As we continue to address these requirements or focus on meeting new or expanded ones, we may expend a substantial amount of time and resources. Any inability to meet these requirements within the required timeframes may subject us to sanctions or other restrictions by governments and/or regulators that could adversely impact our broader business objectives.
Global regulatory and legislative actions and reforms have made the regulatory environment in which we operate more costly and future actions and reforms could adversely impact our financial condition and results of operations. The U.S. federal securities laws have been augmented substantially and made significantly more complex by, among other measures, the Dodd-Frank Act, the Sarbanes-Oxley Act of 2002 and the USA Patriot Act of 2001. Similarly, the securities and related laws outside the U.S. have been augmented substantially and made more complex by measures such as the EU’s Alternative Investment Fund Managers Directive (“AIFMD”) and Markets in Financial Instruments Directive II (“MiFID II”). Although negotiations between the U.K. and EU regarding the U.K.’s proposed withdrawal from the EU (“Brexit”) began in June 2017, it is still unclear what terms may be agreed to in the final outcome and for any transitional period. Ongoing changes in the EU’s regulatory framework applicable to our business, including changes related toBrexit and any other changes in the composition of the EU’s member states, may add further complexity to our global risks and operations. Moreover, the adoption of new laws, regulations or standards and changes in the interpretation or enforcement of existing laws, regulations or standards have directly affected, and will continue to affect, our business. With new laws and changes in interpretation of existing requirements, the associated time we must dedicate to and related costs we must incur in meeting the regulatory complexities of our business have increased. In particular, certain provisions of the Dodd-Frank Act and MiFID II still require the adoption of implementing rules. We may be required to invest significant additional management time and resources to address the new regulations being adopted pursuant to the Dodd-Frank Act, MiFID II and other laws. For example, MiFID II requires the “unbundling” of research and execution charges for trading. The industry’s response to the unbundling rules is still evolving and could lead to increased research costs. Outlays associated with meeting regulatory complexities have also increased as we expand our business into new jurisdictions.
As of May 2018, the EU’s GDPR strengthened and unified data protection rules for individuals within the EU. The GDPR also addresses export of personal data outside the EU. The primary objectives of the GDPR are to give citizens control of their personal data and to simplify the regulatory environment for international business by unifying data protection regulation within the EU. Compliance with the stringent data protection rules under the GDPR requires an extensive review of all of our global data processing systems. The failure to comply timely and properly with GDPR rules and to maintain ongoing compliance with such rules may subject us to enforcement proceedings and significant fines and costs. For example, a failure to comply with the GDPR could result in fines up to 20 million Euros or 4% of our annual global revenues, whichever is higher.
Further, pursuant to ongoing efforts to encourage global tax compliance, the Organization for Economic Co-operation and Development has adopted a global common reporting standard for the automatic exchange of financial information among participating countries (“CRS”), aimed at ensuring that persons with financial assets located outside of their tax residence country pay required taxes. In many cases, intergovernmental agreements between the participating countries will govern implementation of the new CRS rules. CRS will be implemented over a multi-year period and we will continue to monitor the implementing regulations and corresponding intergovernmental agreements to determine our requirements. CRS may subject us to additional reporting, compliance and administrative costs and burdens in jurisdictions where we operate as a qualifying financial institution.
Compliance activities to address these and other new legal requirements have required, and will continue to require, us to expend additional time and resources, and, consequently, we are incurring increased costs of doing business, which potentially negatively impacts our profitability and future financial results. Finally, any further regulatory and legislative actions and reforms affecting the investment management industry, including compliance initiatives, may negatively impact revenues by increasing our costs of accessing or operating in the financial markets or by making certain investment offerings less favorable to our clients.
Failure to comply with the laws, rules or regulations in any of the jurisdictions in which we operate could result in substantial harm to our reputation and results of operations. As with all investment management companies, our activities are highly regulated in almost all countries in which we conduct business. The regulatory environments of the jurisdictions where we conduct our business, or where our products are organized or sold, are complex, uncertain and subject to change.regions. Local regulatory environments may vary widely in terms of scope, adequacy and sophistication. Similarly, local distributors, and their policies and practices as well as financial viability, may vary widely and they may be inconsistent or less developed or mature than other more internationally focused distributors. Growth of our international operations has involved and may continue to involve near-term increases in expenses, as well as additional capital costs, such as information systems and technology costs, and costs related to compliance with particular regulatory or other local requirements or needs. Local requirements or needs also may place additional demands on our sales investment, legal and compliance personnel. Failurepersonnel and resources, such as meeting local language requirements, while also integrating personnel into an organization with a single operating language. Finding, hiring and retaining additional, well-qualified personnel and crafting and adopting policies, procedures and controls to comply with the applicable laws, rules, regulations, codes, directives, noticesaddress local or guidelinesregional requirements remain challenges as we expand our operations internationally.
Moreover, regulators in any of ournon-U.S. jurisdictions could result in a wide range of penalties and disciplinary actions, including fines, censures and the suspension or expulsion from a particular jurisdiction or market or the revocation of licenses, any of which could adversely affect our reputation and operations. In recent years, the regulatory environments in which we operate have seen significant increased and evolving regulations, which have imposed and may continue to impose additional compliance and operational requirements and costs on us in the applicable jurisdictions. Regulators could also change their policies or laws in a manner that might restrict or otherwise impede our ability to offer our services anddistribute or authorize products or maintain their authorizations in their respective markets. Any of these local requirements, activities or needs could increase the costs and expenses we incur in a specific jurisdiction without any corresponding increase in revenues and income from operating in the jurisdiction. Certain laws and regulations both inside and outside the U.S. have extraterritorial application. This may lead to duplicative or conflicting legal or regulatory burdens and additional costs and risks.
Our focus on international markets as a source of investments and sales of our products subjects us to increased exchange rate and market-specific political, economic or weother risks that may be unable to keep up with, or adapt to, the ever changing, complex regulatory requirements in such jurisdictions or markets, which could further negativelyadversely impact our business.revenues and income generated overseas.
ChangesWhile we maintain a significant portion of our operations in tax laws or exposure to additional income tax liabilities could havethe U.S., we also provide services and earn revenues in Asia-Pacific; Europe, Middle East and Africa; Latin America; and Canada. As a material impact on our financial condition, results of operations and liquidity. Weresult, we are subject to income taxes as well as non-income based taxes,foreign currency exchange risk through our non-U.S. operations. Fluctuations in the exchange rates to the U.S. dollar have affected, and may in the future affect, our financial results from one period to the next. While we have taken steps to reduce our exposure to foreign exchange risk, for example, by denominating a significant amount of our transactions in U.S. dollars, our situation may change in the future. Appreciation of the U.S. dollar could in the future moderate revenues from managing our products internationally, or could affect relative investment performance of certain of our products invested in non-U.S. securities. In addition, we have risk associated with the foreign exchange revaluation of U.S. dollar balances held by certain non-U.S. subsidiaries for which the local currency is the functional currency. Separately, management fees that we earn tend to be higher in connection with non-U.S. AUM than with U.S. AUM. Consequently, downturns in international markets have in the past had, and could in the future have, a significant effect on our revenues and income. Moreover, our emerging market portfolios and revenues derived from managing these portfolios are subject to significant risks of loss from financial, economic, political and diplomatic developments, currency fluctuations, social instability, changes in governmental policies, expropriation, nationalization, asset confiscation and changes in legislation related to non-U.S. ownership. International trading markets, particularly in some emerging market countries, are often smaller, less liquid, less regulated and significantly more volatile than those in the U.S. Any ongoing tax audits,and future business, economic, political or social unrest affecting these markets, in various jurisdictionsaddition to any direct consequences such unrest may have on our personnel and facilities located in whichthe affected area, also may have a lasting impact on the long-term investment climate in these and other areas and, as a result, our AUM and the corresponding revenues and income that we operate. Tax authoritiesgenerate from them may disagree with certain positions we have takenbe negatively affected.
COMPETITION AND DISTRIBUTION RISKS
We may review and assess additional taxes. We regularly assess the likely outcomes of these audits in orderpursue strategic transactions that could pose risks to determine the appropriatenessour business.
As part of our tax provision. However, therebusiness strategy, we regularly consider, and have discussions with respect to, potential strategic transactions, including acquisitions, dispositions, consolidations, joint ventures or similar transactions, some of which may be deemed material. There can be no assurance that we will accurately predictfind suitable candidates for strategic transactions at acceptable prices, have sufficient capital resources to accomplish our strategy, or be successful in entering into agreements for desired transactions. In addition, such transactions typically involve a number of risks and present financial, managerial and operational challenges. Acquisitions and related transactions pose the outcomesrisk that any business we acquire may result in the loss of clients, customers or personnel or could underperform relative to expectations. We also may not realize the anticipated benefits of an acquisition, including with respect to revenue, tax benefits, financial benefits or returns, and expense and other synergies. We could also experience financial or other setbacks if transactions encounter unanticipated problems, including problems related to execution or integration. Entries into material transactions typically are announced publicly even though they may remain subject to numerous closing conditions, contingencies and approvals, and there is no assurance that any announced transaction will actually be consummated. Future transactions also may further increase our leverage or, if we issue equity securities to pay for acquisitions, dilute the holdings of our existing stockholders.
In addition, from time to time, we enter into joint ventures or take minority stakes in companies in which we typically do not have control. These investments may involve risks, including the risk that the controlling stakeholder or joint venture partner may have business interests, strategies or goals that are inconsistent with ours. The business decisions or other actions or omissions of the controlling stakeholder, joint venture partner or the entity itself may result in liability to us or harm to our reputation, or adversely affect the value of our investment in the entity.
Failure to properly address the increased transformative pressures affecting the asset management industry could negatively impact our business.
The asset management industry is facing transformative pressures and trends from a variety of different sources includingincreased fee pressure; a continued shift away from actively managed core equities and fixed income strategies towards alternative, passive and smart beta strategies; increased demands from clients and distributors for client engagement and services; a trend towards institutions developing fewer relationships and partners and reducing the number of investment managers they work with;increased regulatory activity and scrutiny of many aspects of the asset management industry, including ESG practices and related matters, transparency/unbundling of fees, inducements, conflicts of interest, capital, liquidity, solvency, leverage, operational risk management, controls and compensation;addressing the key emerging markets in the world, such as China and India, which often have populations with different needs, preferences and horizons than the more developed U.S. and European markets; andadvances in technology and increasing client interest in interacting digitally with their investment portfolios.As a result of the trends and pressures discussed above, the asset management industry is facing an increased level of disruption. If we are unable to adapt our strategy and business to address adequately these audits,trends and pressures, we may be unable to meet client needs satisfactorily, our competitive position may weaken, and our business results and operations may be adversely affected.
Strong competition from numerous and sometimes larger companies with competing offerings and products could limit or reduce sales of our products, potentially resulting in a decline in our market share, revenues and income.
We compete with numerous investment management companies, securities brokerage and investment banking firms, insurance companies, banks and other financial institutions. Our products also compete with products offered by these competitors, as well as with real estate investment trusts, hedge funds and other products. The periodic establishment of new investment management companies and other competitors increases the actual outcomescompetition that we face. At the same time, consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. Competition is based on various factors, including, among others, business reputation, investment performance, product mix and offerings, ESG strategies and considerations, service quality and innovation, distribution relationships, and fees charged. Further, although we may offer certain types of ETFs, to the extent that there is a trend among existing or potential clients in favor of lower-fee index and other ETFs, it may favor our competitors who may offer such products that are more established or on a larger scale than we do. Additionally, competing securities broker-dealers and banks, upon which we rely to distribute and sell certain of our funds and other products, also may sell their own proprietary funds and products, which could limit the distribution of our products. To the extent that existing or potential clients, including securities broker-dealers, decide to invest in or distribute the products of our competitors, the sales of our products as well as our market share, revenues and income could decline. Our ability to
attract and retain AUM is also dependent on the relative investment performance of our products, offering a mix of products and strategies that meets investor demands, and our ability to maintain our investment management fees and pricing structure at competitive levels.
Increasing competition and other changes in the third-party distribution and sales channels on which we depend could reduce our revenues and income and hinder our growth.
We primarily derive our fund sales through third-party broker-dealers, banks, investment advisers and other financial intermediaries. Because we rely on third-party distribution and sales channels to sell our products, we do not control the ultimate investment recommendations given by them to clients. Increasing competition for these distribution and sales channels, and regulatory changes and initiatives, have caused our distribution costs to rise and could cause further cost increases in the future, or could otherwise negatively impact the distribution of our products. Higher distribution costs lower our revenues and income, and consolidations in the broker-dealer or banking industries could also adversely impact our revenues and income. A failure to maintain our third-party distribution and sales channels, or a failure to maintain strong business relationships with our distributors and other intermediaries, may impair our distribution and sales operations.Any inability to access and successfully sell our products to clients through such third-party channels could have a materialnegative effect on our level of AUM and adversely impact our business.
Moreover, we can provide no assurance that we will continue to have access to the third-party financial intermediaries that currently distribute our products, or that we will continue to have the opportunity to offer all or some of our existing products through them. If several of the major financial advisers that distribute our products were to cease operations or limit or otherwise end the distribution of our products, it could have a significant adverse impact on our net incomerevenues and income.
Further, the standards of conduct and disclosure and reporting requirements, with respect to fees, products, services and possible conflicts of interest, applicable to broker-dealers and other financial intermediaries in the U.S., remain subject to change and enhancement pursuant to business and regulatory developments and requirements, including with respect to investor suitability obligations, enhanced investor protections for retail customers, and increased compliance requirements.
In addition, Canada, the U.K., the Netherlands and the EU, through MiFID II, have adopted regimes that ban, or financial condition. Changesmay limit, the payment of commissions and other inducements to intermediaries in tax lawsrelation to certain sales to retail customers in those jurisdictions, and similar regimes are under consideration in several other jurisdictions. Depending on their exact terms, such regimes may result in existing flows of business moving to less profitable channels or tax rulings may at times materiallyeven to competitors providing substitutable products outside the regime. Arrangements with non-independent advisers will also be affected as narrower rules related to the requirement that commissions reflect an enhancement of the service to customers come into effect, along with a prescriptive list of permissible non-monetary benefits. The interpretation of the inducements rules has also resulted in major changes to how fund managers, including us, finance investment research with many firms, by opting to pay for third-party investment research for client accounts covered by MiFID II.
THIRD-PARTY RISKS
Any failure of our third-party providers to fulfill their obligations, or our failure to maintain good relationships with our providers, could adversely impact our effective tax rate. For example, the Tax Cutsbusiness.
We currently, and Jobs Act enacted into lawmay in the U.S.future, depend on December 22, 2017 includesa number of third-party providers to support various operational, technology, administrative, market data, distribution, and other business needs of our company. In addition, we may, from time to time, transfer vendor contracts and services from one provider to another. If our third-party providers fail to deliver required services on a timely basis, or if we experience other negative service quality or relationship issues with our providers, we may be exposed to significant costs and/or operational difficulties, and our ability to conduct and grow our business may be impaired. In addition, we outsource certain administration and other services for our funds to third-party providers. Such administrative and functional changes are costly and complex, and may expose us to heightened operational risks. Any failure to mitigate such risks could result in reputational harm to us, as well as financial losses to us and our clients. The failure of any key provider or vendor to fulfill its obligations to us could result in outcomes inconsistent with our or our clients’ objectives and requirements, result in legal liability and regulatory issues for us, and otherwise adversely impact us.
We may be adversely affected if any of our third-party providers is subject to a successful cyber or security attack.
Due to our interconnectivity with third-party vendors, advisors, central agents, exchanges, clearing organizations and other financial institutions, we may be adversely affected if any of them is subject to a successful cyber attack or other privacy or information security event, including those arising due to the tax law,use of mobile technology or a third-party cloud environment. Most of the software applications that we use in our business are licensed from, and supported, upgraded and maintained by, third-party vendors. Our third-party applications include enterprise cloud storage and cloud computing application services provided and maintained by third-party vendors. Any breach, suspension or termination of certain of these licenses or the related support, upgrades and maintenance could cause temporary system delays or interruption that could adversely impact our business. Our third-party applications may include confidential and proprietary data provided by vendors and by us, including personal employee and/or client data.
TECHNOLOGY AND SECURITY RISKS
Our ability to manage and grow our business successfully can be impeded by systems and other technological limitations.
Our continued success in effectively managing and growing our business depends on our ability to integrate our varied accounting, financial, information, and operational systems on a permanent reductionglobal basis. Moreover, adapting or developing the existing technology systems we use to meet our internal needs, as well as client needs, industry demands and new regulatory requirements, is also critical for our business. The introduction of new technologies presents new challenges to us. On an ongoing basis, we need to upgrade and improve our technology, including our data processing, financial, accounting, shareholder servicing and trading systems. Further, we also must be proactive and prepared to implement new technology when growth opportunities present themselves, whether as a result of a business acquisition or rapidly increasing business activities in particular markets or regions. These needs could present operational issues or require significant capital spending, and may require us to reevaluate the corporate income tax ratecurrent value and/or expected useful lives of the technology we use, which could negatively impact our results of operations. In addition, technology is subject to rapid advancements and one-time transition tax on certain non-U.S. earnings.changes and our competitors may, from time to time, implement newer technologies or more advanced platforms for their services and products, including digital advisers and other advanced electronic systems, which could adversely affect our business if we are unable to remain competitive.
Any significant limitation, failure or security breach of our information and cyber security infrastructure, software applications, technology or other systems that are critical to our operations could disrupt our business and harm our operations and reputation.
We are highly dependent upon the use of various proprietary and third-party information and security technology, software applications and other technology systems to operate our business. We are also dependent on the continuity and effectiveness of our information and cyber security infrastructure, management oversight and reporting framework, policies, procedures and capabilities to protect our computer and telecommunications systems and the data that reside on or are transmitted through them and contracted third-party systems. We use technology on a daily basis in our business to, among other things, support our business continuity and operations, process and transmit confidential communications, store and maintain data, obtain securities pricing information, process client transactions, and provide reports and other customer services to our clients. Any disruptions, inaccuracies, delays, theft, systems failures, data security or privacy breaches, cyber attacks or cybercyber-related fraud, or other security breaches in these and other processes could subject us to significant client dissatisfaction and losses and damage our reputation. We have been, and expect to continue to be, the subject of these types of risks, breaches and/or attacks, as well as attempts to co-opt our brand. Although we take protective measures, including measures to secure and protect information through system security technology and our internal security procedures, thewe can provide no assurance that any of these measures will prove effective or comply with evolving information security standards. The technology systems we use remain vulnerable to denial of service attacks, unauthorized access, computer viruses, potential human errors orand other events and circumstances that may have a security impact, such as an external or internal hacker attack by one or more cyber criminals (including through the use of phishing attacks, malware, ransomware and other methods and activities maliciously designed to maliciously obtain and exploit confidential information and to otherwise cause
system and service disruption and other damage) or an authorized employeeour personnel or vendorvendors inadvertently or recklessly causing us to release confidential information, which could materially harm our operations and reputation.
Potential system disruptions, failures or breaches of the technology systems we use or the security infrastructure we rely upon, andincluding the costs necessary to address them,third-party applications we use, could result in: significant(i) material financial loss or costs;costs, (ii) delays in clients’ ability to access account information or in our ability to process transactions, (iii) the unauthorized disclosure or modification of sensitive or confidential client and business information;information, (iv) loss of valuable information;information, (v) breach of
client and vendor contracts;contracts, (vi) liability for stolen assets, information or identity;identity, (vii) remediation costs to repair damage caused by the failure or breach;breach, (viii) additional security and organizational costs to mitigate against future incidents;incidents, (ix) reputational harm;harm, (x) loss of confidence in our business and products;products, (xi) liability for failure to properly and timely review and disclose applicable incidents or provide relevant updated disclosure;disclosure properly and timely, (xii) regulatory investigations or actions;actions, and/or (xiii) legal claims, litigation, and liability and litigation costs, resulting from the incident.any one or more of which may be material. Moreover, loss or unauthorized disclosure or transfer of confidential and proprietary data or confidential customer identification information could further harm our reputation and subject us to liability under laws that protect confidential data and personal data,information, resulting in increased costs or a decline in our revenues or common stock price. Further, although we take precautions to password protect and encrypt our laptops and sensitive information on our other mobile electronic devices, if such devices are stolen, misplaced or left unattended, they may become vulnerable to hacking or other unauthorized use, creating a possible security risk, and resulting in potentially costly actions by us.
which may require us to incur additional administrative costs and/or take remedial actions. In addition, duefailure to our interconnectivity withmanage and operate properly the data centers and third-party vendors, advisors, central agents, exchanges, clearing organizations and other financial institutions, we may be adversely affected if any of them are subject to a successful cyber attack or other information security event, including those arising due to the use of mobile technology or a third-party cloud environment. Most of the software applications that we use in our business are licensed from, and supported, upgraded and maintained by, third-party vendors. Our third-party applications include enterprise cloud storage and cloud computing application services provided and maintained by third-party vendors. A suspension or termination of certain of these licenses or the related support, upgrades and maintenance could cause temporary system delays or interruption that could adversely impact our business. Also, our third-party applications may include confidential and proprietary data provided by vendors and by us. We may be subject to indemnification costs and liability to third parties if we breach any confidentiality obligations regarding vendor data, for losses related to the data, or if data we provide is deemed to infringe upon the rights of others. In addition, the failure to properly manage and operate the data centers we use could have an adverse impact on our business. Although we have in place certain disaster recovery plans, we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war, and third-party failures. Technology is subject
Our inability to rapid advancementsrecover successfully, should we experience a disaster or other business continuity problem, could cause material financial loss, regulatory actions, legal liability, and/or reputational harm.
Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, hurricane, tsunami, terrorist attack, public health crisis, pandemic or other natural or man-made disaster, our continued success will depend, in part, on the safety and changesavailability of our personnel, our office facilities and infrastructure, and the proper functioning of our technology, computer, telecommunication and other systems and operations that are critical to our business. See “Pandemic-Related Risks” above for risks relating to COVID-19. While our operational size, the diversity of locations from which we operate, and our competitorsvarious back-up systems provide us with an advantage, should we experience a local or regional disaster or other business continuity event, we could still experience operational challenges, in particular depending upon how such a local or regional event may from time to time implement new technologies or more advanced platforms for their services and products, including digital advisers and other advanced electronic systems, which could adversely affect our business if we are unablepersonnel across our operations or with regard to remain competitive.
Our business operations are complex and a failure to properly perform operational tasks or the misrepresentation of our services and products, or the termination of investment management agreements representing a significant portion of our AUM, could have an adverse effect on our revenues and income. Through our subsidiaries, we provide investment management and related services to investors globally through our products. In order to be competitive and comply with our agreements, we must properly perform our fund and portfolio administration and related responsibilities, including portfolio recordkeeping and accounting, security pricing, corporate actions, investment restrictions compliance, daily net asset value computations, account reconciliations, and required distributions to fund shareholders. Manyparticular aspects of our operations, are complex and dependent onsuch as key executives or personnel in our ability to effectively process and monitor a large number of transactions, many of which may occur across numerous markets and currencies at high volumes and frequencies. Althoughtechnology groups. Moreover, as we expend considerable resources on internal controls, supervision, technology and training in an effort to ensure that such transactions do not violate applicable guidelines, rules and regulations or adversely affect our clients, counterparties or us,grow our operations are ultimately dependent on our employees and subject toin new geographic regions, the potential human errors. Our employees and others involved in ourfor particular types of natural or man-made disasters, political, economic or infrastructure instabilities, information, technology or security limitations or breaches, or other country- or region-specific business continuity risks increases. Past disaster recovery efforts have demonstrated that even seemingly localized events may from time to time, make mistakes that are not always immediately detected, which may disruptrequire broader disaster recovery efforts throughout our operations cause losses, leadand, consequently, we regularly assess and take steps to regulatory fines or sanctions, or otherwise damageimprove upon our reputation. In addition, any misrepresentation of our services and products in advertising materials, public relations information, social media or other external communications could also adversely affect our reputation andexisting business prospects. Our investment management fees, which represent the majority of our revenues, are dependentcontinuity plans. However, a disaster on fees earned under investment management agreements that we have with our products. Our revenues could be adversely affected if such agreements representing a significant portion of our AUM are terminatedscale or significantly altered. Further,affecting certain of our subsidiaries may act as general partner for various investment partnerships, which may subject themkey operating areas within or across regions, or our inability to liability for the partnerships’ liabilities. If we fail to properly perform and monitor our operations,recover successfully following a disaster or other business continuity problem, could adversely impact our business could suffer and our revenues and income could be adversely affected.operations.
HUMAN CAPITAL RISKS
We face risks, and corresponding potential costs and expenses, associated with conducting operations and growing our business in numerous countries. We sell our products such as our funds and strategies, and offer our investment management and related services, in many different regulatory jurisdictions around the world, and intend to continue to expand our operations internationally. As we do so, we will continue to face challenges to the adequacy of our resources, procedures and controls to consistently and effectively operate our business. In order to remain competitive, we must be proactive and prepared to implement necessary resources when growth opportunities present themselves, whether as a result of a business acquisition or rapidly increasing business activities in particular markets or regions. Local regulatory environments may vary widely in terms of scope, adequacy and sophistication. Similarly, local distributors, and their policies and practices as well as financial viability, may also vary widely, or be inconsistent or less developed or mature than other more internationally focused distributors. Notwithstanding potential long-term cost savings by increasing certain operations, such as transfer agent and other back-office operations, in countries or regions of the world with lower operating costs, growth of our international operations may involve near-term increases in expenses as well as additional capital costs, such as information systems and technology costs and costs related to compliance with particular regulatory or other local requirements or needs. Local requirements or needs may also place additional demands on sales and compliance personnel and resources, such as meeting local language requirements, while also integrating personnel into an organization with a single operating language. Finding, hiring and retaining additional, well-qualified personnel and crafting and adopting policies, procedures and controls to address local or regional requirements remain a challenge as we expand our operations internationally. Moreover, regulators in non-U.S. jurisdictions could also change their policies or laws in a manner that might restrict or otherwise impede our ability to distribute or authorize products or maintain their authorizations in their respective markets. Any of these local requirements, activities, or needs could increase the costs and expenses we incur in a specific jurisdiction without any corresponding increase in revenues and income from operating in the jurisdiction. Certain laws and regulations both inside and outside the U.S. have included extraterritorial application. This may lead to duplicative or conflicting legal or regulatory burdens and additional costs and risks. In addition, from time to time we enter into joint ventures or take minority stakes in companies in which we typically do not have control. These investments may involve risks, including the risk that the controlling stakeholder or our joint venture partner may have business interests, strategies or goals that are inconsistent with ours, and the risk that business decisions or other actions or omissions of the controlling stakeholder, our joint venture partner or the entity itself may result in liability for us or harm to our reputation or adversely affect the value of our investment in the entity.
We depend on key personnel and our financial performance could be negatively affected by the loss of their services.
The success of our business will continue to depend upon our key personnel, including our portfolio and fund managers, investment analysts, investment advisers, sales and management personnel and other professionals as well as our executive officers and business unit heads. Competition for qualified, motivated, and highly skilledhighly-skilled executives, professionals and other key personnel in the investment management industry remains significant. Our success depends to a substantial degree upon our ability to find, attract, retain and motivate qualified individuals, including through competitive compensation packages, and upon the continued contributions of these people. LawsGlobal and/or local laws and regulations including those contained in or relating to the EU’s Capital Requirements Directive, those adopted under AIFMD and UCITS and those required to be adopted under the Dodd-Frank Act, could impose restrictions on compensation paid by financial institutions, which could restrict our ability to compete effectively for qualified professionals. As our business develops, we are likely tomay need to increase the number of individuals that we employ. Moreover, in order to retain certain key personnel, we may be required to increase compensation to such individuals and increase our key management succession planning, resulting in additional expense without a corresponding increase in potential revenues. There is no assurance that we will be successful in finding, attracting and retaining qualified individuals, and the departure of key investment personnel, in particular, could cause us to lose clients, which could have a material adverse effect on our financial condition, results of operations and business prospects. In addition, due to the global nature of our business, our key personnel may, from time to time, have reasons to travel to regions susceptible to higher risk of civil unrest, organized crime or terrorism, and we may be unable to ensure the safety of our personnel traveling to such regions. There is no assurance that we will be successful in finding, attracting and retaining qualified individuals, and the departure of key investment personnel, in particular, if not replaced, could cause us to lose clients, which could have a material adverse effect on our financial condition, results of operations and business prospects.
Strong competition from numerous and sometimes larger companies with competing offerings and products could limit or reduce sales of our products, potentially resulting in a decline in our market share, revenues and income. We compete with numerous investment management companies, securities brokerage and investment banking firms, insurance companies, banks and other financial institutions. Our products also compete with products offered by these competitors, as well as with real estate investment trusts, hedge funds and other products. The periodic establishment of new investment management companies and other competitors increases the competition that we face. At the same time, consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. Competition is based on various factors, including, among others, business reputation, investment performance, product mix and offerings, service quality and innovation, distribution relationships, and fees charged. Further, although we may offer certain types of exchange-traded funds, to the extent that there is a trend among existing or potential clients in favor of lower fee index and other exchange-traded funds, it may favor our competitors who may offer such products that are more established or on a
CASH MANAGEMENT RISKS
larger scale than we do. Additionally, competing securities broker-dealers, whom we rely upon to distribute and sell certain of our funds and other products, may also sell their own proprietary funds and products, which could limit the distribution of our products. To the extent that existing or potential clients, including securities broker-dealers, decide to invest in or distribute the products of our competitors, the sales of our products as well as our market share, revenues and income could decline. Our ability to attract and retain AUM is also dependent on the relative investment performance of our products, offering a mix of products and strategies that meets investor demands, and our ability to maintain our investment management fees and pricing structure at competitive levels.
Changes in the third-party distribution and sales channels on which we depend could reduce our income and hinder our growth. We derive nearly all of our fund sales through third-party broker-dealers, banks, investment advisers and other financial intermediaries. Increasing competition for these distribution channels and regulatory initiatives have caused our distribution costs to rise and could cause further increases in the future or could otherwise negatively impact the distribution of our products. The SEC has proposed changes to Rule 12b-1 promulgated under the Investment Company Act which, if adopted, could limit our ability to recover expenses relating to the distribution of our U.S.-registered funds. Higher distribution costs lower our income; consolidations in the broker-dealer industry could also adversely impact our income. Moreover, if several of the major financial advisers who distribute our products were to cease operations or limit or otherwise end the distribution of our products, it could have a significant adverse impact on our income. Pursuant to the Dodd-Frank Act, the SEC may establish different standards for broker-dealers in their interaction with retail customers, which could have an impact on sales and/or distribution costs. In April 2018, the SEC proposed rules that would apply to all retail investors and would, among other things: require broker-dealers to act in the best interest of their retail customers when recommending securities and provide additional disclosure about the scope and terms of the relationship; clarify the fiduciary duty that an investment adviser owes to its clients; and require a new short-form disclosure document to inform clients of the nature of their relationships with investment professionals and investment advisers, including differences in the principal types of services offered, the legal standards of conduct that apply to each, the fees a client might pay, and conflicts of interest that may exist. In addition, the U.K., the Netherlands and the EU in MiFID II have adopted regimes which ban, or may limit, the payment of commissions and other inducements to intermediaries in relation to certain sales to retail customers in those jurisdictions, and similar regimes are under consideration in several other jurisdictions. Depending on their exact terms, such regimes may result in existing flows of business moving to less profitable channels or even to competitors providing substitutable products outside the regime. Arrangements with non-independent advisers will also be affected as narrower rules related to the requirement that commissions reflect an enhancement of the service to customers come into effect, along with a prescriptive list of permissible non-monetary benefits. The interpretation of the inducements rules has also resulted in major changes to how fund managers finance investment research with many firms, including ours, opting to pay for third-party investment research for client accounts covered by MiFID II. There is no assurance we will continue to have access to the third-party broker-dealers, banks, investment advisers and other financial intermediaries that currently distribute our products, or continue to have the opportunity to offer all or some of our existing products through them. A failure to maintain strong business relationships with such distributors may also impair our distribution and sales operations. Because we use broker-dealers, banks, investment advisers and other financial intermediaries to sell our products, we do not control the ultimate investment recommendations given to clients. Any inability to access and successfully sell our products to clients through third-party distribution channels could have a negative effect on our level of AUM, income and overall business and financial condition.
Our increasing focus on international markets as a source of investments and sales of our products subjects us to increased exchange rate and market-specific political, economic or other risks that may adversely impact our revenues and income generated overseas. While we maintain a significant portion of our operations in the U.S., we also provide services and earn revenues in Europe, Middle East and Africa, Asia-Pacific, Canada, The Bahamas and Latin America. As a result, we are subject to foreign currency exchange risk through our non-U.S. operations. Fluctuations in the exchange rates to the U.S. dollar have affected and may in the future affect our financial results from one period to the next. While we have taken steps to reduce our exposure to foreign exchange risk, for example, by denominating a significant amount of our transactions in U.S. dollars, the situation may change in the future as our business continues to grow outside the U.S. Appreciation of the U.S. dollar has and could in the future moderate revenues from managing our products internationally, or could affect relative investment performance of certain of our products invested in non-U.S. securities. In addition, we have risk associated with the foreign exchange revaluation of U.S. dollar balances held by certain non-U.S. subsidiaries for which the local currency is the functional currency. Separately, management fees that we earn tend to be higher in connection with non-U.S. AUM than with U.S. AUM. Consequently, downturns in international markets have in the past and could in the future have a significant effect on our revenues and income. Moreover, our emerging market portfolios and revenues derived from managing these portfolios are subject to significant risks of loss from financial, economic, political and diplomatic developments, currency fluctuations, social instability, changes in governmental policies, expropriation, nationalization, asset confiscation and changes in legislation related to non-U.S. ownership. International trading markets, particularly in some emerging market countries,
are often smaller, less liquid, less regulated and significantly more volatile than those in the U.S. As our business continues to grow in non-U.S. markets, any ongoing and future business, economic, political or social unrest affecting these markets, in addition to any direct consequences such unrest may have on our personnel and facilities located in the affected area, may also have a more lasting impact on the long-term investment climate in these and other areas and, as a result, our AUM and the corresponding revenues and income that we generate from them may be negatively affected.
Harm to our reputation or poor investment performance of our products could reduce the level of our AUM or affect our sales, and negatively impact our revenues and income. Our reputation is critical to the success of our business. We believe that our brand names have been, and continue to be, well received both in our industry and with our clients, reflecting the fact that our brands, like our business, are based in part on trust and confidence. If our reputation is harmed, existing clients may reduce amounts held in, or withdraw entirely from, our products or our products may terminate their management agreements with us, which could reduce the amount of our AUM and cause us to suffer a corresponding loss in our revenues and income. Our investment performance, along with achieving and maintaining superior distribution and client service, is also critical to the success of our business. Strong investment performance often stimulates sales of our products. Poor investment performance as compared to third-party benchmarks or competitive products has in the past and could in the future lead to a decrease in sales of our products and stimulate redemptions from existing products, generally lowering the overall level of AUM and reducing the management fees we earn. There is no assurance that past or present investment performance in our products will be indicative of future performance. Any poor investment performance may negatively impact our revenues and income. Reputational harm or poor investment performance may cause us to lose current clients and we may be unable to continue to attract new clients or develop new business. If we fail to address, or appear to fail to address, successfully and promptly the underlying causes of any reputational harm or poor investment performance, we may be unsuccessful in repairing any existing harm to our reputation or performance and our future business prospects would likely be affected.
Our future results are dependent upon maintaining an appropriate level of expenses, which is subject to fluctuation. The level of our expenses is subject to fluctuation and may increase for the following or other reasons: changes in the level and scope of our operating expenses in response to market conditions or regulations; variations in the level of total compensation expense due to, among other things, bonuses, merit increases and severance costs, changes in our employee count and mix, and competitive factors; and/or changes in expenses and capital costs, including costs incurred to maintain and enhance our administrative and operating services infrastructure or to cover uninsured losses, and an increase in insurance expenses including through the assumption of higher deductibles and/or co-insurance liability.
Our ability to successfully manage and grow our business can be impeded by systems and other technological limitations. Our continued success in effectively managing and growing our business depends on our ability to integrate the varied accounting, financial, information, and operational systems on a global basis. Moreover, adapting or developing the existing technology systems we use to meet our internal needs, as well as client needs, industry demands and new regulatory requirements, is also critical for our business. The introduction of new technologies presents new challenges to us. We have an ongoing need to continually upgrade and improve our various technology systems, including our data processing, financial, accounting, shareholder servicing and trading systems. Further, we also must be proactive and prepared to implement technology systems when growth opportunities present themselves, whether as a result of a business acquisition or rapidly increasing business activities in particular markets or regions. These needs could present operational issues or require, from time to time, significant capital spending. It also may require us to reevaluate the current value and/or expected useful lives of the technology systems we use, which could negatively impact our results of operations.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability. Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, tsunami, terrorist attack, pandemic or other natural or man-made disaster, our continued success will depend, in part, on the safety and availability of our personnel, our office facilities and infrastructure, and the proper functioning of our technology, computer, telecommunication and other systems and operations that are critical to our business. While our operational size, the diversity of locations from which we operate, and our various back-up systems provide us with an advantage should we experience a local or regional disaster or other business continuity event, we could still experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel in our technology group. Moreover, as we grow our operations in new geographic regions, the potential for particular types of natural or man-made disasters; political, economic or infrastructure instabilities; information, technology or security limitations or breaches; or other country- or region-specific business continuity risks increases. Past disaster recovery efforts have demonstrated that even seemingly localized events may require broader disaster recovery efforts throughout our operations and, consequently, we regularly assess and take steps to improve upon our existing
business continuity plans and key management succession. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability.
Regulatory and governmental examinations and/or investigations, litigation and the legal risks associated with our business, could adversely impact our AUM, increase costs and negatively impact our profitability and/or our future financial results. From time to time we receive and respond to governmental or regulatory requests for documents or other information, subpoenas, examinations and investigations in connection with our business activities. In addition, governmental or regulatory examinations or investigations that have been inactive could become active. In addition, from time to time, we are named as a party in litigation. We may be obligated, and under our certificate of incorporation, by-laws and standard form of director indemnification agreement we are obligated under certain conditions, or we may choose, to indemnify directors, officers or employees against liabilities and expenses they may incur in connection with such matters to the extent permitted under applicable law. Even if claims made against us are without merit, litigation typically is an expensive process. Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time. Eventual exposures from and expenses incurred relating to any litigation, investigations, examinations and settlements could adversely impact our AUM, increase costs and/or negatively impact our profitability and financial results. Allegations, findings or judgments of wrongdoing by regulatory or governmental authorities or in litigation against us, or settlements with respect thereto, could affect our reputation, increase our costs of doing business and/or negatively impact our revenues, any of which could have a material negative impact on our financial results.
Our ability to meet cash needs depends upon certain factors, including the market value of our assets, our operating cash flows and our perceived creditworthiness.Our ability to meet anticipated cash needs depends upon factors such as the market value of our assets, our operating cash flows and our creditworthiness as perceived by lenders.
If we are unable to obtain cash, financing or access to the capital markets in a timely manner, we may be forced to incur unanticipated costs or revise our business plans, and our business could be adversely impacted. Further, our access to the capital markets depends significantly on our credit ratings. A reduction in our long- or short-term credit ratings could increase our borrowing costs and limit our access to the capital markets. Volatility in the global financing markets also may also impact our ability to access the capital markets should we seek to do so, and may have an adverse effect on investors’ willingness to purchase our securities, interest rates, credit spreads and/or the valuation levels of equity markets.
We are dependent on the earnings of our subsidiaries.
Substantially all of our operations are conducted through our subsidiaries. As a result, our cash flow and our ability to fund operations are dependent upon the earnings of our subsidiaries and the distribution of earnings, loans or other payments by our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to fund our payment obligations, whether by dividends, distributions, loans or other payments. Any payments to us by our subsidiaries could be subject to statutory or contractual restrictions and are contingent upon our subsidiaries’ earnings and business considerations. Certain of our subsidiaries are subject to regulatory restrictions whichthat may limit their ability to transfer assets to their parent companies. Our financial condition could be adversely affected if certain of our subsidiaries are unable to distribute assets to us.
LEGAL AND REGULATORY RISKS
For a more extensive discussion of certain laws, regulations (including certain pending regulatory reforms) and regulators to which we are subject, as well as certain defined terms referenced below, see “Item 1 – Business – Regulation” in Part I of this Annual Report.
We are subject to extensive, complex, overlapping and frequently changing rules, regulations, policies, and legal interpretations.
There is uncertainty associated with the regulatory and compliance environments in which we operate. Our business is subject to extensive and complex, overlapping and/or conflicting, and frequently changing and increasing rules, regulations, policies and legal interpretations, around the world. Political and electoral changes, developments and conflicts have in the past introduced, and may in the future introduce, additional uncertainty. Our regulatory and compliance obligations impose significant operational and cost burdens on us and cover a broad range of requirements related to financial reporting and other disclosure matters, securities and other financial instruments, investment and advisory matters, accounting, tax, compensation, ethics, intellectual property, data protection, privacy, sanctions programs, and escheatment requirements. We may be adversely affected by a failure to comply with applicable laws, regulations and changes in the countries in which we operate.
We may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation of existing laws and regulations, in the U.S. and other jurisdictions.
The laws and regulations applicable to our business generally involve restrictions and requirements in connection with a variety of technical, specialized, and expanding matters and concerns. Over the years, the U.S. federal corporate governance and securities laws, and laws in other jurisdictions, have been augmented substantially and made significantly more complex by various legislation. As we continue to address our legal and regulatory requirements or focus on meeting new or expanded requirements, we may need to continue to expend a substantial amount of additional time, costs and resources.Regulatory reforms may add further complexity to our business and operations and could require us to alter our investment management services and related activities, which could be costly, impede our growth and adversely impact our AUM, revenues and income. Regulatory reforms also may impact our clients, which could cause them to change their investment strategies or allocations in a manner adverse to our business. Certain key regulatory reforms in the U.S. and other jurisdictions that may impact or relate to our business, and may cause us to incur additional obligations, include regulatory matters related to systemically important financial institutions, derivatives and other financial products, privacy and data protection, retail and other investor protections, ESG topics and disclosure, and other asset management disclosure and compliance requirements. The impacts of these and other regulatory reforms on us, now and in the future, could be significant. We expect that the regulatory requirements and developments applicable to us will cause us to continue to incur
additional compliance and administrative burdens and costs. Any inability to meet applicable requirements within the required timeframes may subject us to sanctions or other restrictions by governments and/or regulators that could adversely impact our broader business objectives.
Global regulatory and legislative actions and reforms have made compliance in the regulatory environment in which we operate more costly and future actions and reforms could adversely impact our financial condition and results of operations.
As in the U.S., regulatory and legislative actions outside the U.S. have been augmented substantially and made more complex by measures such as the EU’s Alternative Investment Fund Managers Directive and MiFID II. Further, ongoing changes in the EU’s regulatory framework applicable to our business, including changes related toBrexit and any other changes in the composition of the EU’s member states, may add further complexity to our global risks and operations. Moreover, the adoption of new laws, regulations or standards and changes in the interpretation or enforcement of existing laws, regulations or standards have directly affected, and will continue to affect, our business. With new laws and changes in interpretation of existing requirements, the associated time we must dedicate to and related costs we must incur in meeting the regulatory complexities of our business have increased. We may be required to continue to invest significant additional management time and resources to address new and changing regulations pursuant to MiFID II and other laws. For example, MiFID II requires the unbundling of research and execution charges for trading. Outlays associated with meeting regulatory complexities have also increased as we expand our business into new jurisdictions.
The EU’s GDPR strengthened and unified data protection rules for individuals within the EU and addresses export of personal data outside the EU. The failure to comply properly with GDPR rules on a timely basis and to maintain ongoing compliance with such rules may subject us to enforcement proceedings and significant fines and costs. For example, a failure to comply with GDPR could result in fines up to 20 million Euros or 4% of our annual global revenues, whichever is higher.
Compliance activities to address these and other new legal requirements have required, and will continue to require, us to expend additional time and resources, and, consequently, we are incurring increased costs of doing business, which potentially negatively impacts our profitability and future financial results. Finally, any further regulatory and legislative actions and reforms affecting the investment management industry, including compliance initiatives, may negatively impact revenues by increasing our costs of accessing or operating in financial markets or by making certain investment offerings less favorable to our clients.
Failure to comply with the laws, rules or regulations in any of the jurisdictions in which we operate could result in substantial harm to our reputation and results of operations.
As with all investment management companies, our activities are highly regulated in almost all countries in which we conduct business. Failure to comply with the applicable laws, rules, regulations, codes, directives, notices or guidelines in any of our jurisdictions could result in regulatory enforcement, civil liability, criminal liability and/or the imposition of a range of sanctions or orders against us, including, as applicable, monetary damages, injunctions, disgorgements, fines, penalties, cease and desist orders, censures, reprimands, and the revocation, cancellation, suspension or restriction of licenses, registration status or approvals held by us or our business in a jurisdiction or market, any of which could adversely affect our reputation and operations. Moreover, any potential accounting or reporting errors, whether financial or otherwise, if material, could damage our reputation and adversely affect our business. While management has focused attention and resources on our compliance policies, procedures and practices, the regulatory environments of the jurisdictions where we conduct our business, or where our products are organized or sold, are complex, uncertain and subject to change. Local regulatory environments may vary widely and place additional demands on our sales, investment, legal and compliance personnel. In recent years, the regulatory environments in which we operate have seen significant increased and evolving regulations, which have imposed and may continue to impose additional compliance and operational requirements and costs on us in the applicable jurisdictions. Regulators could also change their policies or laws in a manner that might restrict or otherwise impede our ability to offer our services and products in their respective markets, or we may be unable to keep up with, or adapt to, the ever changing, complex regulatory requirements in such jurisdictions or markets, which could further negatively impact our business.
Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our financial condition, results of operations and liquidity.
We are subject to complex tax regimes, changing tax laws, income taxes, non-income-based taxes, and ongoing tax audits, in the various jurisdictions in which we operate. Tax authorities may disagree with certain positions we have taken
and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits and the actual outcomes could have a material impact on our financial condition. Changes in tax laws or rulings, including corporate tax rate increases, capital gains rate increases for fund investors and other tax rate increases impacting our clients and their willingness to invest in our products, may at times materially impact our financial condition.
Regulatory and governmental examinations and/or investigations, litigation and the legal risks associated with our business, could adversely impact our AUM, increase costs and negatively impact our profitability and/or our future financial results.
We operate in a highly regulated industry and routinely receive and respond to regulatory and governmental requests for documents or other information, subpoenas, examinations and, in some instances, investigations in connection with our business activities. Further, regulatory or governmental examinations or investigations that have been inactive could become active. In addition, we are named as a party in litigation in the ordinary course of business. Even if claims made against us are without merit, they can result in reputational harm and responding to such matters typically is an expensive process. Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time. Regulatory enforcement and civil litigation matters can result in the imposition of a range of sanctions or orders against us, including, as applicable, monetary damages, injunctions, disgorgements, fines, penalties, cease and desist orders, censures, reprimands, and the revocation, cancellations, suspension or restriction of licenses, registration status or approvals held by us or our business. In addition, we may be obligated, and under our certificate of incorporation, bylaws and standard form of director indemnification agreement are obligated under certain conditions, or may choose, to indemnify directors, officers or personnel against liabilities and expenses they may incur in connection with such matters to the extent permitted under applicable law. Eventual financial exposures from and expenses incurred relating to any examinations, investigations, enforcement actions, litigation, and/or settlements could adversely impact our AUM, increase costs, and negatively impact our reputation, profitability, and revenue any of which could have a material negative impact on our financial results. For a discussion of certain legal proceedings and regulatory matters in which we are involved, see the “Legal Proceedings” section in Note 16 - Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report.
Our contractual obligations may subject us to indemnification costs and liability to third parties.
In the ordinary course of business, we enter into contracts with third parties, including, without limitation, clients, vendors, and other service providers, that contain a variety of representations and warranties and that provide for indemnifications by us in certain circumstances. Pursuant to such contractual arrangements, we may be subject to indemnification costs and liability to third parties if, for example, we breach any material obligations under the agreements or agreed standards of care, or in the event such third parties have certain legal claims asserted against them. The terms of these indemnities vary from contract to contract, and future indemnification claims against us could negatively impact our financial condition.
Failure to protect our intellectual property may negatively impact our business.
Although we take steps to safeguard and protect our intellectual property, including but not limited to our trademarks, patents, copyrights and trade secrets, there can be no assurance that we will be able effectively to protect our rights. If our intellectual property rights were violated, we could be subject to economic and reputational harm that could negatively impact our business and competitiveness in the marketplace. Conversely, while we take efforts to avoid infringement of the intellectual property of third parties, if we are deemed to infringe on a third party’s intellectual property rights it could expose us to litigation risks, license fees, liability and reputational harm.
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Item 1B. | Unresolved Staff Comments. |
Item 1B.Unresolved Staff Comments.
None.
Item 2.Properties.
We conduct our worldwide operations using a combination of leasedowned and ownedleased facilities. While we believe we have sufficientour facilities are suitable and adequate to conduct our business at present, we will continue to acquire, lease acquire and dispose of facilities throughout the world as necessary.
We own our San Mateo, California corporate headquarters and various other office buildings in the U.S. and internationally. We lease excess owned space to third parties under leases with terms through 2030. Our owned properties consist of the following:
| | | | | | | | | | | | | | |
| Location | | Owned Square
Footage | | Owned Square
Footage Leased
to Third Parties |
| San Mateo, California | | 743,793 | | | 357,383 | |
| St. Petersburg, Florida | | 560,948 | | | 320,477 | |
| Rancho Cordova, California | | 445,023 | | | 26,962 | |
| Hyderabad, India | | 379,052 | | | — | |
| Poznan, Poland | | 284,436 | | | — | |
| Ft. Lauderdale, Florida | | 102,246 | | | 20,264 | |
| Edinburgh, Scotland | | 87,016 | | | 26,210 | |
| Other | | 78,391 | | | 9,724 | |
| Total | | 2,680,905 | | | 761,020 | |
We lease office space in various15 states in the U.S., including California, Connecticut, Delaware, Florida, Massachusetts, New Jersey, New York, Utah, Virginia and Washington, D.C., and in various non-U.S. locations,internationally, including Australia, Austria, Belgium, Brazil, Canada, the People’s Republic of China (including Hong Kong), Colombia, France, Germany, Hungary, India, Isle of Man, Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands, Poland, Romania, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, United Arab Emirates and the U.K. (including England and Scotland) and Vietnam. As of September 30, 2018,2021, we leased and occupied approximately 1,147,0002,029,000 square feet of space. We have also leasedoffice space worldwide, and subsequently subleased to third parties approximately 35,000460,000 square feet of excess leased space.
In addition, we own buildings in San Mateo, Rancho Cordova and Stockton, California; St. Petersburg and Ft. Lauderdale, Florida; Hyderabad, India; and Nassau, The Bahamas, as well as space in office buildings in Argentina, India and Singapore. The buildings we own consist of approximately 2,118,000 square feet of space. We have leased to third parties approximately 545,000 square feet of excess owned space.
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Item 3. | Legal Proceedings. |
TheItem 3.Legal Proceedings.
Incorporated herein by reference is information regarding certain legal proceedings and regulatory matters in which we are involved as set forth in response to this Item 3 of Regulation S-K under “Legal Proceedings” is incorporated by reference from the “Legal Proceedings” sectioncontained in Note 1216 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K, which is incorporated herein by reference.Annual Report.
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Item 4. | Mine Safety Disclosures. |
Item 4.Mine Safety Disclosures.
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, theThe following description of our executive officers is included as an unnumbered item in this Part I of this reportAnnual Report in lieu of being included in our definitive proxy statement for our annual meeting of stockholders. Set forth below are the name, age, present title, and certain other information for each of our executive officers as of November 9, 2018.the filing date of this Annual Report. Each executive officer is appointed by Franklin’s Boardour board of Directorsdirectors and holds his/his or her office until the earlier of his/his or her death, resignation, retirement, disqualification or removal.
Gregory E. Johnson
Age 57
Chairman of the Board of Franklin since June 2013 and Chief Executive Officer of Franklin since January 2004; formerly, President of Franklin from December 1999 to September 2015; officer and/or director of certain subsidiaries of Franklin; director or trustee of 44 registered investment companies managed or advised by subsidiaries of Franklin.
Jennifer M. Johnson
Age 5457
President of Franklin since December 2016, and Chief Executive Officer and director of Franklin since February 2020; formerly, Chief Operating Officer sinceof Franklin from February 2017; formerly,2017 to February 2020, Co-President of Franklin from October 2015 to December 2016, Executive Vice President and Chief Operating Officer of Franklin from March 2010 to September 2015, Executive Vice President–Operations and Technology of Franklin from December 2005 to March 2010, and Senior Vice President and Chief Information Officer of Franklin from May 2003 to December 2005; officer and/or director of certain subsidiaries of Franklin; officer, director and/or trustee of certain funds registered as investment companies managed or advised by subsidiaries of Franklin.
Gregory E. Johnson
Age 60
Executive Chairman of Franklin since February 2020, Chairman of the Board of Franklin since June 2013 and director of Franklin since January 2007; Chairman of the San Francisco Giants, a professional baseball organization, since November 2019; formerly, Chief Executive Officer of Franklin from July 2005 to February 2020, Co-Chief Executive Officer of Franklin from January 2004 to July 2005, and President of Franklin from December 1999 to September 2015; officer and/or director of certain subsidiaries of Franklin; officer, director and/or trustee of certain funds registered as investment companies managed or advised by subsidiaries of Franklin.
Rupert H. Johnson, Jr.
Age 7881
Vice Chairman of Franklin since December 1999 and director of Franklin since 1969;1971; officer and/or director of certain subsidiaries of Franklin; officer, director and/or trustee of 40certain funds registered as investment companies managed or advised by subsidiaries of Franklin.
Kenneth A. LewisMatthew Nicholls
Age 5749
Executive Vice President of Franklin since October 2007 and Chief Financial Officer of Franklin since October 2006; formerly, Senior Vice President and Treasurer of Franklin from October 2006 to October 2007, Vice President–Enterprise Risk Management of Franklin from April 2006 to October 2006 and Vice President and Treasurer of Franklin from June 2002 to April 2006;May 2019; officer and/or director of certain subsidiaries of Franklin.
Financial Institutions, Corporate Banking, and Global Head of Asset Management, Corporate and Investment Banking, from 2017 to May 2019, as Managing Director, Co-Head, Financial Institutions Corporate and Investment Banking, North America, and Global Head of Asset Management, Corporate and Investment Banking, from 2014 to 2017, as Managing Director, Co-Head, North America, Financial Institutions Corporate and Investment Banking from 2011 to 2014, as Managing Director and Co-Head, North America, Financial Institutions Corporate Banking from 2007 to 2011, and as Managing Director and Co-Head of Asset Management Banking from 2006 to 2007.
Jed A. Plafker
Age 4750
SeniorExecutive Vice President of Franklin since April 2019, formerly, Senior Vice President from June 2018;2018 to April 2019; officer and/or director of various global advisory services relatedcertain subsidiaries of Franklin, for more than the past five years, including as Manager of Brandywine Global Investment Management, LLC and Director of Clarion Partners Holdings LLC, ClearBridge Investments, LLC and Western Asset Management Company, LLC since August 2020; as well as Executive Vice President of subsidiary Franklin Templeton Institutional, LLC since April 2009, President and director of subsidiary Templeton Institutional, Inc. since September 2009, and President since February 2017 and director since December 2016 of subsidiary Templeton Worldwide, Inc.
Alok Sethi
Age 60
Executive Vice President, Technology and Operations, of Franklin since October 18, 2021; officer and/or director of various investment adviser, operations, and technology related subsidiaries of Franklin for more than the past five years, including as Senior Vice President of Franklin Advisers, Inc., Franklin Templeton Institutional, LLC and Templeton Investment Counsel, LLC since July 2014, Vice President of FASA, LLC since June 2014, and Vice President of Franklin Templeton Companies, LLC since June 2010.
Gwen L. Shaneyfelt
Age 59
Chief Accounting Officer of Franklin since April 2019; officer and/or director of certain subsidiaries of Franklin, including as Vice President and Chief Financial Officer of Legg Mason, Inc., Director of ClearBridge Investments, LLC and Manager of Royce & Associates GP, LLC since August 2020; as well as Director of Franklin Templeton Fund Management Limited since May 2019, Manager of Franklin Templeton International Services S.à r.l. since November 2013, and Senior Vice President of Franklin Templeton Companies, LLC since March 2011.
Adam B. Spector
Age 53
Executive Vice President, Global Advisory Services, of Franklin since October 2020, and Head of Global Distribution, responsible for global retail and institutional distribution, including marketing and product strategy, and Managing Partner of Brandywine Global Investment Management, LLC since November 2014, responsible for the overall management of Brandywine including infrastructure, legal and compliance, business strategy, and sales and client service; formerly, Managing Director of Brandywine from 2012 to 2014, Head of Marketing, Sales and Client Service of Brandywine from 2003 to 2014, and Senior Vice President of Client Service of Brandywine from 1997 to 2003; officer and/or director of certain other subsidiaries of Franklin.
Craig S. Tyle
Age 5861
Executive Vice President and General Counsel of Franklin since August 2005; formerly, a partner at Shearman & Sterling LLP (a law firm) from March 2004 to July 2005 and General Counsel for the Investment Company Institute (a trade group for the U.S. fund industry) from September 1997 through March 2004; officer and/or director of certain subsidiaries of Franklin; officer of certain funds registered as investment companies managed or advised by subsidiaries of Franklin.
Alok Sethi
Age 57
Officer and/or director of various operations and technology related subsidiaries of Franklin for more than the past five years, including as Senior Vice President of subsidiaries Franklin Advisers, Inc., Franklin Templeton Institutional, LLC and Templeton Investment Counsel, LLC since July 2014, Vice President of subsidiary FASA, LLC since June 2014, and Vice President of subsidiary Franklin Templeton Companies, LLC since June 2010.
Family Relationships
Jennifer M. Johnson and Gregory E. Johnson are siblings, and their uncle is the nephew of Rupert H. Johnson, Jr. Each serves as both a director and the brotheran executive officer of Charles E. Johnson (a directorFranklin.
PART II
| |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock is traded on the NYSE under the ticker symbol “BEN.” At October 31, 2018,2021, there were 2,9142,645 stockholders of record of our common stock.
The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”
The following table provides information with respect to the shares of our common stock that we repurchased during the three months ended September 30, 2018.2021.
|
| | | | | | | | | | | | | |
| Month | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| July 2018 | | 3,544,755 |
| | $ | 32.59 |
| | 3,544,755 |
| | 78,990,218 |
|
| August 2018 | | 3,935,173 |
| | $ | 32.44 |
| | 3,935,173 |
| | 75,055,045 |
|
| September 2018 | | 3,320,168 |
| | $ | 31.53 |
| | 3,320,168 |
| | 71,734,877 |
|
| Total | | 10,800,096 |
| | | | 10,800,096 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Month | | Total Number of
Shares Purchased | | Average Price
Paid per Share | | Total Number of
Shares Purchased
As Part of Publicly
Announced Plans
or Programs | | Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs |
| July 2021 | | 181,621 | | | $ | 29.55 | | | 181,621 | | | 32,899,416 | |
| August 2021 | | 1,431,110 | | | 32.25 | | | 1,431,110 | | | 31,468,306 | |
| September 2021 | | 600,434 | | | 31.35 | | | 600,434 | | | 30,867,872 | |
| Total | | 2,213,165 | | | | | 2,213,165 | | | |
Under our stock repurchase program, which is not subject to an expiration date, we can repurchase shares of our common stock from time to time in the open market and in private transactions in accordance with applicable laws and regulations, including without limitation applicable federal securities laws. In order to pay taxes due in connection with the vesting of
employee and executive officer stock and stock unit awards, we may repurchase shares under our program using a net stock issuance method. In April 2018, we announced that our Board of Directors authorized the repurchase of up to 80.0 million additional shares of our common stock under the stock repurchase program.
| |
Item 6. | Selected Financial Data. |
FINANCIAL HIGHLIGHTS
Item 6. [Reserved]
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
| | | | | | | | | | | | | | | | | | | | |
as of and for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Summary of Operations (in millions) | | | | | | | | | | |
| Operating revenues | | $ | 6,319.1 |
| | $ | 6,392.2 |
| | $ | 6,618.0 |
| | $ | 7,948.7 |
| | $ | 8,491.4 |
|
| Operating income | | 2,118.6 |
| | 2,264.3 |
| | 2,365.7 |
| | 3,027.6 |
| | 3,221.2 |
|
| Operating margin | | 33.5 | % | | 35.4 | % | | 35.7 | % | | 38.1 | % | | 37.9 | % |
| Net income attributable to Franklin Resources, Inc. | | 764.4 |
| 1 | 1,696.7 |
| | 1,726.7 |
| | 2,035.3 |
| | 2,384.3 |
|
Financial Data (in millions) | | | | | | | | | | |
| Total assets | | $ | 14,383.5 |
| | $ | 17,534.0 |
| | $ | 16,098.8 |
| | $ | 16,335.7 |
| | $ | 16,357.1 |
|
| Debt | | 695.9 |
| | 1,044.2 |
| | 1,401.2 |
| | 1,348.0 |
| | 1,198.2 |
|
| Debt of consolidated investment products | | 32.6 |
| | 53.4 |
| | 682.2 |
| | 807.3 |
| | 950.8 |
|
| Franklin Resources, Inc. stockholders’ equity | | 9,899.2 |
| | 12,620.0 |
| | 11,935.8 |
| | 11,841.0 |
| | 11,584.1 |
|
| Operating cash flows | | 2,229.7 |
| | 1,135.4 |
| | 1,727.7 |
| | 2,252.0 |
| | 2,138.0 |
|
| Investing cash flows | | (290.4 | ) | | 52.0 |
| | 192.2 |
| | 248.9 |
| | 390.6 |
|
| Financing cash flows | | (3,761.7 | ) | | (956.0 | ) | | (1,800.7 | ) | | (1,612.2 | ) | | (1,195.3 | ) |
Assets Under Management (in billions) | | | | | | | | | | |
| Ending | | $ | 717.1 |
| | $ | 753.2 |
| | $ | 733.3 |
| | $ | 770.9 |
| | $ | 898.0 |
|
Average 2 | | 740.5 |
| | 736.9 |
| | 749.3 |
| | 869.5 |
| | 887.9 |
|
| Per Common Share | | | | | | | | | | |
| Earnings | | | | | | | | | | |
| Basic | | $ | 1.39 |
| | $ | 3.01 |
| | $ | 2.94 |
| | $ | 3.29 |
| | $ | 3.79 |
|
| Diluted | | 1.39 |
| | 3.01 |
| | 2.94 |
| | 3.29 |
| | 3.79 |
|
| Cash dividends declared | | 3.92 |
| | 0.80 |
| | 0.72 |
| | 1.10 |
| | 0.48 |
|
| Book value | | 19.07 |
| | 22.74 |
| | 20.93 |
| | 19.62 |
| | 18.60 |
|
| Employee Headcount | | 9,691 |
| | 9,386 |
| | 9,059 |
| | 9,489 |
| | 9,266 |
|
______________
| |
1
| Includes an estimated income tax charge of $968.8 million resulting from enactment of the Tax Cuts and Jobs Act of 2017. |
| |
2
| Represents simple monthly average AUM. |
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
FORWARD-LOOKING STATEMENTS
The following discussion and analysis of the results of operations and financial condition of Franklin Resources, Inc. (“Franklin”) and its subsidiaries (collectively, the “Company”) should be read in conjunction with the “Forward-looking Statements” disclosure set forth in Part I and the “Risk Factors” set forth in Item 1A of Part I of this Annual Report on Form 10-K10‑K (this “Annual Report”) and in any more recent filings with the U.S. Securities and Exchange Commission (the “SEC”), each of which describe theseour risks, uncertainties and other important factors in more detail.
OVERVIEW
Franklin is a holding company with subsidiaries operating under our Franklin Templeton® and/or subsidiary brand names. We are a global investment management organization and derive ourthat derives operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwideworldwide. We deliver our investment capabilities through oura variety of investment products, which include our sponsored funds, as well as institutional and high net-worthhigh-net-worth separate accounts.accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. In addition to investment management, our services include fund administration, sales and distribution, marketing,and shareholder servicing,servicing. We may perform services directly or through third parties. We offer our services and other services. Our products and investment management and related services are distributed or marketed to investors globally under our various distinct brand names, including:including, but not limited to, Franklin®, Templeton®, Legg Mason®, Benefit Street Partners®, Brandywine Global Investment Management®, Clarion Partners®, ClearBridge Investments®, Fiduciary Trust International™, Franklin Bissett®, Franklin Mutual Series®, Franklin Bissett®, Fiduciary Trust™, Darby®, Balanced Equity Management®, K2®, LibertyShares®, Martin Currie®, Royce® Investment Partners and Edinburgh Partners™Western Asset Management Company®. We offer a broad product mix of equity, multi-asset/balanced, fixed income, equity, multi-asset, alternative and cash management fundsasset classes and accounts, including alternative investment products, whichsolutions that meet a wide variety of specific investment goals and needs offor individual and institutional investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to investors under the brand names of those other companies or on a co-branded basis.
The level of our revenues depends largely on the level and relative mix of assets under management (“AUM”). As noted in the “Risk Factors” section set forth above in Item 1A of Part I of this Annual Report, on Form 10-K, the amount and mix of our AUM are subject to significant fluctuations andthat can negatively impact our revenues and income. The level of our revenues also depends on mutual fund sales, the number of shareholder transactions and accounts, and the fees charged for our services, which are based on contracts with our funds or our clients.and customers, fund sales, and the number of shareholder transactions and accounts. These arrangements could change in the future.
As further noted in the “Risk Factors” section, the outbreak and spread of contagious diseases such as the coronavirus disease 2019 (“COVID-19”), a highly transmissible and pathogenic disease, has adversely affected, and may continue to adversely affect, our business, financial condition and results of operations. Ongoing global health concerns, and uncertainty regarding the impact of COVID-19, could lead to further and/or increased volatility in global capital and credit markets, adversely affect our key executives and other personnel, clients, investors, providers, suppliers, lessees, and other third parties, and negatively impact our AUM, revenues, income, business and operations. As of the time of this filing, as the COVID-19 pandemic continues to evolve, it is not possible to predict the full extent to which the pandemic may adversely impact our business, liquidity, capital resources, financial results and operations, which impacts will depend on numerous developing factors that remain uncertain and subject to change.
During the fiscal year ended September 30, 20182021 (“fiscal year 2018”2021”), the global equity markets experienced volatility but providedcontinued to provide strong positive returns, reflecting among other things, generally positivean accelerated rollout of COVID-19 vaccines in most developed economies, government stimulus and other support in many countries, and a decline in U.S. economic data tempered by concerns about rising interest rates, global trade tensions and political uncertainty, as the10-year treasury yields. The S&P 500 Index and MSCI World Index increased 17.9%30.0% and 11.8%.29.4% for the fiscal year. The global bond markets were negatively impacted by rising interest rates anddeclined as the Bloomberg Barclays Global Aggregate Index decreased 1.3%0.9% for the fiscal year.
Our total AUM was $717.1$1,530.1 billion at September 30, 2018, 5% lower2021, which was 8% higher than at September 30, 2017 as $38.02020 driven by $148.0 billion of net outflows and $7.9 billion offrom net market change, distributions and other, wereand $3.5 billion from an acquisition, partially offset by $9.8$25.2 billion from an acquisition.of long-term net outflows and $15.1 billion of cash management net outflows. Simple monthly average AUM (“average AUM”) increased slightly81% during fiscal year 2018.2021, reflecting a full year of AUM from the acquisition of Legg Mason.
The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change. We are subject to various laws, rules and regulations globally that impose restrictions, limitations, and registration, reporting and disclosure requirements on our business, and add complexity to our global compliance operations.
Uncertainties regarding the global economy remain for the foreseeable future. As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our products and on providing high quality service to our clients. We continuously perform reviews of our business model. While we remain focused on expense management, we will also seek to attract, retain and develop employeespersonnel and invest strategically in systems and technology that will provide a secure and stable environment. We will continue to seek to protect and further our brand recognition while developing and maintaining broker-dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed in the “Risk Factors” section in Part I of this Annual Report.
section.
RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | | |
| Operating revenues | | $ | 6,319.1 |
| | $ | 6,392.2 |
| | $ | 6,618.0 |
| | (1 | %) | | (3 | %) |
| Operating income | | 2,118.6 |
| | 2,264.3 |
| | 2,365.7 |
| | (6 | %) | | (4 | %) |
| Net income attributable to Franklin Resources, Inc. | | 764.4 |
| | 1,696.7 |
| | 1,726.7 |
| | (55 | %) | | (2 | %) |
| Diluted earnings per share | | $ | 1.39 |
| | $ | 3.01 |
| | $ | 2.94 |
| | (54 | %) | | 2 | % |
Operating margin 1 | | 33.5 | % | | 35.4 | % | | 35.7 | % | | | �� | |
___________________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | | | | | | | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 | | |
| Operating revenues | | $ | 8,425.5 | | | $ | 5,566.5 | | | $ | 5,669.4 | | | 51 | % | | (2 | %) |
| Operating income | | 1,875.0 | | | 1,048.9 | | | 1,466.9 | | | 79 | % | | (28 | %) |
Operating margin1 | | 22.3 | % | | 18.8 | % | | 25.9 | % | | | | |
| | | | | | | | | | |
| Net income attributable to Franklin Resources, Inc. | | $ | 1,831.2 | | | $ | 798.9 | | | $ | 1,195.7 | | | 129 | % | | (33 | %) |
| Diluted earnings per share | | $ | 3.57 | | | $ | 1.59 | | | $ | 2.35 | | | 125 | % | | (32 | %) |
| | | | | | | | | | |
As adjusted (non-GAAP):2 | | | | | | | | | | |
| Adjusted operating income | | $ | 2,379.3 | | | $ | 1,491.1 | | | $ | 1,654.2 | | | 60 | % | | (10 | %) |
| Adjusted operating margin | | 37.7 | % | | 38.5 | % | | 42.6 | % | | | | |
| | | | | | | | | | |
| Adjusted net income | | $ | 1,915.2 | | | $ | 1,311.0 | | | $ | 1,331.3 | | | 46 | % | | (2 | %) |
| Adjusted diluted earnings per share | | $ | 3.74 | | | $ | 2.61 | | | $ | 2.62 | | | 43 | % | | 0 | % |
__________________1Defined as operating income divided by total operating revenues.
2“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are based on methodologies other than generally accepted accounting principles. See “Supplemental Non-GAAP Financial Measures” for definitions and reconciliations of these measures.
Operating income decreased $145.7increased $826.1 million in fiscal year 2018 due to a 1% decrease in operating revenues and a 2% increase in operating expenses. Net income attributable to Franklin Resources, Inc. decreased $932.3 million primarily due to an estimated income tax charge of $968.8 million resulting from enactment of the Tax Cuts and Jobs Act of 2017.
Operating income decreased $101.4 million in the fiscal year ended September 30, 2017 (“fiscal year 2017”)2021 as a 3% decrease51% increase in operating revenues was partially offset by a 3% decrease45% increase in operating expenses. The increase in operating revenues and operating expenses was primarily due to the acquisition of Legg Mason. Net income attributable to Franklin Resources, Inc. decreased $30.0increased $1,032.3 million asdue to the decreaseincrease in operating income was significantly offset by a $152.3 million increase in investment and higher other income, net, less the portion attributable to noncontrolling interests.interests, partially offset by higher taxes on income.
The Company acquired Legg Mason effective July 31, 2020, and the results of operations for the fiscal year ended September 30, 2020 (“fiscal year 2020”) include two months of Legg Mason’s results. Operating income decreased $418.0 million in fiscal year 2020 due to a 2% decrease in operating revenues and a 7% increase in operating expenses which reflected higher levels of compensation and benefits expense, including acquisition-related retention costs, other acquisition-related expenses, and amortization and impairments of intangible assets and goodwill. Net income attributable to Franklin Resources, Inc. decreased $396.8 million primarily due to the decrease in operating income, as the impact of declines in market valuations amid global concerns about the COVID-19 pandemic resulted in net investment and other losses of $38.4 million, as compared to net gains of $141.4 million in the prior year, less the portion attributable to noncontrolling interests, which was largely offset by lower taxes on income.
Diluted earnings per share increased in fiscal year 2021 and decreased in fiscal year 20182020, consistent with the changes in net income attributable to Franklin Resources, Inc.
Adjusted operating income increased $888.2 millionin fiscal year 2021 primarily due to a 66% increase in investment management fees, partially offset by a 69% increase in compensation and benefits expense. The increase in investment management fees and compensation and benefits expenses was primarily due to the acquisition of Legg Mason. Adjusted net income increased $604.2 million primarily due to the increase in adjusted operating income, partially offset by lower other income, net, less the portion attributable to noncontrolling interests.
Adjusted operating income decreased $163.1 million in fiscal year 2020 primarily due to a 10% increase in compensation and benefits expense, excluding non-GAAP adjustments. Adjusted net income decreased $20.3 million primarily due to the decrease in adjusted operating income substantially offset by lower taxes on income, excluding the net income tax expense of non-GAAP adjustments.
Adjusted diluted earnings per share increased in fiscal year 2017 despite2021 and decreased in fiscal year 2020, consistent with the decreasechanges in adjusted net income. The amounts were impacted by 4% decreases in diluted average common shares outstanding in both periods primarily resulting from repurchases of shares of our common stock.
ASSETS UNDER MANAGEMENT
AUM by investment objectiveasset class was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | | | | | | | 2021 vs. 2020 | | 2020 vs. 2019 |
| as of September 30, | | 2021 | | 2020 | | 2019 | | |
| Fixed Income | | $ | 650.3 | | | $ | 656.9 | | | $ | 250.6 | | | (1 | %) | | 162 | % |
| Equity | | 523.6 | | | 438.1 | | | 263.9 | | | 20 | % | | 66 | % |
| Multi-Asset | | 152.4 | | | 129.4 | | | 123.6 | | | 18 | % | | 5 | % |
| Alternative | | 145.2 | | | 122.1 | | | 45.0 | | | 19 | % | | 171 | % |
| Cash Management | | 58.6 | | | 72.4 | | | 9.5 | | | (19 | %) | | 662 | % |
| Total | | $ | 1,530.1 | | | $ | 1,418.9 | | | $ | 692.6 | | | 8 | % | | 105 | % |
| Average for the Year | | $ | 1,504.1 | | | $ | 832.9 | | | $ | 697.0 | | | 81 | % | | 19 | % |
|
| | | | | | | | | | | | | | | | | | |
| (in billions) | | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| as of September 30, | | 2018 | | 2017 | | 2016 | | |
| Equity | | | | | | | | | | |
| Global/international | | $ | 194.4 |
| | $ | 209.8 |
| | $ | 200.4 |
| | (7 | %) | | 5 | % |
| United States | | 115.2 |
| | 107.2 |
| | 103.3 |
| | 7 | % | | 4 | % |
| Total equity | | 309.6 |
| | 317.0 |
| | 303.7 |
| | (2 | %) | | 4 | % |
| Multi-Asset/Balanced | | 138.9 |
| | 143.3 |
| | 137.4 |
| | (3 | %) | | 4 | % |
| Fixed Income | | | | | | | |
| |
|
| Tax-free | | 63.9 |
| | 71.0 |
| | 76.5 |
| | (10 | %) | | (7 | %) |
| Taxable | | | | | | | |
| |
|
| Global/international | | 150.6 |
| | 165.0 |
| | 156.2 |
| | (9 | %) | | 6 | % |
| United States | | 44.8 |
| | 50.6 |
| | 53.4 |
| | (11 | %) | | (5 | %) |
| Total fixed income | | 259.3 |
| | 286.6 |
| | 286.1 |
| | (10 | %) | | 0 | % |
| Cash Management | | 9.3 |
| | 6.3 |
| | 6.1 |
| | 48 | % | | 3 | % |
| Total | | $ | 717.1 |
| | $ | 753.2 |
| | $ | 733.3 |
| | (5 | %) | | 3 | % |
| Average for the Year | | $ | 740.5 |
| | $ | 736.9 |
| | $ | 749.3 |
| | 0 | % | | (2 | %) |
AUM at September 30, 2018 decreased 5% from September 30, 2017 as $38.0 billionIn the first quarter of net outflows and $7.9 billion of net market change, distributions and other were partially offset by $9.8 billion from an acquisition. Average AUM increased slightly duringthe fiscal year 2018.2021, we revised our presentation of AUM to reflect changes in asset class of certain legacy Legg Mason AUM as part of our post-acquisition onboarding process.
Changes in average AUM at September 30, 2017 increased 3% from September 30, 2016 primarily due to $58.1 billion of net market change, distributions and other, partially offset by $38.6 billion of net outflows. Average AUM decreased 2% during fiscal year 2017.
Average AUM isare generally more indicative of trends in revenue for providing investment management services than the year-over-year change in ending AUM.
Average AUM and the mix of average AUM by investment objectiveasset class are shown below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | Average AUM | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 | | |
| Fixed Income | | $ | 657.5 | | | $ | 330.5 | | | $ | 256.1 | | | 99 | % | | 29 | % |
| Equity | | 502.9 | | | 290.8 | | | 275.5 | | | 73 | % | | 6 | % |
| Multi-Asset | | 146.4 | | | 122.7 | | | 122.2 | | | 19 | % | | 0 | % |
| Alternative | | 132.6 | | | 63.7 | | | 33.7 | | | 108 | % | | 89 | % |
| Cash Management | | 64.7 | | | 25.2 | | | 9.5 | | | 157 | % | | 165 | % |
| Total | | $ | 1,504.1 | | | $ | 832.9 | | | $ | 697.0 | | | 81 | % | | 19 | % |
|
| | | | | | | | | | | | | | | | | | |
| (in billions) | | Average AUM | | 2018 vs. 2017 | | 2017 vs. 2016 |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | | |
| Equity | | | | | | | |
|
| |
|
|
| Global/international | | $ | 205.8 |
| | $ | 203.7 |
| | $ | 205.1 |
| | 1 | % | | (1 | %) |
| United States | | 110.2 |
| | 104.4 |
| | 101.1 |
| | 6 | % | | 3 | % |
| Total equity | | 316.0 |
| | 308.1 |
| | 306.2 |
| | 3 | % | | 1 | % |
| Multi-Asset/Balanced | | 140.6 |
| | 140.2 |
| | 135.5 |
| | 0 | % | | 3 | % |
| Fixed Income | | | | | | | |
|
| |
|
|
| Tax-free | | 67.3 |
| | 72.3 |
| | 74.0 |
| | (7 | %) | | (2 | %) |
| Taxable | | | | | | | |
|
| |
|
|
| Global/international | | 160.6 |
| | 157.8 |
| | 172.6 |
| | 2 | % | | (9 | %) |
| United States | | 48.0 |
| | 52.3 |
| | 54.5 |
| | (8 | %) | | (4 | %) |
| Total fixed income | | 275.9 |
| | 282.4 |
| | 301.1 |
| | (2 | %) | | (6 | %) |
| Cash Management | | 8.0 |
| | 6.2 |
| | 6.5 |
| | 29 | % | | (5 | %) |
| Total | | $ | 740.5 |
| | $ | 736.9 |
| | $ | 749.3 |
| | 0 | % | | (2 | %) |
| | | | | | | | | | | | | | | | | | | | |
| | Mix of Average AUM |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Fixed Income | | 44 | % | | 39 | % | | 37 | % |
| Equity | | 33 | % | | 35 | % | | 40 | % |
| Multi-Asset | | 10 | % | | 15 | % | | 17 | % |
| Alternative | | 9 | % | | 8 | % | | 5 | % |
| Cash Management | | 4 | % | | 3 | % | | 1 | % |
| Total | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | |
| | | Mix of Average AUM |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Equity | | | | | | |
| Global/international | | 28 | % | | 28 | % | | 27 | % |
| United States | | 15 | % | | 14 | % | | 14 | % |
| Total equity | | 43 | % | | 42 | % | | 41 | % |
| Multi-Asset/Balanced | | 19 | % | | 19 | % | | 18 | % |
| Fixed Income | | | | | | |
| Tax-free | | 9 | % | | 10 | % | | 10 | % |
| Taxable | | | | | | |
| Global/international | | 22 | % | | 21 | % | | 23 | % |
| United States | | 6 | % | | 7 | % | | 7 | % |
| Total fixed income | | 37 | % | | 38 | % | | 40 | % |
| Cash Management | | 1 | % | | 1 | % | | 1 | % |
| Total | | 100 | % | | 100 | % | | 100 | % |
Components of the change in AUM are shown below. Net market change, distributions and other includes appreciation (depreciation), distributions to investors that represent return on investments and return of capital, and foreign exchange revaluation and net cash management.revaluation.
| | | (in billions) | | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 | (in billions) | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | | for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 | |
| Beginning AUM | | $ | 753.2 |
| | $ | 733.3 |
| | $ | 770.9 |
| | 3 | % | | (5 | %) | Beginning AUM | | $ | 1,418.9 | | | $ | 692.6 | | | $ | 717.1 | | | 105 | % | | (3 | %) |
| Long-term sales | | 105.0 |
| | 112.3 |
| | 101.7 |
| | (7 | %) | | 10 | % | |
| Long-term redemptions | | (162.1 | ) | | (169.7 | ) | | (186.9 | ) | | (4 | %) | | (9 | %) | |
| Long-term net exchanges | | (0.4 | ) | | (0.1 | ) | | (0.5 | ) | | 300 | % | | (80 | %) | |
| Long-term reinvested distributions | | 19.5 |
| | 18.9 |
| | 23.3 |
| | 3 | % | | (19 | %) | |
| Net flows | | (38.0 | ) | | (38.6 | ) | | (62.4 | ) | | (2 | %) | | (38 | %) | |
| Long-term inflows | | Long-term inflows | | 364.7 | | | 182.4 | | | 175.0 | | | 100 | % | | 4 | % |
| Long-term outflows | | Long-term outflows | | (389.9) | | | (244.0) | | | (206.8) | | | 60 | % | | 18 | % |
| Long-term net flows | | Long-term net flows | | (25.2) | | | (61.6) | | | (31.8) | | | (59 | %) | | 94 | % |
| Cash management net flows | | Cash management net flows | | (15.1) | | | (9.9) | | | 0.9 | | | 53 | % | | NM |
| Total net flows | | Total net flows | | (40.3) | | | (71.5) | | | (30.9) | | | (44 | %) | | 131 | % |
| Acquisitions | | 9.8 |
| | 0.4 |
| | — |
| | NM |
| | NM |
| Acquisitions | | 3.5 | | | 806.5 | | | 26.4 | | | (100 | %) | | NM |
| Net market change, distributions and other | | (7.9 | ) | | 58.1 |
| | 24.8 |
| | NM |
| | 134 | % | Net market change, distributions and other | | 148.0 | | | (8.7) | | | (20.0) | | | NM | | (57 | %) |
| Ending AUM | | $ | 717.1 |
| | $ | 753.2 |
| | $ | 733.3 |
| | (5 | %) | | 3 | % | Ending AUM | | $ | 1,530.1 | | | $ | 1,418.9 | | | $ | 692.6 | | | 8 | % | | 105 | % |
Components of the change in AUM by investment objectiveasset class were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | | | | | | | | | | | |
for the fiscal year ended
September 30, 2021 | | Fixed
Income | | Equity | | Multi-Asset | | Alternative | | Cash
Management | | Total |
| AUM at October 1, 2020 | | $ | 656.9 | | | $ | 438.1 | | | $ | 129.4 | | | $ | 122.1 | | | $ | 72.4 | | | $ | 1,418.9 | |
| Long-term inflows | | 176.5 | | | 132.1 | | | 36.3 | | | 19.8 | | | — | | | 364.7 | |
| Long-term outflows | | (188.2) | | | (154.2) | | | (35.7) | | | (11.8) | | | — | | | (389.9) | |
| Long-term net flows | | (11.7) | | | (22.1) | | | 0.6 | | | 8.0 | | | — | | | (25.2) | |
| Cash management net flows | | — | | | — | | | — | | | — | | | (15.1) | | | (15.1) | |
| Total net flows | | (11.7) | | | (22.1) | | | 0.6 | | | 8.0 | | | (15.1) | | | (40.3) | |
| Acquisition | | 3.5 | | | — | | | — | | | — | | | — | | | 3.5 | |
| Net market change, distributions and other | | 1.6 | | | 107.6 | | | 22.4 | | | 15.1 | | | 1.3 | | | 148.0 | |
| AUM at September 30, 2021 | | $ | 650.3 | | | $ | 523.6 | | | $ | 152.4 | | | $ | 145.2 | | | $ | 58.6 | | | $ | 1,530.1 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | Equity | | | | Fixed Income | | | | |
for the fiscal year ended
September 30, 2018 | | Global/International | | United States | | Multi-Asset/Balanced | | Tax-Free | | Taxable Global/International | | Taxable United States | | Cash Management | | Total |
| AUM at October 1, 2017 | | $ | 209.8 |
| | $ | 107.2 |
| | $ | 143.3 |
| | $ | 71.0 |
| | $ | 165.0 |
| | $ | 50.6 |
| | $ | 6.3 |
| | $ | 753.2 |
|
| Long-term sales | | 22.8 |
| | 16.6 |
| | 15.3 |
| | 5.6 |
| | 36.9 |
| | 7.8 |
| | — |
| | 105.0 |
|
| Long-term redemptions | | (48.0 | ) | | (23.6 | ) | | (23.2 | ) | | (11.9 | ) | | (42.2 | ) | | (13.2 | ) | | — |
| | (162.1 | ) |
| Long-term net exchanges | | (0.3 | ) | | 0.9 |
| | 0.2 |
| | (0.6 | ) | | (0.8 | ) | | 0.2 |
| | — |
| | (0.4 | ) |
| Long-term reinvested distributions | | 2.8 |
| | 4.0 |
| | 5.5 |
| | 2.0 |
| | 4.1 |
| | 1.1 |
| | — |
| | 19.5 |
|
| Net flows | | (22.7 | ) | | (2.1 | ) | | (2.2 | ) | | (4.9 | ) | | (2.0 | ) | | (4.1 | ) | | — |
| | (38.0 | ) |
| Acquisition | | 9.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9.8 |
|
| Net market change, distributions and other | | (2.5 | ) | | 10.1 |
| | (2.2 | ) | | (2.2 | ) | | (12.4 | ) | | (1.7 | ) | | 3.0 |
| | (7.9 | ) |
| AUM at September 30, 2018 | | $ | 194.4 |
| | $ | 115.2 |
| | $ | 138.9 |
| | $ | 63.9 |
| | $ | 150.6 |
| | $ | 44.8 |
| | $ | 9.3 |
| | $ | 717.1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | Equity | | | | Fixed Income | | | | |
for the fiscal year ended
September 30, 2017 | | Global/International | | United States | | Multi-Asset/Balanced | | Tax-Free | | Taxable Global/International | | Taxable United States | | Cash Management | | Total |
| AUM at October 1, 2016 | | $ | 200.4 |
| | $ | 103.3 |
| | $ | 137.4 |
| | $ | 76.5 |
| | $ | 156.2 |
| | $ | 53.4 |
| | $ | 6.1 |
| | $ | 733.3 |
|
| Long-term sales | | 24.7 |
| | 14.7 |
| | 16.8 |
| | 7.4 |
| | 38.2 |
| | 10.5 |
| | — |
| | 112.3 |
|
| Long-term redemptions | | (48.4 | ) | | (25.4 | ) | | (25.7 | ) | | (11.6 | ) | | (44.3 | ) | | (14.3 | ) | | — |
| | (169.7 | ) |
| Long-term net exchanges | | (0.1 | ) | | 0.3 |
| | 0.4 |
| | (0.5 | ) | | (0.4 | ) | | 0.2 |
| | — |
| | (0.1 | ) |
| Long-term reinvested distributions | | 3.0 |
| | 4.3 |
| | 5.1 |
| | 2.0 |
| | 3.4 |
| | 1.1 |
| | — |
| | 18.9 |
|
| Net flows | | (20.8 | ) | | (6.1 | ) | | (3.4 | ) | | (2.7 | ) | | (3.1 | ) | | (2.5 | ) | | — |
| | (38.6 | ) |
| Acquisition | | — |
| | — |
| | 0.4 |
| | — |
| | — |
| | — |
| | — |
| | 0.4 |
|
| Net market change, distributions and other | | 30.2 |
| | 10.0 |
| | 8.9 |
| | (2.8 | ) | | 11.9 |
| | (0.3 | ) | | 0.2 |
| | 58.1 |
|
| AUM at September 30, 2017 | | $ | 209.8 |
| | $ | 107.2 |
| | $ | 143.3 |
| | $ | 71.0 |
| | $ | 165.0 |
| | $ | 50.6 |
| | $ | 6.3 |
| | $ | 753.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | Equity | | | | Fixed Income | | | | |
for the fiscal year ended
September 30, 2016 | | Global/International | | United States | | Multi-Asset/Balanced | | Tax-Free | | Taxable Global/International | | Taxable United States | | Cash Management | | Total |
| AUM at October 1, 2015 | | $ | 212.1 |
| | $ | 100.8 |
| | $ | 138.3 |
| | $ | 71.7 |
| | $ | 182.7 |
| | $ | 58.5 |
| | $ | 6.8 |
| | $ | 770.9 |
|
| Long-term sales | | 21.9 |
| | 13.7 |
| | 14.3 |
| | 8.9 |
| | 34.2 |
| | 8.7 |
| | — |
| | 101.7 |
|
| Long-term redemptions | | (48.9 | ) | | (24.1 | ) | | (26.8 | ) | | (8.8 | ) | | (62.5 | ) | | (15.8 | ) | | — |
| | (186.9 | ) |
| Long-term net exchanges | | (1.1 | ) | | 0.6 |
| | (0.4 | ) | | 0.8 |
| | (0.5 | ) | | 0.1 |
| | — |
| | (0.5 | ) |
| Long-term reinvested distributions | | 4.3 |
| | 5.8 |
| | 5.8 |
| | 2.0 |
| | 4.2 |
| | 1.2 |
| | — |
| | 23.3 |
|
| Net flows | | (23.8 | ) | | (4.0 | ) | | (7.1 | ) | | 2.9 |
| | (24.6 | ) | | (5.8 | ) | | — |
| | (62.4 | ) |
| Net market change, distributions and other | | 12.1 |
| | 6.5 |
| | 6.2 |
| | 1.9 |
| | (1.9 | ) | | 0.7 |
| | (0.7 | ) | | 24.8 |
|
| AUM at September 30, 2016 | | $ | 200.4 |
| | $ | 103.3 |
| | $ | 137.4 |
| | $ | 76.5 |
| | $ | 156.2 |
| | $ | 53.4 |
| | $ | 6.1 |
| | $ | 733.3 |
|
AUM decreased $36.1increased $111.2 billion or 5%8% during fiscal year 20182021 due to $38.0 billion of net outflows and $7.9$148.0 billion of net market change, distributions and other, and $3.5 billion from an acquisition, partially offset by $9.8 billion from an acquisition. The net outflows included outflows of $7.6 billion from seven institutional products, $6.0 billion from three global/international fixed income funds with global macro strategies, $4.5 billion from two global/international equity funds, $4.1 billion from a multi-asset/balanced fund and $0.9 billion from a fixed income tax-free fund, and were partially offset by inflows of $3.3 billion in a global/international fixed income fund that introduced a new share class structure during fiscal year 2017, $3.0 billion in two institutional products and $1.2 billion in a multi-asset/balanced fund. Long-term sales decreased 7% to $105.0 billion from the prior year due to lower sales in all long-term investment objectives with the exception of U.S. equity. Long-term redemptions decreased 4% to $162.1 billion due to lower redemptions in all long-term investment objectives with the exception of tax-free fixed income. Net market change, distributions and other primarily consists of $25.3$25.2 billion of long-term distributionsnet outflows and a $4.7 billion decrease from foreign exchange revaluation, partially offset by $19.1$15.1 billion of market appreciation. The foreign exchange revaluation resulted from AUM in products that are not U.S. dollar denominated, which represented 15% of total AUM as of September 30, 2018, and was primarily due to strengthening of the U.S. dollar against the Indian Rupee, Canadian dollar and Australian dollar. The market appreciation occurred primarily in equity and multi-asset/balanced products, partially offset by depreciation in global/international fixed income products, and reflected positive returns in global equity markets as evidenced by increases of 11.8% and 17.9% in the MSCI World Index and S&P 500 Index and negative returns in global fixed income markets as evidenced by a 1.3% decrease in the Bloomberg Barclays Global Aggregate Index.
AUM increased $19.9 billion or 3% during fiscal year 2017 primarily due to $58.1 billion of net market change, distributions and other, partially offset by $38.6 billion ofcash management net outflows. Net market change, distributions and other primarily consists of $78.0$176.3 billion of market appreciation, and a $2.9 billion increase from foreign exchange revaluation, net of $23.0partially offset by $29.1 billion of long-term distributions. The market appreciation occurred primarily in all asset classes, most significantly in the equity global/international fixed income and multi-asset/balanced products,multi-asset asset classes and reflected positive returns in global markets,equity markets.
Long-term inflows increased 100% to $364.7 billion, as evidenced by increases of 18.8%compared to the prior year, and 18.6%long-term outflows increased 60% to $389.9 billion due to higher inflows and outflows in the MSCI World Index and S&P 500 Index, and strong performance of our global/international fixed income products despite a 1.3% decrease in the Bloomberg Barclays Global Aggregate Index. The foreign exchange revaluation resulted from AUM in products that are not U.S. dollar denominated, which represented 14% of total AUM as of September 30, 2017, and wasall long-term asset classes primarily due to weakeningthe acquisition of the U.S. dollar against the Canadian dollar and Euro. TheLegg Mason. Long-term net outflows included $8.1outflows of $35.7 billion from sixteen institutional products, including two fixed income redemptions of $5.9 billion and $2.0 billion and two equity redemptions of $3.7 billion and $2.2 billion, $12.5 billion from seven fixed income funds, including $3.3 billion from five India credit funds that were non-management fee earning which are in the process of winding up, $5.4 billion from a 529 plan redemption, $3.9 billion from two global/international fixed income funds with global macro strategies, $3.9 billion from three institutional separate accounts, $3.0 billion from two sub-advised variable annuity clients due to shifts in their investment strategies, $2.6 billion from two global/international equity funds $1.2and $3.1 billion from a multi-asset/balancedmulti-asset fund, and $1.0 billion from a U.S. equity fund, and were partially offset by inflows of $4.0$12.3 billion in three fixed income funds, $6.7 billion in three institutional products, $3.7 billion in an equity fund, $3.1 billion in a global/international fixed income fund. Long-term sales increased 10% to $112.3multi-asset fund and $3.0 billion from the prior year due to higher sales in all long-term investment objectives with the exception of tax-free fixed income. Long-term redemptions decreased 9% to $169.7 billion primarily due to lower redemptions of global/international fixed income products.
two alternative funds.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | | | | | | | | | | | |
for the fiscal year ended
September 30, 2020 | | Fixed
Income | | Equity | | Multi-Asset | | Alternative | | Cash
Management | | Total |
| AUM at October 1, 2019 | | $ | 250.6 | | | $ | 263.9 | | | $ | 123.6 | | | $ | 45.0 | | | $ | 9.5 | | | $ | 692.6 | |
| Long-term inflows | | 79.7 | | | 64.6 | | | 27.5 | | | 10.6 | | | — | | | 182.4 | |
| Long-term outflows | | (112.9) | | | (90.6) | | | (33.2) | | | (7.3) | | | — | | | (244.0) | |
| Long-term net flows | | (33.2) | | | (26.0) | | | (5.7) | | | 3.3 | | | — | | | (61.6) | |
| Cash management net flows | | — | | | — | | | — | | | — | | | (9.9) | | | (9.9) | |
| Total net flows | | (33.2) | | | (26.0) | | | (5.7) | | | 3.3 | | | (9.9) | | | (71.5) | |
| Acquisitions | | 449.6 | | | 189.2 | | | 18.2 | | | 73.9 | | | 75.6 | | | 806.5 | |
| Net market change, distributions and other | | (10.1) | | | 11.0 | | | (6.7) | | | (0.1) | | | (2.8) | | | (8.7) | |
| AUM at September 30, 2020 | | $ | 656.9 | | | $ | 438.1 | | | $ | 129.4 | | | $ | 122.1 | | | $ | 72.4 | | | $ | 1,418.9 | |
AUM increased $726.3 billion or 105% during fiscal year 2020 as $806.5 billion from acquisitions was partially offset by $61.6 billion of long-term net outflows, $9.9 billion of cash management net outflows and $8.7 billion of net market change, distributions and other. Acquisitions included $797.4 billion from the acquisition of Legg Mason and $9.1 billion from other acquisitions. Long-term inflows increased 4% to $182.4 billion due to higher inflows in all the long-term asset classes except multi-asset. Long-term outflows increased 18% to $244.0 billion due to higher outflows in all long-term asset classes except multi-asset, most significantly in fixed income products. Long-term net outflows included outflows of $27.6 billion from six fixed income funds, $7.3 billion from seven institutional products, $6.2 billion from three equity funds, and $3.6 billion from a multi-asset fund, partially offset by inflows of $6.0 billion in two equity funds, $4.0 billion in three fixed income funds, $2.0 billion in two institutional products and $1.3 billion in a private open-end product. Net market change, distributions and other primarily consists of $24.8 billion of long-term distributions, partially offset by $15.8 billion of market appreciation. The market appreciation occurred primarily in the equity asset class and reflected positive returns in global equity markets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | | | | | | | | | | | |
for the fiscal year ended
September 30, 2019 | | Fixed
Income | | Equity | | Multi-Asset | | Alternative | | Cash
Management | | Total |
| AUM at October 1, 2018 | | $ | 258.5 | | | $ | 304.6 | | | $ | 126.7 | | | $ | 18.0 | | | $ | 9.3 | | | $ | 717.1 | |
| Long-term inflows | | 75.6 | | | 58.5 | | | 34.8 | | | 6.1 | | | — | | | 175.0 | |
| Long-term outflows | | (81.9) | | | (83.5) | | | (35.9) | | | (5.5) | | | — | | | (206.8) | |
| Long-term net flows | | (6.3) | | | (25.0) | | | (1.1) | | | 0.6 | | | — | | | (31.8) | |
| Cash management net flows | | — | | | — | | | — | | | — | | | 0.9 | | | 0.9 | |
| Total net flows | | (6.3) | | | (25.0) | | | (1.1) | | | 0.6 | | | 0.9 | | | (30.9) | |
| Acquisition | | — | | | — | | | — | | | 26.4 | | | — | | | 26.4 | |
| Net market change, distributions and other | | (1.6) | | | (15.7) | | | (2.0) | | | — | | | (0.7) | | | (20.0) | |
| AUM at September 30, 2019 | | $ | 250.6 | | | $ | 263.9 | | | $ | 123.6 | | | $ | 45.0 | | | $ | 9.5 | | | $ | 692.6 | |
AUM by sales region was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | | | | | | | 2021 vs. 2020 | | 2020 vs. 2019 |
| as of September 30, | | 2021 | | 2020 | | 2019 | | |
| United States | | $ | 1,140.2 | | | $ | 1,024.0 | | | $ | 477.9 | | | 11 | % | | 114 | % |
| International | | | | | | | | | | |
| Asia-Pacific | | 155.6 | | | 168.6 | | | 89.0 | | | (8 | %) | | 89 | % |
| Europe, Middle East and Africa | | 153.9 | | | 141.8 | | | 87.9 | | | 9 | % | | 61 | % |
| Latin America | | 53.5 | | | 59.4 | | | 13.5 | | | (10 | %) | | 340 | % |
| Canada | | 26.9 | | | 25.1 | | | 24.3 | | | 7 | % | | 3 | % |
| Total international | | $ | 389.9 | | | $ | 394.9 | | | $ | 214.7 | | | (1 | %) | | 84 | % |
| Total | | $ | 1,530.1 | | | $ | 1,418.9 | | | $ | 692.6 | | | 8 | % | | 105 | % |
Average AUM by sales region was as follows:
|
| | | | | | | | | | | | | | | | | | |
| (in billions) | | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | | |
| United States | | $ | 491.1 |
| | $ | 497.1 |
| | $ | 507.4 |
| | (1 | %) | | (2 | %) |
| International | | | | | | | |
|
| |
|
|
| Europe, Middle East and Africa | | 105.8 |
| | 104.1 |
| | 108.9 |
| | 2 | % | | (4 | %) |
| Asia-Pacific | | 95.2 |
| | 87.0 |
| | 82.7 |
| | 9 | % | | 5 | % |
| Canada | | 31.1 |
| | 31.1 |
| | 31.3 |
| | 0% |
| | (1 | %) |
Latin America 1 | | 17.3 |
| | 17.6 |
| | 19.0 |
| | (2 | %) | | (7 | %) |
| Total international | | $ | 249.4 |
| | $ | 239.8 |
| | $ | 241.9 |
| | 4 | % | | (1 | %) |
| Total | | $ | 740.5 |
| | $ | 736.9 |
| | $ | 749.3 |
| | 0 | % | | (2 | %) |
______________1 Latin America sales region includes North America-based advisers serving non-resident clients. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in billions) | | | | | | | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 | | |
| United States | | $ | 1,103.6 | | | $ | 587.2 | | | $ | 473.3 | | | 88 | % | | 24 | % |
| International | | | | | | | | | | |
| Asia-Pacific | | 165.9 | | | 102.4 | | | 90.4 | | | 62 | % | | 13 | % |
| Europe, Middle East and Africa | | 151.7 | | | 97.8 | | | 91.5 | | | 55 | % | | 7 | % |
| Latin America | | 56.6 | | | 23.1 | | | 14.6 | | | 145 | % | | 58 | % |
| Canada | | 26.3 | | | 22.4 | | | 27.2 | | | 17 | % | | (18 | %) |
| Total international | | $ | 400.5 | | | $ | 245.7 | | | $ | 223.7 | | | 63 | % | | 10 | % |
| Total | | $ | 1,504.1 | | | $ | 832.9 | | | $ | 697.0 | | | 81 | % | | 19 | % |
The percentage of average AUMregion in which investment products are sold may differ from the United States sales region was 66%, 67% and 68% for fiscal years 2018, 2017 and 2016.
Due to the global nature of our business operations,geographic area in which we provide investment management and related services may be performed in locations unrelated to the sales region.products.
Investment Performance Overview
A key driver of our overall success is the long-term investment performance of our investment products. A standard measure of the performance of these products is the percentage of AUM exceeding benchmarks and peer group medians. Our global/international fixed income products generated notable long-term results with at least 65% of AUM exceeding the benchmarks and peer group medians forand benchmarks. We compare the three-, five- and ten-year periods ended September 30, 2018. Therelative performance of our multi-asset/balanced products significantlymutual funds against peers, and of our strategy composites against benchmarks. Higher long-term relative performance of our mutual fund AUM during fiscal year 2021 resulted in a significant increase from September 30, 2020 to the peer group comparison for the one-, three- and five-year periods. Approximately half of our mutual fund AUM and at least 69% of our strategy composite AUM exceeded the peer group mediansmedian comparisons for the three- and ten-yearall periods but has lagged in the other comparisons, reflectingpresented, primarily driven by the performance of a fund that represents 68% of this category. The performance of our tax-free and U.S. taxable fixed income as well as of our equity products, has mostly lagged the benchmarks and peer group medians during the periods presented.
products.
The performance of our mutual fund products against benchmarks and peer group medians and of our strategy composites against benchmarks is presented in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Peer Group Comparison1 | | Benchmark Comparison2 |
| | % of Mutual Fund AUM
in Top Two Peer Group Quartiles | | % of Strategy Composite AUM
Exceeding Benchmark |
| as of September 30, 2021 | | 1-Year | | 3-Year | | 5-Year | | 10-Year | | 1-Year | | 3-Year | | 5-Year | | 10-Year |
| Fixed Income | | 65 | % | | 60 | % | | 63 | % | | 61 | % | | 95 | % | | 88 | % | | 95 | % | | 95 | % |
| Equity | | 41 | % | | 41 | % | | 41 | % | | 51 | % | | 40 | % | | 41 | % | | 41 | % | | 53 | % |
Total AUM3 | | 58 | % | | 55 | % | | 57 | % | | 61 | % | | 71 | % | | 69 | % | | 72 | % | | 77 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Benchmark Comparison 1, 2 | | Peer Group Comparison 1, 3 |
| | | % of AUM Exceeding Benchmark | | % of AUM in Top Two Peer Group Quartiles |
| as of September 30, 2018 | | 1-Year | | 3-Year | | 5-Year | | 10-Year | | 1-Year | | 3-Year | | 5-Year | | 10-Year |
| Equity | | | | | | | | | | | | | | | | |
| Global/international | | 14 | % | | 18 | % | | 19 | % | | 23 | % | | 37 | % | | 30 | % | | 27 | % | | 40 | % |
| United States | | 32 | % | | 26 | % | | 22 | % | | 29 | % | | 49 | % | | 61 | % | | 40 | % | | 61 | % |
| Total equity | | 21 | % | | 21 | % | | 20 | % | | 26 | % | | 42 | % | | 43 | % | | 32 | % | | 49 | % |
| Multi-Asset/Balanced | | 7 | % | | 12 | % | | 5 | % | | 16 | % | | 12 | % | | 93 | % | | 12 | % | | 96 | % |
| Fixed Income | | | | | | | | | | | | | | | | |
| Tax-free | | 14 | % | | 33 | % | | 40 | % | | 45 | % | | 21 | % | | 40 | % | | 39 | % | | 48 | % |
| Taxable | | | | | | | | | | | | | | | | |
| Global/international | | 26 | % | | 81 | % | | 65 | % | | 77 | % | | 48 | % | | 81 | % | | 75 | % | | 95 | % |
| United States | | 36 | % | | 49 | % | | 44 | % | | 55 | % | | 45 | % | | 46 | % | | 22 | % | | 15 | % |
| Total fixed income | | 25 | % | | 63 | % | | 55 | % | | 63 | % | | 41 | % | | 64 | % | | 56 | % | | 65 | % |
_______________
| |
1
| AUM measured in the 1-year benchmark and peer group rankings represents 89% and 87%1Mutual fund performance is sourced from Morningstar and measures the percent of ranked AUM in the top two quartiles versus peers. Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 42%, 42%, 41% and 39% of our total AUM as of September 30, 2018. |
| |
2
| The benchmark comparisons are based on each fund’s return as compared to a market index that has been selected to be generally consistent with the investment objectives of the fund.
|
| |
3
| The peer group rankings are sourced from Lipper, a Thomson Reuters Company, Morningstar, eVestment and various international third-party providers in each fund’s market and were based on an absolute ranking of returns. © 2018 Morningstar, Inc. All rights reserved. The information herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. |
For products with multiple share classes, rankings for all share classes with applicable history in their respective time periods are included. Rankings for most institutional separate accounts are as of September 30, 2021.
2Strategy composite performance measures the prior quarter-end duepercent of composite AUM beating its benchmark. The benchmark comparisons are based on each account’s/composite’s (strategy composites may include retail separately managed accounts and mutual fund assets managed as part of the same strategy) return as compared to timinga market index that has been selected to be generally consistent with the asset class of availabilitythe account/composite. Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 69%, 68%, 68% and 62% of information. Private equityour total AUM as of September 30, 2021.
3Total mutual fund AUM includes performance of our multi-asset and alternative AUM, and total strategy composite AUM includes performance of our alternative AUM. Multi-asset and alternative AUM represent 10% and 9% of our total AUM at September 30, 2021.
Mutual fund performance data includes U.S. and cross-border domiciled mutual funds certain privately-offered emerging market and real estateexchange-traded funds, and excludes cash management funds and certain hedge and other funds are not included. Certain other funds and products were also excluded becausefund of limited benchmark or peer group data. Had this data been available, the results may have been different.funds. These results assume the reinvestment of dividends, are based on data available as of October 12, 20187, 2021 and are subject to revision. While we remain focused on achieving strong long-term performance, our future benchmarkpeer group and peer groupbenchmarking rankings may vary from our past performance.
Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ. The information in this presentation is provided solely for use in connection with this document, and is not directed toward existing or potential clients of Franklin.
OPERATING REVENUES
The table below presents the percentage change in each operating revenue category.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 | | |
| Investment management fees | | $ | 6,541.6 | | | $ | 3,981.7 | | | $ | 3,985.2 | | | 64 | % | | 0 | % |
| Sales and distribution fees | | 1,635.5 | | | 1,362.0 | | | 1,444.6 | | | 20 | % | | (6 | %) |
| Shareholder servicing fees | | 211.2 | | | 195.1 | | | 216.3 | | | 8 | % | | (10 | %) |
| Other | | 37.2 | | | 27.7 | | | 23.3 | | | 34 | % | | 19 | % |
| Total Operating Revenues | | $ | 8,425.5 | | | $ | 5,566.5 | | | $ | 5,669.4 | | | 51 | % | | (2 | %) |
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | | |
| Investment management fees | | $ | 4,367.5 |
| | $ | 4,359.2 |
| | $ | 4,471.7 |
| | 0 | % | | (3 | %) |
| Sales and distribution fees | | 1,599.8 |
| | 1,705.6 |
| | 1,806.4 |
| | (6 | %) | | (6 | %) |
| Shareholder servicing fees | | 221.9 |
| | 225.7 |
| | 243.6 |
| | (2 | %) | | (7 | %) |
| Other | | 129.9 |
| | 101.7 |
| | 96.3 |
| | 28 | % | | 6 | % |
| Total Operating Revenues | | $ | 6,319.1 |
| | $ | 6,392.2 |
| | $ | 6,618.0 |
| | (1 | %) | | (3 | %) |
Investment Management Fees
Investment management fees are generally calculated under contractual arrangements with our investment products and the products for which we provide sub-advisory services as a percentage of the market value of AUM. Annual fee rates vary by investment objectiveasset class and type of services provided. RatesFee rates for products sold outside of the U.S. are generally higher than for U.S. products because they are structured to compensate for certain distribution costs.products.
Investment management fees increased $8.3$2,559.9 million in fiscal year 20182021 primarily due to the acquisition of Legg Mason, a 5% increase in average AUM and higher performance fees. The increase in average AUM occurred primarily in the equity and multi-asset asset classes, partially offset by decreases in the fixed income asset class. The increase occurred primarily in U.S. sales regions, partially offset by a decline in Asia-Pacific sales region.
Investment management fees decreased $3.5 million in fiscal year 2020 primarily due to a slight increase in average AUM partially offset by lower performance fees. Investment management fees decreased $112.5 million in fiscal year 2017 primarily due to a 2%7% decrease in average AUM, and the impact of a lower effective investment management fee rate partially offset by higherand lower performance fees. Average AUM increases in fiscal year 2018 infees of the Asia-Pacific and Europe, Middle East and Africa sales regions werelegacy Franklin business, largely offset by a decrease in$427.6 million of revenue earned by Legg Mason subsequent to the U.S.acquisition. The decrease in average AUM in fiscal year 2017of the legacy Franklin business occurred primarily in the global/international fixed income investment objective,and equity asset classes, partially offset by an increase in the alternative asset class, and across all sales regions except Asia-Pacific.Europe, Middle East and Africa.
Our effective investment management fee rate excluding performance fees (investment management fees excluding performance fees divided by average AUM) was 59.0, 59.241.8, 47.3 and 59.756.4 basis points for fiscal years 2018, 20172021, 2020 and 2016.2019. The rate decrease in fiscal year 20182021 was primarily due to the Legg Mason acquisition, as Legg Mason generally had a lower performance fees. Theoverall effective fee rate decrease in fiscal year 2017 was primarily due to a higher weightingsmix of AUM in lower fee products in the global/internationalinstitutional and fixed income investment objective in the Europe, Middle East and Africa and Asia-Pacific sales regions, partially offset by higher performance fees.AUM.
Performance-based investment management fees were $21.2$258.6 million, $35.5$44.0 million and $26.5$52.9 million for fiscal years 2018, 20172021, 2020 and 2016, with the changes2019. The increase in fiscal year 2021 was primarily due to the acquisition of Legg Mason as well as strong performance, while the decrease in fiscal year 2020 was primarily due to the lower performance fees earned from a private debt fund, separate accounts.accounts and a real estate fund, partially offset by $15.0 million of performance fees earned by Legg Mason subsequent to the acquisition.
U.S. industry asset-weighted average management fee rates were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in basis points) | | Industry Average1 |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
Fixed Income2 | | 27 | | 27 | | 29 |
Equity3 | | 31 | | 32 | | 33 |
| Multi-Asset | | 37 | | 37 | | 38 |
Alternative4 | | 63 | | 62 | | 72 |
| Cash Management | | 13 | | 16 | | 16 |
________________ |
| | | | | | |
| (in basis points) | | Industry Average 1 |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Equity | | | | | | |
Global/international 2 | | 47 | | 50 | | 53 |
| United States | | 32 | | 35 | | 37 |
| Multi-Asset/Balanced | | 47 | | 49 | | 50 |
| Fixed Income | | | | | | |
| Tax-free | | 32 | | 33 | | 35 |
| Taxable | | | | | | |
Global/international 3 | | 36 | | 39 | | 43 |
| United States | | 30 | | 31 | | 33 |
| Cash Management | | 16 | | 15 | | 10 |
________________2The decreases in the average rate in fiscal years 2021 and 2020 reflect higher weightings of two large low-fee passive funds and lower weightings of two large higher-fee actively managed funds for fiscal year 2020.
| |
1
| U.S. industry asset-weighted average management fee rates were calculated using information available from Lipper, a Thomson Reuters Company, as of September 30, 2018, 2017 and 2016 and include all U.S.-registered open-end funds that reported expense data to Lipper as of the funds’ most recent annual report date, and for which expenses were equal to or greater than zero. As defined by Lipper, management fees include fees from providing advisory and fund administration services. The averages combine retail and institutional funds data and include all share classes and distribution channels, without exception. Variable annuity and fund of fund products are not included.
|
| |
2
| The decreases in the average rate in fiscal years 2018 and 2017 reflect higher weightings of two large low-fee passive funds.
|
| |
3
| The decreases in the average rate in fiscal years 2018 and 2017 reflect higher weightings of a large low-fee passive fund and lower weightings of two large higher-fee actively managed funds.
|
3The decreases in the average rate in fiscal years 2021 and 2020 reflect higher weightings of two large low-fee passive funds.
4The increase in the average rate in fiscal year 2021 reflect higher weightings of one large actively managed fund and lower weightings of one large low-fee passive fund, while decrease in the average rate in fiscal year 2020 reflect higher weightings of one large low-fee passive fund.
The declines in U.S. industry average management fee rates for long-term investment objectivesasset classes generally reflect increased investor demand for lower-fee passive funds. Our actual effective investment management fee rates are generally higher than the U.S. industry average rates as we actively manage substantially all of our products and have a higher levelsignificant amount of international AUM, both of which generate higher fees. Our fiscal year 2021effective investment management fee rates in the U.S. generally decreased during fiscal years 2018 and 2017 to a lessergreater extent than the average industry rates.rates due to the acquisition of Legg Mason, as Legg Mason generally had a lower overall effective fee rate due to a higher mix of institutional and fixed income AUM .
Our product offerings and global operations are diverse. As such, the impact of future changes in the market value of AUM on investment management fees will be affected by the relative mix of investment objective,asset class, geographic region, distribution channel and investment vehicle of the assets.
Sales and Distribution Fees
We earnSales and distribution fees primarily consist of upfront sales commissions and ongoing distribution fees. Sales commissions are earned from the sale of certain classes of sponsored funds at the time of purchase (“commissionable sales”). Sales commissions are and may be reduced or eliminated on some share classes and for some sale transactions depending uponon the amount invested and the type of investor. Therefore, sales fees generally will change with the overall level of gross sales, the size of individual transactions, and the relative mix of sales between different share classes and types of investors.
Our sponsored mutual funds and certain other products generally pay us distribution fees in return for sales, marketing and distribution efforts on their behalf. Specifically, theThe majority of U.S.-registeredour U.S. mutual funds, with the exception of certain of our money market mutual funds and certain other funds specifically designed for purchase through separately managed account programs, have adopted distribution plans under Rule 12b-1 (the “Rule 12b-1 Plans”) promulgated under the Investment Company Act of 1940. The Rule 12b-1 Plans permit the mutual funds to pay us for marketing, marketing support, advertising, printing and sales promotion services relating to the distribution of their shares, subject to the Rule 12b-1 Plans’ limitations on amounts based on daily average daily net AUM. Similar arrangements exist for theWe earn distribution offees from our non-U.S. funds.funds based on daily average AUM.
We pay substantially all of our sales and distribution fees to the financial advisers and other intermediaries who sell our funds on our behalf. See the description of sales, distribution and marketing expenses below.
Sales and distribution fees by revenue driver are presented below.
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | | |
| Asset-based fees | | $ | 1,314.3 |
| | $ | 1,345.1 |
| | $ | 1,410.6 |
| | (2 | %) | | (5 | %) |
| Sales-based fees | | 270.3 |
| | 350.8 |
| | 386.4 |
| | (23 | %) | | (9 | %) |
| Contingent sales charges | | 15.2 |
| | 9.7 |
| | 9.4 |
| | 57 | % | | 3 | % |
| Sales and Distribution Fees | | $ | 1,599.8 |
| | $ | 1,705.6 |
| | $ | 1,806.4 |
| | (6 | %) | | (6 | %) |
Asset-based distribution fees decreased $30.8 million in fiscal year 2018 as a $60.3 million decrease in U.S. product fees primarily due to a 5% decrease in the related average U.S. AUM was partially offset by a $29.5 million increase in non-U.S. product fees primarily due to a 4% increase in the related average international AUM. Asset-based distribution fees decreased $65.5 million in fiscal year 2017 primarily due to a $55.2 million decrease from a 4% decrease in the related average total AUM.
Sales-based fees decreased $80.5 million in fiscal year 2018 primarily due to an $84.6 million decrease from a 26% decrease in total commissionable sales. Sales-based fees decreased $35.6 million in fiscal year 2017 primarily due to decreases of $18.8 million from lower effective fee rates and $18.5 million from a lower mix of U.S. product commissionable sales. The lower effective fee rates primarily resulted from a higher mix of non-U.S. product fixed income sales and tiered pricing on larger trades. Non-U.S. products typically generate lower sales fees than U.S. products, and fixed income products typically generate lower sales fees than equity products. Total commissionable sales increased 4% in fiscal year 2017, however the increase resulted from significantly higher sales of non-U.S. products which were largely offset by lower sales of U.S. products; the lower mix of U.S. product commissionable sales resulted in a net decrease in sales-based fees.
Commissionable sales represented 9% of total sales for fiscal year 2018, 11% for fiscal year 2017, and 12% for fiscal year 2016, with U.S. product commissionable sales representing 74%, 72% and 92% of total commissionable sales.
Contingent sales charges are earned from investor redemptions within a contracted period of time. TheseSubstantially all of these charges are levied only on certain shares sold without a front-end sales charge, and vary with the mix of redemptions of these shares. Contingent
We pay substantially all of our sales chargesand distribution fees to the financial advisers, broker-dealers and other intermediaries that sell our funds on our behalf. See the description of sales, distribution and marketing expenses below.
Sales and distribution fees by revenue driver are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 | | |
| Asset-based fees | | $ | 1,302.3 | | | $ | 1,096.3 | | | $ | 1,188.2 | | | 19 | % | | (8 | %) |
| Sales-based fees | | 314.6 | | | 245.9 | | | 244.0 | | | 28 | % | | 1 | % |
| Contingent sales charges | | 18.6 | | | 19.8 | | | 12.4 | | | (6 | %) | | 60 | % |
| Sales and Distribution Fees | | $ | 1,635.5 | | | $ | 1,362.0 | | | $ | 1,444.6 | | | 20 | % | | (6 | %) |
Asset-based distribution fees increased $5.5$206.0 million in fiscal year 20182021 primarily due to the acquisition of Legg Mason and $53.1 million from a 5% increase in the related average AUM, partially offset by $33.2 million from a higher redemptionsmix of lower-fee U.S. assets. Asset-based distribution fees decreased $91.9 million in fiscal year 2020 primarily due to decreases of $79.2 million from a 7% decrease in the related average AUM and $38.6 million from a higher mix of lower-fee U.S. assets, partially offset by $35.3 million from fees earned by Legg Mason subsequent to the acquisition.
Sales-based fees increased $68.7 million in fiscal year 2021 primarily due to the acquisition of Legg Mason and $13.0 million from higher commissionable sales. Sales-based fees increased $1.9 million in fiscal year 2020 primarily due to increases of $9.8 million from fees earned by Legg Mason subsequent to the acquisition, $7.2 million from higher U.S. product commissionable sales and, $2.9 million from a higher mix of equity sales, which typically generate higher sales fees than fixed income products. The increases were substantially offset by a decrease of $18.7 million from lower non-U.S. products.product commissionable sales.
Shareholder Servicing Fees
We earnSubstantially all shareholder servicing fees are earned from our sponsored funds for providing transfer agency services, which include providing shareholder statements, transaction processing, customer service and tax reporting. Effective November 1, 2017, theThese fees for U.S. funds changed to beare primarily determined based on the levela percentage of AUM and either the number of transactions in shareholder accounts from the prior structure of a fixed charge per shareholder account that varied by fund type and service provided. Outside of the U.S., the fees are based on the level of AUM and/or the number of shareholder accounts.
We also provide other services to individual and trust clients, including trust services, for whichaccounts, while fees from certain funds are based only on AUM. Shareholder servicing fees also include fund reimbursements of expenses incurred while providing transfer agency services.
Shareholder servicing fees increased $16.1 million in fiscal year 2021 primarily due to the levelacquisition of Legg Mason and higher levels of related AUM, and estate planning and tax planning and preparation, for which fees are primarily account based.
partially offset by lower levels of transactions. Shareholder servicing fees decreased $3.8$21.2 million in fiscal year 20182020 primarily due to a $4.9 million decrease from U.S. funds which reflects lower levels of transactions and AUM under the new fee structure, partially offset by a $1.0 million increase from funds in Europe resulting from higher levels of related AUM. Shareholder servicing fees decreased $17.9 million in fiscal year 2017 primarily due to decreases of $14.8 million from U.S. funds resulting from a decrease in active accounts and $3.6 million from funds in Europe resulting from lower levels of related AUM and active accounts.transactions.
Other
Other revenue increased $28.2$9.5 million and $5.4$4.4 million in fiscal years 20182021 and 20172020 primarily due to higher interest and dividend income from consolidated investment products (“CIPs”).miscellaneous fee revenues.
OPERATING EXPENSES
The table below presents the percentage change in each operating expense category.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | | | | |
| Compensation and benefits | | $ | 2,971.3 | | | $ | 1,873.9 | | | $ | 1,584.7 | | | 59 | % | | 18 | % |
| Sales, distribution and marketing | | 2,105.8 | | | 1,703.1 | | | 1,819.6 | | | 24 | % | | (6 | %) |
| Information systems and technology | | 486.1 | | | 288.4 | | | 258.5 | | | 69 | % | | 12 | % |
| Occupancy | | 218.1 | | | 147.9 | | | 133.6 | | | 47 | % | | 11 | % |
| Amortization of intangible assets | | 232.0 | | | 54.0 | | | 14.7 | | | 330 | % | | 267 | % |
| General, administrative and other | | 537.2 | | | 450.3 | | | 391.4 | | | 19 | % | | 15 | % |
| Total Operating Expenses | | $ | 6,550.5 | | | $ | 4,517.6 | | | $ | 4,202.5 | | | 45 | % | | 7 | % |
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| for the fiscal years ended September 30, | | | | | |
| Sales, distribution and marketing | | $ | 2,039.7 |
| | $ | 2,130.9 |
| | $ | 2,209.9 |
| | (4 | %) | | (4 | %) |
| Compensation and benefits | | 1,390.6 |
| | 1,333.7 |
| | 1,360.9 |
| | 4 | % | | (2 | %) |
| Information systems and technology | | 243.9 |
| | 219.8 |
| | 207.3 |
| | 11 | % | | 6 | % |
| Occupancy | | 128.6 |
| | 121.3 |
| | 134.1 |
| | 6 | % | | (10 | %) |
| General, administrative and other | | 397.7 |
| | 322.2 |
| | 340.1 |
| | 23 | % | | (5 | %) |
| Total Operating Expenses | | $ | 4,200.5 |
| | $ | 4,127.9 |
| | $ | 4,252.3 |
| | 2 | % | | (3 | %) |
Sales, Distribution and Marketing
Sales, distribution and marketingThe Legg Mason acquisition had a significant impact on operating expenses primarily consist of payments to financial advisers, broker-dealers and other third parties for providing services to investors in our sponsored funds, including marketing support services. Sales expenses are determined as percentages of sales and are incurred from the same commissionable sales transactions that generate sales fee revenues. Distribution expenses are determined as percentages of AUM and are incurred from assets that generate either distribution fees or higher levels of investment management fees. Marketing support expenses are based on AUM, sales or a combination thereof. Also included is the amortization of deferred sales commissions related to up-front commissions on shares sold without a front-end sales charge. The deferred sales commissions are amortized over the periods in which commissions are generally recovered from related revenues.
Sales, distribution and marketing expenses by cost driver are presented below.
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| for the fiscal years ended September 30, | | | | | |
| Asset-based expenses | | $ | 1,703.9 |
| | $ | 1,735.8 |
| | $ | 1,792.7 |
| | (2 | %) |
| (3 | %) |
| Sales-based expenses | | 255.1 |
| | 323.1 |
| | 342.0 |
| | (21 | %) |
| (6 | %) |
| Amortization of deferred sales commissions | | 80.7 |
| | 72.0 |
| | 75.2 |
| | 12 | % |
| (4 | %) |
| Sales, Distribution and Marketing | | $ | 2,039.7 |
| | $ | 2,130.9 |
| | $ | 2,209.9 |
| | (4 | %) |
| (4 | %) |
Asset-based expenses decreased $31.9 million in fiscal year 2018 as a $60.8 million decrease in U.S. product expenses primarily2021; however, due to a 5% decrease in the related average U.S. AUM was partially offset by a $28.9 million increase in non-U.S. product expenses primarily duecontinued integration of the combined businesses, it is no longer practicable to a 2% increase inseparately quantify the related average international AUM. Asset-based expenses decreased $56.9 million in fiscal year 2017 primarily due to a $62.4 million decrease from a 3% decrease inimpact of the related average total AUM. Distribution expenses, which are typically higher for non-U.S. products, are generally not directly correlated with distribution fee revenues due to international fee structures which provide for recovery of certain distribution costs through investment management fees.legacy Legg Mason business.
Sales-based expenses decreased $68.0 million in fiscal year 2018 primarily due to a $75.0 million decrease from a 26% decrease in total commissionable sales, partially offset by a $4.4 million increase from a higher average commission rate resulting from a higher mix of U.S. product commissionable sales. U.S. products typically generate higher sales commissions than non-U.S. products.
Sales-based expenses decreased $18.9 million in fiscal year 2017 primarily due to decreases of $12.4 million from lower average commission rates and $9.0 million from a lower mix of U.S. product commissionable sales. The lower average commission rates primarily resulted from a higher mix of non-U.S. product fixed income sales and tiered pricing on larger trades. Fixed income products typically generate lower sales commissions than equity products. Total commissionable sales increased 4% in fiscal year 2017, however the increase resulted from significantly higher sales of non-U.S. products that were largely offset by lower sales of U.S. products; the lower mix of U.S. product commissionable sales resulted in a net decrease in sales-based expenses.
Amortization of deferred sales commissions increased $8.7 million in fiscal year 2018 primarily due to a $21.0 million increase from higher sales of non-U.S. shares sold without a front-end sales charge, partially offset by a $12.0 million decrease from lower such sales of U.S. shares. Amortization of deferred sales commissions decreased $3.2 million in fiscal year 2017 primarily due to an $18.5 million decrease related to lower sales of U.S. shares sold without a front-end sales charge, substantially offset by $12.7 million of adjustments recognized in fiscal year 2016 related to prior-year amortization expense and $4.3 million from higher sales of non-U.S. shares sold without a front-end sales charge.
Compensation and Benefits
CompensationThe components of compensation and benefitbenefits expenses are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 | | |
| Salaries, wages and benefits | | $ | 1,415.5 | | | $ | 1,051.7 | | | $ | 960.6 | | | 35 | % | | 9 | % |
| Variable compensation | | 1,365.0 | | | 571.6 | | | 504.9 | | | 139 | % | | 13 | % |
| Acquisition-related retention | | 163.7 | | | 195.8 | | | 63.7 | | | (16 | %) | | 207 | % |
| Special termination benefits | | 27.1 | | | 54.8 | | | 55.5 | | | (51 | %) | | (1 | %) |
| Compensation and Benefits Expenses | | $ | 2,971.3 | | | $ | 1,873.9 | | | $ | 1,584.7 | | | 59 | % | | 18 | % |
Salaries, wages and benefits increased $56.9$363.8 million in fiscal year 20182021, primarily due to a $69.1 million increase in salaries,the acquisition of Legg Mason. Salaries, wages and benefits partially offset by a $12.2increased $91.1 million decrease in variable compensation. The increase in salaries, wages and benefits wasfiscal year 2020, primarily due to increases of $25.1$56.9 million from higher average staffing levels $21.9primarily resulting from acquisitions, $19.3 million for an annual merit salary adjustmentsincrease that werewas effective December 1 2017of the fiscal year and 2016, $14.2$16.2 millionin related to other termination benefits, and $6.5partially offset by a decrease of $5.9 million from unfavorablefavorable foreign currency impacts. The decrease
Variable compensation increased $793.4 million in variable compensation wasfiscal year 2021, primarily due to the acquisition of Legg Mason, which includes $25.3 million from acquisition-related pass through performance fees. Variable compensation increased $66.7 million in fiscal year 2020, primarily due to increases of $67.7 million related to acquired firms’ bonus plans and $10.0 million related to private equity and other product performance fees, partially offset by decreases of $24.0$11.3 million related to unvested mutual fund awards and $5.5$9.6 million in stock and stock unit award amortization, partially offset by a $14.2 million increase inrelated to bonus expense primarily due to higher staffing levels.lower expectations of our annual performance.
Compensation and benefitAcquisition-related retention expenses decreased $27.2$32.1 million in fiscal year 2017 due to a $55.72021 and increased $132.1 million decrease in salaries, wages and benefits, partially offset by a $28.5 million increase in variable compensation. The decrease in salaries, wages and benefits wasfiscal year 2020 primarily due to decreasesthe acquisition of $51.4 million inLegg Mason.
Special termination benefits and $19.9 million from a higher weightingprimarily relate to workforce optimization initiatives related to the acquisition of employeesLegg Mason in lower cost regions outside the U.S., partially offset by an $18.3 million increase for annual merit salary adjustments that were effective December 1, 2016 and 2015. The increase in variable compensation was primarily due to increases of $13.1 million from higher market valuations of mutual fund awards, $13.1 million in bonus expense based on our overall performance and $6.5 million from higher sales-related commissions, partially offset by an $8.3 million decrease in amortization of stock and stock unit awards.
Variable compensation as a percentage of compensation and benefits was 33%, 36% and 33% for fiscal years 2018, 20172021 and 2016. At 2020, and voluntary separation and workforce reduction initiatives of 4.5% of our global workforce in the fiscal year ended September 30, 20182019 (“fiscal year 2019”).
We expect to incur acquisition-related retention expenses of approximately $130 million during the fiscal year ending September 30, 2022 (“fiscal year 2022”), and decreasing over the following two fiscal years by approximately $15 million and $25 million. At September 30, 2021, our global workforce had increaseddecreased to approximately 9,70010,300 employees from approximately 9,40011,800 at September 30, 2017.2020.
We continue to place a high emphasis on our pay for performance philosophy. As such, any changes in the underlying performance of our investment products or changes in the composition of our incentive compensation offerings could have an impact on compensation and benefitbenefits expenses going forward. However, in order to attract and retain talented individuals, our level of compensation and benefit expenses may increase more quickly or decrease more slowly than our revenue.
Sales, Distribution and Marketing
40
AUM. Substantially all sales expenses are incurred from the same commissionable sales transactions that generate sales fee revenues and are determined as a percentage of sales. Marketing support expenses are based on AUM, sales or a combination thereof. Also included is the amortization of deferred sales commissions related to upfront commissions on shares sold without a front-end sales charge. The deferred sales commissions are amortized over the periods in which commissions are generally recovered from related revenues.
Sales, distribution and marketing expenses by cost driver are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | | | | |
| Asset-based expenses | | $ | 1,714.7 | | | $ | 1,369.0 | | | $ | 1,476.0 | | | 25 | % | | (7 | %) |
| Sales-based expenses | | 312.9 | | | 253.8 | | | 257.8 | | | 23 | % | | (2 | %) |
| Amortization of deferred sales commissions | | 78.2 | | | 80.3 | | | 85.8 | | | (3 | %) | | (6 | %) |
| Sales, Distribution and Marketing | | $ | 2,105.8 | | | $ | 1,703.1 | | | $ | 1,819.6 | | | 24 | % | | (6 | %) |
Asset-based expenses increased $345.7 million in fiscal year 2021 primarily due to the acquisition of Legg Mason and $59.7 million from a 5% increase in the related average AUM. Asset-based expenses decreased $107.0 million in fiscal year 2020 primarily due to decreases of $107.4 million from an 8% decrease in the related average AUM and $53.4 million from a higher mix of lower-fee U.S. assets, partially offset by a $58.6 million increase in expenses incurred by Legg Mason subsequent to the acquisition. Distribution expenses are generally not directly correlated with distribution fee revenues due to certain fee structures that do not provide full recovery of distribution costs.
Sales-based expenses increased $59.1 million in fiscal year 2021 primarily due to the acquisition of Legg Mason and $12.1 million from higher commissionable sales. Sales-based expenses decreased $4.0 million in fiscal year 2020 primarily due to a $20.3 million decrease from lower non-U.S. product commissionable sales, largely offset by an $8.6 million increase in expenses incurred by Legg Mason subsequent to the acquisition and a $7.5 million increase from higher U.S. product commissionable sales. U.S. products typically generate higher sales commissions than non-U.S. products.
Information Systems and Technology
Information systems and technology expenses increased $24.1$197.7 million in fiscal year 2018 primarily due to higher technology consulting and software costs, and increased $12.5 million in fiscal year 20172021 primarily due to higher external data service and software costs.
Detailscosts and technology consulting as a result of capitalized informationthe Legg Mason acquisition. Information systems and technology costs are shown below.expenses increased $29.9 million in fiscal year 2020 primarily due to expenses of Legg Mason subsequent to closing of the acquisition.
|
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Net carrying value at beginning of year | | $ | 102.1 |
| | $ | 88.1 |
| | $ | 89.8 |
|
| Additions, net of disposals | | 51.2 |
| | 63.1 |
| | 46.2 |
|
| Amortization | | (47.1 | ) | | (49.1 | ) | | (47.9 | ) |
| Net Carrying Value at End of Year | | $ | 106.2 |
| | $ | 102.1 |
| | $ | 88.1 |
|
Occupancy
We conduct our worldwide operations using a combination of leased and owned facilities. Occupancy expenses include rent and other facilities-related costs including depreciation and utilities.
Occupancy expenses increased $7.3$70.2 million and $14.3 million in fiscal year 2018years 2021 and 2020 primarily due to $6.6an increase in leased office space as a result of the Legg Mason acquisition.
Amortization of intangible assets
Amortization of intangible assets increased $178.0 million of equipment impairment, and decreased $12.8$39.3 million in fiscal year 2017years 2021 and 2020 primarily duerelated to lower rent expense.the intangible assets recognized as part of the acquisition of Legg Mason. See Note 9 – Goodwill and Other Intangible Assets in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for information on definite-lived intangible assets.
General, Administrative and Other
General, administrative and other operating expenses primarily consist of professional fees, fund-related service fees payable to external parties, professional fees, advertising and promotion, travel and entertainment, and other miscellaneous expenses.
General, administrative and other operating expenses increased $75.5$86.9 million in fiscal year 20182021, primarily due to higher contingent consideration expense,the acquisition of Legg Mason and $43.0 million of closed-end fund product launch costs. The increase was also due to increases of $35.0 million third-party fund administration and sub-advisory service fees professional fees, advertising and promotion,$12.9 million placement and travelplatform fees. The increases were partially offset by $55.4 million prior year impairments of intangible assets and entertainment expenses. Contingent consideration expense increased $26.9 million duegoodwill primarily related to revised estimatesassets recognized from the acquisitions of future revenues and profits from K2 Advisors Holdings, LLCBenefit Street Partners, L.L.C. (“K2”BSP”) and a prior-year decline in other acquisition-related AUM. Third-party fees primarily for sub-advisory and fund administration services increased $17.6 million, professional fees increased $16.6 million related to various corporate activities, and advertising and promotion and travel and entertainment expenses increased $7.3 million and $6.6 million due to higher activity levels.Onsa, Inc., (formally known as TokenVault, Inc).
General, administrative and other operating expenses decreased $17.9increased $58.9 million in fiscal year 20172020, primarily due to lowerincreases of $48.0 million in acquisition-related professional fees and $19.3 million of post-acquisition general and administrative expenses, both related to Legg Mason. Additionally, impairments of intangible assets and contingent consideration, partially offset by higher CIPs, advertising and promotion, and travel and entertainment expenses. Definite-lived intangible asset impairment decreased $18.6goodwill increased $42.1 million and amortization expense decreased $6.5 million, both primarily resulting from a prior-year impairment related to assets recognized from the K2 acquisition. Contingent consideration expense decreased $12.8 million due to revised estimatesacquisitions of K2’s future revenuesBSP and profits and a decline in other acquisition-related AUM.Onsa, Inc., (formally known as TokenVault, Inc.). The decreasesincreases were partially offset by increasesdecreases of $9.8$24.6 million in CIPstravel and entertainment expenses $6.7and $13.8 million in advertising and promotion expenses, both primarily due to lower activity levels, and $4.5 million in travel and entertainment expenses.by a prior year litigation settlement.
We are committed to investing in advertising and promotion in response to changing business conditions, and to advance our products where we see continued or potential new growth opportunities. As a result of potential changes in our strategic marketing campaigns, the level of advertising and promotion expenses may increase more rapidly, or decrease more slowly, than our revenues.
OTHER INCOME (EXPENSES)
Other income (expenses) consisted of the following:
| | | (in millions) | | | | | | | | 2018 vs. 2017 | | 2017 vs. 2016 | (in millions) | | 2021 vs. 2020 | | 2020 vs. 2019 |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | | for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 | |
| Investment and other income, net | | $ | 145.3 |
| | $ | 336.3 |
| | $ | 184.0 |
| | (57 | %) |
| 83 | % | |
| Investment and other income (losses), net | | Investment and other income (losses), net | | $ | 264.7 | | | $ | (38.4) | | | $ | 141.4 | | | NM | | NM |
| Interest expense | | (48.7 | ) | | (51.5 | ) | | (49.9 | ) | | (5 | %) | | 3 | % | Interest expense | | (85.4) | | | (33.4) | | | (22.4) | | | 156 | % | | 49 | % |
| Other Income, Net | | $ | 96.6 |
| | $ | 284.8 |
| | $ | 134.1 |
| | (66 | %) | | 112 | % | |
| Investment and other income of consolidated investment products, net | | Investment and other income of consolidated investment products, net | | 421.1 | | | 70.2 | | | 78.8 | | | 500 | % | | (11 | %) |
| Expenses of consolidated investment products | | Expenses of consolidated investment products | | (31.2) | | | (29.4) | | | (16.9) | | | 6 | % | | 74 | % |
| Other Income (Expenses), Net | | Other Income (Expenses), Net | | $ | 569.2 | | | $ | (31.0) | | | $ | 180.9 | | | NM | | NM |
Investment and other income (losses), net consists primarily of interest and dividend income income(losses) from equity method investees, gains (losses) on investments of CIPs and trading investment securities,held by the Company, rental income from excess owned space in our San Mateo, California corporate headquarters and other office buildings which we lease to third parties, gains (losses) on derivatives, foreign currency exchange gains (losses). and dividend income.
OtherInvestment and other income (losses), net decreased $188.2increased $303.1 million in fiscal year 20182021 primarily due to losses on investments held by CIPs, lower income from equity method investees and lower net gains on trading investment securities,investments held by the Company, partially offset by highera decrease in dividend income and losses on derivatives. Investment and other income (losses), net decreased $179.8 million in fiscal year 2020 primarily due to the impact of steep declines in market valuations on investment income, lower dividend and interest income, and foreign exchange gains. Investments heldlosses, partially offset by CIPsan increase in rental income.
Equity method investees generated net lossesincome of $55.0$154.3 million, as compared to net gainslosses of $118.2$98.1 million in the prior year. The losses were primarily from lowercurrent year reflects continued recovery in market valuations of holdingsinvestments held by an emerging marketsvarious global equity fund with a significant exposure in Turkey, several global/international fixed income funds and a U.S. fixed income fund. Incomefunds. Losses from equity method investees decreased $63.5increased $87.7 million in fiscal year 2020, primarily duerelated to lower gains and losses on investments in two global equity funds.
Investments held by three global equity funds, one of which incurred losses on Turkish holdings, and a global macro hedge fund. Net gains on trading investment securities decreased $11.1 million primarily due to losses and lower gains from fixed income funds and other debt and equity securities. The decreases were partially offset by a $37.2 million increase in dividend income primarily due to higher investments in, and yields on, money market funds, andthe Company generated net foreign currency exchange gains of $0.6$90.9 million, as compared to net losses of $16.0$16.8 million in the prior year, primarily from various nonconsolidated funds, and in the impact of strengthening of the U.S. dollar against the Euro on cash and cash equivalents denominated in U.S. dollars held in Europe.current year, assets invested for Legg Mason deferred compensation plans.
OtherDividend income net increased $150.7decreased $40.1 million in fiscal year 20172021 and $48.1 million in fiscal year 2020 primarily due to lower yields on money market funds.
Interest expense increased $52.0 million in fiscal year 2021 primarily due to interest expense recognized on debt of Legg Mason and on the senior unsecured unsubordinated notes issued during fiscal year 2021, partially offset by the redemption of the junior notes issued by Legg Mason. Interest expense increased $11.0 million in fiscal year 2020 primarily due to interest expense recognized on debt of Legg Mason subsequent to the acquisition.
Investment and other income of consolidated investment products, net consists of dividend and interest income and investment gains (losses) on investments held by CIPsCIPs. Expenses of consolidated investment products primarily consists of fund-related expenses, including professional fees and higher income from equity method investeesother administrative expenses, and interest income, partially offset by lower net gains on trading investment securities and net realized gains on sale of available-for-sale securities. Investments held by CIPs generated net gains of $118.2 million, as compared to net losses of $13.5 million in the prior year. The gains were primarily from higher market valuations of holdings by various global/international private equity funds and from a net increase of 20 CIPs due to adoption of new accounting guidance on October 1, 2016. Income from equity method investees increased $51.2 million primarily due to gains on investments held by a global macro hedge fund and a global equity fund. Interest income increased $38.4 million primarily due to higher levels of interest rates and debt securities. The increases were partially offset by a $37.9 million decrease in net gains on trading investment securities primarily due to lower gains from fixed income funds, partially offset by gains on corporate debt securities, as compared to losses in the prior year, and a $24.9 million decrease in net realized gains on sale of available-for-sale securities. The investments in sponsored funds that were classified as trading securities and available-for-sale securities in the prior year were significantly reduced on October 1, 2016 as a substantial amount of the investments were in funds that were consolidated as a result of the new accounting guidance.
expense. Significant portions of the investment and other income of consolidated investment products, net gains (losses)and expenses of CIPsconsolidated investment products are offset in noncontrolling interests in our consolidated statements of income.
Investment and other income of consolidated investment products, net increased $350.9 million in fiscal year 2021 primarily due to net gains on investments held by various alternative funds. Investment and other income of consolidated investment products, net decreased $8.6 million in fiscal year 2020 primarily due to net losses on investments held by various alternative funds, partially offset by net gains from holdings of various equity funds and a U.S. fixed income fund and an increase in dividend and interest income of CIPs.
Expenses of consolidated investment products increased $1.8 million in fiscal year 2021 and $12.5 million in fiscal year 2020, primarily due to activity of the funds.
Our investments in sponsored funds include initial cash investments made in the course of launching mutual fund and other investment product offerings, as well as investments for other business reasons. The market conditions that impact our AUM similarly affect the investment income earned or losses incurred on our investments in sponsored funds.
Our cash, cash equivalents and investments portfolio by investment objectiveasset class and accounting classification at September 30, 2018,2021, excluding third-party assets of CIPs, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Accounting Classification 1 | | | | Total Direct Portfolio |
| (in millions) | | Cash and Cash Equivalents | | Investments,
at
Fair Value | | Equity Method Investments | | Other
Investments | | Direct Investments
in CIPs | |
| Cash and Cash Equivalents | | $ | 4,357.8 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,357.8 | |
| Investments | | | | | | | | | | | | |
| Fixed Income | | — | | | 229.4 | | | 66.4 | | | 37.7 | | | 247.0 | | | 580.5 | |
| Equity | | — | | | 205.7 | | | 421.6 | | | 42.8 | | | 277.0 | | | 947.1 | |
| Multi-Asset | | — | | | 42.9 | | | 5.4 | | | — | | | 94.8 | | | 143.1 | |
| Alternative | | — | | | 110.3 | | | 320.9 | | | 27.2 | | | 424.0 | | | 882.4 | |
| Total investments | | — | | | 588.3 | | | 814.3 | | | 107.7 | | | 1,042.8 | | | 2,553.1 | |
| Total Cash and Cash Equivalents and Investments | | $ | 4,357.8 | | | $ | 588.3 | | | $ | 814.3 | | | $ | 107.7 | | | $ | 1,042.8 | | | $ | 6,910.9 | |
______________
1See Note 1 – Significant Accounting Policies and Note 6 – Investments in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for information on investment accounting classifications.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Accounting Classification 1 | | Total Direct Portfolio |
| (in millions) | | Cash and Cash Equivalents and Other 2 | | Trading Investments | | Equity Method Investments | | Direct Investments in CIPs | |
| Cash and Cash Equivalents | | $ | 6,610.8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,610.8 |
|
| Investments | | | | | | | | | | |
| Equity | | | | | | | | | | |
| Global/international | | 82.2 |
| | 12.9 |
| | 615.4 |
| | 154.2 |
| | 864.7 |
|
| United States | | 37.9 |
| | 7.1 |
| | — |
| | 5.4 |
| | 50.4 |
|
| Total equity | | 120.1 |
| | 20.0 |
| | 615.4 |
| | 159.6 |
| | 915.1 |
|
| Multi-Asset/Balanced | | 14.7 |
| | 5.0 |
| | 14.7 |
| | 196.6 |
| | 231.0 |
|
| Fixed Income | | | | | | | | | | |
| Tax-free | | 0.2 |
| | — |
| | 4.1 |
| | — |
| | 4.3 |
|
| Taxable | | | | | | | | | | |
| Global/international | | 120.4 |
| | 91.8 |
| | 146.6 |
| | 536.9 |
| | 895.7 |
|
| United States | | 44.6 |
| | 228.9 |
| | — |
| | 200.4 |
| | 473.9 |
|
| Total fixed income | | 165.2 |
| | 320.7 |
| | 150.7 |
| | 737.3 |
| | 1,373.9 |
|
| Total investments | | 300.0 |
| | 345.7 |
| | 780.8 |
| | 1,093.5 |
| | 2,520.0 |
|
| Total Cash and Cash Equivalents and Investments | | $ | 6,910.8 |
| | $ | 345.7 |
| | $ | 780.8 |
| | $ | 1,093.5 |
| | $ | 9,130.8 |
|
______________45
| |
1
| See Note 1 – Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K for information on investment accounting classifications. |
| |
2
| Other consists of $194.1 million of available-for-sale investments and $11.8 million of investments in life settlement contracts, both of which are measured at fair value, and $94.1 million of investments carried at cost. |
TAXES ON INCOME
As a multi-national corporation, we provide many of our services from locations outside the U.S. Some of these jurisdictions have lower tax rates than the U.S. Additionally, in certain countries our income is subject to reduced tax rates due to tax rulings. The mix of pre-tax income subject to these lower rates, when aggregated with income originating in the U.S., produces a lower overall effective income tax rate than existing U.S. federal and state income tax rates.
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law in the U.S. on December 22, 2017. The Tax Act includes various changes to the tax law, including a permanent reduction in the corporate income tax rate from 35% to 21% effective January 1, 2018 and assessment of a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. The estimated effects of the changes in the tax rate and laws resulting from the Tax Act were recognized during the quarter ended December 31, 2017, and were subsequently revised based on completion of certain tax return filings, additional technical guidance from the Department of Treasury and various states, and further refinement of the transition tax calculation. As of September 30, 2018, we have completed our analysis of the Tax Act impact except for the transition tax, which is expected to be completed within one year of the Tax Act enactment date.
The transition tax expense was estimated to be $983.2 million as of September 30, 2018 and may be adjusted in the future upon issuance of additional technical guidance, legislative updates from states on tax reform, and the completion of our tax return filings for fiscal years 2017 and 2018. The estimate includes an $87.6 million tax benefit recognized in the fourth quarter of fiscal year 2018 related to U.S. taxation of deemed foreign dividends in the transition fiscal year. This benefit may be reduced or eliminated by future regulation or legislation. The revaluation of our net deferred tax liabilities at the lower corporate income tax rate resulted in a net tax benefit of $53.3 million during fiscal year 2018.
The federal statutory rate for fiscal year 2018 is a blended rate of 24.5% based on the pre- and post-Tax Act rates, and will be 21% for future fiscal years.
Our effective income tax rate for fiscal year 20182021 was 66.5%14.3% as compared to 29.8%22.7% in fiscal year 20172020 and 29.7%26.8% in fiscal year 2016.2019. The rate increasedecrease in fiscal year 20182021 was primarily due to the impactrelease of a tax reserve following the close of an IRS audit of the transitionU.S. taxation of deemed foreign dividends (“Transition Tax”) for fiscal year 2018 and net income attributable to noncontrolling interests as compared to a net loss in the prior fiscal year. The rate decrease in fiscal year 2020 was primarily due to the prior-year reversal of the tax benefit included in the Transition Tax upon issuance of final regulations by the U.S. Department of Treasury for the Tax Cuts and Jobs Act (“Tax Act”), tax benefits from capital losses subsequent to the change in corporate tax structure of a foreign holding company to a U.S. branch, and a statutory rate reduction enacted in India in December 2019. These decreases were partially offset by an increase in the tax rate due to a lower federal statutory rate and the netmix of earnings in lower tax benefit from the revaluation of net deferred tax liabilities.jurisdictions. Our effective income tax rate for fiscal year 2018 excluding the one-time impactsimpact of the Tax Act was 22.7%. The rate increase in21.6% for fiscal year 2017 was primarily due to foreign earnings subject to U.S. taxes and the prior-year recognition of tax benefits in U.S. and non-U.S. jurisdictions as a result of various adjustments to unrecognized tax benefits including the expiration of statutes of limitations, substantially offset by higher net income attributable to noncontrolling interests.2019.
TheOur effective income tax rate for future reporting periods will continue to reflectreflects the relative contributions of non-U.S. earnings that are subject to reducedin the jurisdictions in which we operate, which have varying tax rates. Changes in our pre-tax income mix, tax rates or tax legislation in thesesuch jurisdictions and in our estimated impacts from the Tax Act may affect our effective income tax rate and net income.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES
As supplemental information, we are providing performance measures for “adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share,” each of which is based on methodologies other than generally accepted accounting principles (“non-GAAP measures”). Management believes these non-GAAP measures are useful indicators of our financial performance and may be helpful to investors in evaluating our relative performance against industry peers as these measures exclude the impact of CIPs and mitigate the margin variability related to sales and distribution revenues and expenses across multiple distribution channels globally. These measures also exclude performance-based investment management fees which are fully passed through as compensation and benefits expense per the terms of a previous acquisition by Legg Mason and have no impact on net income. These non-GAAP measures also exclude acquisition-related expenses, certain items which management considers to be nonrecurring, unrealized investment gains and losses included in investment and other income (losses), net, and the related income tax effect of these adjustments, as applicable. These non-GAAP measures also exclude the impact on compensation and benefits expense from gains and losses on investments made to fund deferred compensation plans and on seed investments under certain historical revenue sharing arrangements, which is offset in investment and other income (losses), net.
“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are defined below, followed by reconciliations of operating income, operating margin, net income attributable to Franklin Resources, Inc. and diluted earnings per share on a U.S. GAAP basis to these non-GAAP measures. Non-GAAP measures should not be considered in isolation from, or as substitutes for, any financial information prepared in accordance with U.S. GAAP, and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.
Adjusted Operating Income
We define adjusted operating income as operating income adjusted to exclude the following:
•Elimination of operating revenues upon consolidation of investment products.
•Acquisition-related retention compensation.
•Impact on compensation and benefits expense from gains and losses on investments related to Legg Mason deferred compensation plans and seed investments, which is offset in investment and other income (losses), net.
•Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration liabilities.
•Amortization and impairment of intangible assets and goodwill.
•Special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company.
Adjusted Operating Margin
We calculate adjusted operating margin as adjusted operating income divided by adjusted operating revenues. We define adjusted operating revenues as operating revenues adjusted to exclude the following:
•Acquisition-related performance-based investment management fees which are passed through as compensation and benefits expense.
•Sales and distribution fees and a portion of investment management fees allocated to cover sales, distribution and marketing expenses paid to the financial advisers and other intermediaries who sell our funds on our behalf.
•Elimination of operating revenues upon consolidation of investment products.
Adjusted Net Income
We define adjusted net income as net income attributable to Franklin Resources, Inc. adjusted to exclude the following:
•Activities of CIPs, including investment and other income (losses), net, and income (loss) attributable to noncontrolling interests, net of revenues eliminated upon consolidation of investment products.
•Acquisition-related retention compensation.
•Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration liabilities.
•Amortization and impairment of intangible assets.
•Impairment of goodwill and write off of noncontrolling interests related to the wind down of an acquired business.
•Special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company.
•Net gains or losses on investments related to Legg Mason deferred compensation plans which are not offset by compensation and benefits expense.
•Unrealized investment gains and losses other than those that are offset by compensation and benefits expense.
•Interest expense for amortization of Legg Mason debt premium from acquisition-date fair value adjustment.
•Net income tax expense of the above adjustments based on the respective blended rates applicable to the adjustments.
Adjusted Diluted Earnings Per Share
We define adjusted diluted earnings per share as diluted earnings per share adjusted to exclude the per share impacts of the adjustments applied to net income in calculating adjusted net income.
In calculating adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share, we adjust for activities of CIPs because the impact of consolidated products is not considered reflective of the underlying results of our operations. We adjust for acquisition-related retention compensation, other acquisition-related expenses, amortization and impairment of intangible assets and goodwill, the write-off of noncontrolling interests, and interest expense for amortization of the Legg Mason debt premium to facilitate comparability of our operating results with the results of other asset management firms. We adjust for special termination benefits related to workforce optimization initiatives related to past acquisitions and specific initiatives announced by the Company because these items are deemed nonrecurring. In calculating adjusted net income and adjusted diluted earnings per share, we adjust for unrealized investment gains and losses included in investment and other income (losses), net and net gains or losses on investments related to Legg Mason deferred compensation plans which are not offset by compensation and benefits expense because these items primarily relate to seed and strategic investments which have been and are generally expected to be held long term.
The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| for the fiscal years ended September 30, | | |
| Operating income | | $ | 1,875.0 | | $ | 1,048.9 | | $ | 1,466.9 |
| Add (subtract): | | | | | | |
| Elimination of operating revenues upon consolidation of investment products¹ | | 22.8 | | 23.6 | | 30.7 |
| Acquisition-related retention | | 163.7 | | 195.8 | | 63.7 |
| Compensation and benefits expense from gains on deferred compensation and seed investments, net | | 22.7 | | 1.2 | | — |
| Other acquisition-related expenses | | 36.0 | | 57.4 | | 9.4 |
| Amortization of intangible assets | | 232.0 | | 54.0 | | 14.7 |
| Impairment of goodwill and intangible assets | | — | | 55.4 | | 13.3 |
| Special termination benefits | | 27.1 | | 54.8 | | 55.5 |
| Adjusted operating income | | $ | 2,379.3 | | $ | 1,491.1 | | $ | 1,654.2 |
| | | | | | |
| Total operating revenues | | $ | 8,425.5 | | $ | 5,566.5 | | $ | 5,669.4 |
| Add (subtract): | | | | | | |
| Acquisition-related pass through performance fees | | (25.3) | | (9.4) | | — |
| Sales and distribution fees | | (1,635.5) | | (1,362.0) | | (1,444.6) |
| Allocation of investment management fees for sales, distribution and marketing expenses | | (470.3) | | (341.1) | | (375.0) |
| Elimination of operating revenues upon consolidation of investment products¹ | | 22.8 | | 23.6 | | 30.7 |
| Adjusted operating revenues | | $ | 6,317.2 | | $ | 3,877.6 | | $ | 3,880.5 |
| | | | | | |
| Operating margin | | 22.3 | % | | 18.8 | % | | 25.9 | % |
| Adjusted operating margin | | 37.7 | % | | 38.5 | % | | 42.6 | % |
| | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | | 2021 | | 2020 | | 2019 |
| for the fiscal years ended September 30, | | |
| Net income attributable to Franklin Resources, Inc. | | $ | 1,831.2 | | | $ | 798.9 | | | $ | 1,195.7 | |
| Add (subtract): | | | | | | |
| Net income of consolidated investment products¹ | | (2.8) | | | (4.6) | | | (3.7) | |
| Acquisition-related retention | | 163.7 | | | 195.8 | | | 63.7 | |
| Other acquisition-related expenses | | 34.0 | | | 58.6 | | | 9.4 | |
| Amortization of intangible assets | | 232.0 | | | 54.0 | | | 14.7 | |
| Impairment of goodwill and intangible assets | | — | | | 55.4 | | | 13.3 | |
| Special termination benefits | | 27.1 | | | 54.8 | | | 55.5 | |
| Net gains on deferred compensation plan investments not offset by compensation and benefits expense | | (1.2) | | | (0.1) | | | — | |
| Unrealized investment losses (gains) | | (285.7) | | | 221.0 | | | 20.0 | |
| Interest expense for amortization of debt premium | | (51.4) | | | (4.7) | | | — | |
| Write-off of noncontrolling interests | | — | | | (16.7) | | | — | |
| Net income tax expense of adjustments | | (31.7) | | | (101.4) | | | (37.3) | |
| Adjusted net income | | $ | 1,915.2 | | | $ | 1,311.0 | | | $ | 1,331.3 | |
| | | | | | |
| Diluted earnings per share | | $ | 3.57 | | | $ | 1.59 | | | $ | 2.35 | |
| Adjusted diluted earnings per share | | 3.74 | | | 2.61 | | | 2.62 | |
__________________
1The impact of consolidated investment products is summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| for the fiscal years ended September 30, | | |
| Elimination of operating revenues upon consolidation | | $ | (22.8) | | | $ | (23.6) | | | $ | (30.7) | |
| Other income, net | | 207.4 | | | 33.6 | | | 39.8 | |
| Less: income attributable to noncontrolling interests | | 181.8 | | | 5.4 | | | 5.4 | |
| Net income | | $ | 2.8 | | | $ | 4.6 | | | $ | 3.7 | |
LIQUIDITY AND CAPITAL RESOURCES
Cash flows were as follows:
| | | (in millions) | | | | | | | (in millions) | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Operating cash flows | | $ | 2,229.7 |
| | $ | 1,135.4 |
| | $ | 1,727.7 |
| Operating cash flows | | $ | 1,245.4 | | | $ | 1,083.3 | | | $ | 268.5 | |
| Investing cash flows | | (290.4 | ) | | 52.0 |
| | 192.2 |
| Investing cash flows | | (2,615.9) | | | (4,061.9) | | | (1,275.4) | |
| Financing cash flows | | (3,761.7 | ) | | (956.0 | ) | | (1,800.7 | ) | Financing cash flows | | 2,030.1 | | | 734.4 | | | 339.9 | |
Net cash provided by operating activities increased in fiscal year 20182021 primarily due to higher net income, a decreasehigher adjustment for amortization of intangible assets and increases in trading securitiesaccrued compensation and benefits, partially offset by a lower change in investments, net, adjustments for gains of CIPs as compared to an increaselosses in the prior year, partially offset by an increaseincreases in our trading securitiesreceivables and other assets and income from investments in equity method investees as compared to a decreaselosses in the prior year. Net cash used in investing activities decreased as compared to the prior year primarily due to lower cash paid for acquisitions, partially offset by net deconsolidation of CIPs as compared to net cash providedconsolidation in the prior year, primarily resulted fromhigher net purchases of investments by CLOs and net purchases of CIPs,investments as compared to net liquidations in the prior year. Net cash provided by financing activities increased as compared to the prior year primarily due to proceeds from debt of CIPs, proceeds from issuance of debt and higher net subscriptions in CIPs by noncontrolling interests, partially offset by higher payments on debt by CIPs and debt.
Net cash provided by operating activities increased in fiscal year 2020 primarily due to lower net purchases of investments by CIPs, decreases in investments, net, decreases in receivables and other assets, and a smaller decline in taxes payable, partially offset by decreases in net income and decreases in accounts payable and accrued expenses. Net cash used in investing activities increased as compared to the prior year primarily due to higher cash paid for acquisitions.acquisitions, and net purchases of investments by CLOs, partially offset by net consolidation of CIPs as compared to net deconsolidation in the prior year, higher net liquidation of our investments as compared to the prior year, and lower net additions of property, plant and equipment. Net cash provided by financing activities, as compared to net cash used in financing activities increasedthe prior year, primarily due to higher dividends paid on commonresulted from proceeds from debt of CIPs and lower repurchases of stock, partially offset by lower net subscriptions in CIPs by noncontrolling interests and higher repurchases of common stock, partially offset by lower payments on debt by CIPs.
Net cash provided by operating activities decreased in fiscal year 2017 primarily due to a larger net increase in trading securities of CIPs. Net cash provided by investing activities decreased mainly due to net purchases of the Company’s investments, as compared to net liquidations in the prior year, and the adoption of new accounting guidance. Net cash used in financing activities decreased primarily due to net subscriptions in CIPs by noncontrolling interests, as compared to net distributions in the prior year, and lower repurchases of common stock, partially offset by payments on the Company’s debt, higher payments on debt by CIPs and prior-year proceeds from a loan.
The assets and liabilities of CIPs attributable to third-party investors do not impact our liquidity and capital resources. We have no right to the CIPs’ assets, other than our direct equity investment in them and investment management and other fees earned from them. The debt holders of the CIPs have no recourse to our assets beyond the level of our direct investment, therefore we bear no other risks associated with the CIPs’ liabilities. Accordingly, the assets and liabilities of CIPs, other than our direct investments in them, are excluded from the amounts and discussion below.
Our liquid assets and debt consisted of the following:
| | | (in millions) | | | | | | | (in millions) | |
| as of September 30, | | 2018 | | 2017 | | 2016 | as of September 30, | | 2021 | | 2020 | | 2019 |
| Assets | | | | | | | Assets | | | | | | |
| Cash and cash equivalents | | $ | 6,610.8 |
| | $ | 8,523.3 |
| | $ | 8,247.1 |
| Cash and cash equivalents | | $ | 4,357.8 | | | $ | 3,026.8 | | | $ | 5,803.4 | |
| Receivables | | 733.7 |
| | 767.8 |
| | 746.4 |
| Receivables | | 1,300.4 | | | 1,114.8 | | | 740.0 | |
| Investments | | 2,130.6 |
| | 1,995.2 |
| | 1,896.7 |
| Investments | | 1,042.2 | | | 982.2 | | | 2,029.4 | |
| Total Liquid Assets | | $ | 9,475.1 |
| | $ | 11,286.3 |
| | $ | 10,890.2 |
| Total Liquid Assets | | $ | 6,700.4 | | | $ | 5,123.8 | | | $ | 8,572.8 | |
| | | | | | | | | | | | | |
| Liability | | | | | | | Liability | |
| Debt | | $ | 695.9 |
| | $ | 1,044.2 |
| | $ | 1,401.2 |
| Debt | | $ | 3,399.4 | | | $ | 3,017.1 | | | $ | 696.9 | |
Liquidity
Liquid assets consist of cash and cash equivalents, receivables and certain investments. Cash and cash equivalents at September 30, 20182021 primarily consist of money market funds and deposits with financial institutions and in prior years also included debt instruments and time deposits with original maturities of three months or less at the purchase date.money market funds. Liquid investments consist of trading and available-for-sale securities, investments in equity method investees consisting of mutualsponsored and other funds, direct investments in redeemable CIPs, other equity and debt securities, and time deposits with maturities greater than three months.
We utilize a significant portion of our liquid assets to satisfy operational and regulatory requirements and fund capital contributions relating to oursponsored and other products. Certain of our subsidiaries are required by our internal policy or regulation to maintain minimum levels of cash and/or capital, which are partially maintained by retaining cash and cash equivalents. As a result, such subsidiaries may be restricted in their ability to transfer cash to their parent companies. At Liquid assets used to satisfy these purposes were $4,059.6 million at September 30, 2018, our subsidiaries held $3,382.62021 and $3,290.9 million of liquid assets to satisfy operational and regulatory requirements and capital contributions to our products, as compared to $3,481.9 million held at September 30, 2017. Included in these amounts were liquid assets2020, including $262.6 million and $316.6 million that was restricted by regulatory requirements from transfer to Franklin and other subsidiaries of $252.6 million at September 30, 2018 and $167.4 million at September 30, 2017.requirements. Should we require more capital than is available for use, we could elect to reduce the level of discretionary activities, such as share repurchases or investments in sponsored and other products, or we could raise capital through debt or equity issuance. These alternatives could result in increased interest expense, decreased dividend or interest income, or other dilution to our earnings.
Capital Resources
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations, the ability to issue debt or equity securities and borrowing capacity under our uncommitted commercial paper private placement program.
InOn September 15, 2021, we redeemed all of the outstanding $500.0 million 5.450% junior notes due in September 2056 issued by Legg Mason at the principal amount plus accrued and unpaid interest of $6.8 million.
On August 12, 2021, we completed the offering and sale of the 2.950% senior unsecured unsubordinated notes due 2051 with an aggregate principal amount of $350.0 million.
On March 15, 2021, we redeemed all of the outstanding $250.0 million 6.375% junior notes due in March 2056 issued by Legg Mason at the principal amount plus accrued and unpaid interest of $4.0 million.
On October 19, 2020, we completed the offering and sale of the 1.600% senior unsecured unsubordinated notes due 2030 with a principal amount of $750.0 million. On August 12, 2021, the Company issued an additional $100.0 million in aggregate principal amount of 1.600% senior notes due October 2030. The notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price.
Prior to fiscal years,year 2021, we issued senior unsecured unsubordinated notes for general corporate purposes, to redeem outstanding notes and to finance an acquisition. At September 30, 2018, $699.32021, $699.6 million of the notes issued by Franklin in prior fiscal years were outstanding with an aggregate face valueprincipal amount due of $700.0 million.$700.0 million. The notes were issued at fixed interest rates and consist of $300.0$300.0 million at 2.800% per annum which mature in 2022, and $400.0 million at 2.850% per annum which mature in 2025.
Interest on At September 30, 2021, a total of $1,893.7 million of the notes isissued by Franklin were outstanding with an aggregate principal amount due of $1,900.0 million.
At September 30, 2021, Legg Mason’s outstanding senior unsecured unsubordinated notes had an aggregate principal amount due of $1,250.0 million. The notes have fixed interest rates from 3.950% to 5.625% with interest payable semi-annually. semi-annually and have an aggregate carrying value, inclusive of unamortized premium, of $1,518.3 million at September 30, 2021. Effective August 2, 2021, Franklin has agreed to unconditionally and irrevocably guarantee all of the outstanding notes issued by Legg Mason.
The Franklin and Legg Mason senior notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The indentures governing the senior notes contain limitations on our ability and the ability of our subsidiaries to pledge voting stock or profit participating equity interests in our subsidiaries to secure other debt without similarly securing the notes equally and ratably. TheIn addition, the indentures also include requirements that must be met if we consolidate or merge with, or sell all of our assets to, another entity. We were in compliance with all debt covenants at September 30, 2018.2021.
At September 30, 2018,2021, we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012.
2012 and is unrated.
Our ability to access the capital markets in a timely manner depends on a number of factors, including our credit rating, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. If we are unable to access capital markets in a timely manner, our business could be adversely impacted.
Uses of Capital
We expect that our main uses of cash will be to invest in and grow our business repurchase shares of our common stock,including through acquisitions, pay stockholder dividends, invest in our products, fund propertypay income taxes and equipment purchases, pay operating expenses of the business, enhance technology infrastructure and business processes, pay stockholder dividends and income taxes,repurchase shares of our common stock, and repay and service debt. While we expect to continue to repurchase shares to offset dilution from share-based compensation, and expect to continue to repurchase shares opportunistically from time to time, we will likely spend more of our post-dividend free cash flow investing in our business, including seed capital and acquiring resources to help grow our investment teams and operations.
PriorIn the ordinary course of business, we enter into contracts or purchase obligations with third parties whereby the third parties provide goods or services to enactmentor on behalf of the Tax Act, we indefinitely reinvested the undistributed earnings of all non-U.S. subsidiaries, except for income previously taxedCompany. Purchase obligations include contractual amounts that will be due to purchase goods and services to be used in our operations and are recorded as liabilities in the U.S. or subject to regulatory or legal repatriation restrictions or requirements. Effective January 1, 2018,consolidated financial statements when services are provided. At September 30, 2021, we intend to repatriate the earnings in excesshad $471.8 million of regulatory, capital or operational requirements for substantially all non-U.S. subsidiaries.purchase obligations.
We typically declare cash dividends on a quarterly basis.basis, subject to approval by our Board of Directors. We declared regular cash dividends of $0.92$1.12 per share ($0.23 per share per quarter) and a special dividend of $3.00 per share in fiscal year 2018 and regular cash dividends of $0.80 per share ($0.20($0.28 per share per quarter) in fiscal year 2017.2021, and of $1.08 per share ($0.27 per share per quarter) in fiscal year 2020. We currently expect to continue paying comparable regular cash dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors.
We maintain a stock repurchase program to manage our equity capital with the objective of maximizing shareholder value. Our stock repurchase program is effected through regular open-market purchases and private transactions in accordance with applicable laws and regulations. During fiscal years 2018regulations, and 2017, we repurchased 39.9 million and 19.1 million shares of our common stock at a cost of $1,426.7 million and $771.5 million. At September 30, 2018, 71.7 million shares remained available for repurchase under the program, which is not subject to an expiration date. On April 11, 2018, our Board of Directors authorized the repurchase of up to an additional 80.0 million shares of our common stock in either open market or private transactions. The size and timing of these purchases will depend on business conditions, price, market and business conditions and other factors.
During fiscal year 2018,years 2021 and 2020, we paid $86.8repurchased 7.3 million net of cash acquired, and issued 0.89.0 million shares of our common stock relatedat a cost of $208.2 million and $219.4 million. At September 30, 2021, 30.9 million shares remained available for repurchase under the authorization of 80.0 million shares approved by our Board of Directors in April 2018.
We routinely make cash investments in the course of launching sponsored funds. At September 30, 2021, we had $285.1 million of committed capital contributions which relate to acquisitions. discretionary commitments to invest in sponsored funds and other investment products and entities, including CIPs. These unfunded commitments are not recorded in the consolidated balance sheet.
We invested $182.2 million, net of redemptions, in our sponsored products during fiscal year 2021, and redeemed $636.6 million, net of investments, during fiscal year 2020.
On October 24, 2018,November 1, 2021, we entered into an acquisition agreement with a purchaseto acquire all of the outstanding ownership interests in Lexington Partners L.P. for cash consideration of approximately $683$1.0 billion to be paid at closing and additional cash payments totaling $750.0 million to be paid over the next three years. The acquisition is expected to be completed in the second quarter of the fiscal year 2022 and is expected to be funded from available cash.
On May 21, 2018,September 29, 2021, we redeemed ourentered into an acquisition agreement to acquire all of the outstanding $350.0ownership interests in O'Shaughnessy Asset Management for cash consideration of approximately $300.0 million, 4.625% senior notes dueexcluding future payments to be made upon the attainment of certain performance measures. The acquisition is expected to be completed in May 2020 at a make-whole redemption pricethe first quarter of $361.9 million.
We redeemed $105.9 million, net of investments, from our sponsored products during fiscal year 2018,2022 and invested $4.2 million, net of redemptions, during fiscal year 2017.is expected to be funded from available cash.
The funds that we manage have their own resources available for purposes of providing liquidity to meet shareholder redemptions, including securities that can be sold or provided to investors as in-kind redemptions, and lines of credit. Increased liquidity risks and redemptions have required, and may continue to require, increased cash in the form of loans or other lines of credit to help settle redemptions and for other related purposes. While we have no legal or contractual obligation to do so, we mayhave in certain instances voluntarily electelected to provide the funds with direct or indirect financial support based on our business objectives. In July 2018,April 2020, we purchased $32.6 millionauthorized loans aggregating up to 5.0 billion Indian Rupees (approximately $66.2 million) to certain sponsored funds in India that had experienced increased liquidity risks and redemptions and are in the process of certain equitywinding up. The loans were fully repaid during the second quarter of fiscal year 2021. See Note 16 – Commitments and debt securities from two sponsored funds.Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for further information. We did not provide financial or other support to our sponsored funds during fiscal year 2017.2021 or 2020.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENT LIABILITY
The following table summarizes our contractual obligations, commitments and contingent liability.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Payments Due by Fiscal Year |
| as of September 30, 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | There-
after | | Total |
| Debt | | | | | | | | | | | | | | |
Principal 1 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 300.0 |
| | $ | — |
| | $ | 400.0 |
| | $ | 700.0 |
|
| Interest | | 19.8 |
| | 19.8 |
| | 19.8 |
| | 19.8 |
| | 11.4 |
| | 17.1 |
| | 107.7 |
|
| Operating leases | | 46.6 |
| | 42.2 |
| | 37.8 |
| | 33.1 |
| | 32.6 |
| | 175.1 |
| | 367.4 |
|
Purchase obligations 2 | | 278.2 |
| | 80.4 |
| | 16.0 |
| | 6.0 |
| | 2.8 |
| | 3.1 |
| | 386.5 |
|
| Total Contractual Obligations | | 344.6 |
| | 142.4 |
| | 73.6 |
| | 358.9 |
| | 46.8 |
| | 595.3 |
| | 1,561.6 |
|
Committed capital contributions 3 | | 299.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 299.0 |
|
Contingent consideration liability 4 | | 40.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 40.8 |
|
Federal transition tax liability 5 | | 77.2 |
| | 77.2 |
| | 77.2 |
| | 77.2 |
| | 77.2 |
| | 579.3 |
| | 965.3 |
|
| Total Contractual Obligations, Commitments and Contingent Liability | | $ | 761.6 |
| | $ | 219.6 |
| | $ | 150.8 |
| | $ | 436.1 |
| | $ | 124.0 |
| | $ | 1,174.6 |
| | $ | 2,866.7 |
|
__________________
| |
1
| Debt principal represents maturity amount. |
| |
2
| Purchase obligations include contractual amounts that will be due to purchase goods and services to be used in our operations and may be canceled at earlier times than those indicated under certain conditions that may include termination fees. |
| |
3
| Committed capital contributions relate to discretionary commitments to invest in sponsored funds and other investment products and entities. Generally, the timing of the funding of these commitments is unknown as they are callable on demand at any time prior to the expiration of the commitment periods. |
| |
4
| Contingent consideration liability relates to the Company’s commitment to acquire the remaining interests in K2. |
| |
5
| Estimated transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings under the Tax Act. |
The debt holders of CIPs have no recourse to our assets beyond the level of our direct investments, therefore we bear no risks associated with these entities’ liabilities and have not included them in the table above. See Note 9 – Consolidated Investment Products in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K.
At September 30, 2018, our consolidated balance sheet included liabilities for unrecognized tax benefits of $77.5 million and related accrued interest of $11.3 million (see Note 11 – Taxes on Income in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K). Because of the high degree of uncertainty regarding the timing and amounts of future cash outflows, unrecognized tax benefits and related accrued interest are not included in the table above.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These estimates, judgments and assumptions are affected by our application of accounting policies. Further, global concerns about the COVID-19 pandemic have adversely affected and may continue to adversely affect, our business, financial condition and results of operations including the estimates and assumptions made by management. Actual results could differ from the estimates. Described below are the accounting policies that we believe are most critical to understanding our financial position and results of operations. For additional information about our accounting policies, see Note 1 – Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K.Annual Report.
Consolidation
We consolidate our subsidiaries and investment products in which we have a controlling financial interest. We have a controlling financial interest when we own a majority of the voting interest in a voting interest entity (“VOE”) or are the primary beneficiary of a variable interest entity (“VIE”).
A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or do not have defined rights and obligations normally associated with an equity investment. The assessment of whether an entity is a VIE or VOE involves judgment and analysis on a structure-by-structurestructure by structure basis. When performing the assessment, we consider factors such as the entity’s legal organization, design and capital structure, the rights of the equity investment holders and our contractual involvement with and ownership interest in the entity. Substantially all of ourOur VIEs are primarily investment products and our variable interests consist of our equity ownership interests in and investment management fees earned from these products.
We are the primary beneficiary of a VIE if we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. Investment management fees earned from VIEs are excluded from the primary beneficiary determination if they are deemed to be at market and commensurate with service. The key estimates and assumptionsassumption used in the analyses includeanalysis includes the amount of AUM and the life of the investment product.AUM. These estimates and assumptions are subject to variability. For example, AUM is impacted by market volatility and the level of sales, redemptions, distributions to investors and reinvested distributions. There is judgment involved in assessing whether we have the power to direct the activities that most significantly impact VIEs’ economic performance and the obligation to absorb losses of or right to receive benefits from VIEs that could potentially be significant to the VIEs. As of September 30, 2018,2021, we were the primary beneficiary of 2950 investment product VIEs.
Business Combinations
Business combinations are accounted for by recognizing the acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition-date estimated fair values. Any excess of the purchase consideration over the acquisition-date fair values of these identifiable assets and liabilities is recognized as goodwill. Determining the fair value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in earnings.
Intangible assets acquired in business combinations consist primarily of investment management contracts and trade names. The fair values of the acquired management contracts are based on the net present value of estimated future cash flows attributable to the contracts, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate. The fair value of trade names is determined using the relief from royalty method based on net present value of estimated future cash flows, which include significant assumptions about royalty rate, revenue growth rate, discount rate and effective tax rate. Our estimates are based on assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, may differ from actual results.
Our management contract intangible assets are amortized over their estimated useful lives, which range from three to fifteen years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Indefinite-lived intangible assets represent contracts to manage investment assets for which there is no foreseeable limit on the contract period. Trade names are amortized over their estimated useful lives which range from five to twenty years using the straight-line method.
Goodwill and indefinite-lived intangible assets are tested for impairment annually and when an event occurs or circumstances change that more likely than not reduce the fair value of the related reporting unit or indefinite-lived intangible asset below its carrying value. We have one reporting unit, investment management and related services, consistent with our single operating segment, to which all goodwill has been assigned. We make significant estimates and assumptions when evaluating goodwill and other intangible assets for impairment.
We may first assess goodwill and indefinite-lived intangible assets for qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The qualitative analysis considers entity-specific and macroeconomic factors and their potential impact on key assumptions used in the determination of the fair value of the reporting unit or indefinite-lived intangible asset. A quantitative impairment test is performed if the results of the qualitative assessment indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value or an indefinite-lived intangible asset is impaired, or if a qualitative assessment is not performed. Quantitative tests compare the fair value of the asset to its carrying value.
The fair values of the reporting unit and indefinite-lived intangible assets are based on the net present value of estimated future cash flows, which include significant assumptions about the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate. The most relevant of these assumptions to the determination of estimated fair value are the AUM growth rate, pre-tax profit margin and the discount rate.
We performed a qualitative annual impairment test for goodwill and all indefinite-lived intangible assets as of August 1, 2021 and concluded it is more likely than not that the fair values of the reporting unit and the indefinite-lived intangible assets exceed their carrying values.
We subsequently monitored market conditions and their potential impact on the assumptions used in the annual assessment to determine whether circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value, or indicate that the other indefinite-lived intangible assets might be impaired. We considered, among other things, changes in our AUM and weighted-average cost of capital by assessing whether these changes would impact the reasonableness of our impairment assessment as of August 1, 2021. We also monitored fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole. Subsequent to August 1, 2021, there were no impairments of goodwill or indefinite-lived intangible assets as no events occurred or circumstances changed that would indicate these assets might be impaired.
We test definite-lived intangible assets for impairment quarterly. Impairment is indicated when the carrying value of an asset is not recoverable and exceeds its fair value. Recoverability is evaluated based on estimated undiscounted future cash flows using assumptions about the AUM growth rate, pre-tax profit margin, average effective fee rate and expected useful life as well as royalty rate for trade name intangible assets. The most relevant of these assumptions to determine future cash flows is the AUM growth rate. If the carrying value of an asset is not recoverable through undiscounted cash flows, impairment is recognized in the amount by which the carrying value exceeds the asset’s fair value, as determined by discounted cash flows or other methods as appropriate for the asset type. There were no impairments of definite-lived intangible assets during fiscal year 2021.
While we believe that the assumptions used to estimate fair value in our impairment tests are reasonable and appropriate, future changes in the assumptions could result in recognition of impairment.
Fair Value Measurements
A substantial amount of ourOur investments are primarily recorded at fair value or amounts that approximate fair value on a recurring basis. We use a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. The assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. See Note 1 – Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-KAnnual Report for more information on the fair value hierarchy.
As of September 30, 2018,2021, Level 3 assets represented 14%9% of total assets measured at fair value, substantially all of which related to CIPs’ investments in equity and debt securities, that are not traded in active markets. There was one Level 3 liability, a contingent consideration liability which represented 81% of total liabilities measured at fair value.and real estate. There were no$23.1 million of transfers into orand $5.0 million of transfers out of Level 3 during fiscal year 2018.2021.
FollowingThe following are descriptions of the significant assets and liability measured at fair value and their fair value methodologies.
Investment Securities, TradingSponsored funds and separate accounts consist primarily of investments in nonconsolidated sponsored funds debt and other equity securities.to a lesser extent, separate accounts. Changes in the fair value of the investments are recognized as gains and losses in earnings. The fair values of all funds and certain other equity securitiesfund products are determined based on their published net asset values (“NAV”).NAV or estimated using NAV as a practical expedient. The fair values of the underlying investments in the separate accounts are determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.
Investments related to long-term incentive plans consist primarily of investments in sponsored funds related to certain compensation plans that have certain vesting provisions. Changes in fair value are recognized as gains and losses in earnings. The fair values of the investments are determined based on the fund products’ published NAV or estimated using NAV as a practical expedient.
Other equity and debt and certainsecurities consist of other equity investment securities and trading debt securities. Changes in the fair value are recognized as gains and losses in earnings. The fair values of equity securities other than fund products are determined using independent third-party broker or dealer price quotes or based on discounted cash flows using
significant unobservable inputs. The fair values of debt securities are determined using independent third-party broker or dealer price quotes or based on discounted cash flows using significant unobservable inputs.
Investment Securities, Available-for-Sale consist primarily of nonconsolidated sponsored funds and, to a lesser extent, debt and other equity securities. The fair value of funds is determined based on their published NAV. The fair value of debt securities is primarily determined using independent third-party broker or dealer price quotes. The fair value of other equity securities is determined using quoted market prices.
Investment securities, available-for-sale are evaluated for other-than-temporary impairment on a quarterly basis when the cost of an investment exceeds its fair value. We consider many factors, including the severity and duration of the decline in fair value below cost, our intent and ability to hold the security for a period of time sufficient for an anticipated recovery, and the financial condition of and specific events related to the issuer.
Investments of CIPs consist of tradingmarketable debt and equity securities and other investments that are not generally traded in active markets. TheChanges in the fair value of tradingthe investments are recognized as gains and losses in earnings. The fair values of marketable securities isare determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available. The investments that are not generally traded in active markets consist of debtloans, other equity and equitydebt securities of entities in emerging markets, fund products and fund products.real estate. The fair values of the debt and equity securities are determined using significant unobservable inputs in either a market-based or income-based approach. The fair value ofapproach, except for fund products, isfor which fair values are estimated using NAV as a practical expedient.
Contingent Consideration Liability consiststhird-party equity interests in CIPs and minority interests in certain subsidiaries. Noncontrolling interests that are redeemable or convertible for cash or other assets at the option of the expected future payments related to our commitment to acquire the remaining interests in K2. The liability is determined using the net presentnoncontrolling interest holders and are classified as temporary equity at fair value, of anticipated future cash flows based on estimated future revenue and profits and timing of payments.
Goodwill and Other Intangible Assets
Goodwill represents the excess cost of a business acquisition overexcept when the fair value ofis less than the net assets acquired. Other intangible assets consist of investment management contracts acquiredissuance date fair value, the reported amount is the issuance date fair value. Changes in business acquisitions. We amortize these intangible assets over their estimated useful lives, which range from three to 15 years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Indefinite-lived intangible assets represent contracts to manage investment assets for which there is no foreseeable limit on the contract period.
We make significant estimates and assumptions when valuing goodwill and other intangible assets in connection with the initial purchase price allocation of an acquired entity, as well as when evaluating goodwill and other intangible assets for impairment on an ongoing basis.
Goodwill and indefinite-lived intangible assets are tested for impairment annually and when an event occurs or circumstances change that more likely than not reduce the fair value of redeemable noncontrolling interest is recognized as an adjustment to retained earnings. Nonredeemable noncontrolling interests do not permit the related reporting unit or indefinite-lived intangible asset below its carrying value. We have one reporting unit, investment managementnoncontrolling interest holders to request settlement, are reported at their issuance value and related services, consistent with our single operating segment,undistributed net income (loss) attributable to which all goodwill has been assigned.noncontrolling interests.
We may first assess goodwill and indefinite-lived intangible assets for qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The qualitative analysis considers entity-specific and macroeconomic factors and their potential impact on the key assumptions used in the determination of the fair value of third-party equity interests in CIPs are determined based on the reporting unitpublished NAV or indefinite-lived intangible asset. A quantitative impairment test is performed if the results of the qualitative assessment indicate that it is more likely than not that theestimated using NAV a practical expedient. The fair value of the reporting unit is less than its carrying value or an indefinite-lived intangible asset is impaired, or if a qualitative assessment is not performed. Quantitative tests compare the fair value of the assetredeemable noncontrolling interests related to its carrying value.
Fair values of the reporting unit and indefinite-lived intangible assetsminority interest in certain subsidiaries are based on the net present value of estimated futurederived using discounted cash flows and guideline public company methodology, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, average effective fee rate, effective taxdiscount rate and discount rate, which is based on our weighted-average cost of capital. The most relevant of these assumptions to the determination of estimated fair value are the AUM growth rate and the discount rate.
We performed our annual impairment tests for goodwill and indefinite-lived intangible assets as of August 1, 2018. We elected to perform a qualitative assessment of the valuation of goodwill and 88% of our indefinite-lived intangible assets and concluded it is more likely than not that the fair values of the reporting unit and the specific intangible assets exceed their carrying values. We performed a quantitative test for the remaining indefinite-lived intangible assets and did not recognize any impairment because our estimated fair values of the assets exceeded their carrying values by more than 20%.
We subsequently monitor market conditions and their potential impact on the assumptions used in the annual calculations of fair value to determine whether circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value, or indicate that the indefinite-lived intangible assets might be impaired. We considered, among other things, changes in our AUM and weighted-average cost of capital by assessing whether these changes would impact the reasonableness of the assumptions used in our impairment tests as of August 1, 2018. We also monitored fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole. Subsequent to August 1, 2018, there were no impairments of goodwill or indefinite-lived intangible assets as no events occurred or circumstances changed that would indicate these assets might be impaired.
While we believe that the assumptions used to estimate fair value in our impairment tests are reasonable and appropriate, future changes in the assumptions could result in recognition of impairment.operating income multiples.
Revenues
InvestmentWe earn revenue primarily from providing investment management and related services to our customers. In addition to investment management, services include fund administration, sales and distribution, and shareholder servicing feesservicing. Revenues are recognized when our 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 earned over the period in which services are rendered, except for performance-based investment management fees which are recognized when earned. Sales commissions related tothe sales and distribution obligations for the sale of shares of sponsored funds, which are recognizedsatisfied on trade date. InvestmentMultiple services included in customer contracts are accounted for separately when the obligations are determined to be distinct. Management judgment is involved in assessing the probability of significant revenue reversal and in the identification of distinct services.
Fees from providing investment management fees,and fund administration services (“investment management fees”), other than performance-based fees, and distributioninvestment management fees, are determined based on a percentage of AUM, primarily on a monthly basis using daily average daily AUM.AUM, and are recognized as the services are performed over time. Performance-based investment management fees are based ongenerated when investment products’ performance exceeds targets established
in the relatedamount is no longer probable and may relate to investment management contracts. Shareholder servicingservices 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 factors suchcontractual 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 AUM, transactionsthe amounts become known and shareholder accounts establishedmay relate to sales and distribution services provided in the related service contracts.prior periods.
AUM is generally based on the fair value of the underlying securities held by our 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. The fair values of securities for which market prices are not readily available are valued internally valued using various methodologies which incorporate significant unobservable inputs as appropriate for each security type. Pricing of the securities is governed by our global valuation and pricing policy, which defines valuation and pricing conventions for each security type, including practices for responding to unexpected or unusual market events. As of September 30, 2018, our total AUM by fair value hierarchy level was 54% Level 1, 45% Level 2 and 1% Level 3.
As substantially all of our AUM is valued based on observable market prices or inputs, market risk is the most significant risk underlying the valuation of our AUM.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. In assessing whether a valuation allowance should be established against a deferred income tax asset, we consider all positive and negative evidence, which includes timing of expiration, projected sources of taxable income, limitations on utilization under the statute and the effectiveness of prudent and feasible tax planning strategies among other factors. For each tax position taken or expected to be taken in a tax return, we utilize significant judgment related to the range of possible favorable or unfavorable outcomes to determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement.
As a multinational corporation, weWe operate in various locations outsidenumerous countries, states and other taxing jurisdictions. The income tax laws are complex and subject to different interpretations by the U.S.taxpayer and generate earnings from our non-U.S. subsidiaries. Prior to enactment of the Tax Act, we indefinitely reinvested the undistributed earnings of all our non-U.S. subsidiaries, except for income previously taxedrelevant taxing authorities. Significant judgment is required in the U.S. or subject to regulatory or legal repatriation restrictions or requirements. Effective January 1, 2018, we intend todetermination of our annual income tax provisions, which includes the assessment of deferred tax assets and uncertain tax positions, as well as the interpretation and application of existing and newly enacted tax laws, regulation changes, and new judicial rulings. We repatriate foreign earnings that are in excess of regulatory, capital or operational requirements for substantiallyof all of our non-U.S. subsidiaries.
It is possible that actual results will vary from those recognized in our consolidated financial statements due to changes in the interpretation of applicable guidance or as a result of examinations by taxing authorities.
Loss Contingencies
We are involved in various lawsuits and claims encountered in the normal course of business. When such a matter arises and periodically thereafter, we consult with our legal counsel and evaluate the merits of the claims based on the facts available at that time. In management’s opinion, an adequate accrual has been made as of September 30, 20182021 to provide for any probable losses that may arise from such matters for which we could reasonably estimate an amount. See also Note 1216 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K.Annual Report.
NEW ACCOUNTING GUIDANCE
See Note 2 – New Accounting Guidance in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K.
Annual Report.
Selected Quarterly Financial Data (Unaudited)
|
| | | | | | | | | | | | | | | | |
| (in millions, except per share data) | | | | | | | | |
| Quarter ended | | December 31 | | March 31 | | June 30 | | September 30 |
| Fiscal year 2018 | | | | | | | | |
| Operating revenues | | $ | 1,615.5 |
| | $ | 1,617.8 |
| | $ | 1,558.6 |
| | $ | 1,527.2 |
|
| Operating income | | 581.1 |
| | 555.7 |
| | 503.1 |
| | 478.7 |
|
Net income (loss) attributable to Franklin Resources, Inc. 1 | | (583.3 | ) | | 443.2 |
| | 402.0 |
| | 502.5 |
|
| Earnings (loss) per share | | | | | | | | |
| Basic | | $ | (1.06 | ) | | $ | 0.79 |
| | $ | 0.75 |
| | $ | 0.96 |
|
| Diluted | | (1.06 | ) | | 0.78 |
| | 0.75 |
| | 0.96 |
|
| Dividends declared per share | | $ | 0.23 |
| | $ | 3.23 |
| | $ | 0.23 |
| | $ | 0.23 |
|
AUM (in billions) | | | | | | | | |
| Ending | | $ | 753.8 |
| | $ | 737.5 |
| | $ | 724.1 |
| | $ | 717.1 |
|
| Average | | 752.7 |
| | 751.8 |
| | 731.7 |
| | 724.3 |
|
| | | | | | | | | |
| Fiscal year 2017 | | | | | | | | |
| Operating revenues | | $ | 1,560.8 |
| | $ | 1,600.6 |
| | $ | 1,613.9 |
| | $ | 1,616.9 |
|
| Operating income | | 586.9 |
| | 555.5 |
| | 564.2 |
| | 557.7 |
|
| Net income attributable to Franklin Resources, Inc. | | 440.2 |
| | 420.7 |
| | 410.6 |
| | 425.2 |
|
| Earnings per share | | | | | | | | |
| Basic | | $ | 0.77 |
| | $ | 0.74 |
| | $ | 0.73 |
| | $ | 0.76 |
|
| Diluted | | 0.77 |
| | 0.74 |
| | 0.73 |
| | 0.76 |
|
| Dividends declared per share | | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.20 |
|
AUM (in billions) | | | | | | | | |
| Ending | | $ | 720.0 |
| | $ | 740.0 |
| | $ | 742.8 |
| | $ | 753.2 |
|
| Average | | 722.7 |
| | 731.7 |
| | 742.1 |
| | 749.0 |
|
______________
| |
1
| Net income (loss) attributable to Franklin Resources, Inc. for the quarter ended December 31, 2017 includes an estimated income tax charge of $1.1 billion resulting from enactment of the Tax Act. Decreases to the estimate of $0.8 million, $9.7 million and $89.6 million were recognized during the quarters ended March 31, 2018, June 30, 2018 and September 30, 2018. |
Risk Factors
For a description of certain risk factors and other important factors that may affect us, our subsidiaries and our business, please see the description of the risk factors set forth under Item 1A of Part I of this Form 10-K, which is incorporated herein by reference.
| |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, our financial position is subject to market risk, including, but not limited to, potential loss due to changes in the value of financial instruments including those resulting from adverse changes in interest rates, foreign currency exchange rates and market valuation. Financial instruments include, but are not limited to, investment securities and debt obligations. Management is responsible for managing market risk. Our Enterprise Risk Management Committee is responsible for providing a framework to assist management to identify, assess and manage market and other risks.
Our market risk from assets and liabilities of CIPs is limited to that of our direct equity investments in them and investment management fees earned from them. Accordingly, the assets and liabilities of CIPs are excluded from the discussion below.
AUM Market Price Risk
We are exposed to market risk through our investment management and distribution fees, which are generally calculated as a percentage of the market value of AUM. Changes in equity market prices, interest rates, credit spreads, foreign exchange rates, or a combination of these factors could cause the value of AUM to decline, which would result in lower investment management and distribution fees. Our exposure to these risks is minimizedreduced as we sponsor a broad range of investment products in various global jurisdictions, which serves to mitigate the impact of changes in any particular market or region.
Assuming the respective effective fee rates and asset mix remain unchanged, a proportional 10% change in the value of our average AUM would result in corresponding 10% changes in our investment management fees and asset-based distribution fee revenues, and expenses, excluding performance-based investment management fees. Such a change for the fiscal year ended September 30, 20182021 would have resulted in an increase or decrease in pre-tax earningsoperating revenues of $395.7 million.$758.5 million.
Interest Rate Risk
We are exposed to changes in interest rates primarily through our investments in sponsored funds that invest in debt securities, which were $1,457.8$1,606.0 million at September 30, 2018.2021. Our exposure to interest rate risks from these investments is minimizedmitigated by the low average duration exposure mandate of a substantial majority of the funds. The investment mandates of the remaining funds consist ofand a broad range of products in various global jurisdictions, mitigating the impact of changes in any particular market or region.jurisdictions. We had no exposure to changes in interest rates from debt obligations at September 30, 20182021 as all of our outstanding debt was issued at fixed rates.
As of September 30, 2018,2021, we have considered the potential impact of a 100 basis point movement in market interest rates on our portfolio of sponsoredinvestments in funds that invest in debt securities. Based on our analysis, we do not expect that such a change would have a material impact on our earnings in the next twelve12 months.
Foreign Currency Exchange Risk
We are subject to foreign currency exchange risk through our international operations. While the majority of our revenues are earned in the U.S., we also provide services and earn revenues in Europe, Middle East and Africa, Asia-Pacific Canada, The Bahamas and Latin America.Americas excluding U.S. Our exposure to foreign currency exchange risk is minimizedreduced in relation to our results of operations since a significant portion of these revenues is denominated in U.S. dollars. This situation may change in the future as our business continues to grow outside the U.S. and expenses incurred denominated in foreign currencies increase.
The exposure to foreign currency exchange risk in our consolidated balance sheet mostly relates to cash and cash equivalents and investments that are denominated in foreign currencies, primarily in the Euro, Pound Sterling, Indian Rupee, Canadian dollar and CanadianAustralian dollar. These assets accounted for 10%22% of the total cash and cash equivalents and investments at September 30, 2018. Changes in the values of these assets resulting from changes in U.S. dollar exchange rates are recorded in accumulated other comprehensive income (loss), except for cash and cash equivalents held by subsidiaries for which the U.S. dollar is the functional currency, for which the changes are recorded in earnings. We also have exposure to foreign exchange revaluation of cash and cash equivalents and investments that are denominated in U.S. dollars and held by non-U.S. subsidiaries for which their local currency is the functional currency. These assets accounted for 5% of the total cash and cash equivalents and investments at September 30, 2018. Changes in the values of these assets resulting from changes in U.S. dollar exchange rates are recorded in earnings.
2021.
A 10% weakening of the U.S. dollar against the various foreign currencies to which we had exposure as described above would result in corresponding 10% increases in the U.S. dollar values of the foreign currency assets and 10% decreases in the foreign currency values of the U.S. dollar assets. Such a weakening as of September 30, 20182021 would result in a $69.7$93.4 million increase in accumulated other comprehensive income (loss) and a $31.0$29.7 million decrease in pre-tax earnings. We generally do not use derivative financial instruments to manage foreign currency exchange risk exposure. As a result, both positive and negative currency fluctuations against the U.S. dollar may affect our results of operations and accumulated other comprehensive income (loss).
Market Valuation Risk
We are exposed to market valuation risks related to securities we hold that are carried at fair value. To mitigate the risks we maintain a diversified investment portfolio and, from time to time, we may enter into derivative agreements.
The following is a summary of the effect of a 10% increase or decrease in the carrying values of our financial instruments subject to market valuation risks at September 30, 2018.2021. If such a 10% increase or decrease in carrying values were to occur, the changes from trading investment securitiesinvestments measured at fair value and direct investments in CIPs would result in a $144.0$163.1 million increase or decrease in our pre-tax earnings. The changes from available-for-sale investment securities would not result in a change to other-than-temporary impairment charges that would be material to our pre-tax earnings.
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Carrying Value | | Carrying Value
Assuming a 10% Increase | | Carrying Value
Assuming a 10% Decrease |
| Investments, at fair value | | $ | 588.3 | | | $ | 647.1 | | | $ | 529.5 | |
| Direct investments in CIPs | | 1,042.8 | | | 1,147.1 | | | 938.5 | |
| Total | | $ | 1,631.1 | | | $ | 1,794.2 | | | $ | 1,468.0 | |
|
| | | | | | | | | | | | |
| (in millions) | | Carrying Value | | Carrying Value Assuming a 10% Increase | | Carrying Value Assuming a 10% Decrease |
| Investment securities, trading | | $ | 345.7 |
| | $ | 380.3 |
| | $ | 311.1 |
|
| Investment securities, available-for-sale | | 194.1 |
| | 213.5 |
| | 174.7 |
|
| Direct investments in CIPs | | 1,093.5 |
| | 1,202.9 |
| | 984.2 |
|
| Total | | $ | 1,633.3 |
| | $ | 1,796.7 |
| | $ | 1,470.0 |
|
| |
Item 8. | Financial Statements and Supplementary Data. |
Item 8.Financial Statements and Supplementary Data. Index of Consolidated Financial Statements for the fiscal years ended September 30, 2018, 20172021, 2020 and 2016.2019.
|
| | | | | | | |
| CONTENTS | | Page |
| | 55 |
| | 56 |
| Consolidated Financial Statements of Franklin Resources, Inc. and its consolidated subsidiaries: | | |
| | 58 |
| | 59 |
| | 60 |
| | 61 |
| | 62 |
| | 64 |
All schedules have been omitted as the information is provided in the financial statements or in related notes thereto or is not required to be filed, as the information is not applicable.
Certain required quarterly information is included in Item 7 of Part II of this Form 10-K report under the heading “Selected Quarterly Financial Data (Unaudited)” and incorporated herein by reference.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Franklin Resources, Inc. and its consolidated subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2018,2021, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on that assessment, management concluded that, as of September 30, 2018,2021, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 20182021 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm that audits the Company’s consolidated financial statements, as stated in their report immediately following this report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2018.
2021.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of Franklin Resources, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Franklin Resources, Inc. and its subsidiaries (the “Company”) as of September 30, 20182021 and 2017,2020, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended September 30, 20182021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of September 30, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 20182021 and 2017,2020, and the results of theirits operations and theirits cash flows for each of the three years in the period ended September 30, 20182021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Realizability of Deferred Tax Assets
As described in Note 14 to the consolidated financial statements, the Company had gross deferred tax assets of $1,169.8 million as of September 30, 2021, reduced by a $319.3 million valuation allowance. Management records a valuation allowance to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. In assessing whether a valuation allowance should be established against a deferred income tax asset, management considers all positive and negative evidence, which includes timing of expiration, projected sources of taxable income, limitations on utilization under the statute, and effectiveness of prudent and feasible tax planning strategies.
The principal considerations for our determination that performing procedures relating to the realizability of deferred tax assets is a critical audit matter are the significant judgment by management when assessing the realizability of deferred tax assets, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s assessment of the realizability of deferred tax assets and significant assumptions relating to the timing of expiration, projected sources of taxable income, limitations on utilization under the statute, and effectiveness of prudent and feasible tax planning strategies.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the realizability of deferred tax assets, including controls over the completeness and accuracy of data relevant to the analysis, determination of projected sources of taxable income and expected utilization of deferred tax assets. These procedures also included, among others: (i) evaluating management’s assessment of the realizability of deferred tax assets and the need for a valuation allowance, (ii) evaluating the reasonableness of management’s significant assumptions related to timing of expiration, projected sources of taxable income, limitations on utilization under the statute and effectiveness of prudent and feasible tax planning strategies, (iii) evaluating the prudence and feasibility of the implementation of available tax planning strategies, and (iv) testing the completeness and accuracy of the data utilized in the assessment of the realizability of deferred tax assets.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
November 9, 201819, 2021
We have served as the Company’s auditor since 1974.
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME | |
| | (in millions, except per share data) | | | | | | | (in millions, except per share data) | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Operating Revenues | | | | | | | Operating Revenues | | | | | | |
| Investment management fees | | $ | 4,367.5 |
| | $ | 4,359.2 |
| | $ | 4,471.7 |
| Investment management fees | | $ | 6,541.6 | | | $ | 3,981.7 | | | $ | 3,985.2 | |
| Sales and distribution fees | | 1,599.8 |
| | 1,705.6 |
| | 1,806.4 |
| Sales and distribution fees | | 1,635.5 | | | 1,362.0 | | | 1,444.6 | |
| Shareholder servicing fees | | 221.9 |
| | 225.7 |
| | 243.6 |
| Shareholder servicing fees | | 211.2 | | | 195.1 | | | 216.3 | |
| Other | | 129.9 |
| | 101.7 |
| | 96.3 |
| Other | | 37.2 | | | 27.7 | | | 23.3 | |
| Total operating revenues | | 6,319.1 |
| | 6,392.2 |
| | 6,618.0 |
| Total operating revenues | | 8,425.5 | | | 5,566.5 | | | 5,669.4 | |
| Operating Expenses | | | | | | | Operating Expenses | | | | | | |
| Compensation and benefits | | Compensation and benefits | | 2,971.3 | | | 1,873.9 | | | 1,584.7 | |
| Sales, distribution and marketing | | 2,039.7 |
| | 2,130.9 |
| | 2,209.9 |
| Sales, distribution and marketing | | 2,105.8 | | | 1,703.1 | | | 1,819.6 | |
| Compensation and benefits | | 1,390.6 |
| | 1,333.7 |
| | 1,360.9 |
| |
| Information systems and technology | | 243.9 |
| | 219.8 |
| | 207.3 |
| Information systems and technology | | 486.1 | | | 288.4 | | | 258.5 | |
| Occupancy | | 128.6 |
| | 121.3 |
| | 134.1 |
| Occupancy | | 218.1 | | | 147.9 | | | 133.6 | |
| Amortization of intangible assets | | Amortization of intangible assets | | 232.0 | | | 54.0 | | | 14.7 | |
| General, administrative and other | | 397.7 |
| | 322.2 |
| | 340.1 |
| General, administrative and other | | 537.2 | | | 450.3 | | | 391.4 | |
| Total operating expenses | | 4,200.5 |
| | 4,127.9 |
| | 4,252.3 |
| Total operating expenses | | 6,550.5 | | | 4,517.6 | | | 4,202.5 | |
| Operating Income | | 2,118.6 |
| | 2,264.3 |
| | 2,365.7 |
| Operating Income | | 1,875.0 | | | 1,048.9 | | | 1,466.9 | |
| Other Income (Expenses) | | | | | | | Other Income (Expenses) | | | | | | |
| Investment and other income, net | | 145.3 |
| | 336.3 |
| | 184.0 |
| |
| Investment and other income (losses), net | | Investment and other income (losses), net | | 264.7 | | | (38.4) | | | 141.4 | |
| Interest expense | | (48.7 | ) | | (51.5 | ) | | (49.9 | ) | Interest expense | | (85.4) | | | (33.4) | | | (22.4) | |
| Other income, net | | 96.6 |
| | 284.8 |
| | 134.1 |
| |
| Investment and other income of consolidated investment products, net | | Investment and other income of consolidated investment products, net | | 421.1 | | | 70.2 | | | 78.8 | |
| Expenses of consolidated investment products | | Expenses of consolidated investment products | | (31.2) | | | (29.4) | | | (16.9) | |
| Other income (expenses), net | | Other income (expenses), net | | 569.2 | | | (31.0) | | | 180.9 | |
| Income before taxes | | 2,215.2 |
| | 2,549.1 |
| | 2,499.8 |
| Income before taxes | | 2,444.2 | | | 1,017.9 | | | 1,647.8 | |
| Taxes on income | | 1,472.5 |
| | 759.4 |
| | 742.1 |
| Taxes on income | | 349.6 | | | 230.8 | | | 442.3 | |
| Net income | | 742.7 |
| | 1,789.7 |
| | 1,757.7 |
| Net income | | 2,094.6 | | | 787.1 | | | 1,205.5 | |
| Less: net income (loss) attributable to | | | | | | | Less: net income (loss) attributable to | |
| Redeemable noncontrolling interests | | Redeemable noncontrolling interests | | 94.1 | | | 48.6 | | | 6.2 | |
| Nonredeemable noncontrolling interests | | (8.9 | ) | | 40.0 |
| | 29.4 |
| Nonredeemable noncontrolling interests | | 169.3 | | | (60.4) | | | 3.6 | |
| Redeemable noncontrolling interests | | (12.8 | ) | | 53.0 |
| | 1.6 |
| |
| Net Income Attributable to Franklin Resources, Inc. | | $ | 764.4 |
| | $ | 1,696.7 |
| | $ | 1,726.7 |
| Net Income Attributable to Franklin Resources, Inc. | | $ | 1,831.2 | | | $ | 798.9 | | | $ | 1,195.7 | |
| | | | | | | | | | | | | |
| Earnings per Share | | | | | | | Earnings per Share | |
| Basic | | $ | 1.39 |
| | $ | 3.01 |
| | $ | 2.94 |
| Basic | | $ | 3.58 | | | $ | 1.59 | | | $ | 2.35 | |
| Diluted | | 1.39 |
| | 3.01 |
| | 2.94 |
| Diluted | | 3.57 | | | 1.59 | | | 2.35 | |
| Dividends Declared per Share | | $ | 3.92 |
| | $ | 0.80 |
| | $ | 0.72 |
| |
See Notes to Consolidated Financial Statements.
5863
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |
| | (in millions) | | | | | | | (in millions) | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Net Income | | $ | 742.7 |
| | $ | 1,789.7 |
| | $ | 1,757.7 |
| Net Income | | $ | 2,094.6 | | | $ | 787.1 | | | $ | 1,205.5 | |
| Other Comprehensive Income (Loss) | | | | | | | Other Comprehensive Income (Loss) | |
| Net unrealized gains (losses) on investments, net of tax | | 4.3 |
| | 2.2 |
| | (12.5 | ) | |
| Currency translation adjustments, net of tax | | (91.9 | ) | | 65.4 |
| | (18.3 | ) | Currency translation adjustments, net of tax | | 29.1 | | | 25.8 | | | (52.5) | |
| Net unrealized gains (losses) on defined benefit plans, net of tax | | 1.9 |
| | 2.1 |
| | (2.4 | ) | Net unrealized gains (losses) on defined benefit plans, net of tax | | 0.9 | | | (1.8) | | | (2.0) | |
| Net unrealized gains on investments, net of tax | | Net unrealized gains on investments, net of tax | | — | | | — | | | 1.5 | |
| Total other comprehensive income (loss) | | (85.7 | ) | | 69.7 |
| | (33.2 | ) | Total other comprehensive income (loss) | | 30.0 | | | 24.0 | | | (53.0) | |
| Total comprehensive income | | 657.0 |
| | 1,859.4 |
| | 1,724.5 |
| Total comprehensive income | | 2,124.6 | | | 811.1 | | | 1,152.5 | |
| Less: comprehensive income (loss) attributable to | | | | | | | Less: comprehensive income (loss) attributable to | |
| Redeemable noncontrolling interests | | Redeemable noncontrolling interests | | 94.1 | | | 48.6 | | | 6.2 | |
| Nonredeemable noncontrolling interests | | (8.9 | ) | | 40.0 |
| | 29.4 |
| Nonredeemable noncontrolling interests | | 169.3 | | | (60.4) | | | 3.6 | |
| Redeemable noncontrolling interests | | (12.8 | ) | | 53.0 |
| | 1.6 |
| |
| Comprehensive Income Attributable to Franklin Resources, Inc. | | $ | 678.7 |
| | $ | 1,766.4 |
| | $ | 1,693.5 |
| Comprehensive Income Attributable to Franklin Resources, Inc. | | $ | 1,861.2 | | | $ | 822.9 | | | $ | 1,142.7 | |
See Notes to Consolidated Financial Statements.
5964
FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS | |
| | (in millions, except share and per share data) | | | | | (in millions, except share and per share data) | |
| as of September 30, | | 2018 | | 2017 | as of September 30, | | 2021 | | 2020 |
| Assets | | | | | Assets | | | | |
| Cash and cash equivalents | | $ | 6,610.8 |
| | $ | 8,523.3 |
| Cash and cash equivalents | | $ | 4,357.8 | | | $ | 3,026.8 | |
| Receivables | | 733.7 |
| | 767.8 |
| Receivables | | 1,428.2 | | | 1,233.1 | |
| Investments (including $551.6 and $440.0 at fair value at September 30, 2018 and 2017) | | 1,426.5 |
| | 1,393.6 |
| |
| Investments (including $588.3 and $504.8 at fair value at September 30, 2021 and 2020) | | Investments (including $588.3 and $504.8 at fair value at September 30, 2021 and 2020) | | 1,510.3 | | | 1,304.5 | |
| Assets of consolidated investment products | | | | | Assets of consolidated investment products | |
| Cash and cash equivalents | | 299.8 |
| | 226.4 |
| Cash and cash equivalents | | 289.4 | | | 963.0 | |
| Receivables | | 114.2 |
| | 234.1 |
| |
| Investments, at fair value | | 2,109.4 |
| | 3,467.4 |
| Investments, at fair value | | 5,820.1 | | | 4,074.0 | |
| Property and equipment, net | | 535.0 |
| | 517.2 |
| Property and equipment, net | | 770.0 | | | 813.8 | |
| Goodwill and other intangible assets, net | | 2,333.4 |
| | 2,227.7 |
| |
| Goodwill | | Goodwill | | 4,457.7 | | | 4,500.8 | |
| Intangible assets, net | | Intangible assets, net | | 4,710.2 | | | 4,914.2 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | | 448.4 | | | 534.8 | |
| Other | | 220.7 |
| | 176.5 |
| Other | | 376.3 | | | 319.5 | |
| Total Assets | | $ | 14,383.5 |
| | $ | 17,534.0 |
| Total Assets | | $ | 24,168.4 | | | $ | 21,684.5 | |
| | | | | | | | | |
| Liabilities | | | | | Liabilities | |
| Compensation and benefits | | $ | 405.6 |
| | $ | 396.6 |
| Compensation and benefits | | $ | 1,179.3 | | | $ | 1,064.0 | |
| Accounts payable and accrued expenses | | 158.9 |
| | 167.4 |
| Accounts payable and accrued expenses | | 479.3 | | | 426.9 | |
| Dividends | | 127.7 |
| | 113.3 |
| |
| Commissions | | 297.9 |
| | 313.3 |
| Commissions | | 259.8 | | | 268.0 | |
| Income taxes | | 1,034.8 |
| | 74.7 |
| Income taxes | | 693.6 | | | 703.3 | |
| Debt | | 695.9 |
| | 1,044.2 |
| Debt | | 3,399.4 | | | 3,017.1 | |
| Liabilities of consolidated investment products | | | | | Liabilities of consolidated investment products | |
| Accounts payable and accrued expenses | | 68.0 |
| | 124.1 |
| Accounts payable and accrued expenses | | 558.0 | | | 611.2 | |
| Debt | | 32.6 |
| | 53.4 |
| Debt | | 3,671.0 | | | 2,800.6 | |
| Deferred taxes | | 126.5 |
| | 170.6 |
| |
| Deferred tax liabilities | | Deferred tax liabilities | | 311.7 | | | 305.3 | |
| Operating lease liabilities | | Operating lease liabilities | | 518.4 | | | 621.0 | |
| Other | | 184.1 |
| | 198.7 |
| Other | | 354.3 | | | 456.1 | |
| Total liabilities | | 3,132.0 |
| | 2,656.3 |
| Total liabilities | | 11,424.8 | | | 10,273.5 | |
| Commitments and Contingencies (Note 12) | |
| |
| |
| Commitments and Contingencies (Note 16) | | Commitments and Contingencies (Note 16) | | 0 | | 0 |
| Redeemable Noncontrolling Interests | | 1,043.6 |
| | 1,941.9 |
| Redeemable Noncontrolling Interests | | 933.0 | | | 541.9 | |
| Stockholders’ Equity | | | | | Stockholders’ Equity | |
| Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued | | — |
| | — |
| 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; 519,122,574 and 554,865,343 shares issued and outstanding at September 30, 2018 and 2017 | | 51.9 |
| | 55.5 |
| |
| Common stock, $0.10 par value, 1,000,000,000 shares authorized;501,807,677 and 495,116,677 shares issued and outstanding at September 30, 2021 and 2020 | | Common stock, $0.10 par value, 1,000,000,000 shares authorized;501,807,677 and 495,116,677 shares issued and outstanding at September 30, 2021 and 2020 | | 50.2 | | | 49.5 | |
| Retained earnings | | 10,217.9 |
| | 12,849.3 |
| Retained earnings | | 11,550.8 | | | 10,472.6 | |
| Accumulated other comprehensive loss | | (370.6 | ) | | (284.8 | ) | Accumulated other comprehensive loss | | (377.6) | | | (407.6) | |
| Total Franklin Resources, Inc. stockholders’ equity | | 9,899.2 |
| | 12,620.0 |
| Total Franklin Resources, Inc. stockholders’ equity | | 11,223.4 | | | 10,114.5 | |
| Nonredeemable noncontrolling interests | | 308.7 |
| | 315.8 |
| Nonredeemable noncontrolling interests | | 587.2 | | | 754.6 | |
| Total stockholders’ equity | | 10,207.9 |
| | 12,935.8 |
| Total stockholders’ equity | | 11,810.6 | | | 10,869.1 | |
| Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | | $ | 14,383.5 |
| | $ | 17,534.0 |
| Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | | $ | 24,168.4 | | | $ | 21,684.5 | |
See Notes to Consolidated Financial Statements.
6065
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | |
| | | | | | | | | | | | | | | | | | | | | Franklin Resources, Inc. | | Non-
redeemable
Non-
controlling
Interests | | Total
Stockholders’
Equity |
| | | 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) | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accum- ulated Other Compre- hensive Loss | | Stockholders’ Equity | (in millions) |
| | |
as of and for the fiscal years ended
September 30, 2018, 2017 and 2016 | Shares | | Amount | |
| Balance at October 1, 2015 | | 603.5 |
| | $ | 60.4 |
| | $ | — |
| | $ | 12,094.8 |
| | $ | (314.2 | ) | | $ | 11,841.0 |
| | $ | 654.8 |
| | $ | 12,495.8 |
| |
as of and for the fiscal years ended
September 30, 2021, 2020 and 2019 | | as of and for the fiscal years ended
September 30, 2021, 2020 and 2019 | | Shares | | Amount | | Capital
in Excess
of Par
Value | | Retained
Earnings | | Accum-
ulated
Other
Compre-
hensive
Loss | | Stockholders’
Equity | | Non-
redeemable
Non-
controlling
Interests | | Total
Stockholders’
Equity |
| Balance at October 1, 2018 | | Balance at October 1, 2018 | 519.1 | | | $ | 51.9 | |
| Adoption of new accounting guidance | | Adoption of new accounting guidance | |
| Net income | | |
| | |
| | |
| | 1,726.7 |
| | |
| | 1,726.7 |
| | 29.4 |
| | 1,756.1 |
| Net income | | | | | | | 1,195.7 | | | | | 1,195.7 | |
| Other comprehensive loss | | |
| | |
| | |
| | |
| | (33.2 | ) | | (33.2 | ) | | |
| | (33.2 | ) | Other comprehensive loss | | | | | | | | | | (53.0) | | | (53.0) | | | | | (53.0) | |
| Cash dividends declared on common stock | | | | | | | | (420.7 | ) | | |
| | (420.7 | ) | | |
| | (420.7 | ) | |
| Dividends declared on common stock ($1.04 per share) | | Dividends declared on common stock ($1.04 per share) | | (528.3) | | | | | (528.3) | | | | | (528.3) | |
| Repurchase of common stock | | (36.6 | ) | | (3.7 | ) | | (146.0 | ) | | (1,174.6 | ) | | |
| | (1,324.3 | ) | | |
| | (1,324.3 | ) | Repurchase of common stock | | (24.6) | | | (2.5) | | | (133.8) | | | (620.0) | | | | | (756.3) | | | | | (756.3) | |
| Issuance of common stock | | 3.4 |
| | 0.3 |
| | 149.8 |
| | |
| | |
| | 150.1 |
| | |
| | 150.1 |
| Issuance of common stock | | 4.8 | | | 0.5 | | | 129.8 | | | | | | | 130.3 | | | | | 130.3 | |
| Tax shortfall from stock-based compensation | | |
| | |
| | (5.9 | ) | | |
| | |
| | (5.9 | ) | | |
| | (5.9 | ) | |
| Stock-based compensation | | |
| | |
| | 2.1 |
| | |
| | |
| | 2.1 |
| | |
| | 2.1 |
| Stock-based compensation | | | | | | 4.0 | | | | | | | 4.0 | | | | | 4.0 | |
| Net distributions and other | | |
| | |
| | |
| | |
| | |
| | |
| | (91.8 | ) | | (91.8 | ) | |
| Balance at September 30, 2016 | | 570.3 |
| | $ | 57.0 |
| | $ | — |
| | $ | 12,226.2 |
| | $ | (347.4 | ) | | $ | 11,935.8 |
| | $ | 592.4 |
| | $ | 12,528.2 |
| |
| Net subscriptions and other | | Net subscriptions and other | | | | | | | | | | | | | | 103.6 | | | 103.6 | |
| Net consolidation of investment product | | Net consolidation of investment product | | 24.3 | | | 24.3 | |
| Acquisition | | Acquisition | | 194.8 | | | 194.8 | |
| Balance at September 30, 2019 | | Balance at September 30, 2019 | | 499.3 | | | $ | 49.9 | | | $ | — | | | $ | 10,288.2 | | | $ | (431.6) | | | $ | 9,906.5 | | | $ | 635.0 | | | $ | 10,541.5 | |
| Net income (loss) | | Net income (loss) | | | | | | | | 798.9 | | | | | 798.9 | | | (60.4) | | | 738.5 | |
| Other comprehensive income | | Other comprehensive income | | 24.0 | | | 24.0 | | | 24.0 | |
| Dividends declared on common stock ($1.08 per share) | | Dividends declared on common stock ($1.08 per share) | | (539.0) | | | (539.0) | | | (539.0) | |
| Repurchase of common stock | | Repurchase of common stock | | (9.0) | | | (0.9) | | | (143.0) | | | (75.5) | | | (219.4) | | | (219.4) | |
| Issuance of common stock | | Issuance of common stock | | 4.8 | | | 0.5 | | | 126.7 | | | 127.2 | | | 127.2 | |
| Stock-based compensation | | Stock-based compensation | | 16.3 | | | 16.3 | | | 16.3 | |
| Net subscriptions and other | | Net subscriptions and other | | 164.4 | | | 164.4 | |
| Net deconsolidation of investment products | | Net deconsolidation of investment products | | (6.8) | | | (6.8) | |
| Acquisitions | | Acquisitions | | 39.1 | | | 39.1 | |
| Wind-down of a subsidiary | | Wind-down of a subsidiary | | (16.7) | | | (16.7) | |
| Balance at September 30, 2020 | | Balance at September 30, 2020 | | 495.1 | | | $ | 49.5 | | | $ | — | | | $ | 10,472.6 | | | $ | (407.6) | | | $ | 10,114.5 | | | $ | 754.6 | | | $ | 10,869.1 | |
| Adoption of new accounting guidance | | | | | | | | 5.8 |
| | (7.1 | ) | | (1.3 | ) | | (324.6 | ) | | (325.9 | ) | Adoption of new accounting guidance | | | | | | | | (3.3) | | | | | (3.3) | | | | | (3.3) | |
| Net income | | | | | | | | 1,696.7 |
| | | | 1,696.7 |
| | 40.0 |
| | 1,736.7 |
| Net income | | 1,831.2 | | | 1,831.2 | | | 169.3 | | | 2,000.5 | |
| Other comprehensive income | | | | | | | | | | 69.7 |
| | 69.7 |
| | | | 69.7 |
| Other comprehensive income | | 30.0 | | | 30.0 | | | 30.0 | |
| Cash dividends declared on common stock | | | | | | | | (449.9 | ) | | | | (449.9 | ) | | | | (449.9 | ) | |
| Repurchase of common stock | | (19.1 | ) | | (1.9 | ) | | (140.1 | ) | | (629.5 | ) | | | | (771.5 | ) | | | | (771.5 | ) | |
| Issuance of common stock | | 3.7 |
| | 0.4 |
| | 134.2 |
| | | | | | 134.6 |
| | | | 134.6 |
| |
| Tax shortfall from stock-based compensation | | | | | | (8.7 | ) | | | | | | (8.7 | ) | | | | (8.7 | ) | |
| Stock-based compensation | | | | | | 14.6 |
| | | | | | 14.6 |
| | | | 14.6 |
| |
| Net subscriptions and other | | | | | | | | | | | | | | 17.3 |
| | 17.3 |
| |
| Deconsolidation of investment product | | | | | | | | | | | | | | (9.3 | ) | | (9.3 | ) | |
| Balance at September 30, 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 |
| | (1.6 | ) | | (0.1 | ) | | 0.4 |
| | | | 0.4 |
| |
| Net income | | | | | | | | 764.4 |
| | | | 764.4 |
| | (8.9 | ) | | 755.5 |
| |
| Other comprehensive income | | | | | | | | | | (85.7 | ) | | (85.7 | ) | | | | (85.7 | ) | |
| Cash dividends declared on common stock | | | | | | | | (2,131.3 | ) | | | | (2,131.3 | ) | | | | (2,131.3 | ) | |
| Dividends declared on common stock ($1.12 per share) | | Dividends declared on common stock ($1.12 per share) | | (573.7) | | | (573.7) | | | (573.7) | |
| Repurchase of common stock | | (39.9 | ) | | (4.0 | ) | | (170.4 | ) | | (1,252.3 | ) | | | | (1,426.7 | ) | | | | (1,426.7 | ) | Repurchase of common stock | | (7.3) | | | (0.7) | | | (192.8) | | | (14.7) | | | (208.2) | | | (208.2) | |
| Issuance of common stock | | 3.3 |
| | 0.3 |
| | 130.8 |
| | | | | | 131.1 |
| | | | 131.1 |
| Issuance of common stock | | 14.0 | | | 1.4 | | | 132.0 | | | 133.4 | | | 133.4 | |
| Stock-based compensation | | | | | | 10.6 |
| | | | | | 10.6 |
| | | | 10.6 |
| Stock-based compensation | | 60.8 | | | 60.8 | | | 60.8 | |
| Acquisition | | 0.8 |
| | 0.1 |
| | 26.9 |
| | | | | | 27.0 |
| | | | 27.0 |
| |
| Net distributions and other | | | | | | | | | | | | | | (6.0 | ) | | (6.0 | ) | |
| Net consolidation of investment products | | | | | | | | | | | | | | 2.4 |
| | 2.4 |
| |
| Purchase of noncontrolling interest | | | | | | | | (10.6 | ) | | | | (10.6 | ) | | 5.4 |
| | (5.2 | ) | |
| Balance at September 30, 2018 | | 519.1 |
| | $ | 51.9 |
| | $ | — |
| | $ | 10,217.9 |
| | $ | (370.6 | ) | | $ | 9,899.2 |
| | $ | 308.7 |
| | $ | 10,207.9 |
| |
| Net subscriptions and other | | Net subscriptions and other | | (2.1) | | | (2.1) | | | 215.7 | | | 213.6 | |
| Net deconsolidation of investment products | | Net deconsolidation of investment products | | (552.4) | | | (552.4) | |
| Adjustment to fair value of redeemable noncontrolling interests | | Adjustment to fair value of redeemable noncontrolling interests | | (159.2) | | | (159.2) | | | (159.2) | |
| Balance at September 30, 2021 | | Balance at September 30, 2021 | | 501.8 | | | $ | 50.2 | | | $ | — | | | $ | 11,550.8 | | | $ | (377.6) | | | $ | 11,223.4 | | | $ | 587.2 | | | $ | 11,810.6 | |
See Notes to Consolidated Financial Statements.
6166
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Net Income | | $ | 2,094.6 | | | $ | 787.1 | | | $ | 1,205.5 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Stock-based compensation | | 171.9 | | | 122.3 | | | 111.5 | |
| Amortization of deferred sales commissions | | 78.2 | | | 80.3 | | | 85.8 | |
| Depreciation and other amortization | | 78.6 | | | 74.5 | | | 78.7 | |
| Amortization of intangible assets | | 232.0 | | | 54.0 | | | 14.7 | |
| Impairments of intangible assets and goodwill | | — | | | 55.4 | | | 13.3 | |
| Net (gains) losses on investments | | (75.5) | | | 15.5 | | | 9.7 | |
| Losses (income) from investments in equity method investees | | (154.3) | | | 98.1 | | | 10.4 | |
| Net (gains) losses on investments of consolidated investment products | | (316.4) | | | 36.8 | | | 26.3 | |
| Net purchase of investments by consolidated investment products | | (781.0) | | | (682.8) | | | (1,451.8) | |
| Deferred income taxes | | 3.7 | | | (7.1) | | | (1.3) | |
| Other | | 16.0 | | | (28.7) | | | 17.2 | |
| Changes in operating assets and liabilities: | | | | | | |
| Decrease (increase) in receivables and other assets | | (182.5) | | | 134.7 | | | (63.5) | |
| Decrease in investments, net | | 12.8 | | | 537.3 | | | 142.4 | |
| Increase (decrease) in accrued compensation and benefits | | 114.8 | | | (10.5) | | | 89.4 | |
| Decrease in commissions payable | | (8.2) | | | (33.8) | | | (43.9) | |
| Decrease in income taxes payable | | (12.5) | | | (123.0) | | | (210.1) | |
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | | (89.1) | | | (97.4) | | | 126.0 | |
| Increase in accounts payable and accrued expenses of consolidated investment products | | 62.3 | | | 70.6 | | | 108.2 | |
| Net cash provided by operating activities | | 1,245.4 | | | 1,083.3 | | | 268.5 | |
| Purchase of investments | | (770.4) | | | (481.4) | | | (401.9) | |
| Liquidation of investments | | 594.0 | | | 880.0 | | | 343.2 | |
| Purchase of investments by consolidated collateralized loan obligations | | (3,654.7) | | | (1,530.3) | | | (469.6) | |
| Liquidation of investments by consolidated collateralized loan obligations | | 1,624.2 | | | 448.3 | | | 88.6 | |
| Decrease (increase) in loan receivables, net | | 42.7 | | | (40.6) | | | — | |
| Additions of property and equipment, net | | (79.3) | | | (103.7) | | | (233.7) | |
| Acquisitions, net of cash acquired | | (9.0) | | | (3,821.4) | | | (493.5) | |
| Payments of contingent consideration asset | | 20.3 | | | — | | | — | |
| Net (deconsolidation) consolidation of investment products | | (383.7) | | | 587.2 | | | (108.5) | |
| Net cash used in investing activities | | (2,615.9) | | | (4,061.9) | | | (1,275.4) | |
| | | | | | |
FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Net Income | | $ | 742.7 |
| | $ | 1,789.7 |
| | $ | 1,757.7 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Amortization of deferred sales commissions | | 80.7 |
| | 72.0 |
| | 75.2 |
|
| Depreciation and other amortization | | 76.4 |
| | 80.3 |
| | 87.1 |
|
| Stock-based compensation | | 117.8 |
| | 123.4 |
| | 131.5 |
|
| Income from investments in equity method investees | | (44.4 | ) | | (107.9 | ) | | (56.7 | ) |
| Net losses (gains) on investments of consolidated investment products | | 8.0 |
| | (55.4 | ) | | 19.7 |
|
| Deferred income taxes | | (50.6 | ) | | 8.8 |
| | 9.0 |
|
| Other | | 33.7 |
| | (14.9 | ) | | 3.8 |
|
| Changes in operating assets and liabilities: | | | | | | |
| Decrease (increase) in receivables and other assets | | (90.1 | ) | | (96.7 | ) | | 4.2 |
|
| Decrease (increase) in receivables of consolidated investment products | | 68.5 |
| | (64.3 | ) | | (15.0 | ) |
| Decrease (increase) in trading securities, net | | (39.2 | ) | | 130.2 |
| | 120.4 |
|
| Decrease (increase) in trading securities of consolidated investment products, net | | 412.7 |
| | (875.0 | ) | | (242.3 | ) |
| Increase (decrease) in accrued compensation and benefits | | (19.1 | ) | | 37.2 |
| | (76.7 | ) |
| Increase (decrease) in commissions payable | | (15.4 | ) | | 11.3 |
| | (57.9 | ) |
| Increase (decrease) in income taxes payable | | 965.2 |
| | 44.5 |
| | (14.0 | ) |
| Decrease in accounts payable, accrued expenses and other liabilities | | (23.0 | ) | | (9.2 | ) | | (29.2 | ) |
| Increase in accounts payable and accrued expenses of consolidated investment products | | 5.8 |
| | 61.4 |
| | 10.9 |
|
| Net cash provided by operating activities | | 2,229.7 |
| | 1,135.4 |
| | 1,727.7 |
|
| Purchase of investments | | (358.2 | ) | | (372.5 | ) | | (367.8 | ) |
| Liquidation of investments | | 286.2 |
| | 344.9 |
| | 405.2 |
|
| Purchase of investments by consolidated investment products | | (73.8 | ) | | (114.7 | ) | | (333.3 | ) |
| Liquidation of investments by consolidated investment products | | 73.3 |
| | 368.1 |
| | 597.3 |
|
| Additions of property and equipment, net | | (106.5 | ) | | (74.9 | ) | | (97.6 | ) |
| Adoption of new accounting guidance | | — |
| | (49.2 | ) | | — |
|
| Acquisitions, net of cash acquired | | (86.8 | ) | | (14.0 | ) | | — |
|
| Net deconsolidation of investment products | | (24.6 | ) | | (35.7 | ) | | (11.6 | ) |
| Net cash provided by (used in) investing activities | | (290.4 | ) | | 52.0 |
| | 192.2 |
|
| Issuance of common stock | | 24.8 |
| | 24.9 |
| | 24.1 |
|
| Dividends paid on common stock | | (2,116.9 | ) | | (441.2 | ) | | (408.7 | ) |
| Repurchase of common stock | | (1,424.8 | ) | | (765.3 | ) | | (1,308.0 | ) |
| Excess tax benefit from stock-based compensation | | — |
| | 0.9 |
| | 0.8 |
|
| Payments on debt | | (361.9 | ) | | (300.0 | ) | | — |
|
| Proceeds from loan | | — |
| | — |
| | 93.4 |
|
| Payments on loan | | — |
| | (53.7 | ) | | (41.2 | ) |
[Table continued on next page]
See Notes to Consolidated Financial Statements.
6267
FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Table continued from previous page]
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Issuance of common stock | | $ | 22.3 | | | $ | 20.6 | | | $ | 23.3 | |
| Dividends paid on common stock | | (559.7) | | | (533.2) | | | (518.6) | |
| Repurchase of common stock | | (208.2) | | | (218.2) | | | (754.5) | |
| Proceeds from issuance of debt | | 1,193.9 | | | — | | | — | |
| Payment of debt issuance costs | | (11.8) | | | — | | | — | |
| Payments on debt | | (750.0) | | | — | | | — | |
| Proceeds from loan | | — | | | 0.2 | | | 1.7 | |
| Payments on loan | | — | | | (0.4) | | | (1.5) | |
| Proceeds from debt of consolidated investment products | | 2,937.9 | | | 1,390.7 | | | 681.1 | |
| Payments on debt by consolidated investment products | | (1,315.7) | | | (334.2) | | | (221.4) | |
| Payments on contingent consideration liabilities | | — | | | (0.6) | | | (20.4) | |
| Noncontrolling interests | | 721.4 | | | 409.5 | | | 1,150.2 | |
| Net cash provided by financing activities | | 2,030.1 | | | 734.4 | | | 339.9 | |
| Effect of exchange rate changes on cash and cash equivalents | | (2.2) | | | 27.4 | | | (37.0) | |
| Increase (decrease) in cash and cash equivalents | | 657.4 | | | (2,216.8) | | | (704.0) | |
| Cash and cash equivalents, beginning of year | | 3,989.8 | | | 6,206.6 | | | 6,910.6 | |
| Cash and Cash Equivalents, End of Year | | $ | 4,647.2 | | | $ | 3,989.8 | | | $ | 6,206.6 | |
| | | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | | |
| Cash paid for income taxes | | $ | 498.0 | | | $ | 359.4 | | | $ | 520.8 | |
| Cash paid for interest | | 116.6 | | | 18.9 | | | 27.4 | |
| Cash paid for interest by consolidated investment products | | 102.8 | | | 65.6 | | | 2.3 | |
FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [Table continued from previous page] |
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Proceeds from debt of consolidated investment products | | $ | — |
| | $ | 20.6 |
| | $ | 33.8 |
|
| Payments on debt by consolidated investment products | | (21.0 | ) | | (308.5 | ) | | (179.8 | ) |
| Payments on contingent consideration liabilities | | (21.6 | ) | | (35.3 | ) | | (3.2 | ) |
| Noncontrolling interests | | 159.7 |
| | 901.6 |
| | (11.9 | ) |
| Net cash used in financing activities | | (3,761.7 | ) | | (956.0 | ) | | (1,800.7 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | (16.7 | ) | | 35.0 |
| | (4.0 | ) |
| Increase (decrease) in cash and cash equivalents | | (1,839.1 | ) | | 266.4 |
| | 115.2 |
|
| Cash and cash equivalents, beginning of year | | 8,749.7 |
| | 8,483.3 |
| | 8,368.1 |
|
| Cash and Cash Equivalents, End of Year | | $ | 6,910.6 |
| | $ | 8,749.7 |
| | $ | 8,483.3 |
|
| | | | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | | |
| Cash paid for income taxes | | $ | 523.5 |
| | $ | 712.2 |
| | $ | 758.6 |
|
| Cash paid for interest | | 38.6 |
| | 42.3 |
| | 47.4 |
|
| Cash paid for interest by consolidated investment products | | 2.6 |
| | 11.2 |
| | 28.3 |
|
See Notes to Consolidated Financial Statements.
6368
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Significant Accounting Policies
Business. Franklin Resources, Inc. (“Franklin”) is a holding company that, together with its various subsidiaries (collectively, the “Company”) is referred to asoperating under its Franklin Templeton Investments.and/or subsidiary brand names. The Company provides investment management and related services to investors globallyin jurisdictions worldwide through investment products which include sponsored funds, as well as institutional and high net-worthhigh-net-worth separate accounts.accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. In addition to investment management, the Company’sCompany’s services include fund administration, sales and distribution, marketing,and shareholder servicing and other services.servicing.
Basis of Presentation. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Management 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. Certain comparative amounts for prior fiscal years have been reclassified to conform to the financial statement presentation as of and for the fiscal year ended September 30, 20182021 (“fiscal year 2018”2021”).
During the quarter ended June 30, 2021, the Company identified an error related to the accounting of its indirect interests in certain collateralized loan obligations (“CLOs”) held through a limited partnership and the Company’s conclusion to consolidate that limited partnership. In accordance with U.S. GAAP, the Company should have consolidated the CLOs as the Company is the primary beneficiary of these entities and should not have consolidated the limited partnership. The error resulted in the misstatement of previously reported assets and liabilities and resulting cash flows.
The consolidation of the CLOs results in increases to total assets and liabilities partially offset by the deconsolidation of the limited partnership which results in a reduction to total assets and stockholders’ equity. The error had no impact to net income attributable to the Company, earnings per share, retained earnings, or total Franklin Resources, Inc. stockholders’ equity.
The Company determined that the error did not result in a material misstatement to its previously issued consolidated financial statements. Nonetheless, for comparability, the Company has revised the comparative prior period amounts included in the consolidated balance sheets, consolidated statements of cash flows, and related footnote disclosures.
The impact of the error on the consolidated balance sheet as of September 30, 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | As Reported | | Adjustments | | As Revised |
| Receivables | | $ | 1,200.6 | | | $ | 32.5 | | | $ | 1,233.1 | |
| Investments | | 1,270.5 | | | 34.0 | | | 1,304.5 | |
| Assets of consolidated investment products | | | | | | |
| Cash and cash equivalents | | 930.7 | | | 32.3 | | | 963.0 | |
| Investments, at fair value | | 2,709.2 | | | 1,364.8 | | | 4,074.0 | |
| Total Assets | | 20,220.9 | | | 1,463.6 | | | 21,684.5 | |
| | | | | | |
| Liabilities of consolidated investment products | | | | | | |
| Accounts payable and accrued expenses | | $ | 510.1 | | | $ | 101.1 | | | $ | 611.2 | |
| Debt | | 1,333.4 | | | 1,467.2 | | | 2,800.6 | |
| Total Liabilities | | 8,705.2 | | | 1,568.3 | | | 10,273.5 | |
| | | | | | |
| Nonredeemable noncontrolling interests | | $ | 859.3 | | | $ | (104.7) | | | $ | 754.6 | |
| Stockholders’ equity | | 10,973.8 | | | (104.7) | | | 10,869.1 | |
| Total Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity | | 20,220.9 | | | 1,463.6 | | | 21,684.5 | |
The impact of the error on the consolidated statements of cash flows for the fiscal year ended September 30, 2020 and September 30, 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) for the fiscal years ended September 30, | | 2020 | | 2019 |
| As Reported | | Adjustments | | As Revised | | As Reported | | Adjustments | | As Revised |
| Net cash provided by operating activities | | $ | 1,021.4 | | | $ | 61.9 | | | $ | 1,083.3 | | | $ | 201.6 | | | $ | 66.9 | | | $ | 268.5 | |
| Net cash used in investing activities | | (3,243.1) | | | (818.8) | | | (4,061.9) | | | (1,077.1) | | | (198.3) | | | (1,275.4) | |
| Net cash provided by (used in) financing activities | | 194.2 | | | 540.2 | | | 734.4 | | | (40.5) | | | 380.4 | | 339.9 |
Consolidation. The consolidated financial statements include the accounts of Franklin and its subsidiaries and consolidated investment products (“CIPs”)CIPs in which it has a controlling financial interest. The Company has a controlling financial interest when it owns a majority of the voting interest in a voting interest entity (“VOE”) or is the primary beneficiary of a variable interest entity (“VIE”). Intercompany accounts and transactions have been eliminated.
A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or do not have defined rights and obligations normally associated with an equity investment. Substantially all of theThe Company’s VIEs are primarily investment products, and its variable interests consist of its equity ownership interests in and investment management fees earned from these products.
The Company is the primary beneficiary of a VIE if it has the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. Investment management fees earned from VIEs are excluded from the primary beneficiary determination if they are deemed to be at market and commensurate with service. The key estimates and assumptionsassumption used in the analyses includeanalysis includes the amount of assets under management (“AUM”) and the life of the investment product..
Related Parties include sponsored funds and equity method investees. A substantial amount of the Company’s operating revenues and receivables are from related parties.
Earnings per Share. Basic and diluted earnings per share are computed using the two-class method, which considers participating securities as a separate class of shares. The Company’s participating securities consist of its nonvested stock and stock unit awards that contain nonforfeitable rights to dividends or dividend equivalents. Basic earnings per share is computed by dividing net income available to the Company’s common shareholders,stockholders, adjusted to exclude earnings allocated to participating securities, by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period.
Fair Value Measurements. The Company uses a three-levelBusiness combinations are accounted for by recognizing the acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition-date estimated fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. The three levels of fair value hierarchy are set forth below. The assessmentvalues. Any excess of the hierarchy levelpurchase consideration over the acquisition-date fair values of these identifiable assets and liabilities is recognized as goodwill. During the measurement period, which is not to exceed one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed due to new information about facts that existed as of the assets or liabilities measured at fair value is determined based onacquisition date, with the lowest level input that is significantcorresponding offset to goodwill. Upon the fair valueconclusion of the measurement in its entirety.
|
| |
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities, which may include published net asset values (“NAV”) for fund products. |
| |
Level 2 | Observable inputs other than Level 1 quoted prices, such as non-binding quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or corroborated by observable market data. Level 2 quoted prices are generally obtained from two independent third-party brokers or dealers, including prices derived from model-based valuation techniques for which the significant assumptions are observable in the market or corroborated by observable market data. Quoted prices are validated through price variance analysis,period, any subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of third-party vendors. |
| |
Level 3 | Unobservable inputs that are supported by little or no market activity. These inputs require significant management judgment and reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability. |
Quoted market prices may be adjusted if events occur, such as significant price changes in proxies traded in relevant markets after the close of corresponding markets, trade halts or suspensions, or unscheduled market closures. These proxies consist of correlated country-specific exchange-traded securities, such as futures, American Depositary Receipts indices or exchange-traded funds. The price adjustments are primarily determined based on third-party factors derived from model-based valuation techniques for which the significant assumptions are observablerecorded in the market.earnings.
A substantial amount of the Company’s investments are recorded at fair value or amounts that approximate fair value on a recurring basis. InvestmentsIntangible assets acquired in fund products for which fair value is estimated using NAV as a practical expedient (when the NAV is available to the Company as an investor but is not publicly available) are not classified in the fair value hierarchy. Fair values are estimated for disclosure purposes for financial instruments that are not measured at fair value.
Cash and Cash Equivalents primarily consist of nonconsolidated sponsored money market funds and deposits with financial institutions. At September 30, 2017, cash and cash equivalents also included debt instruments and time deposits with original maturities of three months or less at the purchase date. Cash and cash equivalents are carried at cost, except for debt instruments which are carried at amortized cost. Due to the short-term nature and liquidity of these financial instruments, their carrying values approximate fair value.
The Company maintains cash and cash equivalents with financial institutions in various countries, limits the amount of credit exposure with any given financial institution and conducts ongoing evaluations of the creditworthiness of the financial institutions with which it does business.
Receivablesbusiness combinations consist primarily of fees receivable from investment productsmanagement contracts and are carried at invoiced amounts. Due to the short-term nature and liquidity of the receivables, their carrying values approximate fair value.
Investments consist of investment securities, trading and available-for-sale, investments in equity method investees and other investments.
Investment Securities, Trading consist of nonconsolidated sponsored funds, debt and other equity securities, and are carried at fair value. Changes in the fair value of trading securities are recognized as gains and losses in earnings.trade names. The fair values of all funds and certain other equity securitiesthe acquired management contracts are determined based on their published NAV. The fair valuesthe net present value of debt and certain other equity securities are determined using independent third-party broker or dealer price quotes or based on discountedestimated future cash flows usingattributable to the contracts, which include significant unobservable inputs. At September 30, 2017, investment securities, trading also included corporate debt securities for whichassumptions about forecasts of the fair value was determined using market pricing.
Investment Securities, Available-for-Sale consist primarily of nonconsolidated sponsored fundsAUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and to a lesser extent, debt and other equity securities, and are carried at fair value. Realized gains and losses are included in investment income using the average cost method. Unrealized gains and losses are recorded net ofeffective tax as part of accumulated other comprehensive
income (loss) until realized.rate. The fair value of funds is determined based on their published NAV. The fair value of debt securities is primarily determined using independent third-party broker or dealer price quotes. The fair value of other equity securitiestrade names is determined using quoted market prices.
Investments in Equity Method Investees consist of equity investments in entities, including sponsored funds, over which the Company is able to exercise significant influence, but not control. Significant influence is generally considered to exist when the Company’s ownership interest in the investee is between 20% and 50%, although other factors, such as representation on the investee’s board of directors and the impact of commercial arrangements, also are considered in determining whether the equityrelief from royalty method of accounting is appropriate. Investments in limited partnerships and limited liability companies are accounted for using the equity method when the Company’s investment is more than minor or when the Company is the general partner. Under the equity method of accounting, the investments are initially carried at cost and subsequently adjusted by the Company’s proportionate share of the entities’ net income, which is recognized in earnings.
Other Investments consist of equity investments in fund products and other entities over which the Company is unable to exercise significant influence and are not marketable, time deposits with maturities greater than three months from the date of purchase, and life settlement contracts. The equity investments are accounted for under the cost method. The fair value of fund products is estimated using NAV as a practical expedient. The fair value of other entities is generally estimated using significant unobservable inputs in either a market-based or income-based approach. The time deposits are carried at cost, which approximates fair value due to their short-term nature and liquidity. Life settlement contracts are carried at fair value, which is determined based on discounted cash flows using significant unobservable inputs.
Impairment of Investments. Investments other than trading securities are evaluated for other-than-temporary impairment on a quarterly basis when the cost of an investment exceeds its fair value. The evaluation of equity securities includes the severity and duration of the decline in the fair value below cost, the Company’s intent and ability to hold the security for a period of time sufficient for an anticipated recovery in fair value, and the financial condition of and specific events related to the issuer. When an impairment of an equity security is determined to be other-than-temporary, the impairment is recognized in earnings.
For debt securities, if the Company intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost, the entire impairment is recognized in earnings. If the Company does not intend to sell or it is not more likely than not that it will be required to sell the security before anticipated recovery of its amortized cost, the impairment related to credit loss, which is the difference between the security’s amortized cost and thenet present value of its expected cash flows, is recognized in earnings with the remaining loss recognized in accumulated other comprehensive income (loss).
Cash and Cash Equivalents of CIPs consist of highly liquid investments, including money market funds, which are readily convertible into cash, and deposits with financial institutions, and are carried at cost. Due to the short-term nature and liquidity of these financial instruments, their carrying values approximate fair value.
Receivablesof CIPs consist of investment and share transaction related receivables and are carried at transacted amounts. Due to the short-term nature and liquidity of the receivables, their carrying values approximate fair value.
Investments of CIPs consist of trading securities and other investments that are not generally traded in active markets, and are carried at fair value. Changes in the fair value of the investments are recognized as gains and losses in earnings. The fair value of trading securities is determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.
The investments that are not generally traded in active markets consist of debt and equity securities of entities in emerging markets and fund products. The fair values of debt and equity securities are determined using significant unobservable inputs in either a market-based or income-based approach. The fair value of fund products is estimated using NAV as a practical expedient.
Property and Equipment, net are recorded at cost and depreciated using the straight-line method over their estimated useful lives which range from three to 35 years. Expenditures for repairs and maintenance are charged to expense when incurred. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the lease term, whichever is shorter.
Internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized and amortized over the shorter of the estimated useful lives of the software or the license terms, beginning when the software project is complete and the application is put into production.
Property and equipment is tested for impairment when there is an indication that the carrying value of an asset may not be recoverable. Carrying values are not recoverable when the undiscounted cash flows estimated to be generated by the assets are less than their carrying values. When an asset is determined to not be recoverable, the impairment is measured based on the excess, if any, of the carrying value of the asset over its respective fair value. Fair value is determined by discounted future cash flows, models, appraisals or other applicable methods.
Goodwillwhich include significant assumptions about royalty rate, revenue growth rate, discount rate and Other Intangible Assets, net. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. Other intangible assets consist of investmenteffective tax rate. The management contracts acquired in business acquisitions. Thesecontract intangible assets are amortized over their estimated useful lives, which range from three to 15 years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Indefinite-lived intangible assets represent contracts to manage investment assets for which there is no foreseeable limit on the contract period. Trade names intangible assets are amortized over their estimated useful lives which range from five to twenty years using the straight-line method.
Goodwill and indefinite-lived intangible assets are tested for impairment annually as of August 1 and when an event occurs or circumstances change that more likely than not reduce the fair value of the related reporting unit or indefinite-lived intangible asset below its carrying value. The Company has one1 reporting unit, investment management and related services, consistent with its single operating segment, to which all goodwill has been assigned. Amortization and impairment are recognized in general, administrative and other expense.
Goodwill and indefinite-lived intangible assets may first be assessed for qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The qualitative analysis considers entity-specific and macroeconomic factors and their potential impact on the key assumptions used in the determination of the fair value of the reporting unit or indefinite-lived intangible asset. A quantitative impairment test is performed if the results of the qualitative assessment indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value or an indefinite-lived intangible asset is impaired, or if a qualitative assessment is not performed.
The quantitative goodwill impairment test involves a two-step process. The first step compares the fair value of the reporting unit to its carrying value. If the carrying value is less than the fair value, no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step is performed to compute the amount of any impairment by comparing the implied fair value of the reporting unit goodwill with the carrying value of the goodwill.
The quantitative indefinite-lived intangible assets impairment test compares the fair value of an asset to its carrying value. If the carrying value is higher than the fair value, impairment is recognized in the amount of the difference in values.
The fair values of the reporting unit and indefinite-lived intangible assets are based on the net present value of estimated future cash flows, which include assumptions about the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate and discount rate, whichrate.
If a quantitative goodwill impairment test indicates that the carrying value of the reporting unit exceeds its fair value, impairment is based onrecognized in the Company’s weighted average costamount of capital.the difference in values not to exceed the total amount of goodwill allocated to the reporting unit.
If a quantitative indefinite-lived intangible assets impairment test indicates that the carrying value of the asset exceeds the fair value, impairment is recognized in the amount of the difference in values.
Definite-lived intangible assets are tested for impairment quarterly. Impairment is indicated when the carrying value of an asset is not recoverable and exceeds its fair value. Recoverability is evaluated based on estimated undiscounted future cash flows using assumptions about the AUM growth rate, pre-tax profit margin, average effective fee rates, the pre-tax profit marginrate and expected useful lives.lives as well as royalty rate for trade name intangible assets. If the carrying value of an asset is not recoverable through undiscounted cash flows, impairment is recognized in the amount by which the carrying value exceeds the asset’s fair value, as determined by discounted cash flows or other methods as appropriate for the asset type.
ImpairmentFair Value Measurements. The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. The three levels of fair value hierarchy are set forth below. The assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
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| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities, which may include published net asset values (“NAV”) for fund products. |
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| Level 2 | Observable inputs other than Level 1 quoted prices, such as non-binding quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or model-based valuation methodologies that utilize significant assumptions that are observable or corroborated by observable market data. |
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| Level 3 | Unobservable inputs that are supported by little or no market activity. These inputs require significant management judgment and reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability. |
Quoted market prices may be adjusted if events occur, such as significant price changes in proxies traded in relevant markets after the close of corresponding markets, trade halts or suspensions, or unscheduled market closures. These proxies consist of correlated country-specific exchange-traded securities, such as futures, American Depositary Receipts indices or exchange-traded funds. The price adjustments are primarily determined based on third-party factors derived from model-based valuation techniques for which the significant assumptions are observable in the market.
The Company’s investments are primarily recorded at fair value or amounts that approximate fair value on a recurring basis. Investments in fund products for which fair value is estimated using NAV as a practical expedient (when the NAV is available to the Company as an investor but is not publicly available) are not classified in the fair value hierarchy. Fair values are estimated for disclosure purposes for financial instruments that are not measured at fair value.
Cash and Cash Equivalents primarily consist of nonconsolidated sponsored money market funds and deposits with financial institutions and are carried at cost. Due to the short-term nature and liquidity of these financial instruments, their carrying values approximate fair value.
The Company maintains cash and cash equivalents with financial institutions in various countries, limits the amount of credit exposure with any given financial institution and conducts ongoing evaluations of the creditworthiness of the financial institutions with which it does business.
Receivables consist primarily of fees receivable from investment products and are carried at invoiced amounts. Due to the short-term nature and liquidity of the receivables, their carrying values approximate fair value.
Investments consist of investments in sponsored funds and separate accounts, investments related to long-term incentive plans, other equity and debt securities, investments in equity method investees and other investments.
Sponsored funds and separate accounts consist primarily of nonconsolidated sponsored funds and to a lesser extent, separate accounts. Sponsored funds and separate accounts are carried at fair value with changes in the fair value recognized as gains and losses in earnings. The fair values of fund products are determined based on their published NAV or estimated using NAV as a practical expedient. The fair values of the underlying investments of the separate accounts are determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.
Investments related to long-term incentive plans consist primarily of investments in sponsored funds related to certain compensation plans that have vesting provision and are carried at fair value. Changes in fair value are recognized as gains and losses in earnings. The fair values of the investments are determined based on the sponsored funds’ published NAV or estimated using NAV as a practical expedient.
Other equity and debt securities consist of equity investment securities and debt securities carried at fair value. Changes in the fair value of equity securities are recognized as gains and losses in earnings. The fair values of equity and debt securities are determined using independent third-party broker or dealer price quotes or based on discounted cash flows using significant unobservable inputs.
Investments in Equity Method Investees consist of equity investments in entities, including sponsored funds, over which the Company is able to exercise significant influence, but not control. Significant influence is generally considered to exist when the Company’s ownership interest in the investee is between 20% and 50%, although other factors, such as representation on the investee’s board of directors and the impact of commercial arrangements, also are considered in determining whether the equity method of accounting is appropriate. Investments in limited partnerships and limited liability companies are accounted for using the equity method when the Company’s investment is more than minor or when the Company is the general partner. Under the equity method of accounting, the investments are initially carried at cost and subsequently adjusted by the Company’s proportionate share of the entities’ net income, which is recognized in general, administrativeearnings.
Other Investments consist of equity investments in entities over which the Company is unable to exercise significant influence and do not have a readily determinable fair value, and time deposits with maturities greater than three months from the date of purchase. The equity investments are measured at cost adjusted for observable price changes and impairment, if any, which are recognized in earnings. The fair value of the entities is generally estimated using significant unobservable inputs in either a market-based or income-based approach. The time deposits are carried at cost, which approximates fair value due to their short-term nature and liquidity.
Impairment of Investments. Investments in equity method investees and equity investments that do not have a readily determinable fair value are evaluated for impairment on a quarterly basis. The evaluation of equity investments considers qualitative factors, including the financial condition and specific events related to an investee, that may indicate the fair value of the investment is less than its carrying value. Impairment of equity securities is recognized in earnings.
Cash and Cash Equivalents of CIPs consist of highly liquid investments, including money market funds, which are readily convertible into cash, and deposits with financial institutions, and are carried at cost. Due to the short-term nature and liquidity of these financial instruments, their carrying values approximate fair value.
Receivablesof CIPs consist of investment and share transaction related receivables and are carried at transacted amounts. Due to the short-term nature and liquidity of the receivables, their carrying values approximate fair value.
Investments of CIPs consist of marketable debt and equity securities and other expense.investments that are not generally traded in active markets and are carried at fair value. Changes in the fair value of the investments are recognized as gains and losses in earnings. The fair values of marketable securities are determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.
Deferred Sales Commissions The investments that are not generally traded in active markets consist of up-front commissions paidequity and debt securities of entities in emerging markets, fund products, other equity and debt instruments, real estate and loans. The fair values are determined using significant unobservable inputs in either a market-based or income-based approach, except for fund products, for which fair values are estimated using NAV as a practical expedient.
Property and Equipment, net are recorded at cost and depreciated using the straight-line method over their estimated useful lives which range from three to financial advisers35 years. Expenditures for repairs and broker-dealers on shares of sponsored funds sold without a front-end sales chargemaintenance are charged to investors,expense when incurred. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the lease term, whichever is shorter.
Internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized and amortized over the periods inshorter of the estimated useful lives of the software or the license terms, beginning when the software project is complete and the application is put into production.
Property and equipment are tested for impairment when there is an indication that the carrying value of an asset may not be recoverable. Carrying values are not recoverable when the undiscounted cash flows estimated to be generated by the assets are less than their carrying values. When an asset is determined to not be recoverable, the impairment is measured based on the excess, if any, of the carrying value of the asset over its respective fair value. Fair value is determined by discounted future cash flows models, appraisals or other applicable methods.
Leases consist primarily of operating leases relating to real estate. At the inception of a contract, the Company determines whether it is or contains a lease, which theyincludes consideration of whether there are generally recovered from related revenues, which range from one to seven years. Deferred sales commissions are included in otheridentified assets in the consolidated balance sheet.contract and if the Company has control over such assets. Right-of-use (“ROU”) assets and lease liabilities are recognized for all arrangements that qualify as a lease, except for those with original lease terms of twelve months or less.
ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments using an incremental borrowing rate estimated on a collateralized basis with similar terms for the specific interest rate environment. Leases with fixed payments are expensed on a straight-line basis over the lease term. Variable lease payments based on usage, changes in an index or market rate are expensed as incurred. The lease terms include options to extend or terminate the lease when it is reasonably certain they will be exercised.
Lease and nonlease payment components are accounted for separately. ROU assets are tested for impairment when there is an indication that the carrying value of an asset may not be recoverable.
Debt consists of senior notes and junior notes which are carried at amortized cost. The fair value is estimated using quoted market prices, independent third-party broker or dealer price quotes, or prices of publicly traded debt with similar maturities, credit risk and interest rates. Amortization of debt premium and discount are recognized over the terms of the notes in interest expense.
Debt of CIPs is carried at amortized cost. The fair value is estimated using a discounted cash flow model that considers current interest rate levels, the quality of the underlying collateral and current economic conditions.
Contingent Consideration Liability consists Debt of CIPs also included debt of consolidated collateralized loan obligations (“CLOs”) which was measured primarily based on the fair value of the expected future payments related toassets of the CLOs less the fair value of the Company’s commitment to acquire the remainingown economic interests in K2 Advisors Holdings, LLC (“K2”) and is included in other liabilities in the consolidated balance sheet. The liability is carried at fair value, determined using the net present value of anticipated future cash flows based on estimated future revenue and profits and timing of payments.CLOs.
Noncontrolling Interests relate almost entirely to CIPs.consist of third-party equity interests in CIPs and minority interests in certain subsidiaries. Noncontrolling intereststhat are currently redeemable or convertible for cash or other assets at the option of the holder are classified as temporary equity.equity at the higher of fair value on reporting date or issuance-date fair value. Changes in fair value of redeemable noncontrolling interest is recognized as an adjustment to retained earnings. Nonredeemable noncontrolling interests are classified as a component of equity. Net income (loss) attributable to third-party investors is reflected as net income (loss) attributable to nonredeemable and redeemable noncontrolling interests in the consolidated statements of income. Sales and redemptions of shares of CIPs by third-party investors are a component of the change in noncontrolling interests included in financing activities in the consolidated statements of cash flows.
The fair values of third-party equity interests in CIPs are determined based on the published NAV or estimated using NAV a practical expedient. The fair values of redeemable noncontrolling interests related to minority interest in certain subsidiaries are determined using discounted cash flows and guideline public company methods, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate and public company earnings multiples.
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”), distribution fees and shareholder servicing fees are recognized as earned, over the period in which services are rendered, except forother than performance-based investment management fees which are recognized when earned. Sales commissions related to the sale of shares of sponsored funds are recognized on trade date. Investment management fees, other than performance-based fees, and distribution fees, are determined based on a percentage of AUM, primarily on a monthly basis using daily average daily AUM.AUM, and are recognized as the services are performed over time. Performance-based investment management fees are based ongenerated when investment products’ performance exceeds targets established in customer contracts. These fees are recognized when the relatedamount is no longer probable of significant reversal and may relate to investment management contracts. 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 factors such asa percentage of AUM on a monthly basis using daily average AUM and either the number of transactions andin shareholder accounts established inor the related service contracts.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 the Company’s 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.market in accordance with the Company’s global valuation and pricing policy. The fair values of securities for which market prices are not readily available are valued internally valued using various methodologies which incorporate significant unobservable inputs as appropriate for each security type and represent an insignificant percentage of total AUM. Pricing of the securities
Revenue is governed by the Company’s global valuation and pricing policy, which defines valuation and pricing conventions for each security type, including practices for responding to unexpected or unusual market events.
Sales commissions and distribution fees are recorded gross of sales and distribution expenses paidpayments made to financial advisers and other intermediaries asthird-party service providers in the Company acts as the principal in itsCompany’s role as primary obligorprincipal as it controls the delegated services provided to customers.
Costs of obtaining a contract with a customer include internal and external sales commissions paid upon inception of a contract. The cost to obtain a contract is capitalized if it is incremental and would not have been incurred if the sales and distribution agreements.contract had not been obtained. Capitalized contract costs are amortized based on average investor tenure, which range from five to 10 years.
Stock-Based Compensation. The fair value of share-basedstock-based payment awards is estimated on the date of grant based on the market price of the underlying shares of the Company’s common stock and is amortized to compensation expense on a straight-line basis over the related vesting period, which is generally three years. Expense relating to awards subject to performance conditions is recognized if it is probable that the conditions will be achieved. The probability of achievement is assessed on a quarterly basis. Forfeitures are accounted for as they occur. The fair value of cash-settled phantom stock awards is amortized to compensation expense on a straight-line basis over the related vesting period, which is generally four years, and the related liability is carried at fair value.
Postretirement Benefits. Defined contribution plan costs are expensed as incurred.
Income Taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. In assessing whether a valuation allowance should be established against a deferred income tax asset, the Company considers all positive and negative evidence, which includes timing of expiration, projected sources of taxable income, limitations on utilization under the statute and the effectiveness of prudent and feasible tax planning strategies among other factors. For each tax position taken or expected to be taken in a tax return, the Company determinesutilizes significant judgment related to the range of possible favorable or unfavorable outcomes to determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest on tax matters is recognized in interest expense and penalties in other operating expenses.
As a multinational corporation, theThe Company operates in various locations outsidenumerous countries, states and other taxing jurisdictions. The income tax laws are complex and subject to different interpretations by the U.S.taxpayer and generates earnings from its non-U.S. subsidiaries. Prior to enactmentthe relevant taxing authorities. Significant judgment is required in the determination of the Tax CutsCompany’s annual income tax provisions, which includes the assessment of deferred tax assets and Jobs Act (the “Tax Act”) in December 2017,uncertain tax positions, as well as the interpretation and application of existing and newly enacted tax laws, regulation changes, and new judicial rulings. The Company indefinitely reinvested the undistributedrepatriates foreign earnings of all its non-U.S. subsidiaries, except for income previously taxed in the U.S. or subject to regulatory or legal repatriation restrictions or requirements. Effective January 1, 2018, the Company intends to repatriate the earningsthat are in excess of regulatory, capital or operational requirements of substantially all of its non-U.S. subsidiaries.
Foreign Currency Translation and Transactions. Assets and liabilities of non-U.S. subsidiaries for which the local currency is the functional currency are translated at current exchange rates as of the end of the accounting period. The related revenues and expenses are translated at average exchange rates in effect during the period. Net exchange gains and losses resulting from translation are excluded from income and are recorded as part of accumulated other comprehensive income (loss). Transactions denominated in a foreign currency are revalued at the current exchange rate at the transaction date and any related gains and losses are recognized in earnings.
Note 2 – New Accounting Guidance
Recently Adopted Accounting Guidance
On October 1, 2017,2020, the Company adopted an amendment to the stock-based compensationnew guidance issued by the Financial Accounting Standards Board (“FASB”). The amendment requires all income tax effects of stock-based awards to be recognized as income tax expense when the awards vest or settle and clarifies the classification of these transactions within the statement of cash flows. The amendment also provides an election to account for forfeitures as they occur, which the Company made using the modified retrospective approach which did not require the restatement of prior-year periods and did not result in a material impact on retained earnings. The income tax effect and statement of cash flow changes were adopted on a prospective basis. The adoption of the amendment will increase the volatility of income tax expense as a result of fluctuations in the Company’s stock price.
Accounting Guidance Not Yet Adopted
The FASB issued new guidance in May 2014 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’s adoption of the guidance on October 1, 2018 will not have a significant impact on the timing of recognition or presentation for substantially all of its operating revenue or the accounting for its contract costs. The Company will elect the modified retrospective approach and recognize a cumulative effect adjustment resulting in decreases of approximately $9 million in total assets and retained earnings at adoption.
The FASB issued an amendment to the existing financial instruments guidance in January 2016. The amendment 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 will impact all equity securities currently classified as available-for-sale and investments in fund products for which fair value is estimated using 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 will make. The Company will adopt the amendment on October 1, 2018 and recognize a cumulative effect adjustment resulting in increases in investments, retained earnings and other comprehensive loss of approximately $22 million, $30 million and $8 million.
The FASB issued new guidance for the accounting for leases in February 2016. The new guidance requires lessees to recognize assets and liabilities arising from substantially all leases. The guidance also requires an evaluation at the inception of a contract to determine whether the contract is or contains a lease. The guidance is effective for the Company on October 1, 2019 and requires a cumulative effect adjustment to retained earnings either on the date of adoption or at the beginning of the earliest period presented. The Company is currently evaluating the impact of adopting the guidance and has not yet determined its transition approach.
The FASB issued new guidance for the accounting for credit losses in June 2016.losses. The new guidance requires the application of a current expected credit loss model for financial assets measured at amortized cost, including receivables, and an allowance for credit loss model for available-for-sale debt securities. The Company adopted the new guidance is effective forusing the Company on October 1, 2020modified retrospective approach and requiresrecognized a cumulative effect adjustment toresulting in a decrease of $4.1 million in receivables, net, offset by decreases of $0.8 million in deferred tax liabilities and $3.3 million in retained earnings as of October 1, 2020.
Note 3 – Acquisition
Legg Mason, Inc.
On July 31, 2020, the Company acquired all outstanding shares of Legg Mason, Inc. (“Legg Mason”) common stock for a purchase consideration of $4.5 billion in cash and $0.2 billion related to the settlement of historical compensation arrangements. Legg Mason had outstanding debt with an aggregate principal amount due of $2.0 billion on the acquisition date. The acquisition of Legg Mason, a global investment management organization, established the Company as of one of the world’s largest independent, specialized global investment managers, significantly deepened the Company’s presence in key geographies and created an expansive investment platform that is well balanced between institutional and retail client AUM. The EnTrust business was acquired by its management concurrent with the closing of the acquisition.
The initial and revised estimated fair values of the assets acquired and liabilities and noncontrolling interests assumed were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Initial Estimated
Fair Value | | Adjustments | | Revised Estimated
Fair Value |
| as of July 31, 2020 | | | |
| Cash and cash equivalents | | $ | 681.1 | | | $ | — | | | $ | 681.1 | |
| Cash and cash equivalents of consolidated investment products | | 253.4 | | | — | | | 253.4 | |
| Investments | | 471.8 | | | — | | | 471.8 | |
| Investments of consolidated investment products | | 402.9 | | | — | | | 402.9 | |
| Receivables | | 525.7 | | | — | | | 525.7 | |
| Indefinite-lived intangible assets | | 2,727.8 | | | — | | | 2,727.8 | |
Definite-lived intangible assets1 | | 1,353.8 | | | — | | | 1,353.8 | |
| Goodwill | | 2,325.0 | | | (52.4) | | | 2,272.6 | |
| Deferred tax assets | | 148.4 | | | 57.6 | | | 206.0 | |
| Other assets | | 530.7 | | | — | | | 530.7 | |
| Debt | | (2,324.4) | | | — | | | (2,324.4) | |
| Debt of consolidated investment products | | (330.8) | | | — | | | (330.8) | |
| Compensation and benefits | | (579.9) | | | — | | | (579.9) | |
| Deferred tax liabilities | | (315.4) | | | 0.9 | | | (314.5) | |
| Other liabilities | | (926.4) | | | (6.1) | | | (932.5) | |
| Redeemable noncontrolling interests | | (186.4) | | | — | | | (186.4) | |
| Nonredeemable noncontrolling interests | | (20.1) | | | — | | | (20.1) | |
| Total Identifiable Net Assets | | $ | 4,737.2 | | | $ | — | | | $ | 4,737.2 | |
______________
1Includes $1,123.2 million related to management contracts and $230.6 million related to trade names.
The adjustments to the initial estimated fair values are a result of new information obtained about facts that existed as of the acquisition date. The goodwill is primarily attributable to expected growth opportunities and synergies from the combined operations and is not deductible for tax purposes.
The intangible assets relate to acquired investment management contracts and trade names. Indefinite-lived intangible assets represent contracts for which there is no foreseeable limit on the contract period. Definite-lived intangible assets are amortized over their estimated useful lives, which range from 5.0 years to 7.0 years for those related to the contracts and 5.0 years to 20.0 years for those related to trade names. The definite-lived intangible assets related to the contracts and trade names had estimated weighted-average useful lives of 5.9 years and 14.5 years, respectively, at adoption.acquisition.
The Legg Mason debt was recorded at fair value on acquisition-date and included a premium of $324.4 million.
Transaction costs incurred in connection with the acquisition were $6.7 million and $57.4 million in fiscal years 2021 and 2020. These costs were primarily comprised of professional fees, recorded in general, administrative and other expenses. The Company also incurred $13.0 million and $119.6 million of acquisition-related compensation and benefits expense in fiscal years 2021 and 2020, primarily related to the acceleration of expense for historical Legg Mason compensation arrangements and retention bonuses.
Revenue and net income (loss) of Legg Mason included in total operating revenues and net income attributable to Franklin Resources, Inc. in the accompanying consolidated statements of income were $1,500.8 million and $291.4 million for the six month period ended March 31, 2021 and were $475.7 million and $(28.7) million from the acquisition date through September 30, 2020. Due to the continued integration of the combined businesses, it is currently evaluatingno longer practicable to separately report total revenue and net income of Legg Mason for periods subsequent to March 31, 2021.
The following unaudited pro forma summary presents combined results of operations of the impactCompany as if the Legg Mason acquisition and concurrent divestiture of adoptingEnTrust business had occurred on October 1, 2018. The pro forma adjustments include acquisition-related costs, adjustments to intangible amortization expense, and interest expense related to debt assumed. These pro forma results are not indicative of future results of operations that would have been achieved nor are they indicative of future results of operations of the guidance.combined entity.
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| for the fiscal year ended September 30, | | 2020 | | 2019 |
| Revenues | | $ | 7,862.0 | | | $ | 8,436.0 | |
| Net Income Attributable to Franklin Resources, Inc. | | 967.5 | | | 886.6 | |
Note 3 4 – Earnings per Share
The components of basic and diluted earnings per share were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | | | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Net income attributable to Franklin Resources, Inc. | | $ | 1,831.2 | | | $ | 798.9 | | | $ | 1,195.7 | |
| Less: allocation of earnings to participating nonvested stock and stock unit awards | | 77.7 | | | 15.3 | | | 10.9 | |
| Net Income Available to Common Stockholders | | $ | 1,753.5 | | | $ | 783.6 | | | $ | 1,184.8 | |
| | | | | | |
| Weighted-average shares outstanding – basic | | 489.9 | | | 491.9 | | | 503.6 | |
| Dilutive effect of nonparticipating nonvested stock unit awards | | 0.7 | | | 0.5 | | | 0.7 | |
| Weighted-Average Shares Outstanding – Diluted | | 490.6 | | | 492.4 | | | 504.3 | |
| | | | | | |
| Earnings per Share | | | | | | |
| Basic | | $ | 3.58 | | | $ | 1.59 | | | $ | 2.35 | |
| Diluted | | 3.57 | | | 1.59 | | | 2.35 | |
|
| | | | | | | | | | | | |
| (in millions, except per share data) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Net income attributable to Franklin Resources, Inc. | | $ | 764.4 |
| | $ | 1,696.7 |
| | $ | 1,726.7 |
|
| Less: allocation of earnings to participating nonvested stock and stock unit awards | | 17.6 |
| | 12.4 |
| | 10.9 |
|
| Net Income Available to Common Stockholders | | $ | 746.8 |
| | $ | 1,684.3 |
| | $ | 1,715.8 |
|
| | | | | | | |
| Weighted-average shares outstanding – basic | | 537.4 |
| | 558.8 |
| | 583.8 |
|
| Dilutive effect of nonparticipating nonvested stock unit awards | | 0.6 |
| | 0.3 |
| | — |
|
| Weighted-Average Shares Outstanding – Diluted | | 538.0 |
| | 559.1 |
| | 583.8 |
|
| | | | | | | |
| Earnings per Share | | | | | | |
| Basic | | $ | 1.39 |
| | $ | 3.01 |
| | $ | 2.94 |
|
| Diluted | | 1.39 |
| | 3.01 |
| | 2.94 |
|
Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 0.30.5 million for fiscal year 2018, 0.72020, and 0.2 million for the fiscal year ended September 30, 20172019 (“fiscal year 2017”2019”). No nonparticipating nonvested stock unit awards were excluded for fiscal 2021.
Note 5 – Revenues
Operating revenues by geographic area were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | United
States | | Luxembourg | | Americas
Excluding
United
States | | Asia-
Pacific | | Europe,
Middle East
and Africa,
Excluding
Luxembourg | | Total |
for the fiscal year ended
September 30, 2021 |
| Investment management fees | | $ | 4,647.7 | | | $ | 1,075.0 | | | $ | 285.6 | | | $ | 333.3 | | | $ | 200.0 | | | $ | 6,541.6 | |
| Sales and distribution fees | | 1,137.4 | | | 395.8 | | | 52.5 | | | 46.1 | | | 3.7 | | | 1,635.5 | |
| Shareholder servicing fees | | 164.7 | | | 36.1 | | | 0.2 | | | 6.6 | | | 3.6 | | | 211.2 | |
| Other | | 29.2 | | | 1.0 | | | — | | | 1.9 | | | 5.1 | | | 37.2 | |
| Total | | $ | 5,979.0 | | | $ | 1,507.9 | | | $ | 338.3 | | | $ | 387.9 | | | $ | 212.4 | | | $ | 8,425.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | United
States | | Luxembourg | | Americas
Excluding
United
States | | Asia-
Pacific | | Europe,
Middle East
and Africa,
Excluding
Luxembourg | | Total |
for the fiscal year ended
September 30, 2020 |
| Investment management fees | | $ | 2,482.5 | | | $ | 910.1 | | | $ | 269.2 | | | $ | 217.6 | | | $ | 102.3 | | | $ | 3,981.7 | |
| Sales and distribution fees | | 928.8 | | | 366.1 | | | 51.9 | | | 13.6 | | | 1.6 | | | 1,362.0 | |
| Shareholder servicing fees | | 158.6 | | | 25.5 | | | 0.3 | | | 8.4 | | | 2.3 | | | 195.1 | |
| Other | | 24.9 | | | 1.2 | | | — | | | 0.6 | | | 1.0 | | | 27.7 | |
| Total | | $ | 3,594.8 | | | $ | 1,302.9 | | | $ | 321.4 | | | $ | 240.2 | | | $ | 107.2 | | | $ | 5,566.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | United
States | | Luxembourg | | Americas
Excluding
United
States | | Asia-
Pacific | | Europe,
Middle East
and Africa,
Excluding
Luxembourg | | Total |
for the fiscal year ended
September 30, 2019 |
| Investment management fees | | $ | 2,260.6 | | | $ | 1,064.7 | | | $ | 325.4 | | | $ | 241.8 | | | $ | 92.7 | | | $ | 3,985.2 | |
| Sales and distribution fees | | 941.3 | | | 437.2 | | | 63.3 | | | 1.3 | | | 1.5 | | | 1,444.6 | |
| Shareholder servicing fees | | 175.7 | | | 30.1 | | | 0.1 | | | 10.4 | | | — | | | 216.3 | |
| Other | | 18.6 | | | 1.5 | | | — | | | 1.0 | | | 2.2 | | | 23.3 | |
| Total | | $ | 3,396.2 | | | $ | 1,533.5 | | | $ | 388.8 | | | $ | 254.5 | | | $ | 96.4 | | | $ | 5,669.4 | |
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 81%, 89% and 1.3 million92% of the Company’s total operating revenues for the fiscal year ended September 30, 2016 (“fiscal year 2016”).years 2021, 2020 and 2019.
Note 46 – Investments
The disclosures below include details of the Company’s investments, excluding those of CIPs. See Note 911 – Consolidated Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
| Investments, at fair value | | | | |
| Sponsored funds and separate accounts | | $ | 368.3 | | | $ | 303.4 | |
| Investments related to long-term incentive plans | | 160.0 | | | 146.6 | |
| Other equity and debt investments | | 60.0 | | | 54.8 | |
| Total investments, at fair value | | 588.3 | | | 504.8 | |
| Investments in equity method investees | | 814.3 | | | 716.2 | |
| Other investments | | 107.7 | | | 83.5 | |
| Total | | $ | 1,510.3 | | | $ | 1,304.5 | |
|
| | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2018 | | 2017 |
| Investment securities, trading | | | | |
| Sponsored funds | | $ | 248.1 |
| | $ | 31.1 |
|
| Debt and other equity securities | | 97.6 |
| | 283.4 |
|
| Total investment securities, trading | | 345.7 |
| | 314.5 |
|
| Investment securities, available-for-sale | | | | |
| Sponsored funds | | 178.6 |
| | 110.8 |
|
| Debt and other equity securities | | 15.5 |
| | 1.9 |
|
| Total investment securities, available-for-sale | | 194.1 |
| | 112.7 |
|
| Investments in equity method investees | | 780.8 |
| | 893.5 |
|
| Other investments | | 105.9 |
| | 72.9 |
|
| Total | | $ | 1,426.5 |
| | $ | 1,393.6 |
|
Debt and other equity trading securities consist primarily of corporate debt.
Investment securities with aggregate carrying amounts of $1.2 million and $0.8 million were pledged as collateral at September 30, 2018 and 2017.
Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:
|
| | | | | | | | | | | | | | | | |
| | | | | Gross Unrealized | | |
| (in millions) | Cost Basis | | Gains | | Losses | | Fair Value |
| 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 |
|
| | | | | | | | | |
| as of September 30, 2017 | | | | | | | | |
| Sponsored funds | | $ | 107.9 |
| | $ | 9.4 |
| | $ | (6.5 | ) | | $ | 110.8 |
|
| Debt and other equity securities | | 1.9 |
| | — |
| | — |
| | 1.9 |
|
| Total | | $ | 109.8 |
| | $ | 9.4 |
| | $ | (6.5 | ) | | $ | 112.7 |
|
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:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less Than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (in millions) | | | | | |
| 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 | ) |
| | | | | | | | | | | | | |
| as of September 30, 2017 | | | | | | | | | | | | |
| Sponsored funds | | $ | 28.4 |
| | $ | (6.3 | ) | | $ | 2.4 |
| | $ | (0.2 | ) | | $ | 30.8 |
| | $ | (6.5 | ) |
The Company recognized other-than-temporary impairment of $1.7 million, $0.8 million and $11.1 million during fiscal years 2018, 2017 and 2016, of which $5.8 million in fiscal year 2016 related to available-for-sale sponsored funds.
Note 57 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of CIPs. See Note 911 – Consolidated Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liabilityliabilities 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 September 30, 2021 | | | | | |
| Assets | | | | | | | | | | |
| Investments, at fair value | | | | | | | | | | |
| Sponsored funds and separate accounts | | $ | 241.3 | | | $ | 18.4 | | | $ | 24.6 | | | $ | 84.0 | | | $ | 368.3 | |
| Investments related to long-term incentive plans | | 160.0 | | | — | | | — | | | — | | | 160.0 | |
| Other equity and debt investments | | 3.3 | | | 13.3 | | | — | | | 43.4 | | | 60.0 | |
| Contingent consideration asset | | — | | | — | | | 19.4 | | | — | | | 19.4 | |
| Total Assets Measured at Fair Value | | $ | 404.6 | | | $ | 31.7 | | | $ | 44.0 | | | $ | 127.4 | | | $ | 607.7 | |
| | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Contingent consideration liabilities | | $ | — | | | $ | — | | | $ | 42.4 | | | $ | — | | | $ | 42.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Level 1 | | Level 2 | | Level 3 | | NAV as a
Practical
Expedient | | Total |
| as of September 30, 2020 | | | | | |
| Assets | | | | | | | | | | |
| Investments, at fair value | | | | | | | | | | |
| Sponsored funds and separate accounts | | $ | 176.3 | | | $ | 40.9 | | | $ | 17.4 | | | $ | 68.8 | | | $ | 303.4 | |
| Investments related to long-term incentive plans | | 145.5 | | | — | | | — | | | 1.1 | | | 146.6 | |
| Other equity and debt investments | | 2.1 | | | 1.5 | | | — | | | 51.2 | | | 54.8 | |
| Contingent consideration asset | | — | | | — | | | 39.7 | | | — | | | 39.7 | |
| Total Assets Measured at Fair Value | | $ | 323.9 | | | $ | 42.4 | | | $ | 57.1 | | | $ | 121.1 | | | $ | 544.5 | |
| | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Contingent consideration liabilities | | $ | — | | | $ | — | | | $ | 25.3 | | | $ | — | | | $ | 25.3 | |
|
| | | | | | | | | | | | | | | | |
| (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 |
|
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Level 1 | | Level 2 | | Level 3 | | Total |
| as of September 30, 2017 | | | | |
| Assets | | | | | | | | |
| Investment securities, trading | | | | | | | | |
| Sponsored funds | | $ | 31.1 |
| | $ | — |
| | $ | — |
| | $ | 31.1 |
|
| Debt and other equity securities | | 18.2 |
| | 78.4 |
| | 186.8 |
| | 283.4 |
|
| Investment securities, available-for-sale | | | | | | | | |
| Sponsored funds | | 110.8 |
| | — |
| | — |
| | 110.8 |
|
| Debt and other equity securities | | 1.0 |
| | 0.6 |
| | 0.3 |
| | 1.9 |
|
| Life settlement contracts | | — |
| | — |
| | 12.8 |
| | 12.8 |
|
| Total Assets Measured at Fair Value | | $ | 161.1 |
| | $ | 79.0 |
| | $ | 199.9 |
| | $ | 440.0 |
|
| | | | | | | | | |
| Liability | | | | | | | | |
| Contingent consideration liability | | $ | — |
| | $ | — |
| | $ | 51.0 |
| | $ | 51.0 |
|
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) | | | | |
| as of September 30, | | 2021 | | 2020 |
Nonredeemable investments1 | | | | |
| Investments with known liquidation periods | | $ | 53.9 | | | $ | 51.2 | |
| Investments with unknown liquidation periods | | 46.6 | | | 42.6 | |
| | | | |
Redeemable investments2 | | 26.9 | | | 27.3 | |
| | | | |
| Unfunded commitments | | 51.8 | | | 9.5 | |
_______________
1The 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 4.0 years and 1.9 years at September 30, 2021 and 2020.
2 Investments are redeemable on a monthly and quarterly basis.
Changes in the Level 3 assets and liabilities were as follows:
|
| | | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
| (in millions) | | Investments | | Contingent Consideration Liability | | Investments | | Contingent Consideration Liabilities |
| for the fiscal years ended September 30, | | |
| Balance at beginning of year | | $ | 199.9 |
| | $ | (51.0 | ) | | $ | 205.1 |
| | $ | (98.1 | ) |
| Acquisition | | — |
| | — |
| | — |
| | (5.7 | ) |
| Total realized and unrealized gains (losses) | | | | | | | | |
| Included in investment and other income, net | | 4.5 |
| | — |
| | 8.5 |
| | — |
|
| Included in general, administrative and other expense | | — |
| | (13.1 | ) | | — |
| | 13.8 |
|
| Purchases | | 14.5 |
| | — |
| | 5.4 |
| | — |
|
| Sales | | (2.6 | ) | | — |
| | (17.7 | ) | | — |
|
| Settlements | | (174.0 | ) | | 32.4 |
| | (4.8 | ) | | 39.0 |
|
| Transfers out of Level 3 | | — |
| | — |
| | (0.4 | ) | | — |
|
| Foreign exchange revaluation and other | | (9.7 | ) | | (7.0 | ) | | 3.8 |
| | — |
|
| Balance at End of Year | | $ | 32.6 |
| | $ | (38.7 | ) | | $ | 199.9 |
| | $ | (51.0 | ) |
| Change in unrealized gains (losses) included in net income relating to assets and liability held at end of year | | $ | 2.1 |
| | $ | (13.1 | ) | | $ | 6.0 |
| | $ | 8.1 |
|
There were no transfers into or out of Level 3 during fiscal year 2018. There were no transfers into Level 3 during fiscal year 2017.
Valuation techniques and significant unobservable inputs used in the Level 3 fair value measurements were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| (in millions) | | Investments | | Contingent
Consideration
Asset | | Contingent
Consideration
Liabilities | Investments | | Contingent
Consideration
Asset | | Contingent
Consideration
Liabilities |
| for the fiscal years ended September 30, | | |
| Balance at beginning of year | | $ | 17.4 | | | $ | 39.7 | | | $ | (25.3) | | | $ | 32.1 | | | $ | — | | | $ | — | |
| Acquisitions | | — | | | — | | | (13.0) | | | — | | | 39.7 | | | (27.9) | |
| Total realized and unrealized gains (losses) | | | | | | | | | | | | |
| Included in investment and other income (losses), net | | 0.3 | | | — | | | — | | | — | | | — | | | — | |
| Included in general, administrative and other expense | | — | | | — | | | (4.1) | | | — | | | — | | | 2.0 | |
| Purchases | | 17.6 | | | — | | | — | | | 22.6 | | | — | | | — | |
| Sales | | (6.0) | | | — | | | — | | | (19.0) | | | — | | | — | |
| Settlements | | (3.5) | | | (20.3) | | | — | | | (8.4) | | | — | | | 0.6 | |
| Consolidation of investment product | | — | | | — | | | — | | | (10.0) | | | — | | | — | |
| Transfers into Level 3 | | 1.9 | | | — | | | — | | | 0.1 | | | — | | | — | |
| Transfers out of Level 3 | | (3.1) | | | — | | | — | | | — | | | — | | | — | |
| Balance at End of Year | | $ | 24.6 | | | $ | 19.4 | | | $ | (42.4) | | | $ | 17.4 | | | $ | 39.7 | | | $ | (25.3) | |
| Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of year | | $ | 0.3 | | | $ | — | | | $ | (4.1) | | | $ | (1.4) | | | $ | — | | | $ | — | |
|
| | | | | | | | | | |
| (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% |
|
| | | | | | | | | | |
| (in millions) | | | | | | | | |
| as of September 30, 2017 | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range (Weighted Average) |
| Investment securities, trading – debt and other equity securities | | $ | 175.7 |
| | Market pricing | | Redemption price | | $73 per $100 of par |
| Discount rate | | 18.6% |
| 11.1 |
| | Discounted cash flow | | Discount rate | | 4.1%–6.7% (5.7%) |
| Risk premium | | 2.0%–4.1% (2.9%) |
| | | | | | | | | |
| Life settlement contracts | | 12.8 |
| | Discounted cash flow | | Life expectancy | | 20–123 months (62) |
| Discount rate | | 8.0%–20.0% (13.2%) |
| | | | | | | | | |
| Contingent consideration liability | | 51.0 |
| | Discounted cash flow | | AUM growth rate | | 1.3%–9.4% (5.3%) |
| Discount rate | | 14.6% |
For investment securities, trading – debt and other equity securities using the discounted cash flow technique, a significant increase (decrease) in the discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement.
For life settlement contracts, a significant increase (decrease) in the life expectancy or the discount rate in isolation would result in a significantly lower (higher) fair value measurement.
For the contingent consideration liability, a significant decrease (increase) in the discount rate in isolation would result in a significantly higher (lower) fair value measurement.
Financial instruments that were not measured at fair value were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair
Value
Level | | 2021 | | 2020 |
| (in millions) | Carrying
Value | | Estimated
Fair Value | Carrying
Value | | Estimated
Fair Value |
| as of September 30, |
| Financial Assets | | | | | | | | | | |
| Cash and cash equivalents | | 1 | | $ | 4,357.8 | | | $ | 4,357.8 | | | $ | 3,026.8 | | | $ | 3,026.8 | |
| Other investments | | | | | | | | | | |
| Time deposits | | 2 | | 13.2 | | | 13.2 | | | 19.2 | | | 19.2 | |
| Equity securities | | 3 | | 94.5 | | | 99.1 | | | 64.3 | | | 67.3 | |
| Loans receivable | | 3 | | — | | | — | | | 42.4 | | | 42.4 | |
| | | | | | | | | | |
| Financial Liability | | | | | | | | | | |
| Debt | | 2 | | $ | 3,399.4 | | | $ | 3,434.1 | | | $ | 3,017.1 | | | $ | 3,086.5 | |
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | | | 2018 | | 2017 |
| as of September 30, | | Fair Value Level | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| Financial Assets | | | | | | | | | | |
| Cash and cash equivalents | | 1 | | $ | 6,610.8 |
| | $ | 6,610.8 |
| | $ | 8,523.3 |
| | $ | 8,523.3 |
|
| Other investments | | | | | | | | | | |
| Time deposits | | 2 | | 12.3 |
| | 12.3 |
| | 13.4 |
| | 13.4 |
|
| Cost method investments | | 3 | | 81.8 |
| | 103.6 |
| | 46.7 |
| | 67.7 |
|
| | | | | | | | | | | |
| Financial Liability | | | | | | | | | | |
| Debt | | 2 | | $ | 695.9 |
| | $ | 671.1 |
| | $ | 1,044.2 |
| | $ | 1,073.5 |
|
Note 68 – Property and Equipment
Property and equipment, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | Useful Lives
In Years |
| as of September 30, | | 2021 | | 2020 | |
| Buildings and leasehold improvements | | $ | 868.2 | | | $ | 877.4 | | | 5-35 |
| Software | | 609.4 | | | 576.2 | | | 3-10 |
| Equipment and furniture | | 390.6 | | | 374.0 | | | 3-10 |
| Land | | 82.5 | | | 83.0 | | | N/A |
| Total cost | | 1,950.7 | | | 1,910.6 | | | |
| Less: accumulated depreciation and amortization | | (1,180.7) | | | (1,096.8) | | | |
| Property and Equipment, Net | | $ | 770.0 | | | $ | 813.8 | | | |
|
| | | | | | | | | | |
| (in millions) | | | | | | Useful Lives In Years |
| as of September 30, | | 2018 | | 2017 | |
| Furniture, software and equipment | | $ | 798.6 |
| | $ | 804.7 |
| | 3 – 10 |
| Premises and leasehold improvements | | 628.1 |
| | 580.9 |
| | 5 – 35 |
| Land | | 74.1 |
| | 74.2 |
| | N/A |
| Total cost | | 1,500.8 |
| | 1,459.8 |
| | |
| Less: accumulated depreciation and amortization | | (965.8 | ) | | (942.6 | ) | | |
| Property and Equipment, Net | | $ | 535.0 |
| | $ | 517.2 |
| | |
Depreciation and amortization expense related to property and equipment was $78.9$124.4 million, $81.5$95.2 million and $81.0$83.2 million in fiscal years 2018, 20172021, 2020 and 2016.2019. The Company recognized $6.6 millionno impairment of property and equipment in fiscal years 2021 and 2020 and an insignificant impairment during the fiscal year 2018 and insignificant impairment amounts during fiscal years 2017 and 2016.ended 2019.
Note 79 – Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net consisted of the following:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
| Goodwill | | $ | 4,457.7 | | | $ | 4,500.8 | |
| Indefinite-lived intangible assets | | 3,527.8 | | | 3,500.8 | |
| Definite-lived intangible assets, net | | 1,182.4 | | | 1,413.4 | |
| Goodwill and Other Intangible Assets, Net | | $ | 9,167.9 | | | $ | 9,415.0 | |
|
| | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2018 | | 2017 |
| Goodwill | | $ | 1,794.8 |
| | $ | 1,687.2 |
|
| Indefinite-lived intangible assets | | 530.7 |
| | 534.0 |
|
| Definite-lived intangible assets, net | | 7.9 |
| | 6.5 |
|
| Goodwill and Other Intangible Assets, Net | | $ | 2,333.4 |
| | $ | 2,227.7 |
|
Changes in the carrying value of goodwill were as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 |
| Balance at beginning of year | | $ | 4,500.8 | | | $ | 2,130.3 | |
| Acquisitions | | — | | | 2,389.1 | |
| Impairment | | — | | | (23.7) | |
Purchase price allocation adjustment1 | | (52.4) | | | — | |
| Foreign exchange revaluation | | 9.3 | | | 5.1 | |
| Balance at End of Year | | $ | 4,457.7 | | | $ | 4,500.8 | |
______________ |
| | | | | | | | |
| (in millions) | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 1,687.2 |
| | $ | 1,661.2 |
|
| Acquisitions | | 117.4 |
| | 18.8 |
|
| Foreign exchange revaluation and other | | (9.8 | ) | | 7.2 |
|
| Balance at End of Year | | $ | 1,794.8 |
| | $ | 1,687.2 |
|
Indefinite-lived intangible assets consist of management contracts. NoDuring fiscal years 2021 and 2019, no impairment of goodwill orwas recognized. During the fiscal year 2020, a $23.7 million impairment of goodwill was recognized due to the decision to wind-down operations of Onsa Inc (formerly known as TokenVault, Inc.).
No impairment of indefinite-lived intangible assets was recognized during fiscal year 2021. The Company recognized impairments of indefinite-lived intangible assets of $30.0 million and $9.3 million during fiscal years 2018, 20172020 and 2016.2019. The impairment in fiscal year 2020 was primarily attributable to a Benefit Street Partners L.L.C. related management contract due to declines in revenue growth rates. The impairment in fiscal year 2019 was related to Canadian management contracts due to revised estimates of future pre-tax profit margins and AUM growth rates for the associated fund products.
Definite-lived intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| (in millions) | | Gross
Carrying
Value | | Accumulated
Amortization | | Net
Carrying
Value | | Gross
Carrying
Value | | Accumulated
Amortization | | Net
Carrying
Value |
| as of September 30, | | | | | | |
| Management contracts | | $ | 1,232.0 | | | $ | (262.6) | | | $ | 969.4 | | | $ | 1,231.2 | | | $ | (57.6) | | | $ | 1,173.6 | |
| Trade names | | 230.7 | | | (28.0) | | | 202.7 | | | 230.6 | | | (4.0) | | | 226.6 | |
| Developed software | | 14.4 | | | (4.1) | | | 10.3 | | | 14.4 | | | (1.2) | | | 13.2 | |
| Total | | $ | 1,477.1 | | | $ | (294.7) | | | $ | 1,182.4 | | | $ | 1,476.2 | | | $ | (62.8) | | | $ | 1,413.4 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 |
| (in millions) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| as of September 30, | | | | | | |
| Management contracts | | $ | 54.9 |
| | $ | (47.0 | ) | | $ | 7.9 |
| | $ | 52.4 |
| | $ | (45.9 | ) | | $ | 6.5 |
|
Amortization expense related toNo impairment of definite-lived intangible assets was $1.8 million, $3.9 million and $10.4 million forrecognized during fiscal years 2018, 2017 and 2016.
year 2021. The Company recognized impairment of management contract definite-lived intangible assets of $5.7 million, $9.6$1.7 million and $28.2$4.0 million during fiscal years 2018, 20172020 and 2016. The impairments were2019, primarily relateddue to assets from the K2 acquisition and resulted from increased investor redemptions; lower estimates of future sales and renegotiations of certain investment management fees were also a factor in fiscal year 2016.redemptions.
Definite-lived intangible assets had a weighted-average remaining useful life of 2.86.7 years at September 30, 2018,2021, with estimated remaining amortization expense as follows:
| | | | | | | | |
| (in millions) | | |
| for the fiscal years ending September 30, | | Amount |
| 2022 | | $ | 231.5 | |
| 2023 | | 231.5 | |
| 2024 | | 224.7 | |
| 2025 | | 212.5 | |
| 2026 | | 146.0 | |
| Thereafter | | 136.2 | |
| Total | | $ | 1,182.4 | |
|
| | | | |
| (in millions) | | |
| for the fiscal years ending September 30, | | Amount |
| 2019 | | $ | 3.0 |
|
| 2020 | | 3.0 |
|
| 2021 | | 1.8 |
|
| Thereafter | | 0.1 |
|
| Total | | $ | 7.9 |
|
Note 810 – Debt
The disclosures below include details of the Company’s debt, excluding that of CIPs. See Note 911 – Consolidated Investment Products for information related to the debt of these entities.
Debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | Effective
Interest Rate | | 2020 | | Effective
Interest Rate |
| as of September 30, |
| Notes issued by Franklin Resources, Inc. | | | | | | | | |
| $300 million 2.800% senior notes due September 2022 | | $ | 299.9 | | | 2.93 | % | | $ | 299.8 | | | 2.93 | % |
| $400 million 2.850% senior notes due March 2025 | | 399.7 | | | 2.97 | % | | 399.7 | | | 2.97 | % |
| $850 million 1.600% senior notes due October 2030 | | 846.3 | | | 1.74 | % | | — | | | N/A |
| $350 million 2.950% senior notes due August 2051 | | 347.8 | | | 3.00 | % | | — | | | N/A |
| Total notes issued by Franklin Resources, Inc. | | 1,893.7 | | | | | 699.5 | | | |
| Notes issued by Legg Mason (a subsidiary of Franklin) | | | | | | | | |
| $250 million 3.950% senior notes due July 2024 | | 266.5 | | | 1.53 | % | | 272.4 | | | 1.53 | % |
| $450 million 4.750% senior notes due March 2026 | | 509.6 | | | 1.80 | % | | 523.0 | | | 1.80 | % |
| $550 million 5.625% senior notes due January 2044 | | 742.2 | | | 3.38 | % | | 747.5 | | | 3.38 | % |
| $250 million 6.375% junior notes due March 2056 | | — | | | N/A | | 260.7 | | | 6.08 | % |
| $500 million 5.450% junior notes due September 2056 | | — | | | N/A | | 516.1 | | | 5.25 | % |
| Total notes issued by Legg Mason | | 1,518.3 | | | | | 2,319.7 | | | |
| Debt issuance costs | | (12.6) | | | | | (2.1) | | | |
| Total | | $ | 3,399.4 | | | | | $ | 3,017.1 | | | |
|
| | | | | | | | | | | | | | |
| (in millions) | | 2018 | | Effective Interest Rate | | 2017 | | Effective Interest Rate |
| as of September 30, |
| Senior Notes | | | | | | | | |
| $350 million 4.625% notes due May 2020 | | $ | — |
| | N/A |
| | $ | 349.9 |
| | 4.74 | % |
| $300 million 2.800% notes due September 2022 | | 299.7 |
| | 2.93 | % | | 299.6 |
| | 2.93 | % |
| $400 million 2.850% notes due March 2025 | | 399.6 |
| | 2.97 | % | | 399.5 |
| | 2.97 | % |
| Total senior notes | | 699.3 |
| | | | 1,049.0 |
| | |
| Debt issuance costs | | (3.4 | ) | | | | (4.8 | ) | | |
| Total | | $ | 695.9 |
| | | | $ | 1,044.2 |
| | |
On August 12, 2021, the Company completed its offering and sale of $350.0 million in aggregate principal amount of 2.950% senior unsecured unsubordinated notes due August 2051. The Company incurred $4.1 million of debt issuance costs and the notes were issued at a discount of $2.2 million.
On March 15, 2021, the Company redeemed all of the outstanding $250.0 million 6.375% junior notes due in March 2056 issued by Legg Mason at the principal amount plus accrued and unpaid interest of $4.0 million.
On October 19, 2020, the Company completed its offering and sale of $750.0 million in aggregate principal amount of 1.600% senior unsecured unsubordinated notes due October 2030 (“1.600% Senior Notes”). On August 12, 2021, the Company issued an additional $100.0 million in aggregate principal of 1.600% Senior Notes. The Company incurred $7.7 million in debt issuance costs in total and the notes were issued at an aggregate discount of $3.9 million.
At September 30, 2018, the Company’s2021, Franklin’s outstanding senior unsecured unsubordinated notes had an aggregate face valueprincipal amount due of $700.0 million.$1,900.0 million. The notes have fixed interest rates with interest payable semi-annuallysemi-annually.
At September 30, 2021, Legg Mason’s outstanding senior unsecured unsubordinated notes had an aggregate principal amount due of $1,250.0 million. The notes have fixed interest rates with interest payable semi-annually. Effective August 2, 2021, Franklin has agreed to unconditionally and irrevocably guarantee all of the outstanding notes issued by Legg Mason.
The Franklin and Legg Mason senior notes contain an optional redemption feature that allows the Company to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The indentures governing the senior notes contain limitations on the Company’s ability and the ability of its subsidiaries to pledge voting stock or profit participating equity interests in its subsidiaries to secure other debt without similarly securing the notes equally and ratably. TheIn addition, the indentures also include requirements that must be met if the Company consolidates or merges with, or sells all or substantially all of its assets to, another entity.
On May 21, 2018, the Company redeemed its outstanding 4.625% notes due in May 2020 at a make-whole redemption price of $361.9 million, which resulted in the recognition of $12.5 million of accelerated interest expense.
The Company was in compliance with all debt covenants at September 30, 2018.2021.
At September 30, 2018,2021, the Company had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012.2012.
Note 9 11 – Consolidated Investment Products
CIPs consist of mutual and other investment funds, limited partnerships and similar structures, substantiallyand CLOs, all of which are sponsored by the Company, and include both VOEs and VIEs. The Company had 53 and 5860 CIPs, including 10 CLOs, as of September 30, 20182021 and 2017.75 CIPs, including 8 CLOs, as of September 30, 2020.
The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 289.4 | | | $ | 963.0 | |
| Receivables | | 127.8 | | | 118.3 | |
| Investments, at fair value | | 5,820.1 | | | 4,074.0 | |
| Total Assets | | $ | 6,237.3 | | | $ | 5,155.3 | |
| | | | |
| Liabilities | | | | |
| Accounts payable and accrued expenses | | $ | 558.0 | | | $ | 611.2 | |
| Debt | | 3,671.0 | | | 2,800.6 | |
| Other liabilities | | 13.8 | | | 12.1 | |
| Total liabilities | | 4,242.8 | | | 3,423.9 | |
| Redeemable Noncontrolling Interests | | 622.5 | | | 397.3 | |
Stockholders’ Equity | | | | |
| Franklin Resources, Inc.’s interests | | 1,000.7 | | | 754.4 | |
| Nonredeemable noncontrolling interests | | 371.3 | | | 579.7 | |
| Total stockholders’ equity | | 1,372.0 | | | 1,334.1 | |
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | | $ | 6,237.3 | | | $ | 5,155.3 | |
|
| | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2018 | | 2017 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 299.8 |
| | $ | 226.4 |
|
| Receivables | | 114.2 |
| | 234.1 |
|
| Investments, at fair value | | 2,109.4 |
| | 3,467.4 |
|
| Other assets | | 1.0 |
| | 0.9 |
|
| Total Assets | | $ | 2,524.4 |
| | $ | 3,928.8 |
|
| | | | | |
| Liabilities | | | | |
| Accounts payable and accrued expenses | | $ | 68.0 |
| | $ | 124.1 |
|
| Debt | | 32.6 |
| | 53.4 |
|
| Other liabilities | | 9.3 |
| | 8.7 |
|
| Total liabilities | | 109.9 |
| | 186.2 |
|
| Redeemable Noncontrolling Interests | | 1,043.6 |
| | 1,941.9 |
|
Stockholders’ Equity | | | | |
| Franklin Resources, Inc.’s interests | | 1,092.6 |
| | 1,511.8 |
|
| Nonredeemable noncontrolling interests | | 278.3 |
| | 288.9 |
|
| Total stockholders’ equity | | 1,370.9 |
| | 1,800.7 |
|
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | | $ | 2,524.4 |
| | $ | 3,928.8 |
|
The CIPs did not have a significant impact on net income attributable to the Company in fiscal years 2018, 20172021, 2020 and 2016.2019.
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 trading or available-for-sale investment securities, or equity method or cost method investments depending on the structure of the product and the Company’s role and level of ownership.
Investments84
Investments of CIPs consisted of the following:
|
| | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2018 | | 2017 |
| Investment securities, trading | | $ | 1,651.8 |
| | $ | 3,017.2 |
|
| Other equity securities | | 311.0 |
| | 306.9 |
|
| Other debt securities | | 146.6 |
| | 143.3 |
|
| Total | | $ | 2,109.4 |
| | $ | 3,467.4 |
|
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 September 30, 2021 |
| Assets | | | | | | | | | | |
| Cash and cash equivalents of CLOs | | $ | 145.4 | | | $ | — | | | $ | — | | | $ | — | | | $ | 145.4 | |
| Receivables of CLOs | | — | | | 84.0 | | | — | | | — | | | 84.0 | |
| Investments | | | | | | | | | | |
| Equity and debt securities | | 310.8 | | | 647.3 | | | 453.3 | | | 343.5 | | | 1,754.9 | |
| Loans | | — | | | 3,955.3 | | | 20.5 | | | — | | | 3,975.8 | |
| Real Estate | | — | | | — | | | 89.4 | | | — | | | 89.4 | |
| Total Assets Measured at Fair Value | | $ | 456.2 | | | $ | 4,686.6 | | | $ | 563.2 | | | $ | 343.5 | | | $ | 6,049.5 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (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 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Level 1 | | Level 2 | | Level 3 | | NAV as a Practical Expedient | | Total |
| as of September 30, 2017 | | | | | |
| Assets | | | | | | | | | | |
| Investments | | | | | | | | | | |
| Equity securities | | $ | 331.4 |
| | $ | 128.1 |
| | $ | 160.7 |
| | $ | 155.2 |
| | $ | 775.4 |
|
| Debt securities | | 1.4 |
| | 2,555.2 |
| | 135.4 |
| | — |
| | 2,692.0 |
|
| Total Assets Measured at Fair Value | | $ | 332.8 |
| | $ | 2,683.3 |
| | $ | 296.1 |
| | $ | 155.2 |
| | $ | 3,467.4 |
|
| | | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Other liabilities | | $ | 0.4 |
| | $ | 8.3 |
| | $ | — |
| | $ | — |
| | $ | 8.7 |
|
The fair value of other liabilities, which consist of short positions in debt and equity securities, is determined based on the fair value of the underlying securities using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.
There were no transfers into or out of Level 3 during fiscal years 2018 and 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Level 1 | | Level 2 | | Level 3 | | NAV as a
Practical
Expedient | | Total |
| as of September 30, 2020 |
| Assets | | | | | | | | | | |
| Cash and cash equivalents of CLOs | | $ | 527.3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 527.3 | |
| Receivables of CLOs | | — | | | 57.8 | | | — | | | — | | | 57.8 | |
| Investments | | | | | | | | | | |
| Equity and debt securities | | 177.6 | | | 285.7 | | | 322.3 | | | 261.1 | | | 1,046.7 | |
| Loans | | — | | | 2,663.2 | | | 24.9 | | | — | | | 2,688.1 | |
| Real estate | | — | | | — | | | 339.2 | | | — | | | 339.2 | |
| Total Assets Measured at Fair Value | | $ | 704.9 | | | $ | 3,006.7 | | | $ | 686.4 | | | $ | 261.1 | | | $ | 4,659.1 | |
Investments for which fair value was estimated using reported NAV as a practical expedient consistedconsist of redeemable global hedge fund, nonredeemable real estate and private equity funds.funds and redeemable U.S. equity fund. These investments were as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
Nonredeemable investments1 | | | | |
| Investments with known liquidation periods | | $ | 141.4 | | | $ | 261.1 | |
| | | | |
Redeemable investments2 | | 202.1 | | | — | |
| | | | |
Unfunded commitments3 | | 0.5 | | | 94.0 | |
_______________
1The 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 aassets. Investments have an expected weighted-average periodlife of 3.51.3 years and 4.44.2 years at September 30, 20182021 and 2017. The CIPs’2020.
2Investments are redeemable on a monthly basis and liquidation periods are unknown.
3Of the total unfunded commitments, to these funds totaled $1.9 million, of which the Company was contractually obligated to fund $0.4$0.2 million and $11.4 million based on its ownership percentage in the CIPs, at both September 30, 20182021 and 2017.
2020.
Changes in Level 3 assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Equity and Debt
Securities | | Real Estate | | Loans | | Total
Level 3
Assets |
| for the fiscal year ended September 30, 2021 |
| Balance at beginning of year | | $ | 322.3 | | | $ | 339.2 | | | $ | 24.9 | | | $ | 686.4 | |
| Realized and unrealized gains included in investment and other income of consolidated investment products, net | | 122.8 | | | 8.3 | | | 0.3 | | | 131.4 | |
| Purchases | | 105.7 | | | 161.7 | | | — | | | 267.4 | |
| Sales and settlements | | (62.8) | | | — | | | (4.7) | | | (67.5) | |
| Deconsolidations | | (36.2) | | | (448.8) | | | — | | | (485.0) | |
| Transfers into Level 3 | | 2.7 | | | 18.5 | | | — | | | 21.2 | |
| Transfers out of Level 3 | | (1.9) | | | — | | | — | | | (1.9) | |
| Foreign exchange revaluation | | 0.7 | | | 10.5 | | | — | | | 11.2 | |
| Balance at End of Year | | $ | 453.3 | | | $ | 89.4 | | | $ | 20.5 | | | $ | 563.2 | |
| Change in unrealized gains included in net income relating to assets held at end of year | | $ | 123.9 | | | $ | 5.4 | | | $ | 0.5 | | | $ | 129.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Equity and Debt
Securities | | Real Estate | | Loans | | Total
Level 3
Assets |
| for the fiscal year ended September 30, 2020 |
| Balance at beginning of year | | $ | 333.8 | | | $ | 152.7 | | | $ | 16.6 | | | $ | 503.1 | |
| Acquisition | | — | | | 20.3 | | | 17.6 | | | 37.9 | |
| Realized and unrealized losses included in investment and other income of consolidated investment products, net | | (47.2) | | | (5.2) | | | (1.8) | | | (54.2) | |
| Purchases | | 84.0 | | | 154.9 | | | — | | | 238.9 | |
| Sales and settlements | | (5.0) | | | — | | | (7.5) | | | (12.5) | |
| Deconsolidations | | (47.8) | | | — | | | — | | | (47.8) | |
| Transfers into Level 3 | | 2.2 | | | — | | | — | | | 2.2 | |
| Transfers out of Level 3 | | (1.1) | | | — | | | — | | | (1.1) | |
| Foreign exchange revaluation | | 3.4 | | | 16.5 | | | — | | | 19.9 | |
| Balance at End of Year | | $ | 322.3 | | | $ | 339.2 | | | $ | 24.9 | | | $ | 686.4 | |
| Change in unrealized losses included in net income relating to assets held at end of year | | $ | (47.2) | | | $ | (5.2) | | | $ | (1.8) | | | $ | (54.2) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2018 | | 2017 |
| (in millions) | | Equity Securities | | Debt Securities | | Total Level 3 Assets | | Equity Securities | | Debt Securities | | Total Level 3 Assets |
| for the fiscal years ended September 30, | | | | |
| Balance at beginning of year | | $ | 160.7 |
| | $ | 135.4 |
| | $ | 296.1 |
| | $ | 160.3 |
| | $ | 132.3 |
| | $ | 292.6 |
|
| Adoption of new accounting guidance | | — |
| | — |
| | — |
| | (45.4 | ) | | (0.5 | ) | | (45.9 | ) |
| Realized and unrealized gains (losses) included in investment and other income, net | | 26.2 |
| | 4.2 |
| | 30.4 |
| | 19.2 |
| | (0.3 | ) | | 18.9 |
|
| Purchases | | 32.0 |
| | 42.2 |
| | 74.2 |
| | 30.4 |
| | 24.7 |
| | 55.1 |
|
| Sales | | (17.5 | ) | | (38.6 | ) | | (56.1 | ) | | (6.7 | ) | | (22.3 | ) | | (29.0 | ) |
| Settlements | | — |
| | (0.5 | ) | | (0.5 | ) | | — |
| | (0.6 | ) | | (0.6 | ) |
| Consolidation | | — |
| | 7.0 |
| | 7.0 |
| | — |
| | — |
| | — |
|
| Foreign exchange revaluation | | (1.7 | ) | | 0.6 |
| | (1.1 | ) | | 2.9 |
| | 2.1 |
| | 5.0 |
|
| Balance at End of Year | | $ | 199.7 |
| | $ | 150.3 |
| | $ | 350.0 |
| | $ | 160.7 |
| | $ | 135.4 |
| | $ | 296.1 |
|
| Change in unrealized gains (losses) included in net income relating to assets held at end of year | | $ | 17.3 |
| | $ | 0.1 |
| | $ | 17.4 |
| | $ | 29.4 |
| | $ | (0.9 | ) | | $ | 28.5 |
|
Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | |
| as of September 30, 2021 | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range (Weighted Average1) |
| Equity and debt securities | | $ | 301.1 | | | Market pricing | | Private sale pricing | | $0.39–$100.00 ($19.34) per share |
| 102.3 | | | Market comparable companies | | Enterprise value/
EBITDA multiple | | 6.0–20.6 (13.7) |
| Discount for lack of marketability | | 6.0%–25.5% (17.6%) |
Enterprise value/
Revenue multiple | | 0.6–7.2 (5.1) |
| Price-to-book value ratio | | 0.7–1.8 (1.4) |
| Control premium | | 20% |
| Price-to-earnings ratio | | 28.8 |
| 49.9 | | | Discounted cash flow | | Discount rate | | 3.3%–6.3% (4.3%) |
| | | | | | | | |
| Real estate | | 89.4 | | | Discounted cash flow | | Discount rate | | 5.8%–6.0% (5.9%) |
| Exit capitalization rate | | 5.0%–5.3% (5.1%) |
|
| | | | | | | | | | |
| (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 | | 78.7 |
| | Discounted cash flow | | Discount rate | | 7.0%–14.8% (10.8%) |
| 33.9 |
| | Comparable trading multiple | | Price-to-earnings ratio | | 10.0 |
| | Enterprise value/ EBITDA multiple | | 20.9 |
| 32.3 |
| | Discounted cash flow | | Loss-adjusted discount rate | | 3.0%–22.7% (12.0%) |
| 5.4 |
| | Market pricing | | Private sale pricing | | $42 per $100 of par |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | |
| as of September 30, 2020 | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range (Weighted Average1) |
| Equity and debt securities | | $ | 119.8 | | | Discounted cash flow | | Discount rate | | 4.0%–23.0% (11.4%) |
| Discount for lack of marketability | | 17.0% |
| | Risk premium | | 9.7%–19.3% (16.7%) |
| 108.5 | | | Market comparable companies | | Enterprise value/
EBITDA multiple | | 7.0–19.1 (10.8) |
| Discount for lack of marketability | | 20.0%–25.2% (21.9%) |
| Price-to-earnings ratio | | 9.4–10.0 (9.7) |
| Risk premium | | 55.0% |
Enterprise value/
Revenue multiple | | 7.5 |
| 94.0 | | | Market pricing | | Private sale pricing | | $0.02–$100.00 ($13.01) per share |
| | | | | | | | |
| Real estate | | 231.8 | | | Discounted cash flow | | Discount rate | | 4.5%–6.5% (5.2%) |
| Exit capitalization rate | | 6.0% |
| 107.4 | | | Yield capitalization | | Equivalent yield | | 4.3%–6.1% (5.2%) |
__________________1Based on the relative fair value of the instruments. |
| | | | | | | | | | |
| (in millions) | | | | | | | | |
| as of September 30, 2017 | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Range (Weighted Average) |
| Equity securities | | $ | 101.9 |
| | Market comparable companies | | EBITDA multiple | | 5.5–12.3 (9.0) |
| 44.4 |
| | Discounted cash flow | | Discount rate | | 5.7%–17.9% (14.3%) |
| 14.4 |
| | Market pricing | | Price-to-earnings ratio | | 10.0 |
| | | | | | | | | |
| Debt securities | | 112.7 |
| | Discounted cash flow | | Discount rate | | 5.0%–33.0% (9.5%) |
| | Risk premium | | 0.0%–25.0% (8.4%) |
| 22.7 |
| | Market pricing | | Private sale pricing | | $33–$57 ($52) per $100 of par |
For securities usingIf the market comparable companies valuation technique, arelevant significant increase (decrease)inputs used in the EBITDA multiple in isolation would result in a significantlymarket-based valuations, other than the discount for lack of marketability and risk premium, were independently higher (lower), the resulting fair value measurement.
For securities usingof the assets would be higher (lower). If the relevant significant inputs used in the discounted cash flow valuation technique, a significant increase (decrease)or yield capitalization valuations, as well as the discount for lack of marketability and risk premium in the discount rate or loss-adjusted discount rate in isolation would result in a significantly lower (higher)market-based valuations, were independently higher (lower) as of September 30, 2021, the resulting fair value measurement.
of the assets would be lower (higher).
For securities using the comparable trading multiple valuation technique, a significant increase (decrease) in the price-to-earnings ratio or enterprise value/EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement.
For securities using the market pricing valuation technique, a significant increase (decrease) in the private sale pricing in isolation would result in a significantly higher (lower) fair value measurement.
Financial instruments of CIPs that were not measured at fair value were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Fair Value
Level | | 2021 | | 2020 |
Carrying
Value | | Estimated
Fair Value | Carrying
Value | | Estimated
Fair Value |
| as of September 30, |
| Financial Asset | | | | | | | | | | |
| Cash and cash equivalents | | 1 | | $ | 144.0 | | | $ | 144.0 | | | $ | 435.7 | | | $ | 435.7 | |
| Financial Liabilities | | | | | | | | | | |
Debt of CLOs1 | | 2 or 3 | | 3,634.1 | | | 3,610.6 | | | 2,646.9 | | | 2,683.2 | |
| Other debt | | 3 | | 36.9 | | | 36.6 | | | 153.7 | | | 155.2 | |
|
| | | | | | | | | | | | | | | | | | |
| (in millions) | | | | 2018 | | 2017 |
| as of September 30, | | Fair Value Level | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| Financial Asset | | | | | | | | | | |
| Cash and cash equivalents | | 1 | | $ | 299.8 |
| | $ | 299.8 |
| | $ | 226.4 |
| | $ | 226.4 |
|
| Financial Liability | | | | | | | | | | |
| Debt | | 3 | | $ | 32.6 |
| | $ | 32.4 |
| | $ | 53.4 |
| | $ | 53.1 |
|
1Substantially all was Level 2.
Debt
Debt of CIPs totaled $32.6 million and $53.4 million at September 30, 2018 and 2017. consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) as of September 30, | | 2021 | | 2020 |
| Amount | | Weighted-
Average
Effective
Interest
Rate | | Amount | | Weighted-
Average
Effective
Interest
Rate |
| Debt of CLOs | | $ | 3,634.1 | | | 2.11% | | $ | 2,646.9 | | | 2.99% |
| Other debt | | 36.9 | | | 1.95% | | 153.7 | | | 2.97% |
| Total | | $ | 3,671.0 | | | | | $ | 2,800.6 | | | |
The debt of CLOs had fixed and floating interest rates ranging from 3.07%1.00% to 7.88% with a weighted-average effective interest rate of 6.79%8.22% at September 30, 2018,2021 and from 2.84%1.43% to 6.75% with a weighted-average effective interest rate of 5.15%8.34% at September 30, 2017.2020. The other debt carriedhad floating interest rates ranging from 1.63% to 2.42% at September 30, 2018 matures2021, and fixed and floating rates from 1.00% to 5.81% at September 30, 2020. The floating rates were primarily based on LIBOR.
The contractual maturities for debt of CIPs at September 30, 2021 were as follows:
| | | | | | | | |
| (in millions) | | |
| for the fiscal years ending September 30, | Amount |
| 2022 | | $ | 72.9 | |
| 2023 | | — | |
| 2024 | | — | |
| 2025 | | 9.8 | |
| 2026 | | — | |
| Thereafter | | 3,588.3 | |
| Total | | $ | 3,671.0 | |
Collateralized Loan Obligations
The unpaid principal balance and fair value of the investments of CLOs were as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
| Unpaid principal balance | | $ | 3,951.1 | | | $ | 2,809.8 | |
| Difference between unpaid principal balance and fair value | | 20.9 | | | (146.6) | |
| Fair Value | | $ | 3,972.0 | | | $ | 2,663.2 | |
There were no investments 90 days or more past due at September 30, 2021 and 2020.
During fiscal years 2021 and 2020, the Company recognized $15.4 million of net gains and $1.3 million of net losses related to its own economic interests in fiscal year 2019.the CLOs. The aggregate principal amount due of the debt of CLOs was $3,629.9 million and $2,803.1 million at September 30, 2021 and 2020.
Note 12 –Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests of CIPs were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) for the fiscal years ended September 30, | | 2021 | | 2020 | | 20191 |
| CIPs | | Minority Interests | | Total | | CIPs | | Minority Interests | | Total | |
| Balance at beginning of year | | $ | 397.3 | | | $ | 144.6 | | | $ | 541.9 | | | $ | 746.7 | | | $ | — | | | $ | 746.7 | | | $ | 1,043.6 | |
| Acquisition | | — | | | — | | | — | | | 22.1 | | | 164.3 | | | 186.4 | | | — | |
| Business divestiture | | — | | | — | | | — | | | — | | | (21.3) | | | (21.3) | | | — | |
| Net income | | 63.8 | | | 30.3 | | | 94.1 | | | 45.0 | | | 3.6 | | | 48.6 | | | 6.2 | |
| Net subscriptions (distributions) and other | | 531.4 | | | (23.6) | | | 507.8 | | | 247.1 | | | (2.0) | | | 245.1 | | | 1,046.6 | |
| Net deconsolidations | | (370.0) | | | — | | | (370.0) | | | (663.6) | | | — | | | (663.6) | | | (1,349.7) | |
| Adjustment to fair value | | — | | | 159.2 | | | 159.2 | | | — | | | — | | | — | | | — | |
| Balance at End of Year | | $ | 622.5 | | | $ | 310.5 | | | $ | 933.0 | | | $ | 397.3 | | | $ | 144.6 | | | $ | 541.9 | | | $ | 746.7 | |
______________
1Represents redeemable noncontrolling interests of CIPs.
|
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Balance at beginning of year | | $ | 1,941.9 |
| | $ | 61.1 |
| | $ | 59.6 |
|
| Adoption of new accounting guidance | | — |
| | 824.7 |
| | — |
|
| Net income (loss) | | (12.8 | ) | | 53.0 |
| | 1.6 |
|
| Net subscriptions and other | | 170.9 |
| | 884.3 |
| | 79.9 |
|
| Net consolidations (deconsolidations) | | (1,056.4 | ) | | 118.8 |
| | (80.0 | ) |
| Balance at End of Year | | $ | 1,043.6 |
| | $ | 1,941.9 |
| | $ | 61.1 |
|
Note 10 13 – 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, and investment management and other fee receivables, and loans and related interest receivable as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
| Investments | | $ | 639.2 | | | $ | 439.2 | |
| Receivables | | 172.1 | | | 168.0 | |
| Loans receivable | | — | | | 42.4 | |
| Total | | $ | 811.3 | | | $ | 649.6 | |
|
| | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2018 | | 2017 |
| Investments | | $ | 161.8 |
| | $ | 129.3 |
|
| Receivables | | 140.1 |
| | 155.6 |
|
| Total | | $ | 301.9 |
| | $ | 284.9 |
|
While the Company has no legal or contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. TheAs 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. In July 2018,April 2020, the Company purchased $32.6 millionauthorized loans aggregating up to 5.0 billion Indian Rupees (approximately $66.2 million) to certain sponsored funds in India that had experienced increased liquidity risks and redemptions and which are in the process of certain equitywinding up. See Note 16 – Commitments and debt securities from two sponsored funds.Contingencies for further information. The Company did not provide financial or other support to its sponsored funds, except for the outstanding loans which were fully repaid during the second quarter of fiscal year 2017.
2021.
Note 1114 – Taxes on Income
The Tax Act, which was enacted into law in the U.S. on December 22, 2017, includes various changes to the tax law, including a permanent reduction in the federal corporate income tax rate and assessment of a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. The Company’s transition tax expense was estimated to be $983.2 million as of September 30, 2018 and may be adjusted in the future upon issuance of additional technical guidance, legislative updates from states on tax reform, and the completion of the Company’s tax return filings for fiscal years 2017 and 2018. The estimate includes an $87.6 million tax benefit recognized in the fourth quarter of fiscal year 2018 related to U.S. taxation of deemed foreign dividends in the transition fiscal year. This benefit may be reduced or eliminated by future regulation or legislation.
The federal portion of the transition tax liability, estimated to be $965.3 million, will be paid over eight years beginning in January 2019, with 8% of the liability payable in each of the first five years, 15% in year six, 20% in year seven and 25% in year eight.
The Tax Act reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company’s federal statutory rate for fiscal year 2018 is a blended rate of 24.5%, based on the pre- and post-Tax Act rates, and will be 21% for future fiscal years. The estimated related changes in the Company’s deferred tax assets and deferred tax liabilities resulted in a $35.6 million decrease in deferred tax assets, an $88.9 million decrease in deferred tax liabilities and a $53.3 million net tax benefit in fiscal year 2018. The Company also reclassified $0.1 million from accumulated other comprehensive loss to retained earnings related to stranded tax effects resulting from the change in tax rate during fiscal year 2018.
As of September 30, 2018, the Company completed its analysis of the Tax Act impact except for the transition tax, which is expected to be completed within one year of the Tax Act enactment date.
Prior to the Tax Act, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its non-U.S. subsidiaries as it was the Company’s intention for these tax basis differences to remain indefinitely reinvested. Following the Company’s change in policy effective January 1, 2018 to repatriate earnings of substantially all non-U.S. subsidiaries, other outside basis differences, which arose primarily from purchase accounting adjustments, undistributed earnings that are considered indefinitely reinvested and foreign earnings that are restricted by operational and regulatory requirements, remain indefinitely reinvested. These basis differences could reverse through sales of the subsidiaries or the receipt of dividends from the subsidiaries, as well as various other events, none of which are considered probable as of September 30, 2018. The Company has made no provision for U.S. income taxes on these outside basis differences, and determination of the amount of unrecognized deferred tax liability related to such basis differences is not practicable.
Taxes on income were as follows:
|
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Current expense | | | | | | |
| Federal | | $ | 1,343.7 |
| | $ | 585.0 |
| | $ | 582.8 |
|
| State | | 38.0 |
| | 65.3 |
| | 47.5 |
|
| Non-U.S. | | 141.1 |
| | 100.2 |
| | 102.8 |
|
| Deferred expense (benefit) | | (50.3 | ) | | 8.9 |
| | 9.0 |
|
| Total | | $ | 1,472.5 |
| | $ | 759.4 |
| | $ | 742.1 |
|
The tax benefits from the utilization of net operating loss carry-forwards were insignificant in fiscal years 2018, 2017 and 2016. The Company had tax shortfalls of $8.7 million and $5.9 million in fiscal years 2017 and 2016 associated with stock-based compensation plans, which increased the amount of income taxes that would have otherwise been payable and were reflected as components of stockholders’ equity. In accordance with new accounting guidance adopted on October 1, 2017, the income tax effects of stock-based awards were recognized in income tax expense in fiscal year 2018. See Note 2 – New Accounting Guidance in these notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Current expense | | | | | | |
| Federal | | $ | 226.7 | | | $ | 154.9 | | | $ | 343.4 | |
| State | | 50.3 | | | 28.8 | | | 37.0 | |
| Non-U.S. | | 68.9 | | | 54.2 | | | 66.8 | |
| Deferred expense (benefit) | | 3.7 | | | (7.1) | | | (4.9) | |
| Total | | $ | 349.6 | | | $ | 230.8 | | | $ | 442.3 | |
Income before taxes consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| U.S. | | $ | 1,682.6 | | | $ | 771.7 | | | $ | 1,151.1 | |
| Non-U.S. | | 761.6 | | | 246.2 | | | 496.7 | |
| Total | | $ | 2,444.2 | | | $ | 1,017.9 | | | $ | 1,647.8 | |
|
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| U.S. | | $ | 1,458.1 |
| | $ | 1,594.5 |
| | $ | 1,641.7 |
|
| Non-U.S. | | 757.1 |
| | 954.6 |
| | 858.1 |
|
| Total | | $ | 2,215.2 |
| | $ | 2,549.1 |
| | $ | 2,499.8 |
|
The Company’s income in certain countries is subject to reduced tax rates due to tax rulings.rulings and incentives. The impact of the reduced rates on income tax expense was $31.3$3.2 million or $0.06$0.01 per diluted share for fiscal year 2018, $28.82021, $2.7 million or $0.05$0.01 per diluted share for fiscal year 2017,2020, and $34.2$4.1 million or $0.06$0.01 per diluted share for fiscal year 2016. The2019. One tax rulingsincentive remained in effect at September 30, 2021 which will expire in fiscal years 2019 and 2022.December 2023.
The significant components of deferred tax assets and deferred tax liabilities were as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
| Deferred Tax Assets | | | | |
| Capitalized mixed service costs | | $ | 297.5 | | | $ | 326.1 | |
| Net operating loss and state credit carry-forwards | | 318.5 | | | 317.0 | |
| Deferred compensation and benefits | | 222.3 | | | 160.6 | |
| Foreign tax credit carry-forwards | | 128.0 | | | 103.0 | |
| Debt premium | | 72.1 | | | 81.9 | |
| Other | | 131.4 | | | 148.7 | |
| Total deferred tax assets | | 1,169.8 | | | 1,137.3 | |
| Valuation allowance | | (319.3) | | | (320.6) | |
| Deferred tax assets, net of valuation allowance | | 850.5 | | | 816.7 | |
| Deferred Tax Liabilities | | | | |
| Goodwill and other purchased intangibles | | 961.6 | | | 1,009.4 | |
| Other | | 68.7 | | | 68.5 | |
| Total deferred tax liabilities | | 1,030.3 | | | 1,077.9 | |
| Net Deferred Tax Liability | | $ | 179.8 | | | $ | 261.2 | |
|
| | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2018 | | 2017 |
| Deferred Tax Assets | | | | |
| Deferred compensation and employee benefits | | $ | 33.1 |
| | $ | 60.2 |
|
| Stock-based compensation | | 21.9 |
| | 36.1 |
|
| Net operating loss carry-forwards | | 31.8 |
| | 28.4 |
|
| Tax benefit for uncertain tax positions | | 10.0 |
| | 17.9 |
|
| Other | | 18.7 |
| | 23.9 |
|
| Total deferred tax assets | | 115.5 |
| | 166.5 |
|
| Valuation allowance | | (27.5 | ) | | (25.2 | ) |
| Deferred tax assets, net of valuation allowance | | 88.0 |
| | 141.3 |
|
| Deferred Tax Liabilities | | | | |
| Goodwill and other purchased intangibles | | 142.2 |
| | 205.2 |
|
| Depreciation on fixed assets | | 20.9 |
| | 35.3 |
|
| Investments in partnerships | | 16.4 |
| | 26.0 |
|
| Deferred commissions | | 9.0 |
| | 15.0 |
|
| Other | | 8.7 |
| | 14.6 |
|
| Total deferred tax liabilities | | 197.2 |
| | 296.1 |
|
| Net Deferred Tax Liability | | $ | 109.2 |
| | $ | 154.8 |
|
Deferred income tax assets and liabilities that relate to the same tax jurisdiction are presented net on the consolidated balance sheets. The components of the net deferred tax liability were classified in the consolidated balance sheets as follows:
| | | (in millions) | | | | | (in millions) | |
| as of September 30, | | 2018 | | 2017 | as of September 30, | | 2021 | | 2020 |
| Other assets | | $ | 17.3 |
| | $ | 15.8 |
| Other assets | | $ | 131.9 | | | $ | 44.1 | |
| Deferred tax liabilities | | 126.5 |
| | 170.6 |
| Deferred tax liabilities | | 311.7 | | | 305.3 | |
| Net Deferred Tax Liability | | $ | 109.2 |
| | $ | 154.8 |
| Net Deferred Tax Liability | | $ | 179.8 | | | $ | 261.2 | |
Included in the Company’s net deferred tax liability were the deferred tax effects associated with the fair value of assets acquired and liabilities assumed from the acquisition of Legg Mason and acquired attributes that carry over to post-acquisition tax periods, including U.S. state and foreign net operating losses and foreign tax credits. Utilization of the U.S. state net operating losses and federal credit carry-forwards may be subject to annual limitations due to ownership change provisions under Section 382 of the Internal Revenue Code. Foreign tax credits can only be used to offset tax attributable to foreign source income.
At September 30, 2018,2021, there were $153.2$98.5 million of non-U.S. tax effected net operating loss carry-forwards $78.2 million of which expireexpires between fiscal years 20192022 and 2038 with the remaining carry-forwards having an indefinite life.2041. In addition, there were $32.3$206.1 million in tax effected state net operating loss carry-forwards that expire between fiscal years 20202022 and 2038. A partial2042, with some having an indefinite carry-forward period. The Company also has federal net operating losses of $9.9 million, majority of which will carry-forward indefinitely and $128.0 million of foreign tax credit carry-forwards that expire between fiscal years 2022 and 2029.
The valuation allowance has been provideddecreased $1.3 million in fiscal year 2021 and increased $293.7 million in fiscal year 2020 primarily related to offsetcarry-forward assets recognized in connection with the acquisition of Legg Mason. At September 30, 2021, the valuation allowance of $319.3 million was related deferred tax assetsto $195.1 million for federal, state, and foreign net operating loss carry-forwards, $73.1 million due to the uncertainty of realizing the benefit of the net operating loss carry-forwards. The valuation allowance increased $2.3foreign tax credits, $37.8 million in fiscal year 2018 for capital losses, and $0.6$13.3 million in fiscal year 2017.
for other foreign deferred taxes.
A reconciliation of the amount of tax expense at the federal statutory rate and taxes on income as reflected in the consolidated statements of income is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Federal taxes at statutory rate | | $ | 513.3 | | | 21.0 | % | | $ | 213.8 | | | 21.0 | % | | $ | 346.0 | | | 21.0 | % |
| Transition tax on deemed repatriation of undistributed foreign earnings | | — | | | — | | | — | | | — | | | 86.0 | | | 5.2 | % |
| State taxes, net of federal tax effect | | 60.8 | | | 2.5 | % | | 28.2 | | | 2.8 | % | | 29.7 | | | 1.8 | % |
Tax reserve release on audit settlement, net of valuation allowance1 | | (126.8) | | | (5.2 | %) | | — | | | — | | | — | | | — | |
| Effect of net income (loss) attributable to noncontrolling interests | | (55.3) | | | (2.3 | %) | | 2.5 | | | 0.2 | % | | (2.1) | | | (0.1 | %) |
| Effect of non-U.S. operations | | (30.4) | | | (1.2 | %) | | 6.9 | | | 0.7 | % | | (21.3) | | | (1.3 | %) |
Capital loss on investments, net of valuation allowance2 | | (12.4) | | | (0.5 | %) | | (27.0) | | | (2.7 | %) | | — | | | — | |
| Other | | 0.4 | | | — | | | 6.4 | | | 0.7 | % | | 4.0 | | | 0.2 | % |
| Tax Provision | | $ | 349.6 | | | 14.3 | % | | $ | 230.8 | | | 22.7 | % | | $ | 442.3 | | | 26.8 | % |
______________
1The Company released a tax reserve in fiscal year 2021 following the close of an IRS audit of the transition tax for fiscal year 2018.
2The Company recognized a tax benefit in fiscal years 2021 and 2020 for capital losses that were realized from sales of investments. During fiscal year 2020, the sale of investments were subsequent to the change in corporate tax structure of a foreign holding company to a U.S. branch. These capital losses can be carried forward, for which the Company has assessed for realizability.
|
| | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Federal taxes at statutory rate | | $ | 542.7 |
| | 24.5 | % | | $ | 892.2 |
| | 35.0 | % | | $ | 874.9 |
| | 35.0 | % |
| Transition tax on deemed repatriation of undistributed foreign earnings | | 983.2 |
| | 44.4 | % | | — |
| | — |
| | — |
| | — |
|
| Revaluation of net deferred tax liabilities | | (53.3 | ) | | (2.4 | %) | | — |
| | — |
| | — |
| | — |
|
| Other Tax Act impacts | | 38.9 |
| | 1.8 | % | | — |
| | — |
| | — |
| | — |
|
| State taxes, net of federal tax effect | | 16.6 |
| | 0.7 | % | | 41.4 |
| | 1.6 | % | | 42.7 |
| | 1.7 | % |
| Effect of non-U.S. operations | | (61.9 | ) | | (2.8 | %) | | (146.2 | ) | | (5.7 | %) | | (153.0 | ) | | (6.1 | %) |
| Effect of net (income) loss attributable to noncontrolling interests | | 5.3 |
| | 0.2 | % | | (32.6 | ) | | (1.3 | %) | | (10.9 | ) | | (0.4 | %) |
| Other | | 1.0 |
| | 0.1 | % | | 4.6 |
| | 0.2 | % | | (11.6 | ) | | (0.5 | %) |
| Tax Provision | | $ | 1,472.5 |
| | 66.5 | % | | $ | 759.4 |
| | 29.8 | % | | $ | 742.1 |
| | 29.7 | % |
A reconciliation of the beginning and ending balances of gross unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Balance at beginning of year | | $ | 342.9 | | | $ | 202.6 | | | $ | 77.5 | |
| Additions from business combinations | | — | | | 141.8 | | | — | |
| Additions for tax positions of prior years | | 4.2 | | | 0.9 | | | 131.8 | |
| Reductions for tax positions of prior years | | (163.6) | | | (0.6) | | | (2.9) | |
| Tax positions related to the current year | | 22.2 | | | 12.2 | | | 10.7 | |
| Settlements with taxing authorities | | (3.2) | | | (0.3) | | | (2.2) | |
| Expirations of statute of limitations | | (18.2) | | | (13.7) | | | (12.3) | |
| Balance at End of Year | | $ | 184.3 | | | $ | 342.9 | | | $ | 202.6 | |
|
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Balance at beginning of year | | $ | 81.1 |
| | $ | 82.1 |
| | $ | 105.2 |
|
| Additions for tax positions of prior years | | 3.6 |
| | 6.6 |
| | 0.6 |
|
| Reductions for tax positions of prior years | | (6.6 | ) | | (1.3 | ) | | (9.0 | ) |
| Tax positions related to the current year | | 11.6 |
| | 11.6 |
| | 12.9 |
|
| Settlements with taxing authorities | | — |
| | (5.2 | ) | | (5.4 | ) |
| Expirations of statute of limitations | | (12.2 | ) | | (12.7 | ) | | (22.2 | ) |
| Balance at End of Year | | $ | 77.5 |
| | $ | 81.1 |
| | $ | 82.1 |
|
If recognized, the balance,$173.4 million for 2021, $303.1 million for 2020 and $202.6 million for 2019, net of any deferred tax benefits, would favorably affect the Company’s effective income tax rate in future periods.
The Company accrues interest and penalties related to unrecognized tax benefits in interest expense and general, administrative and other expenses. Accrued interest on uncertain tax positions at September 30, 20182021 and 20172020 was $11.3$25.7 million and $10.4$21.7 million,, and is not presented in the unrecognized tax benefits table above. Interest expense (benefit) of $0.9 million, $1.6 million and $(1.3) million was recognized during fiscal years 2018, 2017 and 2016. Accrued penalties at September 30, 20182021 and 2017 were insignificant.2020 was $3.9 million and $2.9 million.
The Company files a consolidated U.S. federal income tax return, multiple U.S. state and local income tax returns, and income tax returns in multiple non-U.S. jurisdictions. The Company is subject to examination by the taxing authorities in these jurisdictions. The Company’s major tax jurisdictions and the tax years for which the statutes of limitations have not expired are as follows: India 2003 to 2018;2021; Brazil 2008 to 2021, Canada 2011 to 2018;2021; Australia 2017 to 2021, Hong Kong 2015 to 2021; Singapore 2016 to 2021; Luxembourg and the U.K. 2019 to 2021; U.S. federal 2017 to 2021; the City of New York 2012 to 2018; Singapore 2013 to 2018; Luxembourg 2014 to 2018; the U.K. 2017 and 2018; U.S. federal 2015 to 2018; the State of Florida 2013 to 2018;2021; the States of California, Maryland, Massachusetts, Minnesota, and New York, and City of New York 2015Pennsylvania 2017 to 2018.2021.
The Company has ongoing litigations and examinations in various stages, of completion in the StatesState of Florida and Pennsylvania and City of New York,Wisconsin, and in Brazil, Canada, France, Germany, Hong Kong, India and Switzerland.India. Examination outcomes and the timing of settlements are subject to significant uncertainty. Such settlements may involve some or all of the following: the payment of additional taxes, the adjustment of deferred taxes and/or the recognition of unrecognized tax benefits. The Company has recognized a tax benefit only for those positions that meet the more-likely-than-not recognition threshold. It is reasonably possible that the total unrecognized tax benefit as of September 30, 20182021 could decrease by an estimated $16.4$33.6 million within the next twelve months as a result of the expiration of statutes of limitations in the U.S. federal and certain U.S. state and local and non-U.S. tax jurisdictions, and potential settlements with U.S. states and non-U.S. taxing authorities.
The Tax Cuts and Jobs Act which was enacted into law in the U.S. in December 2017, includes various changes to the tax law, including a permanent reduction in the corporate income tax rate and assessment of a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. The payment for the Company’s remaining federal portion of the transition tax liability were as follows:
| | | | | | | | |
| (in millions) | | Amount |
| for the fiscal years ending September 30, | |
| 2022 | | $ | 42.4 | |
| 2023 | | 74.1 | |
| 2024 | | 138.9 | |
| 2025 | | 185.2 | |
| 2026 | | 231.6 | |
| Total | | $ | 672.2 | |
Note 15 – Leases
Lessee Arrangements
The Company’s leases generally include one or more options to renew. Lease expense was as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 |
Operating lease cost1 | | $ | 141.4 | | | $ | 72.5 | |
| Variable lease cost | | 21.2 | | | 6.0 | |
| Finance lease cost | | 0.4 | | | 0.5 | |
| Less: sublease income | | (24.6) | | | (4.2) | |
| Total lease expense | | $ | 138.4 | | | $ | 74.8 | |
__________________1Substantially all operating lease cost is included in occupancy expense.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 |
| Operating cash flows from operating leases included in the measurement of operating lease liabilities | | $ | 133.7 | | | $ | 65.1 | |
| ROU assets obtained in exchange for new/modified operating lease liabilities | | 18.7 | | | 13.7 | |
The weighted-average remaining lease term and weighted-average discount rate for operating lease liabilities were as follows:
| | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
| Weighted-average remaining lease term | | 6.1 years | | 6.5 years |
| Weighted-average discount rate | | 2.1 | % | | 3.5 | % |
The maturities of the liabilities were as follows:
| | | | | | | | |
| (in millions) | | Amount |
| for the fiscal years ending September 30, | |
| 2022 | | $ | 129.3 | |
| 2023 | | 122.9 | |
| 2024 | | 88.3 | |
| 2025 | | 52.9 | |
| 2026 | | 38.1 | |
| Thereafter | | 121.9 | |
| Total lease payments | | 553.4 | |
| Less: interest | | (35.0) | |
| Operating lease liabilities | | $ | 518.4 | |
Lessor Arrangements
The Company leases excess owned space in its San Mateo, California corporate headquarters and other office buildings, primarily in the U.S., to third parties, and generally include one or more options to renew. The Company subleases excess leased office spaces to various firms, primarily in the U.S., and generally include options to renew or terminate within a specified period.
The maturities of lease payments due to the Company as of September 30, 2021 were as follows:
| | | | | | | | | | | | | | |
| (in millions) | | Subleases | | Leases |
| for the fiscal years ending September 30, | | |
| 2022 | | $ | 23.2 | | | $ | 31.0 | |
| 2023 | | 21.5 | | | 32.4 | |
| 2024 | | 9.2 | | | 32.9 | |
| 2025 | | 0.3 | | | 32.5 | |
| 2026 | | 0.1 | | | 32.1 | |
| Thereafter | | 0.1 | | | 41.9 | |
| Total | | $ | 54.4 | | | $ | 202.8 | |
| | | | |
Note 1216 – Commitments and Contingencies
Legal Proceedings
In July 2016,India Credit Fund Closure Matters. Effective April 24, 2020, Franklin Templeton Trustee Services Private Limited (“FTTS”), a former employee filed a class action lawsuit captioned Cryer v.subsidiary of Franklin, Resources, Inc., et al. in the United States District Court for the Northern Districtannounced its decision to wind up six fixed income mutual fund schemes of California against Franklin, the Franklin Templeton 401(k) Retirement PlanMutual Fund in India (referred to herein as the “Funds”), closing the Funds to redemptions. At the time, the Funds had collective assets under management of approximately $3.4 billion. In connection with the wind-up decision, FTTS sought to convene unitholder meetings for the Funds to approve the appointment of a liquidator and the asset management company to the Funds, Franklin Templeton Asset Management (India) Private Limited (“Plan”FTAMI”) Investment Committee, ceased earning investment management fees on the Funds.
In May and June 2020, certain Fund unitholders and others commenced multiple writ petition actions in different courts in India against a number of respondents, including Franklin, its subsidiaries FTTS, FTAMI, and Templeton International, Inc., as sponsor of the Franklin Templeton Mutual Fund, and related individuals (collectively, the “Company Respondents”), the Securities and Exchange Board of India (“Investment Committee”SEBI”), and unnamed Investment Committee members.other governmental entities. The plaintiff assertspetitioners challenged the decision to wind up the Funds and alleged that the Company Respondents violated various SEBI regulations, mismanaged the Funds, misrepresented or omitted certain information relating to the Funds, and/or engaged in other alleged misconduct. The petitioners requested a claimwide range of relief, including, among other items, an order quashing the winding up notices and blocking the unitholder votes, initiating investigations into the Company Respondents, and allowing the unitholder petitioners to redeem their investments with interest. One of the petitioners obtained an interim injunction order staying the operation and implementation of the unitholder voting process. Following appeals to the Supreme Court of India, the petitions were transferred to the High Court of Karnataka for breachfurther consolidated proceedings.
In October 2020, the High Court of fiduciary dutyKarnataka issued its judgment, in which it upheld the decision taken by FTTS to wind up the Funds and held that there was “nothing wrong with the decision making process,” but determined that, under applicable regulations, unitholder approval is required to implement the Employee Retirement Income Security Act (“ERISA”)decision. Certain Company Respondents and other parties filed cross-appeals to the Supreme Court of India, and certain intervenors filed applications, challenging aspects of the High Court’s judgment. In December 2020, with the approval of the Supreme Court, and without prejudice to its arguments on appeal that unitholder approval of the wind-up decision is not required, FTTS proceeded to obtain approval from the majority of the voting unitholders for winding up the six Funds. In February 2021, the Supreme Court issued a decision confirming the results of the unitholder votes and appointed a third-party asset manager to serve as the liquidator and begin cash distributions to unitholders.
In July 2021, the Supreme Court issued a ruling interpreting applicable regulations to require unitholder consent to effect a trustee’s decision to wind up a fund, while finding that, upon the trustee’s publication of its decision to unitholders under applicable regulations, fund business activities, including redemptions, are suspended pending the results of the unitholder vote. The Supreme Court further found that FTTS’ April 2020 publication to unitholders of its wind-up decision complied with applicable regulations, effectively freezing redemptions. Further hearings are anticipated to be scheduled in connection with the remaining issues on appeal.
FTAMI continues to cooperate with the court-appointed liquidator in its work to liquidate the Funds’ remaining investments and distribute proceeds to unitholders. As of September 2021, approximately $3.2 billion has been distributed to Fund unitholders.
Separately, following the completion of a forensic audit/inspection, in late November and early December 2020, SEBI initiated regulatory proceedings by issuing show cause notices against FTAMI, FTTS and certain FTAMI employees (including in their officer or director capacities), alleging thatcertain deficiencies and areas of non-compliance in the defendants selected mutual funds sponsoredmanagement of the Funds. In June 2021, SEBI issued orders against FTAMI, FTTS, and managed by the Company (the “Funds”)FTAMI employee respondents, finding violations of certain regulatory provisions, including with respect to similarity in investment strategies among the Funds, calculation of duration and valuation of portfolio securities, deficiencies in documentation relating to investment diligence and investment terms, and portfolio risk management. SEBI’s orders include, as investment options for the Plan when allegedly lower-cost and better performing non-proprietary investment vehicles were available. The plaintiff also claims that the total Plan costs, inclusiveapplicable, aggregate monetary penalties of INR 20.0 crore (approximately $2.7 million); disgorgement of investment management and administrativeadvisory fees, are excessive.together with interest through the date of SEBI’s order, totaling INR 512.5 crore (approximately $69.1 million), with continuing accrual of 12% interest until paid; and a prohibition on FTAMI from launching new fixed income funds in India for a two-year period. The plaintiff alleges that Plan losses exceed $79.0 million and seeks, among other things, damages, disgorgement, rescission of the Plan’s investments in the Funds, attorneys’ fees and costs, and pre- and post-judgment interest.
On November 2, 2017, a second former employee, represented by the same law firm,respondents filed another class action lawsuit relating to the Plan in the same court, captioned Fernandez v. Franklin Resources, Inc., et al. The plaintiff filed an amended complaint on February 6, 2018, naming the same defendants as those named in the Cryer action,appeals, as well as applications to stay enforcement of SEBI’s orders pending resolution of the Franklin Boardappeals, with the Securities Appellate Tribunal (the “SAT”) in India. In June 2021, the SAT granted the stay requested by FTAMI, subject to FTAMI’s deposit of Directors,INR 250.0 crore (approximately $33.7 million) into an escrow account, which has been deposited. In July 2021, SEBI appealed the Plan Administrative Committee, individual currentSAT’s stay order to the Supreme Court of India. Based on FTAMI’s submission that it would not launch new fixed income schemes in India pending resolution of its appeal, the Supreme Court of India did not interfere with the SAT’s stay order with respect to the monetary amounts and former Franklin directors,disposed of SEBI’s appeal. In July 2021, the SAT also granted the stay requests of FTTS and individual currentthe FTAMI employee respondents, subject to the deposit of an aggregate of INR 7.5 crore (approximately $1.0 million) into an escrow account. The SAT appeals remain pending.
The Company is also responding to related inquiries and former Investment Committee members. The plaintiffinvestigations commenced by certain governmental agencies in this second lawsuit assertsIndia, including the same ERISA breachpreviously-reported “first information report” (the preliminary step in an investigation) registered by the Economic Offences Wing of fiduciary duty claim assertedthe Chennai police department against certain of the Company Respondents in the Cryer action,connection with a complaint by two Fund unitholders, as well as claims for alleged prohibited transactionsa related investigation by virtue of the Plan’s investmentsIndia’s Enforcement Directorate commenced in the Funds and for an alleged failure to monitor the performance of the Investment Committee.or around April 2021. The plaintiff alleges that Plan losses exceed $60.0 million and seeks the same relief soughtCompany is cooperating in the Cryer action. On April 6, 2018, the court consolidated the Fernandez action with the existing Cryer action.these matters.
ManagementThe Company strongly believes that the claims asserteddecision taken by FTTS to wind up the Funds was in the litigation are without meritbest interests of unitholders. The Company further believes that it has meritorious defenses to the outstanding claims in the pending proceedings and Franklin isintends to continue vigorously defending against the consolidated action vigorously. Franklinclaims. The Company cannot at this time predict the eventual outcome of the litigation or whether it will have a material negative impact on the Company,matters described above or reasonably estimate the possible loss or range of loss that may arise from any negative outcome.final outcome of such matters, including due to the complexities and uncertainty involved in the appeals and the various questions of law and fact at issue.
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 September 30, 20182021 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 in those positions. 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 September 30, 2021.
Other Commitments and Contingencies
The Company leases office space and equipment under operating leases expiring at various dates through fiscal year 2032. Lease expense was $55.9 million, $56.3 million and $69.3 million in fiscal years 2018, 2017 and 2016. Sublease income totaled $0.2 million, $0.4 million and $1.6 million in fiscal years 2018, 2017 and 2016.
Future minimum lease payments under long-term non-cancelable operating leases were as follows as of September 30, 2018:
|
| | | | |
| (in millions) | | |
| for the fiscal years ending September 30, | | Amount |
| 2019 | | $ | 46.6 |
|
| 2020 | | 42.2 |
|
| 2021 | | 37.8 |
|
| 2022 | | 33.1 |
|
| 2023 | | 32.6 |
|
| Thereafter | | 175.1 |
|
| Total Minimum Lease Payments | | $ | 367.4 |
|
Future minimum rentals to be received under non-cancelable subleases totaled $0.2 million at September 30, 2018.
While the Company has no legal or contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. At September 30, 2018,2021, the Company had $299.0$285.1 million of committed capital contributions which relate to discretionary commitments to invest in sponsored funds and other investment products and entities.entities, including CIPs. These unfunded commitments are not recorded in the Company’s consolidated balance sheet.
Note 1317 – Stock-Based Compensation
The Company’s stock-based compensation plans consist of the Amended and Restated Annual Incentive Compensation Plan (the “AIP”), the 2002 Universal Stock Incentive Plan, as amended and restated (the “USIP”) and the amended and restated Franklin Resources, Inc. 1998 Employee Stock Investment Plan (the “ESIP”). In connection with the acquisition of Legg Mason, the Company assumed the Legg Mason 2017 Equity Incentive Plan, which was amended and restated as the Amended and Restated Franklin Resources, Inc. 2017 Equity Incentive Plan (the “EIP”). The Compensation Committee of the Board of Directors determines the terms and conditions of awards under the AIP, the USIP, the ESIP and the ESIP.EIP.
Stock-based compensation expenses were as follows:
| | | (in millions) | | | | | | | (in millions) | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 | for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Stock and stock unit awards | | $ | 111.6 |
| | $ | 117.0 |
| | $ | 125.3 |
| Stock and stock unit awards | | $ | 165.2 | | | $ | 117.1 | | | $ | 105.7 | |
| Employee stock investment plan | | 6.2 |
| | 6.4 |
| | 6.2 |
| Employee stock investment plan | | 6.7 | | | 5.2 | | | 5.8 | |
| Phantom unit awards | | Phantom unit awards | | 30.4 | | | 2.7 | | | 1.7 | |
| Total | | $ | 117.8 |
| | $ | 123.4 |
| | $ | 131.5 |
| Total | | $ | 202.3 | | | $ | 125.0 | | | $ | 113.2 | |
Stock and Stock Unit Awards
Under the terms of the AIP, eligible employees may receive cash, equity awards and/or mutual fund unit awards generally based on the performance of the Company and/or its funds, and the individual employee. The USIP providesand EIP provide for the issuance of the Company’s common stock for various stock-related awards to officers, directors and employees. In February 2021, the Company’s stockholders approved an amendment and restatement of the USIP increasing the number of shares authorized by 20.0 million shares to a total of 140.0 million shares. There are 120.023.0 million shares authorized under the USIP, of which 18.4EIP. At September 30, 2021, 23.4 million shares and 14.4 million shares were available for grant at September 30, 2018.under the USIP and EIP.
Stock awards entitle holders to the right to sell the underlying shares of the Company’s common stock once the awards vest. Stock unit awards entitle holders to receive the underlying shares of common stock once the awards vest. Awards vest based on the passage of time or the achievement of predetermined Company financial performance goals.
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 fiscal year ended September 30, 2021 | | | | |
| Nonvested balance at September 30, 2020 | | 12,141 | | | 4,808 | | | 16,949 | | | $ | 24.30 | |
| Granted | | 5,906 | | | 240 | | | 6,146 | | | 21.08 | |
| Vested | | (3,500) | | | (619) | | | (4,119) | | | 26.56 | |
| Forfeited/canceled | | (570) | | | (572) | | | (1,142) | | | 30.61 | |
| Modified | | 199 | | | (199) | | | — | | | n/a |
| Nonvested balance at September 30, 2021 | | 14,176 | | | 3,658 | | | 17,834 | | | $ | 22.27 | |
|
| | | | | | | | | | | | | |
| (shares in thousands) | | Time-Based Shares | | Performance-Based Shares | | Total Shares | | Weighted-Average Grant-Date Fair Value |
| for the fiscal year ended September 30, 2018 | | | | |
| Nonvested balance at September 30, 2017 | | 2,783 |
| | 1,761 |
| | 4,544 |
| | $ | 37.23 |
|
| Granted | | 2,271 |
| | 724 |
| | 2,995 |
| | 42.63 |
|
| Vested | | (2,126 | ) | | (516 | ) | | (2,642 | ) | | 39.18 |
|
| Forfeited/canceled | | (250 | ) | | (156 | ) | | (406 | ) | | 43.84 |
|
| Nonvested balance at September 30, 2018 | | 2,678 |
| | 1,813 |
| | 4,491 |
| | $ | 39.08 |
|
Total unrecognized compensation expense related to nonvested stock and stock unit awards was $120.2$282.5 million at September 30, 2018.2021. This expense is expected to be recognized over a remaining weighted-average vesting period of 1.6 years.2.5 years. The weighted-average grant-date fair values of stock awards and stock unit awards granted during fiscal years 2018, 20172021, 2020 and 20162019 were $42.63, $34.23$21.08, $23.05 and $40.88$30.75 per share. The total fair value of stock and stock unit awards vested during
the same periods was $91.5$121.2 million,, $104.0 $72.2 million and $92.8 million.$84.2 million.
The Company generally does not repurchase shares upon vesting of stock and stock unit awards. However, in order to pay taxes due in connection with the vesting of employee and executive officer stock and stock unit awards, shares are repurchased using a net stock issuance method.
Employee Stock Investment Plan
The ESIP allows eligible participants to buy shares of the Company’s common stock at a discount of its market value on defined dates. A total of 0.81.1 million shares were issued under the ESIP during fiscal year 2018,2021, and 2.84.8 million shares were reserved for future issuance at September 30, 2018.2021.
Note 1418 – Defined Contribution Plans
The Company sponsors a 401(k) plan which covers substantially all U.S. employees who meetmeeting certain employment requirements. Participants may contribute up to 50% of pretax annual compensationtheir eligible salary and up to 100% of the cash portion of the participant’stheir year-end bonus, as defined by the plan and subject to Internal Revenue Code limitations, each year to the plan. In addition, certainThe Company increased its matching contribution rate from 75% to 85% for a period of three years beginning January 1, 2020. Certain of the Company’s non-U.S. subsidiaries also sponsor defined contribution plans primarily for the purpose of providing deferred compensation incentives for employees and to comply with local regulatory requirements. The total expenses recognized for defined contribution plans were $49.8$81.4 million,, $45.5 $59.2 million and $46.8$52.2 million for fiscal years 2018, 20172021, 2020 and 2016.2019.
Note 1519 – Segment and Geographic Information
The Company has one1 operating segment, investment management and related services. See Note 5 – Revenues for total operating revenues disaggregated by geographic location.
Geographic information was as follows: | | | | | | | | | | | | | | |
| (in millions) | | | | |
| as of September 30, | | 2021 | | 2020 |
| Property and Equipment, Net | | | | |
| United States | | $ | 596.6 | | | $ | 634.4 | |
| Europe, Middle East and Africa | | 132.1 | | | 133.0 | |
| Asia-Pacific | | 34.5 | | | 37.7 | |
| Americas excluding United States | | 6.8 | | | 8.7 | |
| Total | | $ | 770.0 | | | $ | 813.8 | |
|
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Operating Revenues | | | | | | |
| United States | | $ | 3,722.1 |
| | $ | 3,898.4 |
| | $ | 4,063.6 |
|
| Luxembourg | | 1,730.6 |
| | 1,652.8 |
| | 1,707.9 |
|
| Asia-Pacific | | 297.4 |
| | 281.0 |
| | 267.9 |
|
| Canada | | 250.3 |
| | 260.8 |
| | 273.8 |
|
| The Bahamas | | 208.1 |
| | 205.9 |
| | 204.6 |
|
| Europe, Middle East and Africa, excluding Luxembourg | | 97.0 |
| | 83.2 |
| | 94.0 |
|
| Latin America | | 13.6 |
| | 10.1 |
| | 6.2 |
|
| Total | | $ | 6,319.1 |
| | $ | 6,392.2 |
| | $ | 6,618.0 |
|
|
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| as of September 30, | | 2018 | | 2017 | | 2016 |
| Property and Equipment, Net | | | | | | |
| United States | | $ | 465.4 |
| | $ | 426.1 |
| | $ | 428.0 |
|
| Asia-Pacific | | 42.1 |
| | 60.2 |
| | 62.9 |
|
| The Bahamas | | 12.8 |
| | 13.4 |
| | 14.3 |
|
| Europe, Middle East and Africa | | 10.1 |
| | 12.2 |
| | 14.9 |
|
| Canada | | 3.7 |
| | 5.3 |
| | 3.1 |
|
| Latin America | | 0.9 |
| | — |
| | — |
|
| Total | | $ | 535.0 |
| | $ | 517.2 |
| | $ | 523.2 |
|
Operating revenues are generally allocated to geographic areas based on the location of the subsidiary providing services.
Note 1620 – Investment and Other Income (Expenses)(Losses), Net
OtherInvestment and other income (expenses)(losses), net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2021 | | 2020 | | 2019 |
| Dividend income | | $ | 8.8 | | | $ | 48.9 | | | $ | 97.0 | |
| Interest income | | 8.8 | | | 14.3 | | | 31.0 | |
| Gains (losses) on investments, net | | 90.9 | | | (16.8) | | | (9.7) | |
| Income (losses) from investments in equity method investees | | 154.3 | | | (98.1) | | | (10.4) | |
| Gains (losses) on derivatives, net | | (23.2) | | | 3.0 | | | — | |
| Rental income | | 28.8 | | | 30.0 | | | 19.8 | |
| Foreign currency exchange (losses) gains, net | | (11.9) | | | (22.3) | | | 13.1 | |
| Other, net | | 8.2 | | | 2.6 | | | 0.6 | |
| Investment and Other Income (Losses), Net | | $ | 264.7 | | | $ | (38.4) | | | $ | 141.4 | |
|
| | | | | | | | | | | | |
| (in millions) | | | | | | |
| for the fiscal years ended September 30, | | 2018 | | 2017 | | 2016 |
| Investment and Other Income, Net | | | | | | |
| Interest income | | $ | 76.5 |
| | $ | 74.9 |
| | $ | 36.5 |
|
| Dividend income | | 51.1 |
| | 13.9 |
| | 20.6 |
|
| Gains on trading investment securities, net | | 1.1 |
| | 12.2 |
| | 50.1 |
|
| Realized gains on sale of investment securities, available-for-sale | | 4.2 |
| | 5.6 |
| | 32.1 |
|
| Realized losses on sale of investment securities, available-for-sale | | (1.2 | ) | | (1.6 | ) | | (3.2 | ) |
| Income from investments in equity method investees | | 44.4 |
| | 107.9 |
| | 56.7 |
|
| Other-than-temporary impairment of investments | | (1.7 | ) | | (0.8 | ) | | (11.1 | ) |
| Gains (losses) on investments of CIPs, net | | (55.0 | ) | | 118.2 |
| | (13.5 | ) |
| Foreign currency exchange gains (losses), net | | 0.6 |
| | (16.0 | ) | | (2.9 | ) |
| Rental income | | 15.9 |
| | 11.1 |
| | 11.0 |
|
| Other, net | | 9.4 |
| | 10.9 |
| | 7.7 |
|
| Total | | 145.3 |
|
| 336.3 |
|
| 184.0 |
|
| Interest Expense | | (48.7 | ) | | (51.5 | ) | | (49.9 | ) |
| Other Income, Net | | $ | 96.6 |
| | $ | 284.8 |
| | $ | 134.1 |
|
Interest income was primarily generated by cash equivalents and trading investment securities. Substantially all of the dividend income and realized gains and losses on sale of available-for-sale securities werewas generated by investments in nonconsolidated sponsored funds. Proceeds from the saleGains (losses) on investments, net consists primarily of available-for-salerealized and unrealized gains (losses) on equity securities were $85.5 million, $51.6 million and $269.4 million for fiscal years 2018, 2017 and 2016.measured at fair value.
Net gains (losses) recognized on the Company’sequity securities measured at fair value and trading investmentdebt securities that were held by the Company at September 30, 2018, 20172021, 2020 and 20162019 were $(1.7)$46.5 million,, $5.0 $(2.6) million, and $27.9 million. Net gains (losses) recognized on trading investment securities of CIPs that were held at September 30, 2018, 2017 and 2016 were $(24.5) million, $21.9 million and $9.4 million.$(0.1) million.
Note 1721 – Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Currency
Translation
Adjustments | | Unrealized
Losses on
Defined Benefit
Plans | | Unrealized
Gains on
Investments | | Total |
as of and for the fiscal years ended
September 30, 2021, 2020 and 2019 | | | |
| Balance at October 1, 2018 | | $ | (372.9) | | | $ | (4.2) | | | $ | 6.5 | | | $ | (370.6) | |
| Adoption of new accounting guidance | | — | | | — | | | (8.0) | | | (8.0) | |
| Other comprehensive income (loss) | | | | | | | | |
| Other comprehensive loss before reclassifications, net of tax | | (53.9) | | | (2.4) | | | (5.4) | | | (61.7) | |
| Reclassifications to compensation and benefits expense, net of tax | | — | | | 0.4 | | | — | | | 0.4 | |
| Reclassifications to net investment and other income (losses), net of tax | | 1.4 | | | — | | | 6.9 | | | 8.3 | |
| Total other comprehensive income (loss) | | (52.5) | | | (2.0) | | | 1.5 | | | (53.0) | |
| Balance at September 30, 2019 | | $ | (425.4) | | | $ | (6.2) | | | $ | — | | | $ | (431.6) | |
| Other comprehensive income (loss) | | | | | | | | |
| Other comprehensive income (loss) before reclassifications, net of tax | | 23.8 | | | (2.1) | | | (1.3) | | | 20.4 | |
| Reclassifications to compensation and benefits expense, net of tax | | — | | | 0.3 | | | — | | | 0.3 | |
| Reclassifications to net investment and other income (losses), net of tax | | 2.0 | | | — | | | 1.3 | | | 3.3 | |
| Total other comprehensive income (loss) | | 25.8 | | | (1.8) | | | — | | | 24.0 | |
| Balance at September 30, 2020 | | $ | (399.6) | | | $ | (8.0) | | | $ | — | | | $ | (407.6) | |
| Other comprehensive income | | | | | | | | |
| Other comprehensive income before reclassifications, net of tax | | 27.1 | | | 1.6 | | | — | | | 28.7 | |
| Reclassifications to compensation and benefits expense, net of tax | | — | | | (0.7) | | | — | | | (0.7) | |
| Reclassifications to net investment and other income (losses), net of tax | | 2.0 | | | — | | | — | | | 2.0 | |
| Total other comprehensive income | | 29.1 | | | 0.9 | | | — | | | 30.0 | |
| Balance at September 30, 2021 | | $ | (370.5) | | | $ | (7.1) | | | $ | — | | | $ | (377.6) | |
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Unrealized Gains on Investments | | Currency Translation Adjustments | | Unrealized Losses on
Defined Benefit Plans | | Total |
| for the fiscal year ended September 30, 2018 | | | | |
| Balance at October 1, 2017 | | $ | 2.2 |
| | $ | (281.0 | ) | | $ | (6.0 | ) | | $ | (284.8 | ) |
| Adoption of new accounting guidance | | — |
| | — |
| | (0.1 | ) | | (0.1 | ) |
| Other comprehensive income (loss) | | | | | | | | |
| Other comprehensive income (loss) before reclassifications, net of tax | | 7.3 |
| | (85.5 | ) | | 1.5 |
| | (76.7 | ) |
| Reclassifications to net investment and other income, net of tax | | (3.0 | ) | | (6.4 | ) | | 0.4 |
| | (9.0 | ) |
| Total other comprehensive income (loss) | | 4.3 |
| | (91.9 | ) | | 1.9 |
| | (85.7 | ) |
| Balance at September 30, 2018 | | $ | 6.5 |
| | $ | (372.9 | ) | | $ | (4.2 | ) | | $ | (370.6 | ) |
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Unrealized Gains on Investments | | Currency Translation Adjustments | | Unrealized Losses on Defined Benefit Plans | | Total |
| for the fiscal year ended September 30, 2017 | | | | |
| Balance at October 1, 2016 | | $ | 6.8 |
| | $ | (346.1 | ) | | $ | (8.1 | ) | | $ | (347.4 | ) |
| Adoption of new accounting guidance | | (6.8 | ) | | (0.3 | ) | | — |
| | (7.1 | ) |
| Other comprehensive income | | | | | | | | |
| Other comprehensive income before reclassifications, net of tax | | 6.5 |
| | 65.4 |
| | 2.1 |
| | 74.0 |
|
| Reclassifications to net investment and other income, net of tax | | (4.3 | ) | | — |
| | — |
| | (4.3 | ) |
| Total other comprehensive income | | 2.2 |
| | 65.4 |
| | 2.1 |
| | 69.7 |
|
| Balance at September 30, 2017 | | $ | 2.2 |
| | $ | (281.0 | ) | | $ | (6.0 | ) | | $ | (284.8 | ) |
Note 1822 – Subsequent EventPending Acquisitions
On October 24, 2018,In September 2021, the Company entered into an agreement to acquire all of the outstanding ownership interestsinterest in Benefit StreetO’Shaughnessy Asset Management, a leading quantitative asset management firm, for cash consideration to be paid at closing of approximately $300.0 million, excluding future payments to be made upon the attainment of certain performance measures. The acquisition is expected to be completed in the first quarter of the fiscal year ended September 30, 2022 (“fiscal year 2022”).
In November 2021, the Company entered into an agreement to acquire all of the outstanding ownership interest in Lexington Partners L.L.C.L.P., a U.S. alternative creditleading global manager of secondary private equity and co-investment funds, for a purchasecash consideration to be paid at closing of approximately $683$1.0 billion and additional cash payments totaling $750.0 million to be paid over the next three years. The acquisition is expected to be completed in cash,the second quarter of which $130 million will be used to retire debt.
fiscal year 2022.
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
| |
Item 9A. | Controls and Procedures. |
Item 9A.Controls and Procedures.
The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2018.2021. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures as of September 30, 20182021 were designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s (“SEC”) rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended September 30, 2018,2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are set forth in Item 8 of Part II of this Annual Report on Form 10-K are10‑K, which is incorporated herein by reference.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2021 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm that audits the Company’s consolidated financial statements, as stated in their report which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021.
| |
Item 9B. | Other Information. |
Item 9B.Other Information.
None.
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
| |
Item 10. | Directors, Executive Officers and Corporate Governance. |
Item 10.Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 with respect to executive officers of the CompanyFranklin is contained at the end of Part I of this Form 10-KAnnual Report under the heading “Executive Officers of the Registrant.“Information About Our Executive Officers.”
Code of Ethics. The Company Franklin has adopted a Code of Ethics and Business Conduct (the “Code of Ethics”) that applies to the CompanyFranklin’s principal executive officer, principal financial officer, principal accounting officer, controller, and any persons performing similar functions, as well as all directors, officers and employees of the CompanyFranklin and its subsidiaries and affiliates. The Code of Ethics is posted on the Company’sour website at www.franklinresources.com under “Corporate Governance.” A copy of the Code of Ethics is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Secretary, Franklin Resources, Inc., One Franklin Parkway, San Mateo, California 94403-1906. The Company intendsWe intend to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the Code of Ethics for the Company’sFranklin’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on itsour website.
The other information required by this Item 10 is incorporated by reference from the information to be provided under the sections entitledtitled “Proposal No. 1 Election of Directors–Nominees,”Nominees” and “Information about the Board and its Committees–The Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” from the Company’sFranklin’s definitive proxy statement for its annual meeting of stockholders to be filed with the SEC within 120 days after September 30, 20182021 (“20192022 Proxy Statement”).
| |
Item 11. | Executive Compensation. |
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference from the information to be provided under the sections entitledof our 2022 Proxy Statement titled “Director Fees,” “Compensation Discussion and Analysis” and “Executive Compensation” of the Company’s 2019 Proxy Statement.Compensation.”
| |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 with respect to security ownership of certain beneficial owners and management is incorporated by reference from the information to be provided under the sections entitledof our 2022 Proxy Statement titled “Stock Ownership of Certain Beneficial Owners” andOwners,” “Stock Ownership and Stock-Based Holdings of Directors and Executive Officers” of the Company’s 2019 Proxy Statement.
and “Executive Compensation–Equity Compensation Plan Information.”
The following table sets forth certain information as of September 30, 2018 with respect to the shares of the Company’s common stock that may be issued under the Company’s existing compensation plans that have been approved by stockholders and plans that have not been approved by stockholders.
|
| | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options,
warrants and rights
(a) | | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) | | Number of securities
remaining available for
future issuance under equity compensation
plans (excluding
securities reflected in
column (a))
(c) | |
Equity compensation plans approved by stockholders 1 | | 2,417,559 |
| 2 | N/A |
| 3 | 21,196,482 |
| 4 |
| Equity compensation plans not approved by stockholders | | — |
| | — |
| | — |
| |
| Total | | 2,417,559 |
| | N/A |
| | 21,196,482 |
| |
________________
| |
1
| Consists of the 2002 Universal Stock Incentive Plan, as amended and restated (the “USIP”) and the amended and restated Franklin Resources, Inc. 1998 Employee Stock Investment Plan (the “ESIP”). Equity securities granted under the USIP may include awards in connection with the Amended and Restated Annual Incentive Compensation Plan and the 2014 Key Executive Incentive Compensation Plan. |
| |
2
| Represents restricted stock unit awards under the USIP that may be settled in shares of the Company’s common stock. Excludes options to purchase shares of the Company’s common stock accruing under the Company’s ESIP. Under the ESIP, each eligible employee is granted a separate option to purchase up to 6,000 shares of common stock each semi-annual accrual period on January 31 and July 31 at a purchase price per share equal to 85% of the fair market value of the common stock on the enrollment date or the exercise date, whichever is lower. |
| |
3
| Does not take into account restricted stock unit awards under the USIP. |
| |
4
| As of September 30, 2018, 2.8 million shares of common stock were available for future issuance under the ESIP and 18.4 million shares of common stock were available for future issuance under the USIP.
|
| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Item 13.Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated by reference from the information to be provided under the sections entitledof our 2022 Proxy Statement titled “Proposal No. 1 Election of Directors–General,” “Corporate Governance–Director Independence Standards” and “Certain Relationships and Related Transactions” of the Company’s 2019 Proxy Statement.Transactions.”
| |
Item 14. | Principal Accountant Fees and Services. |
Item 14.Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated by reference from the information to be provided under the section entitledof our 2022 Proxy Statement titled “Fees Paid to Independent Registered Public Accounting Firm” of the Company’s 2019 Proxy Statement.
Firm.”
PART IV
Item 15.Exhibits and Financial Statement Schedules.
| | | | | |
Item 15.(a)(1) | Exhibits and Financial Statement Schedules. |
|
| |
(a)(1) | The financial statements filed as part of this report are listed in Item 8 of this Form 10-K.Annual Report. |
| (a)(2) | No financial statement schedules are required to be filed as part of this report because all such schedules have been omitted. Such omission has been made on the basis that information is provided in the financial statements, or in the related notes thereto, in Item 8 of this Form 10-KAnnual Report or is not required to be filed as the information is not applicable. |
| (a)(3) | The exhibits listed on the Exhibit Index to this Form 10-KAnnual Report are incorporated herein by reference. |
| |
Item 16. | Form 10-K Summary. |
Item 16.Form 10‑K Summary.
None.
EXHIBIT INDEX
|
| | | | | | | |
| Exhibit No. |
| | Description |
3(i)(a)3.1 |
| | |
3(i)(b)3.2 |
| | |
3(i)(c)3.3 |
| | |
3(i)(d)3.4 |
| | |
3(i)(e)3.5 |
| | |
3(ii)3.6 |
| | |
| 4.1 |
| | |
| 4.2 |
| | |
| 4.3 |
| | |
| 4.4 |
| | |
| 4.5 |
| | |
10.14.6 |
| | |
| 4.7 | | | |
| | | | | | | | |
| Exhibit No. | | Description |
| 4.8 | | | |
| 4.9 | | | |
| 4.10 | | | |
| 4.11 | | | |
| 4.12 | | | |
| 4.13 | | | |
| 4.14 | | | |
| 4.15 | | | |
| 4.16 | | | |
| 10.1 | | | |
| 10.2 |
| | |
|
| 10.3 | | | |
Exhibit No. |
| | Description |
10.3 |
| | |
10.4 |
| | |
10.5 |
| | |
10.610.4 |
| | |
10.710.5 |
| | |
10.810.6 |
| | |
10.910.7 |
| | |
| 10.8 | | | |
| 10.9 | | | |
| 10.10 |
| | |
| | | | | | | | |
10.11Exhibit No. |
| Description |
| 10.11 | | | |
2110.12 |
| | |
| 10.13 | | | |
| 10.14 | | | |
| 10.15 | | | |
| 10.16 | | | |
| 10.17 | | | |
| 21 | | | |
| 23 |
| | |
| 31.1 |
| | |
| 31.2 |
| | |
| 32.1 |
| | |
| 32.2 |
| | |
| 101 |
| | The following materials from the Registrant’s Annual Report on Form 10-K10‑K for the fiscal year ended September 30, 2018,2021, formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL), include: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes (filed herewith) |
| 104 | | | Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101) |
__________________
* Management Contract or Compensatory Plan or Arrangement | | | | | |
| * | Management contract or compensatory plan or arrangement |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | FRANKLIN RESOURCES, INC. |
| | | |
| Date: | November 19, 2021 | FRANKLIN RESOURCES, INC.By: | /s/ Matthew Nicholls |
| | | |
Date: | November 9, 2018 | By: | /s/ Kenneth A. Lewis |
| | | Kenneth A. Lewis,Matthew Nicholls, Executive Vice President and Chief Financial Officer and Executive Vice President |
| | | |
| Date: | November 19, 2021 | By: | /s/ Gwen L. Shaneyfelt |
| | | Gwen L. Shaneyfelt, Chief Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | | | | | | | | |
| Date: | November 19, 2021 | By: | /s/ Jennifer M. Johnson |
| | | Jennifer M. Johnson, President, Chief Executive Officer and Director
(Principal Executive Officer) |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Peter K. Barker Matthew Nicholls |
| | | Peter K. Barker, DirectorMatthew Nicholls, Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Gwen L. Shaneyfelt |
| | | Gwen L. Shaneyfelt, Chief Accounting Officer
(Principal Accounting Officer) |
| | | |
| Date: | November 19, 2021 | By: | /s/ Mariann Byerwalter |
| | | Mariann Byerwalter, Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Charles E. Johnson Alexander S. Friedman |
| | | Charles E. Johnson,Alexander S. Friedman, Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Gregory E. Johnson |
| | | Gregory E. Johnson, Executive Chairman, Director Chairman of the Board
and Chief Executive Officer (Principal Executive Officer)
Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Rupert H. Johnson, Jr. |
| | | Rupert H. Johnson, Jr., Vice Chairman and Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Kenneth A. Lewis John Y. Kim |
| | | Kenneth A. Lewis, Chief Financial Officer and Executive Vice President
(Principal Financial and Accounting Officer)
John Y. Kim, Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Mark C. PigottKaren M. King |
| | | Mark C. Pigott,Karen M. King, Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Chutta Ratnathicam Anthony J. Noto |
| | | Chutta Ratnathicam,Anthony J. Noto, Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Laura Stein John W. Thiel |
| | | Laura Stein,John W. Thiel, Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Seth H. Waugh |
| | | Seth H. Waugh, Director |
| | | |
| Date: | November 9, 201819, 2021 | By: | /s/ Geoffrey Y. Yang |
| | | Geoffrey Y. Yang, Director |