Edgar Filing: FRANKLIN RESOURCES INC

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-09318

FRANKLIN RESOURCES, INC.

(Exact name of registrant as specified in its charter)



Delaware	13-2670991
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

One Franklin Parkway, San Mateo, CA	94403
(Address of principal executive offices)	(Zip Code)

(650) 312-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES o NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). x YES o NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act). o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Outstanding: 527,058,253 shares of common stock, par value $0.10 per share, of Franklin Resources, Inc. as of July 20, 2018.

Table of Contents

INDEX TO FORM 10-Q



			Page
PART I		Financial Information
	Item 1.	Financial Statements (unaudited)
		Consolidated Statements of Income	3
		Consolidated Statements of Comprehensive Income	4
		Consolidated Balance Sheets	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4.	Controls and Procedures	46

PART II		Other Information
	Item 1.	Legal Proceedings	47
	Item 1A.	Risk Factors	47
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
	Item 6.	Exhibits	47

Exhibit Index			48
Signature			49

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME Unaudited

	Three Months Ended June 30,						Nine Months Ended June 30,
(in millions, except per share data)	2018			2017			2018			2017
Operating Revenues
Investment management fees	$	1,077.9		$	1,097.0		$	3,308.6		$	3,249.4
Sales and distribution fees	391.4			433.3			1,219.0			1,283.8
Shareholder servicing fees	53.9			56.7			170.1			169.7
Other	35.4			26.9			94.2			72.4
Total operating revenues	1,558.6			1,613.9			4,791.9			4,775.3
Operating Expenses
Sales, distribution and marketing	499.8			541.2			1,550.0			1,596.0
Compensation and benefits	357.5			342.7			1,045.5			997.6
Information systems and technology	62.5			54.1			175.6			159.8
Occupancy	30.5			30.2			94.0			88.3
General, administrative and other	105.2			81.5			286.9			227.0
Total operating expenses	1,055.5			1,049.7			3,152.0			3,068.7
Operating Income	503.1			564.2			1,639.9			1,706.6
Other Income (Expenses)
Investment and other income (losses), net	(33.8		)	92.2			134.9			222.9
Interest expense	(22.1		)	(12.9		)	(42.9		)	(38.8		)
Other income (expenses), net	(55.9		)	79.3			92.0			184.1
Income before taxes	447.2			643.5			1,731.9			1,890.7
Taxes on income	91.8			184.1			1,465.5			577.5
Net income	355.4			459.4			266.4			1,313.2
Less: net income (loss) attributable to
Nonredeemable noncontrolling interests	(1.6		)	12.5			22.8			8.6
Redeemable noncontrolling interests	(45.0		)	36.3			(18.3		)	33.1
Net Income Attributable to Franklin Resources, Inc.	$	402.0		$	410.6		$	261.9		$	1,271.5

Earnings per Share
Basic	$	0.75		$	0.73		$	0.45		$	2.25
Diluted	0.75			0.73			0.45			2.25
Dividends Declared per Share	$	0.23		$	0.20		$	3.69		$	0.60

See Notes to Consolidated Financial Statements.

Table of Contents

FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Unaudited

(in millions)	Three Months Ended June 30,						Nine Months Ended June 30,
(in millions)	2018			2017			2018			2017
Net Income	$	355.4		$	459.4		$	266.4		$	1,313.2
Other Comprehensive Income (Loss)
Net unrealized gains (losses) on investments, net of tax	3.3			(1.6		)	6.6			1.4
Currency translation adjustments, net of tax	(86.7		)	54.0			(64.1		)	32.3
Net unrealized gains (losses) on defined benefit plans, net of tax	0.2			(0.2		)	(0.5		)	(0.2		)
Total other comprehensive income (loss)	(83.2		)	52.2			(58.0		)	33.5
Total comprehensive income	272.2			511.6			208.4			1,346.7
Less: comprehensive income (loss) attributable to
Nonredeemable noncontrolling interests	(1.6		)	12.5			22.8			8.6
Redeemable noncontrolling interests	(45.0		)	36.3			(18.3		)	33.1
Comprehensive Income Attributable to Franklin Resources, Inc.	$	318.8		$	462.8		$	203.9		$	1,305.0

See Notes to Consolidated Financial Statements.

Table of Contents

FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS Unaudited

(in millions, except share and per share data)	June 30, 2018			September 30, 2017
Assets
Cash and cash equivalents	$	6,422.6		$	8,523.3
Receivables	814.9			767.8
Investments (including $587.0 and $440.0 at fair value at June 30, 2018 and September 30, 2017)	1,509.5			1,393.6
Assets of consolidated investment products
Cash and cash equivalents	231.6			226.4
Receivables	132.0			234.1
Investments, at fair value	3,331.1			3,467.4
Property and equipment, net	522.4			517.2
Goodwill and other intangible assets, net	2,352.9			2,227.7
Other	211.0			176.5
Total Assets	$	15,528.0		$	17,534.0

Liabilities
Compensation and benefits	$	405.9		$	396.6
Accounts payable and accrued expenses	177.5			167.4
Dividends	130.1			113.3
Commissions	291.3			313.3
Income taxes	1,176.2			74.7
Debt	695.7			1,044.2
Liabilities of consolidated investment products
Accounts payable and accrued expenses	76.3			124.1
Debt	34.1			53.4
Deferred taxes	128.0			170.6
Other	190.9			198.7
Total liabilities	3,306.0			2,656.3
Commitments and Contingencies (Note 11)
Redeemable Noncontrolling Interests	2,031.6			1,941.9
Stockholders’ Equity
Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued	—			—
Common stock, $0.10 par value, 1,000,000,000 shares authorized; 529,106,446 and 554,865,343 shares issued and outstanding at June 30, 2018 and September 30, 2017	52.9			55.5
Retained earnings	10,153.5			12,849.3
Accumulated other comprehensive loss	(342.9		)	(284.8		)
Total Franklin Resources, Inc. stockholders’ equity	9,863.5			12,620.0
Nonredeemable noncontrolling interests	326.9			315.8
Total stockholders’ equity	10,190.4			12,935.8
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity	$	15,528.0		$	17,534.0

See Notes to Consolidated Financial Statements.

Table of Contents

FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited

	Nine Months Ended June 30,
(in millions)	2018			2017
Net Income	$	266.4		$	1,313.2
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred sales commissions	60.5			52.9
Depreciation and other amortization	58.7			62.3
Stock-based compensation	89.5			95.0
Income from investments in equity method investees	(41.8		)	(88.4		)
Net gains on investments of consolidated investment products	(35.1		)	(15.7		)
Deferred income taxes	(54.5		)	(7.0		)
Other	28.3			(18.5		)
Changes in operating assets and liabilities:
Increase in receivables and other assets	(79.2		)	(39.0		)
Decrease (increase) in receivables of consolidated investment products	97.1			(45.7		)
Decrease (increase) in trading securities, net	(165.7		)	68.6
Decrease (increase) in trading securities of consolidated investment products, net	235.6			(528.9		)
Increase (decrease) in accrued compensation and benefits	(18.6		)	2.0
Increase (decrease) in commissions payable	(22.0		)	11.0
Increase in income taxes payable	1,106.6			68.8
Decrease in accounts payable, accrued expenses and other liabilities	(18.4		)	(26.3		)
Increase in accounts payable and accrued expenses of consolidated investment products	1.1			54.0
Net cash provided by operating activities	1,508.5			958.3
Purchase of investments	(250.0		)	(336.2		)
Liquidation of investments	127.5			271.3
Purchase of investments by consolidated investment products	(46.1		)	(114.3		)
Liquidation of investments by consolidated investment products	72.3			333.9
Additions of property and equipment, net	(71.5		)	(49.0		)
Adoption of new accounting guidance	—			(49.2		)
Acquisitions, net of cash acquired	(97.0		)	(14.0		)
Net (deconsolidation) consolidation of investment products	(8.0		)	22.4
Net cash provided by (used in) investing activities	(272.8		)	64.9
Issuance of common stock	13.6			13.0
Dividends paid on common stock	(1,994.9		)	(329.4		)
Repurchase of common stock	(1,056.0		)	(600.6		)
Excess tax benefit from stock-based compensation	—			0.6
Payment on debt	(361.9		)	—
Payment on loan	—			(22.5		)
Proceeds from debt of consolidated investment products	—			0.7
Payments on debt by consolidated investment products	(19.6		)	(288.3		)
Payments on contingent consideration liability	(21.6		)	(31.7		)
Noncontrolling interests	123.7			527.4
Net cash used in financing activities	(3,316.7		)	(730.8		)
Effect of exchange rate changes on cash and cash equivalents	(14.5		)	10.5

[Table continued on next page]

See Notes to Consolidated Financial Statements.

Table of Contents

FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited [Table continued from previous page]

	Nine Months Ended June 30,
(in millions)	2018			2017
Increase (decrease) in cash and cash equivalents	$	(2,095.5	)	$	302.9
Cash and cash equivalents, beginning of period	8,749.7			8,483.3
Cash and Cash Equivalents, End of Period	$	6,654.2		$	8,786.2

Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	414.9		$	520.5
Cash paid for interest	34.2			34.4
Cash paid for interest by consolidated investment products	1.9			10.3

See Notes to Consolidated Financial Statements.

Table of Contents

FRANKLIN RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(Unaudited)

Note 1 – Basis of Presentation

The unaudited interim financial statements of Franklin Resources, Inc. (“Franklin”) and its consolidated subsidiaries (collectively, the “Company”) included herein have been prepared by the Company in accordance with the instructions to Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission. Under these rules and regulations, some information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States of America have been shortened or omitted. Management believes that all adjustments necessary for a fair statement of the financial position and the results of operations for the periods shown have been made. All adjustments are normal and recurring. These financial statements should be read together with the Company’s audited financial statements included in its Form 10-K for the fiscal year ended September 30, 2017 (“fiscal year 2017”). Certain comparative amounts for the prior fiscal year period have been reclassified to conform to the financial statement presentation as of and for the period ended June 30, 2018.

Note 2 – New Accounting Guidance

Recently Adopted Accounting Guidance

On October 1, 2017, the Company adopted an amendment to the existing stock-based compensation 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 guidance is effective for the Company on October 1, 2018 and allows for either a full or modified retrospective approach at adoption. While the Company’s implementation efforts are ongoing, it does not expect adoption of the guidance to 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 impact upon adoption may differ based on further evaluation of the Company’s arrangements. The Company will elect the modified retrospective approach and recognize a cumulative effect adjustment to retained earnings at adoption.

There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for fiscal year 2017.

Table of Contents

Note 3 – Stockholders’ Equity

Changes in total stockholders’ equity were as follows:



(in millions)	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity
for the nine months ended June 30, 2018	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity
Balance at October 1, 2017	$	12,620.0		$	315.8		$	12,935.8
Adoption of new accounting guidance	0.4			—			0.4
Net income	261.9			22.8			284.7
Other comprehensive loss	(58.0		)				(58.0		)
Cash dividends declared on common stock	(2,011.7		)				(2,011.7		)
Repurchase of common stock	(1,078.8		)				(1,078.8		)
Stock-based compensation	102.7						102.7
Acquisition	27.0						27.0
Net redemptions and other				(14.1		)	(14.1		)
Net consolidation of investment products				2.4			2.4
Balance at June 30, 2018	$	9,863.5		$	326.9		$	10,190.4



(in millions)	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity
for the nine months ended June 30, 2017	Franklin Resources, Inc. Stockholders’ Equity			Nonredeemable Noncontrolling Interests			Total Stockholders’ Equity
Balance at October 1, 2016	$	11,935.8		$	592.4		$	12,528.2
Adoption of new accounting guidance	(1.3		)	(324.6		)	(325.9		)
Net income	1,271.5			8.6			1,280.1
Other comprehensive income	33.5						33.5
Cash dividends declared on common stock	(338.5		)				(338.5		)
Repurchase of common stock	(603.1		)				(603.1		)
Stock-based compensation	102.1						102.1
Net subscriptions and other				38.0			38.0
Deconsolidation of investment product				(9.3		)	(9.3		)
Balance at June 30, 2017	$	12,400.0		$	305.1		$	12,705.1

During the three and nine months ended June 30, 2018, the Company repurchased 13.4 million and 29.1 million shares of its common stock at a cost of $446.2 million and $1,078.8 million under its stock repurchase program. At June 30, 2018, 82.5 million shares remained available for repurchase under the program, which is not subject to an expiration date. On April 11, 2018, the Company’s Board of Directors authorized the Company to repurchase, from time to time, up to an additional 80.0 million shares of its common stock in either open market or private transactions. Shares repurchased under the stock repurchase program are retired. During the three and nine months ended June 30, 2017, the Company repurchased 4.1 million and 15.2 million shares of its common stock at a cost of $174.6 million and $603.1 million.

Table of Contents

Note 4 – Earnings per Share

The components of basic and diluted earnings per share were as follows:



(in millions, except per share data)	Three Months Ended June 30,				Nine Months Ended June 30,
(in millions, except per share data)	2018		2017		2018		2017
Net income attributable to Franklin Resources, Inc.	$	402.0	$	410.6	$	261.9	$	1,271.5
Less: allocation of earnings to participating nonvested stock and stock unit awards	3.3		3.5		17.1		9.9
Net Income Available to Common Stockholders	$	398.7	$	407.1	$	244.8	$	1,261.6

Weighted-average shares outstanding – basic	533.0		556.2		542.9		560.5
Dilutive effect of nonparticipating nonvested stock unit awards	0.5		0.5		0.7		0.3
Weighted-Average Shares Outstanding – Diluted	533.5		556.7		543.6		560.8

Earnings per Share
Basic	$	0.75	$	0.73	$	0.45	$	2.25
Diluted	0.75		0.73		0.45		2.25

Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 0.8 million and 0.3 million for the three and nine months ended June 30, 2018, and 0.2 million and 0.7 million for the three and nine months ended June 30, 2017.

Note 5 – Investments

The disclosures below include details of the Company’s investments, excluding those of consolidated investment products. See Note 8 – Consolidated Investment Products for information related to the investments held by these entities.

Investments consisted of the following:



(in millions)	June 30, 2018		September 30, 2017
Investment securities, trading
Sponsored funds	$	203.7	$	31.1
Debt and other equity securities	269.6		283.4
Total investment securities, trading	473.3		314.5
Investment securities, available-for-sale
Sponsored funds	100.9		110.8
Debt and other equity securities	1.0		1.9
Total investment securities, available-for-sale	101.9		112.7
Investments in equity method investees	858.8		893.5
Other investments	75.5		72.9
Total	$	1,509.5	$	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 June 30, 2018 and September 30, 2017.

Table of Contents

Gross unrealized gains and losses relating to investment securities, available-for-sale were as follows:



(in millions)	Cost Basis		Gross Unrealized					Fair Value
(in millions)	Cost Basis		Gains		Losses			Fair Value
as of June 30, 2018
Sponsored funds	$	93.0	$	9.7	$	(1.8	)	$	100.9
Debt and other equity securities	1.0		—		—			1.0
Total	$	94.0	$	9.7	$	(1.8	)	$	101.9

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:



(in millions)	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
as of June 30, 2018
Sponsored funds	$	20.3	$	(1.3	)	$	21.3	$	(0.5	)	$	41.6	$	(1.8	)

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 $0.3 million and $0.9 million during the three and nine months ended June 30, 2018, and $0.5 million and $0.8 million during the three and nine months ended June 30, 2017.

Note 6 – Fair Value Measurements

The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated investment products. See Note 8 – Consolidated Investment Products for information related to fair value measurements of the assets and liabilities of these entities.

The assets and liability measured at fair value on a recurring basis were as follows:



(in millions)	Level 1		Level 2		Level 3		Total
as of June 30, 2018	Level 1		Level 2		Level 3		Total
Assets
Investment securities, trading
Sponsored funds	$	203.7	$	—	$	—	$	203.7
Debt and other equity securities	19.4		58.1		192.1		269.6
Investment securities, available-for-sale
Sponsored funds	100.9		—		—		100.9
Debt and other equity securities	0.2		0.5		0.3		1.0
Life settlement contracts	—		—		11.8		11.8
Total Assets Measured at Fair Value	$	324.2	$	58.6	$	204.2	$	587.0

Liability
Contingent consideration liability	$	—	$	—	$	35.6	$	35.6

Table of Contents



(in millions)	Level 1		Level 2		Level 3		Total
as of September 30, 2017	Level 1		Level 2		Level 3		Total
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

Level 1 assets consist primarily of sponsored funds and other equity securities for which the fair values are based on published net asset values (“NAV”) or quoted market prices. Level 2 assets consist of debt and equity securities for which the fair values are determined using independent third-party broker or dealer price quotes. Level 3 assets consist of corporate debt securities for which the fair value is determined using market pricing, and other debt securities and life settlement contracts for which the fair values are based on discounted cash flows using significant unobservable inputs.

The fair value of the contingent consideration liability is determined using an income-based method which considers the net present value of anticipated future cash flows.

Transfers into Level 2 from Level 1 were nil and $0.5 million for the three and nine months ended June 30, 2018, and transfers into Level 1 from Level 2 were $0.5 million for both periods. The transfers into Level 2 from Level 1 were securities for which the quoted market prices were adjusted as of March 31, 2018 due to significant price changes in U.S.-traded market proxies resulting from global market volatility. The adjustments were made after the close of foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. The transfers into Level 1 from Level 2 were securities that were valued using unadjusted quoted market prices. There were no transfers between Level 1 and Level 2 during the nine months ended June 30, 2017. There were no transfers into or out of Level 3 during the nine months ended June 30, 2018, and there were no transfers into Level 3 for the nine months ended June 30, 2017.

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 three months ended June 30,	Investments			Contingent Consideration Liability			Investments			Contingent Consideration Liabilities
Balance at beginning of period	$	208.1		$	(31.2	)	$	211.0		$	(60.4	)
Total realized and unrealized gains (losses)
Included in investment and other income, net	1.0			—			1.7			—
Included in general, administrative and other expense	—			(4.4		)	—			5.6
Purchases	5.4			—			1.3			—
Sales	(0.4		)	—			—			—
Settlements	(1.1		)	—			(0.1		)	—
Foreign exchange revaluation and other	(8.8		)	—			0.9			—
Balance at End of Period	$	204.2		$	(35.6	)	$	214.8		$	(54.8	)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period	$	0.4		$	(4.4	)	$	2.2		$	(0.1	)

Table of Contents



	2018						2017
(in millions)	Investments			Contingent Consideration Liability			Investments			Contingent Consideration Liabilities
for the nine months ended June 30,	Investments			Contingent Consideration Liability			Investments			Contingent Consideration Liabilities
Balance at beginning of period	$	199.9		$	(51.0	)	$	205.1		$	(98.1	)
Acquisition	—			—			—			(5.7		)
Total realized and unrealized gains (losses)
Included in investment and other income, net	4.0			—			7.3			—
Included in general, administrative and other expense	—			(10.0		)	—			13.6
Purchases	12.1			—			2.1			—
Sales	(0.4		)	—			(2.4		)	—
Settlements	(3.0		)	32.4			(2.6		)	35.4
Transfers out of Level 3	—			—			(0.4		)	—
Foreign exchange revaluation and other	(8.4		)	(7.0		)	5.7			—
Balance at End of Period	$	204.2		$	(35.6	)	$	214.8		$	(54.8	)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of period	$	2.4		$	(10.0	)	$	6.2		$	7.9

Valuation techniques and significant unobservable inputs used in the Level 3 fair value measurements were as follows:



(in millions)
as of June 30, 2018	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range (Weighted Average)
Investment securities, trading – debt and other equity securities	$	171.3	Market pricing	Redemption price	$73 per $100 of par
				Discount rate	18.7%
	20.8		Discounted cash flow	Discount rate	3.4%–6.6% (5.4%)
				Risk premium	2.0%–4.7% (3.1%)

Life settlement contracts	11.8		Discounted cash flow	Life expectancy	20–117 months (62)
				Discount rate	8.0%–20.0% (13.1%)

Contingent consideration liability	35.6		Discounted cash flow	AUM growth rate	(3.4%)
				Discount rate	13.8%



(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 market pricing technique, a significant increase (decrease) in the redemption price in isolation would result in a significantly higher (lower) fair value measurement, while a significant increase (decrease) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement.

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.

Table of Contents

For the contingent consideration liability, a significant increase (decrease) in the assets under management (“AUM”) growth rate, or 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:



(in millions)	Fair Value Level	June 30, 2018				September 30, 2017
(in millions)	Fair Value Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets
Cash and cash equivalents	1	$	6,422.6	$	6,422.6	$	8,523.3	$	8,523.3
Other investments
Time deposits	2	12.2		12.2		13.4		13.4
Cost method investments	3	51.5		73.7		46.7		67.7

Financial Liability
Debt	2	$	695.7	$	685.0	$	1,044.2	$	1,073.5

Note 7 – Debt

The disclosures below include details of the Company’s debt, excluding that of consolidated investment products. See Note 8 – Consolidated Investment Products for information related to the debt of these entities.

Debt consisted of the following:



	June 30, 2018			Effective Interest Rate		September 30, 2017			Effective Interest Rate
(in millions)	June 30, 2018			Effective Interest Rate		September 30, 2017			Effective Interest Rate
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	399.5			2.97	%	399.5			2.97	%
Total senior notes	699.2					1,049.0
Debt issuance costs	(3.5		)			(4.8		)
Total	$	695.7				$	1,044.2

At June 30, 2018, the Company’s outstanding senior unsecured unsubordinated notes had an aggregate face value of $700.0 million. The notes have fixed interest rates with interest payable semi-annually and 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 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. 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 June 30, 2018.

At June 30, 2018, 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.

Table of Contents

Note 8 – Consolidated Investment Products

Consolidated investment products (“CIPs”) consist of mutual and other investment funds, limited partnerships and similar structures, substantially all of which are sponsored by the Company, and include both voting interest entities and variable interest entities. The Company had 55 and 58 CIPs as of June 30, 2018 and September 30, 2017.

The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:



(in millions)	June 30, 2018		September 30, 2017
Assets
Cash and cash equivalents	$	231.6	$	226.4
Receivables	132.0		234.1
Investments, at fair value	3,331.1		3,467.4
Other assets	1.0		0.9
Total Assets	$	3,695.7	$	3,928.8

Liabilities
Accounts payable and accrued expenses	$	76.3	$	124.1
Debt	34.1		53.4
Other liabilities	8.9		8.7
Total liabilities	119.3		186.2
Redeemable Noncontrolling Interests	2,031.6		1,941.9
Stockholders’ Equity
Franklin Resources, Inc.’s interests	1,244.2		1,511.8
Nonredeemable noncontrolling interests	300.6		288.9
Total stockholders’ equity	1,544.8		1,800.7
Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity	$	3,695.7	$	3,928.8

The CIPs did not have a significant impact on net income attributable to the Company during the three and nine months ended June 30, 2018 and 2017.

The Company has no right to the CIPs’ assets, other than its direct equity investments in them and investment management 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.

Investments

Investments of CIPs consisted of the following:



(in millions)	June 30, 2018		September 30, 2017
Investment securities, trading	$	2,861.3	$	3,017.2
Other equity securities	346.9		306.9
Other debt securities	122.9		143.3
Total	$	3,331.1	$	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.

Table of Contents

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 June 30, 2018	Level 1		Level 2		Level 3		NAV as a Practical Expedient		Total
Assets
Investments
Equity securities	$	307.1	$	307.1	$	187.5	$	160.8	$	962.5
Debt securities	3.4		2,242.3		122.9		—		2,368.6
Total Assets Measured at Fair Value	$	310.5	$	2,549.4	$	310.4	$	160.8	$	3,331.1

Liabilities
Other liabilities	$	0.6	$	8.3	$	—	$	—	$	8.9



(in millions)	Level 1		Level 2		Level 3		NAV as a Practical Expedient		Total
as of September 30, 2017	Level 1		Level 2		Level 3		NAV as a Practical Expedient		Total
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

Level 1 assets consist of equity and debt securities for which the fair values are based on quoted market prices. Level 2 assets consist of debt and equity securities for which the fair values are determined using independent third-party broker or dealer price quotes. Level 3 assets consist of equity and debt securities of entities in emerging markets and other debt instruments for which the fair values are determined using significant unobservable inputs in either a market-based or income-based approach.

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.

Transfers into Level 2 from Level 1 were nil and $3.5 million for the three and nine months ended June 30, 2018, and transfers into Level 1 from Level 2 were $2.8 million for both periods. The transfers into Level 2 from Level 1 were securities for which the quoted market prices were adjusted as of March 31, 2018 due to significant price changes in U.S.-traded market proxies resulting from global market volatility. The impacted securities trade in 11 different countries in Asia-Pacific, Europe and Latin America. The adjustments were made after the close of the foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. The transfers into Level 1 from Level 2 were securities that were valued using unadjusted quoted market prices. There were no transfers between Level 1 and Level 2 during the nine months ended June 30, 2017. There were no transfers into or out of Level 3 during the nine months ended June 30, 2018 and 2017.

Investments for which fair value was estimated using reported NAV as a practical expedient consisted of nonredeemable real estate and private equity funds. These investments are expected to be returned through distributions as a result of liquidations of the funds’ underlying assets over a weighted-average period of 3.7 years and 4.4 years at June 30, 2018 and September 30, 2017. The CIPs’ unfunded commitments to these funds totaled $1.9 million, of which the Company was contractually obligated to fund $0.4 million based on its ownership percentage in the CIPs, at both June 30, 2018 and September 30, 2017.

Table of Contents

Changes in Level 3 assets were as follows:



	2018									2017
(in millions)	Equity Securities			Debt Securities			Total Level 3 Assets			Equity Securities			Debt Securities			Total Level 3 Assets
for the three months ended June 30,	Equity Securities			Debt Securities			Total Level 3 Assets			Equity Securities			Debt Securities			Total Level 3 Assets
Balance at beginning of period	$	188.4		$	112.2		$	300.6		$	140.7		$	114.4		$	255.1
Realized and unrealized gains (losses) included in investment and other income, net	5.4			0.3			5.7			(10.3		)	18.3			8.0
Purchases	0.1			5.0			5.1			4.7			15.5			20.2
Sales	(2.6		)	(0.1		)	(2.7		)	(0.5		)	(4.7		)	(5.2		)
Settlements	—			(0.5		)	(0.5		)	—			(0.6		)	(0.6		)
Consolidation	—			7.0			7.0			—			—			—
Foreign exchange revaluation	(3.8		)	(1.0		)	(4.8		)	2.4			2.4			4.8
Balance at End of Period	$	187.5		$	122.9		$	310.4		$	137.0		$	145.3		$	282.3
Change in unrealized gains (losses) included in net income relating to assets held at end of period	$	0.9		$	0.2		$	1.1		$	(10.3	)	$	18.2		$	7.9



	2018									2017
(in millions)	Equity Securities			Debt Securities			Total Level 3 Assets			Equity Securities			Debt Securities			Total Level 3 Assets
for the nine months ended June 30,	Equity Securities			Debt Securities			Total Level 3 Assets			Equity Securities			Debt Securities			Total Level 3 Assets
Balance at beginning of period	$	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	22.9			2.4			25.3			(9.4		)	3.8			(5.6		)
Purchases	22.7			15.5			38.2			30.2			23.3			53.5
Sales	(17.5		)	(37.8		)	(55.3		)	(0.6		)	(13.0		)	(13.6		)
Settlements	—			(0.5		)	(0.5		)	—			(0.6		)	(0.6		)
Consolidation	—			7.0			7.0			—			—			—
Foreign exchange revaluation	(1.3		)	0.9			(0.4		)	1.9			—			1.9
Balance at End of Period	$	187.5		$	122.9		$	310.4		$	137.0		$	145.3		$	282.3
Change in unrealized gains (losses) included in net income relating to assets held at end of period	$	17.5		$	(2.1	)	$	15.4		$	0.7		$	3.2		$	3.9

Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:



(in millions)
as of June 30, 2018	Fair Value		Valuation Technique	Significant Unobservable Inputs	Range (Weighted Average)
Equity securities	$	159.8	Market comparable companies	EBITDA multiple	5.9–13.6 (9.4)
Equity securities	27.7		Discounted cash flow	Discount rate	8.1%–16.5% (14.1%)

Debt securities	76.9		Discounted cash flow	Discount rate	7.0%–14.8% (10.7%)
	30.9		Comparable trading multiple	Price to earnings ratio	10.0
	30.9		Comparable trading multiple	Enterprise value/ EBITDA multiple	20.9
	12.0		Discounted cash flow	Loss-adjusted discount rate	3.0%–62.3% (10.7%)
	3.1		Market pricing	Private sale pricing	$33 per $100 of par

Table of Contents



(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%)
	112.7		Discounted cash flow	Risk premium	0.0%–25.0% (8.4%)
	22.7		Market pricing	Private sale pricing	$33–$57 ($52) per $100 of par

For securities using the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement.

For securities using the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, loss-adjusted discount rate or risk premium in isolation would result in a significantly lower (higher) fair value measurement.

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 or price to earnings ratio 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	June 30, 2018				September 30, 2017
(in millions)	Fair Value Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Asset
Cash and cash equivalents	1	$	231.6	$	231.6	$	226.4	$	226.4
Financial Liability
Debt	3	$	34.1	$	33.9	$	53.4	$	53.1

Debt

Debt of CIPs totaled $34.1 million and $53.4 million at June 30, 2018 and September 30, 2017. The debt had fixed and floating interest rates ranging from 3.07% to 7.63% with a weighted-average effective interest rate of 6.65% at June 30, 2018, and from 2.84% to 6.75% with a weighted-average effective interest rate of 5.15% at September 30, 2017. The debt carried at June 30, 2018 matures in fiscal year 2019.

Redeemable Noncontrolling Interests

Changes in redeemable noncontrolling interests of CIPs were as follows:



(in millions)
for the nine months ended June 30,	2018			2017
Balance at beginning of period	$	1,941.9		$	61.1
Adoption of new accounting guidance	—			824.7
Net income (loss)	(18.3		)	33.1
Net subscriptions and other	137.8			489.4
Net consolidations (deconsolidations)	(29.8		)	422.3
Balance at End of Period	$	2,031.6		$	1,830.6

Table of Contents

Note 9 – Nonconsolidated Variable Interest Entities

Variable interest entities (“VIEs”) for which the Company is not the primary beneficiary consist of sponsored funds and other investment products in which the Company has an equity ownership interest. The Company’s maximum exposure to loss from these VIEs consists of investment management fee receivables and equity investments as follows:



(in millions)	June 30, 2018		September 30, 2017
Receivables	$	147.3	$	155.6
Investments	84.7		129.3
Total	$	232.0	$	284.9

While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. The Company also may voluntarily elect to provide its sponsored funds with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its sponsored funds during the nine months ended June 30, 2018 or fiscal year 2017.

Note 10 – Taxes on Income

The Tax Act imposes a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. During the quarter ended December 31, 2017, the Company recognized an estimated transition tax expense of $1,120.7 million based on information then available. The Company subsequently decreased this estimate by $45.6 million as a result of the completion of the Company’s tax return filings for fiscal year 2017, additional technical guidance from the Department of Treasury, and further refinement of the calculation. The expense may be further adjusted in future quarters 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 year 2018. The federal portion of the transition tax liability, estimated to be $1,059.6 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 the fiscal year ending September 30, 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. During the quarter ended December 31, 2017, the Company recognized the estimated related changes in its deferred tax assets and deferred tax liabilities, which resulted in a $35.7 million decrease in deferred tax assets, an $88.8 million decrease in deferred tax liabilities and a $53.1 million net tax benefit. The Company subsequently increased the estimated net tax benefit by $0.4 million, and the estimate may be further revised in future quarters as the related temporary differences are realized or settled. During the nine months ended June 30, 2018, the Company reclassified $0.1 million from accumulated other comprehensive loss to retained earnings related to stranded tax effects resulting from the change in tax rate.

Deferred tax assets and deferred tax liabilities were as follows:



(in millions)	June 30, 2018		September 30, 2017
Deferred tax assets, net of valuation allowance	$	92.4	$	141.3
Deferred tax liabilities	199.4		296.1
Net Deferred Tax Liability	$	107.0	$	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)	June 30, 2018		September 30, 2017
Other assets	$	21.0	$	15.8
Deferred tax liabilities	128.0		170.6
Net Deferred Tax Liability	$	107.0	$	154.8

Table of Contents

Prior to the Tax Act, the Company indefinitely reinvested the undistributed earnings of all its foreign subsidiaries, except for income previously taxed in the U.S. or subject to regulatory or legal repatriation restrictions or requirements. The Company is currently reconsidering its repatriation policy in light of the changes contained in the Tax Act.

The Company’s effective income tax rate was 20.5% and 84.6% for the three and nine months ended June 30, 2018, and is expected to be approximately 71% for the full fiscal year 2018.

Taxes on income and the related impacts on the effective income tax rate were as follows:



(in millions)	Three Months Ended June 30, 2018					Nine Months Ended June 30, 2018
(in millions)	Amount			Percentage of Income Before Taxes		Amount			Percentage of Income Before Taxes
Tax expense before one-time charges	$	101.5		22.7	%	$	407.1		23.5	%
Transition tax on deemed repatriation of undistributed foreign earnings	(45.1		)	(10.1	%)	1,075.1			62.1	%
Revaluation of net deferred tax liabilities	0.1			0.0	%	(53.5		)	(3.1	%)
Other Tax Act impacts	35.3			7.9	%	36.8			2.1	%
Total	$	91.8		20.5	%	$	1,465.5		84.6	%

Other Tax Act impacts consist primarily of foreign dividend distribution taxes and tax withholdings.

Note 11 – Commitments and Contingencies

Legal Proceedings

On July 28, 2016, a former employee filed a class action lawsuit captioned Cryer v. Franklin Resources, Inc., et al. in the United States District Court for the Northern District of California against Franklin, the Franklin Templeton 401(k) Retirement Plan (“Plan”) Investment Committee (“Investment Committee”), and unnamed Investment Committee members. The plaintiff asserts a claim for breach of fiduciary duty under the Employee Retirement Income Security Act (“ERISA”), alleging that the defendants selected mutual funds sponsored and managed by the Company (the “Funds”) 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, inclusive of investment management and administrative fees, are excessive. 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, 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, as well as the Franklin Board of Directors, the Plan Administrative Committee, individual current and former Franklin directors, and individual current and former Investment Committee members. The plaintiff in this second lawsuit asserts the same ERISA breach of fiduciary duty claim asserted in the Cryer action, as well as claims for alleged prohibited transactions by virtue of the Plan’s investments in the Funds and for an alleged failure to monitor the performance of the Investment Committee. The plaintiff alleges that Plan losses exceed $60.0 million and seeks the same relief sought in the Cryer action. On April 6, 2018, the court consolidated the Fernandez action with the existing Cryer action.

Management strongly believes that the claims asserted in the litigation are without merit. The fact discovery phase in the consolidated action is closed and the parties are currently in the expert discovery phase. Franklin is defending against the consolidated action vigorously. Franklin cannot at this time predict the eventual outcome of the litigation or whether it will have a material negative impact on the Company, or reasonably estimate the possible loss or range of loss that may arise from any negative outcome.

The Company is from time to time involved in other litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business, financial position, results of operations or liquidity. In management’s opinion, an adequate accrual has been made as of June 30, 2018 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.

Table of Contents

Other Commitments and Contingencies

At June 30, 2018, there were no material changes in the other commitments and contingencies as reported in the Company’s Form 10-K for fiscal year 2017.

Note 12 – Stock-Based Compensation

Stock and stock unit award activity was as follows:



(shares in thousands)	Time-Based Shares		Performance- Based Shares		Total Shares		Weighted-Average Grant-Date Fair Value
for the nine months ended June 30, 2018	Time-Based Shares		Performance- Based Shares		Total Shares		Weighted-Average Grant-Date Fair Value
Nonvested balance at October 1, 2017	2,783		1,761		4,544		$	37.23
Granted	2,260		724		2,984		42.67
Vested	(149	)	(516	)	(665	)	39.23
Forfeited/canceled	(202	)	(149	)	(351	)	44.58
Nonvested Balance at June 30, 2018	4,692		1,820		6,512		$	39.12

Total unrecognized compensation expense related to nonvested stock and stock unit awards was $148.1 million at June 30, 2018. This expense is expected to be recognized over a remaining weighted-average vesting period of 1.7 years.

Note 13 – Other Income (Expenses)

Other income (expenses) consisted of the following:



	Three Months Ended June 30,						Nine Months Ended June 30,
(in millions)	2018			2017			2018			2017
Investment and Other Income (Losses), Net
Interest income	$	15.4		$	20.3		$	64.9		$	49.9
Dividend income	16.6			3.3			30.0			8.4
Gains (losses) on trading investment securities, net	(2.4		)	1.1			0.1			11.5
Realized gains on sale of investment securities, available-for-sale	0.6			2.6			2.7			5.5
Realized losses on sale of investment securities, available-for-sale	(0.4		)	(0.4		)	(0.8		)	(1.6		)
Income (losses) from investments in equity method investees	(4.1		)	17.9			41.8			88.4
Other-than-temporary impairment of investments	(0.3		)	(0.5		)	(0.9		)	(0.8		)
Gains (losses) on investments of CIPs, net	(69.9		)	59.8			(15.3		)	52.6
Foreign currency exchange gains (losses), net	5.8			(19.2		)	(4.9		)	(5.6		)
Other, net	4.9			7.3			17.3			14.6
Total	(33.8		)	92.2			134.9			222.9
Interest Expense	(22.1		)	(12.9		)	(42.9		)	(38.8		)
Other Income (Expenses), Net	$	(55.9	)	$	79.3		$	92.0		$	184.1

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 were generated by investments in nonconsolidated funds. Proceeds from the sale of available-for-sale securities were $6.8 million and $48.2 million for the three and nine months ended June 30, 2018, and $2.5 million and $28.3 million for the three and nine months ended June 30, 2017.

Net gains (losses) recognized on the Company’s trading investment securities that were held at June 30, 2018 and 2017 were $(1.1) million and $2.3 million for the three and nine months ended June 30, 2018, and $1.3 million and $3.8 million for the three and nine months ended June 30, 2017. Net gains (losses) recognized on trading investment securities of CIPs that were held at June 30, 2018 and 2017 were $(39.0) million and $(49.7) million for the three and nine months ended June 30, 2018, and $19.9 million and $25.8 million for the three and nine months ended June 30, 2017.

Table of Contents

Note 14 – Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component were as follows:



(in millions)	Unrealized Gains on Investments		Currency Translation Adjustments			Unrealized Losses on Defined Benefit Plans			Total
for the three months ended June 30, 2018	Unrealized Gains on Investments		Currency Translation Adjustments			Unrealized Losses on Defined Benefit Plans			Total
Balance at April 1, 2018	$	5.5	$	(258.4	)	$	(6.8	)	$	(259.7	)
Other comprehensive income (loss), net of tax	3.3		(86.7		)	0.2			(83.2		)
Balance at June 30, 2018	$	8.8	$	(345.1	)	$	(6.6	)	$	(342.9	)



(in millions)	Unrealized Gains on Investments			Currency Translation Adjustments			Unrealized Losses on Defined Benefit Plans			Total
for the nine months ended June 30, 2018	Unrealized Gains on Investments			Currency Translation Adjustments			Unrealized Losses on Defined Benefit Plans			Total
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	8.3			(62.6		)	(0.5		)	(54.8		)
Reclassifications to net investment and other income (losses), net of tax	(1.7		)	(1.5		)	—			(3.2		)
Total other comprehensive income (loss)	6.6			(64.1		)	(0.5		)	(58.0		)
Balance at June 30, 2018	$	8.8		$	(345.1	)	$	(6.6	)	$	(342.9	)



(in millions)	Unrealized Gains on Investments			Currency Translation Adjustments			Unrealized Losses on Defined Benefit Plans			Total
for the three months ended June 30, 2017	Unrealized Gains on Investments			Currency Translation Adjustments			Unrealized Losses on Defined Benefit Plans			Total
Balance at April 1, 2017	$	3.0		$	(368.1	)	$	(8.1	)	$	(373.2	)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications, net of tax	(0.1		)	54.0			(0.2		)	53.7
Reclassifications to net investment and other income (losses), net of tax	(1.5		)	—			—			(1.5		)
Total other comprehensive income (loss)	(1.6		)	54.0			(0.2		)	52.2
Balance at June 30, 2017	$	1.4		$	(314.1	)	$	(8.3	)	$	(321.0	)



(in millions)	Unrealized Gains on Investments			Currency Translation Adjustments			Unrealized Losses on Defined Benefit Plans			Total
for the nine months ended June 30, 2017	Unrealized Gains on Investments			Currency Translation Adjustments			Unrealized Losses on Defined Benefit Plans			Total
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 (loss)
Other comprehensive income (loss) before reclassifications, net of tax	3.9			32.3			(0.2		)	36.0
Reclassifications to net investment and other income (losses), net of tax	(2.5		)	—			—			(2.5		)
Total other comprehensive income (loss)	1.4			32.3			(0.2		)	33.5
Balance at June 30, 2017	$	1.4		$	(314.1	)	$	(8.3	)	$	(321.0	)

There were no reclassifications from accumulated other comprehensive income (loss) for the three months ended June 30, 2018.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

In this section, we discuss and analyze the results of operations and financial condition of Franklin Resources, Inc. (“Franklin”) and its subsidiaries (collectively, the “Company”). In addition to historical information, we also make statements relating to the future, called “forward-looking” statements, which are provided under the “safe harbor” protection of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “could,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “seek,” “estimate” or other similar words. Moreover, statements that speculate about future events are forward-looking statements. These forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. You should carefully review the “Risk Factors” section set forth below, which describes these risks, uncertainties and other important factors in more detail.

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 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 Form 10-Q 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, unless required by law.

The following discussion should be read in conjunction with our Form 10-K for the fiscal year ended September 30, 2017 (“fiscal year 2017”) filed with the U.S. Securities and Exchange Commission, and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

OVERVIEW

We are a global investment management organization and derive our operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide through our investment products that 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. Our products and investment management and related services are distributed or marketed to investors globally under various distinct brand names: Franklin^®, Templeton^®, Franklin Mutual Series^®, Franklin Bissett^®, Fiduciary Trust™, Darby^®, Balanced Equity Management^®, K2^®, LibertyShares^®, Edinburgh Partners™ and Random Forest Capital™. We offer a broad range of products under equity, multi-asset/balanced, fixed income and cash management funds and accounts, including alternative investment products, that meet a wide variety of specific investment needs of 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 below, the amount and mix of our AUM are subject to significant fluctuations and 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. These arrangements could change in the future.

During the first nine months of our fiscal year, the global equity markets experienced volatility but provided overall positive returns as the S&P 500 Index and MSCI World Index increased 9.5% and 6.4%. However, volatility remains amid concerns about rising interest rates and trade sanctions between the U.S. and China, among other things. The global bond markets were negative as the Bloomberg Barclays Global Aggregate Index decreased 2.8% during our third fiscal quarter and 0.4% for the fiscal year to date.

Our total AUM at June 30, 2018 was $724.1 billion, 4% lower than at September 30, 2017 and 3% lower than at June 30, 2017. Simple monthly average AUM (“average AUM”) for the three and nine months ended June 30, 2018 decreased 1% and increased 2% from the same periods in the prior fiscal year.

Table of Contents

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 customer 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 employees 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 set forth below.

RESULTS OF OPERATIONS



	Three Months Ended June 30,						Percent Change		Nine Months Ended June 30,						Percent Change
(in millions, except per share data)	2018			2017			Percent Change		2018			2017			Percent Change
Operating revenues	$	1,558.6		$	1,613.9		(3	%)	$	4,791.9		$	4,775.3		0	%
Operating income	503.1			564.2			(11	%)	1,639.9			1,706.6			(4	%)
Net income attributable to Franklin Resources, Inc.	402.0			410.6			(2	%)	261.9			1,271.5			(79	%)
Diluted earnings per share	$	0.75		$	0.73		3	%	$	0.45		$	2.25		(80	%)
Operating margin ¹	32.3		%	35.0		%			34.2		%	35.7		%

^{__________________}


¹	Defined as operating income divided by total operating revenues.

Operating income decreased $61.1 million for the three months ended June 30, 2018, as compared to the same period in the prior fiscal year, as operating revenues decreased 3% while operating expenses increased 1%. Operating income decreased $66.7 million for the nine months ended June 30, 2018 primarily due to a 3% increase in operating expenses.

Net income attributable to Franklin Resources, Inc. decreased $8.6 million for the three months ended June 30, 2018 due to the decrease in operating income, investment and other losses, net, as compared to investment and other income, net, in the prior-year period, less the portion attributable to noncontrolling interests, and higher interest expense, partially offset by lower taxes on income. Net income attributable to Franklin Resources, Inc. decreased $1.0 billion for the nine months ended June 30, 2018 primarily due to an estimated income tax charge of $1.1 billion resulting from enactment of the Tax Cuts and Jobs Act of 2017.

Diluted earnings per share increased for the three months ended June 30, 2018 despite the decrease in net income and decreased for the nine-month period consistent with net income. The amounts were impacted by 4% and 3% decreases in diluted average common shares outstanding primarily resulting from repurchases of shares of our common stock during the twelve-month period ended June 30, 2018.

ASSETS UNDER MANAGEMENT

AUM by investment objective was as follows:



(in billions)	June 30, 2018		June 30, 2017		Percent Change
Equity
Global/international	$	201.0	$	206.8	(3	%)
United States	109.6		105.7		4	%
Total equity	310.6		312.5		(1	%)
Multi-Asset/Balanced	137.7		141.2		(2	%)
Fixed Income
Tax-free	65.6		71.2		(8	%)
Taxable
Global/international	154.5		159.8		(3	%)
United States	46.6		52.1		(11	%)
Total fixed income	266.7		283.1		(6	%)
Cash Management	9.1		6.0		52	%
Total	$	724.1	$	742.8	(3	%)

Table of Contents

AUM at June 30, 2018 decreased 3% from June 30, 2017 as $30.3 billion of net outflows were partially offset by $9.8 billion from an acquisition and $1.8 billion of net market change, distributions and other.

Average AUM and the mix of average AUM by investment objective are shown below.



(in billions)	Average AUM				Percent Change		Mix of Average AUM
for the three months ended June 30,	2018		2017		Percent Change		2018		2017
Equity
Global/international	$	202.4	$	206.3	(2	%)	28	%	28	%
United States	108.2		105.7		2	%	15	%	14	%
Total equity	310.6		312.0		0	%	43	%	42	%
Multi-Asset/Balanced	137.9		141.7		(3	%)	19	%	19	%
Fixed Income
Tax-free	66.3		71.4		(7	%)	9	%	10	%
Taxable
Global/international	160.2		158.3		1	%	22	%	21	%
United States	47.4		52.5		(10	%)	6	%	7	%
Total fixed income	273.9		282.2		(3	%)	37	%	38	%
Cash Management	9.3		6.2		50	%	1	%	1	%
Total	$	731.7	$	742.1	(1	%)	100	%	100	%



(in billions)	Average AUM				Percent Change		Mix of Average AUM
for the nine months ended June 30,	2018		2017		Percent Change		2018		2017
Equity
Global/international	$	207.9	$	201.8	3	%	28	%	28	%
United States	108.9		103.7		5	%	14	%	14	%
Total equity	316.8		305.5		4	%	42	%	42	%
Multi-Asset/Balanced	140.9		139.5		1	%	19	%	19	%
Fixed Income
Tax-free	68.1		72.6		(6	%)	9	%	10	%
Taxable
Global/international	162.9		156.2		4	%	22	%	21	%
United States	49.0		52.6		(7	%)	7	%	7	%
Total fixed income	280.0		281.4		0	%	38	%	38	%
Cash Management	7.7		6.2		24	%	1	%	1	%
Total	$	745.4	$	732.6	2	%	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, foreign exchange revaluation and net cash management.



(in billions)	Three Months Ended June 30,						Percent Change		Nine Months Ended June 30,						Percent Change
(in billions)	2018			2017			Percent Change		2018			2017			Percent Change
Beginning AUM	$	737.5		$	740.0		0	%	$	753.2		$	733.3		3	%
Long-term sales	25.8			29.8			(13	%)	82.5			84.8			(3	%)
Long-term redemptions	(41.8		)	(41.1		)	2	%	(122.9		)	(132.3		)	(7	%)
Long-term net exchanges	(0.1		)	0.2			NM		(0.3		)	(0.1		)	200	%
Long-term reinvested distributions	4.0			3.8			5	%	16.3			14.9			9	%
Net flows	(12.1		)	(7.3		)	66	%	(24.4		)	(32.7		)	(25	%)
Acquisitions	9.8			—			NM		9.8			0.4			NM
Net market change, distributions and other	(11.1		)	10.1			NM		(14.5		)	41.8			NM
Ending AUM	$	724.1		$	742.8		(3	%)	$	724.1		$	742.8		(3	%)

Table of Contents

Components of the change in AUM by investment objective were as follows:



(in billions)	Equity						Multi-Asset/ Balanced			Fixed Income									Cash Management			Total
for the three months ended June 30, 2018	Global/ International			United States			Multi-Asset/ Balanced			Tax-Free			Taxable Global/ International			Taxable United States			Cash Management			Total
AUM at April 1, 2018	$	202.7		$	106.6		$	137.6		$	67.0		$	165.0		$	48.2		$	10.4		$	737.5
Long-term sales	6.0			4.4			4.0			1.2			8.3			1.9			—			25.8
Long-term redemptions	(13.3		)	(5.5		)	(5.7		)	(2.9		)	(11.0		)	(3.4		)	—			(41.8		)
Long-term net exchanges	(0.2		)	0.4			—			(0.1		)	(0.2		)	—			—			(0.1		)
Long-term reinvested distributions	0.2			0.5			1.5			0.5			1.0			0.3			—			4.0
Net flows	(7.3		)	(0.2		)	(0.2		)	(1.3		)	(1.9		)	(1.2		)	—			(12.1		)
Acquisition	9.8			—			—			—			—			—			—			9.8
Net market change, distributions and other	(4.2		)	3.2			0.3			(0.1		)	(8.6		)	(0.4		)	(1.3		)	(11.1		)
AUM at June 30, 2018	$	201.0		$	109.6		$	137.7		$	65.6		$	154.5		$	46.6		$	9.1		$	724.1



(in billions)	Equity						Multi-Asset/ Balanced			Fixed Income									Cash Management		Total
for the three months ended June 30, 2017	Global/ International			United States			Multi-Asset/ Balanced			Tax-Free			Taxable Global/ International			Taxable United States			Cash Management		Total
AUM at April 1, 2017	$	204.9		$	105.3		$	141.9		$	71.5		$	157.6		$	52.8		$	6.0	$	740.0
Long-term sales	6.5			3.6			4.6			1.7			11.2			2.2			—		29.8
Long-term redemptions	(12.9		)	(5.9		)	(6.8		)	(2.9		)	(9.5		)	(3.1		)	—		(41.1		)
Long-term net exchanges	0.1			—			0.1			—			—			—			—		0.2
Long-term reinvested distributions	0.1			0.4			1.5			0.5			0.9			0.4			—		3.8
Net flows	(6.2		)	(1.9		)	(0.6		)	(0.7		)	2.6			(0.5		)	—		(7.3		)
Net market change, distributions and other	8.1			2.3			(0.1		)	0.4			(0.4		)	(0.2		)	—		10.1
AUM at June 30, 2017	$	206.8		$	105.7		$	141.2		$	71.2		$	159.8		$	52.1		$	6.0	$	742.8

AUM decreased $13.4 billion or 2% during the quarter ended June 30, 2018 due to $12.1 billion of net outflows and $11.1 billion of net market change, distributions and other, partially offset by $9.8 billion from an acquisition. The net outflows included outflows of $3.8 billion from two institutional separate accounts, $1.8 billion from two global/international equity funds, $1.4 billion from a multi-asset/balanced fund, and $1.3 billion from two global/international fixed income funds with global macro strategies, and inflows of $1.8 billion from two institutional products. Long-term sales decreased 13% to $25.8 billion, as compared to the prior-year period, primarily due to lower sales in global/international fixed income products. Long-term redemptions increased 2% to $41.8 billion primarily due to higher redemptions of global/international fixed income products, partially offset by lower redemptions of multi-asset/balanced products. Net market change, distributions and other consists of $5.1 billion of long-term distributions, a $4.4 billion decrease from foreign exchange revaluation, a $1.3 billion decrease in net cash management and $0.3 billion of market depreciation. The foreign exchange revaluation resulted from AUM in products that are not U.S. dollar denominated, which represented 15% of total AUM, and was primarily due to strengthening of the U.S. dollar against the Euro, Indian Rupee, Canadian dollar, Pound Sterling and Australian dollar. Market depreciation occurred in global/international products and was substantially offset by appreciation in the other long-term investment objectives, reflecting mixed market returns as the S&P 500 Index and MSCI World Index increased 3.4% and 1.9% and the Bloomberg Barclays Global Aggregate Index decreased 2.8%.

AUM increased $2.8 billion during the quarter ended June 30, 2017 due to $10.1 billion of net market change, distributions and other, partially offset by $7.3 billion of net outflows. Net market change, distributions and other primarily consists of $12.0 billion of market appreciation and a $2.8 billion increase from foreign exchange revaluation, net of $4.7 billion of long-term distributions. The market appreciation occurred in all long-term investment objectives, primarily in equity products, and reflected positive returns in global equity markets as evidenced by increases of 3.1% and 4.2% in the S&P 500 Index and MSCI World Index. The foreign exchange revaluation was primarily due to weakening of the U.S. dollar against the Euro and Canadian dollar. The net outflows occurred most significantly in global/international equity products, including $2.8 billion from three institutional separate accounts.

Table of Contents



(in billions)	Equity						Multi-Asset/ Balanced			Fixed Income									Cash Management		Total
for the nine months ended June 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	18.5			12.1			11.5			4.4			29.7			6.3			—		82.5
Long-term redemptions	(36.5		)	(17.7		)	(17.8		)	(9.2		)	(32.2		)	(9.5		)	—		(122.9		)
Long-term net exchanges	—			0.5			0.1			(0.5		)	(0.6		)	0.2			—		(0.3		)
Long-term reinvested distributions	2.6			3.9			4.4			1.5			3.1			0.8			—		16.3
Net flows	(15.4		)	(1.2		)	(1.8		)	(3.8		)	—			(2.2		)	—		(24.4		)
Acquisition	9.8			—			—			—			—			—			—		9.8
Net market change, distributions and other	(3.2		)	3.6			(3.8		)	(1.6		)	(10.5		)	(1.8		)	2.8		(14.5		)
AUM at June 30, 2018	$	201.0		$	109.6		$	137.7		$	65.6		$	154.5		$	46.6		$	9.1	$	724.1



(in billions)	Equity						Multi-Asset/ Balanced			Fixed Income									Cash Management			Total
for the nine months ended June 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	19.3			11.6			12.8			5.8			26.3			9.0			—			84.8
Long-term redemptions	(37.4		)	(19.8		)	(19.5		)	(9.4		)	(35.3		)	(10.9		)	—			(132.3		)
Long-term net exchanges	(0.1		)	0.3			0.4			(0.5		)	(0.4		)	0.2			—			(0.1		)
Long-term reinvested distributions	2.4			3.6			4.0			1.5			2.5			0.9			—			14.9
Net flows	(15.8		)	(4.3		)	(2.3		)	(2.6		)	(6.9		)	(0.8		)	—			(32.7		)
Acquisition	—			—			0.4			—			—			—			—			0.4
Net market change, distributions and other	22.2			6.7			5.7			(2.7		)	10.5			(0.5		)	(0.1		)	41.8
AUM at June 30, 2017	$	206.8		$	105.7		$	141.2		$	71.2		$	159.8		$	52.1		$	6.0		$	742.8

AUM decreased $29.1 billion during the nine months ended June 30, 2018 due to $24.4 billion of net outflows and $14.5 billion of net market change, distributions and other, partially offset by $9.8 billion from an acquisition. The net outflows included outflows of $4.8 billion from three institutional separate accounts, $3.7 billion from three global/international fixed income funds with global macro strategies, $3.1 billion from two global/international equity funds and $3.0 billion from a multi-asset/balanced fund, and inflows of $3.2 billion in a global/international fixed income fund that introduced a new share class structure during fiscal year 2017 and $2.9 billion in two institutional products. Long-term sales decreased 3% to $82.5 billion, as compared to the prior-year period, primarily due to lower sales of taxable U.S. and tax-free fixed income and multi-asset/balanced products, partially offset by higher sales of global/international fixed income products. Long-term redemptions decreased 7% to $122.9 billion with decreases in all investment objectives, most significantly in global/international fixed income products. Net market change, distributions and other consists of $20.8 billion of long-term distributions and a $3.5 billion decrease from foreign exchange revaluation, net of $7.0 billion of market appreciation and a $2.8 billion increase in net cash management. The foreign exchange revaluation was primarily due to strengthening of the U.S. dollar against the Canadian dollar, Indian Rupee 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 9.5% and 6.4% in the S&P 500 Index and MSCI World Index and negative returns in global fixed income markets as evidenced by a 0.4% decrease in the Bloomberg Barclays Global Aggregate Index.

AUM increased $9.5 billion or 1% during the nine months ended June 30, 2017 primarily due to $41.8 billion of net market change, distributions and other, substantially offset by $32.7 billion of net outflows. Net market change, distributions and other primarily consists of $59.1 billion of market appreciation net of $17.7 billion of long-term distributions. The market appreciation occurred in all long-term investment objectives except tax-free fixed income, primarily in equity, global/international fixed income and multi-asset/balanced products, and reflected positive returns in global equity markets as evidenced by increases of 13.5% and 13.2% in the S&P 500 Index and MSCI World Index, and strong performance of our global/international fixed income products despite a 3.0% decrease in the Bloomberg Barclays Global Aggregate Index. The net outflows, which occurred in all long-term investment objectives and most significantly in equity and global/international fixed income products, included $9.6 billion from three global/international fixed income funds with global macro strategies, $4.5 billion from four institutional separate accounts,

Table of Contents

$2.9 billion from two sub-advised variable annuity clients due to shifts in their investment strategies and $1.2 billion from a global/international equity fund.

Average AUM by sales region was as follows:



	Three Months Ended June 30,				Percent Change		Nine Months Ended June 30,				Percent Change
(in billions)	2018		2017		Percent Change		2018		2017		Percent Change
United States	$	484.6	$	499.6	(3	%)	$	492.9	$	496.2	(1	%)
International
Europe, Middle East and Africa	104.0		105.0		(1	%)	107.7		102.9		5	%
Asia-Pacific	95.4		88.4		8	%	95.8		85.3		12	%
Canada	30.6		31.2		(2	%)	31.3		30.8		2	%
Latin America ¹	17.1		17.9		(4	%)	17.7		17.4		2	%
Total international	247.1		242.5		2	%	252.5		236.4		7	%
Total	$	731.7	$	742.1	(1	%)	$	745.4	$	732.6	2	%

^{__________________}


¹	Latin America sales region includes North America-based advisers serving non-resident clients.

The percentage of average AUM in the United States sales region was 66% for the three and nine months ended June 30, 2018 and 67% and 68% for the same periods in the prior fiscal year.

Due to the global nature of our business operations, investment management and related services may be performed in locations unrelated to the sales region.

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 results with at least 79% of AUM exceeding the benchmark and peer group median comparisons for the ten-year period. Lower relative investment performance by these products during the nine months ended June 30, 2018 resulted in significant reductions from September 30, 2017 to the benchmark and peer group median comparisons for the one-, three- and five-year periods. The performance of our multi-asset/balanced products significantly exceeded the peer group median for the three- and ten-year periods, but has lagged in the one- and five-year comparisons and against the benchmarks for all periods presented, reflecting the performance of a fund that represents approximately 70% 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.

Table of Contents

The performance of our products against benchmarks and peer group medians is presented in the table below.



	Benchmark Comparison ^1,2								Peer Group Comparison ^1,3
	% of AUM Exceeding Benchmark								% of AUM in Top Two Peer Group Quartiles
as of June 30, 2018	1-Year		3-Year		5-Year		10-Year		1-Year		3-Year		5-Year		10-Year
Equity
Global/international	9	%	16	%	14	%	34	%	26	%	23	%	36	%	47	%
United States	55	%	38	%	21	%	28	%	44	%	61	%	43	%	74	%
Total equity	27	%	25	%	17	%	31	%	33	%	38	%	39	%	59	%
Multi-Asset/Balanced	10	%	10	%	12	%	12	%	16	%	90	%	10	%	95	%
Fixed Income
Tax-free	4	%	40	%	40	%	40	%	14	%	41	%	39	%	74	%
Taxable
Global/international	7	%	7	%	43	%	79	%	4	%	15	%	65	%	87	%
United States	48	%	31	%	47	%	57	%	6	%	16	%	17	%	25	%
Total fixed income	14	%	21	%	43	%	63	%	7	%	24	%	48	%	72	%

^{__________________}


¹	AUM measured in the benchmark and peer group rankings represents 87% and 80% of our total AUM as of June 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.

The peer group rankings are sourced from either Lipper, a Thomson Reuters Company, Morningstar or eVestment 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 the primary share class are applied to the entire product. Rankings for most institutional separately-managed accounts are as of the prior quarter-end due to timing of availability of information. Private equity funds, certain privately-offered emerging market and real estate funds, cash management funds and certain hedge and other funds are not included. Certain other funds and products were also excluded because of limited benchmark or peer group data. Had this data been available, the results may have been different. These results assume the reinvestment of dividends, are based on data available as of July 20, 2018 and are subject to revision. While we remain focused on achieving strong long-term performance, our future benchmark and peer group rankings may vary from our past performance.

OPERATING REVENUES

The table below presents the percentage change in each operating revenue category.



(in millions)	Three Months Ended June 30,				Percent Change		Nine Months Ended June 30,				Percent Change
(in millions)	2018		2017		Percent Change		2018		2017		Percent Change
Investment management fees	$	1,077.9	$	1,097.0	(2	%)	$	3,308.6	$	3,249.4	2	%
Sales and distribution fees	391.4		433.3		(10	%)	1,219.0		1,283.8		(5	%)
Shareholder servicing fees	53.9		56.7		(5	%)	170.1		169.7		0	%
Other	35.4		26.9		32	%	94.2		72.4		30	%
Total Operating Revenues	$	1,558.6	$	1,613.9	(3	%)	$	4,791.9	$	4,775.3	0	%

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 rates vary by investment objective and type of services provided. 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.

Investment management fees decreased $19.1 million for the three months ended June 30, 2018 primarily due to a 1% decrease in average AUM and lower performance fees. The decrease in average AUM occurred primarily in the U.S. sales region, partially offset by higher average AUM in the Asia-Pacific sales region.

Table of Contents

Investment management fees increased $59.2 million for the nine months ended June 30, 2018 primarily due to a 2% increase in average AUM, partially offset by lower performance fees. The increase in average AUM occurred most significantly in the Asia-Pacific and Europe, Middle East and Africa sales regions, partially offset by lower average AUM in the U.S. sales region.

Our effective investment management fee rate (annualized investment management fees divided by average AUM) was 58.9 and 59.2 basis points for the three and nine months ended June 30, 2018, and 59.1 basis points for the same periods in the prior fiscal year. The rate decrease for the three-month period was primarily due to lower performance fees. The rate increase for the nine-month period was primarily due to a higher weighting of AUM in international products, partially offset by lower performance fees.

Performance-based investment management fees were $5.9 million and $14.6 million for the three and nine months ended June 30, 2018, and $10.3 million and $34.2 million for the same periods in the prior fiscal year, with the decreases primarily related to fees earned from separately-managed accounts.

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, geographic region, distribution channel and investment vehicle of the assets.

Sales and Distribution Fees

We earn fees from the sale of certain classes of sponsored funds on which investors pay a commission at the time of purchase (“commissionable sales”). Sales commissions are reduced or eliminated on some share classes and for some sale transactions depending upon the amount invested and the type of investor. Therefore, sales fees 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.

Globally, our mutual funds and certain other products generally pay us distribution fees in return for sales, marketing and distribution efforts on their behalf. Specifically, the majority of U.S.-registered mutual funds, with the exception of certain of our money market mutual funds, 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 average daily net AUM. Similar arrangements exist for the distribution of our non-U.S. funds.

We pay substantially all of our sales and distribution fees to the financial advisers and other intermediaries who sell our funds to investors 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)	Three Months Ended June 30,				Percent Change		Nine Months Ended June 30,				Percent Change
(in millions)	2018		2017		Percent Change		2018		2017		Percent Change
Asset-based fees	$	324.0	$	334.7	(3	%)	$	996.3	$	1,005.2	(1	%)
Sales-based fees	63.3		96.4		(34	%)	211.1		271.8		(22	%)
Contingent sales charges	4.1		2.2		86	%	11.6		6.8		71	%
Sales and Distribution Fees	$	391.4	$	433.3	(10	%)	$	1,219.0	$	1,283.8	(5	%)

Asset-based distribution fees decreased $10.7 million and $8.9 million for the three and nine months ended June 30, 2018 as lower fees from U.S. products were partially offset by higher fees from non-U.S. products. U.S. product fees decreased $18.8 million and $42.0 million primarily due to 7% and 5% decreases in the related average U.S. AUM, while non-U.S. product fees increased $8.1 million and $33.1 million primarily due to 4% and 8% increases in the related average international AUM.

Sales-based fees decreased $33.1 million and $60.7 million for the three and nine months ended June 30, 2018 primarily due to $35.1 million and $63.3 million decreases from 39% and 23% decreases in total commissionable sales.

Commissionable sales represented 8% and 9% of total sales for the three and nine months ended June 30, 2018, and 12% and 11% for the same periods in the prior year. U.S. product commissionable sales were 76% and 73% of total commissionable sales for the three and nine months ended June 30, 2018, and 69% and 75% for the same periods in the prior year.

Contingent sales charges are earned from investor redemptions within a contracted period of time. 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.

Table of Contents

Shareholder Servicing Fees

We earn shareholder servicing fees 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 fees for U.S. funds changed to be based on the level of AUM and 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. We do not expect this change to have a significant impact on total annual shareholder servicing fees. 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 which fees are based on the level of AUM, and estate planning and tax planning and preparation, for which fees are primarily account based.

Shareholder servicing fees decreased $2.8 million and increased $0.4 million for the three and nine months ended June 30, 2018. The decrease for the three-month period was primarily due to a $3.4 million decrease from U.S. funds which reflects the impact of a seasonally lower level of transactions under the new fee structure.

Other

Other revenue increased $8.5 million and $21.8 million for the three and nine months ended June 30, 2018 primarily due to higher interest and dividend income from consolidated investment products.

OPERATING EXPENSES

The table below presents the percentage change in each operating expense category.



	Three Months Ended June 30,				Percent Change		Nine Months Ended June 30,				Percent Change
(in millions)	2018		2017		Percent Change		2018		2017		Percent Change
Sales, distribution and marketing	$	499.8	$	541.2	(8	%)	$	1,550.0	$	1,596.0	(3	%)
Compensation and benefits	357.5		342.7		4	%	1,045.5		997.6		5	%
Information systems and technology	62.5		54.1		16	%	175.6		159.8		10	%
Occupancy	30.5		30.2		1	%	94.0		88.3		6	%
General, administrative and other	105.2		81.5		29	%	286.9		227.0		26	%
Total Operating Expenses	$	1,055.5	$	1,049.7	1	%	$	3,152.0	$	3,068.7	3	%

Sales, Distribution and Marketing

Sales, distribution and marketing 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 to investors. 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.



	Three Months Ended June 30,				Percent Change		Nine Months Ended June 30,				Percent Change
(in millions)	2018		2017		Percent Change		2018		2017		Percent Change
Asset-based expenses	$	420.4	$	432.9	(3	%)	$	1,292.2	$	1,294.3	0	%
Sales-based expenses	59.4		89.8		(34	%)	197.3		248.8		(21	%)
Amortization of deferred sales commissions	20.0		18.5		8	%	60.5		52.9		14	%
Sales, Distribution and Marketing	$	499.8	$	541.2	(8	%)	$	1,550.0	$	1,596.0	(3	%)

Table of Contents

Asset-based expenses decreased $12.5 million and $2.1 million for the three and nine months ended June 30, 2018 as lower distribution expenses related to U.S. products were significantly offset by higher expenses related to non-U.S. products. U.S. product expenses decreased $19.4 million and $44.3 million primarily due to 8% and 5% decreases in the related average U.S. AUM, while non-U.S. product expenses increased $6.9 million and $42.2 million primarily due to 2% and 6% increases in the related average international 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.

Sales-based expenses decreased $30.4 million and $51.5 million for the three and nine months ended June 30, 2018 primarily due to $31.5 million and $55.0 million decreases from 39% and 23% decreases in total commissionable sales,

Amortization of deferred sales commissions increased $1.5 million and $7.6 million for the three and nine months ended June 30, 2018 primarily due to higher sales of non-U.S. shares sold without a front-end sales charge to investors, partially offset by lower such sales of U.S. shares.

Compensation and Benefits

Compensation and benefit expenses increased $14.8 million and $47.9 million for the three and nine months ended June 30, 2018 due to $19.5 million and $61.4 million increases in salaries, wages and benefits, partially offset by $4.7 million and $13.5 million decreases in variable compensation. Salaries, wages and benefits increased primarily due to increases of $7.2 million and $23.5 million from higher average staffing levels, $5.7 million and $16.3 million for annual merit salary adjustments that were effective December 1, 2017 and 2016, $3.9 million and $13.8 million in termination benefits, and $1.5 million and $8.6 million from unfavorable foreign currency impacts. Variable compensation decreased primarily due to decreases of $4.0 million and $20.5 million related to unvested mutual fund awards, and $3.8 million and $5.5 million of stock and stock unit award amortization, partially offset by increases of $4.0 million and $12.4 million in bonus expense primarily due to higher staffing levels.

Variable compensation as a percentage of compensation and benefits was 34% and 33% for the three and nine months ended June 30, 2018, and 37% and 36% for the same periods in the prior fiscal year. At June 30, 2018, our global workforce had increased to approximately 9,800 employees from approximately 9,400 at June 30, 2017.

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 benefit 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.

Information Systems and Technology

Information systems and technology expenses increased $8.4 million and $15.8 million for the three and nine months ended June 30, 2018 primarily due to higher technology consulting and software costs, partially offset by lower amortization of capitalized software costs.

Details of capitalized information systems and technology costs are shown below.



	Three Months Ended June 30,						Nine Months Ended June 30,
(in millions)	2018			2017			2018			2017
Net carrying value at beginning of period	$	106.9		$	96.4		$	102.1		$	88.1
Additions, net of disposals	9.9			14.1			38.8			49.0
Amortization	(11.7		)	(12.7		)	(35.8		)	(39.3		)
Net Carrying Value at End of Period	$	105.1		$	97.8		$	105.1		$	97.8

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 $0.3 million and $5.7 million for the three and nine months ended June 30, 2018. The increase for the nine-month period was primarily due to $3.9 million of equipment impairment.

Table of Contents

General, Administrative and Other

General, administrative and other operating expenses primarily consist of 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 $23.7 million and $59.9 million for the three and nine months ended June 30, 2018, primarily due to higher contingent consideration expense, third-party service fees, professional fees and advertising and promotion expenses. Contingent consideration expense increased $10.0 million and $23.6 million due to revised estimates of future revenues and profits from K2 Advisors Holdings, LLC (“K2”) and a prior-year decline in other acquisition-related AUM. Third-party fees primarily for sub-advisory and fund administration services increased $6.3 million and $12.6 million, professional fees increased $4.2 million and $12.0 million related to various corporate activities and advertising and promotion expenses increased $2.5 million and $7.5 million due to higher activity levels. The increase for the three-month period also included a $3.9 million increase in impairment of definite-lived intangible assets, primarily related to fund of hedge funds products from the K2 acquisition, and the nine-month period also included a $4.8 million increase in travel and entertainment expenses.

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:



	Three Months Ended June 30,						Percent Change		Nine Months Ended June 30,						Percent Change
(in millions)	2018			2017			Percent Change		2018			2017			Percent Change
Investment and other income (losses), net	$	(33.8	)	$	92.2		NM		$	134.9		$	222.9		(39	%)
Interest expense	(22.1		)	(12.9		)	71	%	(42.9		)	(38.8		)	11	%
Other Income (Expenses), Net	$	(55.9	)	$	79.3		NM		$	92.0		$	184.1		(50	%)

Investment and other income (losses), net consists primarily of interest and dividend income, income from equity method investees, gains (losses) on investments of consolidated investment products (“CIPs”) and foreign currency exchange gains (losses).

Other income (expenses), net decreased $135.2 million and $92.1 million for the three and nine months ended June 30, 2018, primarily due to losses on investments held by CIPs, lower income from equity method investees and higher interest expense, partially offset by higher dividend income. Investments held by CIPs generated net losses of $69.9 million and $15.3 million, as compared to net gains of $59.8 million and $52.6 million in the prior-year periods. The losses were primarily from lower market valuations of holdings by various global/international fixed income funds, a U.S. fixed income fund and an emerging markets equity fund. Equity method investees generated losses of $4.1 million for the three-month period as compared to income of $17.9 million in the prior year, and $46.6 million less income for the nine-month period, primarily due to losses and lower gains on investments held by a global equity fund and a global macro hedge fund. Interest expense increased $9.2 million and $4.1 million primarily due to $12.5 million of costs related to early redemption of senior notes, partially offset by lower debt balances. Dividend income increased $13.3 million and $21.6 million primarily due to higher investments in, and yields on, money market funds. The decrease for the three-month period was also partially offset by $5.8 million of net foreign currency exchange gains, as compared to net losses of $19.2 million in the prior year, primarily from 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. The decrease for the nine-month period was also partially offset by a $15.0 million increase in interest income primarily due to higher interest rates partially offset by lower levels of cash equivalents.

Significant portions of the net gains (losses) of CIPs are offset in noncontrolling interests in our consolidated statements of income.

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.

Table of Contents

Our cash, cash equivalents and investments portfolio by investment objective and accounting classification at June 30, 2018, excluding third-party assets of CIPs, was as follows:



	Accounting Classification¹								Total Direct Portfolio
(in millions)	Cash and Cash Equivalents and Other²		Trading Investments		Equity Method Investments		Direct Investments in CIPs		Total Direct Portfolio
Cash and Cash Equivalents	$	6,422.6	$	—	$	—	$	—	$	6,422.6
Investments
Equity
Global/international	62.1		12.8		689.2		167.1		931.2
United States	12.9		6.6		0.9		4.0		24.4
Total equity	75.0		19.4		690.1		171.1		955.6
Multi-Asset/Balanced	9.2		5.2		18.1		196.1		228.6
Fixed Income
Tax-free	0.1		—		5.0		—		5.1
Taxable
Global/international	58.9		253.1		145.6		595.4		1,053.0
United States	34.2		195.6		—		224.5		454.3
Total fixed income	93.2		448.7		150.6		819.9		1,512.4
Total investments	177.4		473.3		858.8		1,187.1		2,696.6
Total Cash and Cash Equivalents and Investments	$	6,600.0	$	473.3	$	858.8	$	1,187.1	$	9,119.2

^{______________}


¹	See Note 1 – Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of our Form 10-K for fiscal year 2017 for information on investment accounting classifications.


²	Other consists of $101.9 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 $63.7 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 our tax return filings for fiscal year 2017, additional technical guidance from the Department of Treasury, and further refinement of the transition tax calculation.

The transition tax expense was estimated to be $1,075.1 million as of June 30, 2018 and may be further adjusted in future quarters upon issuance of additional technical guidance, legislative updates from states on tax reform, and the completion of our tax return filings for fiscal year 2018. The revaluation of our net deferred tax liabilities at the lower corporate income tax rate resulted in an estimated net tax benefit of $53.5 million during the nine months ended June 30, 2018, which may be revised in future quarters as the related temporary differences are realized or settled.

The federal statutory rate for our fiscal year ending September 30, 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.

Table of Contents

Our effective income tax rate was 20.5% and 84.6% for the three and nine months ended June 30, 2018, as compared to 28.6% and 30.5% for the same periods in the prior fiscal year. The rate decrease for the three-month period was due to the lower federal statutory rate partially offset by lower tax benefits attributable to foreign earnings. The rate increase for the nine-month period was primarily due to the impact of the transition tax, partially offset by the lower statutory rate and the net tax benefit from the revaluation of net deferred tax liabilities. Our effective income tax rate is expected to be approximately 71% for the full fiscal year 2018, and approximately 23% to 24% excluding the one-time impacts of the Tax Act.

The effective income tax rate for future reporting periods will continue to reflect the relative contributions of non-U.S. earnings that are subject to reduced tax rates. Changes in tax rates in these jurisdictions and in our estimated impacts from the Tax Act may affect our effective income tax rate and net income.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows were as follows:



	Nine Months Ended June 30,
(in millions)	2018			2017
Cash Flow Data
Operating cash flows	$	1,508.5		$	958.3
Investing cash flows	(272.8		)	64.9
Financing cash flows	(3,316.7		)	(730.8		)

Net cash provided by operating activities increased during the nine months ended June 30, 2018 primarily due to a decrease in trading securities of CIPs as compared to an increase in the prior year, partially offset by an increase in our trading securities as compared to a decrease in the prior year. Net cash used in investing activities, as compared to net cash provided in the prior year, primarily resulted from lower net liquidations of investments of CIPs, higher cash paid for acquisitions and higher net purchases of our investments. Net cash used in financing activities increased primarily due to higher dividends paid on common stock, higher repurchases of common stock, lower net subscriptions in CIPs by noncontrolling interests and the early redemption of debt, partially offset by lower payments on debt by CIPs.

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 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)	June 30, 2018		September 30, 2017
Assets
Cash and cash equivalents	$	6,422.6	$	8,523.3
Receivables	814.9		767.8
Investments	2,332.4		1,995.2
Total Liquid Assets	$	9,569.9	$	11,286.3

Liability
Debt	$	695.7	$	1,044.2

Liquidity

Liquid assets consist of cash and cash equivalents, receivables, and certain investments. Cash and cash equivalents primarily consist of debt instruments with original maturities of three months or less at the purchase date, money market funds, time deposits with maturities of three months or less, and deposits with financial institutions. Liquid investments consist of trading and available-for-sale securities, investments in equity method investees consisting of sponsored mutual funds, direct investments in redeemable CIPs, and time deposits with maturities greater than three months.

Table of Contents

We utilize a significant portion of our liquid assets to satisfy operational and regulatory requirements and fund capital contributions relating to our products. Certain of our subsidiaries are required by our internal policy or regulation to maintain minimum levels of 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 June 30, 2018, our subsidiaries held $3,251.1 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 assets that were restricted from transfer to Franklin and other subsidiaries of $181.8 million at June 30, 2018 and $167.4 million at September 30, 2017. 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 we could raise capital through debt or equity issuance. These alternatives could result in increased interest expense 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 private placement program.

In prior fiscal years, we issued senior unsecured unsubordinated notes for general corporate purposes, to redeem outstanding notes and to finance an acquisition. At June 30, 2018, $699.2 million of the notes were outstanding with an aggregate face value of $700.0 million. The notes were issued at fixed interest rates and consist of $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 the notes is payable semi-annually. 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. The indentures governing the 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. 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 June 30, 2018.

At June 30, 2018, 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.

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, invest in our products, fund property and equipment purchases, pay operating expenses of the business, enhance technology infrastructure and business processes, pay stockholder dividends and income taxes, and repay and service debt. We are currently reassessing our capital management and repatriation policies in light of the changes contained in the Tax Act.

We declare dividends on a quarterly basis. We declared regular cash dividends of $0.69 ($0.23 per share per quarter) and a special dividend of $3.00 per share during the nine months ended June 30, 2018, and regular cash dividends of $0.60 per share ($0.20 per share per quarter) during the nine months ended June 30, 2017. 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 the three and nine months ended June 30, 2018, we repurchased 13.4 million and 29.1 million shares of our common stock at a cost of $446.2 million and $1,078.8 million. At June 30, 2018, 82.5 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 price, market and business conditions and other factors. During the three and nine months ended June 30, 2017, we repurchased 4.1 million and 15.2 million shares of our common stock at a cost of $174.6 million and $603.1 million.

During the nine months ended June 30, 2018, we paid $97.0 million, net of cash acquired, and issued 0.8 million shares of our common stock related to acquisitions.

Table of Contents

On May 21, 2018, we redeemed our outstanding $350.0 million 4.625% senior notes due in May 2020 at a make-whole redemption price of $361.9 million.

We redeemed $132.6 million, net of investments, from our sponsored products during the nine months ended June 30, 2018, and invested $71.6 million, net of redemptions, in the prior-year period.

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. While we have no contractual obligation to do so, we may voluntarily elect to provide the funds with direct or indirect financial support based on our business objectives.

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENT LIABILITY

Our contractual obligations, commitments and contingent liability are summarized in our Form 10-K for the fiscal year ended September 30, 2017.

The Tax Act imposes a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. We estimate our federal transition tax liability to be $1,059.6 million. This liability is payable 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.

On May 21, 2018, we redeemed our outstanding $350.0 million 4.625% senior notes due in May 2020 at a make-whole redemption price of $361.9 million.

At June 30, 2018, there were no other material changes in our other contractual obligations, commitments and contingent liability from September 30, 2017.

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. Actual results may differ from those estimates under different assumptions. The following are updates to our critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for fiscal year 2017.

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”). Our VIEs are all investment entities and our variable interests consist of our equity ownership interest in and certain investment management fees earned from these entities. As of June 30, 2018, we were the primary beneficiary of 31 VIEs.

Fair Value Measurements

We record a substantial amount of our investments at fair value or amounts that approximate fair value on a recurring basis. We use a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable.

As of June 30, 2018, Level 3 assets represented 13% of total assets measured at fair value, substantially all of which related to CIPs’ investments in equity and debt securities and our direct investments in debt securities that are not traded in active markets. There was one Level 3 liability, a contingent consideration liability which represented 80% of total liabilities measured at fair value. There were no transfers into or out of Level 3 during the nine months ended June 30, 2018.

Table of Contents

Goodwill and Other Intangible Assets

Subsequent to our annual impairment tests as of August 1, 2017, there were no impairments to goodwill or indefinite-lived intangible assets. We monitored market conditions, including changes in our AUM and weighted-average cost of capital, 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 our reporting unit below its carrying value, or indicate that our indefinite-lived intangible assets might be impaired. We also monitored fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole.

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.

Revenues

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 average daily AUM. Performance-based investment management fees are based on performance targets established in the related investment management contracts. 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 the underlying securities for which market prices are not readily available are internally valued using various methodologies which incorporate unobservable inputs as appropriate for each security type. As of June 30, 2018, our total AUM by fair value hierarchy level was 54% Level 1, 45% Level 2 and 1% Level 3.

Income Taxes

As a multinational corporation, we operate in various locations outside the U.S. and generate earnings from our foreign subsidiaries. Prior to enactment of the Tax Act, we indefinitely reinvested the undistributed earnings of all our foreign subsidiaries, except for income previously taxed in the U.S. or subject to regulatory or legal repatriation restrictions or requirements. We are currently reconsidering our repatriation policy in light of the changes contained in the Tax Act.

NEW ACCOUNTING GUIDANCE

See Note 2 – New Accounting Guidance in the notes to consolidated financial statements in Item 1 of Part I of this Form 10‑Q.

RISK FACTORS

Volatility and disruption of the capital and credit markets, and adverse changes in the global economy, may significantly affect our results of operations and may put pressure on our financial results. The capital and credit markets may from time to time experience volatility and disruption worldwide. Declines in global financial market conditions have in the past resulted in significant decreases in our assets under management (“AUM”), revenues and income, and future declines may further negatively impact our financial results. Such declines have had and may in the future have an adverse impact on our results of operations. 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 that 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, insurrection or other business, social or political crises. Global economic conditions, exacerbated by war, terrorism, natural disasters or financial

Table of Contents

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. Our funds may be subject to liquidity risks or an unanticipated large number of redemptions as a result of the events or conditions described above, causing the funds to sell securities 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. We have in the past, 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 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, changing market conditions may cause a shift 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 in the future direction 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. Any decrease in the level of our AUM resulting from market declines, interest rate volatility or uncertainty, increased redemptions or other factors could negatively impact our revenues and income.

We are subject to extensive, complex, overlapping and frequently changing rules, regulations, policies, and legal interpretations. There is uncertainty associated with the regulatory environments in which we operate. As described below, our business is subject to extensive and complex, overlapping and/or conflicting, and frequently changing and increasing rules, regulations, policies and legal interpretations in the countries in which we operate. Our regulatory and compliance obligations impose significant operational and cost burdens on us and cover a broad range of requirements related to securities and other financial instruments, investment 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, certain of our subsidiaries are also subject to the rules 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”) and the U.S. Department of Treasury. 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 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 products and services 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.

Table of Contents

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, the 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 affected as a result of new or revised legislation or regulations or by changes 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 products and services. 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. For example, effective May 2018, failure to timely and properly comply and maintain ongoing compliance with the data protection rules under the EU’s GDPR may subject us to enforcement proceedings and significant fines and costs.

Table of Contents

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 to Brexit 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 final rules in this area, and the industry’s response to them, are 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.

Effective May 2018, the EU’s GDPR strengthened and unified data protection rules for individuals within the EU. GDPR also addresses export of personal data outside the EU. The primary objectives of 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 rules under GDPR will continue to require an extensive review of all of our global data processing systems. A failure to comply with GDPR could result in fines up to 20 million Euros or 4% of 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. Local regulatory environments may vary widely and place additional demands on our sales, investment, legal and compliance personnel. Failure to comply with the applicable laws, rules, regulations, codes, directives, notices or guidelines in any of our 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 products and services 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 income taxes as well as non-income based taxes, and are subject to ongoing tax audits, in 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 net income or financial condition. Changes in tax laws or tax rulings may at times

Table of Contents

materially impact our effective tax rate, such as pursuant to the reduction in the corporate income tax rate and one-time transition tax on certain non-U.S. earnings under the Tax Cuts and Jobs Act of 2017 enacted into law in December 2017.

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, systems failures, data or privacy breaches, or cyber or other security breaches in these and other processes could subject us to significant client dissatisfaction and losses and damage our reputation. Although we take protective measures, including measures to secure and protect information through system security technology and our internal security procedures, the technology systems we use remain vulnerable to unauthorized access, computer viruses or other events that 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 designed to maliciously obtain and exploit confidential information and to otherwise cause damage) or an authorized employee or vendor 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, and the costs necessary to address them, could result in: significant material financial loss or costs; the unauthorized disclosure or modification of sensitive or confidential client and business information; loss of valuable information; breach of client and vendor contracts; liability for stolen assets, information or identity; remediation costs to repair damage caused by the failure or breach; additional security and organizational costs to mitigate against future incidents; reputational harm; loss of confidence in our business and products; liability for failure to properly and timely review and disclose applicable incidents or provide relevant updated disclosure; regulatory investigations or actions; and/or legal claims, liability and litigation costs resulting from the incident. Moreover, loss or unauthorized disclosure or transfer of confidential customer identification information could further harm our reputation and subject us to liability under laws that protect confidential personal data, 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.

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 to rapid advancements and changes and our competitors may from time to time implement more advanced technology platforms for their products and services, including digital advisers and other advanced electronic systems, which could adversely affect our business if we are unable to remain competitive.

Our business operations are complex and a failure to properly perform operational tasks or the misrepresentation of our products and services, 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. Many of our operations are complex and dependent on 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. 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 employees who 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, or otherwise damage our reputation. In addition, any misrepresentation of our products and services in advertising

Table of Contents

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. Our revenues could be adversely affected if such agreements representing a significant portion of our AUM are terminated or significantly altered. 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 properly perform and monitor our operations, our business could suffer and our revenues and income could be adversely affected.

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 international 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 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. 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 to 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, 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, 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

Table of Contents

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 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. On April 18, 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

Table of Contents

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.

Table of Contents

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 may receive requests for documents or other information from governmental authorities or regulatory bodies. We may also become the subject of governmental or regulatory investigations and/or examinations, or governmental or regulatory investigations and/or examinations that have been inactive could become active. In addition, we may be 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. Judgments, findings or allegations 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, 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 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 which 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

During the nine months ended June 30, 2018, there were no material changes from the market risk disclosures in our Form 10‑K for the fiscal year ended September 30, 2017.

Item 4. 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 (the “Exchange Act”)) as of June 30, 2018. Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company’s disclosure controls and procedures as of June 30, 2018 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’s 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 June 30, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of our legal proceedings, please see the description set forth in the “Legal Proceedings” section in Note 11 – Commitments and Contingencies in the notes to the consolidated financial statements in Item 1 of Part I of this Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors.

Our Form 10‑K for the fiscal year ended September 30, 2017 filed with the SEC includes a discussion of the risk factors identified by us, which are also set forth under the heading “Risk Factors” in Item 2 of Part I of this Form 10-Q. There were no material changes from the Risk Factors as previously disclosed in our Form 10‑K for the fiscal year ended September 30, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On May 1, 2018, we issued 816,344 unregistered shares of our common stock with an aggregate market value of $27.0 million as of that date in a private placement to an accredited investor in accordance with Rule 506(b) under the Securities Act of 1933, as amended, pursuant to an acquisition.

The following table provides information with respect to the shares of our common stock that we repurchased during the three months ended June 30, 2018.



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
April 2018	2,633,639	$	33.64	2,633,639	93,279,631
May 2018	4,855,772	33.34		4,855,772	88,423,859
June 2018	5,888,886	33.24		5,888,886	82,534,973
Total	13,378,297			13,378,297

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 and June 2016, we announced that our Board of Directors authorized the repurchase of up to 80.0 million and 50.0 million additional shares of our common stock under the stock repurchase program.

Item 6. Exhibits.

The exhibits listed on the Exhibit Index to this Form 10-Q are incorporated herein by reference.

Table of Contents

EXHIBIT INDEX



Exhibit No.			Description

3(i)(a)			Registrant’s Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 001-09318) (the “1994 Annual Report”)

3(i)(b)			Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit 3(ii) to the 1994 Annual Report

3(i)(c)			Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit 3(iii) to the 1994 Annual Report

3(i)(d)			Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit 3(iv) to the 1994 Annual Report

3(i)(e)			Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed on February 4, 2005, incorporated by reference to Exhibit (3)(i)(e) to the Registrant’s Quarterly Report on Form 10-Q for the period ended December 31, 2004 (File No. 001-09318)

3(ii)			Registrant’s Amended and Restated Bylaws (as adopted and effective October 23, 2017), incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed with the SEC on October 23, 2017 (File No. 001-09318)

10.1			English language summary of Preliminary Real Estate Sale Agreement, dated December 18, 2017, between the Registrant’s subsidiary Franklin Templeton Investments Poland sp. z o.o., as purchaser, and Skanska Property Poland Fundusz, et. al., as seller (filed herewith)

31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101			The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, and (v) related notes (filed herewith)

Table of Contents

SIGNATURE

Pursuant to the requirements 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:	July 27, 2018	By:	/S/ KENNETH A. LEWIS
			Kenneth A. Lewis
			Chief Financial Officer and Executive Vice President
			(Duly Authorized Officer and Principal Financial Officer)