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Legg Mason Reports Results For Second Fiscal Quarter

-- Second Quarter Net Income of $75.7 Million, or $0.78 per Diluted Share

-- Assets Under Management of $754.4 Billion

-- Long-term Net Outflows of $1.2 Billion for the Quarter

Company Release - 10/25/2017 4:01 PM ET

BALTIMORE, Oct. 25, 2017 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2017. 






Quarters Ended


Six Months Ended

Financial Results

Sep


Jun


Sep


Sep


Sep

(Amounts in millions, except per share amounts)

2017


2017


2016


2017


2016

Operating Revenues

$

768.3



$

793.8



$

748.4



$

1,562.2



$

1,448.5


Operating Expenses

623.9



686.6



620.7



1,310.6



1,247.3


Operating Income

144.4



107.2



127.6



251.6



201.2


Net Income1

75.7



50.9



66.4



126.6



99.9


Net Income Per Share - Diluted1

0.78



0.52



0.63



1.29



0.94












Assets Under Management2










(Amounts in billions)










End of Period Assets Under Management

$

754.4



$

741.2



$

732.9



$

754.4



$

732.9


Average Assets Under Management

750.3



740.3



742.1



745.8



723.3












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

(2) September 2016 AUM excludes $12.8 billion of separately managed account assets classified as Assets Under Advisement reported in September and June 2017 as Assets Under Management

 (PRNewsfoto/Legg Mason, Inc.)

Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "We are pleased to have delivered a strong operating quarter driven by solid core revenues and prudent expense management.  The diversification of our business mix contributed to these results and the resiliency of our operating revenue yield.  We are realizing greater client asset persistency in the retail channels as we continue to provide greater choice in investment strategies and vehicles.  Net sales across our Global Distribution platform also reflect the diversification of our business by geography, channel and investment affiliate.  We will continue to execute our strategy of expanding client choice to meet the rapidly evolving needs of our global client base."

Assets Under Management of $754.4 Billion

Assets Under Management ("AUM") were $754.4 billion at September 30, 2017 compared with $741.2 billion at June 30, 2017, resulting from $12.5 billion in positive market performance and other, $2.2 billion in positive foreign exchange and liquidity inflows of $0.2 billion, partially offset by long-term outflows of $1.2 billion.











Quarter Ended September 30, 2017



Assets Under Management

AUM

(in billions)


Flows

(in billions)


Operating
Revenue
Yield 1



Equity

$

201.2



$

(2.0)



 63 bps



Fixed Income

411.9



1.5



 27 bps



Alternative

65.8



(0.7)2



 64 bps



Long-Term Assets

678.9



(1.2)






Liquidity

75.5



0.2



 13 bps



Total

$

754.4



$

(1.0)



  38 bps











(1) Operating revenue yield equals total operating revenues less performance fees divided by average AUM



(2) Excludes realizations of $0.5 billion


At September 30, 2017, fixed income represented 54% of AUM, while equity represented 27%, liquidity represented 10% and alternatives represented 9%. 

By geography, 68% of AUM was from clients domiciled in the United States and 32% from non-US domiciled clients.

Average AUM during the quarter was $750.3 billion compared to $740.3 billion in the prior quarter and $742.1 billion in the second quarter of fiscal year 2017.  Average long-term AUM was $675.1 billion compared to $658.7 billion in the prior quarter and $631.9 billion in the second quarter of fiscal year 2017.














Quarterly Performance























At September 30, 2017:


1-Year


3-Year


5-Year


10-Year



% of Strategy AUM beating Benchmark3


74%


74%


79%


85%















% of Long-Term U.S. Fund Assets Beating Lipper Category Average












Fixed Income


81%


74%


79%


87%




Equity


39%


50%


52%


74%




Alternatives (performance relates to only 3 funds)


100%


100%


100%


n/a




Total U.S. Fund Assets


59%


62%


64%


80%
















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










Of Legg Mason's long-term U.S. mutual fund assets, 52% were in funds rated 4 or 5 stars by Morningstar.

Operating Results - Comparison to the First Quarter of Fiscal Year 2018

Net income was $75.7 million, or $0.78 per diluted share, compared to net income of $50.9 million, or $0.52 per diluted share, in the first quarter of fiscal year 2018. In addition to the net impact of the factors listed below, the increased earnings were driven by higher average AUM, one additional day in the quarter, higher non-pass through performance fees and lower compensation expenses due to seasonal factors in the prior quarter. 

This quarter's results included:

  • Severance charges of $1.7 million, or $0.01 per diluted share.
  • EnTrustPermal acquisition and transition-related costs of $1.4 million, or $0.01 per diluted share.
  • Year-to-date annualization tax benefit of $1.2 million, or $0.01 per diluted share.

The prior quarter's results included:

  • Non-cash impairment charges totaling $34.0 million, or $0.24 per diluted share.
  • Contingent consideration credit adjustments of $16.6 million, or $0.12 per diluted share.
  • EnTrustPermal acquisition and transition-related costs of $2.6 million, or $0.02 per diluted share.

Operating revenues of $768.3 million were down 3% compared with $793.8 million in the prior quarter reflecting:

  • A reduction in pass through performance fees at Clarion of $45.5 million, which, per the terms of the acquisition, were passed through as compensation.
  • Excluding the pass through performance fees, revenues increased 3% due to higher average long-term AUM, one additional day in the quarter and an increase of 30% in non-pass through performance fees.

Operating expenses of $623.9 million were down 9% compared with $686.6 million in the prior quarter reflecting:

  • Lower compensation of $45.4 million driven by the decrease in Clarion pass through performance fees.
  • Acquisition and transition-related charges of $1.4 million, as compared to $2.6 million in the prior quarter.
  • The prior quarter included non-cash impairment charges of $34.0 million, as well as credits of $16.6 million for contingent consideration fair value adjustments.
  • A $4.8 million gain in the market value of deferred compensation and seed investments, which is recorded as an increase in compensation and benefits with an offset in non-operating income, in line with the prior quarter.

Non-operating expense was $18.1 million, as compared to $15.4 million in the prior quarter reflecting:  

  • Gains on corporate investments, not offset in compensation, were $2.4 million compared with gains of $5.7 million in the prior quarter. The prior quarter included a $2.3 million gain related to an accelerated contingent payment received on a prior sale of a non-strategic manager.
  • Gains on funded deferred compensation and seed investments, as described above.
  • A $2.1 million gain associated with the consolidation of sponsored investment vehicles compared to $1.2 million in gains in the prior quarter. The consolidation of sponsored investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.

Operating margin was 18.8% compared to 13.5% in the prior quarter.  Operating margin, as adjusted4, was 24.9%, as compared to 22.5% in the prior quarter.

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

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $10.4 million compared to $12.0 million in the prior quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

Operating Results - Comparison to the Second Quarter of Fiscal Year 2017

Net income was $75.7 million, or $0.78 per diluted share, compared to net income of $66.4 million, or $0.63 per diluted share, in the second quarter of fiscal year 2017.  The increased earnings were driven by higher average long-term AUM, higher non-pass through performance fees and lower acquisition and transition-related costs.

This quarter's results included:

  • Severance charges of $1.7 million, or $0.01 per diluted share.
  • EnTrustPermal acquisition and transition-related costs of $1.4 million, or $0.01 per diluted share.
  • Year-to-date annualization tax benefit of $1.2 million, or $0.01 per diluted share.

The prior year quarter's results included:

  • EnTrustPermal and Clarion acquisition and transition-related costs of $13.2 million, or $0.09 per diluted share.
  • Contingent consideration credit adjustments of $7.0 million, or $0.05 per diluted share.
  • A tax benefit of $6.3 million, or $0.06 per diluted share.

Operating revenues of $768.3 million were up 3% compared with $748.4 million in the prior year quarter reflecting:

  • Increases principally due to higher average long-term AUM.
  • An increase in non-pass through performance fees of $14.8 million, partially offsetting a decrease in pass through performance fees of $15.9 million.

Operating expenses of $623.9 million were up 1% compared with $620.7 million in the prior year quarter reflecting:

  • Increased compensation, excluding acquisition and transition-related charges of $5.3 million, related to increased revenues driven by higher average long-term AUM.
  • Acquisition and transition-related charges of $1.4 million, as compared with $13.2 million in the prior year.
  • The prior year quarter included a contingent consideration credit adjustment of $7.0 million.
  • A $4.8 million gain in the market value of deferred compensation and seed investments, which is recorded as an increase in compensation and benefits with an offset in non-operating income, compared with a gain of $5.4 million in the prior year quarter.

Non-operating expense was $18.1 million, compared to $11.2 million in the prior year quarter reflecting:

  • A $1.2 million increase in interest expense for debt raised to pay for the Clarion and EnTrust acquisitions.
  • A $3.7 million loss on the termination of an interest rate swap in the prior year quarter.
  • Gains on corporate investments, not offset in compensation, were $2.4 million compared with gains of $7.3 million in the prior year quarter.
  • Gains on funded deferred compensation and seed investments, as described above.
  • $2.1 million in gains associated with the consolidation of sponsored investment vehicles, as compared to $6.2 million in gains in the prior year quarter. The consolidation of sponsored investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.

Operating margin was 18.8% as compared to 17.1% in the prior year quarter .  Operating margin, as adjusted, was 24.9%, as compared to 22.7% in the prior year quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $10.4 million, compared to $14.4 million in the prior year quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

Quarterly Business Developments and Recent Announcements

  • ClearBridge's Large Cap Growth portfolio co-managers Margaret Vitrano and Peter Bourbeau won the Investment Advisor 2017 SMA Manager of the Year Award in the large cap equity category.
  • On July 14, 2017, Legg Mason launched its first dedicated small-cap, multi-factor ETF sub-advised by Royce & Associates; Legg Mason Small-Cap Quality Value ETF (NASDAQ: SQLV).
  • On October 5, 2017, Moody's Investor Services affirmed the Baa1 senior debt rating of Legg Mason and moved the rating outlook from negative to stable.

Balance Sheet

At September 30, 2017, Legg Mason's cash position was $654 million.  Total debt, net was $2.2 billion and stockholders' equity was $4.0 billion.  The ratio of total debt to total capital was 36%, in line with the prior quarter.  Seed investments totaled $279 million.

In the second fiscal quarter, the Company retired $90 million, or 2.3 million shares, in the open market. The net impact of the share activity reduced the weighted average shares by 1.1 million.

Conference Call to Discuss Results
A conference call to discuss the Company's results, hosted by Joseph A. Sullivan, will be held at 5:00 p.m. 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 45681143, at least 10 minutes prior to the scheduled start to ensure connection.  A live, listen-only webcast will also be available via the Investor Relations section of www.leggmason.com.

The presentation slides that will be reviewed during the discussion of 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, www.leggmason.com, in the Investor Relations section, or by dialing 1-888-843-7419 (or for international calls 1-630-652-3042), enter pass code 45681143# when prompted.  Please note that the replay will be available beginning at 8:00 p.m. EDT on Wednesday, October 25, 2017, and ending at 11:59 p.m. EST on Wednesday, November 8, 2017.

About Legg Mason

Legg Mason is a global asset management firm, with $754.4 billion in AUM as of September 30, 2017.  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, 2017 and in the Company's quarterly reports on Form 10-Q.

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 eighty-eight percent of total AUM is included in strategy AUM as of September 30, 2017, 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 which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. Funds-of-hedge funds generally do not have specified benchmarks. For purposes of this comparison, performance of those products is net of fees, and is compared to the relevant HFRX index.  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 regarding this presentation, 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)

(Unaudited)


















Quarters Ended


Six Months Ended





September


June


September


September


September





2017


2017


2016


2017


2016

Operating Revenues:











Investment advisory fees:












Separate accounts (1)

$          253,128


$          250,046


$          233,328


$          503,174


$          460,181



Funds

393,035


382,228


377,079


775,263


740,542



Performance fees

40,821


81,537


41,970


122,358


59,429


Distribution and service fees (1)

80,668


78,906


94,545


159,574


185,927


Other

686


1,125


1,448


1,811


2,456




Total operating revenues

768,338


793,842


748,370


1,562,180


1,448,535














Operating Expenses: (2)











Compensation and benefits

367,951


413,307


368,330


781,258


726,955


Distribution and servicing

123,634


122,349


128,868


245,983


253,531


Communications and technology

51,299


50,303


51,281


101,602


104,013


Occupancy

25,171


24,408


30,558


49,579


63,700


Amortization of intangible assets

6,082


6,339


6,271


12,421


11,974


Impairment of intangible assets


34,000



34,000



Contingent consideration fair value adjustments


(16,550)


(7,000)


(16,550)


(25,000)


Other

49,782


52,481


42,429


102,263


112,174




Total operating expenses

623,919


686,637


620,737


1,310,556


1,247,347














Operating Income

144,419


107,205


127,633


251,624


201,188














Non-Operating Income (Expense):











Interest income

1,572


1,468


1,545


3,040


3,393


Interest expense

(29,077)


(29,266)


(27,925)


(58,343)


(52,490)


Other income, net

7,289


11,388


9,975


18,677


16,560


Non-operating income of












consolidated investment vehicles, net

2,094


997


5,206


3,091


8,434




Total non-operating income (expense)

(18,122)


(15,413)


(11,199)


(33,535)


(24,103)














Income Before Income Tax Provision

126,297


91,792


116,434


218,089


177,085















Income tax provision

38,673


28,255


29,902


66,928


45,213














Net Income

87,624


63,537


86,532


151,161


131,872


Less: Net income attributable












to noncontrolling interests

11,960


12,617


20,091


24,577


31,979














Net Income Attributable to Legg Mason, Inc.

$            75,664


$            50,920


$            66,441


$          126,584


$            99,893






















(Continued)














(1) For the quarters ended September 30, 2017 and June 30, 2017, separate accounts advisory fees include $13.8 million and $12.4 million, respectively, of revenue relating to retail separately managed accounts for which revenues were previously classified as Distribution and service fees. See note 2 on page 12.














(2) Operating expenses include acquisition and transition-related costs related to business combinations.















Acquisition and transition-related costs:












Compensation

$              1,115


$              2,364


$              6,821


$              3,479


$            37,007



Occupancy

(23)


121


5,086


98


14,179



Other

266


77


1,269


343


18,775




Total acquisition and transition-related costs

$              1,358


$              2,562


$            13,176


$              3,920


$            69,961

 

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME, CONTINUED

(Amounts in thousands, except per share amounts)

(Unaudited)













Quarters Ended


Six Months Ended


September


June


September


September


September


2017


2017


2016


2017


2016











Net Income Attributable to Legg Mason, Inc.

$            75,664


$            50,920


$            66,441


$          126,584


$            99,893











Less: Earnings (distributed and undistributed)










allocated to participating securities (1)

2,687


1,736


2,183


4,387


3,173











Net Income (Distributed and Undistributed)










  Allocated to Shareholders (Excluding










  Participating Securities)

$            72,977


$            49,184


$            64,258


$          122,197


$            96,720











Net Income per Share Attributable to










  Legg Mason, Inc. Shareholders:










      Basic

$                 0.78


$                 0.52


$                 0.63


$                 1.30


$                 0.94











      Diluted

$                 0.78


$                 0.52


$                 0.63


$                 1.29


$                 0.94











Weighted-Average Number of Shares










  Outstanding:










      Basic

93,087


94,869


101,817


93,973


103,075

      Diluted

93,496


95,297


102,057


94,390


103,301












(1) Participating securities excluded from weighted-average number of shares outstanding were 3,417, 3,192, and 3,447 for the quarters ended September 2017, June 2017, and September 2016, respectively, and 3,305 and 3,291 for the six months ended September 2017 and September 2016, respectively.

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

(Amounts in thousands)

(Unaudited)





Quarters Ended





September 2017


June 2017


September 2016


























Balance Before
Consolidation of
Consolidated
Investment
Vehicles and
Other (1)


Consolidated
Investment
Vehicles and
Other (1)


Consolidated
Totals

Balance Before
Consolidation of
Consolidated
Investment
Vehicles and
Other (1)


Consolidated
Investment
Vehicles and
Other (1)


Consolidated
Totals

Balance Before
Consolidation of
Consolidated
Investment
Vehicles and
Other(1)


Consolidated
Investment
Vehicles and
Other(1)


Consolidated
Totals




















Total operating revenues

$               768,361


$               (23)


$        768,338

$               793,886


$               (44)


$        793,842

$               748,384


$               (14)


$        748,370

Total operating expenses

623,814


105


623,919

686,614


23


686,637

620,613


124


620,737

Operating Income (Loss)

144,547


(128)


144,419

107,272


(67)


107,205

127,771


(138)


127,633

Non-operating income (expense)

(19,794)


1,672


(18,122)

(16,128)


715


(15,413)

(17,023)


5,824


(11,199)

Income Before Income Tax Provision

124,753


1,544


126,297

91,144


648


91,792

110,748


5,686


116,434

Income tax provision

38,673



38,673

28,255



28,255

29,902



29,902

Net Income

86,080


1,544


87,624

62,889


648


63,537

80,846


5,686


86,532

Less: Net income attributable
















to noncontrolling interests

10,416


1,544


11,960

11,969


648


12,617

14,405


5,686


20,091

Net Income Attributable to Legg Mason, Inc.

$                75,664


$                —


$          75,664

$                50,920


$                —


$          50,920

$                66,441


$                —


$          66,441















































Six Months Ended











September 2017


September 2016
































Balance Before Consolidation of Consolidated Investment Vehicles and
Other (1)


Consolidated Investment Vehicles and Other (1)


Consolidated Totals

Balance Before Consolidation of Consolidated Investment Vehicles and
Other(1)


Consolidated Investment Vehicles and
Other(1)


Consolidated Totals

























Total operating revenues

$            1,562,247


$               (67)


$     1,562,180

$            1,448,561


$               (26)


$     1,448,535






Total operating expenses

1,310,428


128


1,310,556

1,247,124


223


1,247,347






Operating Income (Loss)

251,819


(195)


251,624

201,437


(249)


201,188






Non-operating income (expense)

(35,922)


2,387


(33,535)

(32,518)


8,415


(24,103)






Income Before Income Tax Provision

215,897


2,192


218,089

168,919


8,166


177,085






Income tax provision

66,928



66,928

45,213



45,213






Net Income

148,969


2,192


151,161

123,706


8,166


131,872






Less: Net income attributable
















to noncontrolling interests

22,385


2,192


24,577

23,813


8,166


31,979






Net Income Attributable to Legg Mason, Inc.

$               126,584


$                —


$        126,584

$                99,893


$                —


$          99,893



























(1) Other represents consolidated sponsored investment products that are not designated as CIVs







 

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






2017


2017


2016



2017


2016

















Operating Revenues, GAAP basis

$            768,338


$            793,842


$            748,370



$        1,562,180


$        1,448,535


















Plus (less):














Pass-through performance fees

(19,874)


(65,431)


(35,831)



(85,305)


(50,431)




Operating revenues eliminated upon















consolidation of investment vehicles

23


44


14



67


26




Distribution and servicing expense excluding















consolidated investment vehicles

(123,578)


(122,349)


(128,806)



(245,927)


(253,396)

















Operating Revenues, as Adjusted

$            624,909


$            606,106


$            583,747



$        1,231,015


$        1,144,734
































Operating Income, GAAP basis

$            144,419


$            107,205


$            127,633



$            251,624


$            201,188


















Plus (less):














Gains on deferred compensation















and seed investments, net

4,824


5,428


5,432



10,252


7,598




Impairment of intangible assets


34,000




34,000





Amortization of intangible assets

6,082


6,339


6,271



12,421


11,974




Contingent consideration fair value adjustments


(16,550)


(7,000)



(16,550)


(25,000)




Operating loss of consolidated investment















vehicles, net

128


67


138



195


249

















Operating Income, as Adjusted

$            155,453


$            136,489


$            132,474



$            291,942


$            196,009

















Operating Margin, GAAP basis

18.8

%

13.5

%

17.1

%


16.1

%

13.9

%

Operating Margin, as Adjusted

24.9


22.5


22.7



23.7


17.1

















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


 

LEGG MASON, INC. AND SUBSIDIARIES

SUPPLEMENTAL DATA

RECONCILIATION OF CASH PROVIDED BY OPERATING ACTIVITIES

TO ADJUSTED EBITDA (1)

(Amounts in thousands)

(Unaudited)


















Quarters Ended


Six Months Ended


















September


June


September


September


September





2017


2017


2016


2017


2016














Cash provided by (used in) operating activities, GAAP basis

$                  289,329


$             (113,580)


$                  303,829


$            175,749


$            137,859















Plus (less):












Interest expense, net of accretion and amortization













of debt discounts and premiums

28,343


28,330


26,487


56,673


50,393



Current tax expense

9,662


6,072


15,689


15,734


14,906



Net change in assets and liabilities

(145,656)


213,323


(92,837)


67,667


129,588



Net change in assets and liabilities













of consolidated investment vehicles

1,235


31,789


(97,344)


33,024


(58,773)



Net income attributable to noncontrolling interests

(11,960)


(12,617)


(20,091)


(24,577)


(31,979)



Net gains (losses) and earnings on investments

1,491


5,546


1,103


7,037


(3,391)



Net gains on consolidated investment vehicles

2,094


997


5,206


3,091


8,434



Other

194


77


948


271


(499)














Adjusted EBITDA

$                  174,732


$               159,937


$                  142,990


$            334,669


$            246,538



























(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 2017


June 2017


March 2017


December 2016


September 2016






Equity

$                         201.2


$                         196.2


$                         179.8


$                         169.0


$                         168.4






Fixed Income

411.9


403.6


394.3


381.1


396.9






Alternative

65.8


66.5


67.9


71.5


72.0







Long-Term Assets

678.9


666.3


642.0


621.6


637.3






Liquidity

75.5


74.9


86.4


88.8


95.6







Total

$                         754.4


$                         741.2


$                         728.4


$                         710.4


$                         732.9
























Quarters Ended


Six Months Ended

By asset class (average):

September 2017


June 2017


March 2017


December 2016


September 2016


September 2017


September 2016


Equity

$                         198.9


$                         190.6


$                         174.2


$                         166.7


$                         166.1


$                         194.5


$                         164.6


Fixed Income

410.2


400.7


388.1


387.8


393.7


405.7


385.5


Alternative

66.0


67.4


70.4


71.3


72.1


66.7


63.8



Long-Term Assets

675.1


658.7


632.7


625.8


631.9


666.9


613.9


Liquidity

75.2


81.6


86.2


90.9


110.2


78.9


109.4



Total

$                         750.3


$                         740.3


$                         718.9


$                         716.7


$                         742.1


$                         745.8


$                         723.3

































Component Changes in Assets Under Management














Quarters Ended


Six Months Ended




September 2017


June 2017


March 2017


December 2016


September 2016


September 2017


September 2016

Beginning of period

$                         741.2


$                         728.4


$                         710.4


$                         732.9


$                         741.9


$                         728.4


$                         669.6

Net client cash flows:














   Equity

(2.0)


1.0


3.1


(3.7)


(1.5)


(1.0)


(4.5)

   Fixed Income

1.5


0.3


3.5


0.5


2.8


1.7


6.7

   Alternative

(0.7)


(0.8)


(2.7)


(0.8)


(1.6)


(1.5)


(3.6)

Long-Term flows

(1.2)


0.5


3.9


(4.0)


(0.3)


(0.8)


(1.4)

   Liquidity

0.2


(11.5)


(3.1)


(6.9)


(25.4)


(11.3)


(17.4)

             Total net client cash flows

(1.0)


(11.0)


0.8


(10.9)


(25.7)


(12.1)


(18.8)

Realizations(1)

(0.5)


(1.3)





(1.9)


Market performance and other(2)

12.5


24.7


17.1


(2.3)


15.7


37.4


27.9

Impact of foreign exchange

2.2


0.7


4.0


(8.4)


1.0


2.9


3.1

Acquisitions (disposition), net


(0.3)


(3.9)


(0.9)



(0.3)


51.1

End of period

$                         754.4


$                         741.2


$                         728.4


$                         710.4


$                         732.9


$                         754.4


$                         732.9

















(1) Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (e.g. client requested redemptions, liquidations or asset transfers).  Realizations of $0.2 billion, $0.4 billion, $0.4 billion, and $0.3 billion were included in net client cash flows for the quarters ended March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, respectively.


(2) For the quarter ended June 30, 2017, Other includes a reclass, effective April 1, 2017, of $16.0 billion of certain assets which were previously included in Assets Under Advisement to Assets Under Management, specifically retail separately managed account programs that operate and have fee rates comparable to programs managed on a fully discretionary basis.  These Assets Under Advisement as of the quarters ended March 31, 2017, December 31, 2016, and September 30, 2016 were $16.0 billion, $13.7 billion, and $12.8 billion, respectively.  For the quarter ended June 30, 2017, Other also includes a $3.7 billion reconciliation to previously reported amounts.


(3) Due to effects of rounding, the sum of the quarterly results may differ immaterially from the year-to-date results.

















Use of Supplemental Non-GAAP Financial Information
As supplemental information, we are providing a performance measure for "Operating Margin, as Adjusted" and a liquidity measure for "Adjusted EBITDA", each of which are based on methodologies other than generally accepted accounting principles ("non-GAAP").  Our management uses these measures as benchmarks in evaluating and comparing our period-to-period operating performance and liquidity.

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, and less performance fees that are passed through as compensation expenses or net income (loss) attributable to non-controlling interests, which we refer to as "Operating Revenues, as Adjusted".  The deferred compensation items are removed from Operating Income in the calculation because they are offset by an equal amount in 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.  We also use Operating Revenues, as Adjusted in the calculation to show the operating margin without performance fees, which are passed through as compensation expense or net income (loss) attributable to non-controlling interests per the terms of certain more recent acquisitions.  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, performance fees that are passed through as compensation expense or net income (loss) attributable to non-controlling interests per the terms of certain more recent acquisitions, 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.

Adjusted EBITDA
We define Adjusted EBITDA as cash provided by (used in) operating activities plus (minus) interest expense, net of accretion and amortization of debt discounts and premiums, current income tax expense (benefit), the net change in assets and liabilities, net (income) loss attributable to noncontrolling interests, net gains (losses) and earnings on investments, net gains (losses) on consolidated investment vehicles, and other.  The net change in assets and liabilities adjustment aligns with the Consolidated Statements of Cash Flows.  Adjusted EBITDA is not reduced by equity-based compensation expense, including management equity plan non-cash issuance-related charges.  Most management equity plan units may be put to or called by Legg Mason for cash payment, although their terms do not require this to occur.

We believe that this measure is useful to investors and us as it provides additional information with regard to our ability to meet working capital requirements, service our debt, and return capital to our shareholders.  This measure is provided in addition to Cash provided by operating activities and may not be comparable to non-GAAP performance measures or liquidity measures of other companies, including their measures of EBITDA or Adjusted EBITDA.  Further, this measure is not to be confused with Net Income, Cash provided by operating activities, or other measures of earnings or cash flows under GAAP, and are provided as a supplement to, and not in replacement of, GAAP measures.

We have previously disclosed Adjusted EBITDA that conformed to calculations required by our debt covenants, which adjusted for certain items that required cash settlement that are not part of the current definition.   

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SOURCE Legg Mason, Inc.