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Legg Mason Reports Results For Fourth Fiscal Quarter And Fiscal Year-Ended 2018

-- Fourth Quarter Net Income of $76.3 Million, or $0.86 per Diluted Share

-- Assets Under Management of $754.1 Billion

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

-- Quarterly Dividend Increased by 21% to $0.34, Per Share

Company Release - 4/25/2018 4:15 PM ET

BALTIMORE, April 25, 2018 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the fourth fiscal quarter and the fiscal year ended March 31, 2018. 






Quarters Ended


Fiscal Years Ended

Financial Results

Mar


Dec


Mar


Mar


Mar

(Amounts in millions, except per share amounts)

2018


2017


2017


2018


2017

Operating Revenues

$

785.1



$

793.1



$

723.1



$

3,140.3



$

2,886.9


Operating Expenses

618.3



820.4



613.2



2,749.3



2,464.7


Operating Income (Loss)

166.7



(27.3)



109.9



391.0



422.2


Net Income1

76.3



149.2



75.9



352.1



227.3


Net Income Per Share - Diluted1

0.86



1.58



0.76



3.72



2.18












Assets Under Management2










(Amounts in billions)










End of Period Assets Under Management

$

754.1



$

767.2



$

728.4



$

754.1



$

728.4


Average Assets Under Management

766.9



759.9



718.9



754.4



720.2












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

(2)    March 2017 Assets Under Management ("AUM") excludes $16.0 billion of separately managed account assets which were classified as Assets Under Advisement and reported as AUM effective April 1, 2017.

Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "We are very pleased with strong operating results for the past quarter, highlighted by solid investment performance, a higher operating revenue yield, expense management and long-term inflows.  Higher advisory fee revenues and better than expected performance fees reflect a continued focus on alternative and next generation active products and solutions.  Legg Mason's global retail distribution platform had another strong quarter as a result of expanded client choice of investment strategies and vehicles.  

"For the fiscal year, the adjusted operating margin increased nicely driven by generally strong markets, portfolio diversification and revenue growth, combined with thoughtful expense management. We continue to see many growth opportunities ahead and are focused on building our current business momentum in the coming year."

Assets Under Management of $754.1 Billion

Assets Under Management were $754.1 billion at March 31, 2018 compared with $767.2 billion at December 31, 2017, resulting from $10.7 billion in liquidity outflows, negative market performance and other of $3.1 billion (despite positive foreign exchange of $2.9B) and realizations of $0.5 billion.  These were partially offset by long-term inflows of $1.2 billion.











Quarter Ended March 31, 2018



Assets Under Management

AUM
(in billions)


Flows
(in billions)


Operating
Revenue
Yield 1



Equity

$

203.0



$

(2.1)



61 bps



Fixed Income

422.3



2.8



28 bps



Alternative

66.1



0.5


2

65 bps



Long-Term Assets

691.4



1.2






Liquidity

62.7



(10.7)



14 bps



Total

$

754.1



$

(9.5)



39 bps











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



(2) Excludes realizations of $0.5 billion


At March 31, 2018, fixed income represented 56% of AUM, while equity represented 27%, alternative represented 9% and liquidity represented 8%. 

By geography, 69% of AUM was from clients domiciled in the United States and 31% from non-US domiciled clients.

Average AUM during the quarter was $766.9 billion compared to $759.9 billion in the prior quarter and $718.9 billion in the fourth quarter of fiscal year 2017.  Average long-term AUM was $697.1 billion compared to $685.3 billion in the prior quarter and $632.7 billion in the fourth quarter of fiscal year 2017.














Quarterly Performance























At March 31, 2018:


1-Year


3-Year


5-Year


10-Year



% of Strategy AUM beating Benchmark3


72%


72%


75%


85%















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












Fixed Income


86%


73%


81%


83%




Equity


32%


56%


46%


55%




Alternatives (performance relates to only 3 funds)


10%


0%


93%


n/a




Total U.S. Fund Assets


58%


64%


63%


68%
















(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 Third Quarter of Fiscal Year 2018

Net income was $76.3 million, or $0.86 per diluted share, compared to net income of $149.2 million, or $1.58 per diluted share, in the third quarter of fiscal year 2018. In addition to the net impact of the factors listed below, the decreased earnings were driven by lower non-pass through performance fees and seasonal expenses. 

     This quarter's results included:

  • Contingent consideration credit adjustments of $15.5 million, or $0.11 per diluted share.
  • Net losses on seed and other investments, not offset in compensation, of $11.9 million, or $0.09 per diluted share.
  • Permal acquisition and transition-related costs of $1.8 million, or $0.01 per diluted share.
  • Corporate severance costs of $1.9 million, or $0.01 per diluted share.

     The prior quarter's results included:

  • One-time non-cash tax benefit of $213.7 million, or $2.27 per diluted share, related to the new tax law.
  • Non-cash intangible asset impairment charge of $195.0 million, or $1.62 per diluted share.
  • Discrete tax expense items of $7.4 million, or $0.08 per diluted share.
  • EnTrustPermal acquisition and transition-related costs of $1.3 million, or $0.01 per diluted share.

Operating revenues of $785.1 million were down 1% compared to $793.1 million in the prior quarter reflecting:

  • A decrease in non-pass through performance fees of $15.9 million, which more than offset an increase in pass through performance fees of $3.5 million.
  • Excluding performance fees, operating revenues increased 1% due to higher average long-term AUM.

Operating expenses were $618.3 million compared to $820.4 million in the prior quarter, but excluding the non-cash impairment charge of $195.0 million in the third fiscal quarter, expenses were down slightly, reflecting:

  • Contingent consideration credits of $15.5 million.
  • Higher compensation and benefits of $3.4 million driven by an increase in seasonal compensation, higher pass through performance fees and sales commissions, partially offset by a decrease in non-pass through performance fees.
  • Decrease in distribution and servicing expense of $5.2 million, primarily due to two fewer days in the quarter.
  • Increases in Communications & Technology expenses and Occupancy Expenses of $2.7 million and $1.2 million, respectively.
  • A $7.0 million increase in Other Expenses including higher advertising, charitable contributions and foreign exchange losses.
  • A $2.2 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 non-operating income, as compared to a $4.3 million gain in the prior quarter.

Non-operating expense was $43.1 million, as compared to $13.5 million in the prior quarter reflecting:  

  • Net losses on seed and other investments, not offset in compensation, were $11.9 million compared with gains of $1.5 million in the prior quarter.
  • Losses on funded deferred compensation and seed investments, as described above.
  • A $1.3 million loss associated with the consolidation of sponsored investment vehicles compared to a $7.9 million gain 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 21.2% compared to (3.4%) in the prior quarter, reflecting the impact of the non-cash impairment charge of $195.0 million in the prior quarter.  Operating margin, as adjusted4, was 23.8%, as compared to 27.2% in the prior quarter. 

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $8.6 million compared to $13.6 million in the prior quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

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

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

Net income was $76.3 million, or $0.86 per diluted share, compared to net income of $75.9 million, or $0.76 per diluted share, in the fourth quarter of fiscal year 2017.  In addition to the factors listed below, the increased earnings were driven by higher average long-term AUM and higher non-pass through performance fees.

     This quarter's results included:

  • Contingent consideration credit adjustments of $15.5 million, or $0.11 per diluted share.
  • Net losses on seed and other investments, not offset in compensation, of $11.9 million, or $0.09 per diluted share.
  • EnTrustPermal acquisition and transition-related costs of $1.8 million, or $0.01 per diluted share.
  • Corporate severance costs of $1.9 million, or $0.01 per diluted share.

     The prior year quarter's results included:

  • Discrete tax credits of $15.4 million, or $0.15 per diluted share.
  • Gains on the sales of non-strategic managers of $4.7 million, or $0.03 per diluted share.
  • Royce MEP non-cash charge of $4.6 million, or $0.03 per diluted share.
  • EnTrustPermal acquisition and transition-related costs of $2.1 million, or $0.01 per diluted share.

Operating revenues of $785.1 million were up 9% compared with $723.1 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 $15.2 million, and an increase in pass through performance fees of $5.4 million.

Operating expenses of $618.3 million were up 1% compared with $613.2 million in the prior year quarter reflecting:

  • Contingent consideration credits of $15.5 million
  • Increased compensation, related to increased revenues driven by higher average long-term AUM and performance fees.
  • Increased communications and technology expenses of $4.7 million.
  • Increased other expenses of $1.7 million driven by the higher advertising expenses.
  • Acquisition and transition-related charges of $1.8 million, as compared with $2.1 million in the prior year.
  • A $2.2 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 non-operating income, compared with a gain of $5.4 million in the prior year quarter.

Non-operating expense was $43.1 million, compared to $7.1 million in the prior year quarter reflecting:

  • Net losses on seed and other investments, not offset in compensation, of $11.9 million compared with net gains of $11.9 million in the prior year quarter.
  • Losses on funded deferred compensation and seed investments, as described above compared with a gain in the prior year quarter.
  • A $1.3 million loss associated with the consolidation of sponsored investment vehicles, as compared to a $5.2 million gain 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 21.2% as compared to 15.2% in the prior year quarter.  Operating margin, as adjusted, was 23.8%, as compared to 20.6% in the prior year quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $8.6 million, compared to $11.1 million in the prior year quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

Comparison to the Full Fiscal Year 2017

Net income was $352.1 million, or $3.72 per diluted share, compared to net income of $227.3 million, or $2.18 per diluted share, for fiscal year 2017.  In addition to the factors listed below, the increased earnings were driven by higher average long-term AUM and higher non-pass through performance fees.

     This year's results included:

  • Tax benefit of $213.7 million, or $2.26 per diluted share
  • Non-cash impairment charges of $229.0 million, or $1.96 per diluted share
  • Contingent consideration credit adjustments of $31.3 million, or $0.33 per diluted share.
  • EnTrustPermal acquisition and transition-related costs of $7.0 million, or $0.05 per diluted share.

     The prior year's results included:

  • Non-cash impairment charges of $35.0 million, or $0.26 per diluted share.
  • Contingent consideration credit adjustments of $39.5 million, or $0.36 per diluted share.
  • Acquisition and transition-related costs of $75.1 million, or $0.48 per diluted share.
  • Royce MEP non-cash charge of $4.6 million, or $0.03 per diluted share.

Operating revenues of $3.1 billion were up 9% compared with $2.9 billion in the prior year reflecting:

  • Increases principally due to higher average long-term AUM, as well as
  • An increase in non-pass through performance fees of $71.5 million, and an increase in pass through performance fees of $48.0 million.

Operating expenses of $2.7 billion were up 12% compared with $2.5 billion in the prior year, but excluding the non -cash impairment charges were up 4% reflecting:

  • Increased compensation, related to increased revenues driven by higher average long-term AUM and higher performance fees.
  • Distribution and servicing expenses decreased $9.8 million resulting from lower AUM on which we pay third party distributors.
  • A $14.0 million increase in other expenses, excluding acquisition and transition-related charges, largely due to increased professional fees, advertising, charitable contributions and foreign exchange losses.
  • Contingent consideration fair value adjustments of $31.3 million, compared with $39.5 million in the prior year.
  • Acquisition and transition-related charges of $7.0 million, as compared with $75.1 million in the prior year.
  • A $12.3 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 $14.4 million in the prior year quarter.

Non-operating expense was $90.2 million, compared to $51.4 million in the prior year quarter reflecting:

  • Net losses on corporate investments, not offset in compensation, were $1.8 million compared with net gains of $25.0 million in the prior year.
  • Gains on funded deferred compensation and seed investments, as described above.
  • A $10.0 million gain associated with the consolidation of sponsored investment vehicles, as compared to a $15.6 million gain in the prior year. 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 12.5% as compared to 14.6% in the prior year.  Operating margin, as adjusted, was 24.6%, as compared to 19.7% in the prior year.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $44.6 million, compared to $48.0 million in the prior year, principally related to Clarion, EnTrustPermal, RARE and Royce.

Quarterly Business Developments and Recent Announcements

  • QS Investors received the Lipper award for the 3-year period ended November 30, 2017 in the Global Multi-Cap Core Funds category.
  • Royce & Associates received the Lipper award for the 3-year period ended November 30, 2017 in the International Small/Mid-Cap Growth Funds category.
  • Western Asset received the Lipper award for the 3-year and 5-year periods ended November 30, 2017 in the Core Bond Funds category.
  • The Western Asset Asian Opportunities Bond Fund received the Morningstar award for the Best Asia Bond Fund.
  • Western Asset won Morningstar Australia's Fund Manager of the Year 2018 in the Fixed Income category.
  • Legg Mason, in partnership with BetaShares launched two Active ETFs in Australia, which mirror two Martin Currie Australia investment strategies.
  • Legg Mason launched a Portfolio Investment Entity (PIE) version of the Legg Mason Brandywine Global Opportunistic Fixed Income Fund in New Zealand.

Balance Sheet

At March 31, 2018, Legg Mason's cash position was $736.1 million.  Total debt, after a $100 million revolver repayment in March 2018, was $2.4 billion and stockholders' equity was $3.9 billion.  The ratio of total debt to total capital was 38%, down from 39% in the prior quarter.  Seed investments totaled $268.3 million.

In the fourth fiscal quarter, the Company did not retire any shares because of the accelerated repurchase in the prior quarter.

The Board of Directors has declared a quarterly cash dividend on the Company's common stock in the amount of $0.34 per share.  The dividend is payable on July 9, 2018 to shareholders of record at the close of business on June 12, 2018.

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 46762769, 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 46762769# when prompted.  Please note that the replay will be available beginning at 8:00 p.m. EDT on Wednesday, April 25, 2018, and ending at 11:59 p.m. EDT on Wednesday, May 9, 2018.

About Legg Mason

Guided by a mission of Investing to Improve Lives,  Legg Mason helps investors globally achieve better financial outcomes by expanding choice across investment strategies, vehicles and investor access through independent investment managers with diverse expertise in equity, fixed income, alternative and liquidity investments.  Legg Mason's assets under management are $754.1 billion as of March 31, 2018.  To learn more, visit our web site, our newsroom, or follow us on LinkedIn, Twitter, or Facebook

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-seven percent of total AUM is included in strategy AUM as of March 31, 2018, 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


Fiscal Years Ended





March


December


March


March


March





2018


2017


2017


2018


2017

Operating Revenues:











Investment advisory fees:












Separate accounts (1)

$          261,920


$          255,696


$          233,147


$      1,020,790


$          925,250



Funds

394,206


395,370


372,541


1,564,839


1,482,045



Performance fees

46,501


58,926


25,935


227,785


108,277


Distribution and service fees (1)

80,899


81,463


90,555


321,936


366,677


Other

1,526


1,635


948


4,972


4,653




Total operating revenues

785,052


793,090


723,126


3,140,322


2,886,902














Operating Expenses: (2)











Compensation and benefits

365,469


362,071


346,831


1,508,798


1,401,648


Distribution and servicing

119,094


124,254


122,403


489,331


499,125


Communications and technology

56,957


54,239


52,242


212,798


208,885


Occupancy

26,199


24,982


26,477


100,760


113,714


Amortization of intangible assets

6,112


6,071


6,939


24,604


26,190


Impairment of intangible assets


195,000



229,000


35,000


Contingent consideration fair value adjustments

(15,518)


739



(31,329)


(39,500)


Other

60,029


53,067


58,345


215,359


219,597




Total operating expenses

618,342


820,423


613,237


2,749,321


2,464,659














Operating Income (Loss)

166,710


(27,333)


109,889


391,001


422,243














Non-Operating Income (Expense):











Interest income

2,239


1,827


1,709


7,106


6,815


Interest expense

(30,441)


(29,088)


(31,188)


(117,872)


(113,173)


Other income (expense), net

(13,372)


5,519


18,978


10,824


41,664


Non-operating income (expense) of












consolidated investment vehicles, net

(1,535)


8,225


3,437


9,781


13,329




Total non-operating income (expense)

(43,109)


(13,517)


(7,064)


(90,161)


(51,365)














Income (Loss) Before Income Tax Provision











(Benefit)

123,601


(40,850)


102,825


300,840


370,878















Income tax provision (benefit)

39,958


(209,396)


12,521


(102,510)


84,175














Net Income

83,643


168,546


90,304


403,350


286,703


Less: Net income attributable












to noncontrolling interests

7,374


19,324


14,380


51,275


59,447














Net Income Attributable to Legg Mason, Inc.

$            76,269


$          149,222


$            75,924


$          352,075


$          227,256





















(Continued)


(1) Separate accounts advisory fees for the quarters ended March 31, 2018 and December 31, 2017 include $16.1 million and $15.2 million, respectively, and for the fiscal year ended March 31, 2018 includes $57.5 million, 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

$              1,220


$              1,099


$              1,744


$              5,798


$            42,514



Occupancy

204


72


312


374


13,529



Other

393


141


78


877


19,075




Total acquisition and transition-related costs

$              1,817


$              1,312


$              2,134


$              7,049


$            75,118














 

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME, CONTINUED

(Amounts in thousands, except per share amounts)

(Unaudited)


















Quarters Ended


Fiscal Years Ended





March


December


March


March


March





2018


2017


2017


2018


2017














Net Income Attributable to Legg Mason, Inc.

$            76,269


$          149,222


$            75,924


$          352,075


$          227,256













Less: Earnings (distributed and undistributed)












allocated to participating securities (1)

2,879


5,347


2,552


12,486


7,384














Net Income (Distributed and Undistributed)











Allocated to Shareholders (Excluding











Participating Securities)

$            73,390


$          143,875


$            73,372


$          339,589


$          219,872














Net Income per Share Attributable to











Legg Mason, Inc. Shareholders:













Basic

$                0.87


$                1.59


$                0.76


$                3.74


$                2.19

















Diluted

$                0.86


$                1.58


$                0.76


$                3.72


$                2.18














Weighted-Average Number of Shares











Outstanding:













Basic

84,526


90,377


96,555


90,734


100,580




Diluted

85,079


90,833


96,830


91,194


100,799














(1)

Participating securities excluded from weighted-average number of shares outstanding were 3,343, 3,357, and 3,353 for the quarters ended March 2018, December 2017, and March 2017, respectively, and 3,327 and 3,335 for the fiscal years ended March 2018 and March 2017, respectively.






 

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME

(Amounts in thousands)

(Unaudited)





Quarters Ended





March 2018


December 2017


March 2017


























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

$               785,280


$             (228)


$        785,052

$               793,373


$             (283)


$        793,090

$               723,269


$             (143)


$        723,126

Total operating expenses

618,610


(268)


618,342

819,984


439


820,423

613,170


67


613,237

Operating Income (Loss)

166,670


40


166,710

(26,611)


(722)


(27,333)

110,099


(210)


109,889

Non-operating income (expense)

(41,802)


(1,307)


(43,109)

(19,970)


6,453


(13,517)

(10,573)


3,509


(7,064)

Income (Loss) Before Income Tax Provision (Benefit)

124,868


(1,267)


123,601

(46,581)


5,731


(40,850)

99,526


3,299


102,825

Income tax provision (benefit)

39,958



39,958

(209,396)



(209,396)

12,521



12,521

Net Income

84,910


(1,267)


83,643

162,815


5,731


168,546

87,005


3,299


90,304

Less: Net income (loss) attributable
















to noncontrolling interests

8,641


(1,267)


7,374

13,593


5,731


19,324

11,081


3,299


14,380

Net Income Attributable to Legg Mason, Inc.

$                76,269


$                —


$          76,269

$               149,222


$                —


$        149,222

$                75,924


$                —


$          75,924







Fiscal Years Ended







March 2018


March 2017




















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

$            3,140,900


$             (578)


$     3,140,322

$            2,887,431


$             (529)


$     2,886,902

Total operating expenses

2,749,022


299


2,749,321

2,464,369


290


2,464,659

Operating Income (Loss)

391,878


(877)


391,001

423,062


(819)


422,243

Non-operating income (expense)

(97,694)


7,533


(90,161)

(63,636)


12,271


(51,365)

Income Before Income Tax Provision (Benefit)

294,184


6,656


300,840

359,426


11,452


370,878

Income tax provision (benefit)

(102,510)



(102,510)

84,175



84,175

Net Income

396,694


6,656


403,350

275,251


11,452


286,703

Less: Net income attributable











to noncontrolling interests

44,619


6,656


51,275

47,995


11,452


59,447

Net Income Attributable to Legg Mason, Inc.

$               352,075


$                —


$        352,075

$               227,256


$                —


$        227,256
















(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



Fiscal Years Ended





















March


December


March



March


March






2018


2017


2017



2018


2017

















Operating Revenues, GAAP basis

$            785,052


$            793,090


$            723,126



$        3,140,322


$        2,886,902


















Plus (less):














Pass-through performance fees

(13,482)


(9,970)


(8,075)



(108,757)


(60,756)




Operating revenues eliminated upon















consolidation of investment vehicles

228


283


143



578


529




Distribution and servicing expense excluding















consolidated investment vehicles

(119,312)


(124,071)


(122,404)



(489,310)


(499,126)

















Operating Revenues, as Adjusted

$            652,486


$            659,332


$            592,790



$        2,542,833


$        2,327,549
































Operating Income (Loss), GAAP basis

$            166,710


$            (27,333)


$            109,889



$            391,001


$            422,243


















Plus (less):














Gains (losses) on deferred compensation















and seed investments, net

(2,240)


4,333


5,355



12,345


14,427




Impairment of intangible assets


195,000




229,000


35,000




Amortization of intangible assets

6,112


6,071


6,939



24,604


26,190




Contingent consideration fair value adjustments

(15,518)


739




(31,329)


(39,500)




Operating (income) loss of consolidated investment















vehicles, net

(40)


722


210



877


819

















Operating Income, as Adjusted

$            155,024


$            179,532


$            122,393



$            626,498


$            459,179

















Operating Margin, GAAP basis

21.2

%

(3.4)

%

15.2

%


12.5

%

14.6

%

Operating Margin, as Adjusted

23.8


27.2


20.6



24.6


19.7

















(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


Fiscal Years Ended


















March


December


March


March


March





2018


2017


2017


2018


2017














Cash provided by operating activities, GAAP basis

$                  199,864


$               117,323


$                  192,811


$            492,936


$            539,772















Plus (less):












Interest expense, net of accretion and amortization













of debt discounts and premiums

29,880


28,503


28,556


115,056


107,483



Current tax expense

14,426


8,823


14,446


38,983


26,371



Net change in assets and liabilities

(62,586)


25,077


(55,246)


30,158


(33,900)



Net change in assets and liabilities













of consolidated investment vehicles

15,044


21,873


(26,324)


69,941


(41,365)



Net income attributable to noncontrolling interests

(7,374)


(19,324)


(14,380)


(51,275)


(59,447)



Net gains (losses) and earnings on investments

(3,179)


(4,163)


3,614


(305)


9,717



Net gains (losses) on consolidated investment vehicles

(1,535)


8,225


3,437


9,781


13,329



Other

(1,981)


663


(583)


(1,047)


(1,720)














Adjusted EBITDA

$                  182,559


$               187,000


$                  146,331


$            704,228


$            560,240



























(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:

March 2018


December 2017


September 2017


June 2017


March 2017






Equity

$                         203.0


$                         207.6


$                         201.2


$                         196.2


$                         179.8






Fixed Income

422.3


420.1


411.9


403.6


394.3






Alternative

66.1


66.3


65.8


66.5


67.9







Long-Term Assets

691.4


694.0


678.9


666.3


642.0






Liquidity

62.7


73.2


75.5


74.9


86.4







Total

$                         754.1


$                         767.2


$                         754.4


$                         741.2


$                         728.4
























Quarters Ended


Fiscal Years Ended

By asset class (average):

March 2018


December 2017


September 2017


June 2017


March 2017


March 2018


March 2017


Equity

$                         208.8


$                         204.7


$                         198.9


$                         190.6


$                         174.2


$                         200.5


$                         167.6


Fixed Income

422.2


414.8


410.2


400.7


388.1


412.0


386.5


Alternative

66.1


65.8


66.0


67.4


70.4


66.3


66.9



Long-Term Assets

697.1


685.3


675.1


658.7


632.7


678.8


621.0


Liquidity

69.8


74.6


75.2


81.6


86.2


75.6


99.2



Total

$                         766.9


$                         759.9


$                         750.3


$                         740.3


$                         718.9


$                         754.4


$                         720.2

































Component Changes in Assets Under Management














Quarters Ended


Fiscal Years Ended




March 2018


December 2017


September 2017


June 2017


March 2017


March 2018


March 2017

Beginning of period

$                         767.2


$                         754.4


$                         741.2


$                         728.4


$                         710.4


$                         728.4


$                         669.6

     Net client cash flows:














    Equity

(2.1)


(3.2)


(2.4)


1.0


3.1


(6.7)


(5.2)

    Fixed Income

2.8


5.4


0.9


0.3


3.5


9.4


10.8

    Alternative

0.5



(0.7)


(0.8)


(2.7)


(1.0)


(7.2)

         Long-Term flows

1.2


2.2


(2.2)


0.5


3.9


1.7


(1.6)

    Liquidity

(10.7)


(2.3)


0.2


(11.5)


(3.1)


(24.3)


(27.3)

         Total net client cash flows

(9.5)


(0.1)


(2.0)


(11.0)


0.8


(22.6)


(28.9)

Realizations(1)

(0.5)


(0.3)


(0.5)


(1.3)



(2.6)


Market performance and other(2)

(6.0)


13.5


13.5


24.7


17.1


45.7


42.7

Impact of foreign exchange

2.9


(0.4)


2.2


0.7


4.0


5.4


(1.3)

Acquisitions (disposition), net


0.1



(0.3)


(3.9)


(0.2)


46.3

End of period

$                         754.1


$                         767.2


$                         754.4


$                         741.2


$                         728.4


$                         754.1


$                         728.4

















(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. The quarter ended September 30, 2017 includes a reclassification of $1.0 billion from long-term net client cash flows to Market performance and other related to this AUM.  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.