# FRANKLIN RESOURCES INC (BEN) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from FRANKLIN RESOURCES INC's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/38777/000003877723000169/ben-20230930.htm Accession: 0000038777-23-000169 Filing date: 2023-11-14 Report date: 2023-09-30 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/BEN/ All MD&A years: /company/BEN/mda/ Previous year: /company/BEN/mda/fy2022/ (FY 2022) Next year: /company/BEN/mda/fy2024/ (FY 2024) Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS The following discussion and analysis of the results of operations and financial condition of Franklin Resources, Inc. (“Franklin”) and its subsidiaries (collectively, the “Company”) should be read in conjunction with the “Forward-looking Statements” disclosure set forth in Part I and the “Risk Factors” set forth in Item 1A of Part I of this Annual Report on Form 10‑K (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 Franklin is a holding company with subsidiaries operating under our Franklin Templeton® and/or subsidiary brand names. We are a global investment management organization that derives operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide. We deliver our investment capabilities through a variety of investment products, which include our sponsored funds, as well as institutional and high-net-worth separate accounts, retail separately managed account programs, sub-advised products and other investment vehicles. Related services include fund administration, sales and distribution, and shareholder servicing. We may perform services directly or through third parties. We offer our services and products under our various distinct brand names, including, but not limited to, Alcentra®, Benefit Street Partners®, Brandywine Global Investment Management®, Clarion Partners®, ClearBridge Investments®, Fiduciary Trust International™, Franklin®, Franklin Bissett®, Franklin Mutual Series®, K2®, Legg Mason®, Lexington Partners®, Martin Currie®, O’Shaughnessy® Asset Management, Royce® Investment Partners, Templeton® and Western Asset Management Company®. We offer a broad product mix of fixed income, equity, alternative, multi-asset and cash management asset classes and solutions that meet a wide variety of specific investment goals and needs for individual and institutional investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to investors under the brand names of those other companies or on a co-branded basis. 30 Table of Contents 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 that can negatively impact our revenues and income. The level of our revenues also depends on the fees charged for our services, which are based on contracts with our funds and customers, fund sales, and the number of shareholder transactions and accounts. These arrangements could change in the future. During the fiscal year ended September 30, 2023 (“fiscal year 2023”), global equity markets provided positive returns driven by moderating inflation, easing of monetary policy and resilient economic activity amid continued concerns about the risk of recession. The S&P 500 Index and MSCI World Index increased 21.6% and 22.6% for the fiscal year. The global bond markets remained positive as the Bloomberg Barclays Global Aggregate Index increased 2.2% for the fiscal year, reflecting moderating inflation and easing of monetary policy. Our total AUM was $1,374.2 billion at September 30, 2023, which was 6% higher than at September 30, 2022 driven by the positive impact of $58.9 billion of net market change, distributions and other, $34.9 billion from an acquisition, and $4.3 billion of cash management net inflows, partially offset by $21.3 billion of long-term net outflows. Simple monthly average AUM (“average AUM”) decreased 5% during fiscal year 2023. On November 1, 2022, we acquired BNY Alcentra Group Holdings, Inc. (together with its subsidiaries, “Alcentra”), one of the largest European credit and private debt managers, with global expertise in senior secured loans, high yield bonds, private credit, structured credit, special situations and multi-strategy credit strategies. Total purchase price included cash consideration of $594.1 million, which includes $188.3 million for certain securities held in Alcentra’s collateralized loan obligations; deferred consideration of $62.0 million which was paid on November 1, 2023; and contingent consideration to be paid upon the achievement of certain performance thresholds over the next four years of up to $350.0 million that had an acquisition-date fair value of $24.6 million. The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change. We are subject to various laws, rules and regulations globally that impose restrictions, limitations, registration, reporting and disclosure requirements on our business, and add complexity to our global compliance operations. Uncertainties regarding the global economy remain for the foreseeable future. As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our products and on providing high quality service to our clients. We continuously perform reviews of our business model. While we remain focused on expense management, we will also seek to attract, retain and develop personnel and invest strategically in systems and technology that will provide a secure and stable environment. We will continue to seek to protect and further our brand recognition while developing and maintaining broker-dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed in the “Risk Factors” section. 31 Table of Contents RESULTS OF OPERATIONS [[GREPCENT_TABLE]] [["(in millions, except per share data)","","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Operating revenues","","$","7,849.4","","$","8,275.3","","$","8,425.5","","(5","%)","","(2","%)"],["Operating income","","1,102.3","","1,773.9","","1,875.0","","(38","%)","","(5","%)"],["Operating margin1","","14.0","%","","21.4","%","","22.3","%"],["Net income attributable to Franklin Resources, Inc.","","$","882.8","","$","1,291.9","","$","1,831.2","","(32","%)","","(29","%)"],["Diluted earnings per share","","$","1.72","","$","2.53","","$","3.57","","(32","%)","","(29","%)"],["As adjusted (non-GAAP):2"],["Adjusted operating income","","$","1,823.8","","$","2,323.5","","$","2,379.3","","(22","%)","","(2","%)"],["Adjusted operating margin","","29.9","%","","35.9","%","","37.7","%"],["Adjusted net income","","$","1,332.2","","$","1,855.6","","$","1,915.2","","(28","%)","","(3","%)"],["Adjusted diluted earnings per share","","$","2.60","","$","3.63","","$","3.74","","(28","%)","","(3","%)"]] [[/GREPCENT_TABLE]] __________________ 1Defined as operating income divided by total operating revenues. 2“Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are based on methodologies other than generally accepted accounting principles. See “Supplemental Non-GAAP Financial Measures” for definitions and reconciliations of these measures. ASSETS UNDER MANAGEMENT AUM by asset class was as follows: [[GREPCENT_TABLE]] [["(in billions)","","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["as of September 30,","","2023","","2022","","2021"],["Fixed Income","","$","483.1","","","$","490.9","","","$","650.3","","","(2","%)","","(25","%)"],["Equity","","430.4","","","392.3","","","523.6","","","10","%","","(25","%)"],["Alternative","","254.9","","","225.1","","","145.2","","","13","%","","55","%"],["Multi-Asset","","145.0","","","131.5","","","152.4","","","10","%","","(14","%)"],["Cash Management","","60.8","","","57.6","","","58.6","","","6","%","","(2","%)"],["Total","","$","1,374.2","","","$","1,297.4","","","$","1,530.1","","","6","%","","(15","%)"]] [[/GREPCENT_TABLE]] 32 Table of Contents Changes in average AUM are generally more indicative of trends in revenue for providing investment management services than the year-over-year change in ending AUM. Average AUM and the mix of average AUM by asset class are shown below. [[GREPCENT_TABLE]] [["(in billions)","","Average AUM","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Fixed Income","","$","499.7","","","$","586.5","","","$","657.5","","","(15","%)","","(11","%)"],["Equity","","436.1","","","491.3","","","502.9","","","(11","%)","","(2","%)"],["Alternative","","251.9","","","185.1","","","132.6","","","36","%","","40","%"],["Multi-Asset","","144.4","","","146.1","","","146.4","","","(1","%)","","0","%"],["Cash Management","","68.3","","","60.2","","","64.7","","","13","%","","(7","%)"],["Total","","$","1,400.4","","","$","1,469.2","","","$","1,504.1","","","(5","%)","","(2","%)"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Mix of Average AUM"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Fixed Income","","36","%","","40","%","","44","%"],["Equity","","31","%","","33","%","","33","%"],["Alternative","","18","%","","13","%","","9","%"],["Multi-Asset","","10","%","","10","%","","10","%"],["Cash Management","","5","%","","4","%","","4","%"],["Total","","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] Components of the change in AUM are shown below. Net market change, distributions and other includes appreciation (depreciation), distributions to investors that represent return on investments and return of capital, and foreign exchange revaluation. [[GREPCENT_TABLE]] [["(in billions)","","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Beginning AUM","","$","1,297.4","","","$","1,530.1","","","$","1,418.9","","","(15","%)","","8","%"],["Long-term inflows","","254.9","","","320.4","","","364.7","","","(20","%)","","(12","%)"],["Long-term outflows","","(276.2)","","","(348.2)","","","(389.9)","","","(21","%)","","(11","%)"],["Long-term net flows","","(21.3)","","","(27.8)","","","(25.2)","","","(23","%)","","10","%"],["Cash management net flows","","4.3","","","(0.8)","","","(15.1)","","","NM","","(95%)"],["Total net flows","","(17.0)","","","(28.6)","","","(40.3)","","","(41","%)","","(29","%)"],["Acquisitions","","34.9","","","64.9","","","3.5","","","(46","%)","","NM"],["Net market change, distributions and other","","58.9","","","(269.0)","","","148.0","","","NM","","NM"],["Ending AUM","","$","1,374.2","","","$","1,297.4","","","$","1,530.1","","","6","%","","(15","%)"]] [[/GREPCENT_TABLE]] 33 Table of Contents Components of the change in AUM by asset class were as follows: [[GREPCENT_TABLE]] [["(in billions)"],["for the fiscal year ended September 30, 2023","","Fixed Income","","Equity","","Alternative","","Multi-Asset","","Cash Management","","Total"],["AUM at October 1, 2022","","$","490.9","","","$","392.3","","","$","225.1","","","$","131.5","","","$","57.6","","","$","1,297.4"],["Long-term inflows","","112.7","","","84.4","","","22.6","","","35.2","","","\u2014","","","254.9"],["Long-term outflows","","(128.9)","","","(103.1)","","","(16.8)","","","(27.4)","","","\u2014","","","(276.2)"],["Long-term net flows","","(16.2)","","","(18.7)","","","5.8","","","7.8","","","\u2014","","","(21.3)"],["Cash management net flows","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","4.3","","","4.3"],["Total net flows","","(16.2)","","","(18.7)","","","5.8","","","7.8","","","4.3","","","(17.0)"],["Acquisitions","","\u2014","","","\u2014","","","34.9","","","\u2014","","","\u2014","","","34.9"],["Net market change, distributions and other","","8.4","","","56.8","","","(10.9)","","","5.7","","","(1.1)","","","58.9"],["AUM at September 30, 2023","","$","483.1","","","$","430.4","","","$","254.9","","","$","145.0","","","$","60.8","","","$","1,374.2"]] [[/GREPCENT_TABLE]] AUM increased $76.8 billion or 6% during fiscal year 2023 due to the positive impact of $58.9 billion of net market change, distributions and other, $34.9 billion from an acquisition, and $4.3 billion of cash management net inflows, partially offset by $21.3 billion of long-term net outflows. Net market change, distributions and other primarily consists of $94.4 billion of market appreciation, and a $4.6 billion increase from foreign exchange revaluation, partially offset by $40.1 billion of long-term distributions. The market appreciation occurred in all asset classes with the exception of the alternative asset class, most significantly in the equity asset class and reflected positive returns in the global equity markets. Foreign exchange revaluation from AUM in products that are not U.S. dollar denominated was primarily due to a weaker U.S. dollar compared to the Euro, British Pound and Brazilian Real. Long-term inflows decreased 20% to $254.9 billion, as compared to the prior year, driven by lower inflows in equity and fixed income open-end funds, fixed income institutional separate accounts, and equity retail separately managed accounts. Long-term inflows for fiscal years 2023 and 2022 include reinvested distributions of $20.6 billion and $32.0 billion. Long-term outflows decreased 21% to $276.2 billion due to lower outflows in fixed income and equity open-end funds, fixed income institutional separate accounts, multi-asset sub-advised mutual funds, and equity retail separately managed accounts. [[GREPCENT_TABLE]] [["(in billions)"],["for the fiscal year ended September 30, 2022","","Fixed Income","","Equity","","Alternative","","Multi-Asset","","Cash Management","","Total"],["AUM at October 1, 2021","","$","650.3","","","$","523.6","","","$","145.2","","","$","152.4","","","$","58.6","","","$","1,530.1"],["Long-term inflows","","138.4","","","123.0","","","22.4","","","36.6","","","\u2014","","","320.4"],["Long-term outflows","","(168.6)","","","(131.6)","","","(16.1)","","","(31.9)","","","\u2014","","","(348.2)"],["Long-term net flows","","(30.2)","","","(8.6)","","","6.3","","","4.7","","","\u2014","","","(27.8)"],["Cash management net flows","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(0.8)","","","(0.8)"],["Total net flows","","(30.2)","","","(8.6)","","","6.3","","","4.7","","","(0.8)","","","(28.6)"],["Acquisitions","","\u2014","","","4.6","","","58.0","","","2.3","","","\u2014","","","64.9"],["Net market change, distributions and other","","(129.2)","","","(127.3)","","","15.6","","","(27.9)","","","(0.2)","","","(269.0)"],["AUM at September 30, 2022","","$","490.9","","","$","392.3","","","$","225.1","","","$","131.5","","","$","57.6","","","$","1,297.4"]] [[/GREPCENT_TABLE]] AUM decreased $232.7 billion or 15% during fiscal year 2022 due to the negative impact of $269.0 billion of net market change, distributions and other, $27.8 billion of long-term net outflows and $0.8 billion of cash management net outflows, partially offset by acquisitions of $64.9 billion. Net market change, distributions and other primarily consists of $199.2 billion of market depreciation, $48.7 billion of long-term distributions and a $21.1 billion decrease from foreign exchange revaluation. The market depreciation occurred in all asset classes with the exception of the alternative asset class. Foreign exchange revaluation from AUM in products that are not U.S. dollar denominated was primarily due to a stronger U.S. dollar compared to the Japanese Yen, Euro, British Pound and Australian dollar. Long-term inflows decreased 12% to $320.4 billion, as compared to the prior year, driven by lower inflows in fixed income institutional separate accounts, open-end funds, and retail separately managed accounts, as well as equity open-end 34 Table of Contents funds, partially offset by higher alternative inflows for private funds. Long-term outflows decreased 11% to $348.2 billion due to lower outflows in fixed income institutional separate accounts, equity and multi-asset open-end funds, and equity sub-advised mutual funds, partially offset by higher equity outflows in retail separately managed accounts and multi-asset sub-advised mutual funds. [[GREPCENT_TABLE]] [["(in billions)"],["for the fiscal year ended September 30, 2021","","Fixed Income","","Equity","","Alternative","","Multi-Asset","","Cash Management","","Total"],["AUM at October 1, 2020","","$","656.9","","","$","438.1","","","$","122.1","","","$","129.4","","","$","72.4","","","$","1,418.9"],["Long-term inflows","","176.5","","","132.1","","","19.8","","","36.3","","","\u2014","","","364.7"],["Long-term outflows","","(188.2)","","","(154.2)","","","(11.8)","","","(35.7)","","","\u2014","","","(389.9)"],["Long-term net flows","","(11.7)","","","(22.1)","","","8.0","","","0.6","","","\u2014","","","(25.2)"],["Cash management net flows","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(15.1)","","","(15.1)"],["Total net flows","","(11.7)","","","(22.1)","","","8.0","","","0.6","","","(15.1)","","","(40.3)"],["Acquisition","","3.5","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","3.5"],["Net market change, distributions and other","","1.6","","","107.6","","","15.1","","","22.4","","","1.3","","","148.0"],["AUM at September 30, 2021","","$","650.3","","","$","523.6","","","$","145.2","","","$","152.4","","","$","58.6","","","$","1,530.1"]] [[/GREPCENT_TABLE]] AUM by sales region was as follows: [[GREPCENT_TABLE]] [["(in billions)","","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["as of September 30,","","2023","","2022","","2021"],["United States","","$","979.9","","","$","971.3","","","$","1,140.2","","","1","%","","(15","%)"],["International"],["Europe, Middle East and Africa","","156.0","","","126.6","","","153.9","","","23","%","","(18","%)"],["Asia-Pacific","","126.7","","","118.4","","","155.6","","","7","%","","(24","%)"],["Americas, excl. U.S.","","111.6","","","81.1","","","80.4","","","38","%","","1","%"],["Total international","","$","394.3","","","$","326.1","","","$","389.9","","","21","%","","(16","%)"],["Total","","$","1,374.2","","","$","1,297.4","","","$","1,530.1","","","6","%","","(15","%)"]] [[/GREPCENT_TABLE]] 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 of our strategy composites against benchmarks. 35 Table of Contents The performance of our mutual fund products against peer group medians and of our strategy composites against benchmarks is presented in the table below. [[GREPCENT_TABLE]] [["","","Peer Group Comparison1","","Benchmark Comparison2"],["","","% of Mutual Fund AUM in Top Two Peer Group Quartiles","","% of Strategy Composite AUM Exceeding Benchmark"],["as of September 30, 2023","","1-Year","","3-Year","","5-Year","","10-Year","","1-Year","","3-Year","","5-Year","","10-Year"],["Fixed Income","","46","%","","39","%","","37","%","","67","%","","80","%","","47","%","","46","%","","90","%"],["Equity","","61","%","","39","%","","51","%","","56","%","","45","%","","38","%","","38","%","","31","%"],["Total AUM3","","48","%","","49","%","","54","%","","52","%","","61","%","","48","%","","47","%","","61","%"]] [[/GREPCENT_TABLE]]  _______________ 1Mutual fund performance is sourced from Morningstar and measures the percent of ranked AUM in the top two quartiles versus peers. Total mutual fund AUM measured for the 1-, 3-, 5- and 10-year periods represents 35%, 35%, 35% and 33% of our total AUM as of September 30, 2023. 2Strategy composite performance measures the percent of composite AUM beating its benchmark. The benchmark comparisons are based on each account’s/composite’s (strategy composites may include retail separately managed accounts and mutual fund assets managed as part of the same strategy) return as compared to a market index that has been selected to be generally consistent with the asset class of the account/composite. Total strategy composite AUM measured for the 1-, 3-, 5- and 10-year periods represents 50%, 50%, 49% and 46% of our total AUM as of September 30, 2023. 3Total mutual fund AUM includes performance of our alternative and multi-asset funds, and total strategy composite AUM includes performance of our alternative composites. Alternative and multi-asset AUM represent 19% and 11% of our total AUM at September 30, 2023. Mutual fund performance data includes U.S. and cross-border domiciled mutual funds and exchange-traded funds, excludes cash management and fund of funds, and assumes the reinvestment of dividends. Past performance is not indicative of future results. For strategy composite AUM included in institutional and retail separately managed accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ. The information in this presentation is provided solely for use in connection with this document, and is not directed toward existing or potential clients of Franklin. 36 Table of Contents OPERATING REVENUES The table below presents the percentage change in each operating revenue category. [[GREPCENT_TABLE]] [["(in millions)","","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Investment management fees","","$","6,452.9","","","$","6,616.8","","","$","6,541.6","","","(2","%)","","1","%"],["Sales and distribution fees","","1,203.7","","","1,415.0","","","1,635.5","","","(15","%)","","(13","%)"],["Shareholder servicing fees","","152.7","","","193.0","","","211.2","","","(21","%)","","(9","%)"],["Other","","40.1","","","50.5","","","37.2","","","(21","%)","","36","%"],["Total Operating Revenues","","$","7,849.4","","","$","8,275.3","","","$","8,425.5","","","(5","%)","","(2","%)"]] [[/GREPCENT_TABLE]] 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 $163.9 million in fiscal year 2023 primarily due to a 5% decrease in average AUM, partially offset by higher performance fees. The decrease in average AUM occurred primarily in the fixed income and equity asset classes, partially offset by an increase in the alternative asset class that includes the acquisitions of Lexington Partners L.P. (“Lexington”) on April 1, 2022 and Alcentra on November 1, 2022. Investment management fees increased $75.2 million in fiscal year 2022 primarily due to higher performance fees, partially offset by a 2% decrease in average AUM. The decrease in average AUM occurred primarily in the fixed income and equity asset classes, partially offset by an increase in the alternative asset class that includes the acquisition of Lexington. Our effective investment management fee rate excluding performance fees (investment management fees excluding performance fees divided by average AUM) was 42.1, 41.6 and 41.8 basis points for fiscal years 2023, 2022 and 2021. The rate increase in fiscal year 2023 was primarily due to a shift in AUM from lower-fee fixed income products to higher-fee alternative products, including those from the acquisitions of Lexington and Alcentra, and an increase in certain transaction-related fees received in the current year. The rate decrease in fiscal year 2022 was primarily due to a shift in assets from higher-fee products to lower-fee products in the fixed income and equity asset classes. Performance-based investment management fees were $550.1 million, $498.2 million and $258.6 million for fiscal years 2023, 2022 and 2021. The increase in fiscal year 2023 was primarily due to a $166.0 million increase in performance fees earned by Lexington, which were passed through as compensation expense per the terms of the acquisition agreement, partially offset by lower performance fees earned by our other alternative specialist investment managers, while the increase in fiscal year 2022 was primarily due to strong performance by our alternative specialist investment managers. 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 37 Table of Contents 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. 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. 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. Sales and distribution fees by revenue driver are presented below. [[GREPCENT_TABLE]] [["(in millions)","","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Asset-based fees","","$","998.0","","","$","1,150.2","","","$","1,302.3","","","(13","%)","","(12","%)"],["Sales-based fees","","205.7","","","264.8","","","333.2","","","(22","%)","","(21","%)"],["Sales and Distribution Fees","","$","1,203.7","","","$","1,415.0","","","$","1,635.5","","","(15","%)","","(13","%)"]] [[/GREPCENT_TABLE]] Asset-based distribution fees decreased $152.2 million and $152.1 million in fiscal years 2023 and 2022 primarily due to decreases of 11% and 12% in the related average AUM and, in fiscal year 2023, a higher mix of lower-fee assets. Sales-based fees decreased $59.1 million and $68.4 million in fiscal years 2023 and 2022 primarily due to a 20% decrease in commissionable sales in both years. 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. Shareholder servicing fees also include fund reimbursements of expenses incurred while providing transfer agency services. Effective October 1, 2023, fees charged to certain of our U.S. sponsored funds are determined based on a contractual margin. Shareholder servicing fees decreased $40.3 million in fiscal year 2023, primarily due to a reduction in fee rates charged for transfer agency services in the U.S., partially related to the outsourcing of our transfer agency services, lower levels of related AUM and fewer transactions. Shareholder servicing fees decreased $18.2 million in fiscal year 2022 primarily due lower levels of related AUM and fewer transactions. Other Other revenue decreased $10.4 million in fiscal year 2023 and increased $13.3 million in fiscal year 2022 driven by the volume of real estate transaction fees earned by certain of our alternative asset managers in each year. 38 Table of Contents OPERATING EXPENSES The table below presents the percentage change in each operating expense category. [[GREPCENT_TABLE]] [["(in millions)","","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,"],["Compensation and benefits","","$","3,494.0","","","$","3,089.8","","","$","2,971.3","","","13","%","","4","%"],["Sales, distribution and marketing","","1,613.1","","","1,845.6","","","2,105.8","","","(13","%)","","(12","%)"],["Information systems and technology","","505.0","","","500.2","","","486.1","","","1","%","","3","%"],["Occupancy","","228.9","","","218.9","","","218.1","","","5","%","","0","%"],["Amortization of intangible assets","","341.1","","","282.0","","","232.0","","","21","%","","22","%"],["General, administrative and other","","565.0","","","564.9","","","537.2","","","0","%","","5","%"],["Total Operating Expenses","","$","6,747.1","","","$","6,501.4","","","$","6,550.5","","","4","%","","(1","%)"]] [[/GREPCENT_TABLE]] Compensation and Benefits The components of compensation and benefits expenses are presented below. [[GREPCENT_TABLE]] [["(in millions)","","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Salaries, wages and benefits","","$","1,499.5","","","$","1,426.4","","","$","1,428.6","","","5","%","","0","%"],["Incentive compensation","","1,532.1","","","1,500.5","","","1,303.9","","","2","%","","15","%"],["Acquisition-related retention","","164.9","","","167.2","","","163.7","","","(1","%)","","2","%"],["Acquisition-related performance fee pass through1","","169.7","","","4.2","","","25.3","","","NM","","(83","%)"],["Other1, 2","","127.8","","","(8.5)","","","49.8","","","NM","","NM"],["Compensation and Benefits Expenses","","$","3,494.0","","","$","3,089.8","","","$","2,971.3","","","13","%","","4","%"]] [[/GREPCENT_TABLE]] _______________ 1    See “Supplemental Non-GAAP Financial Measures” for additional information. 2    Includes impact of gains and losses on investments related to deferred compensation plans, which is offset in investment and other income (losses), net; minority interests in certain subsidiaries, which is offset in net income (loss) attributable to redeemable noncontrolling interests; and special termination benefits. Salaries, wages and benefits increased $73.1 million in fiscal year 2023 primarily due to the recent acquisitions and annual salary increases, partially offset by the impact of headcount reductions. Salaries, wages and benefits decreased $2.2 million in fiscal year 2022 primarily due to a $16.8 million decrease in termination benefits and the impact of headcount reductions which were substantially offset by increases due to annual salary adjustments and the acquisitions of Lexington and OSAM. Incentive compensation increased $31.6 million in fiscal year 2023, primarily due to an increase in expense for deferred compensation awards, due, in part, to an increase in annual acceleration for retirement-eligible employees, and recent acquisitions. These increases were partially offset by lower incentive compensation at specialist investment managers and lower bonus expense based on our annual performance. Incentive compensation increased $196.6 million in fiscal year 2022, primarily due to higher performance fees and the acquisition of Lexington. Acquisition-related retention expenses decreased $2.3 million in fiscal year 2023, primarily due to lower compensation associated with performance-based awards, partially offset by an increase due to the acquisition of Alcentra. Acquisition-related retention expenses increased $3.5 million in fiscal year 2022, primarily due to the acquisition of Lexington. Acquisition-related performance fee pass through expenses increased $165.5 million in fiscal year 2023, due to higher performance fees earned by Lexington, and decreased $21.1 million in fiscal year 2022, due to lower pass through performance fees at Clarion Partners. Other compensation and benefits were $127.8 million, $(8.5) million, and $49.8 million for fiscal years 2023, 2022, 39 Table of Contents and 2021. Fiscal year 2023 included the impact of $20.3 million of market gains on investments related to our deferred compensation plans, while fiscal year 2022 included losses of $36.7 million and fiscal year 2021 included $22.7 million of such gains. Special termination benefits increased $55.0 million in fiscal year 2023 primarily due to workforce optimization initiatives and the acquisition of Alcentra and decreased $18.9 million in fiscal year 2022 primarily due to workforce optimization initiatives related to the acquisition of Legg Mason. Compensation related to minority interests increased $24.3 million in fiscal year 2023 and $20.0 million in fiscal year 2022. We expect to incur acquisition-related retention expenses of approximately $240 million during the fiscal year ending September 30, 2024 (“fiscal year 2024”), and decreasing over the following two fiscal years by approximately $80 million and $20 million. At September 30, 2023, our global workforce had decreased to approximately 9,200 employees from approximately 9,800 at September 30, 2022. We continue to place a high emphasis on our pay for performance philosophy. As such, any changes in the underlying performance of our investment products or changes in the composition of our incentive compensation offerings could have an impact on compensation and benefits expenses going forward. However, in order to attract and retain talented individuals, our level of compensation and benefit expenses may increase more quickly or decrease more slowly than our revenue. Sales, Distribution and Marketing Sales, distribution and marketing expenses primarily relate to services provided by financial advisers, broker-dealers and other intermediaries to our sponsored funds, including marketing support services. Substantially all distribution expenses are incurred from assets that generate distribution fees and are determined as a percentage of AUM. Substantially all sales expenses are incurred from the same commissionable sales transactions that generate sales fee revenues and are determined as a percentage of sales. Marketing support expenses are based on AUM, sales or a combination thereof. Also included is the amortization of deferred sales commissions related to upfront commissions on shares sold without a front-end sales charge. The deferred sales commissions are amortized over the periods in which commissions are generally recovered from related revenues. Sales, distribution and marketing expenses by cost driver are presented below. [[GREPCENT_TABLE]] [["(in millions)","","2023","","2022","","2021","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,"],["Asset-based expenses","","$","1,368.1","","","$","1,532.6","","","$","1,714.7","","","(11","%)","","(11","%)"],["Sales-based expenses","","195.0","","","248.2","","","312.9","","","(21","%)","","(21","%)"],["Amortization of deferred sales commissions","","50.0","","","64.8","","","78.2","","","(23","%)","","(17","%)"],["Sales, Distribution and Marketing","","$","1,613.1","","","$","1,845.6","","","$","2,105.8","","","(13","%)","","(12","%)"]] [[/GREPCENT_TABLE]] Asset-based expenses decreased $164.5 million and $182.1 million in fiscal years 2023 and 2022 primarily due to decreases of 10% and 11% in the related average AUM and in fiscal year 2023, a higher mix of lower-fee assets. Sales-based expenses decreased $53.2 million and $64.7 million in fiscal years 2023 and 2022 primarily due to a 20% decrease in commissionable sales in both years. Information Systems and Technology Information systems and technology expenses increased $4.8 million in fiscal year 2023 primarily due to higher software costs partially offset by lower technology depreciation. Information systems and technology expenses increased $14.1 million in fiscal year 2022 primarily due to higher costs incurred for technology consulting, software and external data services partially offset by lower technology depreciation. 40 Table of Contents Occupancy Occupancy expenses increased $10.0 million in fiscal year 2023 primarily due to higher utility costs, reflecting a full year of return to office, and higher leasehold and equipment depreciation. Occupancy expenses remained relatively flat in fiscal year 2022. We expect to incur additional expense of approximately $50 million in fiscal year 2024 primarily related to new leased office space located at One Madison Avenue. This is part of an initiative to consolidate our existing office space in New York City. Amortization of intangible assets Amortization of intangible assets increased $59.1 million and $50.0 million in fiscal years 2023 and 2022, primarily due to intangible assets recognized as part of the acquisition of Lexington and, in fiscal year 2023, the acquisition of Alcentra. General, Administrative and Other General, administrative and other expenses primarily consist of professional fees, fund-related service fees payable to external parties, advertising and promotion, travel and entertainment, and other miscellaneous expenses. General, administrative and other operating expenses remained relatively flat in fiscal year 2023 as an increase of $35.9 million in travel and entertainment expenses and conference costs, reflecting the resumption of activity post-pandemic, and the impact of net credits of $19.2 million recognized in the prior year to adjust the fair values of our contingent consideration asset and liabilities, were substantially offset by a $17.3 million decrease in third-party sub-advisory service fees, a $20.6 million decrease in acquisition-related costs, primarily due to costs associated with our global brand campaign in the prior year, and a $6.8 million decrease in other taxes at certain European subsidiaries. General, administrative and other operating expenses increased $27.7 million in fiscal year 2022, primarily due to increases of $27.1 million in advertising and promotion expenses, due in part to our global brand campaign, $25.7 million in professional fees, largely related to acquisition costs, and $24.0 million in travel and entertainment expenses. Fiscal year 2022 also included $20.3 million of non-recurring costs incurred in connection with the outsourcing of our transfer agent functions. These increases were partially offset by $43.0 million of closed-end fund product launch costs incurred in the prior year. Fiscal year 2022 also included net credits of $19.2 million to adjust the fair values of our contingent consideration asset and liabilities, as compared to $4.1 million of expense recognized in the prior year. OTHER INCOME (EXPENSES) Other income (expenses) consisted of the following: [[GREPCENT_TABLE]] [["(in millions)","","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Investment and other income, net","","$","340.0","","","$","91.1","","","$","264.7","","","273","%","","(66","%)"],["Interest expense","","(123.7)","","","(98.2)","","","(85.4)","","","26","%","","15","%"],["Investment and other income (losses) of consolidated investment products, net","","115.8","","","(17.7)","","","421.1","","","NM","","NM"],["Expenses of consolidated investment products","","(18.7)","","","(19.7)","","","(31.2)","","","(5","%)","","(37","%)"],["Other income (expenses), net","","$","313.4","","","$","(44.5)","","","$","569.2","","","NM","","NM"]] [[/GREPCENT_TABLE]] Investment and other income, net consists primarily of gains (losses) on investments held by the Company, income (losses) from equity method investees, foreign currency exchange gains (losses), rental income from excess owned space leased to third parties, gains (losses) on derivatives, and dividend and interest income. Investment and other income, net increased $248.9 million in fiscal year 2023 primarily due to an increase in dividend and interest income, gains on investments held by the Company as compared to losses in the prior year, and higher income from equity method investees, partially offset by net foreign currency exchange losses as compared to gains in the prior year. Investment and other income, net decreased $173.6 million in fiscal year 2022 primarily due to the impact of market declines. 41 Table of Contents Dividend and interest income increased $122.0 million in fiscal year 2023, primarily due to higher yields, and increased $20.3 million in fiscal year 2022, primarily due to higher yields on money market funds. Investments held by the Company generated net gains of $39.5 million, as compared to net losses of $75.4 million in the prior year, primarily from investments in nonconsolidated funds and separate accounts and assets invested for deferred compensation plans, partially offset by net losses from investments measured at cost adjusted for observable price changes. Investments held by the Company generated net losses of $75.4 million in fiscal year 2022, as compared to net gains of $90.9 million in fiscal year 2021, primarily from investments in nonconsolidated funds and separate accounts and assets invested for deferred compensation plans. The losses in fiscal year 2022 were partially offset in by net gains from investments measured at cost adjusted for observable price changes. Income from equity method investees generated income of $123.1 million in fiscal year 2023 and income of $36.2 million in fiscal year 2022. The current year income was largely related to various global alternative funds, and included $86.0 million which was fully offset in noncontrolling interest. Income from equity method investees decreased $118.1 million in fiscal year 2022. Fiscal year 2022 included a $52.6 million gain recognized on the sale of our investment in Embark, offset in part by losses from equity method investees, largely related to declines in market valuations of investments held by various global equity and alternative funds, while fiscal year 2021 included gains from equity method investees. Net foreign currency exchange losses were $26.7 million in fiscal year 2023, as compared to net gains of $40.6 million fiscal year 2022 and net losses of $11.9 million in fiscal year 2021. The net losses in fiscal year 2023 compared to fiscal year 2022 were primarily due to the impact of the weakening of the U.S. dollar against the Euro and British Pound on cash and cash equivalents denominated in U.S. dollars held by our European subsidiaries. The net gains in fiscal year 2022 compared to fiscal year 2021 were primarily due to the impact of the strengthening of the U.S. dollar against the Euro and British Pound. Derivatives generated losses of $15.1 million in fiscal year 2023, gains of $20.9 million in fiscal 2022, and losses of $23.2 million in fiscal 2021. Interest expense increased $25.5 million in fiscal year 2023 primarily due to a full year of accretion on Lexington deferred consideration, higher interest on debt and an increase in interest recognized on tax reserves. Interest expense increased $12.8 million in fiscal year 2022 primarily due to accretion on Lexington deferred consideration. Investment and other income (loss) of consolidated investment products, net consists of investment gains (losses) on investments held by consolidated investment products (“CIPs”) and dividend and interest income. 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. Investments held by CIPs generated investment and other income of $115.8 million in fiscal year 2023, as compared to investment and other losses of $17.7 million in fiscal year 2022 and investment and other income of $421.1 million in fiscal year 2021, largely related to net investment gains (losses) on holdings of various equity, fixed income and alternative funds. Expenses of consolidated investment products decreased $1.0 million in fiscal year 2023 and decreased $11.5 million in fiscal year 2022, due to activity of the funds. Our investments in sponsored funds include initial cash investments made in the course of launching mutual fund and other investment product offerings, as well as investments for other business reasons. The market conditions that impact our AUM similarly affect the investment income earned or losses incurred on our investments in sponsored funds. 42 Table of Contents Our cash, cash equivalents and investments portfolio by asset class and accounting classification at September 30, 2023, excluding third-party assets of CIPs, was as follows: [[GREPCENT_TABLE]] [["","","Accounting Classification 1","","","","Total"],["(in millions)","","Cash and Cash Equivalents","","Investments, at Fair Value","","Equity Method Investments","","Other Investments","","Direct Investments in CIPs"],["Cash and Cash Equivalents","","$","3,686.4","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","3,686.4"],["Investments"],["Alternative","","\u2014","","","299.4","","","820.7","","","69.7","","","505.7","","","1,695.5"],["Equity","","\u2014","","","314.0","","","213.1","","","153.7","","","103.9","","","784.7"],["Fixed Income","","\u2014","","","236.8","","","44.0","","","36.6","","","279.1","","","596.5"],["Multi-Asset","","\u2014","","","22.6","","","11.4","","","\u2014","","","145.2","","","179.2"],["Total investments","","\u2014","","","872.8","","","1,089.2","","","260.0","","","1,033.9","","","3,255.9"],["Total Cash and Cash Equivalents and Investments 2, 3","$","3,686.4","","","$","872.8","","","$","1,089.2","","","$","260.0","","","$","1,033.9","","","$","6,942.3"]] [[/GREPCENT_TABLE]]  ______________ 1See Note 1 – Significant Accounting Policies and Note 5 – Investments in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report for information on investment accounting classifications. 2Total cash and cash equivalents and investments includes $4,084.8 million held for operational activities, including investments in sponsored funds and other products, and $324.2 million necessary to comply with regulatory requirements. 3Total cash and cash equivalents and investments includes $295.8 million attributable to employee-owned and other third-party investments made through partnerships which are offset in nonredeemable noncontrolling interests and approximately $380 million of investments that are subject to long-term repurchase agreements and other financing arrangements. TAXES ON INCOME Our effective income tax rate for fiscal year 2023 was 22.1% as compared to 22.9% in fiscal year 2022 and 14.3% in fiscal year 2021. The rate decrease in fiscal year 2023 was primarily due to an increase in foreign earnings and activity of CIPs for which there is no related tax impact, partially offset by additional state tax expense. The rate increase in fiscal year 2022 was primarily due to the release of a tax reserve in the prior year following the close of an IRS audit of the U.S. taxation of deemed foreign dividends for fiscal year 2018, activity of CIPs for which there is no related tax impact, and a decrease in foreign earnings. Our effective income tax rate reflects the relative contributions of earnings in the jurisdictions in which we operate, which have varying tax rates. Changes in our pre-tax income mix, tax rates or tax legislation in such jurisdictions may affect our effective income tax rate and net income. SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES As supplemental information, we are providing performance measures for “adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share,” each of which is based on methodologies other than generally accepted accounting principles (“non-GAAP measures”). Management believes these non-GAAP measures are useful indicators of our financial performance and may be helpful to investors in evaluating our relative performance against industry peers. “Adjusted operating income,” “adjusted operating margin,” “adjusted net income” and “adjusted diluted earnings per share” are defined below, followed by reconciliations of operating income, operating margin, net income attributable to Franklin Resources, Inc. and diluted earnings per share on a U.S. GAAP basis to these non-GAAP measures. Non-GAAP measures should not be considered in isolation from, or as substitutes for, any financial information prepared in accordance with U.S. GAAP, and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate. 43 Table of Contents Adjusted Operating Income We define adjusted operating income as operating income adjusted to exclude the following: •Elimination of operating revenues upon consolidation of investment products. •Acquisition-related items: ◦Acquisition-related retention compensation. ◦Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities. ◦Amortization of intangible assets. ◦Impairment of intangible assets and goodwill, if any. •Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company. •Impact on compensation and benefits expense from gains and losses on investments related to deferred compensation plans, which is offset in investment and other income (losses), net. •Impact on compensation and benefits expense related to minority interests in certain subsidiaries, which is offset in net income (loss) attributable to redeemable noncontrolling interests. Adjusted Operating Margin We calculate adjusted operating margin as adjusted operating income divided by adjusted operating revenues. We define adjusted operating revenues as operating revenues adjusted to exclude the following: •Elimination of operating revenues upon consolidation of investment products. •Acquisition-related performance-based investment management fees which are passed through as compensation and benefits expense. •Sales and distribution fees and a portion of investment management fees allocated to cover sales, distribution and marketing expenses paid to the financial advisers and other intermediaries who sell our funds on our behalf. Adjusted Net Income and Adjusted Diluted Earnings Per Share We define adjusted net income as net income attributable to Franklin Resources, Inc. adjusted to exclude the following: •Activities of CIPs. •Acquisition-related items: ◦Acquisition-related retention compensation. ◦Other acquisition-related expenses including professional fees, technology costs and fair value adjustments related to contingent consideration assets and liabilities. ◦Amortization of intangible assets. ◦Impairment of intangible assets and goodwill, if any. ◦Write off of noncontrolling interests related to the wind down of an acquired business. ◦Interest expense for amortization of Legg Mason debt premium from acquisition-date fair value adjustment. 44 Table of Contents •Special termination benefits related to workforce optimization initiatives related to past acquisitions and certain initiatives undertaken by the Company. •Net gains or losses on investments related to deferred compensation plans which are not offset by compensation and benefits expense. •Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests. •Unrealized investment gains and losses. •Net income tax expense of the above adjustments based on the respective blended rates applicable to the adjustments. We define adjusted diluted earnings per share as diluted earnings per share adjusted to exclude the per share impacts of the adjustments applied to net income in calculating adjusted net income. In calculating our non-GAAP measures, we adjust for the impact of CIPs because it is not considered reflective of our underlying results of operations. Acquisition-related items and special termination benefits are excluded to facilitate comparability to other asset management firms. We adjust for compensation and benefits expense related to funded deferred compensation plans because it is partially offset in other income (expense), net. We adjust for compensation and benefits expense and net income (loss) attributable to redeemable noncontrolling interests to reflect the economics of certain profits interest arrangements. Sales and distribution fees and a portion of investment management fees generally cover sales, distribution and marketing expenses and, therefore, are excluded from adjusted operating revenues. In addition, when calculating adjusted net income and adjusted diluted earnings per share we exclude unrealized investment gains and losses included in investment and other income (losses) because the related investments are generally expected to be held long term. 45 Table of Contents The calculations of adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share are as follows: [[GREPCENT_TABLE]] [["(in millions)","","2023","","2022","","2021"],["for the fiscal years ended September 30,"],["Operating income","","$","1,102.3","","$","1,773.9","","$","1,875.0"],["Add (subtract):"],["Elimination of operating revenues upon consolidation of investment products\u00b9","","37.5","","48.2","","22.8"],["Acquisition-related retention","","164.9","","167.2","","163.7"],["Compensation and benefits expense from gains (losses) on deferred compensation, net","","20.3","","(36.7)","","22.7"],["Other acquisition-related expenses","","50.2","","60.7","","36.0"],["Amortization of intangible assets","","341.1","","282.0","","232.0"],["Special termination benefits","","63.2","","8.2","","27.1"],["Compensation and benefits expense related to minority interests in certain subsidiaries","","44.3","","20.0","","\u2014"],["Adjusted operating income","","$","1,823.8","","$","2,323.5","","$","2,379.3"],["Total operating revenues","","$","7,849.4","","$","8,275.3","","$","8,425.5"],["Add (subtract):"],["Acquisition-related pass through performance fees","","(169.7)","","(4.2)","","(25.3)"],["Sales and distribution fees","","(1,203.7)","","(1,415.0)","","(1,635.5)"],["Allocation of investment management fees for sales, distribution and marketing expenses","","(409.4)","","(430.6)","","(470.3)"],["Elimination of operating revenues upon consolidation of investment products\u00b9","","37.5","","48.2","","22.8"],["Adjusted operating revenues","","$","6,104.1","","$","6,473.7","","$","6,317.2"],["Operating margin","","14.0","%","","21.4","%","","22.3","%"],["Adjusted operating margin","","29.9","%","","35.9","%","","37.7","%"]] [[/GREPCENT_TABLE]] 46 Table of Contents [[GREPCENT_TABLE]] [["(in millions, except per share data)","","2023","","2022","","2021"],["for the fiscal years ended September 30,"],["Net income attributable to Franklin Resources, Inc.","","$","882.8","","","$","1,291.9","","","$","1,831.2"],["Add (subtract):"],["Net (income) loss of consolidated investment products\u00b9","","8.0","","","(0.2)","","","(2.8)"],["Acquisition-related retention","","164.9","","","167.2","","","163.7"],["Other acquisition-related expenses","","70.4","","","73.3","","","34.0"],["Amortization of intangible assets","","341.1","","","282.0","","","232.0"],["Special termination benefits","","63.2","","","8.2","","","27.1"],["Net losses (gains) on deferred compensation plan investments not offset by compensation and benefits expense","","(15.5)","","","9.0","","","(1.2)"],["Unrealized investment losses (gains)","","(2.6)","","","191.9","","","(285.7)"],["Interest expense for amortization of debt premium","","(25.4)","","","(25.2)","","","(51.4)"],["Net compensation and benefits expense related to minority interests in certain subsidiaries not offset by net income (loss) attributable to redeemable noncontrolling interests","","0.1","","","1.4","","","\u2014"],["Net income tax expense of adjustments","","(154.8)","","","(143.9)","","","(31.7)"],["Adjusted net income","","$","1,332.2","","","$","1,855.6","","","$","1,915.2"],["Diluted earnings per share","","$","1.72","","","$","2.53","","","$","3.57"],["Adjusted diluted earnings per share","","2.60","","","3.63","","","3.74"]] [[/GREPCENT_TABLE]] __________________ 1The impact of consolidated investment products is summarized as follows: [[GREPCENT_TABLE]] [["(in millions)","","2023","","2022","","2021"],["for the fiscal years ended September 30,"],["Elimination of operating revenues upon consolidation","","$","(37.5)","","","$","(48.2)","","","$","(22.8)"],["Other income, net","","88.8","","","24.2","","","207.4"],["Less: income (loss) attributable to noncontrolling interests","","59.3","","","(24.2)","","","181.8"],["Net income (loss)","","$","(8.0)","","","$","0.2","","","$","2.8"]] [[/GREPCENT_TABLE]] LIQUIDITY AND CAPITAL RESOURCES Cash flows were as follows: [[GREPCENT_TABLE]] [["(in millions)"],["for the fiscal years ended September 30,","","2023","","2022","","2021"],["Operating cash flows","","$","1,138.7","","","$","1,956.7","","","$","1,245.4"],["Investing cash flows","","(3,582.1)","","","(3,329.2)","","","(2,615.9)"],["Financing cash flows","","2,029.0","","","1,585.0","","","2,030.1"]] [[/GREPCENT_TABLE]] Net cash provided by operating activities decreased in fiscal year 2023 primarily due to higher net purchases of investments by CIPs and lower net income adjusted for non-cash items. Net cash used in investing activities increased as compared to the prior year primarily due to net purchases of our investments as compared to net liquidations in the prior year, higher net purchases of investments by collateralized loan obligations (“CLOs”), payments of deferred consideration liability in the current year, and net deconsolidation of CIPs as compared to net consolidation in the prior year, partially offset by lower cash paid for acquisitions in the current year. Net cash provided by financing activities increased as compared to the prior year primarily due to proceeds from repurchase agreements in the current year and higher net proceeds from debt of CIPs. Net cash provided by operating activities increased in fiscal year 2022 primarily due to lower net purchases of 47 Table of Contents investments by CIPs, higher net income adjusted for non-cash items and timing differences in the cash settlement of operating assets and liabilities. Net cash used in investing activities increased as compared to the prior year primarily due to cash paid for acquisitions in the current year, partially offset by net liquidations of our investments as compared to net purchases in the prior year. Net cash provided by financing activities decreased as compared to the prior year primarily due to proceeds from issuance of debt in the prior year, partially offset by higher net proceeds from debt of CIPs. The assets and liabilities of CIPs attributable to third-party investors do not impact our liquidity and capital resources. We have no right to the CIPs’ assets, other than our direct equity investment in them and investment management 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: [[GREPCENT_TABLE]] [["(in millions)"],["as of September 30,","","2023","","2022","","2021"],["Assets"],["Cash and cash equivalents","","$","3,592.8","","","$","4,086.8","","","$","4,357.8"],["Receivables","","1,181.7","","","1,130.8","","","1,300.4"],["Investments","","1,098.8","","","830.0","","","1,042.2"],["Total Liquid Assets","","$","5,873.3","","","$","6,047.6","","","$","6,700.4"],["Liability"],["Debt","","$","3,052.8","","","$","3,376.4","","","$","3,399.4"]] [[/GREPCENT_TABLE]] Liquidity Liquid assets consist of cash and cash equivalents, receivables and certain investments. Cash and cash equivalents at September 30, 2023 primarily consist of money market funds and deposits with financial institutions. Liquid investments consist of investments in sponsored and other funds, direct investments in redeemable CIPs, other equity and debt securities, and time deposits with maturities greater than three months. We utilize a significant portion of our liquid assets to satisfy operational and regulatory requirements and fund capital contributions to sponsored and other products. Certain of our subsidiaries are required by our internal policy or regulation to maintain minimum levels of cash and/or capital, and may be restricted in their ability to transfer cash to their parent companies. Should we require more capital than is available for use, we could elect to reduce the level of discretionary activities, such as share repurchases or investments in sponsored and other products, we could raise capital through debt or equity issuances, or utilize existing or new credit facilities. These alternatives could result in increased interest expense, decreased dividend or interest income, or other dilution to our earnings. Capital Resources We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations, amounts available under the credit facility discussed below, the ability to issue debt or equity securities and borrowing capacity under our uncommitted commercial paper private placement program. In prior fiscal years, we issued senior unsecured unsubordinated notes for general corporate purposes and to redeem outstanding notes. At September 30, 2023, Franklin’s outstanding senior notes had an aggregate principal amount due of $1,600.0 million. The notes have fixed interest rates from 1.600% to 2.950% with interest paid semi-annually and have an aggregate carrying value, inclusive of unamortized discounts and debt issuance costs, of $1,585.0 million. At September 30, 2023, Legg Mason’s outstanding senior notes had an aggregate principal amount due of $1,250.0 million. The notes have fixed interest rates from 3.950% to 5.625% with interest paid semi-annually and have an aggregate carrying value, inclusive of unamortized premium, of $1,467.8 million. The senior notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The indentures governing the senior notes 48 Table of Contents 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. On July 25, 2023, we terminated our undrawn 364-day $500.0 million revolving credit facility and our 3-year term loan with an aggregate commitment of $300.0 million. The term loan was repaid with existing cash. Concurrently, the Company entered into a $800.0 million 5-year revolving credit facility which remains undrawn as of the time of this filing. This facility contains a financial performance covenant requiring that the Company maintain a consolidated net leverage ratio, measured as of the last day of each fiscal quarter, of no greater than 3.25 to 1.00. We were in compliance with all debt covenants at September 30, 2023. At September 30, 2023, we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since 2012 and is unrated. Our ability to access the capital markets in a timely manner depends on a number of factors, including our credit rating, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. If we are unable to access capital markets in a timely manner, our business could be adversely impacted. Uses of Capital We expect that our main uses of cash will be to invest in and grow our business including through acquisitions, pay stockholder dividends, invest in our products, pay income taxes and operating expenses of the business, enhance technology infrastructure and business processes, repurchase shares of our common stock, and repay and service debt. While we expect to continue to repurchase shares to offset dilution from stock-based compensation, and expect to continue to repurchase shares opportunistically from time to time, we will likely spend more of our post-dividend free cash flow investing in our business, including seed capital and acquiring resources to help grow our investment teams and operations. In the ordinary course of business, we enter into contracts or purchase obligations with third parties whereby the third parties provide goods or services to or on behalf of the Company. Purchase obligations include contractual amounts that will be due to purchase goods and services to be used in our operations and are recorded as liabilities in the consolidated financial statements when services are provided. At September 30, 2023, we had $779.1 million of purchase obligations. We typically declare cash dividends on a quarterly basis, subject to approval by our Board of Directors. We declared regular dividends of $1.20 per share ($0.30 per share per quarter) in fiscal year 2023, and of $1.16 per share ($0.29 per share per quarter) in fiscal year 2022. We currently expect to continue paying comparable regular dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors. We maintain a stock repurchase program to manage our equity capital with the objective of maximizing shareholder value. Our stock repurchase program is effected through open-market purchases and private transactions in accordance with applicable laws and regulations, and is not subject to an expiration date. The size and timing of these purchases will depend on business conditions, price, market and other factors. During fiscal years 2023 and 2022, we repurchased 9.6 million and 6.5 million shares of our common stock at a cost of $256.3 million and $180.8 million. At September 30, 2023, 14.7 million shares remained available for repurchase under the authorization of 80.0 million shares approved by our Board of Directors in April 2018. While we have no legal or contractual obligation to do so, we routinely make cash investments in the course of launching sponsored funds. At September 30, 2023, we had $305.6 million of committed capital contributions which relate to commitments to invest in sponsored funds and other investment products and entities, including CIPs. These unfunded commitments are not recorded in the consolidated balance sheet. We entered into a lease agreement for office space in New York City located at One Madison Avenue with occupancy expected to begin in early fiscal year 2024 with an aggregate expected commitment of $766.7 million over sixteen years. In the first quarter of fiscal year 2024, we expect to recognize operating lease liabilities of approximately $400 million. This is part of an initiative to consolidate our existing office space in New York City. 49 Table of Contents On May 31, 2023, we entered into a definitive agreement to acquire Putnam Investments from Great-West Lifeco, Inc. (“Great-West”) for approximately 33.3 million shares of our common stock that we will issue to Great-West at closing and $100.0 million paid in cash 180 days after closing. We plan to pay the cash portion with existing cash. On November 1, 2022, we acquired all of the outstanding ownership interests in BNY Alcentra Group Holdings, Inc. from The Bank of New York Mellon Corporation. Total purchase consideration consisted of cash consideration of approximately $594.1 million, which includes $188.3 million for certain securities held in Alcentra’s CLOs; deferred consideration of $62.0 million which was paid on November 1, 2023; and contingent consideration of up to $350.0 million to be paid upon the achievement of certain performance thresholds over the next four years that has an acquisition-date fair value of $24.6 million. We paid the purchase price from our existing cash. On December 15, 2022, we entered into repurchase agreements with a third-party financing company for certain securities held in Alcentra’s CLOs. Under the terms of the repurchase agreements, we received cash proceeds of approximately $175.0 million with pledged collateral consisting of Alcentra investments with a carrying value of $171.3 million at September 30, 2023. The repurchase agreements have contractual maturity dates ranging between 2029 to 2034. On April 1, 2022, we acquired all of the outstanding ownership interests in Lexington for cash consideration of approximately $1.0 billion and additional payments of $750.0 million to be paid in cash over the next three years. The first additional payment of $250.0 million was made during the quarter ended June 30, 2023 from our existing cash. The funds that we manage have their own resources available for purposes of providing liquidity to meet shareholder redemptions, including securities that can be sold or provided to investors as in-kind redemptions, and lines of credit. Increased liquidity risks and redemptions have required, and may continue to require, increased cash in the form of loans or other lines of credit to help settle redemptions and for other related purposes. While we have no legal or contractual obligation to do so, we have in certain instances voluntarily elected to provide the funds with direct or indirect financial support based on our business objectives. We did not provide financial or other support to our sponsored funds during fiscal year 2023 or 2022. CRITICAL ACCOUNTING POLICIES Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These estimates, judgments, and assumptions are affected by our application of accounting policies. Further, concerns about the global economic outlook have adversely affected and may continue to adversely affect our business, financial condition and results of operations including the estimates and assumptions made by management. Actual results could differ from the estimates. Described below are the 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. 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, design and capital structure, the rights of the equity investment holders and our contractual involvement with and ownership interest in the entity. Our VIEs are primarily investment products and our variable interests consist of our equity ownership interests in and investment management fees earned from these products. 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 50 Table of Contents beneficiary determination if they are deemed to be at market and commensurate with service. The key assumption used in the analysis includes the amount of AUM. These estimates and assumptions are subject to variability. For example, AUM is impacted by market volatility and the level of sales, redemptions, distributions to investors and reinvested distributions. There is judgment involved in assessing whether we have the power to direct the activities that most significantly impact VIEs’ economic performance and the obligation to absorb losses of or right to receive benefits from VIEs that could potentially be significant to the VIEs. As of September 30, 2023, we were the primary beneficiary of 63 investment product VIEs. Business Combinations Business combinations are accounted for by recognizing the acquired assets, including separately identifiable intangible assets, and assumed liabilities at their acquisition-date estimated fair values. Any excess of the purchase consideration over the acquisition-date fair values of these identifiable assets and liabilities is recognized as goodwill. Determining the fair value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in earnings. Intangible assets acquired in business combinations consist primarily of investment management contracts and trade names. The fair values of the acquired management contracts are based on the net present value of estimated future cash flows attributable to the contracts, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate. The fair value of trade names is determined using the relief from royalty method based on net present value of estimated future cash flows, which include significant assumptions about royalty rate, revenue growth rate, discount rate and effective tax rate. Our estimates are based on assumptions believed to be reasonable, but are inherently uncertain and unpredictable and, as a result, may differ from actual results. Our management contract intangible assets are amortized over their estimated useful lives, which range from three to sixteen years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Indefinite-lived intangible assets represent contracts to manage investment assets for which there is no foreseeable limit on the contract period. Trade names are amortized over their estimated useful lives which range from five to twenty years using the straight-line method. Goodwill and indefinite-lived intangible assets are tested for impairment annually and when an event occurs or circumstances change that more likely than not reduce the fair value of the related reporting unit or indefinite-lived intangible asset below its carrying value. We have one reporting unit, investment management and related services, consistent with our single operating segment, to which all goodwill has been assigned. We make significant estimates and assumptions when evaluating goodwill and other intangible assets for impairment. We may first assess goodwill and indefinite-lived intangible assets for qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The qualitative analysis considers entity-specific and macroeconomic factors and their potential impact on key assumptions used in the determination of the fair value of the reporting unit or indefinite-lived intangible asset. A quantitative impairment test is performed if the results of the qualitative assessment indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value or an indefinite-lived intangible asset is impaired, or if a qualitative assessment is not performed. Quantitative tests compare the fair value of the asset to its carrying value. The fair values of the reporting unit and indefinite-lived intangible assets are based on the net present value of estimated future cash flows, which include significant assumptions about the AUM growth rate, pre-tax profit margin, discount rate, average effective fee rate and effective tax rate. The most relevant of these assumptions to the determination of estimated fair value are the AUM growth rate, pre-tax profit margin and the discount rate. We performed a qualitative annual impairment test for goodwill and all indefinite-lived intangible assets as of August 1, 2023 and concluded it is more likely than not that the fair values of the reporting unit and the indefinite-lived intangible assets exceed their carrying values. 51 Table of Contents We subsequently monitored market conditions and their potential impact on the assumptions used in the annual assessment to determine whether circumstances have changed that would more likely than not reduce the fair value of the reporting unit below its carrying value, or indicate that the other indefinite-lived intangible assets might be impaired. We considered, among other things, changes in our AUM and weighted-average cost of capital by assessing whether these changes would impact the reasonableness of our impairment assessment as of August 1, 2023. 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, 2023, there were no impairments of goodwill or indefinite-lived intangible assets as no events occurred or circumstances changed that would indicate these assets might be impaired. We test definite-lived intangible assets for impairment quarterly. Impairment is indicated when the carrying value of an asset is not recoverable and exceeds its fair value. Recoverability is evaluated based on estimated undiscounted future cash flows using assumptions about the AUM growth rate, pre-tax profit margin, average effective fee rate and expected useful life as well as royalty rate for trade name intangible assets. The most relevant of these assumptions to determine future cash flows is the AUM growth rate. If the carrying value of an asset is not recoverable through undiscounted cash flows, impairment is recognized in the amount by which the carrying value exceeds the asset’s fair value, as determined by discounted cash flows or other methods as appropriate for the asset type. There were no impairments of definite-lived intangible assets during fiscal year 2023. While we believe that the assumptions used to estimate fair value in our impairment tests are reasonable and appropriate, future changes in the assumptions could result in recognition of impairment. Fair Value Measurements Our investments are primarily recorded at fair value or amounts that approximate fair value on a recurring basis. We use a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. 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. As of September 30, 2023, Level 3 assets represented 6% of total assets measured at fair value, substantially all of which related to CIPs’ investments in equity and debt securities. There were insignificant transfers into and out of Level 3 during fiscal year 2023. 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 fund products are determined based on their published NAV or estimated using NAV as a practical expedient. The fair values of the underlying investments in the separate accounts are determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available. Investments related to long-term incentive plans consist primarily of investments in sponsored funds related to certain compensation plans that have certain vesting provisions. Changes in fair value are recognized as gains and losses in earnings. The fair values of the investments are determined based on the fund products’ published NAV or estimated using NAV as a practical expedient. Other equity and debt investments consist of other equity and debt securities carried at fair value. Changes in the fair value are recognized as gains and losses in earnings. The fair values of equity securities, excluding fund products, and debt securities are determined using independent third-party broker or dealer price quotes or based on either a market-based or income-based approach using significant unobservable inputs. The fair values of fund products are determined based on their published NAV or estimated using NAV as a practical expedient. 52 Table of Contents 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 loans, other equity and debt securities of entities in emerging markets, fund products and real estate. 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 values of redeemable noncontrolling interests related to minority interest in certain subsidiaries are determined using discounted cash flows and guideline public company methods, which include significant assumptions about forecasts of the AUM growth rate, pre-tax profit margin, discount rate and public company earnings multiples. Revenues We earn revenue primarily from providing investment management and related services to our customers, which are generally investment products or investors in separate accounts. Related services include fund administration, sales and distribution, and shareholder servicing. Revenues are recognized when 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. 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 significant reversal of the amount is no longer probable 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 our AUM is primarily valued based on observable market prices or inputs, market risk is the most significant risk underlying the valuation of our AUM. 53 Table of Contents Income Taxes Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. In assessing whether a valuation allowance should be established against a deferred income tax asset, we consider all positive and negative evidence, which includes timing of expiration, projected sources of taxable income, limitations on utilization under the statute and the effectiveness of prudent and feasible tax planning strategies among other factors. For each tax position taken or expected to be taken in a tax return, we utilize significant judgment related to the range of possible favorable or unfavorable outcomes to determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. We operate in numerous countries, states and other taxing jurisdictions. The income tax laws are complex and subject to different interpretations by the taxpayer and the relevant taxing authorities. Significant judgment is required in the determination of our annual income tax provisions, which includes the assessment of deferred tax assets and uncertain tax positions, as well as the interpretation and application of existing and newly enacted tax laws, regulation changes, and new judicial rulings. We repatriate foreign earnings that are in excess of regulatory, capital or operational requirements of all of our non-U.S. subsidiaries. It is possible that actual results will vary from those recognized in our consolidated financial statements due to changes in the interpretation of applicable guidance or as a result of examinations by taxing authorities. Loss Contingencies We are involved in various lawsuits and claims encountered in the normal course of business. When such a matter arises and periodically thereafter, we consult with our legal counsel and evaluate the merits of the claims based on the facts available at that time. In management’s opinion, an adequate accrual has been made as of September 30, 2023 to provide for any probable losses that may arise from such matters for which we could reasonably estimate an amount. See also Note 15 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Annual Report. 54 Table of Contents