filings.toolsItem 8. Financial Statements and Supplementary Data.
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Item 8. Financial Statements and Supplementary Data.
Index of Consolidated Financial Statements for the fiscal years ended September 30, 2020, 2019 and 2018.
All schedules have been omitted as the information is provided in the financial statements or in related notes thereto or is not required to be filed, as the information is not applicable.
Certain required quarterly information is included in Item 7 of Part II of this Annual Report under the heading “Selected Quarterly Financial Data (Unaudited)” and incorporated herein by reference.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Franklin Resources, Inc. and its consolidated subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
On July 31, 2020, Franklin Resources, Inc. completed its acquisition of Legg Mason, Inc. (“Legg Mason”). Consistent with guidance issued by the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from management’s report on internal control over financial reporting in the year of acquisition, management excluded an assessment of the effectiveness of the Company’s internal control over financial reporting related to Legg Mason. Total assets and operating revenues of Legg Mason that were excluded from management’s assessment constitute 12% of the Company’s consolidated total assets as of September 30, 2020 and 9% of consolidated total operating revenues for the fiscal year ended September 30, 2020. Management’s basis for exclusion included the size and complexity of the acquired business, the timing between acquisition and fiscal year end, and expected integration plans during the fiscal year ending September 30, 2021.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2020, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on that assessment, management concluded that, as of September 30, 2020, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2020 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm that audits the Company’s consolidated financial statements, as stated in their report immediately following this report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2020.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of Franklin Resources, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Franklin Resources, Inc. and its subsidiaries (the “Company”) as of September 30, 2020 and 2019, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended September 30, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Legg Mason, Inc. from its assessment of internal control over financial reporting as of September 30, 2020 because Legg Mason, Inc. was acquired by the Company in a purchase business combination during 2020. We have also excluded Legg Mason, Inc. from our audit of internal control over financial reporting. Legg Mason, Inc. is a wholly-owned subsidiary whose total assets and total operating revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 12% and 9%, respectively, of the related consolidated financial statement amounts as of and for the year ended September 30, 2020.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisition of Legg Mason, Inc. - Fair Value of Indefinite-lived and Definite-lived Investment Management Contract Intangible Assets and One Redeemable Noncontrolling Interest
As described in Notes 1 and 3 to the consolidated financial statements, in July 2020, the Company completed its acquisition of Legg Mason, Inc. for a purchase consideration of $4.7 billion, which resulted in management recording $2.7 billion of indefinite-lived investment management contract intangible assets, $1.1 billion of definite-lived investment management contract intangible assets, and $186.4 million of redeemable noncontrolling interests. Fair values of acquired indefinite-lived and definite-lived investment management contract intangible assets are based on the net present value of estimated future cash flows attributable to the contracts, which include significant assumptions about forecasts of the assets under management (“AUM”) growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate. Fair values of redeemable noncontrolling interests are determined using discounted cash flows and guideline public company methods, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate and public company earnings multiples.
The principal considerations for our determination that performing procedures relating to the fair value of indefinite-lived and definite-lived investment management contract intangible assets and redeemable noncontrolling interest from the acquisition of Legg Mason, Inc. is a critical audit matter are the significant judgment by management when developing the estimated fair value of indefinite-lived and definite-lived investment management contract intangible assets and redeemable noncontrolling interest; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to (i) the AUM growth rate and discount rate assumptions utilized within the net present value of estimated future cash flows for the valuation of the investment management contract intangible assets and redeemable noncontrolling interest and (ii) the public company earnings multiples utilized within the guideline public company method for the valuation of the redeemable noncontrolling interest. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the fair value of indefinite-lived and definite-lived investment management contract intangible assets and redeemable noncontrolling interest in the acquisition of Legg Mason, Inc., including controls over development of (i) the AUM growth rate and discount rate assumptions utilized within the net present value of estimated future cash flows and (ii) the public company earnings multiples utilized within the guideline public company method. These procedures also included, among others, identifying the acquired contracts by reading the purchase agreement and testing management’s process for estimating the fair value of the acquired indefinite-lived and definite-lived investment management contract intangible assets and
redeemable noncontrolling interest. Testing management’s process included (i) evaluating the appropriateness of the methods, (ii) testing the completeness, accuracy, and relevance of underlying data used in the methods, and (iii) evaluating management’s significant assumptions related to the AUM growth rate and discount rate for the valuation of the investment management contract intangible assets and redeemable noncontrolling interest, and the public company earnings multiples for the valuation of the redeemable noncontrolling interest. Evaluating the reasonableness of the AUM growth rate and public company earnings multiples involved considering the past performance of the acquired business, the consistency with external market and industry data and whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s discounted cash flow method and guideline public company method and the reasonableness of the discount rate.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
November 20, 2020
We have served as the Company’s auditor since 1974.
| FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except per share data) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Operating Revenues | ||||||||||||
| Investment management fees | $ | 3,981.7 | $ | 3,985.2 | $ | 4,367.5 | ||||||
| Sales and distribution fees | 1,362.0 | 1,444.6 | 1,599.8 | |||||||||
| Shareholder servicing fees | 195.1 | 216.3 | 221.9 | |||||||||
| Other | 27.7 | 23.3 | 15.3 | |||||||||
| Total operating revenues | 5,566.5 | 5,669.4 | 6,204.5 | |||||||||
| Operating Expenses | ||||||||||||
| Compensation and benefits | 1,873.9 | 1,584.7 | 1,390.6 | |||||||||
| Sales, distribution and marketing | 1,703.1 | 1,819.6 | 2,039.7 | |||||||||
| Information systems and technology | 288.4 | 258.5 | 243.9 | |||||||||
| Occupancy | 147.9 | 133.6 | 128.6 | |||||||||
| Amortization of intangible assets | 54.0 | 14.7 | 1.8 | |||||||||
| General, administrative and other | 450.3 | 391.4 | 371.7 | |||||||||
| Total operating expenses | 4,517.6 | 4,202.5 | 4,176.3 | |||||||||
| Operating Income | 1,048.9 | 1,466.9 | 2,028.2 | |||||||||
| Other Income (Expenses) | ||||||||||||
| Investment and other income (losses), net | (38.4 | ) | 141.4 | 200.3 | ||||||||
| Interest expense | (33.4 | ) | (22.4 | ) | (46.3 | ) | ||||||
| Investment and other income of consolidated investment products, net | 70.2 | 78.8 | 59.6 | |||||||||
| Expenses of consolidated investment products | (29.4 | ) | (16.9 | ) | (26.6 | ) | ||||||
| Other income (expenses), net | (31.0 | ) | 180.9 | 187.0 | ||||||||
| Income before taxes | 1,017.9 | 1,647.8 | 2,215.2 | |||||||||
| Taxes on income | 230.8 | 442.3 | 1,472.5 | |||||||||
| Net income | 787.1 | 1,205.5 | 742.7 | |||||||||
| Less: net income (loss) attributable to | ||||||||||||
| Redeemable noncontrolling interests | 48.6 | 6.2 | (12.8 | ) | ||||||||
| Nonredeemable noncontrolling interests | (60.4 | ) | 3.6 | (8.9 | ) | |||||||
| Net Income Attributable to Franklin Resources, Inc. | $ | 798.9 | $ | 1,195.7 | $ | 764.4 | ||||||
| Earnings per Share | ||||||||||||
| Basic | $ | 1.59 | $ | 2.35 | $ | 1.39 | ||||||
| Diluted | 1.59 | 2.35 | 1.39 |
See Notes to Consolidated Financial Statements.
| FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Net Income | $ | 787.1 | $ | 1,205.5 | $ | 742.7 | ||||||
| Other Comprehensive Income (Loss) | ||||||||||||
| Currency translation adjustments, net of tax | 25.8 | (52.5 | ) | (91.9 | ) | |||||||
| Net unrealized gains (losses) on defined benefit plans, net of tax | (1.8 | ) | (2.0 | ) | 1.9 | |||||||
| Net unrealized gains on investments, net of tax | — | 1.5 | 4.3 | |||||||||
| Total other comprehensive income (loss) | 24.0 | (53.0 | ) | (85.7 | ) | |||||||
| Total comprehensive income | 811.1 | 1,152.5 | 657.0 | |||||||||
| Less: comprehensive income (loss) attributable to | ||||||||||||
| Redeemable noncontrolling interests | 48.6 | 6.2 | (12.8 | ) | ||||||||
| Nonredeemable noncontrolling interests | (60.4 | ) | 3.6 | (8.9 | ) | |||||||
| Comprehensive Income Attributable to Franklin Resources, Inc. | $ | 822.9 | $ | 1,142.7 | $ | 678.7 |
See Notes to Consolidated Financial Statements.
| FRANKLIN RESOURCES, INC. CONSOLIDATED BALANCE SHEETS | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions, except share and per share data) | ||||||||
| as of September 30, | 2020 | 2019 | ||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 3,026.8 | $ | 5,803.4 | ||||
| Receivables | 1,114.8 | 740.0 | ||||||
| Investments (including $504.8 and $589.7 at fair value at September 30, 2020 and 2019) | 1,270.5 | 1,555.8 | ||||||
| Assets of consolidated investment products | ||||||||
| Cash and cash equivalents | 930.7 | 154.2 | ||||||
| Receivables | 85.8 | 99.0 | ||||||
| Investments, at fair value | 2,709.2 | 2,303.9 | ||||||
| Property and equipment, net | 813.8 | 683.7 | ||||||
| Goodwill | 4,500.8 | 2,130.3 | ||||||
| Intangible assets, net | 4,914.2 | 864.2 | ||||||
| Operating lease right-of-use assets | 534.8 | — | ||||||
| Other | 319.5 | 197.7 | ||||||
| Total Assets | $ | 20,220.9 | $ | 14,532.2 | ||||
| Liabilities | ||||||||
| Compensation and benefits | $ | 1,064.0 | $ | 502.4 | ||||
| Accounts payable and accrued expenses | 283.7 | 222.9 | ||||||
| Dividends | 143.2 | 137.4 | ||||||
| Commissions | 268.0 | 254.0 | ||||||
| Income taxes | 703.3 | 824.7 | ||||||
| Debt | 3,017.1 | 696.9 | ||||||
| Liabilities of consolidated investment products | ||||||||
| Accounts payable and accrued expenses | 510.1 | 81.5 | ||||||
| Debt | 1,333.4 | 50.8 | ||||||
| Deferred tax liabilities | 305.3 | 120.1 | ||||||
| Operating lease liabilities | 621.0 | — | ||||||
| Other | 456.1 | 270.6 | ||||||
| Total liabilities | 8,705.2 | 3,161.3 | ||||||
| Commitments and Contingencies (Note 16) | ||||||||
| Redeemable Noncontrolling Interests | 541.9 | 746.7 | ||||||
| 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; 495,116,677 and 499,303,269 shares issued and outstanding at September 30, 2020 and 2019 | 49.5 | 49.9 | ||||||
| Retained earnings | 10,472.6 | 10,288.2 | ||||||
| Accumulated other comprehensive loss | (407.6 | ) | (431.6 | ) | ||||
| Total Franklin Resources, Inc. stockholders’ equity | 10,114.5 | 9,906.5 | ||||||
| Nonredeemable noncontrolling interests | 859.3 | 717.7 | ||||||
| Total stockholders’ equity | 10,973.8 | 10,624.2 | ||||||
| Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | $ | 20,220.9 | $ | 14,532.2 |
See Notes to Consolidated Financial Statements.
| FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Franklin Resources, Inc. | Non- redeemable Non- controlling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
| Common Stock | Capital in Excess of Par Value | Retained Earnings | Accum- ulated Other Compre- hensive Loss | Stockholders’ Equity | |||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||
| as of and for the fiscal years ended September 30, 2020, 2019 and 2018 | Shares | Amount | |||||||||||||||||||||||||||||
| Balance at October 1, 2017 | 554.9 | $ | 55.5 | $ | — | $ | 12,849.3 | $ | (284.8 | ) | $ | 12,620.0 | $ | 315.8 | $ | 12,935.8 | |||||||||||||||
| Adoption of new accounting guidance | 2.1 | (1.6 | ) | (0.1 | ) | 0.4 | 0.4 | ||||||||||||||||||||||||
| Net income (loss) | 764.4 | 764.4 | (8.9 | ) | 755.5 | ||||||||||||||||||||||||||
| Other comprehensive loss | (85.7 | ) | (85.7 | ) | (85.7 | ) | |||||||||||||||||||||||||
| Dividends declared on common stock ($3.92 per share) | (2,131.3 | ) | (2,131.3 | ) | (2,131.3 | ) | |||||||||||||||||||||||||
| Repurchase of common stock | (39.9 | ) | (4.0 | ) | (170.4 | ) | (1,252.3 | ) | (1,426.7 | ) | (1,426.7 | ) | |||||||||||||||||||
| Issuance of common stock | 3.3 | 0.3 | 130.8 | 131.1 | 131.1 | ||||||||||||||||||||||||||
| Stock-based compensation | 10.6 | 10.6 | 10.6 | ||||||||||||||||||||||||||||
| Acquisition | 0.8 | 0.1 | 26.9 | 27.0 | 27.0 | ||||||||||||||||||||||||||
| Net distributions and other | (6.0 | ) | (6.0 | ) | |||||||||||||||||||||||||||
| Net consolidation of investment product | 2.4 | 2.4 | |||||||||||||||||||||||||||||
| Purchase of noncontrolling interest | (10.6 | ) | (10.6 | ) | 5.4 | (5.2 | ) | ||||||||||||||||||||||||
| Balance at September 30, 2018 | 519.1 | $ | 51.9 | $ | — | $ | 10,217.9 | $ | (370.6 | ) | $ | 9,899.2 | $ | 308.7 | $ | 10,207.9 | |||||||||||||||
| Adoption of new accounting guidance | 22.9 | (8.0 | ) | 14.9 | 14.9 | ||||||||||||||||||||||||||
| Net income | 1,195.7 | 1,195.7 | 3.6 | 1,199.3 | |||||||||||||||||||||||||||
| Other comprehensive loss | (53.0 | ) | (53.0 | ) | (53.0 | ) | |||||||||||||||||||||||||
| Dividends declared on common stock ($1.04 per share) | (528.3 | ) | (528.3 | ) | (528.3 | ) | |||||||||||||||||||||||||
| Repurchase of common stock | (24.6 | ) | (2.5 | ) | (133.8 | ) | (620.0 | ) | (756.3 | ) | (756.3 | ) | |||||||||||||||||||
| Issuance of common stock | 4.8 | 0.5 | 129.8 | 130.3 | 130.3 | ||||||||||||||||||||||||||
| Stock-based compensation | 4.0 | 4.0 | 4.0 | ||||||||||||||||||||||||||||
| Net subscriptions and other | 165.0 | 165.0 | |||||||||||||||||||||||||||||
| Net consolidation of investment product | 24.3 | 24.3 | |||||||||||||||||||||||||||||
| Acquisition | 216.1 | 216.1 | |||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 499.3 | $ | 49.9 | $ | — | $ | 10,288.2 | $ | (431.6 | ) | $ | 9,906.5 | $ | 717.7 | $ | 10,624.2 | |||||||||||||||
| Net income (loss) | 798.9 | 798.9 | (60.4 | ) | 738.5 | ||||||||||||||||||||||||||
| Other comprehensive income | 24.0 | 24.0 | 24.0 | ||||||||||||||||||||||||||||
| Dividends declared on common stock ($1.08 per share) | (539.0 | ) | (539.0 | ) | (539.0 | ) | |||||||||||||||||||||||||
| Repurchase of common stock | (9.0 | ) | (0.9 | ) | (143.0 | ) | (75.5 | ) | (219.4 | ) | (219.4 | ) | |||||||||||||||||||
| Issuance of common stock | 4.8 | 0.5 | 126.7 | 127.2 | 127.2 | ||||||||||||||||||||||||||
| Stock-based compensation | 16.3 | 16.3 | 16.3 | ||||||||||||||||||||||||||||
| Net subscriptions and other | 186.4 | 186.4 | |||||||||||||||||||||||||||||
| Deconsolidation of investment products | (6.8 | ) | (6.8 | ) | |||||||||||||||||||||||||||
| Acquisitions | 39.1 | 39.1 | |||||||||||||||||||||||||||||
| Wind-down of a subsidiary | (16.7 | ) | (16.7 | ) | |||||||||||||||||||||||||||
| Balance at September 30, 2020 | 495.1 | $ | 49.5 | $ | — | $ | 10,472.6 | $ | (407.6 | ) | $ | 10,114.5 | $ | 859.3 | $ | 10,973.8 |
See Notes to Consolidated Financial Statements.
| FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Net Income | $ | 787.1 | $ | 1,205.5 | $ | 742.7 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Stock-based compensation | 122.3 | 111.5 | 117.8 | |||||||||
| Amortization of deferred sales commissions | 80.3 | 85.8 | 80.7 | |||||||||
| Depreciation and other amortization | 74.5 | 78.7 | 74.6 | |||||||||
| Amortization of intangible assets | 54.0 | 14.7 | 1.8 | |||||||||
| Impairments of intangible assets and goodwill | 55.4 | 13.3 | 5.7 | |||||||||
| Losses (income) from investments in equity method investees | 98.1 | 10.4 | (44.4 | ) | ||||||||
| Net losses on investments of consolidated investment products | 36.8 | 26.3 | 55.0 | |||||||||
| Net (purchase) liquidation of investments by consolidated investment products | (746.9 | ) | (1,497.6 | ) | 365.7 | |||||||
| Deferred income taxes | (7.1 | ) | (1.3 | ) | (50.6 | ) | ||||||
| Other | (26.1 | ) | 11.8 | 28.0 | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Decrease (increase) in receivables and other assets | 135.7 | (34.2 | ) | (90.1 | ) | |||||||
| Decrease (increase) in receivables of consolidated investment products | (4.2 | ) | (34.3 | ) | 68.5 | |||||||
| Decrease (increase) in investments, net | 554.7 | 142.5 | (39.2 | ) | ||||||||
| Decrease in operating lease right-of-use assets | 38.2 | — | — | |||||||||
| Increase (decrease) in accrued compensation and benefits | (10.5 | ) | 89.4 | (19.1 | ) | |||||||
| Decrease in commissions payable | (33.8 | ) | (43.9 | ) | (15.4 | ) | ||||||
| Increase (decrease) in income taxes payable | (123.0 | ) | (210.1 | ) | 965.2 | |||||||
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | (97.4 | ) | 126.0 | (23.0 | ) | |||||||
| Increase in accounts payable and accrued expenses of consolidated investment products | 70.6 | 107.1 | 5.8 | |||||||||
| Decrease in operating lease liabilities | (37.3 | ) | — | — | ||||||||
| Net cash provided by operating activities | 1,021.4 | 201.6 | 2,229.7 | |||||||||
| Purchase of investments | (467.4 | ) | (393.9 | ) | (358.2 | ) | ||||||
| Liquidation of investments | 880.0 | 343.2 | 286.2 | |||||||||
| Purchase of investments by consolidated collateralized loan obligations | (369.2 | ) | — | — | ||||||||
| Liquidation of investments by consolidated collateralized loan obligations | 92.0 | — | — | |||||||||
| Purchase of investments by consolidated investment products | — | — | (73.8 | ) | ||||||||
| Liquidation of investments by consolidated investment products | — | — | 73.3 | |||||||||
| Issuance of loans receivable, net | (40.6 | ) | — | — | ||||||||
| Additions of property and equipment, net | (103.7 | ) | (233.7 | ) | (106.5 | ) | ||||||
| Acquisitions, net of cash acquired | (3,821.4 | ) | (684.2 | ) | (86.8 | ) | ||||||
| Net consolidation (deconsolidation) of investment products | 587.2 | (108.5 | ) | (24.6 | ) | |||||||
| Net cash used in investing activities | (3,243.1 | ) | (1,077.1 | ) | (290.4 | ) |
[Table continued on next page]
See Notes to Consolidated Financial Statements.
| FRANKLIN RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [Table continued from previous page] | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Issuance of common stock | $ | 20.6 | $ | 23.3 | $ | 24.8 | ||||||
| Dividends paid on common stock | (533.2 | ) | (518.6 | ) | (2,116.9 | ) | ||||||
| Repurchase of common stock | (218.2 | ) | (754.5 | ) | (1,424.8 | ) | ||||||
| Payments on debt | — | — | (361.9 | ) | ||||||||
| Proceeds from loan | 0.2 | 1.7 | — | |||||||||
| Payments on loan | (0.4 | ) | (1.5 | ) | — | |||||||
| Proceeds from debt of consolidated investment products | 635.2 | 19.9 | — | |||||||||
| Payments on debt by consolidated investment products | (140.9 | ) | (2.0 | ) | (21.0 | ) | ||||||
| Payments on contingent consideration liabilities | (0.6 | ) | (20.4 | ) | (21.6 | ) | ||||||
| Noncontrolling interests | 431.5 | 1,211.6 | 159.7 | |||||||||
| Net cash provided by (used in) financing activities | 194.2 | (40.5 | ) | (3,761.7 | ) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 27.4 | (37.0 | ) | (16.7 | ) | |||||||
| Decrease in cash and cash equivalents | (2,000.1 | ) | (953.0 | ) | (1,839.1 | ) | ||||||
| Cash and cash equivalents, beginning of year | 5,957.6 | 6,910.6 | 8,749.7 | |||||||||
| Cash and Cash Equivalents, End of Year | $ | 3,957.5 | $ | 5,957.6 | $ | 6,910.6 | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||||||
| Cash paid for income taxes | $ | 359.4 | $ | 520.8 | $ | 523.5 | ||||||
| Cash paid for interest | 18.9 | 27.4 | 38.6 | |||||||||
| Cash paid for interest by consolidated investment products | 9.9 | 2.3 | 2.6 |
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Significant Accounting Policies
Business. Franklin Resources, Inc. (“Franklin”) is a holding company with subsidiaries (collectively, the “Company”) operating under its Franklin Templeton and/or subsidiary brand names. The Company provides investment management and related services in jurisdictions worldwide for investors in investment products which include sponsored funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. In addition to investment management, the Company’s services include fund administration, sales and distribution, and shareholder servicing.
Basis of Presentation. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Management believes that the accounting estimates are appropriate, and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates, actual amounts may differ from these estimates. Certain comparative amounts for prior fiscal years have been reclassified to conform to the financial statement presentation as of and for the fiscal year ended September 30, 2020 (“fiscal year 2020”).
In the quarter ended September 30, 2020, the Company changed the presentation of its consolidated statements of income to include dividend and investment income and expenses of consolidated investment products in other income, net. Amounts for the comparative prior fiscal year periods have been reclassified to conform to the current year presentation. These reclassifications had no impact on previously reported net income or financial position. Management believes the revised presentation is more useful to readers of its financial statements and more accurately portrays the nature of the consolidated investment products (“CIP”) revenue and expenses as the operations of CIPs are not related to the Company’s core business.
The following table presents the effects of the change in the presentation of operating revenues, operating expenses and other income, net to the Company’s previously reported consolidated statements of income:
| 2019 | 2018 | |||||||||||||||||||||||
| (in millions) for the fiscal years ended September | As Reported | Adjustments | As Amended | As Reported | Adjustments | As Amended | ||||||||||||||||||
| Operating Revenues | ||||||||||||||||||||||||
| Other | $ | 128.4 | $ | (105.1 | ) | $ | 23.3 | $ | 129.9 | $ | (114.6 | ) | $ | 15.3 | ||||||||||
| Operating Expenses | ||||||||||||||||||||||||
| General, administrative and other1 | 420.7 | (14.6 | ) | 406.1 | 397.7 | (24.2 | ) | 373.5 | ||||||||||||||||
| Other Income (Expenses) | ||||||||||||||||||||||||
| Investment and other income (losses), net | 115.1 | 26.3 | 141.4 | 145.3 | 55.0 | 200.3 | ||||||||||||||||||
| Interest expense | (24.7 | ) | 2.3 | (22.4 | ) | (48.7 | ) | 2.4 | (46.3 | ) | ||||||||||||||
| Investment and other income of consolidated investment products, net | — | 78.8 | 78.8 | — | 59.6 | 59.6 | ||||||||||||||||||
| Expenses of consolidated investment products | — | (16.9 | ) | (16.9 | ) | — | (26.6 | ) | (26.6 | ) | ||||||||||||||
| Other income (expenses), net | $ | 90.4 | $ | 90.5 | $ | 180.9 | $ | 96.6 | $ | 90.4 | $ | 187.0 |
| 1 | General, administrative and other includes amortization of intangible assets. |
Consolidation. The consolidated financial statements include the accounts of Franklin and its subsidiaries and CIPs in which it has a controlling financial interest. The Company has a controlling financial interest when it owns a majority of the voting interest in a voting interest entity (“VOE”) or is the primary beneficiary of a variable interest entity (“VIE”). Intercompany accounts and transactions have been eliminated.
A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or do not have defined rights and obligations normally associated with an equity investment. Substantially all of the Company’s VIEs are investment products, and its variable interests consist of its equity ownership interests in and investment management fees earned from these products.
The Company is the primary beneficiary of a VIE if it has the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. Investment management fees earned from VIEs are excluded from the primary beneficiary determination if they are deemed to be at market and commensurate with service. The key estimates and assumptions used in the analyses include the amount of assets under management (“AUM”) and the life of the investment product.
Related Parties include sponsored funds and equity method investees. A substantial amount of the Company’s operating revenues and receivables are from related parties.
Earnings per Share. Basic and diluted earnings per share are computed using the two-class method, which considers participating securities as a separate class of shares. The Company’s participating securities consist of its nonvested stock and stock unit awards that contain nonforfeitable rights to dividends or dividend equivalents. Basic earnings per share is computed by dividing net income available to the Company’s common stockholders, adjusted to exclude earnings allocated to participating securities, by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period.
Business combinations are accounted for by recognizing the acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition-date estimated fair values. Any excess of the purchase consideration over the acquisition-date fair values of these identifiable assets and liabilities is recognized as goodwill. During the measurement period, which is not to exceed one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed due to new information about facts that existed as of the acquisition date, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in earnings.
Intangible assets acquired in business combinations consist primarily of investment management contracts and trade names. The fair values of the acquired management contracts are based on the net present value of estimated future cash flows attributable to the contracts, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate. The fair value of trade names is determined using the relief from royalty method based on net present value of estimated future cash flows, which include significant assumptions about royalty rate, revenue growth rate, discount rate and effective tax rate. The management contract intangible assets are amortized over their estimated useful lives, which range from three to 15 years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Indefinite-lived intangible assets represent contracts to manage investment assets for which there is no foreseeable limit on the contract period. Trade names intangible assets are amortized over their estimated useful lives which range from five to twenty years using the straight-line method.
Goodwill and indefinite-lived intangible assets are tested for impairment annually as of August 1 and when an event occurs or circumstances change that more likely than not reduce the fair value of the related reporting unit or indefinite-lived intangible asset below its carrying value. The Company has one reporting unit, investment management and related services, consistent with its single operating segment, to which all goodwill has been assigned. Amortization and impairment are recognized in general, administrative and other expense.
Goodwill and indefinite-lived intangible assets may first be assessed for qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The qualitative analysis considers entity-specific and macroeconomic factors and their potential impact on the key assumptions used in the determination of the fair value of the reporting unit or indefinite-lived intangible asset. A quantitative impairment test is performed if the results of the qualitative assessment indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value or an indefinite-lived intangible asset is impaired, or if a qualitative assessment is not performed.
If a quantitative goodwill impairment test indicates that the carrying value of the goodwill exceeds the fair value of the reporting unit, impairment is recognized in the amount of the excess of the carrying value over the implied fair value of the goodwill, which considers the fair value assigned to all other assets and liabilities of the reporting unit.
If a quantitative indefinite-lived intangible assets impairment test indicates that the carrying value of the asset exceeds the fair value, impairment is recognized in the amount of the difference in values.
The fair values of the reporting unit and indefinite-lived intangible assets are based on the net present value of estimated future cash flows, which include assumptions about the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate.
Definite-lived intangible assets are tested for impairment quarterly. Impairment is indicated when the carrying value of an asset is not recoverable and exceeds its fair value. Recoverability is evaluated based on estimated undiscounted future cash flows using assumptions about the AUM growth rate, pre-tax profit margin, average effective fee rate and expected useful lives as well as royalty rate for trade name intangible assets. If the carrying value of an asset is not recoverable through undiscounted cash flows, impairment is recognized in the amount by which the carrying value exceeds the asset’s fair value, as determined by discounted cash flows or other methods as appropriate for the asset type.
Fair Value Measurements. The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. The three levels of fair value hierarchy are set forth below. The assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities, which may include published net asset values (“NAV”) for fund products. |
| Level 2 | Observable inputs other than Level 1 quoted prices, such as non-binding quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or model-based valuation methodologies that utilize significant assumptions that are observable or corroborated by observable market data. |
| Level 3 | Unobservable inputs that are supported by little or no market activity. These inputs require significant management judgment and reflect the Company’s estimation of assumptions that market participants would use in pricing the asset or liability. |
Quoted market prices may be adjusted if events occur, such as significant price changes in proxies traded in relevant markets after the close of corresponding markets, trade halts or suspensions, or unscheduled market closures. These proxies consist of correlated country-specific exchange-traded securities, such as futures, American Depositary Receipts indices or exchange-traded funds. The price adjustments are primarily determined based on third-party factors derived from model-based valuation techniques for which the significant assumptions are observable in the market.
A substantial amount of the Company’s investments is recorded at fair value or amounts that approximate fair value on a recurring basis. Investments in fund products for which fair value is estimated using NAV as a practical expedient (when the NAV is available to the Company as an investor but is not publicly available) are not classified in the fair value hierarchy. Fair values are estimated for disclosure purposes for financial instruments that are not measured at fair value.
Cash and Cash Equivalents primarily consist of nonconsolidated sponsored money market funds and deposits with financial institutions and are carried at cost. Due to the short-term nature and liquidity of these financial instruments, their carrying values approximate fair value.
The Company maintains cash and cash equivalents with financial institutions in various countries, limits the amount of credit exposure with any given financial institution and conducts ongoing evaluations of the creditworthiness of the financial institutions with which it does business.
Receivables consist primarily of fees receivable from investment products and are carried at invoiced amounts. Due to the short-term nature and liquidity of the receivables, their carrying values approximate fair value.
Investments consist of investments in sponsored funds and separate accounts, investments related to long-term incentive plans, other equity and debt securities, investments in equity method investees and other investments.
Sponsored funds and separate accounts consist primarily of nonconsolidated sponsored funds and to a lesser extent, separate accounts. Sponsored funds and separate accounts are carried at fair value with changes in the fair value recognized as gains and losses in earnings. The fair values of funds are determined based on their published NAV or estimated using NAV as a practical expedient. The fair values of separate accounts are determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.
Investments related to long-term incentive plans consist primarily of investments in sponsored funds related to certain compensation plans that have vesting provision and are carried at fair value. Changes in fair value are recognized as gains and losses in earnings. The fair values of the investments are determined based on the funds’ published NAV or estimated using NAV as a practical expedient.
Other equity and debt securities consist of equity investment securities and debt securities classified as trading or available-for-sale and are carried at fair value. Changes in the fair value of trading securities are recognized as gains and losses in earnings. Unrealized gains and losses on available-for-sale securities are recorded net of tax as part of accumulated other comprehensive income (loss) until realized, at which time they are recognized in earnings using the average cost method. The fair values of equity securities are determined using independent third-party broker or dealer price quotes or based on discounted cash flows using significant unobservable inputs. The fair values of debt securities are determined using independent third-party broker or dealer price quotes or based on discounted cash flows using significant unobservable inputs.
Investments in Equity Method Investees consist of equity investments in entities, including sponsored funds, over which the Company is able to exercise significant influence, but not control. Significant influence is generally considered to exist when the Company’s ownership interest in the investee is between 20% and 50%, although other factors, such as representation on the investee’s board of directors and the impact of commercial arrangements, also are considered in determining whether the equity method of accounting is appropriate. Investments in limited partnerships and limited liability companies are accounted for using the equity method when the Company’s investment is more than minor or when the Company is the general partner. Under the equity method of accounting, the investments are initially carried at cost and subsequently adjusted by the Company’s proportionate share of the entities’ net income, which is recognized in earnings.
Other Investments consist of equity investments in entities over which the Company is unable to exercise significant influence and do not have a readily determinable fair value, and time deposits with maturities greater than three months from the date of purchase. The equity investments are measured at cost adjusted for observable price changes and impairment, if any, which are recognized in earnings. The fair value of the entities is generally estimated using significant unobservable inputs in either a market-based or income-based approach. The time deposits are carried at cost, which approximates fair value due to their short-term nature and liquidity. Life settlement contracts, which were disposed during fiscal year 2020, were carried at fair value, determined based on discounted cash flows using significant unobservable inputs.
Impairment of Investments. Investments in available-for-sale securities, equity method investees and equity investments that do not have a readily determinable fair value are evaluated for impairment on a quarterly basis. The evaluation of equity investments considers qualitative factors, including the financial condition and specific events related to an investee, that may indicate the fair value of the investment is less than its carrying value. Impairment of equity securities is recognized in earnings.
Cash and Cash Equivalents of CIPs consist of highly liquid investments, including money market funds, which are readily convertible into cash, and deposits with financial institutions, and are carried at cost. Due to the short-term nature and liquidity of these financial instruments, their carrying values approximate fair value.
Receivables of CIPs consist of investment and share transaction related receivables and are carried at transacted amounts. Due to the short-term nature and liquidity of the receivables, their carrying values approximate fair value.
Investments of CIPs consist of marketable debt and equity securities and other investments that are not generally traded in active markets and are carried at fair value. Changes in the fair value of the investments are recognized as gains and losses in earnings. The fair values of marketable securities are determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available.
The investments that are not generally traded in active markets consist of equity and debt securities of entities in emerging markets, fund products, other equity and debt instruments, real estate and loans. The fair values are determined using significant unobservable inputs in either a market-based or income-based approach, except for fund products, for which fair values are estimated using NAV as a practical expedient.
Property and Equipment, net are recorded at cost and depreciated using the straight-line method over their estimated useful lives which range from three to 35 years. Expenditures for repairs and maintenance are charged to expense when incurred. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the lease term, whichever is shorter.
Internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized and amortized over the shorter of the estimated useful lives of the software or the license terms, beginning when the software project is complete and the application is put into production.
Property and equipment are tested for impairment when there is an indication that the carrying value of an asset may not be recoverable. Carrying values are not recoverable when the undiscounted cash flows estimated to be generated by the assets are less than their carrying values. When an asset is determined to not be recoverable, the impairment is measured based on the excess, if any, of the carrying value of the asset over its respective fair value. Fair value is determined by discounted future cash flows models, appraisals or other applicable methods.
Leases consist primarily of operating leases relating to real estate. At the inception of a contract, the Company determines whether it is or contains a lease, which includes consideration of whether there are identified assets in the contract and if the Company has control over such assets. Right-of-use (“ROU”) assets and lease liabilities are recognized for all arrangements that qualify as a lease, except for those with original lease terms of twelve months or less.
ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments using an incremental borrowing rate estimated on a collateralized basis with similar terms for the specific interest rate environment. Leases with fixed payments are expensed on a straight-line basis over the lease term. Variable lease payments based on usage, changes in an index or market rate are expensed as incurred. The lease terms include options to extend or terminate the lease when it is reasonably certain they will be exercised.
Lease and nonlease payment components are accounted for separately. ROU assets are tested for impairment when there is an indication that the carrying value of an asset may not be recoverable.
Deferred Sales Commissions consist of upfront commissions paid to financial advisers and broker-dealers on shares of sponsored funds sold without a front-end sales charge, and are amortized over the periods in which they are generally recovered from related revenues, which range from 18 months to seven years. Deferred sales commissions are included in other assets in the consolidated balance sheet.
Debt consists of senior notes and junior notes which are carried at amortized cost. The fair value is estimated using quoted market prices, independent third-party broker or dealer price quotes, or prices of publicly traded debt with similar maturities, credit risk and interest rates. Amortization of debt premium and discount are recognized in interest expense.
Debt of CIPs is carried at amortized cost. The fair value is estimated using a discounted cash flow model that considers current interest rate levels, the quality of the underlying collateral and current economic conditions. At September 30, 2020, debt of CIPs also included debt of consolidated collateralized loan obligations (“CLOs”) which was measured primarily based on the fair value of the assets of the CLOs less the fair value of the Company’s own economic interests in the CLOs.
Noncontrolling Interests consist of third-party equity interests in CIPs and minority interests in certain subsidiaries. Noncontrolling interests that are redeemable or convertible for cash or other assets at the option of the holder are classified as temporary equity at the higher of fair value on reporting date or issuance-date fair value. Changes in fair value of redeemable noncontrolling interest is recognized as an adjustment to retained earnings. Nonredeemable noncontrolling interests are classified as a component of equity. Net income (loss) attributable to third-party investors is reflected as net income (loss) attributable to nonredeemable and redeemable noncontrolling interests in the consolidated statements of income. Sales and redemptions of shares of CIPs by third-party investors are a component of the change in noncontrolling interests included in financing activities in the consolidated statements of cash flows.
The fair values of third-party equity interests in CIPs are determined based on the published NAV or estimated using NAV a practical expedient. The fair values of redeemable noncontrolling interests related to minority interest in certain subsidiaries are determined using discounted cash flows and guideline public company methods, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate and public company earnings multiples.
Revenues. The Company earns revenue primarily from providing investment management and related services to its customers, which are generally investment products or investors in separate accounts. Related services include fund administration, sales and distribution, and shareholder servicing. Revenues are recognized when the Company’s obligations related to the services are satisfied and it is probable that a significant reversal of the revenue amount would not occur in future periods. The obligations are satisfied over time as the services are rendered, except for the sales and distribution obligations for the sale of shares of sponsored funds which are satisfied on trade date. Multiple services included in customer contracts are accounted for separately when the obligations are determined to be distinct.
Fees from providing investment management and fund administration services (“investment management fees”), other than performance-based investment management fees, are determined based on a percentage of AUM, primarily on a monthly basis using daily average AUM, and are recognized as the services are performed over time. Performance-based investment management fees are generated when investment products’ performance exceeds targets established in customer contracts. These fees are recognized when the amount is no longer probable of significant reversal and may relate to investment management services that were provided in prior periods.
Sales and distribution fees primarily consist of upfront sales commissions and ongoing distribution fees. Sales commissions are based on contractual rates for sales of certain classes of sponsored funds and are recognized on trade date. Distribution service fees are determined based on a percentage of AUM, primarily on a monthly basis using daily average AUM. As the fee amounts are uncertain on trade date, they are recognized over time as the amounts become known and may relate to sales and distribution services provided in prior periods.
Shareholder servicing fees are primarily determined based on a percentage of AUM on a monthly basis using daily average AUM and either the number of transactions in shareholder accounts or the number of shareholder accounts, while fees from certain investment products are based only on AUM. The fees are recognized as the services are performed over time.
AUM is generally based on the fair value of the underlying securities held by investment products and is calculated using fair value methods derived primarily from unadjusted quoted market prices, unadjusted independent third-party broker or dealer price quotes in active markets, or market prices or price quotes adjusted for observable price movements after the close of the primary market in accordance with the Company’s global valuation and pricing policy. The fair values of securities for which market prices are not readily available are valued internally using various methodologies which incorporate significant unobservable inputs as appropriate for each security type and represent an insignificant percentage of total AUM.
Revenue is recorded gross of payments made to third-party service providers in the Company’s role as principal as it controls the delegated services provided to customers.
Costs of obtaining a contract with a customer include internal and external sales commissions paid upon inception of a contract. The cost to obtain a contract is capitalized if it is incremental and would not have been incurred if the contract had not been obtained. Capitalized contract costs are amortized based on average investor tenure, which range from five to 10 years.
Stock-Based Compensation. The fair value of stock-based payment awards is estimated on the date of grant based on the market price of the underlying shares of the Company’s common stock and is amortized to compensation expense on a straight-line basis over the related vesting period, which is generally three years. Expense relating to awards subject to performance conditions is recognized if it is probable that the conditions will be achieved. The probability of achievement is assessed on a quarterly basis. Forfeitures are accounted for as they occur.
Postretirement Benefits. Defined contribution plan costs are expensed as incurred.
Income Taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. For each tax position taken or expected to be taken in a tax return, the Company determines whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest on tax matters is recognized in interest expense and penalties in other operating expenses.
As a multinational corporation, the Company operates in various locations outside the U.S. and generates earnings worldwide. The Company repatriates its foreign earnings that are in excess of regulatory, capital or operational requirements of all of its non-U.S. subsidiaries.
Foreign Currency Translation and Transactions. Assets and liabilities of non-U.S. subsidiaries for which the local currency is the functional currency are translated at current exchange rates as of the end of the accounting period. The related revenues and expenses are translated at average exchange rates in effect during the period. Net exchange gains and losses resulting from translation are excluded from income and are recorded as part of accumulated other comprehensive income (loss). Transactions denominated in a foreign currency are revalued at the current exchange rate at the transaction date and any related gains and losses are recognized in earnings.
Note 2 – New Accounting Guidance
Recently Adopted Accounting Guidance
On October 1, 2019, the Company adopted new guidance issued by the Financial Accounting Standards Board (“FASB”) for leases. The new guidance requires lessees to recognize assets and liabilities arising from substantially all leases. The guidance also requires an evaluation at the inception of a contract to determine whether the contract is or contains a lease. The Company adopted the new guidance using the modified retrospective approach and recognized right-of-use assets of $274.5 million and lease liabilities of $315.2 million, substantially all of which relate to real estate leases. The right-of-use assets recognized as of October 1, 2019 were net of $40.7 million of deferred rent previously included in other liabilities on the consolidated balance sheet. See Note 15 – Leases for additional disclosures.
Accounting Guidance Not Yet Adopted
The FASB issued new guidance for the accounting for credit losses in June 2016. The new guidance requires the application of a current expected credit loss model for financial assets measured at amortized cost, including receivables, and an allowance for credit loss model for available-for-sale debt securities. The Company will adopt the guidance on October 1, 2020 and expects to recognize a cumulative effect adjustment to retained earnings of approximately $6 million.
Note 3 – Acquisitions
Legg Mason, Inc.
On July 31, 2020, the Company acquired all outstanding shares of Legg Mason, Inc. (“Legg Mason”) common stock for a purchase consideration of $4.5 billion in cash and $0.2 billion related to the settlement of historical compensation arrangements. Legg Mason has outstanding debt with an aggregate principal amount due of $2.0 billion. The acquisition of Legg Mason, a global investment management organization, establishes the Company as of one of the world’s largest independent, specialized global investment managers, significantly deepens the Company’s presence in key geographies and creates an expansive investment platform that is well balanced between institutional and retail client AUM. The EnTrust business was acquired by its management concurrent with the closing of the acquisition.
The purchase price allocation is preliminary and subject to change during the measurement period, which is not to exceed one year from the acquisition date. At this time, the Company does not expect material changes to the assets acquired or liabilities assumed with the exception of deferred tax assets and liabilities which were valued using preliminary assumptions.
The initial estimated fair values of the assets acquired and liabilities and noncontrolling interests assumed were as follows:
| (in millions) | Estimated Fair Value | |||
| as of July 31, 2020 | ||||
| Cash and cash equivalents | $ | 681.1 | ||
| Cash and cash equivalents of consolidated investment products | 253.4 | |||
| Investments | 471.8 | |||
| Investments of consolidated investment products | 402.9 | |||
| Receivables | 525.7 | |||
| Indefinite-lived intangible assets | 2,727.8 | |||
| Definite-lived intangible assets1 | 1,353.8 | |||
| Goodwill | 2,325.0 | |||
| Deferred tax assets | 148.4 | |||
| Other assets | 530.7 | |||
| Debt | (2,324.4 | ) | ||
| Debt of consolidated investment products | (330.8 | ) | ||
| Compensation and benefits | (579.9 | ) | ||
| Deferred tax liabilities | (315.4 | ) | ||
| Other liabilities | (926.4 | ) | ||
| Redeemable noncontrolling interests | (186.4 | ) | ||
| Nonredeemable noncontrolling interests | (20.1 | ) | ||
| Total Identifiable Net Assets | $ | 4,737.2 |
| 1 | Includes $1,123.2 million related to management contracts and $230.6 million related to trade names. |
The goodwill is primarily attributable to expected growth opportunities and synergies from the combined operations and is not deductible for tax purposes.
The intangible assets relate to acquired investment management contracts and trade names. Indefinite-lived intangible assets represent contracts for which there is no foreseeable limit on the contract period. Definite-lived intangible assets are amortized over their estimated useful lives, which range from 5.0 years to 7.0 years for those related to the contracts and 5.0 years to 20.0 years for those related to trade names. The definite-lived intangible assets related to the contracts and trade names have estimated weighted-average useful lives of 5.9 years and 14.5 years, respectively.
The Legg Mason debt is recorded at fair value on acquisition-date and includes a premium of $324.4 million.
Transaction costs incurred in connection with the acquisition were $57.4 million in fiscal year 2020. These costs were primarily comprised of professional fees, recorded in general, administrative and other expenses. The Company also incurred $119.6 million of acquisition-related compensation and benefits expense in fiscal year 2020, primarily related to the acceleration of expense for historical Legg Mason compensation arrangements and retention bonuses.
Revenue and net loss of Legg Mason included in total operating revenues and net income attributable to Franklin Resources, Inc. in the accompanying consolidated statements of income from the acquisition date through September 30, 2020 were $475.7 million and $28.7 million, respectively.
The following unaudited pro forma summary presents combined results of operations of the Company as if the Legg Mason acquisition and concurrent divestiture of EnTrust business had occurred on October 1, 2018. The pro forma adjustments include acquisition-related costs, adjustments to intangible amortization expense, and interest expense related to debt assumed. These pro forma results are not indicative of future results of operations that would have been achieved nor are they indicative of future results of operations of the combined entity.
| (in millions) | ||||||||
| for the fiscal year ended September 30, | 2020 | 2019 | ||||||
| Revenues | $ | 7,862.0 | $ | 8,436.0 | ||||
| Net Income Attributable to Franklin Resources, Inc. | 967.5 | 886.6 |
Benefit Street Partners L.L.C.
On February 1, 2019, the Company acquired all of the outstanding ownership interests in Benefit Street Partners L.L.C. (“BSP”), a U.S. alternative credit manager, for a purchase consideration of $720.1 million in cash, of which $135.0 million was used to retire debt. The acquisition provides the Company private credit capabilities that complement its alternative and fixed income strategies available to clients.
The estimated fair values of the assets acquired and liabilities and noncontrolling interests assumed were as follows:
| (in millions) | Estimated Fair Value | |||
| as of February 1, 2019 | ||||
| Cash | $ | 33.2 | ||
| Investments | 138.8 | |||
| Investments of consolidated investment products | 84.9 | |||
| Indefinite-lived intangible assets | 280.1 | |||
| Definite-lived intangible assets | 75.8 | |||
| Goodwill | 345.7 | |||
| Other assets | 35.2 | |||
| Other liabilities | (57.5 | ) | ||
| Nonredeemable noncontrolling interests | (216.1 | ) | ||
| Total Identifiable Net Assets | $ | 720.1 |
The goodwill is primarily attributable to expected growth from the private credit asset class. The amount of goodwill expected to be deductible for tax purposes is $453.2 million, which includes deferred payments that are recognized as compensation expense for accounting purposes.
Costs incurred in connection with the acquisition were $6.8 million in the fiscal year ended September 30, 2019 (“fiscal year 2019”).
The Company has not presented pro forma combined results of operations for the acquisition of BSP, because the results of operations as reported in the accompanying consolidated statements of income would not have been materially different.
Note 4 – Earnings per Share
The components of basic and diluted earnings per share were as follows:
| (in millions, except per share data) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Net income attributable to Franklin Resources, Inc. | $ | 798.9 | $ | 1,195.7 | $ | 764.4 | ||||||
| Less: allocation of earnings to participating nonvested stock and stock unit awards | 15.3 | 10.9 | 17.6 | |||||||||
| Net Income Available to Common Stockholders | $ | 783.6 | $ | 1,184.8 | $ | 746.8 | ||||||
| Weighted-average shares outstanding – basic | 491.9 | 503.6 | 537.4 | |||||||||
| Dilutive effect of nonparticipating nonvested stock unit awards | 0.5 | 0.7 | 0.6 | |||||||||
| Weighted-Average Shares Outstanding – Diluted | 492.4 | 504.3 | 538.0 | |||||||||
| Earnings per Share | ||||||||||||
| Basic | $ | 1.59 | $ | 2.35 | $ | 1.39 | ||||||
| Diluted | 1.59 | 2.35 | 1.39 |
Nonparticipating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been antidilutive were 0.5 million for fiscal year 2020, 0.2 million for fiscal year 2019, and 0.3 million for the fiscal year ended September 30, 2018 (“fiscal year 2018”).
Note 5 – Revenues
Operating revenues by geographic area were as follows:
| (in millions) | United States | Luxembourg | Americas Excluding United States | Asia- Pacific | Europe, Middle East and Africa, Excluding Luxembourg | Total | ||||||||||||||||||
| for the fiscal year ended September 30, 2020 | ||||||||||||||||||||||||
| Investment management fees | $ | 2,482.5 | $ | 910.1 | $ | 269.2 | $ | 217.6 | $ | 102.3 | $ | 3,981.7 | ||||||||||||
| Sales and distribution fees | 928.8 | 366.1 | 51.9 | 13.6 | 1.6 | 1,362.0 | ||||||||||||||||||
| Shareholder servicing fees | 158.6 | 25.5 | 0.3 | 8.4 | 2.3 | 195.1 | ||||||||||||||||||
| Other | 24.9 | 1.2 | — | 0.6 | 1.0 | 27.7 | ||||||||||||||||||
| Total | $ | 3,594.8 | $ | 1,302.9 | $ | 321.4 | $ | 240.2 | $ | 107.2 | $ | 5,566.5 |
| (in millions) | United States | Luxembourg | Americas Excluding United States | Asia- Pacific | Europe, Middle East and Africa, Excluding Luxembourg | Total | ||||||||||||||||||
| for the fiscal year ended September 30, 2019 | ||||||||||||||||||||||||
| Investment management fees | $ | 2,260.6 | $ | 1,064.7 | $ | 325.4 | $ | 241.8 | $ | 92.7 | $ | 3,985.2 | ||||||||||||
| Sales and distribution fees | 941.3 | 437.2 | 63.3 | 1.3 | 1.5 | 1,444.6 | ||||||||||||||||||
| Shareholder servicing fees | 175.7 | 30.1 | 0.1 | 10.4 | — | 216.3 | ||||||||||||||||||
| Other | 18.6 | 1.5 | — | 1.0 | 2.2 | 23.3 | ||||||||||||||||||
| Total | $ | 3,396.2 | $ | 1,533.5 | $ | 388.8 | $ | 254.5 | $ | 96.4 | $ | 5,669.4 |
| (in millions) | United States | Luxembourg | Americas Excluding United States | Asia- Pacific | Europe, Middle East and Africa, Excluding Luxembourg | Total | ||||||||||||||||||
| for the fiscal year ended September 30, 2018 | ||||||||||||||||||||||||
| Investment management fees | $ | 2,309.5 | 1,213.5 | $ | 463.8 | $ | 283.3 | $ | 97.4 | $ | 4,367.5 | |||||||||||||
| Sales and distribution fees | 1,108.2 | 482.2 | 6.4 | 2.9 | 0.1 | 1,599.8 | ||||||||||||||||||
| Shareholder servicing fees | 177.2 | 33.7 | 0.2 | 10.8 | — | 221.9 | ||||||||||||||||||
| Other | 12.6 | 2.3 | — | 0.4 | — | 15.3 | ||||||||||||||||||
| Total | $ | 3,607.5 | $ | 1,731.7 | $ | 470.4 | $ | 297.4 | $ | 97.5 | $ | 6,204.5 |
Operating revenues are attributed to geographic areas based on the locations of the subsidiaries that provide the services, which may differ from the regions in which the related investment products are sold.
Note 6 – Investments
The disclosures below include details of the Company’s investments, excluding those of CIPs. See Note 11 – Consolidated Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
| (in millions) | ||||||||
| as of September 30, | 2020 | 2019 | ||||||
| Investments, at fair value | ||||||||
| Sponsored funds and separate accounts | $ | 303.4 | $ | 533.6 | ||||
| Investments related to long-term incentive plans | 146.6 | — | ||||||
| Other equity and debt investments | 54.8 | 44.6 | ||||||
| Life settlement contracts | — | 11.5 | ||||||
| Total investments, at fair value | 504.8 | 589.7 | ||||||
| Investments in equity method investees | 682.2 | 933.4 | ||||||
| Other investments | 83.5 | 32.7 | ||||||
| Total | $ | 1,270.5 | $ | 1,555.8 |
The Company recognized other-than-temporary impairment of $9.7 million during fiscal year 2020, and $10.5 million and $1.7 million during fiscal years 2019 and 2018.
Note 7 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of CIPs. See Note 11 – Consolidated Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
The assets and liabilities measured at fair value on a recurring basis were as follows:
| (in millions) | Level 1 | Level 2 | Level 3 | NAV as a Practical Expedient | Total | |||||||||||||||
| as of September 30, 2020 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Investments, at fair value | ||||||||||||||||||||
| Sponsored funds and separate accounts | $ | 176.3 | $ | 40.9 | $ | 17.4 | $ | 68.8 | $ | 303.4 | ||||||||||
| Investments related to long-term incentive plans | 145.5 | — | — | 1.1 | 146.6 | |||||||||||||||
| Other equity and debt investments | 2.1 | 1.5 | — | 51.2 | 54.8 | |||||||||||||||
| Contingent consideration asset | — | — | 39.7 | — | 39.7 | |||||||||||||||
| Total Assets Measured at Fair Value | $ | 323.9 | $ | 42.4 | $ | 57.1 | $ | 121.1 | $ | 544.5 | ||||||||||
| Liabilities | ||||||||||||||||||||
| Contingent consideration liabilities | $ | — | $ | — | $ | 25.3 | $ | — | $ | 25.3 |
| (in millions) | Level 1 | Level 2 | Level 3 | NAV as a Practical Expedient | Total | |||||||||||||||
| as of September 30, 2019 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Investments, at fair value | ||||||||||||||||||||
| Sponsored funds and separate accounts | $ | 417.4 | $ | 26.2 | $ | 20.6 | $ | 69.4 | $ | 533.6 | ||||||||||
| Other equity and debt investments | 2.2 | 5.4 | — | 37.0 | 44.6 | |||||||||||||||
| Life settlement contracts | — | — | 11.5 | — | 11.5 | |||||||||||||||
| Total Assets Measured at Fair Value | $ | 419.6 | $ | 31.6 | $ | 32.1 | $ | 106.4 | $ | 589.7 |
Investments for which fair value was estimated using reported NAV as a practical expedient primarily consist of nonredeemable private debt, equity and infrastructure funds, and redeemable global equity funds and investments related to long-term incentive plans. The investments in nonredeemable funds are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets. Investments with known liquidation periods were $51.2 million with an expected weighted-average life of 1.9 years at September 30, 2020, and $46.9 million with an expected weighted-average life of 1.3 years at September 30, 2019. The liquidation period for an investment in a private debt fund of $40.2 million and $48.6 million at September 30, 2020 and 2019 is unknown. The Company’s unfunded commitments to the funds totaled $9.5 million and $4.7 million at September 30, 2020 and 2019. The redeemable global equity funds investment of $25.3 million and $10.1 million at September 30, 2020 and 2019 can be redeemed monthly, and investments related to long-term incentive plans of $1.1 million at September 30, 2020 can be redeemed semi-monthly.
Changes in the Level 3 assets and liabilities were as follows:
| 2020 | 2019 | |||||||||||||||||||
| (in millions) | Investments | Contingent Consideration Asset | Contingent Consideration Liabilities | Investments | Contingent Consideration Liability | |||||||||||||||
| for the fiscal years ended September 30, | ||||||||||||||||||||
| Balance at beginning of year | $ | 32.1 | $ | — | $ | — | $ | 32.6 | $ | (38.7 | ) | |||||||||
| Acquisitions | — | 39.7 | (27.9 | ) | — | — | ||||||||||||||
| Total realized and unrealized gains (losses) | ||||||||||||||||||||
| Included in investment and other income (losses), net | — | — | — | 7.0 | — | |||||||||||||||
| Included in general, administrative and other expense | — | — | 2.0 | — | (2.0 | ) | ||||||||||||||
| Purchases | 22.6 | — | — | 10.7 | — | |||||||||||||||
| Sales | (19.0 | ) | — | — | (6.5 | ) | — | |||||||||||||
| Settlements | (8.4 | ) | — | 0.6 | (4.6 | ) | 40.7 | |||||||||||||
| Consolidation of investment product | (10.0 | ) | — | — | — | — | ||||||||||||||
| Transfers into Level 3 | 0.1 | — | — | — | — | |||||||||||||||
| Transfers out of Level 3 | — | — | — | (7.1 | ) | — | ||||||||||||||
| Balance at End of Year | $ | 17.4 | $ | 39.7 | $ | (25.3 | ) | $ | 32.1 | $ | — | |||||||||
| Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of year | $ | (1.4 | ) | $ | — | $ | — | $ | 3.4 | $ | — |
Financial instruments that were not measured at fair value were as follows:
| Fair Value Level | 2020 | 2019 | ||||||||||||||||
| (in millions) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||||
| as of September 30, | ||||||||||||||||||
| Financial Assets | ||||||||||||||||||
| Cash and cash equivalents | 1 | $ | 3,026.8 | $ | 3,026.8 | $ | 5,803.4 | $ | 5,803.4 | |||||||||
| Other investments | ||||||||||||||||||
| Time deposits | 2 | 19.2 | 19.2 | 15.4 | 15.4 | |||||||||||||
| Equity securities | 3 | 64.3 | 67.3 | 17.3 | 19.2 | |||||||||||||
| Loans receivable | 3 | 42.4 | 42.4 | — | — | |||||||||||||
| Financial Liability | ||||||||||||||||||
| Debt | 2 | $ | 3,017.1 | $ | 3,086.5 | $ | 696.9 | $ | 718.7 |
Note 8 – Property and Equipment
Property and equipment, net consisted of the following:
| (in millions) | Useful Lives In Years | |||||||||
| as of September 30, | 2020 | 2019 | ||||||||
| Buildings and leasehold improvements | $ | 877.4 | $ | 789.2 | 5 – 35 | |||||
| Software | 576.2 | 522.4 | 3 - 10 | |||||||
| Equipment and furniture | 374.0 | 324.3 | 3 - 10 | |||||||
| Land | 83.0 | 80.1 | N/A | |||||||
| Total cost | 1,910.6 | 1,716.0 | ||||||||
| Less: accumulated depreciation and amortization | (1,096.8 | ) | (1,032.3 | ) | ||||||
| Property and Equipment, Net | $ | 813.8 | $ | 683.7 |
Depreciation and amortization expense related to property and equipment was $95.2 million, $83.2 million and $78.9 million in fiscal years 2020, 2019 and 2018. The Company recognized $6.6 million of equipment impairment during fiscal year 2018, and insignificant impairment amounts during fiscal year 2019. No impairment of equipment was recorded in fiscal year 2020.
Note 9 – Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net consisted of the following:
| (in millions) | ||||||||
| as of September 30, | 2020 | 2019 | ||||||
| Goodwill | $ | 4,500.8 | $ | 2,130.3 | ||||
| Indefinite-lived intangible assets | 3,500.8 | 799.4 | ||||||
| Definite-lived intangible assets, net | 1,413.4 | 64.8 | ||||||
| Goodwill and Other Intangible Assets, Net | $ | 9,415.0 | $ | 2,994.5 |
Changes in the carrying value of goodwill were as follows:
| (in millions) | ||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | ||||||
| Balance at beginning of year | $ | 2,130.3 | $ | 1,794.8 | ||||
| Acquisitions | 2,389.1 | 345.7 | ||||||
| Impairment | (23.7 | ) | — | |||||
| Foreign exchange revaluation | 5.1 | (10.2 | ) | |||||
| Balance at End of Year | $ | 4,500.8 | $ | 2,130.3 |
During the fiscal year 2020, a $23.7 million impairment of goodwill was recognized due to the decision to wind-down operations of Onsa Inc. (formally known as TokenVault, Inc.) which was acquired in fiscal year 2020. During fiscal years 2019 and 2018, no impairment of goodwill was recognized.
The Company recognized impairments of indefinite-lived intangible assets of $30.0 million and $9.3 million during fiscal years 2020 and 2019. The impairment in fiscal year 2020 was primarily attributable to a BSP related management contract due to declines in revenue growth rates. The impairment in fiscal year 2019 was related to Canadian management contracts due to revised estimates of future pre-tax profit margins and AUM growth rates for the associated fund products. No impairment of indefinite-lived intangible assets was recognized during fiscal year 2018.
Definite-lived intangible assets were as follows:
| 2020 | 2019 | |||||||||||||||||||||||
| (in millions) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||
| as of September 30, | ||||||||||||||||||||||||
| Management contracts | $ | 1,283.2 | $ | (109.6 | ) | $ | 1,173.6 | $ | 125.4 | $ | (60.6 | ) | $ | 64.8 | ||||||||||
| Trade names | 230.6 | (4.0 | ) | 226.6 | — | — | — | |||||||||||||||||
| Developed software | 14.4 | (1.2 | ) | 13.2 | — | — | — | |||||||||||||||||
| Total | $ | 1,528.2 | $ | (114.8 | ) | $ | 1,413.4 | $ | 125.4 | $ | (60.6 | ) | $ | 64.8 |
The Company recognized impairment of definite-lived intangible assets of $1.7 million, $4.0 million and $5.7 million during fiscal years 2020, 2019 and 2018, primarily due to investor redemptions.
Definite-lived intangible assets had a weighted-average remaining useful life of 7.5 years at September 30, 2020, with estimated remaining amortization expense as follows:
| (in millions) | ||||
| for the fiscal years ending September 30, | Amount | |||
| 2021 | $ | 231.4 | ||
| 2022 | 231.4 | |||
| 2023 | 231.4 | |||
| 2024 | 224.5 | |||
| 2025 | 212.4 | |||
| Thereafter | 282.3 | |||
| Total | $ | 1,413.4 |
Note 10 – Debt
The disclosures below include details of the Company’s debt, excluding that of CIPs. See Note 11 – Consolidated Investment Products for information related to the debt of these entities.
Debt consisted of the following:
| (in millions) | 2020 | Effective Interest Rate | 2019 | Effective Interest Rate | ||||||||||
| as of September 30, | ||||||||||||||
| Notes issued by Franklin Resources, Inc. | ||||||||||||||
| $300 million 2.800% senior notes due September 2022 | $ | 299.8 | 2.93 | % | $ | 299.8 | 2.93 | % | ||||||
| $400 million 2.850% senior notes due March 2025 | 399.7 | 2.97 | % | 399.6 | 2.97 | % | ||||||||
| Total notes issued by Franklin Resources, Inc. | 699.5 | 699.4 | ||||||||||||
| Notes issued by Legg Mason (a subsidiary of Franklin) | ||||||||||||||
| $250 million 3.950% senior notes due July 2024 | 272.4 | 1.53 | % | — | N/A | |||||||||
| $450 million 4.750% senior notes due March 2026 | 523.0 | 1.80 | % | — | N/A | |||||||||
| $550 million 5.625% senior notes due January 2044 | 747.5 | 3.38 | % | — | N/A | |||||||||
| $250 million 6.375% junior notes due March 2056 | 260.7 | 6.08 | % | — | N/A | |||||||||
| $500 million 5.450% junior notes due September 2056 | 516.1 | 5.25 | % | — | N/A | |||||||||
| Total notes issued by Legg Mason | 2,319.7 | — | ||||||||||||
| Other | ||||||||||||||
| Loan due December 2019 | — | N/A | 0.2 | 9.30 | % | |||||||||
| Debt issuance costs | (2.1 | ) | (2.7 | ) | ||||||||||
| Total | $ | 3,017.1 | $ | 696.9 |
At September 30, 2020, Franklin’s outstanding senior unsecured unsubordinated notes had an aggregate principal amount due of $700.0 million. The notes have fixed interest rates with interest payable semi-annually.
At September 30, 2020, Legg Mason’s outstanding senior and junior unsecured unsubordinated notes had an aggregate principal amount due of $2,000.0 million. The notes have fixed interest rates with interest payable semi-annually for senior notes and quarterly for junior notes.
The senior notes contain an optional redemption feature that allows the Company to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The junior notes due March 2056 and September 2056 may only be redeemed in whole prior to March 2021 and September 2021, respectively. The indentures governing the senior notes contain limitations on the Company’s ability and the ability of its subsidiaries to pledge voting stock or profit participating equity interests in its subsidiaries to secure other debt without similarly securing the notes equally and ratably. In addition, the indentures 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. The Company was in compliance with all debt covenants at September 30, 2020.
At September 30, 2020, 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.
On October 19, 2020, the Company completed its offering and sale of the 1.600% Notes due 2030 with a principal amount of $750.0 million. See Note 22 – Subsequent Event for additional information.
Note 11 – Consolidated Investment Products
CIPs consist of mutual and other investment funds, limited partnerships and similar structures, and CLOs, all of which are sponsored by the Company, and include both VOEs and VIEs. CLOs are asset-backed financing entities collateralized by a pool of corporate loans. The Company had 72 CIPs, including four CLOs, as of September 30, 2020 and 60 CIPs, none of which were CLOs, as of September 30, 2019.
The balances related to CIPs included in the Company’s consolidated balance sheets were as follows:
| (in millions) | ||||||||
| as of September 30, | 2020 | 2019 | ||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 930.7 | $ | 154.2 | ||||
| Receivables | 85.8 | 99.0 | ||||||
| Investments, at fair value | 2,709.2 | 2,303.9 | ||||||
| Total Assets | $ | 3,725.7 | $ | 2,557.1 | ||||
| Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 510.1 | $ | 81.5 | ||||
| Debt | 1,333.4 | 50.8 | ||||||
| Other liabilities | 12.1 | — | ||||||
| Total liabilities | 1,855.6 | 132.3 | ||||||
| Redeemable Noncontrolling Interests | 397.3 | 746.7 | ||||||
| Stockholders’ Equity | ||||||||
| Franklin Resources, Inc.’s interests | 788.4 | 1,129.6 | ||||||
| Nonredeemable noncontrolling interests | 684.4 | 548.5 | ||||||
| Total stockholders’ equity | 1,472.8 | 1,678.1 | ||||||
| Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity | $ | 3,725.7 | $ | 2,557.1 |
The CIPs did not have a significant impact on net income attributable to the Company in fiscal years 2020, 2019 and 2018.
The Company has no right to the CIPs’ assets, other than its direct equity investments in them and investment management and other fees earned from them. The debt holders of the CIPs have no recourse to the Company’s assets beyond the level of its direct investment, therefore the Company bears no other risks associated with the CIPs’ liabilities.
Fair Value Measurements
Assets and liabilities of CIPs measured at fair value on a recurring basis were as follows:
| (in millions) | Level 1 | Level 2 | Level 3 | NAV as a Practical Expedient | Total | |||||||||||||||
| as of September 30, 2020 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents of CLOs | $ | 488.8 | $ | — | $ | — | $ | — | $ | 488.8 | ||||||||||
| Receivables of CLOs | — | 21.2 | — | — | 21.2 | |||||||||||||||
| Investments | ||||||||||||||||||||
| Equity and debt securities | 177.6 | 285.7 | 469.7 | 261.1 | 1,194.1 | |||||||||||||||
| Loans | — | 1,151.0 | 24.9 | — | 1,175.9 | |||||||||||||||
| Real Estate | — | — | 339.2 | — | 339.2 | |||||||||||||||
| Total Assets Measured at Fair Value | $ | 666.4 | $ | 1,457.9 | $ | 833.8 | $ | 261.1 | $ | 3,219.2 |
| (in millions) | Level 1 | Level 2 | Level 3 | NAV as a Practical Expedient | Total | |||||||||||||||
| as of September 30, 2019 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Investments | ||||||||||||||||||||
| Equity and debt securities | $ | 195.2 | $ | 1,307.5 | $ | 427.8 | $ | 204.1 | $ | 2,134.6 | ||||||||||
| Real estate | — | — | 152.7 | — | 152.7 | |||||||||||||||
| Loans | — | — | 16.6 | — | 16.6 | |||||||||||||||
| Total Assets Measured at Fair Value | $ | 195.2 | $ | 1,307.5 | $ | 597.1 | $ | 204.1 | $ | 2,303.9 |
Investments for which fair value was estimated using reported NAV as a practical expedient consist of nonredeemable real estate and private equity funds. These investments are expected to be returned through distributions over the life of the funds as a result of liquidations of the funds’ underlying assets over a weighted-average period of 4.2 years and 4.4 years at September 30, 2020 and 2019. The CIPs’ unfunded commitments to these funds totaled $94.0 million and $168.7 million, of which the Company was contractually obligated to fund $11.4 million and $20.6 million based on its ownership percentage in the CIPs, at September 30, 2020 and 2019.
Changes in Level 3 assets were as follows:
| (in millions) | Equity and Debt Securities | Real Estate | Loans | Total Level 3 Assets | ||||||||||||
| for the fiscal year ended September 30, 2020 | ||||||||||||||||
| Balance at beginning of year | $ | 427.8 | $ | 152.7 | $ | 16.6 | $ | 597.1 | ||||||||
| Acquisition | — | 20.3 | 17.6 | 37.9 | ||||||||||||
| Realized and unrealized losses included in investment and other income of consolidated investment products, net | (57.9 | ) | (5.2 | ) | (1.8 | ) | (64.9 | ) | ||||||||
| Purchases | 200.5 | 154.9 | — | 355.4 | ||||||||||||
| Sales and settlements | (57.4 | ) | — | (7.5 | ) | (64.9 | ) | |||||||||
| Deconsolidations | (47.8 | ) | — | — | (47.8 | ) | ||||||||||
| Transfers into Level 3 | 2.2 | — | — | 2.2 | ||||||||||||
| Transfers out of Level 3 | (1.1 | ) | — | — | (1.1 | ) | ||||||||||
| Foreign exchange revaluation | 3.4 | 16.5 | — | 19.9 | ||||||||||||
| Balance at End of Year | $ | 469.7 | $ | 339.2 | $ | 24.9 | 833.8 | |||||||||
| Change in unrealized losses included in net income relating to assets held at end of year | $ | (57.9 | ) | $ | (5.2 | ) | $ | (0.7 | ) | $ | (63.8 | ) |
| (in millions) | Equity and Debt Securities | Real Estate | Loans | Total Level 3 Assets | ||||||||||||
| for the fiscal year ended September 30, 2019 | ||||||||||||||||
| Balance at beginning of year | $ | 317.7 | $ | — | $ | 32.3 | $ | 350.0 | ||||||||
| Acquisition | 84.9 | — | — | 84.9 | ||||||||||||
| Realized and unrealized gains (losses) included in investment and other income of consolidated investment products, net | (5.9 | ) | 5.0 | (3.3 | ) | (4.2 | ) | |||||||||
| Purchases | 167.5 | 147.0 | 9.2 | 323.7 | ||||||||||||
| Sales and settlements | (101.6 | ) | — | (21.6 | ) | (123.2 | ) | |||||||||
| Transfers into Level 3 | 0.5 | — | — | 0.5 | ||||||||||||
| Transfers out of Level 3 | (29.0 | ) | — | — | (29.0 | ) | ||||||||||
| Foreign exchange revaluation | (6.3 | ) | 0.7 | — | (5.6 | ) | ||||||||||
| Balance at End of Year | $ | 427.8 | $ | 152.7 | $ | 16.6 | $ | 597.1 | ||||||||
| Change in unrealized gains (losses) included in net income relating to assets held at end of year | $ | (12.0 | ) | $ | 5.0 | $ | (0.6 | ) | $ | (7.6 | ) |
Valuation techniques and significant unobservable inputs used in Level 3 fair value measurements were as follows:
| (in millions) | ||||||||||
| as of September 30, 2020 | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range (Weighted Average1) | ||||||
| Equity and debt securities | $ | 244.9 | Discounted cash flow | Discount rate | 4.0%–23.0% (11.5%) | |||||
| Discount for lack of marketability | 17.0% | |||||||||
| Risk premium | 9.7%–19.3% (16.7%) | |||||||||
| 116.3 | Market pricing | Private sale pricing | $0.02–$100.00 ($13.01) per share | |||||||
| 108.5 | Market comparable companies | Enterprise value/ EBITDA multiple | 7.0–19.1 (10.8) | |||||||
| Discount for lack of marketability | 20.0%–25.2% (21.9%) | |||||||||
| Risk premium | 55.0% | |||||||||
| Enterprise value/ Revenue multiple | 7.5 | |||||||||
| Price-to-earnings ratio | 9.4–10.0 (9.7) | |||||||||
| Real estate | 231.8 | Discounted cash flow | Discount rate | 4.5%–6.5% (5.2%) | ||||||
| Exit capitalization rate | 6.0% | |||||||||
| 107.4 | Yield capitalization | Equivalent yield | 4.3%–6.1% (5.2%) |
| (in millions) | ||||||||||
| as of September 30, 2019 | Fair Value | Valuation Technique | Significant Unobservable Inputs | Range (Weighted Average1) | ||||||
| Equity and debt securities | $ | 212.7 | Discounted cash flow | Discount rate | 4.8%–17.4% (10.0%) | |||||
| Discount for lack of marketability | 17.0%–24.7% (20.0%) | |||||||||
| 192.8 | Market comparable companies | Enterprise value/ EBITDA multiple | 4.5–21.9 (10.8) | |||||||
| Discount for lack of marketability | 15.0%–30.0% (23.1%) | |||||||||
| Risk premium | 18.9% | |||||||||
| Enterprise value/ Revenue multiple | 3.7 | |||||||||
| 22.3 | Market pricing | Private sale pricing | $0.25–$20.13 ($2.06) per share | |||||||
| Real estate | 84.7 | Discounted cash flow | Discount rate | 6.4%–7.4% (7.1%) | ||||||
| 68.0 | Yield capitalization | Equivalent yield | 4.3%–6.1% (5.4%) |
| 1 | Based on the relative fair value of the instruments. |
If the relevant significant inputs used in the market-based valuations, other than the discount for lack of marketability and risk premium, were independently higher (lower), the resulting fair value of the assets would be higher (lower). If the relevant significant inputs used in the discounted cash flow or yield capitalization valuations, as well as the discount for lack of marketability and risk premium in the market-based valuations, were independently higher (lower) as of September 30, 2020, the resulting fair value of the assets would be lower (higher).
Financial instruments of CIPs that were not measured at fair value were as follows:
| (in millions) | Fair Value Level | 2020 | 2019 | |||||||||||||||
| Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||||
| as of September 30, | ||||||||||||||||||
| Financial Asset | ||||||||||||||||||
| Cash and cash equivalents | 1 | $ | 441.9 | $ | 441.9 | $ | 154.2 | $ | 154.2 | |||||||||
| Financial Liabilities | ||||||||||||||||||
| Debt of CLOs | 2 | 1,179.7 | 1,225.0 | — | — | |||||||||||||
| Other debt | 3 | 153.7 | 155.2 | 50.8 | 51.0 |
Debt
Debt of CIPs consisted of the following:
| (in millions) | 2020 | 2019 | ||||||||||
| as of September 30, | Amount | Weighted- Average Effective Interest Rate | Amount | Weighted- Average Effective Interest Rate | ||||||||
| Debt of CLOs | $ | 1,179.7 | 2.85% | $ | — | N/A | ||||||
| Other debt | 153.7 | 2.97% | 50.8 | 5.09% | ||||||||
| Total | $ | 1,333.4 | $ | 50.8 |
The debt of CLOs had floating interest rates based on LIBOR ranging from 1.48% to 8.19% at September 30, 2020. The other debt had fixed and floating interest rates primarily based on LIBOR ranging from 1.00% to 5.81% at September 30, 2020, and from 2.08% to 7.94% at September 30, 2019.
The contractual maturities for debt of CIPs at September 30, 2020 were as follows:
| (in millions) | ||||
| for the fiscal years ending September 30, | Amount | |||
| 2021 | $ | 76.4 | ||
| 2022 | — | |||
| 2023 | — | |||
| 2024 | 35.1 | |||
| 2025 | 39.3 | |||
| Thereafter | 1,182.6 | |||
| Total | $ | 1,333.4 |
Collateralized Loan Obligations
The unpaid principal balance and fair value of the investments of CLOs were as follows:
| (in millions) | ||||
| as of September 30, | 2020 | |||
| Unpaid principal balance | $ | 1,196.5 | ||
| Difference between unpaid principal balance and fair value | (45.5 | ) | ||
| Fair Value | $ | 1,151.0 |
Investments 90 days or more past due were $3.9 million at September 30, 2020.
The Company recognized $1.3 million of net losses during fiscal year 2020 related to its own economic interests in the CLOs.
The aggregate principal amount due of the debt of CLOs was $1,235.8 million at September 30, 2020.
Note 12 – Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests were as follows:
| (in millions) for the fiscal years ended September 30, | 2020 | 2019****1 | 2018****1 | |||||||||||||||||
| CIPs | Minority Interests | Total | ||||||||||||||||||
| Balance at beginning of year | $ | 746.7 | $ | — | $ | 746.7 | $ | 1,043.6 | $ | 1,941.9 | ||||||||||
| Acquisition | 22.1 | 164.3 | 186.4 | — | — | |||||||||||||||
| Business divestiture | — | (21.3 | ) | (21.3 | ) | — | — | |||||||||||||
| Net income (loss) | 45.0 | 3.6 | 48.6 | 6.2 | (12.8 | ) | ||||||||||||||
| Net subscriptions (distributions) and other | 247.1 | (2.0 | ) | 245.1 | 1,046.6 | 170.9 | ||||||||||||||
| Net deconsolidations | (663.6 | ) | — | (663.6 | ) | (1,349.7 | ) | (1,056.4 | ) | |||||||||||
| Balance at End of Year | $ | 397.3 | $ | 144.6 | $ | 541.9 | $ | 746.7 | $ | 1,043.6 |
| 1 | Represents redeemable noncontrolling interests of CIPs. |
Note 13 – Nonconsolidated Variable Interest Entities
VIEs for which the Company is not the primary beneficiary consist of sponsored funds and other investment products in which the Company has an equity ownership interest. The Company’s maximum exposure to loss from these VIEs consists of equity investments, investment management and other fee receivables, and loans and related interest receivable as follows:
| (in millions) | ||||||||
| as of September 30, | 2020 | 2019 | ||||||
| Investments | $ | 439.2 | $ | 458.1 | ||||
| Receivables | 168.0 | 149.5 | ||||||
| Loans receivable | 42.4 | — | ||||||
| Total | $ | 649.6 | $ | 607.6 |
While the Company has no legal or contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. As it has done in the past, the Company also may voluntarily elect to provide its sponsored funds with additional direct or indirect financial support based on its business objectives. In April 2020, the Company authorized loans aggregating up to 5.0 billion Indian Rupees (approximately $66.2 million) to certain sponsored funds in India that had experienced increased liquidity risks and redemptions. The funds are subject to the decision of the funds’ trustee to wind up the funds. See Note 16 – Commitments and Contingencies for further information. The loans have a fixed interest rate of 8.0% per annum, are secured by the funds’ assets and are due upon demand. At September 30, 2020, the loans have an aggregate outstanding balance of $42.4 million, and the remaining authorization available is approximately $4.9 million. The Company did not provide financial or other support to its sponsored funds during fiscal year 2019.
Note 14 – Taxes on Income
The Tax Cuts and Jobs Act (“the Tax Act”), which was enacted into law in the U.S. in December 2017, includes various changes to the tax law, including a permanent reduction in the corporate income tax rate and assessment of a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiaries’ earnings. The estimated related changes in the Company’s deferred tax assets and deferred tax liabilities resulted in a $35.6 million decrease in deferred tax assets, an $88.9 million decrease in deferred tax liabilities and a $53.3 million net tax benefit in fiscal year 2018. The Company also reclassified $0.1 million from accumulated other comprehensive loss to retained earnings related to stranded tax effects resulting from the change in tax rate during fiscal year 2018.
The Company completed its analysis of the Tax Act impact during the first quarter of fiscal year 2019 with no significant adjustment to the provisional amounts previously recorded. The estimated transition tax expense recognized in fiscal year 2018 of $983.2 million was net of an $87.6 million tax benefit related to U.S. taxation of deemed foreign dividends. This benefit was reversed during fiscal year 2019 upon issuance of final regulations by the U.S. Department of Treasury, resulting in increased income tax expense and gross unrecognized tax benefits.
The remaining federal portion of the transition tax liability was $757.2 million at September 30, 2020, and will be paid over the next six years, with 8% of the original liability payable in each of the next three years, 15% in year four, 20% in year five and 25% in year six.
The Tax Act reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company’s federal statutory rate for fiscal year 2018 was a blended rate of 24.5%, based on the pre- and post-Tax Act rates.
Prior to the Tax Act, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its non-U.S. subsidiaries as it was the Company’s intention for these tax basis differences to remain indefinitely reinvested. Following the Company’s change in policy effective April 1, 2020 to repatriate earnings of all non-U.S. subsidiaries, other outside basis differences, which arose primarily from purchase accounting adjustments, undistributed earnings that are considered indefinitely reinvested and foreign earnings that are restricted by operational and regulatory requirements, remain indefinitely reinvested. These basis differences could reverse through sales of the subsidiaries or the receipt of dividends from the subsidiaries, as well as various other events, none of which are considered probable as of September 30, 2020. The Company has made no provision for U.S. income taxes on these outside basis differences, and determination of the amount of unrecognized deferred tax liability related to such basis differences is not practicable.
The Coronavirus Aid, Relief, and Economic Security Act, which includes several corporate tax provisions and was signed into law on March 27, 2020, did not have a material impact on the Company’s income taxes.
Taxes on income were as follows:
| (in millions) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Current expense | ||||||||||||
| Federal | $ | 154.9 | $ | 343.4 | $ | 1,343.7 | ||||||
| State | 28.8 | 37.0 | 38.0 | |||||||||
| Non-U.S. | 54.2 | 66.8 | 141.1 | |||||||||
| Deferred benefit | (7.1 | ) | (4.9 | ) | (50.3 | ) | ||||||
| Total | $ | 230.8 | $ | 442.3 | $ | 1,472.5 |
Income before taxes consisted of the following:
| (in millions) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| U.S. | $ | 771.7 | $ | 1,151.1 | $ | 1,458.1 | ||||||
| Non-U.S. | 246.2 | 496.7 | 757.1 | |||||||||
| Total | $ | 1,017.9 | $ | 1,647.8 | $ | 2,215.2 |
The Company’s income in certain countries is subject to reduced tax rates due to tax rulings and incentives. The impact of the reduced rates on income tax expense was $2.7 million or $0.01 per diluted share for fiscal year 2020, $4.1 million or $0.01 per diluted share for fiscal year 2019, and $31.3 million or $0.06 per diluted share for fiscal year 2018. One tax incentive remained in effect at September 30, 2020 which will expire in December 2023.
The significant components of deferred tax assets and deferred tax liabilities were as follows:
| (in millions) | ||||||||
| as of September 30, | 2020 | 2019 | ||||||
| Deferred Tax Assets | ||||||||
| Capitalized mixed service costs | $ | 326.1 | $ | — | ||||
| Net operating loss and state credit carry-forwards | 317.0 | 31.9 | ||||||
| Deferred compensation and benefits | 160.6 | 39.7 | ||||||
| Foreign tax credit carry-forwards | 103.0 | — | ||||||
| Debt premium | 81.9 | — | ||||||
| Stock-based compensation | 26.6 | 19.6 | ||||||
| Unrealized foreign exchange losses | 1.2 | 11.0 | ||||||
| Other | 120.9 | 30.4 | ||||||
| Total deferred tax assets | 1,137.3 | 132.6 | ||||||
| Valuation allowance | (320.6 | ) | (26.9 | ) | ||||
| Deferred tax assets, net of valuation allowance | 816.7 | 105.7 | ||||||
| Deferred Tax Liabilities | ||||||||
| Goodwill and other purchased intangibles | 1,009.4 | 159.5 | ||||||
| Depreciation on property and equipment | 23.6 | 22.5 | ||||||
| Other | 44.9 | 23.0 | ||||||
| Total deferred tax liabilities | 1,077.9 | 205.0 | ||||||
| Net Deferred Tax Liability | $ | 261.2 | $ | 99.3 |
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) | ||||||||
| as of September 30, | 2020 | 2019 | ||||||
| Other assets | $ | 44.1 | $ | 20.8 | ||||
| Deferred tax liabilities | 305.3 | 120.1 | ||||||
| Net Deferred Tax Liability | $ | 261.2 | $ | 99.3 |
The Company recorded on a preliminary basis the deferred tax effects associated with the fair value of assets acquired and liabilities assumed from the acquisition of Legg Mason and acquired attributes that carry over to post-acquisition tax periods, including U.S. state and foreign net operating losses and foreign tax credits. Utilization of the U.S. state net operating losses and federal credit carry-forwards may be subject to annual limitations due to ownership change provisions under Section 382 of the Internal Revenue Code. Foreign tax credits can only be used to offset tax attributable to foreign source income.
At September 30, 2020, there were $107.3 million of non-U.S. tax effected net operating loss carry-forwards which expire between fiscal years 2021 and 2040. In addition, there were $199.4 million in tax effected state net operating loss carry-forwards that expire between fiscal years 2021 and 2041, with some having an indefinite carry-forward period. The Company also has federal net operating losses of $9.3 million, the majority of which will carry-forward indefinitely and $103.0 million of foreign tax credit carry-forwards that expire between fiscal years 2021 and 2028.
The Company recognizes a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of a deferred tax asset will not be realized based on timing of expiration, nature, projected sources of income and limitations on utilization under the statute. The valuation allowance increased $293.7 million in fiscal year 2020 primarily related to carry-forward assets recognized in connection with the acquisition of Legg Mason, and decreased $0.6 million in fiscal year 2019. At September 30, 2020, a valuation allowance of $320.6 million was recorded for the following items: $202.2 million for federal, state, and foreign net operating loss carry-forwards, $45.0 million due to uncertainty of realizing the benefit of foreign tax credits, $38.4 million for other foreign deferred taxes including carried forward U.K. interest deductions, and $35.0 million for capital losses.
A reconciliation of the amount of tax expense at the federal statutory rate and taxes on income as reflected in the consolidated statements of income is as follows:
| (in millions) | |||||||||||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | ||||||||||||||||||
| Federal taxes at statutory rate | $ | 213.8 | 21.0 | % | $ | 346.0 | 21.0 | % | $ | 542.7 | 24.5 | % | |||||||||
| Transition tax on deemed repatriation of undistributed foreign earnings | — | — | 86.0 | 5.2 | % | 983.2 | 44.4 | % | |||||||||||||
| Revaluation of net deferred tax liabilities | — | — | — | — | (53.3 | ) | (2.4 | %) | |||||||||||||
| Other Tax Act impacts | — | — | 0.4 | — | 38.9 | 1.8 | % | ||||||||||||||
| State taxes, net of federal tax effect | 28.2 | 2.8 | % | 29.7 | 1.8 | % | 16.6 | 0.7 | % | ||||||||||||
| Capital loss on investments, net of valuation allowance | (27.0 | ) | (2.7 | %) | — | — | — | — | |||||||||||||
| Effect of non-U.S. operations | 6.9 | 0.7 | % | (21.3 | ) | (1.3 | %) | (61.9 | ) | (2.8 | %) | ||||||||||
| Effect of net loss (income) attributable to noncontrolling interests | 2.5 | 0.2 | % | (2.1 | ) | (0.1 | %) | 5.3 | 0.2 | % | |||||||||||
| Other | 6.4 | 0.7 | % | 3.6 | 0.2 | % | 1.0 | 0.1 | % | ||||||||||||
| Tax Provision | $ | 230.8 | 22.7 | % | $ | 442.3 | 26.8 | % | $ | 1,472.5 | 66.5 | % |
Other Tax Act impacts consist primarily of foreign dividend distribution taxes and tax withholdings.
The Company recognized a tax benefit in fiscal year 2020 for capital losses that were realized from sales of investments subsequent to the change in corporate tax structure of a foreign holding company to a U.S. branch. The benefit reflects the Company’s ability to carryback losses for the last three tax years at historical Federal statutory tax rates. The remaining capital losses can be carried forward, which the Company assessed for realizability.
A reconciliation of the beginning and ending balances of gross unrecognized tax benefits is as follows:
| (in millions) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Balance at beginning of year | $ | 202.6 | $ | 77.5 | $ | 81.1 | ||||||
| Additions from business combinations | 141.8 | — | — | |||||||||
| Additions for tax positions of prior years | 0.9 | 131.8 | 3.6 | |||||||||
| Reductions for tax positions of prior years | (0.6 | ) | (2.9 | ) | (6.6 | ) | ||||||
| Tax positions related to the current year | 12.2 | 10.7 | 11.6 | |||||||||
| Settlements with taxing authorities | (0.3 | ) | (2.2 | ) | — | |||||||
| Expirations of statute of limitations | (13.7 | ) | (12.3 | ) | (12.2 | ) | ||||||
| Balance at End of Year | $ | 342.9 | $ | 202.6 | $ | 77.5 |
If recognized, $303.1 million for 2020 and the balance for 2019 and 2018, net of any deferred tax benefits, would favorably affect the Company’s effective income tax rate in future periods.
The Company accrues interest and penalties related to unrecognized tax benefits in general, administrative and other expenses. Accrued interest on uncertain tax positions at September 30, 2020 and 2019 was $21.7 million and $11.9 million, and is not presented in the unrecognized tax benefits table above. Accrued penalties at September 30, 2020 was $2.9 million and insignificant in 2019.
The Company files a consolidated U.S. federal income tax return, multiple U.S. state and local income tax returns, and income tax returns in multiple non-U.S. jurisdictions. The Company is subject to examination by the taxing authorities in these jurisdictions. The Company’s major tax jurisdictions and the tax years for which the statutes of limitations have not expired are as follows: India 2003 to 2020; Brazil 2008 to 2020, Canada 2011 to 2020; Hong Kong 2014 to 2020; Singapore 2015 to 2020; Luxembourg and the U.K. 2019 to 2020; U.S. federal 2017 to 2020; the City of New York 2012 to 2020; and the States of California, and Minnesota 2016 to 2020; and the States of Florida, Maryland, Massachusetts, New York, and Pennsylvania 2017 to 2020.
The Company has ongoing examinations in various stages of completion in the State of Illinois, City of New York, and in Canada, France, Germany and India. Examination outcomes and the timing of settlements are subject to significant uncertainty. Such settlements may involve some or all of the following: the payment of additional taxes, the adjustment of deferred taxes and/or the recognition of unrecognized tax benefits. The Company has recognized a tax benefit only for those positions that meet the more-likely-than-not recognition threshold. It is reasonably possible that the total unrecognized tax benefit as of September 30, 2020 could decrease by an estimated $35.4 million within the next twelve months as a result of the expiration of statutes of limitations in the U.S. federal and certain U.S. state and local and non-U.S. tax jurisdictions, and potential settlements with U.S. states and non-U.S. taxing authorities.
Note 15 – Leases
Lessee Arrangements
The leases had a weighted-average remaining lease term of 6.5 years as of September 30, 2020, and generally include one or more options to renew.
Lease expense was as follows:
| (in millions) | ||||
| for the fiscal year ended September 30, 2020 | Amount | |||
| Operating lease cost1 | $ | 72.5 | ||
| Finance lease cost | 0.5 | |||
| Variable lease cost | 6.0 | |||
| Less: sublease income | (4.2 | ) | ||
| Total lease expense | $ | 74.8 |
| 1 | Substantially all is included in occupancy expense. |
Supplemental cash flow information related to leases was as follows:
| (in millions) | Amount | |||
| for the fiscal year ended September 30, 2020 | ||||
| Operating cash flows from operating leases included in the measurement of operating lease liabilities | $ | 65.1 | ||
| ROU assets obtained in exchange for new/modified operating lease liabilities | 13.7 |
The weighted-average discount rate for the operating lease liabilities as of September 30, 2020 was 3.5%. The maturities of the liabilities were as follows:
| (in millions) | Amount | |||
| for the fiscal years ending September 30, | ||||
| 2021 | $ | 134.8 | ||
| 2022 | 131.5 | |||
| 2023 | 125.4 | |||
| 2024 | 89.0 | |||
| 2025 | 50.2 | |||
| Thereafter | 153.5 | |||
| Total lease payments | 684.4 | |||
| Less: interest | (63.4 | ) | ||
| Operating lease liabilities | $ | 621.0 |
As of September 30, 2019, future minimum lease payments under long-term non-cancelable operating leases were as follows:
| (in millions) | ||||
| for the fiscal years ending September 30, | Amount | |||
| 2020 | $ | 49.5 | ||
| 2021 | 45.3 | |||
| 2022 | 40.9 | |||
| 2023 | 39.1 | |||
| 2024 | 36.7 | |||
| Thereafter | 149.1 | |||
| Total Minimum Lease Payments | $ | 360.6 |
Lessor Arrangements
The Company leases excess owned space in its San Mateo, California corporate headquarters and other office buildings, primarily in the U.S., to third parties, and generally include one or more options to renew. The Company subleases excess leased office spaces to various firms, primarily in the U.S., and generally include options to renew or terminate within a specified period.
The maturities of lease payments due to the Company and weighted-average remaining lease term as of September 30, 2020 were as follows:
| (in millions) | Subleases | Leases | ||||||
| for the fiscal years ending September 30, | ||||||||
| 2021 | $ | 19.0 | $ | 31.2 | ||||
| 2022 | 19.2 | 28.0 | ||||||
| 2023 | 18.7 | 28.8 | ||||||
| 2024 | 8.5 | 29.8 | ||||||
| 2025 | 0.2 | 29.9 | ||||||
| Thereafter | 0.1 | 70.7 | ||||||
| Total | $ | 65.7 | $ | 218.4 | ||||
| Weighted-average remaining lease term | 3.4 years | 7.2 years |
Note 16 – Commitments and Contingencies
Legal Proceedings
India Credit Fund Closure Matters. Effective April 24, 2020, a subsidiary of Franklin, Franklin Templeton Trustee Services Private Limited (“FTTS”), announced its decision to wind-up six fixed income mutual fund schemes of the Franklin Templeton Mutual Fund in India (referred to herein as the “Funds” or the “India Fixed Income Funds”), which at the time had collective assets under management of approximately USD $3.4 billion. FTTS took action to convene unitholder meetings for the Funds to approve the appointment of liquidators, and the asset management company to the Funds, Franklin Templeton Asset Management (India) Private Limited (“FTAMI”), ceased earning investment management fees on the Funds. Certain Fund unitholders and others subsequently commenced multiple writ petition actions in India (some of which were promptly voluntarily dismissed), challenging the decision to wind up the Funds and alleging that the Company Respondents (as defined below) violated various regulations of the Securities and Exchange Board of India (“SEBI”), mismanaged the Funds, misrepresented or omitted certain information relating to the Funds, and/or engaged in other alleged misconduct. The petitions were filed in May 2020 and June 2020 in the High Court of Gujarat, the High Court of Madras, and the High Court of Delhi, and named as respondents one or more of Franklin, its subsidiaries Templeton International, Inc., FTTS, FTAMI, and certain individual directors, officers, and employees of FTAMI (collectively, the “Company Respondents”), as well as SEBI and other governmental authorities. The petitioners sought a wide range of relief, including, among other items, an order quashing the
wind-up notice and blocking the unitholder vote, initiating various investigations into the Company Respondents, and allowing the unitholder petitioners to redeem their investments with interest.
On June 3, 2020, the High Court of Gujarat granted an ex parte interim injunction order, staying the operation and implementation of the unitholder voting process. On June 19, 2020, the petitions were transferred to the High Court of Karnataka for hearing and resolution. In the course of the hearings, on September 24, 2020, the Company learned that a “first information report” or “FIR” had been registered by the Economic Offenses Wing of the Chennai police department against certain of the Company Respondents in connection with a complaint made by one of the petitioners. In light of the registration of the FIR, which is the preliminary step in an investigation, the court disposed of the petition that had sought an order for such an investigation.
On October 24, 2020, the High Court of Karnataka issued its judgment, in which it upheld the decision taken by FTTS to wind up the Funds and held that there was “nothing wrong with the decision making process,” but determined that consent of the unitholders is required to implement the decision. The court did not grant the other relief sought by the petitioners. The court stayed the operation of its judgment for a period of six weeks, during which time the court held that there will not be any redemptions from the Funds. The deadline for any party to file an appeal is 90 days from the date of the judgment. Certain Company Respondents intend to appeal parts of the judgment.
Separately, on May 27, 2020, SEBI initiated a forensic audit/inspection of Franklin Templeton Mutual Fund, FTAMI, and FTTS and appointed an outside auditor to conduct the review. The auditor submitted a confidential report to SEBI containing certain preliminary observations, to which SEBI sought responses from FTAMI and FTTS, and such responses were provided in September 2020. The matter is currently under review by SEBI. As part of the judgment issued by the High Court of Karnataka, the court directed SEBI to decide whether or not to take action within six weeks from the date it receives a final report by the forensic auditor.
The Company strongly believes that the decision by FTTS to wind up the India Fixed Income Funds was taken in the best interests of investors and fully pursuant to applicable SEBI regulations. Nonetheless, to implement the decision, FTTS ultimately may be required, or may determine, to obtain unitholder consent. If that effort is unsuccessful and/or if unitholder redemptions from the Funds are not suspended until the process for seeking such consent is complete, the Funds could experience significant redemption pressures. In the event that the Funds are unable to meet investor redemption requests in an orderly fashion, including if redemptions require the Funds to undertake distressed sales of assets resulting in the reduction of the net asset values of the Funds, additional litigation and/or regulatory or governmental investigations and proceedings could be initiated. In addition, if SEBI were to commence a regulatory proceeding in connection with the forensic audit, and ultimately conclude that the respondents violated applicable regulations, it is possible that certain Franklin subsidiaries and related individuals could be subject to the imposition of regulatory sanctions. While the Company believes that it would have meritorious defenses to any such actions, such matters could involve the risk of significant financial penalties and other liabilities, reputational harm, and restrictions on the Company’s asset management activities in India, all of which could adversely impact the Company’s financial results. The Company cannot at this time predict the eventual outcome of the matters described above or reasonably estimate the possible loss or range of loss that may arise from any negative outcome of such matters, including due to the current stage of these matters.
Other Litigation Matters. The Company is from time to time involved in other litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company’s business, financial position, results of operations or liquidity. In management’s opinion, an adequate accrual has been made as of September 30, 2020 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.
Indemnifications and Guarantees
In the ordinary course of business or in connection with certain acquisition agreements, the Company enters into contracts that provide for indemnifications by the Company in certain circumstances. In addition, certain Company entities guarantee certain financial and performance-related obligations of various Franklin subsidiaries. The Company is also subject to certain legal requirements and agreements providing for indemnifications of directors, officers and personnel against liabilities and expenses they may incur under certain circumstances in connection with their service in those positions. The terms of these indemnities and guarantees vary pursuant to applicable facts and circumstances, and from agreement to agreement. Future payments for claims against the Company under these indemnities or guarantees could negatively impact the Company’s financial condition. In management’s opinion, no material loss was deemed probable or reasonably possible pursuant to such indemnification agreements and/or guarantees as of September 30, 2020.
Other Commitments and Contingencies
While the Company has no legal or contractual obligation to do so, it routinely makes cash investments in the course of launching sponsored funds. At September 30, 2020, the Company had $335.6 million of committed capital contributions which relate to discretionary commitments to invest in sponsored funds and other investment products and entities, including CIPs. These unfunded commitments are not recorded in the Company’s consolidated balance sheet.
Note 17 – Stock-Based Compensation
The Company’s stock-based compensation plans consist of the Amended and Restated Annual Incentive Compensation Plan (the “AIP”), the 2002 Universal Stock Incentive Plan, as amended and restated (the “USIP”) and the amended and restated Franklin Resources, Inc. 1998 Employee Stock Investment Plan (the “ESIP”). In connection with the acquisition of Legg Mason, the Company assumed the Legg Mason 2017 Equity Incentive Plan, which was amended and restated as the Amended and Restated Franklin Resources, Inc. 2017 Equity Incentive Plan (the “EIP”). The Compensation Committee of the Board of Directors determines the terms and conditions of awards under the AIP, the USIP, the ESIP and the EIP.
Stock-based compensation expenses were as follows:
| (in millions) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Stock and stock unit awards | $ | 117.1 | $ | 105.7 | $ | 111.6 | ||||||
| Employee stock investment plan | 5.2 | 5.8 | 6.2 | |||||||||
| Total | $ | 122.3 | $ | 111.5 | $ | 117.8 |
Stock and Stock Unit Awards
Under the terms of the AIP, eligible employees may receive cash, equity awards and/or mutual fund unit awards generally based on the performance of the Company and/or its funds, and the individual employee. The USIP and EIP provide for the issuance of the Company’s common stock for various stock-related awards to officers, directors and employees. There are 120.0 million shares authorized under the USIP and 23.0 million shares authorized under the EIP, of which 4.5 million shares and 18.3 million shares were available for grant at September 30, 2020.
Stock awards entitle holders to the right to sell the underlying shares of the Company’s common stock once the awards vest. Stock unit awards entitle holders to receive the underlying shares of common stock once the awards vest. Awards vest based on the passage of time or the achievement of predetermined Company financial performance goals.
Stock and stock unit award activity was as follows:
| (shares in thousands) | Time-Based Shares | Performance- Based Shares | Total Shares | Weighted-Average Grant-Date Fair Value | |||||||||
| for the fiscal year ended September 30, 2020 | |||||||||||||
| Nonvested balance at September 30, 2019 | 3,778 | 1,854 | 5,632 | $ | 34.06 | ||||||||
| Granted | 11,540 | 3,891 | 15,431 | 23.05 | |||||||||
| Vested | (2,798 | ) | (374 | ) | (3,172 | ) | 32.89 | ||||||
| Forfeited/canceled | (379 | ) | (563 | ) | (942 | ) | 33.26 | ||||||
| Nonvested balance at September 30, 2020 | 12,141 | 4,808 | 16,949 | $ | 24.30 |
Total unrecognized compensation expense related to nonvested stock and stock unit awards was $338.2 million at September 30, 2020. This expense is expected to be recognized over a remaining weighted-average vesting period of 3.1 years. The weighted-average grant-date fair values of stock awards and stock unit awards granted during fiscal years 2020, 2019 and 2018 were $23.05, $30.75 and $42.63 per share. The total fair value of stock and stock unit awards vested during the same periods was $72.2 million, $84.2 million and $91.5 million.
The Company generally does not repurchase shares upon vesting of stock and stock unit awards. However, in order to pay taxes due in connection with the vesting of employee and executive officer stock and stock unit awards, shares are repurchased using a net stock issuance method.
Employee Stock Investment Plan
The ESIP allows eligible participants to buy shares of the Company’s common stock at a discount of its market value on defined dates. A total of 1.0 million shares were issued under the ESIP during fiscal year 2020, and 5.9 million shares were reserved for future issuance at September 30, 2020.
Note 18 – Defined Contribution Plans
The Company sponsors a 401(k) plan which covers substantially all U.S. employees meeting certain employment requirements. Participants may contribute up to 50% of their eligible salary and up to 100% of the cash portion of their year-end bonus, as defined by the plan and subject to Internal Revenue Code limitations, each year to the plan. The Company increased its matching contribution rate from 75% to 85% for a period of three years beginning January 1, 2020. Certain of the Company’s non-U.S. subsidiaries also sponsor defined contribution plans primarily for the purpose of providing deferred compensation incentives for employees and to comply with local regulatory requirements. The total expenses recognized for defined contribution plans were $59.2 million, $52.2 million and $49.8 million for fiscal years 2020, 2019 and 2018.
Note 19 – Segment and Geographic Information
The Company has one operating segment, investment management and related services. See Note 5 – Revenues for total operating revenues disaggregated by geographic location.
| (in millions) | ||||||||
| as of September 30, | 2020 | 2019 | ||||||
| Property and Equipment, Net | ||||||||
| United States | $ | 634.4 | $ | 542.8 | ||||
| Europe, Middle East and Africa | 133.0 | 90.0 | ||||||
| Asia-Pacific | 37.7 | 40.7 | ||||||
| Americas excluding United States | 8.7 | 10.2 | ||||||
| Total | $ | 813.8 | $ | 683.7 |
Note 20 – Investment and Other Income (Losses), Net
Investment and other income (losses), net consisted of the following:
| (in millions) | ||||||||||||
| for the fiscal years ended September 30, | 2020 | 2019 | 2018 | |||||||||
| Dividend income | $ | 48.9 | $ | 97.0 | $ | 51.1 | ||||||
| Interest income | 14.3 | 31.0 | 76.5 | |||||||||
| Gains (losses) on investments, net | (16.8 | ) | (9.7 | ) | 6.0 | |||||||
| Income (losses) from investments in equity method investees | (98.1 | ) | (10.4 | ) | 44.4 | |||||||
| Rental income | 30.0 | 19.8 | 15.9 | |||||||||
| Foreign currency exchange (losses) gains, net | (22.3 | ) | 13.1 | 0.6 | ||||||||
| Other, net | 5.6 | 0.6 | 5.8 | |||||||||
| Investment and Other Income (Losses), Net | $ | (38.4 | ) | $ | 141.4 | $ | 200.3 |
Substantially all dividend income was generated by investments in nonconsolidated sponsored funds. Interest income was primarily generated by cash equivalents, debt securities of U.S. states and political subdivisions. Gains (losses) on investments, net consists primarily of realized and unrealized gains (losses) on equity securities measured at fair value and other-than-temporary impairment of investments.
Proceeds from the sale of available-for-sale securities were $1.6 million and $85.5 million in fiscal years 2020 and 2018. There were no sales of available-for-sale securities in fiscal year 2019.
Net losses recognized on equity securities measured at fair value and trading debt securities that were held by the Company at September 30, 2020 and 2019 were $2.6 million and $0.1 million, and the net loss recognized on trading investment securities that were held by the Company at September 30, 2018 was $1.7 million.
Note 21 – Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component were as follows:
| (in millions) | Currency Translation Adjustments | Unrealized Losses on Defined Benefit Plans | Unrealized Gains on Investments | Total | ||||||||||||
| as of and for the fiscal years ended September 30, 2020, 2019 and 2018 | ||||||||||||||||
| Balance at October 1, 2017 | $ | (281.0 | ) | $ | (6.0 | ) | $ | 2.2 | $ | (284.8 | ) | |||||
| Adoption of new accounting guidance | — | (0.1 | ) | — | (0.1 | ) | ||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | (85.5 | ) | 1.5 | 7.3 | (76.7 | ) | ||||||||||
| Reclassifications to compensation and benefits expense, net of tax | — | 0.4 | — | 0.4 | ||||||||||||
| Reclassifications to net investment and other income (losses), net of tax | (6.4 | ) | — | (3.0 | ) | (9.4 | ) | |||||||||
| Total other comprehensive income (loss) | (91.9 | ) | 1.9 | 4.3 | (85.7 | ) | ||||||||||
| Balance at September 30, 2018 | $ | (372.9 | ) | $ | (4.2 | ) | $ | 6.5 | $ | (370.6 | ) | |||||
| Adoption of new accounting guidance | — | — | (8.0 | ) | (8.0 | ) | ||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Other comprehensive loss before reclassifications, net of tax | (53.9 | ) | (2.4 | ) | (5.4 | ) | (61.7 | ) | ||||||||
| Reclassifications to compensation and benefits expense, net of tax | — | 0.4 | — | 0.4 | ||||||||||||
| Reclassifications to net investment and other income (losses), net of tax | 1.4 | — | 6.9 | 8.3 | ||||||||||||
| Total other comprehensive income (loss) | (52.5 | ) | (2.0 | ) | 1.5 | (53.0 | ) | |||||||||
| Balance at September 30, 2019 | $ | (425.4 | ) | $ | (6.2 | ) | $ | — | $ | (431.6 | ) | |||||
| Other comprehensive income (loss) | ||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | 23.8 | (2.1 | ) | (1.3 | ) | 20.4 | ||||||||||
| Reclassifications to compensation and benefits expense, net of tax | — | 0.3 | — | 0.3 | ||||||||||||
| Reclassifications to net investment and other income (losses), net of tax | 2.0 | — | 1.3 | 3.3 | ||||||||||||
| Total other comprehensive income (loss) | 25.8 | (1.8 | ) | — | 24.0 | |||||||||||
| Balance at September 30, 2020 | $ | (399.6 | ) | $ | (8.0 | ) | $ | — | $ | (407.6 | ) |
Note 22 – Subsequent Event
On October 19, 2020, the Company completed its offering and sale of the 1.600% Notes due 2030 with a principal amount of $750.0 million. Interest on the notes will be payable semi-annually on April 30 and October 30 of each year, beginning on April 30, 2021. The notes contain an optional redemption feature that allows the Company to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price.
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