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

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

FORWARD-LOOKING STATEMENTS

This Form 10-Q and the documents incorporated by reference herein may include forward-looking statements that reflect our current views with respect to future events, financial performance and market conditions. Such statements are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and generally can be identified by words or phrases written in the future tense and/or preceded by words such as “anticipate,” “believe,” “could,” “depends,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “potential,” “seek,” “should,” “will,” “would,” or other similar words or variations thereof, or the negative thereof, but these terms are not the exclusive means of identifying such statements.

Forward-looking statements involve a number of known and unknown risks, uncertainties and other important factors that may cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements, including pandemic-related risks, market and volatility risks, investment performance and reputational risks, global operational risks, competition and distribution risks, third-party risks, technology and security risks, human capital risks, cash management risks, and legal and regulatory risks. The forward-looking statements contained in this Form 10-Q or that are incorporated by reference herein are qualified in their entirety by reference to the risks and uncertainties disclosed in this Form 10-Q and/or discussed under the headings “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (“fiscal year 2023”).

While forward-looking statements are our best prediction at the time that they are made, you should not rely on them and are cautioned against doing so. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other possible future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. They are neither statements of historical fact nor guarantees or assurances of future performance. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them.

If a circumstance occurs after the date of this Form 10-Q that causes any of our forward-looking statements to be inaccurate, whether as a result of new information, future developments or otherwise, we undertake no obligation to announce publicly the change to our expectations, or to make any revision to our forward-looking statements, to reflect any change in assumptions, beliefs or expectations, or any change in events, conditions or circumstances upon which any forward-looking statement is based, unless required by law.

In this section, we discuss and analyze the results of operations and financial condition of Franklin Resources, Inc. (“Franklin”) and its subsidiaries (collectively, the “Company”). The following discussion should be read in conjunction with our Annual Report on Form 10-K for fiscal year 2023 filed with the U.S. Securities and Exchange Commission (the “SEC”), and the consolidated financial statements and notes thereto included in subsequent filings on Form 10-Q and elsewhere in this Form 10-Q.

OVERVIEW

Franklin is a holding company with subsidiaries operating under our Franklin Templeton® and/or subsidiary brand names. We are a global investment management organization that derives operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide. We deliver our investment capabilities through a variety of investment products, which include our sponsored funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products, and other investment vehicles. Related services include fund administration, sales and distribution, and shareholder servicing. We may perform services directly or through third parties. We offer our services and products under our various distinct brand names, including, but not limited to, Franklin®, Templeton®, Legg Mason®, Alcentra®, Benefit Street Partners®, Brandywine Global Investment Management®, Clarion Partners®, ClearBridge Investments®, Fiduciary Trust International™, Franklin Bissett®, Franklin Mutual Series®, K2®, Lexington Partners®, Martin Currie®, O’Shaughnessy® Asset Management, Putnam®, Royce® Investment Partners and Western Asset Management Company®. We offer a broad product mix of fixed income, equity, alternative, multi-asset and cash management asset classes and solutions that meet a wide variety of specific investment goals and needs for individual and institutional investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to investors under the brand names of those other companies or on a co-branded basis.

The level of our revenues depends largely on the level and relative mix of assets under management (“AUM”). As noted in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year 2023, the amount and mix of our AUM are subject to significant fluctuations that can negatively impact our revenues and income. The level of our revenues also depends on the fees charged for our services, which are based on contracts with our funds and customers, fund sales, and the number of shareholder transactions and accounts. These arrangements could change in the future.

During our third fiscal quarter, global equity markets provided positive returns, reflecting strong corporate earnings in certain sectors due to ongoing enthusiasm around artificial intelligence and expectations of an economic soft landing, although inflation remained a concern and expectations of interest rate reductions eased. The S&P 500 Index and MSCI World Index increased 4.3% and 2.8% for the quarter and 28.8% and 25.0% for the fiscal year to date. The Bloomberg Global Aggregate Index decreased 1.1% during the quarter, reflecting the shift in interest rate expectations, but increased 4.7% for the fiscal year to date, reflecting strong positive returns, in our first fiscal quarter.

Our total AUM at June 30, 2024 was $1,646.6 billion, 20% higher than at September 30, 2023 and 15% higher than at June 30, 2023. Monthly average AUM (“average AUM”) for the three and nine months ended June 30, 2024 increased 15% and 10% from the same periods in the prior fiscal year.

On January 1, 2024, we acquired Putnam Investments (“Putnam”), a global asset management firm, from Great-West Lifeco Inc. (“Great-West”).

The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change. We are subject to various laws, rules and regulations globally that impose restrictions, limitations, registration, reporting and disclosure requirements on our business, and add complexity to our global compliance operations.

Uncertainties regarding the global economy remain for the foreseeable future. As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our products and on providing high quality service to our clients. We continuously perform reviews of our business model. While we remain focused on expense management, we will also seek to attract, retain and develop personnel and invest strategically in systems and technology that will provide a secure and stable environment. We will continue to seek to protect and further our brand recognition while developing and maintaining broker-dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year 2023.

RESULTS OF OPERATIONS


	Three Months Ended June 30,						Percent Change			Nine Months Ended June 30,							Percent Change
(in millions, except per share data)	2024			2023					2024				2023
Operating revenues	$	2,122.9		$	1,969.0		8	%		$	6,266.8			$	5,863.3		7	%
Operating income	222.5			314.9			(29	%)		558.3				764.0			(27	%)
Operating margin1	10.5		%	16.0		%				8.9		%		13.0		%

Net income attributable to Franklin Resources, Inc.	$	174.0		$	227.5		(24	%)		$	549.5			$	587.3		(6	%)
Diluted earnings per share	0.32			0.44			(27	%)		1.03				1.14			(10	%)

As adjusted (non-GAAP):2
Adjusted operating income	$	424.9		$	476.8		(11	%)		$	1,261.5			$	1,312.1		(4	%)
Adjusted operating margin	25.7		%	30.5		%				26.0		%		29.0		%

Adjusted net income	$	326.4		$	326.1		—	%		$	961.5			$	905.2		6	%
Adjusted diluted earnings per share	0.60			0.63			(5	%)		1.81				1.76			3	%

1Defined as operating income divided by operating revenues.

2“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are based on methodologies other than generally accepted accounting principles. See “Supplemental Non-GAAP Financial Measures” for definitions and reconciliations of these measures.

ASSETS UNDER MANAGEMENT

AUM by asset class was as follows:


(in billions)	June 30, 2024		June 30, 2023		Percent Change
Equity	$	595.0	$	458.0	30	%
Fixed Income	564.5		505.1		12	%
Alternative	254.5		257.2		(1	%)
Multi-Asset	168.1		148.3		13	%
Cash Management	64.5		62.9		3	%
Total	$	1,646.6	$	1,431.5	15	%

Average AUM and the mix of average AUM by asset class are shown below.


(in billions)	Average AUM				Percent Change			Mix of Average AUM
for the three months ended June 30,	2024		2023				2024			2023
Equity	$	584.0	$	442.8	32	%		36	%		31	%
Fixed Income	564.8		507.1		11	%		34	%		36	%
Alternative	255.4		257.5		(1	%)		16	%		18	%
Multi-Asset	165.3		146.3		13	%		10	%		10	%
Cash Management	63.1		65.9		(4	%)		4	%		5	%
Total	$	1,632.6	$	1,419.6	15	%		100	%		100	%


(in billions)	Average AUM				Percent Change			Mix of Average AUM
for the nine months ended June 30,	2024		2023				2024			2023
Equity	$	521.6	$	431.8	21	%		34	%		31	%
Fixed Income	534.8		500.4		7	%		35	%		36	%
Alternative	255.7		250.6		2	%		17	%		18	%
Multi-Asset	157.3		143.1		10	%		10	%		10	%
Cash Management	63.7		70.2		(9	%)		4	%		5	%
Total	$	1,533.1	$	1,396.1	10	%		100	%		100	%

Components of the change in AUM are shown below. Net market change, distributions and other includes appreciation (depreciation), distributions to investors that represent return on investments and return of capital, and foreign exchange revaluation.


(in billions)		Three Months Ended June 30,					Percent Change		Nine Months Ended June 30,				Percent Change
	2024			2023			2024		2023
Beginning AUM		$	1,644.7		$	1,422.1	16	%	$	1,374.2	$	1,297.4	6	%
Long-term inflows		82.7			67.4		23	%	236.5		199.7		18	%
Long-term outflows		(85.9)			(67.2)		28	%	(237.8)		(214.1)		11	%
Long-term net flows		(3.2)			0.2		NM		(1.3)		(14.4)		(91	%)
Cash management net flows		3.0			(7.3)		NM		2.9		5.9		(51	%)
Total net flows		(0.2)			(7.1)		(97	%)	1.6		(8.5)		NM
Acquisition		—			—		NM		148.3		34.9		NM
Net market change, distributions and other		2.1			16.5		(87	%)	122.5		107.7		14	%
Ending AUM		$	1,646.6		$	1,431.5	15	%	$	1,646.6	$	1,431.5	15	%

Components of the change in AUM by asset class were as follows:


(in billions)	Equity		Fixed Income		Alternative		Multi-Asset		Cash Management		Total
for the three months ended June 30, 2024
AUM at April 1, 2024	$	592.7	$	571.4	$	255.5	$	163.4	$	61.7	$	1,644.7
Long-term inflows	32.0		37.4		3.4		9.9		—		82.7
Long-term outflows	(33.6)		(42.2)		(2.0)		(8.1)		—		(85.9)
Long-term net flows	(1.6)		(4.8)		1.4		1.8		—		(3.2)
Cash management net flows	—		—		—		—		3.0		3.0
Total net flows	(1.6)		(4.8)		1.4		1.8		3.0		(0.2)
Net market change, distributions and other	3.9		(2.1)		(2.4)		2.9		(0.2)		2.1
AUM at June 30, 2024	$	595.0	$	564.5	$	254.5	$	168.1	$	64.5	$	1,646.6

AUM increased $1.9 billion during the three months ended June 30, 2024 due to $3.0 billion of cash management net inflows and the positive impact of $2.1 billion of net market change, distributions and other, partially offset by $3.2 billion of long-term net outflows, which include $3.6 billion of long-term reinvested distributions. Net market change, distributions and other primarily consists of $14.5 billion of market appreciation, partially offset by $9.7 billion of long-term distributions and a $2.7 billion decrease from foreign exchange revaluation. The market appreciation occurred in all asset classes, most significantly in the multi-asset and equity asset classes and reflected positive returns in the global equity markets. Foreign exchange revaluation from AUM in products that are not U.S. dollar denominated was primarily due to a stronger U.S. dollar compared to the Japanese Yen, Brazilian Real, Euro and Canadian dollar, partially offset by a weaker U.S. dollar compared to the Australian dollar.

AUM increased $215.1 billion or 15%, as compared to the prior year period, primarily due to the acquisition of Putnam. Long-term inflows increased 23% to $82.7 billion, driven by higher inflows in fixed income institutional separate accounts and equity fund vehicles and institutional and retail separate accounts, partially offset by lower inflows in alternative private fund vehicles. Long-term outflows increased 28% to $85.9 billion driven by higher redemptions in fixed income and equity open end funds and institutional and retail separate accounts.


(in billions)	Equity		Fixed Income		Alternative		Multi-Asset		Cash Management		Total
for the three months ended June 30, 2023
AUM at April 1, 2023	$	437.1	$	510.1	$	258.2	$	146.1	$	70.6	$	1,422.1
Long-term inflows	23.0		26.5		7.3		10.6		—		67.4
Long-term outflows	(26.0)		(29.6)		(3.3)		(8.3)		—		(67.2)
Long-term net flows	(3.0)		(3.1)		4.0		2.3		—		0.2
Cash management net flows	—		—		—		—		(7.3)		(7.3)
Total net flows	(3.0)		(3.1)		4.0		2.3		(7.3)		(7.1)
Net market change, distributions and other	23.9		(1.9)		(5.0)		(0.1)		(0.4)		16.5
AUM at June 30, 2023	$	458.0	$	505.1	$	257.2	$	148.3	$	62.9	$	1,431.5

AUM increased $9.4 billion or 1% during the three months ended June 30, 2023 due to the positive impact of $16.5 billion of net market change, distributions and other and $0.2 billion of long-term net inflows (which includes $3.5 billion of long-term reinvested distributions), partially offset by $7.3 billion of cash management net outflows. Long-term net inflows included $3.2 billion from a low-fee equity mandate. Net market change, distributions and other primarily consists of $24.4 billion of market appreciation and a $0.1 billion increase from foreign exchange revaluation, partially offset by $8.0 billion of long-term distributions. The market appreciation occurred in all asset classes with the exception of the alternative asset class, most significantly in the equity asset class, reflecting positive returns in the global equity markets.

AUM increased $51.7 billion or 4%, as compared to the fiscal year 2022 period. Long-term inflows decreased 13% to $67.4 billion, driven by lower inflows in fixed income, equity, and multi-asset open end funds, fixed income institutional separate accounts, multi-asset sub-advised mutual funds, and equity retail separate accounts, partially offset by higher inflows for multi-asset institutional separate accounts, alternative private funds, and equity sub-advised mutual funds. Long-term outflows decreased 31% to $67.2 billion driven by lower redemptions in fixed income and equity open end funds, fixed income and equity institutional separate accounts, multi-asset sub-advised mutual funds, and equity and fixed income retail separate accounts, partially offset by higher redemptions for multi-asset institutional separate accounts.


(in billions)	Equity		Fixed Income		Alternative		Multi-Asset		Cash Management		Total
for the nine months ended June 30, 2024
AUM at October 1, 2023	$	430.4	$	483.1	$	254.9	$	145.0	$	60.8	$	1,374.2
Long-term inflows	86.5		109.5		12.7		27.8		—		236.5
Long-term outflows	(93.2)		(114.4)		(7.6)		(22.6)		—		(237.8)
Long-term net flows	(6.7)		(4.9)		5.1		5.2		—		(1.3)
Cash management net flows	—		—		—		—		2.9		2.9
Total net flows	(6.7)		(4.9)		5.1		5.2		2.9		1.6
Acquisition	81.3		59.3		0.7		5.8		1.2		148.3
Net market change, distributions and other	90.0		27.0		(6.2)		12.1		(0.4)		122.5
AUM at June 30, 2024	$	595.0	$	564.5	$	254.5	$	168.1	$	64.5	$	1,646.6

AUM increased $272.4 billion, or 20%, during the nine months ended June 30, 2024 due to $148.3 billion from the acquisition of Putnam, the positive impact of $122.5 billion of net market change, distributions and other and $2.9 billion of cash management net inflows, partially offset by $1.3 billion of long-term net outflows, which include $17.5 billion of long-term reinvested distributions. Net market change, distributions and other primarily consists of $160.7 billion of market appreciation, partially offset by $36.9 billion of long-term distributions and a $1.3 billion decrease from foreign exchange revaluation. The market appreciation occurred in all asset classes, most significantly in the equity and fixed income asset classes and reflected positive returns in the global equity and fixed income markets.

Long-term inflows increased 18% to $236.5 billion, as compared to the prior year period, driven by higher inflows in equity and multi-asset open end funds and separately managed accounts, fixed income institutional separate accounts, investment trusts, and subadvised mutual funds, partially offset by lower inflows in alternative private fund vehicles. Long-term outflows increased 11% to $237.8 billion due to higher outflows in equity open end funds and fixed income institutional separate accounts and investment trusts.


(in billions)	Equity		Fixed Income		Alternative		Multi-Asset		Cash Management		Total
for the nine months ended June 30, 2023
AUM at October 1, 2022	$	392.3	$	490.9	$	225.1	$	131.5	$	57.6	$	1,297.4
Long-term inflows	67.3		86.5		18.7		27.2		—		199.7
Long-term outflows	(78.3)		(101.1)		(13.7)		(21.0)		—		(214.1)
Long-term net flows	(11.0)		(14.6)		5.0		6.2		—		(14.4)
Cash management net flows	—		—		—		—		5.9		5.9
Total net flows	(11.0)		(14.6)		5.0		6.2		5.9		(8.5)
Acquisition	—		—		34.9		—		—		34.9
Net market change, distributions and other	76.7		28.8		(7.8)		10.6		(0.6)		107.7
AUM at June 30, 2023	$	458.0	$	505.1	$	257.2	$	148.3	$	62.9	$	1,431.5

AUM increased $134.1 billion, or 10%, during the nine months ended June 30, 2023 due to the positive impact of $107.7 billion of net market change, distributions and other, $34.9 billion from an acquisition, and $5.9 billion of cash management net inflows, partially offset by $14.4 billion of long-term net outflows. Net market change, distributions and other primarily consists of $131.0 billion of market appreciation, a $9.8 billion increase from foreign exchange revaluation, partially offset by $33.1 billion of long-term distributions. The market appreciation occurred in all asset classes with the exception of the alternative asset class, most significantly in the equity and fixed income asset classes and reflected positive returns in the global equity and fixed income markets. Foreign exchange revaluation from AUM in products that are not U.S. dollar denominated was primarily due to a weaker U.S. dollar compared to the Euro, Pound Sterling, Brazilian Real and Australian dollar.

Long-term inflows decreased 23% to $199.7 billion, as compared to the fiscal year 2022 period, driven by lower inflows in equity and fixed income open end funds, fixed income institutional separate accounts, and equity retail separate accounts. Decreased inflows for open end mutual funds include the impact of lower reinvested distributions, which were $18.0 billion in the current year period, as compared to $29.5 billion in the prior year period. Long-term outflows decreased 20% to $214.1 billion due to lower outflows in fixed income and equity open end funds, multi-asset sub-advised mutual funds, fixed income and equity institutional separate accounts, and equity retail separate accounts.

AUM by sales region was as follows:


(in billions)	June 30, 2024		June 30, 2023		Percent Change
United States	$	1,155.0	$	1,026.0	13	%
International
Europe, Middle East and Africa1	205.8		170.6		21	%
Asia-Pacific	174.1		121.0		44	%
Americas, excl. U.S.	111.7		113.9		(2	%)
Total international	491.6		405.5		21	%
Total	$	1,646.6	$	1,431.5	15	%

1Effective October 1, 2023, India region is included in Europe, Middle East and Africa.

Investment Performance Overview

A key driver of our overall success is the long-term investment performance of our investment products. A measure of the performance of these products is the percentage of AUM exceeding peer group medians and benchmarks. We compare the relative performance of our mutual funds against peers, and of our strategy composites against benchmarks.

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


	Peer Group Comparison1								Benchmark Comparison2
	% of Mutual Fund AUM in Top Two Peer Group Quartiles								% of Strategy Composite AUM Exceeding Benchmark
as of June 30, 2024	1-Year		3-Year		5-Year		10-Year		1-Year		3-Year		5-Year		10-Year
Equity	52	%	52	%	44	%	61	%	45	%	40	%	41	%	51	%
Fixed Income	59	%	57	%	53	%	69	%	50	%	51	%	61	%	93	%
Total AUM3	48	%	60	%	43	%	56	%	53	%	49	%	52	%	70	%

1Mutual fund performance is sourced from Morningstar and measures the percent of ranked AUM in the top two quartiles versus peers. Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 38%, 37%, 37% and 35% of our total AUM as of June 30, 2024.

2Strategy composite performance measures the percent of composite AUM beating its benchmark. The benchmark comparisons are based on each account’s/composite’s (strategy composites may include retail separately managed accounts and mutual fund assets managed as part of the same strategy) return as compared to a market index that has been selected to be generally consistent with the asset class of the account/composite. Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 54%, 54%, 53% and 49% of our total AUM as of June 30, 2024.

3Total mutual fund AUM includes performance of our alternative and multi-asset funds, and total strategy composite AUM includes performance of our alternative composites. Alternative and multi-asset AUM represent 16% and 10% of our total AUM at June 30, 2024.

Mutual fund performance data includes U.S. and cross-border domiciled mutual funds and exchange-traded funds, excludes cash management and fund of funds, and assumes the reinvestment of dividends.

Past performance is not indicative of future results. For strategy composite AUM included in institutional and retail separately managed accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ. The information in this presentation is provided solely for use in connection with this document, and is not directed toward existing or potential clients of Franklin.

OPERATING REVENUES

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


(in millions)		Three Months Ended June 30,					Percent Change		Nine Months Ended June 30,				Percent Change
	2024			2023			2024		2023
Investment management fees		$	1,689.9		$	1,613.4	5	%	$	5,056.0	$	4,818.5	5	%
Sales and distribution fees		358.3			304.0		18	%	1,013.0		897.3		13	%
Shareholder servicing fees		61.8			38.8		59	%	162.3		115.5		41	%
Other		12.9			12.8		1	%	35.5		32.0		11	%
Total Operating Revenues		$	2,122.9		$	1,969.0	8	%	$	6,266.8	$	5,863.3	7	%

Investment Management Fees

Investment management fees increased $76.5 million and $237.5 million for the three and nine months ended June 30, 2024 primarily due to a 15% and 10% increase in average AUM, partially offset by a decrease in performance fees and lower catch-up fees recognized at the closing of fundraising rounds in a secondary private equity fund, which ended in January 2024. The increases in average AUM primarily occurred in the equity, fixed income and multi-asset asset classes, driven by the acquisition of Putnam.

Our effective investment management fee rate excluding performance fees (annualized investment management fees excluding performance fees divided by average AUM) was 40.2 and 41.4 basis points for the three and nine months ended June 30, 2024, as compared to 42.0 and 41.9 basis points for the same periods in the prior fiscal year. The rate decreases were primarily due to lower catch-up fees recognized at the closing of fundraising rounds in a secondary private equity fund, which ended in January 2024, and increased AUM in lower fee products, including those from the acquisition of Putnam.

Performance fees were $56.6 million and $308.2 million for the three and nine months ended June 30, 2024, and $125.9 million and $446.1 million for the same periods in the prior fiscal year. The decrease for both periods was primarily due to lower performance fees earned by certain of our alternative specialist investment managers, and decreases of $11.6 million and $77.1 million in performance fees earned by Lexington Partners L.P. (“Lexington”), which were passed through as compensation expense per the terms of the acquisition agreement.

Sales and Distribution Fees

Sales and distribution fees by revenue driver are presented below.


(in millions)		Three Months Ended June 30,					Percent Change		Nine Months Ended June 30,				Percent Change
	2024			2023			2024		2023
Asset-based fees		$	294.6		$	251.0	17	%	$	832.1	$	743.7	12	%
Sales-based fees		63.7			53.0		20	%	180.9		153.6		18	%
Sales and Distribution Fees		$	358.3		$	304.0	18	%	$	1,013.0	$	897.3	13	%

Asset-based distribution fees increased $43.6 million and $88.4 million for the three and nine months ended June 30, 2024 primarily due to revenue earned by Putnam subsequent to the acquisition and increases of 4% and 3% in the related average AUM, excluding the impact of Putnam.

Sales-based fees increased $10.7 million and $27.3 million for the three and nine months ended June 30, 2024 primarily due to increases of 6% and 10% in commissionable sales and sales-based revenue earned by Putnam subsequent to the acquisition.

Shareholder Servicing Fees

Shareholder servicing fees increased $23.0 million and $46.8 million for the three and nine months ended June 30, 2024 primarily due to fees earned by Putnam subsequent to the acquisition, partially offset by the impact of a change in fee structure for certain U.S. sponsored funds.

OPERATING EXPENSES

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


	Three Months Ended June 30,				Percent Change			Nine Months Ended June 30,					Percent Change
(in millions)	2024		2023				2024			2023
Compensation and benefits	$	893.8	$	841.2	6	%		$	2,890.3		$	2,667.7	8	%
Sales, distribution and marketing	481.1		406.8		18	%		1,366.2			1,202.0		14	%
Information systems and technology	156.6		127.3		23	%		442.7			376.7		18	%
Occupancy	104.8		56.9		84	%		247.7			171.1		45	%
Amortization of intangible assets	84.0		85.4		(2	%)		254.4			254.6		0	%
General, administrative and other	180.1		136.5		32	%		507.2			427.2		19	%
Total Operating Expenses	$	1,900.4	$	1,654.1	15	%		$	5,708.5		$	5,099.3	12	%

The Putnam acquisition had a significant impact on operating expenses in the three and nine months ended June 30, 2024; however, due to the ongoing integration of the combined businesses, it is not practicable to separately quantify the impact of the legacy Putnam business.

Compensation and Benefits

The components of compensation and benefits expenses are presented below.


	Three Months Ended June 30,				Percent Change			Nine Months Ended June 30,					Percent Change
(in millions)	2024		2023				2024			2023
Salaries, wages and benefits	$	425.0	$	373.9	14	%		$	1,249.7		$	1,131.6	10	%
Incentive compensation	396.3		400.0		(1	%)		1,205.1			1,150.1		5	%
Acquisition-related retention1	43.7		21.3		105	%		217.3			108.1		101	%
Acquisition-related performance fee pass through1	—		11.6		(100	%)		87.0			164.1		(47	%)
Other1,2	28.8		34.4		(16	%)		131.2			113.8		15	%
Compensation and Benefits Expenses	$	893.8	$	841.2	6	%		$	2,890.3		$	2,667.7	8	%

1See “Supplemental Non-GAAP Financial Measures” for additional information.

2Includes impact of gains and losses on investments related to deferred compensation plans, which is offset in investment and other income (losses), net; minority interests in certain subsidiaries, which is offset in net income (loss) attributable to redeemable noncontrolling interests; and special termination benefits.

Salaries, wages and benefits increased $51.1 million and $118.1 million for the three and nine months ended June 30, 2024, primarily due to higher headcount as a result of the acquisition of Putnam and annual salary increases, partially offset by the impact of other headcount reductions.

Incentive compensation remained flat for the three months ended June 30, 2024 and increased $55.0 million for the nine months ended June 30, 2024 primarily due to the acquisition of Putnam, an increase in expense for deferred compensation awards, and higher bonus expense based on expectations of our annual performance, partially offset by lower incentive compensation at specialist investment managers.

Acquisition-related retention expenses increased $22.4 million and $109.2 million for the three and nine months ended June 30, 2024 primarily due to higher costs associated with recent acquisitions.

Acquisition-related performance fee pass through expenses decreased $11.6 million and $77.1 million for the three and nine months ended June 30, 2024, due to lower performance fees earned by Lexington.

Other compensation and benefits decreased $5.6 million for the three months ended June 30, 2024, primarily due to lower net market gains of deferred compensation plans, partially offset by an increase in special termination benefits; and increased $17.4 million for the nine months ended June 30, 2024, primarily due to an increase in special termination benefits and higher net market gains on investments related to our deferred compensation plans. Special termination benefits increased $4.5 million and $8.9 million for the three and nine months ended June 30, 2024 primarily due to the acquisition of Putnam, partially offset by costs associated with workforce optimization initiatives in the prior year. Compensation expense related to minority interests decreased $1.8 million for the three months ended June 30, 2024 and remained flat for the nine months ended June 30, 2024.

We expect to incur additional acquisition-related retention expenses of approximately $60 million during the remainder of the current fiscal year, and annual amounts beginning at approximately $190 million in the fiscal year ending September 30, 2025 and decreasing over the following two fiscal years by approximately $20 million and $80 million. At June 30, 2024, our global workforce increased to approximately 10,300 employees from approximately 9,300 at June 30, 2023, primarily due to the acquisition of Putnam.

Sales, Distribution and Marketing

Sales, distribution and marketing expenses by cost driver are presented below.


	Three Months Ended June 30,				Percent Change			Nine Months Ended June 30,					Percent Change
(in millions)	2024		2023				2024			2023
Asset-based expenses	$	405.9	$	344.0	18	%		$	1,152.1		$	1,018.9	13	%
Sales-based expenses	60.2		50.6		19	%		170.8			145.9		17	%
Amortization of deferred sales commissions	15.0		12.2		23	%		43.3			37.2		16	%
Sales, Distribution and Marketing	$	481.1	$	406.8	18	%		$	1,366.2		$	1,202.0	14	%

Asset-based expenses increased $61.9 million and $133.2 million for the three and nine months ended June 30, 2024 primarily due to expenses incurred by Putnam subsequent to the acquisition, increases of 4% and 3% in the related average AUM, excluding the impact of Putnam, and higher marketing support fees. Distribution expenses are generally not directly correlated with distribution fee revenues due to certain fee structures that do not provide full recovery of distribution costs.

Sales-based expenses increased $9.6 million and $24.9 million for the three and nine months ended June 30, 2024 primarily due to increases of 6% and 10% in commissionable sales and sales-based expenses incurred by Putnam subsequent to the acquisition.

Occupancy

Occupancy expenses increased $47.9 million and $76.6 million for the three and nine months ended June 30, 2024, driven by impairment of the right of use asset related to vacated office space and new leased office space located at One Madison Avenue, primarily associated with an initiative to consolidate our office space in New York City, and expenses incurred by Putnam subsequent to the acquisition.

Information Systems and Technology

Information systems and technology expenses increased $29.3 million and $66.0 million for the three and nine months ended June 30, 2024, primarily due to expenses incurred by Putnam subsequent to the acquisition, higher outsourced data services and software costs.

Amortization of Intangible Assets

Amortization of intangible assets decreased $1.4 million and $0.2 million for the three and nine months ended June 30, 2024, primarily due to the net effect of intangible assets which became fully amortized during the period, partially offset by the amortization of intangible assets recognized as part of the acquisition of Putnam and, for the nine month period, Alcentra.

General, Administrative and Other

General, administrative and other operating expenses increased $43.6 million and $80.0 million for the three and nine months ended June 30, 2024, primarily due to the acquisition of Putnam, increases of $14.6 million and $31.3 million in professional fees, and increases of $5.7 million and $15.0 million in travel and entertainment expenses due to higher activity levels. These increases were partially offset by decreases of $4.4 million and $14.1 million in fund-related expenses.

OTHER INCOME (EXPENSES)

Other income (expenses) consisted of the following:


	Three Months Ended June 30,				Percent Change			Nine Months Ended June 30,					Percent Change
(in millions)	2024		2023				2024			2023
Investment and other income, net	$	74.5	$	49.8	50	%		$	300.2		$	200.3	50	%
Interest expense	(25.7)		(34.9)		(26	%)		(72.2)			(99.3)		(27	%)
Investment and other income of consolidated investment products, net	37.6		1.7		NM			103.7			75.3		38	%
Expenses of consolidated investment products	(8.8)		(0.8)		NM			(20.6)			(15.7)		31	%
Other Income, Net	$	77.6	$	15.8	391	%		$	311.1		$	160.6	94	%

Investment and other income, net increased $24.7 million for the three months ended June 30, 2024, primarily due to income from equity method investees and net foreign currency gains as compared to losses in the prior year quarter, partially offset by losses on investments, as compared to gains in the prior year quarter. Investment and other income, net increased $99.9 million for the nine months ended June 30, 2024, primarily due to higher net income from equity method investees, lower net foreign currency exchange losses, and higher dividend and interest income, partially offset by lower gains on investments.

Investments held by the Company generated net losses of $24.3 million and net gains of $17.3 million in the three and nine months ended June 30, 2024, as compared to net gains of $13.8 million and $62.3 million for the three and nine months ended June 30, 2023. The net losses in the three months ended June 30, 2024 were primarily from investments in nonconsolidated funds and separate accounts, and investments measured at cost adjusted for observable price changes, while the net gains in the prior year period were primarily from investments in nonconsolidated funds and separate accounts, and assets invested for deferred compensation plans. The net gains in the nine months ended June 30, 2024 were primarily from assets invested for deferred compensation plans, partially offset by losses on investments measured at cost adjusted for observable price changes, while the net gains in the prior year were primarily from investments in nonconsolidated funds and separate accounts, and assets invested for deferred compensation plans.

Equity method investees generated income of $41.0 million and $122.3 million for the three and nine months ended June 30, 2024, as compared to losses of $9.1 million and income of $43.5 million in the prior year. The income for the three months ended June 30, 2024 was largely related to various global alternative funds, while the losses in the prior year period were primarily due to a $7.5 million other-than-temporary impairment of an equity method investment. The income in the nine months ended June 30, 2024 was largely related to various global alternative and equity funds, while the income in the prior year was largely related to various global alternative, equity and fixed income funds.

Net foreign currency exchange gains (losses), net were gains of $1.2 million for the three months ended June 30, 2024 and losses of $7.5 million for the nine months ended June 30, 2024, as compared to net losses of $6.6 million and $40.2 million for the three and nine months ended June 30, 2023. The U.S. dollar strengthened against the Euro and weakened less against the British Pound in the three months ended June 30, 2024, which resulted in net foreign exchange gains on cash and cash equivalents denominated in U.S. dollars held by our European subsidiaries, as compared to losses in the prior year period. The U.S. dollar weakened less in the nine month period against the Euro and British Pound, which resulted in lower foreign exchange losses on cash and cash equivalents denominated in U.S. dollars held by our European subsidiaries.

Dividend and interest income decreased $2.9 million for the three months ended June 30, 2024, primarily due to lower average balances, partially offset by higher yields. Dividend and interest income increased $21.1 million for the nine months ended June 30, 2024, primarily due to higher yields.

Interest expense decreased $9.2 million and $27.1 million for the three and nine months ended June 30, 2024 primarily due to interest expense recognized in the prior year periods on our term loan that was terminated on July 25, 2023 and a decrease in interest recognized on tax reserves.

Investments held by consolidated investment products (“CIPs”) generated investment gains and other income of $37.6 million and $103.7 million in the three and nine months ended June 30, 2024, largely related to gains on holdings of various funds. Investments held by CIPs generated investment gains and other income of $1.7 million and $75.3 million in the three and nine months ended June 30, 2023, largely related to gains on holdings of various equity and fixed income funds, substantially offset by losses on holdings of various alternative funds.

Expenses of CIPs increased $8.0 million and $4.9 million for the three and nine months ended June 30, 2024, due to activity of the funds.

Our cash, cash equivalents and investments portfolio by asset class and accounting classification at June 30, 2024, excluding third-party assets of CIPs, was as follows:


	Accounting Classification1										Total
(in millions)	Cash and Cash Equivalents		Investments at Fair Value		Equity Method Investments		Other Investments		Direct Investments in CIPs
Cash and Cash Equivalents	$	3,378.5	$	—	$	—	$	—	$	—	$	3,378.5
Investments
Alternative	—		222.6		930.8		94.6		660.3		1,908.3
Equity	—		365.2		229.4		146.2		165.1		905.9
Fixed Income	—		87.2		63.8		36.1		262.4		449.5
Multi-Asset	—		45.4		3.2		—		153.2		201.8
Total investments	—		720.4		1,227.2		276.9		1,241.0		3,465.5
Total Cash and Cash Equivalents and Investments2, 3	$	3,378.5	$	720.4	$	1,227.2	$	276.9	$	1,241.0	$	6,844.0

1See Note 1 – Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for fiscal year 2023 for information on investment accounting classifications.

2Total cash and cash equivalents and investments includes $4,188.8 million maintained for operational activities, including investments in sponsored funds and other products, and $458.7 million necessary to comply with regulatory requirements.

3Total cash and cash equivalents and investments includes approximately $370 million attributable to employee-owned and other third-party investments made through partnerships which are offset in nonredeemable noncontrolling interests, $286.1 million of investments that are subject to long-term repurchase agreements and other net financing arrangements, and $440.3 million of cash and investments related to deferred compensation plans.

TAXES ON INCOME

Our effective income tax rate was 22.7% and 23.7% for the three and nine months ended June 30, 2024, as compared to 25.4% and 25.7% for the three and nine months ended June 30, 2023. The rate decrease for the three month period was primarily due to state tax provision to return adjustments in the prior year period and activity of CIPs for which there is no related tax impact, partially offset by benefits in the prior year from the release of valuation allowances for capital losses. The rate decrease for the nine month period was primarily due to state tax provision to return adjustments and tax benefits from stock-based compensation.

Our effective income tax rate reflects the relative contributions of earnings in the jurisdictions in which we operate, which have varying tax rates. Changes in our pre-tax income mix, tax rates or tax legislation in such jurisdictions may affect our effective income tax rate and net income.

SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES

As supplemental information, we are providing performance measures for “adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share,” each of which is based on methodologies other than generally accepted accounting principles (“non-GAAP measures”). Management believes these non-GAAP measures are useful indicators of our financial performance and may be helpful to investors in evaluating our relative performance against industry peers.

“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are defined below, followed by reconciliations of operating income, operating margin, net income attributable to Franklin Resources, Inc. and diluted earnings per share on a U.S. GAAP basis to these non-GAAP measures. Non-GAAP measures should not be considered in isolation from, or as substitutes for, any financial information prepared in accordance with U.S. GAAP, and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.

Adjusted Operating Income

We define adjusted operating income as operating income adjusted to exclude the following:

Elimination of operating revenues upon consolidation of investment products.
Acquisition-related items:

◦Acquisition-related retention compensation.

◦Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities.

◦Amortization of intangible assets.

◦Impairment of intangible assets and goodwill, if any.

Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company.
Impact on compensation and benefits expense from gains and losses on investments related to deferred compensation plans, which is offset in investment and other income (losses), net.
Impact on compensation and benefits expense related to minority interests in certain subsidiaries, which is offset in net income (loss) attributable to redeemable noncontrolling interests.

Adjusted Operating Margin

We calculate adjusted operating margin as adjusted operating income divided by adjusted operating revenues. We define adjusted operating revenues as operating revenues adjusted to exclude the following:

Elimination of operating revenues upon consolidation of investment products.
Acquisition-related performance-based investment management fees which are passed through as compensation and benefits expense.
Sales and distribution fees and a portion of investment management fees allocated to cover sales, distribution and marketing expenses paid to the financial advisers and other intermediaries who sell our funds on our behalf.

Adjusted Net Income and Adjusted Diluted Earnings Per Share

We define adjusted net income as net income attributable to Franklin Resources, Inc. adjusted to exclude the following:

Activities of CIPs.
Acquisition-related items:

◦Acquisition-related retention compensation.

◦Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities.

◦Amortization of intangible assets.

◦Impairment of intangible assets and goodwill, if any.

◦Write off of noncontrolling interests related to the wind down of an acquired business.

◦Interest expense for amortization of Legg Mason debt premium from acquisition-date fair value adjustment.

Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company.
Net gains or losses on investments related to deferred compensation plans which are not offset by compensation and benefits expense.
Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests.
Unrealized investment gains and losses.
Net income tax expense of the above adjustments based on the respective blended rates applicable to the adjustments.

We define adjusted diluted earnings per share as diluted earnings per share adjusted to exclude the per share impacts of the adjustments applied to net income in calculating adjusted net income.

In calculating our non-GAAP measures, we adjust for the impact of CIPs because it is not considered reflective of our underlying results of operations. Acquisition-related items and special termination benefits are excluded to facilitate comparability to other asset management firms. We adjust for compensation and benefits expense related to funded deferred compensation plans because it is partially offset in other income (expense), net. We adjust for compensation and benefits expense and net income (loss) attributable to redeemable noncontrolling interests to reflect the economics of certain profits interest arrangements. Sales and distribution fees and a portion of investment management fees generally cover sales, distribution and marketing expenses and, therefore, are excluded from adjusted operating revenues. In addition, when calculating adjusted net income and adjusted diluted earnings per share we exclude unrealized investment gains and losses included in investment and other income (losses) because the related investments are generally expected to be held long term.

The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows:


(in millions)	Three Months Ended June 30,				Nine Months Ended June 30,
2024	2023		2024		2023
Operating income	$	222.5	$	314.9	$	558.3	$	764.0
Add (subtract):
Elimination of operating revenues upon consolidation of investment products*	12.3		12.1		34.7		26.3
Acquisition-related retention	43.7		21.3		217.3		108.1
Compensation and benefits expense from gains on deferred compensation, net	1.8		10.1		34.8		26.3
Other acquisition-related expenses	33.6		8.7		65.6		45.3
Amortization of intangible assets	84.0		85.4		254.4		254.6
Special termination benefits	16.7		12.2		63.8		54.9
Compensation and benefits expense related to minority interests in certain subsidiaries	10.3		12.1		32.6		32.6
Adjusted operating income	$	424.9	$	476.8	$	1,261.5	$	1,312.1

Total operating revenues	$	2,122.9	$	1,969.0	$	6,266.8	$	5,863.3
Add (subtract):
Acquisition-related pass through performance fees	—		(11.6)		(87.0)		(164.1)
Sales and distribution fees	(358.3)		(304.0)		(1,013.2)		(897.3)
Allocation of investment management fees for sales, distribution and marketing expenses	(122.8)		(102.8)		(353.0)		(304.7)
Elimination of operating revenues upon consolidation of investment products*	12.3		12.1		34.7		26.3
Adjusted operating revenues	$	1,654.1	$	1,562.7	$	4,848.3	$	4,523.5

Operating margin	10.5%		16.0%		8.9%		13.0%
Adjusted operating margin	25.7%		30.5%		26.0%		29.0%


(in millions, except per share data)	Three Months Ended June 30,				Nine Months Ended June 30,
2024	2023		2024		2023
Net income attributable to Franklin Resources, Inc.	$	174.0	$	227.5	$	549.5	$	587.3
Add (subtract):
Net (income) loss of consolidated investment products*	(2.4)		1.5		(1.1)		6.4
Acquisition-related retention	43.7		21.3		217.3		108.1
Other acquisition-related expenses	34.9		12.7		75.0		61.5
Amortization of intangible assets	84.0		85.4		254.4		254.6

Special termination benefits	16.7		12.2		63.8		54.9
Net gains on deferred compensation plan investments not offset by compensation and benefits expense	(1.1)		(0.5)		(11.0)		(14.1)
Unrealized investment (gains) losses	31.0		9.4		(27.6)		(23.2)
Interest expense for amortization of debt premium	(6.4)		(6.3)		(19.2)		(19.0)
Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests	2.8		(1.0)		1.2		(0.9)
Net income tax expense of adjustments	(50.8)		(36.1)		(140.8)		(110.4)
Adjusted net income	$	326.4	$	326.1	$	961.5	$	905.2

Diluted earnings per share	$	0.32	$	0.44	$	1.03	$	1.14
Adjusted diluted earnings per share	0.60		0.63		1.81		1.76

*The impact of CIPs is summarized as follows:


(in millions)	Three Months Ended June 30,				Nine Months Ended June 30,
2024	2023		2024		2023
Elimination of operating revenues upon consolidation	$	(12.3)	$	(12.1)	$	(34.7)	$	(26.3)
Other income, net	42.0		7.3		72.0		67.4
Less: income (loss) attributable to noncontrolling interests	27.3		(3.3)		36.2		47.5
Net income (loss)	$	2.4	$	(1.5)	$	1.1	$	(6.4)

LIQUIDITY AND CAPITAL RESOURCES

Cash flows were as follows:


	Nine Months Ended June 30,
(in millions)	2024		2023
Operating cash flows	$	413.1	$	324.7
Investing cash flows	(1,222.7)		(3,278.2)
Financing cash flows	506.4		2,492.6

Net cash provided by operating activities increased during the nine months ended June 30, 2024 primarily due to lower net purchases of investments by CIPs, partially offset by decreases in accounts payable and accrued expenses and income taxes payable. Net cash used in investing activities decreased primarily due to lower net purchases of investments by collateralized loan obligations (“CLOs”), lower cash paid for acquisitions in the current year as compared to the prior year and net liquidations of investments as compared to purchases in the prior year. Net cash provided by financing activities decreased primarily due to lower net proceeds on debt of CIPs, lower net subscriptions in CIPs by noncontrolling interests, and proceeds from repurchase agreements in the prior year.

The assets and liabilities of CIPs attributable to third-party investors do not impact our liquidity and capital resources. We have no right to the CIPs’ assets, other than our direct equity investment in them and investment management and other fees earned from them. The debt holders of the CIPs have no recourse to our assets beyond the level of our direct investment, therefore we bear no other risks associated with the CIPs’ liabilities. Accordingly, the assets and liabilities of CIPs, other than our direct investments in them, are excluded from the amounts and discussion below.

Our liquid assets and debt consisted of the following:


(in millions)	June 30, 2024		September 30, 2023
Assets
Cash and cash equivalents	$	3,336.1	$	3,592.8
Receivables	1,224.6		1,181.7
Investments	1,115.4		1,098.8
Total Liquid Assets	$	5,676.1	$	5,873.3

Liability
Debt	$	3,035.0	$	3,052.8

Liquidity

Liquid assets consist of cash and cash equivalents, receivables and certain investments. Cash and cash equivalents at June 30, 2024 primarily consist of money market funds and deposits with financial institutions. Liquid investments consist of investments in sponsored and other funds, direct investments in redeemable CIPs, other equity and debt securities, and time deposits with maturities greater than three months.

We utilize a significant portion of our liquid assets to satisfy operational and regulatory requirements and fund capital contributions to sponsored and other products. Certain of our subsidiaries are required by our internal policy or regulation to maintain minimum levels of cash and/or capital, and may be restricted in their ability to transfer cash to their parent companies. Should we require more capital than is available for use, we could elect to reduce the level of discretionary activities, such as share repurchases or investments in sponsored and other products, we could raise capital through debt or equity issuances, or utilize existing or new credit facilities. These alternatives could result in increased interest expense, decreased dividend or interest income, or other dilution to our earnings.

Capital Resources

We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations, amounts available under the credit facility discussed below, the ability to issue debt or equity securities and borrowing capacity under our uncommitted commercial paper private placement program.

In prior fiscal years, we issued senior unsecured unsubordinated notes for general corporate purposes and to redeem outstanding notes. At June 30, 2024, Franklin’s outstanding senior notes had an aggregate principal amount due of $1,600.0 million. The notes have fixed interest rates from 1.600% to 2.950% with interest paid semi-annually and have an aggregate carrying value, inclusive of unamortized discounts and debt issuance costs, of $1,586.5 million. At June 30, 2024, Legg Mason’s outstanding senior notes had an aggregate principal amount due of $1,250.0 million. The notes have fixed interest rates from 3.950% to 5.625% with interest paid semi-annually and have an aggregate carrying value, inclusive of unamortized premium, of $1,448.5 million at June 30, 2024. Franklin unconditionally and irrevocably guarantees all of the outstanding notes issued by Legg Mason. On July 15, 2024, we repaid all of the outstanding $250.0 million 3.950% senior notes due July 2024 issued by Legg Mason at the principal amount plus accrued and unpaid interest of $4.9 million.

The senior notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The indentures governing the senior notes contain limitations on our ability and the ability of our subsidiaries to pledge voting stock or profit participating equity interests in our subsidiaries to secure other debt without similarly securing the notes equally and ratably. In addition, the indentures include requirements that must be met if we consolidate or merge with, or sell all of our assets to, another entity.

We maintain an $800.0 million 5-year revolving credit facility that contains a financial performance covenant requiring that the Company maintain a consolidated net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 3.25 to 1.00. This facility remains undrawn as of the time of this filing. We were in compliance with all debt covenants at June 30, 2024.

At June 30, 2024, we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012 and is unrated.

Our ability to access the capital markets in a timely manner depends on a number of factors, including our credit rating, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. If we are unable to access capital markets in a timely manner, our business could be adversely impacted.

Uses of Capital

We expect that our main uses of cash will be to invest in and grow our business including through acquisitions, pay stockholder dividends, invest in our products, pay income taxes and operating expenses of the business, enhance technology infrastructure and business processes, repurchase shares of our common stock, and repay and service debt. While we expect to continue to repurchase shares to offset dilution from stock-based compensation, and expect to continue to repurchase shares opportunistically from time to time, we will likely spend more of our post-dividend free cash flow investing in our business, including seed capital and acquiring resources to help grow our investment teams and operations.

We typically declare cash dividends on a quarterly basis, subject to approval by our Board of Directors. We declared regular dividends of $0.93 per share during the nine months ended June 30, 2024 and $0.90 per share during the nine months ended June 30, 2023. We currently expect to continue paying comparable regular dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors.

We maintain a stock repurchase program to manage our equity capital with the objective of maximizing shareholder value. Our stock repurchase program is effected through open-market purchases and private transactions in accordance with applicable laws and regulations, and is not subject to an expiration date. The size and timing of these purchases will depend on business conditions, price, market and other factors, including the terms of any 10b5-1 stock purchase plan that may be in effect at any given time. During the three and nine months ended June 30, 2024, we repurchased 4.3 million and 7.1 million shares of our common stock at a cost of $101.5 million and $172.0 million. In December 2023, our Board of Directors authorized the repurchase of up to an additional 27.2 million shares of our common stock in either open market or private transactions, for a total of up to 40.0 million shares available for repurchase under the stock repurchase program. At June 30, 2024, 34.8 million shares remained available for repurchase under the authorization approved by our Board of Directors.

On January 1, 2024, we acquired Putnam from Great-West for 31.6 million shares of our common stock, cash consideration paid at close of $221.7 million for investments and other purchase-related amounts, and deferred cash consideration of $100.0 million paid on July 1, 2024. The cash consideration paid at close and the deferred consideration payment was funded from existing cash. In addition, the Company will pay up to $375.0 million between the third and seventh anniversaries of the closing date related to revenue growth targets from the strategic partnership with Great-West and its affiliates which will be recognized in operating income.

On November 1, 2023, we paid $60.8 million in deferred cash consideration related to our acquisition of Alcentra from existing cash. On April 1, 2024, we paid $400.0 million in deferred cash consideration related to our acquisition of Lexington from existing cash. We expect to make an additional deferred cash payment related to our acquisition of Lexington of $100.0 million during the third quarter of fiscal year 2025 from existing cash and sources of liquidity.

The funds that we manage have their own resources available for purposes of providing liquidity to meet shareholder redemptions, including securities that can be sold or provided to investors as in-kind redemptions, and lines of credit. Increased liquidity risks and redemptions have required, and may continue to require, increased cash in the form of loans or other lines of credit to help settle redemptions and for other related purposes. While we have no legal or contractual obligation to do so, we have in certain instances voluntarily elected to provide the funds with direct or indirect financial support based on our business objectives. We did not provide financial or other support to our sponsored funds during the nine months ended June 30, 2024.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These estimates, judgments and assumptions are affected by our application of accounting policies. Further, concerns about the global economic outlook have adversely affected, and may continue to adversely affect, our business, financial condition and results of operations including the estimates and assumptions made by management. Actual results could differ from the estimates. Described below are the updates to our critical accounting policies disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year 2023.

Consolidation

We consolidate our subsidiaries and investment products in which we have a controlling financial interest. We have a controlling financial interest when we own a majority of the voting interest in a voting interest entity or are the primary beneficiary of a variable interest entity (“VIE”). Our VIEs are primarily investment products and our variable interests consist of our equity ownership interests in and investment management fees earned from these products. As of June 30, 2024, we were the primary beneficiary of 75 investment product VIEs.

Business Combinations

Business combinations are accounted for by recognizing the acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition-date estimated fair values. Any excess of the purchase consideration over the acquisition-date fair values of these identifiable assets and liabilities is recognized as goodwill. Goodwill and indefinite-lived intangible assets are tested for impairment annually and when an event occurs or circumstances change that more likely than not reduce the fair value of the related reporting unit or indefinite-lived intangible asset below its carrying value. Definite-lived intangible assets are tested for impairment quarterly.

Subsequent to the annual impairment tests performed as of August 1, 2023, we monitored both macroeconomic and entity-specific factors, including changes in our AUM to determine whether circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value or indicate that the other indefinite-lived intangible assets might be impaired. We also monitored fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole. During the nine months ended June 30, 2024, there were no events or circumstances which would indicate that goodwill, indefinite-lived intangible assets or definite-lived intangible assets might be impaired.

While we believe that the assumptions used to estimate fair value in our impairment tests are reasonable and appropriate, future changes in the assumptions could result in recognition of impairment.

Fair Value Measurements

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

As of June 30, 2024, Level 3 assets represented 4% of total assets measured at fair value, which primarily related to CIPs’ investments in equity and debt securities. There were insignificant transfers into and out of Level 3 during the nine months ended June 30, 2024.

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