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Legg Mason Reports Results For Second Fiscal Quarter

-- Net Income of $72.8 Million, or $0.82 per Diluted Share

-- Assets Under Management of $755.4 Billion

-- Long-term Net Outflows of $1.0 Billion

Company Release - 10/24/2018 4:15 PM ET

BALTIMORE, Oct. 24, 2018 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2018. 






Quarters Ended


Six Months Ended

Financial Results

Sep


Jun


Sep


Sep


Sep

(Amounts in millions, except per share amounts)

2018


2018


2017


2018


2017

Operating Revenues

$

758.4



$

747.9



$

768.3



$

1,506.3



$

1,562.2


Operating Expenses

622.7



622.2



623.9



1,244.9



1,310.6


Operating Income

135.7



125.7



144.4



261.4



251.6


Net Income1

72.8



66.1



75.7



138.9



126.6


Net Income Per Share - Diluted1

0.82



0.75



0.78



1.57



1.29












Assets Under Management










(Amounts in billions)










End of Period Assets Under Management

$

755.4



$

744.6



$

754.4



$

755.4



$

754.4


Average Assets Under Management

750.2



749.5



750.3



750.7



745.8






















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


Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "We are pleased to have delivered a solid quarter, even as the industry continued to navigate significant challenges.  Executing our strategy of expanding client choice has diversified our platform across investment strategies, clients and geographies, making our business more resilient. 

"Flows in the month of September were strong, our unfunded pipeline remains near record levels, and our business mix, with alternative and institutional inflows partially offsetting softness in retail and traditional strategies, demonstrates this business resilience.

"We look forward to continuing to deliver more of the platform's potential to our clients and the related financial results for our stakeholders."

Assets Under Management of $755.4 Billion

Assets Under Management ("AUM") were $755.4 billion at September 30, 2018 compared with $744.6 billion at June 30, 2018 resulting from positive market performance of $11.0 billion and liquidity inflows of $3.0 billion.  These more than offset negative foreign exchange of $2.0 billion, long-term outflows of $1.0 billion and realizations of $0.2 billion. 




Quarter Ended September 30, 2018


Assets Under Management

AUM

(in billions)


Flows

(in billions)


Operating
Revenue Yield 1


Equity

$

214.5



$

(1.1)


60 bps


Fixed Income

411.0




(0.5)


27 bps


Alternative

67.4




0.62


61 bps


Long-Term Assets

692.9




(1.0)




Liquidity

62.5




3.0


14 bps


Total

$

755.4



$

2.0


38 bps






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


(2)  Excludes realizations of $0.2 billion




At September 30, 2018, fixed income represented 55% of AUM, while equity represented 28%, alternatives represented 9% and liquidity represented 8%. 

By geography, 70% of AUM was from clients domiciled in the United States and 30% from non-US domiciled clients.

Average AUM during the quarter was $750.2 billion compared to $749.5 billion in the prior quarter and $750.3 billion in the second quarter of fiscal year 2018.  Average long-term AUM was $690.0 billion compared to $687.7 billion in the prior quarter and $675.1 billion in the second quarter of fiscal year 2018.



Quarterly Performance




At September 30, 2018:


1-Year


3-Year


5-Year


10-Year


% of Strategy AUM beating Benchmark3


42%


68%


73%


82%













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


37%


59%


61%


66%













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





Of Legg Mason's long-term U.S. mutual fund assets, 50% were in funds rated 4 or 5 stars by Morningstar.

Operating Results - Comparison to the First Quarter of Fiscal Year 2019

Net income was $72.8 million, or $0.82 per diluted share, compared to net income of $66.1 million, or $0.75 per diluted share, in the first quarter of fiscal year 2019.  The increase was driven by lower seasonal compensation costs and a discrete tax benefit.  

This quarter's results included:

  • Discrete tax benefit related to the completion of a prior year audit of $2.8 million, or $0.03 per diluted share.
  • Real estate charge associated with the sublease of office space in the Company's Baltimore headquarters of $2.4 million, or $0.02 per diluted share.

The prior quarter results included:

  • Regulatory charge of $4.0 million, or $0.04 per diluted share.
  • EnTrustPermal acquisition and transition-related costs of $1.5 million, or $0.01 per diluted share.

Operating revenues of $758.4 million were up 1% compared with $747.9 million in the prior quarter reflecting:

  • An increase in pass through performance fees of $11.4 million.
  • Higher advisory fee revenues of $2.0 million reflecting one additional day in the quarter.

Operating expenses were $622.7 million compared with $622.2 million in the prior quarter reflecting:

  • Higher compensation and benefits of $3.3 million reflecting increased pass through performance fees, partially offset by seasonal compensation factors in the prior quarter.
  • Occupancy expense increased by $2.4 million reflecting the real estate charge.
  • A $4.0 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, as compared to a $1.3 million gain in the prior quarter.
  • Other expenses decreased by $3.6 million as the prior quarter included a regulatory charge of $4.0 million.

Non-operating expense was $24.8 million, as compared to $16.6 million in the prior quarter reflecting:  

  • Gains on corporate investments, not offset in compensation, were $2.9 million compared with gains of $5.8 million in the prior quarter.
  • Gains on funded deferred compensation and seed investments, as described above.
  • A $4.3 million loss associated with the consolidation of sponsored investment vehicles compared to a $3.7 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 17.9% compared to 16.8% in the prior quarter.  Operating margin, as adjusted4, was 23.6%, as compared to 22.3% in the prior quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $11.3 million compared to $9.7 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 Second Quarter of Fiscal Year 2018

Net income was $72.8 million, or $0.82 per diluted share, compared to net income of $75.7 million, or $0.78 per diluted share, in the second quarter of fiscal year 2018.

This quarter's results included:

  • Discrete tax benefit of $2.8 million, or $0.03 per diluted share.
  • Real estate charge of $2.4 million, or $0.02 per diluted share.

The prior year quarter 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.

Operating revenues of $758.4 million were down 1% compared with $768.3 million in the prior year quarter reflecting:

  • Lower non-pass through performance fees of $13.1 million.

Operating expenses were $622.7 million compared with $623.9 million in the second quarter of fiscal year 2018 reflecting:

  • Lower compensation and benefits of $3.1 million, due to the decrease in non-pass through performance fees.
  • Lower distribution and servicing expenses of $9.1 million. 
  • A $6.2 million increase in communications and technology expenses reflecting incremental spending.
  • An increase in occupancy expenses of $2.2 million reflecting the real estate charge.
  • A $4.0 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 $4.8 million in the prior year quarter.

Non-operating expense was $24.8 million, compared to $18.1 million in the second quarter of fiscal year 2018 reflecting:

  • Gains on corporate investments, not offset in compensation, were $2.9 million compared with gains of $2.4 million in the prior year quarter.
  • Gains on funded deferred compensation and seed investments, as described above.
  • $4.3 million in losses associated with the consolidation of sponsored investment vehicles, as compared to $2.1 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 17.9% as compared to 18.8% in the second quarter of fiscal year 2018.  Operating margin, as adjusted, was 23.6%, as compared to 24.9% in the second quarter of fiscal year 2018.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $11.3 million, compared to $10.4 million in the prior year quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

Quarterly Business Developments and Recent Announcements

  • Legg Mason paid-off the $125.5 million that was outstanding on the Company's revolver during FQ2.
  • On October 4, 2018, Legg Mason announced it had launched its first actively managed taxable fixed-income ETF, sub-advised by Western Asset Management Company, LLC, a Legg Mason affiliate and globally integrated fixed-income manager, the Western Asset Total Return ETF [Nasdaq: WBND].

Balance Sheet

At September 30, 2018, Legg Mason's cash position was $611.2 million.  Total debt, net was $2.2 billion, and stockholders' equity was $3.9 billion.  The ratio of total debt to total capital was 37%, compared to 38% in the prior quarter.  Seed investments totaled $250.2 million.

Conference Call to Discuss Results

A conference call to discuss the Company's results, hosted by Joseph A. Sullivan, Chairman and CEO of Legg Mason, Inc., 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 47604534, at least 10 minutes prior to the scheduled start to ensure a 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 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) and entering pass code 47604534# when prompted. Please note that the replay will be available beginning at 8:00 p.m. EDT on Wednesday, October 24, 2018, and ending at 11:59 p.m. EST on Wednesday, November 7, 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 $755.4 billion as of September 30, 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, 2018 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 89% of total AUM is included in strategy AUM as of September 30, 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.





















At September 30, 2018:


1-Year


3-Year


5-Year


10-Year


% of Strategy AUM beating Benchmark





















Fixed Income


41%


84%


84%


92%



Equity


22%


28%


37%


59%



Alternatives


67%


71%


92%


59%














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.











At September 30, 2018:


1-Year


3-Year


5-Year


10-Year























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











Fixed Income


38%


69%


79%


81%



Equity


36%


51%


45%


53%



Alternatives (performance relates to only 3 funds)


0%


0%


92%


n/a













 

 

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands)

(Unaudited)


















Quarters Ended


Six Months Ended





September


June


September


September


September





2018


2018


2017


2018


2017

Operating Revenues:











Investment advisory fees:












Separate accounts

$

261,567



$

259,895



$

253,128



$

521,462



$

503,174




Funds

383,923



383,564



393,035



767,487



775,263




Performance fees

31,874



24,036



40,821



55,910



122,358



Distribution and service fees

79,074



79,190



80,668



158,264



159,574



Other

1,989



1,220



686



3,209



1,811





Total operating revenues

758,427



747,905



768,338



1,506,332



1,562,180















Operating Expenses:











Compensation and benefits

364,885



361,568



367,951



726,453



781,258



Distribution and servicing

114,525



116,592



123,634



231,117



245,983



Communications and technology

57,489



56,740



51,299



114,229



101,602



Occupancy

27,352



24,904



25,171



52,256



49,579



Amortization of intangible assets

6,102



6,180



6,082



12,282



12,421



Impairment of intangible assets









34,000



Contingent consideration fair value adjustments

145



426





571



(16,550)



Other

52,201



55,819



49,782



108,020



102,263





Total operating expenses

622,699



622,229



623,919



1,244,928



1,310,556















Operating Income

135,728



125,676



144,419



261,404



251,624















Non-Operating Income (Expense):











Interest income

2,420



2,446



1,572



4,866



3,040



Interest expense

(29,860)



(29,917)



(29,077)



(59,777)



(58,343)



Other income, net

6,627



7,252



7,289



13,879



18,677



Non-operating income (expense) of












consolidated investment vehicles, net

(3,998)



3,583



2,094



(415)



3,091





Total non-operating income (expense)

(24,811)



(16,636)



(18,122)



(41,447)



(33,535)















Income Before Income Tax Provision

110,917



109,040



126,297



219,957



218,089
















Income tax provision

29,844



30,675



38,673



60,519



66,928















Net Income

81,073



78,365



87,624



159,438



151,161



Less: Net income attributable












 to noncontrolling interests

8,270



12,275



11,960



20,545



24,577















Net Income Attributable to Legg Mason, Inc.

$

72,803



$

66,090



$

75,664



$

138,893



$

126,584























(Continued)

 

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





2018


2018


2017


2018


2017














Net Income Attributable to Legg Mason, Inc.

$

72,803



$

66,090



$

75,664



$

138,893



$

126,584














Less: Earnings (distributed and undistributed)












allocated to participating securities (1)

2,577



2,324



2,687



4,898



4,387















Net Income (Distributed and Undistributed)











Allocated to Shareholders (Excluding











Participating Securities)

$

70,226



$

63,766



$

72,977



$

133,995



$

122,197















Net Income per Share Attributable to











Legg Mason, Inc. Shareholders:













Basic

$

0.82



$

0.75



$

0.78



$

1.57



$

1.30


















Diluted

$

0.82



$

0.75



$

0.78



$

1.57



$

1.29















Weighted-Average Number of Shares











Outstanding:













Basic

85,482



85,120



93,087



85,303



93,973





Diluted

85,612



85,491



93,496



85,536



94,390















(1) Participating securities excluded from weighted-average number of shares outstanding were 3,156, 3,053, and 3,417 for the
     quarters ended September 2018, June 2018, and September 2017, respectively, and 3,105 and 3,305 for the six months
     ended September 2018 and September 2017, respectively.

 


LEGG MASON, INC. AND SUBSIDIARIES


CONSOLIDATING STATEMENTS OF INCOME


(Amounts in thousands)


(Unaudited)






Quarters Ended






September 2018


June 2018


September 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

$

758,530



$

(103)



$

758,427


$

748,108



$

(203)



$

747,905


$

768,361



$

(23)



$

768,338



Total operating expenses

622,430



269



622,699


621,816



413



622,229


623,814



105



623,919



Operating Income (Loss)

136,100



(372)



135,728


126,292



(616)



125,676


144,547



(128)



144,419



Non-operating income (expense)

(22,189)



(2,622)



(24,811)


(19,784)



3,148



(16,636)


(19,794)



1,672



(18,122)



Income (Loss) Before Income Tax Provision

113,911



(2,994)



110,917


106,508



2,532



109,040


124,753



1,544



126,297



Income tax provision

29,844





29,844


30,675





30,675


38,673





38,673



Net Income (Loss)

84,067



(2,994)



81,073


75,833



2,532



78,365


86,080



1,544



87,624



Less: Net income (loss) attributable

















 to noncontrolling interests

11,264



(2,994)



8,270


9,743



2,532



12,275


10,416



1,544



11,960



Net Income Attributable to Legg Mason, Inc.

$

72,803



$



$

72,803


$

66,090



$



$

66,090


$

75,664



$



$

75,664



















































Six Months Ended












September 2018


September 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

$

1,506,638



$

(306)



$

1,506,332


$

1,562,247



$

(67)



$

1,562,180








Total operating expenses

1,244,246



682



1,244,928


1,310,428



128



1,310,556








Operating Income (Loss)

262,392



(988)



261,404


251,819



(195)



251,624








Non-operating income (expense)

(41,973)



526



(41,447)


(35,922)



2,387



(33,535)








Income (Loss) Before Income Tax Provision

220,419



(462)



219,957


215,897



2,192



218,089








Income tax provision

60,519





60,519


66,928





66,928








Net Income (Loss)

159,900



(462)



159,438


148,969



2,192



151,161








Less: Net income (Loss) attributable

















 to noncontrolling interests

21,007



(462)



20,545


22,385



2,192



24,577








Net Income Attributable to Legg Mason, Inc.

$

138,893



$



$

138,893


$

126,584



$



$

126,584






























(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






2018


2018


2017



2018


2017

















Operating Revenues, GAAP basis

$

758,427



$

747,905



$

768,338




$

1,506,332



$

1,562,180



















Plus (less):














Pass-through performance fees

(24,006)



(12,620)



(19,874)




(36,626)



(85,305)





Operating revenues eliminated upon















consolidation of investment vehicles

103



203



23




306



67





Distribution and servicing expense excluding















consolidated investment vehicles

(114,516)



(116,558)



(123,578)




(231,074)



(245,927)


















Operating Revenues, as Adjusted

$

620,008



$

618,930



$

624,909




$

1,238,938



$

1,231,015

































Operating Income, GAAP basis

$

135,728



$

125,676



$

144,419




$

261,404



$

251,624



















Plus (less):














Gains on deferred compensation















and seed investments, net

3,964



1,272



4,824




5,236



10,252





Impairment of intangible assets










34,000





Amortization of intangible assets

6,102



6,180



6,082




12,282



12,421





Contingent consideration fair value adjustments

145



426






571



(16,550)





Charge related to regulatory matter

151



4,000






4,151







Operating loss of consolidated investment















vehicles, net

372



616



128




988



195


















Operating Income, as Adjusted

$

146,462



$

138,170



$

155,453




$

284,632



$

291,942


















Operating Margin, GAAP basis

17.9


%

16.8


%

18.8


%


17.4


%

16.1


%

Operating Margin, as Adjusted

23.6



22.3



24.9




23.0



23.7


















(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


Six Months Ended


















September


June


September


September


September





2018


2018


2017


2018


2017














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

$

289,568



$

(102,170)



$

290,390



$

187,398



$

174,906
















Plus (less):












Interest expense, net of accretion and amortization













of debt discounts and premiums

29,341



29,356



28,343



58,697



56,673




Current tax expense

9,975



8,878



9,662



18,853



15,734




Net change in assets and liabilities

(69,426)



215,016



(144,921)



145,590



70,334




Net change in assets and liabilities













of consolidated investment vehicles

(84,704)



14,580



(561)



(70,124)



31,200




Net income attributable to noncontrolling interests

(8,270)



(12,275)



(11,960)



(20,545)



(24,577)




Net gains and earnings on investments

8,336



6,792



1,491



15,128



7,037




Net gains (losses) on consolidated investment vehicles

(3,998)



3,583



2,094



(415)



3,091




Other

153



(374)



194



(221)



271















Adjusted EBITDA

$

170,975



$

163,386



$

174,732



$

334,361



$

334,669















(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 2018


June 2018


March 2018


December 2017


September 2017






Equity

$

214.5



$

206.4



$

203.0



$

207.6



$

201.2







Fixed Income

411.0



412.3



422.3



420.1



411.9







Alternative

67.4



66.4



66.1



66.3



65.8








Long-Term Assets

692.9



685.1



691.4



694.0



678.9







Liquidity

62.5



59.5



62.7



73.2



75.5








Total

$

755.4



$

744.6



$

754.1



$

767.2



$

754.4

























Quarters Ended


Six Months Ended

By asset class (average):

September 2018


June 2018


March 2018


December 2017


September 2017


September 2018


September 2017


Equity

$

212.2



$

205.0



$

208.8



$

204.7



$

198.9



$

208.9



$

194.5



Fixed Income

411.4



416.7



422.2



414.8



410.2



414.3



405.7



Alternative

66.4



66.0



66.1



65.8



66.0



66.2



66.7




Long-Term Assets

690.0



687.7



697.1



685.3



675.1



689.4



666.9



Liquidity

60.2



61.8



69.8



74.6



75.2



61.3



78.9




Total

$

750.2



$

749.5



$

766.9



$

759.9



$

750.3



$

750.7



$

745.8


















Component Changes in Assets Under Management














Quarters Ended


Six Months Ended




September 2018


June 2018


March 2018


December 2017


September 2017


September 2018


September 2017

Beginning of period

$

744.6



$

754.1



$

767.2



$

754.4



$

741.2



$

754.1



$

728.4


Net client cash flows:














Equity

(1.1)



(2.2)



(2.1)



(3.2)



(2.4)



(3.3)



(1.4)


Fixed Income

(0.5)



1.3



2.8



5.4



0.9



0.8



1.2


Alternative

0.6





0.5





(0.7)



0.6



(1.5)


Long-Term flows

(1.0)



(0.9)



1.2



2.2



(2.2)



(1.9)



(1.7)


Liquidity

3.0



(2.9)



(10.7)



(2.3)



0.2





(11.3)


Total net client cash flows

2.0



(3.8)



(9.5)



(0.1)



(2.0)



(1.9)



(13.0)


Realizations(1)

(0.2)



(0.3)



(0.5)



(0.3)



(0.5)



(0.5)



(1.9)


Market performance and other(2)

11.0



1.1



(6.0)



13.5



13.5



12.2



38.3


Impact of foreign exchange

(2.0)



(6.5)



2.9



(0.4)



2.2



(8.5)



2.9


Acquisitions (disposition), net







0.1







(0.3)


End of period

$

755.4



$

744.6



$

754.1



$

767.2



$

754.4



$

755.4



$

754.4


















(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).

(2) 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.  For the six months ended September 30, 2017, Other 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 arrangements, amortization related to intangible assets, income (loss) of consolidated investment vehicles, the impact of fair value adjustments of contingent consideration liabilities, if any, unusual and other non-core charges (including the previously disclosed regulatory charge), 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 expense or net income (loss) attributable to noncontrolling 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), net, and thus have no impact on Net Income (Loss) Attributable to Legg Mason, Inc. We adjust for the impact of the 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 the results of other asset management firms that have not engaged in significant acquisitions. Impairment charges, unusual and other non-core charges (including the previously disclosed regulatory charge), 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 performances fees which are passed through as compensation expense or net income (loss) attributable to noncontrolling 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 (Loss) Attributable to Legg Mason, Inc. and indicates what our operating margin would have been without 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 noncontrolling 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, unusual and other non-core charges (including the previously disclosed regulatory charge), 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 (Loss) 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.

 

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SOURCE Legg Mason, Inc.