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Legg Mason Reports Second Fiscal Quarter Results

-- Second Quarter Net Income of $64 Million, or $0.58 per Diluted Share --

-- Second Quarter Adjusted Income of $99 Million, or $0.89 per Diluted Share --

-- Assets Under Management of $672.1 Billion and Long-Term Net Inflows of $3.1 Billion --

Company Release - 10/30/2015 7:00 AM ET

BALTIMORE, Oct. 30, 2015 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2015.  The Company reported net income1 of $64.3 million, or $0.58 per diluted share, as compared to $94.5 million, or $0.84 per diluted share, in the previous quarter, and net income of $4.9 million, or $0.04 per diluted share, in the second quarter of fiscal 2015.  Included in this quarter's results were losses on corporate investments not offset in compensation, as well as an $11.1 million loss on an Australian dollar hedge related to the RARE Infrastructure acquisition which combined to total $22.6 million, or $0.13 per diluted share.  In addition, the current quarter included a tax benefit largely due to reserve adjustments related to the successful conclusion of certain tax examinations of $5.0 million, or $0.05 per diluted share.  Included in last quarter's results was a tax benefit of $18.0 million, or $0.16 per diluted share, resulting from an increase in the value of our deferred tax assets, primarily due to changes in the New York City tax code.  In the prior year's quarter Legg Mason completed a debt refinancing that resulted in a $107.1 million charge, or $0.59 per diluted share.  Adjusted income2 for the second fiscal quarter was $99.1 million, or $0.89 per diluted share, as compared to $129.3 million, or $1.14 per diluted share, in the previous quarter and $40.6 million, or $0.35 per diluted share, in the second quarter of fiscal 2015.  For the current quarter, operating revenues were $673.1 million, down 5% from $708.6 million in the prior quarter, and down 4% compared to $703.9 million in the second quarter of fiscal 2015.  Operating expenses were $540.1 million, down 8% from $584.1 million in the prior quarter, and down 6% compared to $573.5 million in the second quarter of fiscal 2015.

Assets Under Management ("AUM") were $672.1 billion as of September 30, 2015, down 4% from $699.2 billion as of June 30, 2015, and down 5% from $707.8 billion as of September 30, 2014.

Legg Mason also announced today that its Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.20 per share.

(Amounts in millions, except per share amounts)





Quarters Ended


Six Months Ended


Sep


Jun


Sep


Sep


Sep


2015


2015


2014


2015


2014

Operating Revenues

$

673.1



$

708.6



$

703.9



$

1,381.7



$

1,397.8


Operating Expenses

540.1



584.1



573.5



1,124.2



1,147.9


Operating Income

133.0



124.5



130.4



257.5



249.9


Net Income1

64.3



94.5



4.9



158.9



77.1


Adjusted Income2

99.1



129.3



40.6



228.4



147.8


Net Income Per Share - Diluted1

0.58



0.84



0.04



1.42



0.66


Adjusted Income Per Share - Diluted2

0.89



1.14



0.35



2.03



1.26












(1)    Net Income Attributable to Legg Mason, Inc.

(2)    See "Use of Supplemental Non-GAAP Financial Information."

 

Comments on the Second Quarter of Fiscal Year 2016 Results

Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "Legg Mason generated solid operating results for the quarter against a backdrop of market volatility and declines that negatively impacted revenues and non-operating expenses.  Legg Mason delivered its sixth straight quarter of long-term inflows driven by QS Investors, Brandywine and Western Asset, and largely from institutional investors.   Legg Mason's long-term organic growth rate for the second quarter of fiscal 2016 was 2.2%, underscoring the diversity across our affiliate and product portfolios, by asset class, geography and investor type.

"We continue to execute against a thoughtful set of strategic growth priorities to position our affiliate portfolio for long-term operating success.   At the same time, we continue to expand our equity and alternatives offerings through QS Investors, Martin Currie and now RARE Infrastructure, our most recent acquisition.  We are well positioned across asset classes to capitalize on opportunities for our clients and we feel especially good about our fixed income positioning, as we manage through an evolving rate environment.

"As we navigate through a volatile market environment, we remain committed to managing the company efficiently and balancing business investments with dividend growth and share repurchases.  We are confident that our shareholders will benefit as we execute this plan and further leverage our global scale and diversification in the coming years."

Assets Under Management of $672.1 Billion

AUM decreased 4% to $672.1 billion at September 30, 2015 compared with $699.2 billion at June 30, 2015, driven by $22.6 billion in negative market performance, $4.6 billion in negative foreign exchange and liquidity outflows of $3.0 billion.  This was partially offset by long-term net inflows of $3.1 billion.  AUM was down 5% from $707.8 billion at September 30, 2014.

  • Long-term net inflows of $3.1 billion included fixed income inflows of $3.0 billion and equity inflows of $0.1 billion.
  • At September 30, 2015, fixed income represented 55% of AUM, while equity represented 26%, and liquidity represented 19%.
  • By geography, 64% of AUM was from clients domiciled in the United States and 36% from non-US domiciled clients.
  • Average AUM during the quarter was $687.2 billion compared to $703.9 billion in the prior quarter and $704.1 billion in the second quarter of fiscal year 2015.  Average long-term AUM was $560.4 billion compared to $575.6 billion in the prior quarter and $558.7 billion in the second quarter of fiscal year 2015.

Comparison to the First Quarter of Fiscal Year 2016

Net income was $64.3 million, or $0.58 per diluted share, as compared with net income of $94.5 million, or $0.84 per diluted share, in the first quarter of fiscal year 2016.  Included in this quarter's results were losses on corporate investments not offset in compensation and a loss on an Australian dollar hedge related to the RARE Infrastructure acquisition, which combined to total $22.6 million or $0.13 per diluted share.  In addition, the current quarter included a tax benefit largely due to reserve adjustments related to the successful conclusion of certain tax examinations of $5.0 million, or $0.05 per diluted share.  Last quarter's results included a tax benefit of $18.0 million, or $0.16 per diluted share.

  • Operating revenues of $673.1 million were down 5% from $708.6 million in the prior quarter, reflecting a 2% decrease in average AUM, a less favorable AUM mix and lower performance fees. 
  • Operating expenses of $540.1 million were down 8% from $584.1 million in the prior quarter primarily due to lower revenue share compensation related to lower revenues.   Last quarter's expenses included $11.5 million in higher seasonal compensation costs.  The current quarter expenses included a $5.5 million loss in the market value of deferred compensation and seed investments, which is recorded as a decrease in compensation and benefits with an offset in other non-operating income, compared to a gain of $1.2 million in the prior quarter.
  • Other non-operating expense was $42.5 million compared to $4.5 million in the prior quarter.  Other non-operating expenses included an $11.1 million loss on an Australian dollar hedge related to the RARE Infrastructure acquisition as well as losses on corporate investments, not offset in compensation of $11.5 million, compared with gains of $4.5 million last quarter.  Both quarters included losses and gains on funded deferred compensation and seed investments, as described above.  In addition, the current quarter included $2.3 million in losses associated with consolidated investment vehicles compared to $0.4 million of gains in the prior quarter.  The consolidation of investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.
  • Operating margin was 19.8%, as compared to 17.6% in the prior quarter.  Operating margin, as adjusted2, was 24.0%, as compared to 22.6% in the prior quarter.
  • Adjusted income was $99.1 million, or $0.89 per diluted share, as compared to adjusted income of $129.3 million, or $1.14 per diluted share, in the prior quarter.

Comparison to the Second Quarter of Fiscal Year 2015

Net income was $64.3 million, or $0.58 per diluted share, as compared with $4.9 million, or $0.04 per diluted share, in the second quarter of fiscal year 2015.  Included in this quarter's results were losses on corporate investments not offset in compensation and a loss on an Australian dollar hedge related to the RARE Infrastructure acquisition which combined to total $22.6 million or $0.13 per diluted share.  In addition, the current quarter included a tax benefit largely due to reserve adjustments related to the successful conclusion of certain tax examinations of $5.0 million, or $0.05 per diluted share.  The second quarter of fiscal year 2015 included a $107.1 million charge, or $0.59 per diluted share, related to a debt refinancing.

  • Operating revenues of $673.1 million were down 4% compared with $703.9 million in the second quarter of fiscal year 2015, reflecting a less favorable AUM mix, lower performance fees and a 2% decline in average AUM. 
  • Operating expenses of $540.1 million were down 6% compared with $573.5 million in the second quarter of fiscal year 2015 primarily due to lower revenue share compensation related to lower revenues.  In addition, the prior year quarter included $8.7 million in costs related to the QS Investors integration and other corporate initiatives.  The current quarter expenses also included a loss of $5.5 million in the market value of deferred compensation and seed investments, which are recorded as a decrease in compensation and benefits with an offset in other non-operating income, compared to a loss of $0.4 million in the prior year quarter.
  • Other non-operating expense was $42.5 million, as compared to $121.5 million in the second quarter of fiscal year 2015.  Other non-operating expenses included an $11.1 million loss on an Australian dollar hedge related to the RARE Infrastructure acquisition as well as losses on corporate investments, not offset in compensation, of $11.5 million compared with losses of $0.7 million in the prior year quarter.  The prior year quarter included a $107.1 million charge related to the debt refinancing.  Both quarters included losses on funded deferred compensation and seed investments, as described above.  In addition, the current quarter also included $2.3 million in losses associated with consolidated investment vehicles, as compared to $0.1 million in losses in the prior year quarter.  The consolidation of investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.
  • Operating margin was 19.8%, as compared to 18.5% in the second quarter of fiscal year 2015.  Operating margin, as adjusted, was 24.0%, as compared to 23.8% in the second quarter of fiscal year 2015.
  • Adjusted income was $99.1 million, or $0.89 per diluted share, as compared to adjusted income of $40.6 million, or $0.35 per diluted share, in the second quarter of fiscal year 2015.

Quarterly Business Developments and Recent Announcements

  • Legg Mason announced on July 28th the agreement to acquire RARE Infrastructure Limited, a pioneer in global listed infrastructure investing headquartered in Sydney, Australia.  The transaction closed on October 21, 2015.
  • On September 4, 2015 Legg Mason filed a preliminary prospectus for its first four smart-beta ETFs, subadvised by QS Investors.

Quarterly Performance

At September 30, 2015:



1-Year

3-Year

5-Year

10-Year

% of Strategy AUM beating Benchmark3

44%

84%

85%

88%







% of Long-Term US Fund Assets Beating Lipper Category Average3






Equity

33%

45%

56%

50%


Fixed Income

67%

69%

82%

80%


Total US Fund Assets

48%

55%

67%

62%

Of Legg Mason's long-term U.S. mutual fund assets, 42.7% were in funds rated 4 or 5 stars by Morningstar.

Balance Sheet

At September 30, 2015, Legg Mason's cash position was $619 million.  Total debt was $1.1 billion and stockholders' equity was $4.5 billion.  The ratio of total debt to total capital was 19%. In the second fiscal quarter, the Company completed additional open market purchases of 1.9 million shares which reduced the weighted average shares by 907 thousand.

The Board of Directors has declared a quarterly cash dividend on the Company's common stock in the amount of $0.20 per share.  The dividend is payable January 11, 2016 to shareholders of record at the close of business on December 16, 2015.

Conference Call to Discuss Results

A conference call to discuss the Company's results, hosted by Mr. Sullivan, will be held at 8:00 am EDT today. The call will be open to the general public.  Interested participants should access the call by dialing 1-800-447-0521 (or for international calls 1-847-413-3238), confirmation number 40682166, at least 10 minutes prior to the scheduled start to ensure connection.

The presentation slides that will be reviewed during the conference call will be available on the Investor Relations section of the Legg Mason website shortly after the release of the financial results.

A replay of the live broadcast will be available on the Legg Mason website, in the investor relations section, or by dialing 1-888-843-7419 (or for international calls 1-630-652-3042), enter pass code 40682166# when prompted.  Please note that the replay will be available beginning at 10:30 a.m. EDT on Friday, October 30, 2015, and ending at 11:59 p.m. EST on Friday, November 13, 2015.

About Legg Mason

Legg Mason is a global asset management firm, with $672.1 billion in AUM as of September 30, 2015.  The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

This release contains forward-looking statements subject to risks, uncertainties and other factors that may cause actual results to differ materially. For a discussion of these risks and uncertainties, see "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Legg Mason's Annual Report on Form 10-K for the fiscal year ended March 31, 2015 and in the Company's quarterly reports on Form 10-Q.

(3) See "Supplemental Data Regarding Quarterly Performance."

Supplemental Data Regarding Quarterly Performance

Strategy Performance

For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and other products) into a single group that represents a particular investment objective.  In the case of separate accounts, the investment performance of the account is based upon the performance of the strategy to which the account has been assigned.  Each of our asset managers has its own specific guidelines for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the performance comparison for all of the assets is based upon the performance of the separate account.

Approximately ninety percent of total AUM is included in strategy AUM as of September 30, 2015, although not all strategies have three-, five-, and ten-year histories.  Total strategy AUM includes liquidity assets.  Certain assets are not included in reported performance comparisons. These include: accounts that are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet been assigned to a strategy; and certain smaller products at some of our affiliates. 

Past performance is not indicative of future results.  For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds (including fund-of-hedge 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 table is provided solely for use in connection with this table, and is not directed toward existing or potential clients of Legg Mason.

Long-term US Fund Assets Beating Lipper Category Average

Long-term US fund assets include open-end, closed-end, and variable annuity funds. These performance comparisons do not reflect the actual performance of any specific fund; individual fund performance may differ.  Past performance is not a guarantee of future results.  Source: Lipper Inc.

 

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)


















Quarters Ended


Six Months Ended





September


June


September


September


September





2015


2015


2014


2015


2014

Operating Revenues:











Investment advisory fees:












Separate accounts

$     205,155


$     208,104


$     204,739


$     413,259


$     409,509



Funds

359,871


384,345


389,238


744,216


770,865



Performance fees

7,902


18,653


13,993


26,555


30,296


Distribution and service fees

99,602


96,860


94,481


196,462


184,197


Other

556


688


1,444


1,244


2,909




Total operating revenues

673,086


708,650


703,895


1,381,736


1,397,776














Operating Expenses:











Compensation and benefits

282,433


315,052


303,878


597,485


609,384


Distribution and servicing

138,930


149,288


155,100


288,218


303,808


Communications and technology

49,845


48,677


44,624


98,522


86,574


Occupancy

25,716


25,987


22,710


51,703


49,667


Amortization of intangible assets

670


657


464


1,327


1,359


Other

42,462


44,446


46,764


86,908


97,083




Total operating expenses

540,056


584,107


573,540


1,124,163


1,147,875














Operating Income

133,030


124,543


130,355


257,573


249,901














Other Non-Operating Income (Expense):











Interest income

1,229


1,317


1,680


2,546


4,205


Interest expense

(13,280)


(11,949)


(14,975)


(25,229)


(32,033)


Other income (expense), net, including $107,074

  debt extinguishment loss in September 2014











(28,110)


5,711


(108,156)


(22,399)


(101,908)


Other non-operating income (expense) of

  consolidated investment vehicles, net











(2,303)


407


(79)


(1,896)


2,928




Total other non-operating income
  (expense)

(42,464)


(4,514)


(121,530)


(46,978)


(126,808)














Income Before Income Tax Provision

90,566


120,029


8,825


210,595


123,093















Income tax provision

27,647


25,090


3,804


52,737


44,460














Net Income

62,919


94,939


5,021


157,858


78,633


Less: Net income (loss) attributable












to noncontrolling interests

(1,400)


391


124


(1,009)


1,548














Net Income Attributable to Legg Mason, Inc.

$       64,319


$       94,548


$        4,897


$     158,867


$       77,085














Net Income per Share Attributable to











Legg Mason, Inc. Shareholders:













Basic

$          0.58


$          0.85


$          0.04


$          1.43


$          0.66

















Diluted

$          0.58


$          0.84


$          0.04


$          1.42


$          0.66














Weighted-Average Number of Shares











Outstanding: (1)













Basic

110,624


111,691


115,799


111,154


116,459




Diluted

111,556


112,971


116,940


112,258


117,574














 

(1)

Includes weighted-average unvested restricted shares deemed to be participating securities of 2,772, 2,737, and 3,109 for the quarters ended September 2015, June 2015, and September 2014, respectively, and 2,754 and 3,059 for the six months ended September 2015 and September 2014, respectively.

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

(Amounts in thousands)

(Unaudited)





Quarters Ended





September 2015


June 2015


September 2014


























Balance Before Consolidation of Consolidated Investment Vehicles


Consolidated Investment Vehicles


Consolidated Totals

Balance Before Consolidation of Consolidated Investment Vehicles


Consolidated Investment Vehicles


Consolidated Totals

Balance Before Consolidation of Consolidated Investment Vehicles


Consolidated Investment Vehicles


Consolidated Totals




















Total operating revenues

$           673,168


$            (82)


$     673,086

$           708,735


$            (85)


$     708,650

$           704,079


$          (184)


$     703,895

Total operating expenses

540,023


33


540,056

584,087


20


584,107

573,486


54


573,540

Operating Income (Loss)

133,145


(115)


133,030

124,648


(105)


124,543

130,593


(238)


130,355

Other non-operating income (expense)

(40,988)


(1,476)


(42,464)

(4,879)


365


(4,514)

(121,714)


184


(121,530)

Income (Loss) Before Income Tax Provision

92,157


(1,591)


90,566

119,769


260


120,029

8,879


(54)


8,825

Income tax provision

27,647



27,647

25,090



25,090

3,804



3,804

Net Income (Loss)

64,510


(1,591)


62,919

94,679


260


94,939

5,075


(54)


5,021

Less: Net income (loss) attributable
















          to noncontrolling interests

191


(1,591)


(1,400)

131


260


391

178


(54)


124

Net Income Attributable to Legg Mason,
  Inc.

$             64,319


$              —


$       64,319

$             94,548


$              —


$       94,548

$               4,897


$              —


$         4,897




































































Six Months Ended











September 2015


September 2014
































Balance Before Consolidation of Consolidated Investment Vehicles


Consolidated Investment Vehicles


Consolidated Totals

Balance Before Consolidation of Consolidated Investment Vehicles


Consolidated Investment Vehicles


Consolidated Totals

























Total operating revenues

$        1,381,903


$          (167)


$  1,381,736

$        1,398,143


$          (367)


$  1,397,776






Total operating expenses

1,124,110


53


1,124,163

1,147,801


74


1,147,875






Operating Income (Loss)

257,793


(220)


257,573

250,342


(441)


249,901






Other non-operating income (expense)

(45,867)


(1,111)


(46,978)

(128,530)


1,722


(126,808)






Income (Loss) Before Income Tax Provision

211,926


(1,331)


210,595

121,812


1,281


123,093






Income tax provision

52,737



52,737

44,460



44,460






Net Income (Loss)

159,189


(1,331)


157,858

77,352


1,281


78,633






Less: Net income (loss) attributable
















          to noncontrolling interests

322


(1,331)


(1,009)

267


1,281


1,548






Net Income Attributable to Legg Mason, Inc.

$           158,867


$              —


$     158,867

$             77,085


$              —


$       77,085






 

 

LEGG MASON, INC. AND SUBSIDIARIES

SUPPLEMENTAL DATA

RECONCILIATION OF NET INCOME ATTRIBUTABLE TO LEGG MASON, INC.

TO ADJUSTED INCOME (1)

(Amounts in thousands, except per share amounts)

(Unaudited)












Quarters Ended


Six Months Ended












September


June


September


September


September


2015


2015


2014


2015


2014











Net Income Attributable to Legg Mason, Inc.

$       64,319


$       94,548


$        4,897


$     158,867


$       77,085











    Plus:











    Amortization of intangible assets

670


657


464


1,327


1,359


    Deferred tax amortization benefit
      on intangible assets

34,116


34,121


35,225


68,237


69,369











Adjusted Income

$       99,105


$     129,326


$       40,586


$     228,431


$     147,813





















Net Income per Diluted Share Attributable
  to Legg Mason, Inc. Shareholders

$          0.58


$          0.84


$          0.04


$          1.42


$          0.66











    Plus: (2)











    Amortization of intangible assets





0.01


    Deferred tax amortization benefit
      on intangible assets

0.31


0.30


0.31


0.61


0.59












Adjusted Income per Diluted Share

$          0.89


$          1.14


$          0.35


$          2.03


$          1.26















 

(1)

See explanations for "Use of Supplemental Non-GAAP Financial Information."

(2)

In calculating Adjusted Income per Diluted Share, we include the weighted-average of unvested restricted shares deemed to be participating securities and the earnings allocated to these participating securities.  For purposes of this non-GAAP performance measure, earnings are allocated in the same ratio to participating securities and common shares.  As a result, the inclusion of these participating securities and the earnings allocated thereto do not impact the per share amounts of the adjustments made to Net Income per Diluted Share Attributable to Legg Mason, Inc. Shareholders.

 

LEGG MASON, INC. AND SUBSIDIARIES


SUPPLEMENTAL DATA


 RECONCILIATION OF OPERATING MARGIN,  AS ADJUSTED (1)


(Amounts in thousands)


(Unaudited)




































Quarters Ended



Six Months Ended





















September


June


September



September


September






2015


2015


2014



2015


2014

















Operating Revenues, GAAP basis

$       673,086


$       708,650


$       703,895



$    1,381,736


$    1,397,776


















Plus (less):














Operating revenues eliminated upon















consolidation of investment vehicles

82


85


184



167


367




Distribution and servicing expense excluding















consolidated investment vehicles

(138,920)


(149,280)


(155,090)



(288,200)


(303,791)

















Operating Revenues, as Adjusted

$       534,248


$       559,455


$       548,989



$    1,093,703


$    1,094,352
































Operating Income, GAAP basis

$       133,030


$       124,543


$       130,355



$       257,573


$       249,901


















Plus (less):














Gains (losses) on deferred compensation















and seed investments, net

(5,499)


1,210


(374)



(4,289)


4,075




Amortization of intangible assets

670


657


464



1,327


1,359




Operating income of consolidated
  investment
vehicles, net














115


105


238



220


441

















Operating Income, as Adjusted

$       128,316


$       126,515


$       130,683



$       254,831


$       255,776

















Operating Margin, GAAP basis

19.8

%

17.6

%

18.5

%


18.6

%

17.9

%

Operating Margin, as Adjusted

24.0


22.6


23.8



23.3


23.4
































(1) See explanations for "Use of Supplemental Non-GAAP Financial Information."


LEGG MASON, INC. AND SUBSIDIARIES

(Amounts in billions)

(Unaudited)

















Assets Under Management
















Quarters Ended





By asset class:

September 2015


June 2015


March 2015


December 2014


September 2014






Equity

$                177.6


$                197.3


$                199.4


$                198.7


$                193.6






Fixed Income

368.4


372.2


376.1


367.4


360.4







Long-Term Assets

546.0


569.5


575.5


566.1


554.0






Liquidity

126.1


129.7


127.2


143.0


153.8







Total

$                672.1


$                699.2


$                702.7


$                709.1


$                707.8
























Quarters Ended


Six Months Ended

By asset class (average):

September 2015


June 2015


March 2015


December 2014


September 2014


September 2015


September 2014


Equity

$                189.6


$                199.8


$                198.3


$                200.0


$                194.6


$                194.3


$                191.4


Fixed Income

370.8


375.8


373.2


365.8


364.1


373.5


363.4



Long-Term Assets

560.4


575.6


571.5


565.8


558.7


567.8


554.8


Liquidity

126.8


128.3


135.6


145.1


145.4


127.2


142.0



Total

$                687.2


$                703.9


$                707.1


$                710.9


$                704.1


$                695.0


$                696.8

































Component Changes in Assets Under Management














Quarters Ended


Six Months Ended




September 2015


June 2015


March 2015


December 2014


September 2014


September 2015


September 2014

Beginning of period

$                699.2


$                702.7


$                709.1


$                707.8


$                704.3


$                702.7


$                701.8

Net client cash flows:














Equity

0.1


(1.3)


(1.4)


(1.1)


1.6


(1.2)


(0.2)

Fixed Income

3.0


2.6


7.6


9.9


(0.9)


5.6


1.6

Long-Term flows

3.1


1.3


6.2


8.8


0.7


4.4


1.4

Liquidity

(3.0)


2.3


(15.3)


(10.6)


12.7


(0.7)


3.7

Total net client cash flows

0.1


3.6


(9.1)


(1.8)


13.4


3.7


5.1

Market performance and other (1)

(22.6)


(8.9)


9.0


9.5


(2.5)


(31.4)


1.7

Impact of foreign exchange

(4.6)


1.8


(6.3)


(6.4)


(7.4)


(2.9)


(5.8)

Acquisitions (Disposition), net







5.0

End of period

$                672.1


$                699.2


$                702.7


$                709.1


$                707.8


$                672.1


$                707.8

















Note: Due to effects of rounding, the sum of the quarterly results may differ immaterially from the year-to-date results.

















(1) Includes $12.8 billion of certain client assets previously reported as Assets Under Management that have been reclassified as Assets Under Advisement for the six months ended September 2014.

 

 

Use of Supplemental Non-GAAP Financial Information

As supplemental information, we are providing performance measures that are based on methodologies other than generally accepted accounting principles ("non-GAAP") for "Adjusted Income" and "Operating Margin, as Adjusted" that management uses as benchmarks in evaluating and comparing our period-to-period operating performance.

Adjusted Income
We define "Adjusted Income" as Net Income Attributable to Legg Mason, Inc., plus amortization and deferred taxes related to intangible assets and goodwill, imputed interest and tax benefits on contingent convertible debt less deferred income taxes on goodwill and indefinite-life intangible asset impairment, if any.  We also adjust for non-core items that are not reflective of our economic performance, such as intangible asset impairments, the impact of fair value adjustments of contingent consideration liabilities, if any, the impact of tax rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets, and loss on extinguishment of contingent convertible debt.

We believe that Adjusted Income provides a useful representation of our operating performance adjusted for non-cash acquisition related items and other items that facilitate comparison of our results to the results of other asset management firms that have not issued/extinguished contingent convertible debt or made significant acquisitions.  We also believe that Adjusted Income is an important metric in estimating the value of an asset management business.

Adjusted Income only considers adjustments for certain items that relate to operating performance and comparability, and therefore, is most readily reconcilable to Net Income Attributable to Legg Mason, Inc. determined under GAAP.  This measure is provided in addition to Net Income Attributable to Legg Mason, Inc., but is not a substitute for Net Income Attributable to Legg Mason, Inc. and may not be comparable to non-GAAP performance measures, including measures of adjusted earnings or adjusted income, of other companies.  Further, Adjusted Income is not a liquidity measure and should not be used in place of cash flow measures determined under GAAP.  Fair value adjustments of contingent consideration liabilities may or may not provide a tax benefit, depending on the tax attributes of the acquisition transaction.  We consider Adjusted Income to be useful to investors because it is an important metric in measuring the economic performance of asset management companies, as an indicator of value, and because it facilitates comparison of our operating results with the results of other asset management firms that have not issued/extinguished contingent convertible debt or made significant acquisitions.

In calculating Adjusted Income, we adjust for the impact of the amortization of management contract assets and impairment of indefinite-life intangible assets, and add (subtract) the impact of fair value adjustments on contingent consideration liabilities, if any, all of which arise from acquisitions, to Net Income Attributable to Legg Mason, Inc. to reflect the fact that these items distort comparisons of our operating results with the results of other asset management firms that have not engaged in significant acquisitions.  Deferred taxes on indefinite-life intangible assets and goodwill include actual tax benefits from amortization deductions that are not realized under GAAP absent an impairment charge or the disposition of the related business.  Because we fully expect to realize the economic benefit of the current period tax amortization, we add this benefit to Net Income Attributable to Legg Mason, Inc. in the calculation of Adjusted Income.  However, because of our net operating loss carry-forward, we will receive the benefit of the current tax amortization over time.  Conversely, we subtract the non-cash income tax benefits on goodwill and indefinite-life intangible asset impairment charges and U.K. tax rate adjustments on excess book basis on certain acquired indefinite-life intangible assets, if applicable, that have been recognized under GAAP.  We also add back, if applicable, non-cash imputed interest and the extinguishment loss on contingent convertible debt adjusted for amounts allocated to the conversion feature, as well as adding the actual tax benefits on the imputed interest that are not realized under GAAP.  We do not adjust for debt extinguishment losses resulting from prepayment fees, if any.  These adjustments reflect that these items distort comparisons of our operating results to other periods and the results of other asset management firms that have not engaged in significant acquisitions, including any related impairments, or issued/extinguished contingent convertible debt.

Should a disposition, impairment charge or other non-core item occur, its impact on Adjusted Income may distort actual changes in the operating performance or value of our firm.  Accordingly, we monitor these items and their related impact, including taxes, on Adjusted Income to ensure that appropriate adjustments and explanations accompany such disclosures.

Although depreciation and amortization of fixed assets are non-cash expenses, we do not add these charges in calculating Adjusted Income because these charges are related to assets that will ultimately require replacement.

Operating Margin, as Adjusted
We calculate "Operating Margin, as Adjusted," by dividing (i) Operating Income, adjusted to exclude the impact on compensation expense of gains or losses on investments made to fund deferred compensation plans, the impact on compensation expense of gains or losses on seed capital investments by our affiliates under revenue sharing agreements, amortization related to intangible assets, income (loss) of consolidated investment vehicles, the impact of fair value adjustments of contingent consideration liabilities, if any, and impairment charges by (ii) our operating revenues, adjusted to add back net investment advisory fees eliminated upon consolidation of investment vehicles, less distribution and servicing expenses which we use as an approximate measure of revenues that are passed through to third parties, which we refer to as "Operating Revenues, as Adjusted".  The compensation items are removed from Operating Income in the calculation because they are offset by an equal amount in Other non-operating income (expense), and thus have no impact on Net Income Attributable to Legg Mason, Inc.  We adjust for the impact of amortization of management contract assets and the impact of fair value adjustments of contingent consideration liabilities, if any, which arise from acquisitions to reflect the fact that these items distort comparison of our operating results with results of other asset management firms that have not engaged in significant acquisitions.  Impairment charges and income (loss) of consolidated investment vehicles are removed from Operating Income in the calculation because these items are not reflective of our core asset management operations.  We use Operating Revenues, as Adjusted in the calculation to show the operating margin without distribution and servicing expenses, which we use to approximate our distribution revenues that are passed through to third parties as a direct cost of selling our products, although distribution and servicing expenses may include commissions paid in connection with the launching of closed-end funds for which there is no corresponding revenue in the period.  Operating Revenues, as Adjusted also include our advisory revenues we receive from consolidated investment vehicles that are eliminated in consolidation under GAAP.

We believe that Operating Margin, as Adjusted, is a useful measure of our performance because it provides a measure of our core business activities.  It excludes items that have no impact on Net Income Attributable to Legg Mason, Inc. and indicates what our operating margin would have been without the distribution revenues that are passed through to third parties as a direct cost of selling our products, amortization related to intangible assets, changes in the fair value of contingent consideration liabilities, if any, impairment charges, and the impact of the consolidation of certain investment vehicles described above.  The consolidation of these investment vehicles does not have an impact on Net Income Attributable to Legg Mason, Inc.  This measure is provided in addition to our operating margin calculated under GAAP, but is not a substitute for calculations of margins under GAAP and may not be comparable to non-GAAP performance measures, including measures of adjusted margins of other companies.

 

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SOURCE Legg Mason, Inc.