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MarketScreener Homepage  >  Equities  >  Nyse  >  Franklin Resources, Inc.    BEN

FRANKLIN RESOURCES, INC.

(BEN)
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FRANKLIN RESOURCES : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

11/23/2020 | 06:05am EST
FORWARD-LOOKING STATEMENTS
The following discussion and analysis of the results of operations and financial
condition of Franklin Resources, Inc. ("Franklin") and its subsidiaries
(collectively, the "Company") should be read in conjunction with the
"Forward-looking Statements" disclosure set forth in Part I and the "Risk
Factors" set forth in Item 1A of Part I of this Annual Report on Form 10­K (this
"Annual Report") and in any more recent filings with the U.S. Securities and
Exchange Commission (the "SEC"), each of which describe our risks, uncertainties
and other important factors in more detail.
OVERVIEW
We are a global investment management organization and derive our operating
revenues and net income from providing investment management and related
services in jurisdictions worldwide for investors in our 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. In addition to investment management,
our services include fund administration, sales and distribution, and
shareholder servicing. We may perform services directly or through third
parties. We offer our services and products under our various distinct brand
names, including, but not limited to, Franklin®, Templeton®, Legg Mason®,
Balanced Equity Management®, Benefit Street Partners®, Darby®, Edinburgh
Partners™, Fiduciary Trust™, Franklin Bissett®, Franklin Mutual Series®, K2® and
LibertyShares®. In addition, pursuant to our acquisition of Legg Mason, Inc.
("Legg Mason") on July 31, 2020, we acquired certain additional brand names
including Brandywine Global Investment Management®, Clarion Partners®,
ClearBridge Investments®, Martin Currie®, QS Investors®, Royce® Investment
Partners and Western Asset Management Company®. We offer a broad product mix of
fixed income, equity, multi-asset, alternative 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 set
forth above in Item 1A of Part I of this Annual Report, the amount and mix of
our AUM are subject to significant fluctuations and can negatively impact our
revenues and income. The level of our revenues also depends on mutual fund
sales, the number of shareholder transactions and accounts, and the fees charged
for our services, which are based on contracts with our funds and our clients.
These arrangements could change in the future.
As further noted in the "Risk Factors" section, the outbreak and spread of
contagious diseases such as the coronavirus disease 2019 ("COVID-19"), a highly
transmissible and pathogenic disease, has adversely affected, and we expect will
continue to adversely affect, our business, financial condition and results of
operations. Global health concerns, and uncertainty regarding the impact of
COVID-19, could lead to further and/or increased volatility in global capital
and credit markets, adversely affect our key executives and other personnel,
clients, investors, providers, suppliers, lessees, and other third parties, and
negatively impact our AUM, revenues, income, business and operations. As of the
time of this filing, as the COVID-19 pandemic continues to evolve, it is not
possible to predict the full extent to which COVID-19 will adversely impact our
business, liquidity, capital resources, financial results and operations due to
numerous developing factors that are highly uncertain and rapidly changing.
During the fiscal year ended September 30, 2020 ("fiscal year 2020"), the global
equity markets experienced volatility reflecting, among other things, ongoing
global concerns about the COVID-19 pandemic, but provided overall strong
positive returns. Despite easing of shutdown measures and some signs of economic
recovery following significant accommodative economic efforts by governments and
central banks, concerns about the severe economic impact of the ongoing COVID-19
pandemic persist. The S&P 500 Index and MSCI World Index increased 15.2% and
11.0% for the fiscal year.
Our total AUM was $1,418.9 billion at September 30, 2020, which was 105% higher
than at September 30, 2019 reflecting an increase of $806.5 billion from
acquisitions, partially offset by $61.6 billion of long-term net outflows,
$9.9 billion of cash management net outflows and $8.7 billion from net market
change, distributions and other. Simple monthly average AUM ("average AUM")
increased 19% during fiscal year 2020.
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.


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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.
RESULTS OF OPERATIONS
(in millions, except per share data)
for the fiscal years ended
September 30,                                20201         2019          2018        2020 vs. 2019     2019 vs. 2018
Operating revenues2                       $ 5,566.5$ 5,669.4$ 6,204.5           (2 %)             (9 %)
Operating income2                           1,048.9       1,466.9       2,028.2          (28 %)            (28 %)
Operating margin3                              18.8 %        25.9 %        32.7 %

Net income attributable to Franklin
Resources, Inc.                           $   798.9$ 1,195.7$   764.4          (33 %)             56 %
Diluted earnings per share                $    1.59$    2.35$    1.39          (32 %)             69 %

As adjusted (non-GAAP):4
Adjusted operating income                 $ 1,491.1$ 1,654.2$ 2,093.5          (10 %)            (21 %)
Adjusted operating margin                      38.5 %        42.6 %        49.8 %

Adjusted net income                       $ 1,311.0$ 1,331.3$   798.1           (2 %)             67 %

Adjusted diluted earnings per share $ 2.61$ 2.62$ 1.45

            0 %              81 %


___________________

1 Includes the impact of the Company's acquisition of Legg Mason, Inc. which

was effective July 31, 2020. See Note 3 - Acquisitions in the notes to

consolidated financial statements in Item 8 of Part II of this Annual Report

     for information.


2    In fiscal year 2020, the Company changed the presentation of its

consolidated statements of income to include dividend and interest income

and other expenses from consolidated investment products in non-operating

income (expense). Amounts for the comparative prior fiscal years have been

reclassified to conform to the current presentation. These reclassifications

had no impact on previously reported net income attributable to Franklin

     Resources, Inc.


3  Defined as operating income divided by total operating revenues.

4 "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.



The Company acquired Legg Mason effective July 31, 2020, and the results of
operations for fiscal year 2020 include two months of Legg Mason's results.
Operating income decreased $418.0 million in fiscal year 2020 due to a 2%
decrease in operating revenues and a 7% increase in operating expenses which
reflected higher levels of compensation and benefits expense, including
acquisition-related retention costs, other acquisition-related expenses, and
amortization and impairments of intangible assets and goodwill. Net income
attributable to Franklin Resources, Inc. decreased $396.8 million primarily due
to the decrease in operating income, as the impact of declines in market
valuations amid global concerns about the COVID-19 pandemic resulted in net
investment and other losses of $38.4 million, as compared to net gains of
$141.4 million in the prior year, less the portion attributable to
noncontrolling interests, was largely offset by lower taxes on income.
Operating income decreased $561.3 million in the fiscal year ended September 30,
2019 ("fiscal year 2019") due to a 9% decrease in operating revenues and a 1%
increase in operating expenses. Net income attributable to Franklin Resources,
Inc. increased $431.3 million primarily due to a prior year estimated income tax
charge of $968.8 million resulting from enactment of the Tax Cuts and Jobs Act
of 2017 (the "Tax Act"), partially offset by the decrease in operating income.
Diluted earnings per share decreased in fiscal year 2020 and increased in fiscal
year 2019, consistent with the changes in net income and the impacts of 2% and
6% decreases in diluted average common shares outstanding primarily resulting
from repurchases of shares of our common stock.


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Adjusted operating income decreased $163.1 million in fiscal year 2020 primarily
due to a 10% increase in compensation and benefits expense, excluding non-GAAP
adjustments. Adjusted net income decreased $20.3 million primarily due to the
decrease in adjusted operating income substantially offset by lower taxes on
income, excluding the net income tax expense of non-GAAP adjustments.
Adjusted operating income decreased $439.3 million in fiscal year 2019 primarily
due to an 8% decrease in adjusted operating revenues and a 6% increase in
compensation and benefits expense, excluding non-GAAP adjustments. Adjusted net
income attributable to Franklin Resources, Inc. increased $533.2 million
primarily due to a prior-year estimated income tax charge of $968.8 million
resulting from enactment of the Tax Act, partially offset by the decrease in
adjusted operating income.
Adjusted diluted earnings per share decreased in fiscal year 2020 and increased
in fiscal year 2019, consistent with the changes in adjusted net income and the
impacts of the decreases in diluted average common shares outstanding.
ASSETS UNDER MANAGEMENT
In the fourth quarter of fiscal year 2020, we revised our presentation of AUM to
disclose AUM by asset class and introduced a simplified presentation of
long-term net flows to incorporate all client-driven flow activity, which is
defined as long-term inflows net of long-term outflows. Additionally, we report
cash management net flows as a separate component of total net flows. These
changes reflect the new breadth of our business and the expansion of our client
base and investment vehicle offerings, both of which expanded significantly
beyond retail mutual funds following the acquisition of Legg Mason.
AUM by asset class was as follows:
(in billions)
as of September 30,       2020        2019       2018      2020 vs. 2019     2019 vs. 2018
Fixed Income           $   656.7$ 250.6$ 258.5           162 %            (3 %)
Equity                     432.0      263.9      304.6            64 %           (13 %)
Multi-Asset                133.8      123.6      126.7             8 %            (2 %)
Alternative                124.0       45.0       18.0           176 %           150 %
Cash Management             72.4        9.5        9.3           662 %             2 %
Total                  $ 1,418.9$ 692.6$ 717.1           105 %            (3 %)
Average for the Year   $   832.9$ 697.0$ 740.5            19 %      

(6 %)



AUM at September 30, 2020 increased 105% from September 30, 2019 driven by
$806.5 billion from acquisitions, partially offset by $61.6 billion of long-term
net outflows, $9.9 billion of cash management net outflows and $8.7 billion from
net market change, distributions and other.
AUM at September 30, 2019 decreased 3% from September 30, 2018 as $31.8 billion
of long-term net outflows and $20.0 billion of net market change, distributions
and other, were partially offset by $26.4 billion from an acquisition and
$0.9 billion of cash management net inflows.
Changes in average AUM are generally more indicative of trends in revenue for
providing investment management services than the year-over-year change in
ending AUM.


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Average AUM and the mix of average AUM by asset class are shown below. (in billions)

                                          Average AUM
for the fiscal years ended September 30,      2020         2019         2018       2020 vs. 2019     2019 vs. 2018
Fixed Income                               $  330.5$  256.1$  275.2             29 %            (7 %)
Equity                                        290.3        275.5        310.8              5 %           (11 %)
Multi-Asset                                   123.0        122.2        129.3              1 %            (5 %)
Alternative                                    63.8         33.7         17.2             89 %            96 %
Cash Management                                25.3          9.5          8.0            166 %            19 %
Total                                      $  832.9$  697.0$  740.5             19 %            (6 %)


                                              Mix of Average AUM
for the fiscal years ended September 30,    2020       2019    2018
Fixed Income                                 39 %       37 %    37 %
Equity                                       35 %       40 %    42 %
Multi-Asset                                  15 %       17 %    18 %
Alternative                                   8 %        5 %     2 %
Cash Management                               3 %        1 %     1 %
Total                                       100 %      100 %   100 %


Components of the change in AUM are shown below. Net market change,
distributions and other includes appreciation (depreciation), distributions to
investors that represent return on investments and return of capital, and
foreign exchange revaluation.
(in billions)
for the fiscal years ended September
30,                                       2020          2019         2018       2020 vs. 2019     2019 vs. 2018
Beginning AUM                          $   692.6$  717.1$  753.2           (3 %)             (5 %)
Long-term inflows                          182.4        175.0        165.5            4 %               6 %
Long-term outflows                        (244.0 )     (206.8 )     (203.5 )         18 %               2 %
Long-term net flows                        (61.6 )      (31.8 )      (38.0 )         94 %             (16 %)
Cash management net flows                   (9.9 )        0.9          3.5           NM               (74 %)
Total net flows                            (71.5 )      (30.9 )      (34.5 )        131 %             (10 %)
Acquisitions                               806.5         26.4          9.8           NM               169 %
Net market change, distributions and
other                                       (8.7 )      (20.0 )      (11.4 )        (57 %)             75 %
Ending AUM                             $ 1,418.9$  692.6$  717.1          105 %              (3 %)





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Components of the change in AUM by asset class were as follows: (in billions) for the fiscal year ended Fixed

                                                     Cash
September 30, 2020              Income      Equity      Multi-Asset     Alternative     Management        Total
AUM at October 1, 2019         $ 250.6$ 263.9$     123.6$      45.0$       9.5$   692.6
Long-term inflows                 79.7        64.3            27.8            10.6               -         182.4
Long-term outflows              (112.9 )     (90.2 )         (33.6 )          (7.3 )             -        (244.0 )
Long-term net flows              (33.2 )     (25.9 )          (5.8 )           3.3               -         (61.6 )
Cash management net flows            -           -               -               -            (9.9 )        (9.9 )
Total net flows                  (33.2 )     (25.9 )          (5.8 )           3.3            (9.9 )       (71.5 )
Acquisitions                     449.4       183.2            22.5            75.8            75.6         806.5
Net market change,
distributions and other          (10.1 )      10.8            (6.5 )          (0.1 )          (2.8 )        (8.7 )
AUM at September 30, 2020      $ 656.7$ 432.0$     133.8$     124.0$      72.4$ 1,418.9



(in billions)
for the fiscal year ended        Fixed                                                      Cash
September 30, 2019              Income      Equity      Multi-Asset     Alternative      Management       Total
AUM at October 1, 2018         $ 258.5$ 304.6$     126.7$      18.0$       9.3$ 717.1
Long-term inflows                 75.6        58.5            34.8             6.1               -        175.0
Long-term outflows               (81.9 )     (83.5 )         (35.9 )          (5.5 )             -       (206.8 )
Long-term net flows               (6.3 )     (25.0 )          (1.1 )           0.6               -        (31.8 )
Cash management net flows            -           -               -               -             0.9          0.9
Total net flows                   (6.3 )     (25.0 )          (1.1 )           0.6             0.9        (30.9 )
Acquisition                          -           -               -            26.4               -         26.4
Net market change,
distributions and other           (1.6 )     (15.7 )          (2.0 )             -            (0.7 )      (20.0 )
AUM at September 30, 2019      $ 250.6$ 263.9$     123.6$      45.0$       9.5$ 692.6



(in billions)
for the fiscal year ended        Fixed                                                      Cash
September 30, 2018              Income      Equity      Multi-Asset     Alternative      Management       Total
AUM at October 1, 2017         $ 286.0$ 311.7$     132.5$      16.7$       6.3$ 753.2
Long-term inflows                 71.2        63.9            25.6             4.8               -        165.5
Long-term outflows               (82.4 )     (88.5 )         (29.0 )          (3.6 )             -       (203.5 )
Long-term net flows              (11.2 )     (24.6 )          (3.4 )           1.2               -        (38.0 )
Cash management net flows            -           -               -               -             3.5          3.5
Total net flows                  (11.2 )     (24.6 )          (3.4 )           1.2             3.5        (34.5 )
Acquisition                          -         9.8               -               -               -          9.8
Net market change,
distributions and other          (16.3 )       7.7            (2.4 )           0.1            (0.5 )      (11.4 )
AUM at September 30, 2018      $ 258.5$ 304.6$     126.7$      18.0$       9.3$ 717.1


AUM increased $726.3 billion or 105% during fiscal year 2020 as $806.5 billion
from acquisitions was partially offset by $61.6 billion of long-term net
outflows, $9.9 billion of cash management net outflows and $8.7 billion of net
market change, distributions and other. Acquisitions included $797.4 billion
from the acquisition of Legg Mason and $9.1 billion from other acquisitions.
Long-term inflows increased 4% to $182.4 billion, as compared to the prior year,
due to higher inflows in all long-term asset classes except multi-asset.
Long-term outflows increased 18% to $244.0 billion due to higher outflows in all
long-term asset classes except multi-asset, most significantly in fixed income
products. Long-term net outflows included outflows of $27.6 billion from six
fixed income funds, $7.3 billion from seven institutional products, $6.2 billion
from three equity funds and $3.6 billion from a multi-asset fund, partially
offset by inflows of $6.0 billion in two equity funds, $4.0 billion in three
fixed income funds, $2.0 billion in two institutional products and $1.3 billion
in a private open-end product. Net


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market change, distributions and other primarily consists of $24.8 billion of
long-term distributions, partially offset by $15.8 billion of market
appreciation. The market appreciation occurred primarily in the equity asset
class, and reflected positive returns in global equity markets as evidenced by
increases of 15.2% and 11.0% in the S&P 500 Index and MSCI World Index.
AUM decreased $24.5 billion or 3% during fiscal year 2019 due to $31.8 billion
of long-term net outflows and $20.0 billion of net market change, distributions
and other, partially offset by $26.4 billion from an acquisition. Long-term
inflows increased 6% to $175.0 billion due to higher inflows in all the
long-term asset classes except the equity asset class, and long-term outflows
increased 2% to $206.8 billion due to higher outflows in the multi-asset and
alternative asset classes, partially offset by lower outflows in the equity
asset class. Long-term net outflows included outflows of $7.0 billion from six
institutional clients, of which $2.9 billion was from Canadian mandates and
$2.1 billion was due to two clients' mandatory redemption policies following
portfolio manager departures; $4.3 billion from two equity funds; $2.7 billion
from a fixed income fund; $1.4 billion from an institutional fixed income
product; $1.3 billion from a multi-asset fund; $1.2 billion from two sub-advised
institutional products and $1.0 billion from a sub-advised variable annuity
client. The outflows were partially offset by inflows of $1.9 billion in a fixed
income fund and $1.8 billion in an equity fund. Net market change, distributions
and other primarily consists of $31.5 billion of long-term distributions and a
$2.9 billion decrease from foreign exchange revaluation, partially offset by
$14.4 billion of market appreciation. The foreign exchange revaluation resulted
from AUM in products that are not U.S. dollar denominated, which represented 14%
of total AUM as of September 30, 2019, and was primarily due to strengthening of
the U.S. dollar against the Euro, Canadian dollar, Australian dollar and Pound
Sterling. The market appreciation occurred in all long-term asset classes except
equity, and reflected positive returns in global fixed income markets as
evidenced by a 7.6% increase in the Bloomberg Barclays Global Aggregate Index.
AUM by sales region was as follows:
(in billions)
as of September 30,                       2020          2019         2018       2020 vs. 2019     2019 vs. 2018
United States                          $ 1,024.0$  477.9$  482.0            114 %            (1 %)
International
Asia-Pacific                               168.6         89.0         91.4             89 %            (3 %)
Europe, Middle East and Africa             141.8         87.9         98.3             61 %           (11 %)
Latin America1                              59.4         13.5         15.6            340 %           (13 %)
Canada                                      25.1         24.3         29.8              3 %           (18 %)
Total international                    $   394.9$  214.7$  235.1             84 %            (9 %)
Total                                  $ 1,418.9$  692.6$  717.1            105 %            (3 %)


 ______________

1 Includes North America-based advisers serving non-resident clients.



Average AUM by sales region was as follows:
(in billions)
for the fiscal years ended September 30,      2020         2019         2018       2020 vs. 2019     2019 vs. 2018
United States                              $  587.2$  473.3$  491.1           24 %              (4 %)
International
Asia-Pacific                                  102.4         90.4         95.2           13 %              (5 %)
Europe, Middle East and Africa                 97.8         91.5        105.8            7 %             (14 %)
Latin America1                                 23.1         14.6         17.3           58 %             (16 %)
Canada                                         22.4         27.2         31.1          (18 %)            (13 %)
Total international                        $  245.7$  223.7$  249.4           10 %             (10 %)
Total                                      $  832.9$  697.0$  740.5           19 %              (6 %)


 ______________

1 Includes North America-based advisers serving non-resident clients.

The percentage of average AUM in the United States sales region was 70%, 68% and 66% for fiscal years 2020, 2019 and 2018.

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The region in which investment products are sold may differ from the geographic
area in which we provide investment management and related services to the
products.
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 our institutional
products against benchmarks. Approximately half of our mutual fund AUM exceeded
the peer group median comparisons for all periods presented. Our institutional
products generated strong long-term results with at least 63% of AUM exceeding
the benchmark comparisons for all periods presented, primarily driven by the
performance of our fixed income products which had at least 73% of AUM exceeding
the benchmark comparisons.
The performance of our mutual fund products against peer group medians and of
our institutional products against benchmarks is presented in the table below.
                                        Peer Group Comparison1                           Benchmark Comparison2
                                         % of Mutual Fund AUM                            % of Institutional AUM
                                   in Top Two Peer Group Quartiles                        Exceeding Benchmark
as of September 30, 2020    1-Year        3-Year        5-Year     10-Year     1-Year      3-Year      5-Year     10-Year
Fixed Income                  58 %          53 %          51 %       56 %        73 %        80 %        92 %       97 %
Equity                        48 %          56 %          56 %       47 %        28 %        33 %        27 %       50 %
Total AUM3                    47 %          48 %          47 %       58 %        63 %        69 %        73 %       84 %


 _______________

1 Mutual 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 39%, 38%, 38% and

36% of our total AUM as of September 30, 2020.

2 Institutional performance measures the percent of institutional AUM beating

its benchmark. The benchmark comparisons are based on each

account's/composite's (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

institutional AUM measured for the 1-, 3-, 5- and 10-year periods represents

55%, 54%, 52% and 48% of our total AUM as of September 30, 2020.

3 Total AUM includes performance of our multi-asset and alternative AUM, which

each represent 9% of our total AUM at September 30, 2020.



Mutual fund performance data includes U.S. and cross-border domiciled mutual
funds and exchange-traded funds, and excludes cash management and fund of funds.
These results assume the reinvestment of dividends, are based on data available
as of October 12, 2020 and are subject to revision. While we remain focused on
achieving strong long-term performance, our future peer group and benchmark
rankings may vary from our past performance.


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OPERATING REVENUES
The table below presents the percentage change in each operating revenue
category.
(in millions)
for the fiscal years ended September 30,      2020          2019          2018        2020 vs. 2019     2019 vs. 2018
Investment management fees                 $ 3,981.7$ 3,985.2$ 4,367.5            0 %              (9 %)
Sales and distribution fees                  1,362.0       1,444.6       1,599.8           (6 %)            (10 %)
Shareholder servicing fees                     195.1         216.3         221.9          (10 %)             (3 %)
Other                                           27.7          23.3          15.3           19 %              52 %
Total Operating Revenues                   $ 5,566.5$ 5,669.4$ 6,204.5           (2 %)             (9 %)


Investment Management Fees
Investment management fees are generally calculated under contractual
arrangements with our investment products and the products for which we provide
sub-advisory services as a percentage of AUM. Annual fee rates vary by asset
class and type of services provided. Fee rates for products sold outside of the
U.S. are generally higher than for U.S. products.
Investment management fees decreased $3.5 million in fiscal year 2020 primarily
due to a 7% decrease in average AUM, lower effective investment management fee
rate and lower performance fees of the legacy Franklin business, largely offset
by $427.6 million of revenue earned by Legg Mason subsequent to the acquisition.
The decrease in average AUM of the legacy Franklin business occurred primarily
in the fixed income and equity asset classes, partially offset by an increase in
the alternative asset class, and across all sales regions except Europe, Middle
East and Africa.
Investment management fees decreased $382.3 million in fiscal year 2019
primarily due to a 6% decrease in average AUM, a $59.6 million decrease from a
change in presentation of certain fees from investment management fees to
distribution fees upon adoption of new revenue recognition accounting guidance
on October 1, 2018, and a lower effective investment management fee rate,
partially offset by higher performance fees. The decrease in average AUM
occurred primarily in the equity, fixed income and multi-asset asset classes,
partially offset by an increase in the alternative asset class, and across all
sales regions, most significantly in the U.S. and Europe, Middle East and
Africa.
Our effective investment management fee rate excluding performance fees
(investment management fees excluding performance fees divided by average AUM)
was 47.3, 56.4 and 58.7 basis points for fiscal years 2020, 2019 and 2018. The
rate decrease in fiscal year 2020 was primarily due to the Legg Mason
acquisition, as Legg Mason generally has a lower overall effective fee rate due
to a higher mix of institutional and fixed income AUM. The fee rate decrease is
also due to higher weighting of AUM in lower-fee products, a shift from
higher-fee products in the U.S. sales region to lower-fee products in Europe,
Middle East and Africa sales regions for the fixed income asset class, and
certain sponsored funds in India with total AUM of $3.4 billion at September 30,
2020, which are subject to the decision of the funds' trustees to wind up the
funds (see Note 16 - Commitments and Contingencies in the notes to consolidated
financial statements in Item 8 of Part II of this Annual Report for further
information), and for which the Company no longer earns investment management
fees.
Performance-based investment management fees were $44.0 million, $52.9 million
and $21.2 million for fiscal years 2020, 2019 and 2018. The decrease in fiscal
year 2020 was primarily due to lower performance fees earned from a private debt
fund, separate accounts, and a real estate fund, while the increase in fiscal
year 2019 was primarily due to the higher fees earned from the same funds. The
decrease in fiscal year 2020 was partially offset by $15.0 million of
performance fees earned by Legg Mason subsequent to the acquisition.


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U.S. industry asset-weighted average management fee rates were as follows: (in basis points)

                            Industry Average1
for the fiscal years ended September 30,   2020     2019    2018
Fixed Income2                               27       29      30
Equity3                                     32       33      36
Multi-Asset                                 37       38      40
Alternative4                                62       72      77
Cash Management                             16       16      16


 ________________

1 U.S. industry asset-weighted average management fee rates were calculated

using information available from Lipper, a Refinitiv Company, as of

September 30, 2020, 2019 and 2018 and include all U.S.-registered open-end

funds that reported expense data to Lipper as of the funds' most recent

annual report date, and for which expenses were equal to or greater than

zero. As defined by Lipper, management fees include fees from providing

advisory and fund administration services. The averages combine retail and

institutional funds data and include all share classes and distribution

channels, without exception. Variable annuity and fund of fund products are

not included.

2 The decreases in the average rate in fiscal years 2020 and 2019 reflect

higher weightings of two large low-fee passive funds and lower weightings of

two large higher-fee actively managed funds.

3 The decreases in the average rate in fiscal years 2020 and 2019 reflect

higher weightings of two large low-fee passive funds.

4 The decreases in the average rate in fiscal years 2020 and 2019 reflect

higher weightings of one large low-fee passive fund.



The declines in U.S. industry average management fee rates for long-term asset
classes generally reflect increased investor demand for lower-fee passive funds.
Our actual effective investment management fee rates are generally higher than
the U.S. industry average rates as we actively manage substantially all of our
products and have a higher level of international AUM, both of which generate
higher fees. Our fiscal year 2020 effective fee rates in the U.S. generally
decreased to a greater extent than the average industry rates following the
acquisition of Legg Mason on July 31, 2020 and are expected to decrease further
in the fiscal year ending September 30, 2021 which will include a full year of
Legg Mason results.
Our product offerings and global operations are diverse. As such, the impact of
future changes in AUM on investment management fees will be affected by the
relative mix of asset class, geographic region, distribution channel and
investment vehicle of the assets.
Sales and Distribution Fees
Sales and distribution fees primarily consist of upfront sales commissions and
ongoing distribution fees. Sales commissions are earned from the sale of certain
classes of sponsored funds at the time of purchase ("commissionable sales") and
may be reduced or eliminated depending on the amount invested and the type of
investor. Therefore, sales fees generally will change with the overall level of
gross sales, the size of individual transactions, and the relative mix of sales
between different share classes and types of investors.
Our sponsored mutual funds generally pay us distribution fees in return for
sales, marketing and distribution efforts on their behalf. The majority of our
U.S. mutual funds, with the exception of certain money market funds and certain
other funds specifically designed for purchase through separately managed
account programs, have adopted distribution plans under Rule 12b-1 (the
"Rule 12b-1 Plans") promulgated under the Investment Company Act of 1940. The
Rule 12b-1 Plans permit the funds to pay us for marketing, marketing support,
advertising, printing and sales promotion services relating to the distribution
of their shares, subject to the Rule 12b-1 Plans' limitations on amounts based
on daily average AUM. We earn distribution fees from our non-U.S. funds based on
daily average AUM.
We pay substantially all of our sales and distribution fees to the financial
advisers, broker-dealers and other intermediaries that sell our funds on our
behalf. See the description of sales, distribution and marketing expenses below.


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Sales and distribution fees by revenue driver are presented below.
(in millions)
for the fiscal years ended September 30,      2020          2019          2018        2020 vs. 2019     2019 vs. 2018
Asset-based fees                           $ 1,096.3$ 1,188.2$ 1,314.3          (8 %)             (10 %)
Sales-based fees                               245.9         244.0         270.3           1 %              (10 %)
Contingent sales charges                        19.8          12.4          15.2          60 %              (18 %)
Sales and Distribution Fees                $ 1,362.0$ 1,444.6$ 1,599.8          (6 %)             (10 %)


Asset-based distribution fees decreased $91.9 million in fiscal year 2020
primarily due to decreases of $79.2 million from a 7% decrease in the related
average AUM and $38.6 million from a higher mix of lower-fee U.S. assets,
partially offset by a $35.3 million increase from fees earned by Legg Mason
subsequent to the acquisition. Asset-based distribution fees decreased
$126.1 million in fiscal year 2019 primarily due to decreases of $120.5 million
from a 9% decrease in the related average AUM and $67.6 million from a lower mix
of U.S. Class C assets which have higher fee rates than other share classes,
partially offset by a $59.6 million increase from a change in presentation of
certain fees to distribution fees from investment management fees upon adoption
of new revenue recognition accounting guidance on October 1, 2018.
Sales-based fees increased $1.9 million in fiscal year 2020 primarily due to
increases of $9.8 million from fees earned by Legg Mason subsequent to the
acquisition, $7.2 million from higher U.S. product commissionable sales and,
$2.9 million from a higher mix of equity sales, which typically generate higher
sales fees than fixed income products. The increases were substantially offset
by a decrease of $18.7 million from lower non-U.S. product commissionable sales.
Sales-based fees decreased $26.3 million in fiscal year 2019 primarily due to
decreases of $18.2 million from lower total commissionable sales and
$5.3 million from a lower mix of U.S. product commissionable sales.
Contingent sales charges are earned from investor redemptions within a
contracted period of time. Substantially all of these charges are levied on
certain shares sold without a front-end sales charge, and vary with the mix of
redemptions of these shares. Contingent sales charges increased $7.4 million in
fiscal year 2020 and decreased $2.8 million in fiscal year 2019 primarily due to
changes in redemptions.
Shareholder Servicing Fees
Substantially all shareholder servicing fees are earned from our sponsored funds
for providing transfer agency services, which include providing shareholder
statements, transaction processing, customer service and tax reporting. These
fees are primarily determined based on a percentage of AUM and either the number
of transactions in shareholder accounts or the number of shareholder accounts,
while fees from certain funds are based only on AUM. In addition, fund
reimbursements of expenses incurred while providing transfer agency services are
recognized as revenue effective October 1, 2018 under new revenue recognition
guidance.
Shareholder servicing fees decreased $21.2 million in fiscal year 2020 primarily
due to lower levels of related AUM and transactions. Shareholder servicing fees
decreased $5.6 million in fiscal year 2019 primarily due to lower levels of
related AUM and transactions, partially offset by $8.6 million of fund expense
reimbursement revenue.
Other
Other revenue increased $4.4 million and $8.0 million in fiscal years 2020 and
2019 primarily due to higher miscellaneous fee revenues.


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OPERATING EXPENSES
The table below presents the percentage change in each operating expense
category.
(in millions)
for the fiscal years ended September 30,      2020          2019          2018        2020 vs. 2019     2019 vs. 2018
Compensation and benefits                  $ 1,873.9$ 1,584.7$ 1,390.6           18 %              14 %
Sales, distribution and marketing            1,703.1       1,819.6       2,039.7           (6 %)            (11 %)
Information systems and technology             288.4         258.5         243.9           12 %               6 %
Occupancy                                      147.9         133.6         128.6           11 %               4 %
Amortization of intangible assets               54.0          14.7           1.8          267 %             717 %
General, administrative and other              450.3         391.4         371.7           15 %               5 %
Total Operating Expenses                   $ 4,517.6$ 4,202.5$ 4,176.3            7 %               1 %


Compensation and Benefits
The components of compensation and benefits expenses are presented below.
(in millions)
for the fiscal years ended September 30,      2020          2019          2018        2020 vs. 2019     2019 vs. 2018
Salaries, wages and benefits               $ 1,072.1$   974.9$   928.4           10 %                 5 %
Variable compensation                          551.2         490.6         454.3           12 %                 8 %
Acquisition-related retention                  195.8          63.7           7.9          207 %               706 %
Special termination benefits                    54.8          55.5             -           (1 %)               NM

Compensation and Benefits Expenses $ 1,873.9$ 1,584.7$ 1,390.6

           18 %                14 %


Salaries, wages and benefits increased $97.2 million and $46.5 million in fiscal
year 2020 and 2019, primarily due to increases of $56.9 million and
$23.8 million from higher average staffing levels primarily resulting from
acquisitions, and $19.3 million and $24.5 million for annual salary increases
that were effective December 1 of each fiscal year, partially offset by
decreases of $5.9 million and $12.5 million from favorable foreign currency
impacts. The increase in fiscal year 2020 also included a $16.2 million increase
in other termination benefits.
Variable compensation increased $60.6 million and $36.3 million in fiscal year
2020 and 2019, primarily due to increases of $67.7 million and $52.4 million
related to acquired firms' bonus plans and $10.0 million and $2.2 million
related to private equity and other product performance fees, partially offset
by decreases of $9.6 million and $18.0 million in bonus expense primarily due to
lower expectations of our annual performance. Variable compensation related to
unvested mutual fund awards decreased $11.3 million in fiscal year 2020 and
increased $3.8 million in fiscal year 2019. The increases in fiscal year 2019
were also partially offset by a $7.9 million decrease in stock and stock unit
award amortization.
Acquisition-related retention expenses increased $132.1 million in fiscal year
2020 primarily related to the acquisition of Legg Mason, and increased
$55.8 million in fiscal year 2019 primarily related to the acquisition of
Benefit Street Partners, L.L.C. ("BSP").
Special termination benefits relate to workforce optimization initiatives
related to the acquisition of Legg Mason in fiscal year 2020, and voluntary
separation and workforce reduction initiatives of 4.5% of our global workforce
in fiscal year 2019.
We expect to incur acquisition-related retention expenses of approximately
$150 million during the fiscal year ending September 30, 2021 ("fiscal year
2021"), and amounts that decrease by approximately $20 million per year in the
following three fiscal years. At September 30, 2020, our global workforce had
increased to approximately 11,800 employees from approximately 9,600 at
September 30, 2019.
We continue to place a high emphasis on our pay for performance philosophy. As
such, any changes in the underlying performance of our investment products or
changes in the composition of our incentive compensation offerings could have an
impact on compensation and benefits expenses going forward. However, in order to
attract and retain talented individuals, our level of compensation and benefit
expenses may increase more quickly or decrease more slowly than our revenue.


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Sales, Distribution and Marketing
Sales, distribution and marketing expenses primarily relate to services provided
by financial advisers, broker-dealers and other intermediaries to our sponsored
funds, including marketing support services. Substantially all sales expenses
are incurred from the same commissionable sales transactions that generate sales
fee revenues and are determined as a percentage of sales. Substantially all
distribution expenses are incurred from assets that generate distribution fees
and are determined as a percentage of AUM. Marketing support expenses are based
on AUM, sales or a combination thereof. Also included is the amortization of
deferred sales commissions related to upfront commissions on shares sold without
a front-end sales charge. The deferred sales commissions are amortized over the
periods in which commissions are generally recovered from related revenues.
Sales, distribution and marketing expenses by cost driver are presented below.
(in millions)
for the fiscal years ended September 30,        2020          2019          2018        2020 vs. 2019     2019 vs. 2018
Asset-based expenses                         $ 1,369.0$ 1,476.0$ 1,703.9          (7 %)             (13 %)
Sales-based expenses                             253.8         257.8         255.1          (2 %)               1 %

Amortization of deferred sales commissions 80.3 85.8

   80.7          (6 %)               6 %
Sales, Distribution and Marketing            $ 1,703.1$ 1,819.6$ 2,039.7          (6 %)             (11 %)


Asset-based expenses decreased $107.0 million in fiscal year 2020 primarily due
to decreases of $107.4 million from an 8% decrease in the related average AUM
and $53.4 million from a higher mix of lower-fee U.S. assets, partially offset
by a $58.6 million increase in expenses incurred by Legg Mason subsequent to the
acquisition. Asset-based expenses decreased $227.9 million in fiscal year 2019
primarily due to decreases of $161.4 million from a 10% decrease in the related
average AUM, and $64.3 million from a lower mix of U.S. Class C assets which
have higher expense rates than other share classes. Distribution expenses are
generally not directly correlated with distribution fee revenues due to certain
international fee structures that do not provide full recovery of distribution
costs.
Sales-based expenses decreased $4.0 million in fiscal year 2020 primarily due to
a $20.3 million decrease from lower non-U.S. product commissionable sales,
largely offset by an $8.6 million increase in expenses incurred by Legg Mason
subsequent to the acquisition and a $7.5 million increase from higher U.S.
product commissionable sales. U.S. products typically generate higher sales
commissions than non-U.S. products. Sales-based expenses increased $2.7 million
in fiscal year 2019 primarily due to increases of $22.6 million from the
recognition of sales commissions on U.S. Class C shares as expense at the time
of sale and $10.0 million from revised U.S. dealer commission pricing effective
September 2018, partially offset by decreases of $14.2 million from lower total
commissionable sales and $12.6 million in India primarily related to
regulatory-driven changes in fee structure. The recognition of sales commissions
on U.S. Class C shares as expense at the time of sale is consistent with the
treatment of contract costs with a useful life of one year or less under new
revenue recognition accounting guidance adopted on October 1, 2018. The
commissions relate to shares sold without a front-end sales charge and were
deferred and amortized over one year in prior years.
Amortization of deferred sales commissions decreased $5.5 million in fiscal year
2020, primarily due to a $15.0 million decrease from lower sales of non-U.S.
shares sold without front-end sales charge, partially offset by an $8.6 million
increase from higher sales of U.S. shares. Amortization of deferred sales
commissions increased $5.1 million in fiscal year 2019, as the impact of higher
sales of shares sold without a front-end sales charge was largely offset by the
change in accounting for U.S. Class C shares discussed above, which resulted in
no further deferral and amortization. The unamortized deferred Class C
commission balance of $9.1 million at September 30, 2018 was reversed against
retained earnings upon adoption of the new accounting guidance.
Information Systems and Technology
Information systems and technology expenses increased $29.9 million in fiscal
year 2020 primarily due to expenses of Legg Mason subsequent to closing of the
acquisition. Information systems and technology expenses increased $14.6 million
in fiscal year 2019 primarily due to higher external data service and software
costs.


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Occupancy

We conduct our worldwide operations using a combination of leased and owned
facilities. Occupancy expenses include rent and other facilities-related costs
including depreciation and utilities.
Occupancy expenses increased $14.3 million in fiscal year 2020 primarily due to
expenses of Legg Mason subsequent to closing of the acquisition, and higher
depreciation expense related to our buildings in San Mateo, California and
Poznan, Poland which we occupied beginning in the second half of fiscal year
2019, partially offset by lower levels of rent expense and building maintenance
costs. Occupancy expenses increased $5.0 million in fiscal year 2019 primarily
due to higher levels of rent expense and building depreciation and maintenance
costs, partially offset by a $6.3 million decrease in equipment impairment.
Amortization of intangible assets
Amortization of intangible assets increased $39.3 million in fiscal year 2020
primarily related to the acquisition of Legg Mason, and increased $12.9 million
in fiscal year 2019 primarily related to the acquisition of BSP. See Note 9 -
Goodwill and Other Intangible Assets in the notes to consolidated financial
statements in Item 8 of Part II of this Annual Report for information on
definite-lived intangible assets.
General, Administrative and Other
General, administrative and other operating expenses primarily consist of
professional fees, fund-related service fees payable to external parties,
impairments of intangible assets and goodwill, advertising and promotion, travel
and entertainment, and other miscellaneous expenses.
General, administrative and other operating expenses increased $58.9 million in
fiscal year 2020, primarily due to increases of $48.0 million in
acquisition-related professional fees and $19.3 million of post-acquisition
general and administrative expenses, both related to Legg Mason. Additionally,
impairments of intangible assets and goodwill increased $42.1 million primarily
related to assets recognized from the acquisitions of BSP and Onsa, Inc.,
(formally known as TokenVault, Inc.). The increases were partially offset by
decreases of $24.6 million in travel and entertainment expenses and
$13.8 million in advertising and promotion expenses, both primarily due to lower
activity levels, and by a prior year litigation settlement.
General, administrative and other operating expenses increased $19.7 million in
fiscal year 2019 primarily due to a $13.9 million litigation settlement and
higher third-party service fees and professional fees. Third-party fees
primarily for sub-advisory and fund administration services increased
$13.7 million, including $8.6 million from the recognition of certain payments
reimbursed by funds as expense upon adoption of new revenue recognition
accounting guidance on October 1, 2018. Professional fees increased
$10.6 million primarily related to the acquisition of BSP. The increases were
partially offset by decreases of $11.1 million in contingent consideration
expense for the K2 Advisors Holdings, LLC ("K2") acquisition and $8.6 million in
advertising and promotion.


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OTHER INCOME (EXPENSES)
Other income (expenses) consisted of the following:
(in millions)
for the fiscal years ended September
30,                                        2020         2019         2018       2020 vs. 2019     2019 vs. 2018
Investment and other income (losses),
net                                     $  (38.4 )$  141.4$  200.3           NM               (29 %)
Interest expense                           (33.4 )      (22.4 )      (46.3 )         49 %             (52 %)
Investment and other income of
consolidated investment products, net       70.2         78.8         59.6          (11 %)             32 %
Expenses of consolidated investment
products                                   (29.4 )      (16.9 )      (26.6 )         74 %             (36 %)
Other Income (Expenses), Net            $  (31.0 )$  180.9$  187.0           NM                (3 %)


In fiscal year 2020, the Company changed the presentation of its consolidated
statements of income to include dividend and interest income and other expenses
from consolidated investment products ("CIPs") in non-operating income
(expense). Amounts for the comparative prior fiscal years have been reclassified
to conform to the current presentation. See Note 1 - Significant Accounting
Policies in the notes to consolidated financial statements in Item 8 of Part II
of this Annual Report for more information.
Investment and other income (losses), net consists primarily of income (losses)
from equity method investees, dividend and interest income, rental income from
excess owned space in our San Mateo, California corporate headquarters and other
office buildings which we lease to third parties, foreign currency exchange
gains (losses), and gains (losses) on investments held by the Company.
Investment and other income (losses), net decreased $179.8 million in fiscal
year 2020 primarily due to the impact of steep declines in market valuations on
investment income, lower dividend and interest income, and foreign exchange
losses, partially offset by an increase in rental income. Losses from equity
method investees increased $87.7 million, primarily related to investments in
two global equity funds. Dividend income decreased $48.1 million primarily due
to lower yields on money market funds. Net foreign currency exchange losses were
$22.3 million in fiscal year 2020 as compared to net gains of $13.1 million in
the prior year. The decrease was primarily due to the impact of the weakening of
the U.S. dollar against the Euro on cash and cash equivalents denominated in
U.S. dollars held in Europe.
Interest income decreased $16.7 million primarily due to lower levels of cash
equivalents and debt securities and lower interest rates. The decreases were
partially offset by a $10.2 million increase in rental income due to additional
leases which took effect in fiscal year 2020.
Investment and other income (losses), net decreased $58.9 million in fiscal year
2019 primarily due to losses from equity method investees, as compared to income
in the prior year, lower interest income and losses on investments held by the
Company, as compared to gains in the prior year. These decreases were largely
offset by higher dividend income and higher foreign exchange gains. Equity
method investees generated losses of $10.4 million as compared to income of
$44.4 million in the prior year primarily due to changes in market valuations of
investments held by two global equity funds. Interest income decreased
$45.5 million primarily due to lower levels of cash equivalents and debt
securities, partially offset by higher interest rates. Investments held by the
Company generated net losses of $9.7 million primarily due to $9.0 million of
other-than-temporary impairment of an available-for-sale debt security, as
compared to net gains of $6.0 million in the prior year. The decreases were
partially offset by a $45.9 million increase in dividend income primarily due to
higher yields on, and investments in, money market funds. Net foreign currency
exchange gains increased $12.5 million primarily from the impact of
strengthening of the U.S. dollar against the Euro on cash and cash equivalents
denominated in U.S. dollars held in Europe.
Interest expense increased $11.0 million in fiscal year 2020 primarily due to
interest expense recognized on debt of Legg Mason subsequent to the acquisition.
Interest expense decreased $23.9 million in fiscal year 2019 primarily due to
$12.5 million of prior year costs related to early redemption of senior notes
and lower debt balances.
Investment and other income of consolidated investment products, net consists of
dividend and interest income and investment gains (losses) on investments held
by CIPs. Expenses of consolidated investment products primarily consists of
fund-related expenses, including professional fees and other administrative
expenses, and interest expense. Significant portions of the investment and other
income of consolidated investment products, net and expenses of consolidated
investment products are offset in noncontrolling interests in our consolidated
statements of income.


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Investment and other income of consolidated investment products, net decreased
$8.6 million in fiscal year 2020. Net losses on investments held by CIPs
increased $12.6 million primarily from holdings of various alternative funds
partially offset by gains from holdings of various equity funds and a U.S. fixed
income fund. This decrease was partially offset by a $4.0 million increase in
dividend and interest income of CIPs.
Investment and other income of consolidated investment products, net increased
$19.2 million in fiscal year 2019. Net losses on investments held by CIPs
decreased $28.7 million primarily from holdings of various global/international
funds and a U.S. fixed income fund. This increase was partially offset by a
$9.5 million decrease in investment income of CIPs.
Expenses of consolidated investment products increased $12.5 million in fiscal
year 2020, primarily due to higher expenses incurred by two alternative funds.
Expenses of consolidated investment products decreased $9.7 million in fiscal
year 2019, primarily due to lower expenses incurred by an equity fund and a
fixed income fund.
Our investments in sponsored funds include initial cash investments made in the
course of launching mutual fund and other investment product offerings, as well
as investments for other business reasons. The market conditions that impact our
AUM similarly affect the investment income earned or losses incurred on our
investments in sponsored funds.
Our cash, cash equivalents and investments portfolio by asset class and
accounting classification at September 30, 2020, excluding third-party assets of
CIPs, was as follows:
                                                 Accounting Classification 1
                                               Investments,
                            Cash and Cash           at            Equity Method           Other         Direct Investments     Total Direct
(in millions)                Equivalents        Fair Value         Investments         Investments            in CIPs            Portfolio
Cash and Cash
Equivalents               $       3,026.8     $           -     $              -     $           -     $                 -     $   3,026.8
Investments
Fixed Income                            -             198.7                139.7              40.8                   242.9           622.1
Equity                                  -             209.4                308.9              22.8                    67.9           609.0
Multi-Asset                             -              64.4                 50.2                 -                    64.3           178.9
Alternative                             -              32.3                183.4              19.9                   410.2           645.8
Total investments                       -             504.8                682.2              83.5                   785.3         2,055.8
Total Cash and Cash
Equivalents and
Investments               $       3,026.8$       504.8     $          682.2     $        83.5     $             785.3     $   5,082.6

______________

1 See Note 1 - Significant Accounting Policies and Note 6 - Investments in the

notes to consolidated financial statements in Item 8 of Part II of this

Annual Report for information on investment accounting classifications.



TAXES ON INCOME
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 from 35% to 21% effective January 1, 2018 and assessment of a
one-time transition tax on the deemed repatriation of post-1986 undistributed
foreign subsidiaries' earnings. We completed our analysis of the Tax Act impact
during the quarter ended December 31, 2018 with no significant adjustment to the
provisional amounts previously recorded. The transition tax expense recognized
in fiscal year 2018 was net of an $87.6 million tax benefit related to U.S.
taxation of deemed foreign dividends. This benefit was reversed in fiscal year
2019 upon issuance of final regulations by the U.S. Department of Treasury.
Our effective income tax rate for fiscal year 2020 was 22.7% as compared to
26.8% in fiscal year 2019 and 66.5% in fiscal year 2018. The rate decrease in
fiscal year 2020 was primarily due to the prior-year reversal of the tax benefit
included in the transition tax related to U.S. taxation of deemed foreign
dividends upon issuance of final regulations by the U.S. Department of Treasury
for the Tax Act, tax benefits from capital losses subsequent to the change in
corporate tax structure of a foreign holding company to a U.S. branch, and a
statutory rate reduction enacted in India in December 2019. These decreases were
partially offset by an increase in the tax rate due to a lower mix of earnings
in lower tax jurisdictions. 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 our income taxes. The rate
decrease in fiscal year 2019 was primarily


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due to the prior year impact of the transition tax, net of the tax benefit from
the revaluation of net deferred tax liabilities at the lower statutory rate, and
the current year impact of the lower 21% statutory rate as compared to the
prior-year blended statutory rate of 24.5%, partially offset by the reversal of
the tax benefit related to the U.S. taxation of deemed foreign dividends. Our
effective income tax rate excluding the one-time impacts of the Tax Act was
21.6% and 22.7% for fiscal years 2019 and 2018.
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 as these measures exclude the impact of CIPs
and mitigate the margin variability related to sales and distribution revenues
and expenses across multiple distribution channels globally. These measures also
exclude performance-based investment management fees which are fully passed
through as compensation and benefits expense per the terms of a previous
acquisition by Legg Mason and have no impact on net income. These non-GAAP
measures also exclude acquisition-related expenses, certain items which
management considers to be nonrecurring, unrealized investment gains and losses
included in investment and other income (losses), net, and the related income
tax effect of these adjustments, as applicable. These non-GAAP measures also
exclude the impact on compensation and benefits expense which is offset by gains
and losses in investment and other income (losses), net on investments made to
fund deferred compensation plans and on seed investments under certain
historical revenue sharing arrangements.
"Adjusted operating income," "adjusted operating margin," "adjusted net income"
and "adjusted diluted earnings per share" are defined below, followed by
reconciliations of operating income, operating margin, net income attributable
to Franklin Resources, Inc. and diluted earnings per share on a U.S. GAAP basis
to these non-GAAP measures. Non-GAAP measures should not be considered in
isolation from, or as substitutes for, any financial information prepared in
accordance with U.S. GAAP, and may not be comparable to other similarly titled
measures of other companies. Additional reconciling items may be added in the
future to these non-GAAP measures if deemed appropriate.
Adjusted Operating Income
We define adjusted operating income as operating income adjusted to exclude the
following:
• Elimination of operating revenues upon consolidation of investment products.


• Acquisition-related retention compensation.


•      Impact on compensation and benefits expense from gains and losses on
       investments related to Legg Mason deferred compensation plans and seed

investments, which is offset in investment and other income (expense),

       net.


•      Other acquisition-related expenses including professional fees and fair
       value adjustments related to contingent consideration liabilities.

• Amortization and impairment of intangible assets and goodwill.

• Special termination benefits related to workforce optimization initiatives

       related to the acquisition of Legg Mason in fiscal year 2020, and
       voluntary separation and workforce reduction initiatives of 4.5% of our
       global workforce in fiscal year 2019.




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Adjusted Operating Margin
We calculate adjusted operating margin as adjusted operating income divided by
adjusted operating revenues. We define adjusted operating revenues as operating
revenues adjusted to exclude the following:
•      Acquisition-related performance-based investment management fees which are

passed through as compensation and benefits expense.

• Sales and distribution fees and a portion of investment management fees

allocated to cover sales, distribution and marketing expenses paid to the

       financial advisers and other intermediaries who sell our funds on our
       behalf.

• Elimination of operating revenues upon consolidation of investment products.



Adjusted Net Income
We define adjusted net income as net income attributable to Franklin Resources,
Inc. adjusted to exclude the following:
•      Activities of CIPs, including investment and other income (losses), net,

other expenses and income (loss) attributable to noncontrolling interests,

net of revenues eliminated upon consolidation of investment products.

• Acquisition-related retention compensation.

• Other acquisition-related expenses including professional fees and fair

value adjustments related to contingent consideration liabilities and the

market-based component of retention awards.

• Amortization and impairment of intangible assets.

• Impairment of goodwill and write off of noncontrolling interests related

to the wind down of a recently acquired business.

• Special termination benefits related to workforce optimization initiatives

       related to the acquisition of Legg Mason in fiscal year 2020, and
       voluntary separation and workforce reduction initiatives of 4.5% of our
       global workforce in fiscal year 2019.


•      Net gains or losses on investments related to Legg Mason deferred
       compensation plans which are not offset by compensation and benefits
       expense.


•      Unrealized investment gains and losses included in investment and other

income (losses), net, other than those that are offset by compensation and

       benefits expense.


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

• Net income tax expense of the above adjustments based on the respective

blended rates applicable to the adjustments.



Adjusted Diluted Earnings Per Share
We define adjusted diluted earnings per share as diluted earnings per share
adjusted to exclude the per share impacts of the adjustments applied to net
income in calculating adjusted net income.
In calculating adjusted operating income, adjusted operating margin, adjusted
net income and adjusted diluted earnings per share, we adjust for activities of
CIPs because the impact of consolidated products are not considered reflective
of the underlying results of our operations. We adjust for acquisition-related
retention compensation, other acquisition-related expenses, amortization and
impairment of intangible assets and goodwill, the write-off of noncontrolling
interests, and interest expense for amortization of the Legg Mason debt premium
to facilitate comparability of our operating results with the results of other
asset management firms. We adjust for special termination benefits related to
workforce optimization initiatives related to the acquisition of Legg Mason in
fiscal year 2020 and certain voluntary separation and workforce reduction
initiatives because these items are deemed nonrecurring. In calculating adjusted
net income and adjusted diluted earnings per share, we adjust for unrealized
investment gains and losses included in investment and other income (losses),
net and net gains or losses on investments related to Legg Mason deferred
compensation plans which are not offset by compensation and benefits expense
because these items primarily relate to seed and strategic investments which
have been and are generally expected to be held long term.


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The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows: (in millions) for the fiscal years ended September 30,

                2020          2019  

2018

Operating income                                     $ 1,048.9$ 1,466.9$ 2,028.2
Add (subtract):
Elimination of operating revenues upon
consolidation of investment products¹                     23.6          30.7          35.2
Acquisition-related retention                            195.8          63.7           7.9
Compensation and benefits expense from gain on
deferred compensation and seed investments, net            1.2             -             -
Other acquisition-related expenses                        57.4           9.4          14.7
Amortization of intangible assets                         54.0          14.7           1.8
Impairment of goodwill and intangible assets              55.4          13.3           5.7
Special termination benefits                              54.8          55.5             -
Adjusted operating income                            $ 1,491.1$ 1,654.2$ 2,093.5

Total operating revenues                             $ 5,566.5$ 5,669.4$ 6,204.5
Add (subtract):
Acquisition-related pass through performance fees         (9.4 )           -             -
Sales and distribution fees                           (1,362.0 )    (1,444.6 )    (1,599.8 )
Allocation of investment management fees for
sales, distribution and marketing expenses              (341.1 )      (375.0 )      (439.9 )
Elimination of operating revenues upon
consolidation of investment products¹                     23.6          30.7          35.2
Adjusted operating revenues                          $ 3,877.6$ 3,880.5$ 4,200.0

Operating margin                                          18.8 %        25.9 %        32.7 %
Adjusted operating margin                                 38.5 %        42.6 %        49.8 %




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(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
Add (subtract):
Net income of consolidated investment products¹           (4.6 )        (3.7 )        (5.8 )
Acquisition-related retention                            195.8          63.7           7.9
Other acquisition-related expenses                        58.6           9.4          14.5
Amortization of intangible assets                         54.0          14.7           1.8
Impairment of goodwill and intangible assets              55.4          13.3           5.7
Special termination benefits                              54.8          55.5             -
Net gains on deferred compensation plan
investments not offset by compensation and
benefits expense                                          (0.1 )           -             -
Unrealized investment losses included in
investment and other income (losses), net                221.0          

20.0 15.3 Interest expense for amortization of debt premium (4.7 ) -

             -
Write off of noncontrolling interests                    (16.7 )           -             -
Net income tax expense of adjustments                   (101.4 )       (37.3 )        (5.7 )
Adjusted net income                                  $ 1,311.0$ 1,331.3$   798.1

Diluted earnings per share                           $    1.59$    2.35$    1.39
Adjusted diluted earnings per share                       2.61          

2.62 1.45

__________________

1 The impact of consolidated investment products is summarized as follows:



(in millions)
for the fiscal years ended September 30,              2020           2019   

2018

Elimination of operating revenues upon
consolidation                                     $    (23.6 )$    (30.7 )$    (35.2 )
Other income, net                                       33.6           39.8 

18.6

Less: income (loss) attributable to
noncontrolling interests                                 5.4            5.4          (22.4 )
Net income                                        $      4.6$      3.7$      5.8


LIQUIDITY AND CAPITAL RESOURCES
Cash flows were as follows:
(in millions)
for the fiscal years ended September 30,      2020           2019          2018
Operating cash flows                       $ 1,021.4$    201.6$ 2,229.7
Investing cash flows                        (3,243.1 )     (1,077.1 )      (290.4 )
Financing cash flows                           194.2          (40.5 )    (3,761.7 )


Net cash provided by operating activities increased in fiscal year 2020
primarily due to lower net purchases of investments by CIPs, decreases in
investments, net, decreases in receivables and other assets, and a smaller
decline in taxes payable, partially offset by decreases in accounts payable and
accrued expenses, and decreases in net income. Net cash used in investing
activities increased as compared to the prior year, primarily due to higher cash
paid for acquisitions, and net purchases of investments by CLOs, partially
offset by net consolidation of CIPs as compared to net deconsolidation in the
prior year, higher net liquidation of our investments as compared to the prior
year, and lower net additions of property, plant and equipment. Net cash
provided by financing activities, as compared to net cash used in the prior
year, primarily resulted from proceeds from debt of CIPs and lower repurchases
of stock, partially offset by lower net subscriptions in CIPs by noncontrolling
interests and payments on debt by CIPs.


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Net cash provided by operating activities decreased in fiscal year 2019
primarily due to activities of CIPs which had net purchases of investments as
compared to net liquidations in the prior year. Net cash used in investing
activities increased primarily due to cash paid for BSP and higher net additions
of property and equipment primarily related to construction of two new buildings
at our corporate headquarters campus in San Mateo, California and a purchased
office building in Poznan, Poland. Net cash used in financing activities
decreased primarily due to lower dividends paid on, and repurchases of, common
stock, higher net subscriptions in CIPs by noncontrolling interests, and a
prior-year debt payment.
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)
as of September 30,            2020         2019         2018

Assets

Cash and cash equivalents   $ 3,026.8$ 5,803.4$ 6,610.8
Receivables                   1,114.8        740.0        733.7
Investments                     982.2      2,029.4      2,130.6
Total Liquid Assets         $ 5,123.8$ 8,572.8$ 9,475.1

Liability
Debt                        $ 3,017.1$   696.9$   695.9


Liquidity
Liquid assets consist of cash and cash equivalents, receivables and certain
investments. Cash and cash equivalents at September 30, 2020 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. Liquid
assets used to satisfy these purposes were $3,290.9 million at September 30,
2020 and $3,429.0 million at September 30, 2019, including $316.6 million and
$263.3 million that was restricted by regulatory requirements. Should we require
more capital than is available for use, we could elect to reduce the level of
discretionary activities, such as share repurchases or investments in sponsored
and other products, or we could raise capital through debt or equity issuance.
These alternatives could result in increased interest expense, decreased
dividend or interest income, or other dilution to our earnings.
Capital Resources
We believe that we can meet our present and reasonably foreseeable operating
cash needs and future commitments through existing liquid assets, continuing
cash flows from operations, the ability to issue debt or equity securities and
borrowing capacity under our uncommitted private placement program.
In prior fiscal years, we issued senior unsecured unsubordinated notes for
general corporate purposes, to redeem outstanding notes and to finance an
acquisition. At September 30, 2020, $699.5 million of the notes were outstanding
with an aggregate principal amount due of $700.0 million. The notes were issued
at fixed interest rates and consist of $300.0 million at 2.800% per annum which
mature in 2022 and $400.0 million at 2.850% per annum which mature in 2025.


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Additionally, Legg Mason has outstanding senior and junior unsecured
unsubordinated notes with an aggregate principal amount due of $2,000.0 million
at September 30, 2020. The notes have fixed interest rates from 3.950% to 6.375%
with interest payable semi-annually for senior notes and quarterly for junior
notes, and have an aggregate carrying value, inclusive of unamortized premium,
of $2,319.7 million at September 30, 2020.
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 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
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 were in compliance with all debt
covenants at September 30, 2020.
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. 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.
At September 30, 2020, 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,
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, fund property and
equipment purchases, and service and repay debt. While we expect to continue to
repurchase shares to offset dilution from share-based compensation, and expect
to continue to repurchase shares opportunistically from time to time, we will
likely spend more of our post-dividend free cash flow investing in our business,
including seed capital and acquiring resources to help grow our investment
teams, affiliates and operations.
We repatriate the earnings in excess of regulatory, capital or operational
requirements for all non-U.S. subsidiaries.
We declare dividends on a quarterly basis. We declared regular dividends of
$1.08 per share ($0.27 per share per quarter) in fiscal year 2020, and of $1.04
per share ($0.26 per share per quarter) in fiscal year 2019. 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 regular 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. During fiscal years 2020 and 2019,
we repurchased 9.0 million and 24.6 million shares of our common stock at a cost
of $219.4 million and $756.3 million. At September 30, 2020, 38.2 million shares
remained available for repurchase under the authorization of 80.0 million shares
approved by our Board of Directors in April 2018.
We redeemed $636.6 million, net of investments, in our sponsored products during
fiscal year 2020, and invested $128.0 million, net of redemptions, during fiscal
year 2019.
On July 31, 2020, we acquired all of the outstanding common stock of Legg Mason
for a purchase consideration of $4.5 billion in cash and $0.2 billion related to
the settlement of historical compensation arrangements. During the fiscal year
2020, we completed additional acquisitions with a total purchase consideration
of $94.8 million in cash, including the acquisitions of Pennsylvania Trust
Company, AdvisorEngine Inc., Athena Capital Advisors, LLC and Onsa, Inc. On
February 1, 2019, we acquired all of the outstanding ownership interests in BSP
for a purchase consideration of $720.1 million in cash.


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In February 2020, we purchased an office building in Edinburgh, Scotland with a
total cost of approximately $40 million. During fiscal year 2019, we completed
construction of two new buildings at our corporate headquarters campus in San
Mateo, California with a total cost of approximately $130 million and purchased
an office building in Poznan, Poland with a total cost of approximately
$86 million. The buildings are used in our business operations, and portions of
the Edinburgh building and California campus are leased to third parties.
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. Current increased liquidity risks and redemptions in these funds 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. In April 2020, we 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 and that are subject to the decision of the fund's trustee
to wind up the funds. See Note 16 - Commitments and Contingencies in the notes
to consolidated financial statements in Item 8 of Part II of this Annual Report
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. We did not
provide financial or other support to our sponsored funds during fiscal year
2019.


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CONTRACTUAL OBLIGATIONS AND COMMITMENTS AND CONTINGENT LIABILITIES
The following table summarizes our contractual obligations and commitments.
(in millions)                                               Payments Due by Fiscal Year
                                                                                             There-
as of September 30, 2020         2021        2022        2023        2024        2025         after         Total
Debt1
Principal                      $     -     $ 300.0     $     -     $ 250.0$ 400.0$ 1,750.0$ 2,700.0
Interest                         125.2       125.2       116.8       116.8       101.2       1,913.9       2,499.1
Operating leases                 134.8       131.5       125.4        89.0        50.2         153.5         684.4
Purchase obligations2            186.7       112.4        60.9        46.2        28.7           8.2         443.1
Purchase consideration
obligation3                       47.9        31.9           -           -           -             -          79.8
Total Contractual
Obligations                      494.6       701.0       303.1       502.0       580.1       3,825.6       6,406.4
Committed capital
contributions4                   335.6           -           -           -           -             -         335.6
Contingent consideration
liabilities5                       1.7        10.2         8.1         7.1           -             -          27.1
Federal transition tax
liability6                        53.3        74.1        74.1       138.9       185.2         231.6         757.2
Total Contractual
Obligations, Commitments,
and Contingent Liabilities     $ 885.2$ 785.3$ 385.3$ 648.0$ 765.3$ 4,057.2$ 7,526.3


 __________________

1 Debt principal represents amounts due on maturity. Excludes 1.600% notes

     with a principal amount of $750.0 million due 2030 which were issued on
     October 19, 2020. See Note 22 - Subsequent Event in the notes to
     consolidated financial statements in Item 8 of Part II of this Annual
     Report.


2    Purchase obligations include contractual amounts that will be due to

purchase goods and services to be used in our operations and may be canceled

at earlier times than those indicated under certain conditions that may

include termination fees.

3 Represents purchase consideration payments to be made in connection with the

     acquisition of Legg Mason.


4    Committed capital contributions relate to discretionary commitments to
     invest in sponsored funds and other investment products and entities,

including CIPs. Generally, the timing of the funding of these commitments is

unknown as they are callable on demand at any time prior to the expiration

of the commitment periods.

5 The amount of contingent consideration liabilities reflected for any year

represents the expected settlement amounts as of September 30, 2020. The

     fair value of the aggregate contingent consideration liability at
     September 30, 2020 totaled $25.3 million and is included in other
     liabilities in the consolidated balance sheet.

6 Transition tax on the deemed repatriation of post-1986 undistributed foreign

subsidiaries' earnings under the Tax Act.



The debt holders of CIPs have no recourse to our assets beyond the level of our
direct investments, therefore we bear no risks associated with these entities'
liabilities and have not included them in the table above. See Note 11 -
Consolidated Investment Products in the notes to consolidated financial
statements in Item 8 of Part II of this Annual Report.
At September 30, 2020, our consolidated balance sheet included liabilities for
unrecognized tax benefits of $262.9 million and related accrued interest of
$24.6 million (see Note 14 - Taxes on Income in the notes to consolidated
financial statements in Item 8 of Part II of this Annual Report). Because of the
high degree of uncertainty regarding the timing and amounts of future cash
outflows, unrecognized tax benefits and related accrued interest are not
included in the table above.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the use of estimates, judgments and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods presented. These estimates, judgments and assumptions are affected
by our application of accounting policies. Further, global concerns about the
COVID-19 pandemic have adversely affected, and we expect will continue to
adversely affect, our business, financial condition and results of operations
including the estimates and assumptions made by management. Actual results could
differ from the estimates. Described below are the accounting policies that we
believe are most critical to understanding our financial position and results of
operations. For additional information about our accounting policies, see Note 1
- Significant Accounting Policies in the notes to consolidated financial
statements in Item 8 of Part II of this Annual Report.


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Consolidation

We consolidate our subsidiaries and investment products in which we have a
controlling financial interest. We have a controlling financial interest when we
own a majority of the voting interest in a voting interest entity ("VOE") or are
the primary beneficiary of a variable interest entity ("VIE").
A VIE is an entity in which the equity investment holders have not contributed
sufficient capital to finance its activities or do not have defined rights and
obligations normally associated with an equity investment. The assessment of
whether an entity is a VIE or VOE involves judgment and analysis on a
structure-by-structure basis. When performing the assessment we consider factors
such as the entity's legal organization and capital structure, the rights of the
equity investment holders and our contractual involvement with and ownership
interest in the entity. Substantially all of our VIEs are investment products
and our variable interests consist of our equity ownership interests in and
investment management fees earned from these products.
We are the primary beneficiary of a VIE if we have the power to direct the
activities that most significantly impact the VIE's economic performance and the
obligation to absorb losses of or right to receive benefits from the VIE that
could potentially be significant to the VIE. Investment management fees earned
from VIEs are excluded from the primary beneficiary determination if they are
deemed to be at market and commensurate with service. The key estimates and
assumptions used in the analyses include the amount of AUM and the life of the
investment product. These estimates and assumptions are subject to variability.
For example, AUM is impacted by market volatility and the level of sales,
redemptions, distributions to investors and reinvested distributions. There is
judgment involved in assessing whether we have the power to direct the
activities that most significantly impact VIEs' economic performance and the
obligation to absorb losses of or right to receive benefits from VIEs that could
potentially be significant to the VIEs. As of September 30, 2020, we were the
primary beneficiary of 43 investment product VIEs.
Business Combinations
Business combinations are accounted for by recognizing the acquired assets,
including separately identifiable intangible assets, and assumed liabilities at
their acquisition-date estimated fair values. Any excess of the purchase
consideration over the acquisition-date fair values of these identifiable assets
and liabilities is recognized as goodwill. Determining the fair value of assets
acquired and liabilities assumed involves the use of significant estimates and
assumptions. During the measurement period, which is not to exceed one year from
the acquisition date, we may record adjustments to the assets acquired and
liabilities assumed, with the corresponding offset to goodwill. Upon the
conclusion of the measurement period, any subsequent adjustments are recorded in
earnings.
Intangible assets acquired in business combinations consist primarily of
investment management contracts and trade names. The fair values of the acquired
management contracts are based on the net present value of estimated future cash
flows attributable to the contracts, which include significant assumptions about
forecasts of the AUM growth rate, pre-tax profit margin, discount rate, average
effective fee rate and effective tax rate. The fair value of trade names is
determined using the relief from royalty method based on net present value of
estimated future cash flows, which include significant assumptions about royalty
rate, revenue growth rate, discount rate and effective tax rate. Our estimates
are based on assumptions believed to be reasonable, but are inherently uncertain
and unpredictable and, as a result, may differ from actual results.
The Company's management contract intangible assets are amortized over their
estimated useful lives, which range from three to fifteen years, using the
straight-line method, unless the asset is determined to have an indefinite
useful life. Indefinite-lived intangible assets represent contracts to manage
investment assets for which there is no foreseeable limit on the contract
period. Trade names are amortized over their estimated useful lives which range
from five to twenty years using the straight-line method.
On July 31, 2020, the Company acquired all outstanding shares of Legg Mason
common stock for purchase consideration of $4.5 billion in cash and $0.2 billion
related to the settlement of historical compensation arrangements, and
recognized $2.3 billion of goodwill, $2.7 billion of indefinite-lived intangible
assets related to investment management contracts and $1.4 billion of
definite-lived intangible assets primarily related to investment management
contracts and trade names.
Goodwill and indefinite-lived intangible assets are tested for impairment
annually and when an event occurs or circumstances change that more likely than
not reduce the fair value of the related reporting unit or indefinite-lived
intangible asset below its carrying value. We have one reporting unit,
investment management and related services, consistent with our single operating
segment, to which all goodwill has been assigned. We make significant estimates
and assumptions when evaluating goodwill and other intangible assets for
impairment.


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We may first assess goodwill and indefinite-lived intangible assets for
qualitative factors to determine whether it is necessary to perform a
quantitative impairment test. The qualitative analysis considers entity-specific
and macroeconomic factors and their potential impact on the key assumptions used
in the determination of the fair value of the reporting unit or indefinite-lived
intangible asset. A quantitative impairment test is performed if the results of
the qualitative assessment indicate that it is more likely than not that the
fair value of the reporting unit is less than its carrying value or an
indefinite-lived intangible asset is impaired, or if a qualitative assessment is
not performed. Quantitative tests compare the fair value of the asset to its
carrying value.
The fair values of the reporting unit and indefinite-lived intangible assets are
based on the net present value of estimated future cash flows, which include
significant assumptions about the AUM growth rate, pre-tax profit margin,
discount rate, average effective fee rate and effective tax rate. The most
relevant of these assumptions to the determination of estimated fair value are
the AUM growth rate, pre-tax profit margin and the discount rate.
We performed our annual impairment tests for goodwill and indefinite-lived
intangible assets as of August 1, 2020. We performed a qualitative test for
goodwill and a substantial portion of the indefinite-lived intangible assets and
concluded it is more likely than not that the fair value of the specific
intangible assets exceeds their carrying value. We performed a quantitative test
for approximately 21% of indefinite-lived intangible assets, and recognized
$30.0 million of impairments of indefinite-lived intangible assets. The Company
recognized $23.7 million of impairment of goodwill directly attributable to the
Company's decision to wind-down Onsa, Inc. which was acquired on October 24,
2019 and had not been integrated into the Company. The impairments of
indefinite-lived intangible assets were primarily due to a reduction in the
revenue growth rate assumption for a Benefit Street Partners' private debt fund
resulting from declines in interest rates and continued market volatility. The
estimated fair values of substantially all of the other indefinite-lived
intangible assets exceeded their carrying values by more than 47%. We estimated
the discounted future cash flows for indefinite-lived intangible assets using
compounded annual AUM growth rates ranging from (10.0%) to 11.6%, which were
developed taking into account ongoing volatility in the capital markets, and a
discount rate of 8.1%, which is based on our weighted average cost of capital. A
hypothetical 200 basis point decline in the AUM growth rates or a 200 basis
point increase in the discount rate would not reduce the estimated fair values
of the other indefinite-lived intangible assets below their carrying values.
We subsequently monitored market conditions and their potential impact on the
assumptions used in the annual calculations of fair value to determine whether
circumstances have changed that would more likely than not reduce the fair value
of the reporting unit below its carrying value, or indicate that the other
indefinite-lived intangible assets might be impaired. We considered, among other
things, changes in our AUM and weighted-average cost of capital by assessing
whether these changes would impact the reasonableness of the assumptions used in
the impairment tests as of August 1, 2020. We also monitored fluctuations of our
common stock per share price to evaluate our market capitalization relative to
the reporting unit as a whole. Subsequent to August 1, 2020, there were no
impairments of goodwill or indefinite-lived intangible assets as no events
occurred or circumstances changed that would indicate these assets might be
impaired.
We test definite-lived intangible assets for impairment quarterly. Impairment is
indicated when the carrying value of an asset is not recoverable and exceeds its
fair value. Recoverability is evaluated based on estimated undiscounted future
cash flows using assumptions about the AUM growth rate, pre-tax profit margin,
average effective fee rate and expected useful life as well as royalty rate for
trade name intangible assets. The most relevant of these assumptions to
determine future cash flows is the AUM growth rate. If the carrying value of an
asset is not recoverable through undiscounted cash flows, impairment is
recognized in the amount by which the carrying value exceeds the asset's fair
value, as determined by discounted cash flows or other methods as appropriate
for the asset type. We recognized $1.7 million of impairment of definite-lived
intangible assets during fiscal year 2020 related to Edinburgh Partners
management contracts due to the loss of a significant mandate.
While we believe that the assumptions used to estimate fair value in our
impairment tests are reasonable and appropriate, future changes in the
assumptions could result in recognition of impairment.
Fair Value Measurements
A substantial amount of our investments is recorded at fair value or amounts
that approximate fair value on a recurring basis. We use a three-level fair
value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value based on whether the inputs to those valuation techniques are
observable or unobservable. The assessment of the hierarchy level of the assets
or liabilities measured at fair value is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. See
Note 1 - Significant Accounting Policies in the notes to consolidated financial
statements in Item 8 of Part II of this Annual Report for more information on
the fair value hierarchy.


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As of September 30, 2020, Level 3 assets represented 24% of total assets
measured at fair value, substantially all of which related to CIPs' investments
in equity and debt securities, and real estate. There were $2.3 million of
transfers into and $1.1 million of transfers out of Level 3 during fiscal year
2020.
The following are descriptions of the significant assets measured at fair value
and their fair value methodologies.
Sponsored funds and separate accounts consist primarily of investments in
nonconsolidated sponsored funds and to a lesser extent, separate accounts.
Changes in the fair value of the investments are recognized as gains and losses
in earnings. The fair values of 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
certain vesting provisions. Changes in fair value are recognized as gains and
losses in earnings. The fair values of the investments are determined based on
the funds' published NAV or estimated using NAV as a practical expedient.
Other equity and debt securities consist of other equity investment securities
and debt securities classified as trading or available-for-sale. Changes in the
fair value of other equity and trading debt 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 other than
funds 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 of CIPs consist of marketable debt and equity securities and other
investments that are not generally traded in active markets. 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.
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
noncontrolling interest holders and are classified as temporary equity at fair
value, except when the fair value is less than the issuance date fair value, the
reported amount is the issuance date fair value. Changes in fair value of
redeemable noncontrolling interest is recognized as an adjustment to retained
earnings. Nonredeemable noncontrolling interests do not permit the
noncontrolling interest holders to request settlement, are reported at their
issuance value and undistributed net income (loss) attributable to
noncontrolling interests.
The fair value of third-party equity interests in CIPs are determined based on
the published NAV or estimated using NAV a practical expedient. The fair value
of redeemable noncontrolling interests related to minority interest in certain
subsidiaries are derived using discounted cash flows and guideline public
company methodology, which include significant assumptions about forecasts of
the AUM growth rate, pre-tax profit margin, discount rate and operating income
multiples.
Revenues
We earn revenue primarily from providing investment management and related
services to our customers. In addition to investment management, services
include fund administration, sales and distribution, and shareholder servicing.
Revenues are recognized when our obligations related to the services are
satisfied and it is probable that a significant reversal of the revenue amount
would not occur in future periods. The obligations are satisfied over time as
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. Management judgement is
involved in assessing the probability of significant revenue reversal and in the
identification of distinct services.


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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.
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.
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. Pricing of the
securities is governed by our global valuation and pricing policy, which defines
valuation and pricing conventions for each security type, including practices
for responding to unexpected or unusual market events.
As substantially all of our AUM is valued based on observable market prices or
inputs, market risk is the most significant risk underlying the valuation of our
AUM.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences
between the tax basis of assets and liabilities and the reported amounts in the
consolidated financial statements using the statutory tax rates in effect for
the year when the reported amount of the asset or liability is expected to be
recovered or settled, respectively. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax expense in the
period that includes the enactment date. A valuation allowance is recorded to
reduce the carrying values of deferred tax assets to the amount that is more
likely than not to be realized. For each tax position taken or expected to be
taken in a tax return, we determine whether it is more likely than not that the
position will be sustained upon examination based on the technical merits of the
position, including resolution of any related appeals or litigation. A tax
position that meets the more likely than not recognition threshold is measured
at the largest amount of benefit that is greater than 50% likely of being
realized upon settlement.
As a multinational corporation, we operate in various locations outside the U.S.
and generate earnings worldwide. We repatriate the foreign earnings that are in
excess of regulatory, capital or operational requirements of all of our non-U.S.
subsidiaries.
Loss Contingencies
We are involved in various lawsuits and claims encountered in the normal course
of business. When such a matter arises and periodically thereafter, we consult
with our legal counsel and evaluate the merits of the claims based on the facts
available at that time. In management's opinion, an adequate accrual has been
made as of September 30, 2020 to provide for any probable losses that may arise
from such matters for which we could reasonably estimate an amount. See also
Note 16 - Commitments and Contingencies in the notes to consolidated financial
statements in Item 8 of Part II of this Annual Report.
NEW ACCOUNTING GUIDANCE
See Note 2 - New Accounting Guidance in the notes to consolidated financial
statements in Item 8 of Part II of this Annual Report.


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Selected Quarterly Financial Data (Unaudited)
(in millions, except per share data)
Quarter ended                             December 31       March 31       June 30        September 30
Fiscal year 20201
Operating revenues                      $     1,389.2$  1,311.2$  1,161.1$      1,705.0
Operating income                                372.9          339.9          232.5              103.6
Net income attributable to Franklin
Resources, Inc.2                                350.5           79.1          290.4               78.9
Earnings per share
Basic                                   $        0.70$     0.16$     0.58     $         0.15
Diluted                                          0.70           0.16           0.58               0.15
Dividends declared per share            $        0.27$     0.27$     0.27     $         0.27
AUM (in billions)
Ending                                  $       698.3$    580.3$    622.8$      1,418.9
Average                                         693.8          655.8          605.0            1,227.8

Fiscal year 20191
Operating revenues                      $     1,385.4$  1,412.8$  1,448.4$      1,422.8
Operating income                                385.3          367.3          349.2              365.1
Net income attributable to Franklin
Resources, Inc.3                                275.9          367.5          245.9              306.4
Earnings per share
Basic                                   $        0.54$     0.72$     0.48     $         0.61
Diluted                                          0.54           0.72           0.48               0.61
Dividends declared per share            $        0.26$     0.26$     0.26     $         0.26
AUM (in billions)
Ending                                  $       649.9$    712.3$    715.2$        692.6
Average                                         683.2          688.6          710.8              702.0


 __________________

1 In the quarter ended September 30, 2020, the Company changed the

presentation of its consolidated statements of income to include dividend

and interest income and other expenses from consolidated investment products

in non-operating income. Amounts for the comparative prior fiscal quarters

     have been reclassified to conform to the current presentation. These
     reclassifications had no impact on previously reported net income
     attributable to Franklin Resources, Inc.

2 Information presented for the quarter ended September 30, 2020 includes the

impact of the Legg Mason, Inc. acquisition effective July 31, 2020. See Note

3 - Acquisitions in the notes to consolidated financial statements in Item 8

     of Part II of this Annual Report for more information.


3    The quarter ended June 30, 2019 includes an income tax charge of

$86.4 million due to the reversal of a tax benefit recognized in fiscal year

2018 upon issuance of final regulations by the U.S. Department of Treasury.



Risk Factors
For a description of certain risk factors and other important factors that may
affect us, our subsidiaries and our business, please see the description of the
risk factors set forth under Item 1A of Part I of this Annual Report, which is
incorporated herein by reference.


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