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Legg Mason Reports Results For Third Fiscal Quarter

-- Third Quarter Net Loss of $216.9 Million, or $2.55 per Diluted Share, Including:

- Non-Cash Intangible Asset Impairment Charges of $365.2 Million, or $3.11 per Diluted Share

- Net Discrete Expenses and Other Tax Items of $10.5 Million, or $0.12 per Diluted Share

-- Assets Under Management of $727.2 Billion

-- Long-term Net Outflows of $8.5 Billion for the Quarter

-- Initiating New Global Operating Platform

- Annual Expense Savings of $90 Million to $110 Million

- Expected Costs to Implement of $130 Million to $150 Million

Company Release - 2/4/2019 4:15 PM ET

BALTIMORE, Feb. 4, 2019 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the third fiscal quarter ended December 31, 2018. 

(PRNewsfoto/Legg Mason, Inc.)

 






Quarters Ended


Nine Months Ended

Financial Results

Dec


Sep


Dec


Dec


Dec

(Amounts in millions, except per share amounts)

2018


2018


2017


2018


2017

Operating Revenues

$

704.3



$

758.4



$

793.1



$

2,210.7



$

2,355.3


Operating Expenses

940.7



622.7



820.4



2,185.7



2,131.0


Operating Income (Loss)

(236.4)



135.7



(27.3)



25.0



224.3


Net Income (Loss)1

(216.9)



72.8



149.2



(78.0)



275.8


Net Income (Loss) Per Share - Diluted1

(2.55)



0.82



1.58



(0.95)



2.86












Assets Under Management










(Amounts in billions)










End of Period Assets Under Management

$

727.2



$

755.4



$

767.2



$

727.2



$

767.2


Average Assets Under Management

739.3



750.2



759.9



745.6



750.6












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


Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "Legg Mason's quarterly results were negatively impacted by the industry's record net outflows from actively-managed U.S. mutual funds, as well as double-digit equity market losses. However, the diversification of our assets under management served to mitigate equity market declines, with Legg Mason's total AUM down just 4%.  Furthermore, we continue to focus on working together with our Affiliates from both strategic and operational perspectives to better execute for our clients and shareholders.  To that point, we are developing a new global operating platform to enhance collaboration to improve the efficiency and effectiveness of our multi-Affiliate model, while still prioritizing independent investment management.  Over time, we believe a more integrated operating platform will benefit clients and create a path for continued growth."

Assets Under Management of $727.2 Billion

Assets Under Management were $727.2 billion at December 31, 2018 compared with $755.4 billion at September 30, 2018, resulting from $30.0 billion in negative market performance and other, $8.5 billion in long-term outflows and $0.2 billion in realizations, partially offset by liquidity inflows of $10.5 billion.

 












Quarter Ended December 31, 2018




Assets Under Management

AUM

(in billions)


Flows

(in billions)


Operating

Revenue Yield 1




Equity

$

181.0



$

(3.3)



59 bps




Fixed Income

406.6



(5.1)



27 bps




Alternative

66.3



(0.1)2



59 bps




Long-Term Assets

653.9



(8.5)







Liquidity

73.3



10.5



 13 bps




Total

$

727.2



$

2.0



 37 bps













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



(2) Excludes realizations of $0.2 billion


At December 31, 2018, fixed income represented 56% of AUM, while equity represented 25%, alternative represented 9% and liquidity represented 10%. 

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 $739.3 billion compared to $750.2 billion in the prior quarter and $759.9 billion in the third quarter of fiscal year 2018.  Average long-term AUM was $672.4 billion compared to $690.0 billion in the prior quarter and $685.3 billion in the third quarter of fiscal year 2018.


Quarterly Performance




1-Year


3-Year


5-Year


10-Year

% of Strategy AUM beating Benchmark3


41%


80%


73%


81%











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


43%


69%


71%


65%











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





Of Legg Mason's long-term U.S. mutual fund assets, 59% were in funds rated 4 or 5 stars by Morningstar.

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

Net loss was $216.9 million, or $2.55 per diluted share, compared to net income of $72.8 million, or $0.82 per diluted share, in the second quarter of fiscal year 2019. In addition to the net impact of the factors listed below, the decreased earnings were driven by lower average AUM and lower non-pass through performance fees. 

This quarter's results included:

  • Non-cash intangible asset impairment charges of $365.2 million, or $3.11 per diluted share, primarily related to commingled fund management contracts at EnTrustPermal and RARE Infrastructure.
  • Net discrete expenses and other tax items of $10.5 million, or $0.12 per diluted share.
  • Global operating platform implementation costs4 of $5.9 million, or $0.05 per diluted share.

The prior 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.
  • Global operating platform implementation costs of $3.2 million, or $0.02 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.

Operating revenues of $704.3 million were down 7% compared to $758.4 million in the prior quarter reflecting:

  • A decrease in separate account and fund advisory fee revenues of $27.7 million, or 4% reflecting lower average AUM.
  • A $16.6 million decrease in pass-through performance fees.

Operating expenses were $940.7 million compared to $622.7 million in the prior quarter, but excluding the non-cash impairment charges of $365.2 million, expenses were down 8%, reflecting:

  • Lower compensation of $48.0 million driven by lower operating revenues.
  • An increase in other expenses of $10.8 million.
  • A $10.8 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 $4.0 million gain in the prior quarter.

Non-operating expense was $30.3 million, as compared to $24.8 million in the prior quarter reflecting:  

  • Losses on corporate investments, not offset in compensation, were $4.9 million compared with gains of $2.9 million in the prior quarter.
  • A residual distribution of $8.4 million from an investment holding.
  • Gains on funded deferred compensation and seed investments, as described above.
  • A $2.6 million gain associated with the consolidation of sponsored investment vehicles compared to a $4.3 million loss 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 (33.6%) compared to 17.9% in the prior quarter, reflecting the impact of the non-cash impairment charges of $365.2 million.  Operating margin, as adjusted5, was 21.1%, as compared to 23.6% in the prior quarter. 

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $9.0 million compared to $11.3 million in the prior quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

(4)  For the September and December quarters, global operating platform implementation costs include all collaboration initiatives costs
(5)  See "Use of Supplemental Non-GAAP Financial Information."

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

Net loss was $216.9 million, or $2.55 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 factors listed below, the decreased earnings were driven by lower average long-term AUM and lower non-pass through performance fees.

This quarter's results included:

  • Non-cash intangible asset impairment charges of $365.2 million, or $3.11 per diluted share, primarily related to commingled fund management contracts at EnTrustPermal and RARE Infrastructure.
  • Net discrete expenses and other tax items of $10.5 million, or $0.12 per diluted share.
  • Global operating platform implementation costs of $5.9 million, or $0.05 per diluted share.

The prior year quarter's results included:

  • One-time non-cash tax benefit of $213.7 million, or $2.27 per diluted share, related to the tax law change.
  • 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 $704.3 million down 11% compared with $793.1 million in the prior year quarter reflecting:

  • Decreases principally due to lower average long-term AUM.
  • A decrease in non-pass through performance fees of $43.8 million.

Operating expenses of $940.7 million were up 15% compared with $820.4 million in the prior year quarter reflecting:

  • Non-cash intangible impairment charges of $365.2 million, compared with a non-cash impairment charge of $195.0 million in the prior year quarter.
  • Decreased compensation, related to decreased revenues driven by lower average long-term AUM and performance fees. 
  • An increase in other expenses of $9.9 million. 
  • A $10.8 million loss 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 $4.3 million in the prior year quarter.

Non-operating expense was $30.3 million, compared to $13.5 million in the prior year quarter reflecting:

  • Losses on corporate investments, not offset in compensation, were $4.9 million compared with gains of $1.5 million in the prior year quarter.
  • Losses on funded deferred compensation and seed investments this quarter, as compared to gains in the prior year quarter, as described above.
  • A residual distribution of $8.4 million from an investment holding.
  • A $2.6 million gain associated with the consolidation of sponsored investment vehicles, as compared to an $7.9 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 (33.6%) as compared to (3.4%) in the prior year quarter reflecting the impact of the non-cash impairment charges of $365.2 million this quarter and $195.0 million in the prior year quarter.  Operating margin, as adjusted, was 21.1%, as compared to 27.2% in the prior year quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $9.0 million, compared to $13.6 million in the prior year quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

Quarterly Business Developments and Recent Announcements

  • Legg Mason initiated a new global operating platform, which will result in annual expense savings of $90 million to $110 million, and costs to implement of $130 million to $150 million.
  • Legg Mason, Brandywine Global, ClearBridge Investments and Western Asset were all recognized by Pensions & Investments (P&I) in their Best Places to Work in Investment Management survey for 2018.
  • Legg Mason was ranked #3 among 32 Capital Markets companies and was ranked in the top quintile overall in the Forbes/Just Capital annual ranking.
  • Western Asset Management  is the sub-advisor on the launch of the first active fixed income ETF in Australia on November 11, 2018, the Betashares Legg Mason Australia Bond Fund.

Balance Sheet

At December 31, 2018, Legg Mason's cash position was $835.2 million.  Total debt was $2.2 billion, and stockholders' equity was $3.7 billion.  The ratio of total debt to total capital was 38%, compared to 37% in the prior quarter.   Seed investments totaled $224.2 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. EST 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 48102569, 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 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 48102569# when prompted.  Please note that the replay will be available beginning at 8:00 p.m. EST on Monday, February 4, 2019, and ending at 11:59 p.m. EST on Monday, February 18, 2019.

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 $727.2 billion as of December 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, 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 December 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.

At December 31, 2018:


1-Year


3-Year


5-Year


10-Year

% of Strategy AUM beating Benchmark



















Fixed Income


19%


88%


81%


92%


Equity


56%


57%


36%


51%


Alternatives


75%


73%


93%


56%

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 December 31, 2018:


1-Year


3-Year


5-Year


10-Year




















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










Fixed Income


26%


75%


83%


84%


Equity


62%


63%


59%


44%


Alternatives (performance relates to only 3 funds)


30%


0%


0%


n/a

 

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Amounts in thousands)

(Unaudited)



Quarters Ended


Nine Months Ended


December


September


December


December


December


2018


2018


2017


2018


2017

Operating Revenues:










Investment advisory fees:










Separate accounts

$          256,657


$          261,567


$          255,696


$          778,119


$          758,870

Funds

361,173


383,923


395,370


1,128,660


1,170,633

Performance fees

12,619


31,874


58,926


68,529


181,284

Distribution and service fees

72,185


79,074


81,463


230,449


241,037

Other

1,688


1,989


1,635


4,897


3,446

Total operating revenues

704,322


758,427


793,090


2,210,654


2,355,270











Operating Expenses:










Compensation and benefits

316,876


364,885


362,071


1,043,329


1,143,329

Distribution and servicing

108,842


114,525


124,254


339,959


370,237

Communications and technology

56,664


57,489


54,239


170,893


155,841

Occupancy

24,077


27,352


24,982


76,333


74,561

Amortization of intangible assets

6,089


6,102


6,071


18,371


18,492

Impairment of intangible assets

365,200



195,000


365,200


229,000

Contingent consideration fair value adjustments


145


739


571


(15,811)

Other

63,001


52,201


53,067


171,021


155,330

Total operating expenses

940,749


622,699


820,423


2,185,677


2,130,979











Operating Income (Loss)

(236,427)


135,728


(27,333)


24,977


224,291











Non-Operating Income (Expense):










Interest income

3,126


2,420


1,827


7,992


4,867

Interest expense

(28,770)


(29,860)


(29,088)


(88,547)


(87,431)

Other income (expense), net

(7,042)


6,627


5,519


6,837


24,196

Non-operating income (expense) of










consolidated investment vehicles, net

2,369


(3,998)


8,225


1,954


11,316

Total non-operating income (expense)

(30,317)


(24,811)


(13,517)


(71,764)


(47,052)











Income Before Income Tax Provision










(Benefit)

(266,744)


110,917


(40,850)


(46,787)


177,239











Income tax provision (benefit)

(60,354)


29,844


(209,396)


165


(142,468)











Net Income (Loss)

(206,390)


81,073


168,546


(46,952)


319,707

Less: Net income attributable










to noncontrolling interests

10,498


8,270


19,324


31,043


43,901











Net Income (Loss) Attributable to Legg










Mason, Inc.

$        (216,888)


$            72,803


$          149,222


$          (77,995)


$          275,806

 

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS), CONTINUED

(Amounts in thousands, except per share amounts)

(Unaudited)












Quarters Ended


Nine Months Ended


December


September


December


December


December


2018


2018


2017


2018


2017











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

$        (216,888)


$            72,803


$          149,222


$          (77,995)


$          275,806











Less: Earnings (distributed and undistributed)










allocated to participating securities (1)

1,049


2,577


5,347


3,190


9,639











Net Income (Loss) (Distributed and Undistributed)










Allocated to Shareholders (Excluding










Participating Securities)

$        (217,937)


$            70,226


$          143,875


$          (81,185)


$          266,167











Net Income (Loss) per Share Attributable to










Legg Mason, Inc. Shareholders:










Basic

$               (2.55)


$                 0.82


$                 1.59


$               (0.95)


$                 2.87











Diluted

$               (2.55)


$                 0.82


$                 1.58


$               (0.95)


$                 2.86











Weighted-Average Number of Shares










Outstanding: (2)










Basic

85,537


85,482


90,377


85,381


92,770

Diluted

85,537


85,612


90,833


85,381


93,199



(1)

Participating securities excluded from weighted-average number of shares outstanding were 3,104, 3,156, and 3,357 for the quarters ended December 2018, September 2018, and December 2017, respectively, and 3,104 and 3,322 for the nine months ended December 2018 and December 2017, respectively.

(2)

Diluted shares are the same as basic shares for periods with a loss.

 

 

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATING STATEMENTS OF INCOME (LOSS)

(Amounts in thousands)

(Unaudited)


Quarters Ended


December 2018


September 2018


December 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

$               704,477


$             (155)


$        704,322

$               758,530


$             (103)


$        758,427

$               793,373


$             (283)


$        793,090

Total operating expenses

940,561


188


940,749

622,430


269


622,699

819,984


439


820,423

Operating Income (Loss)

(236,084)


(343)


(236,427)

136,100


(372)


135,728

(26,611)


(722)


(27,333)

Non-operating income (expense)

(32,158)


1,841


(30,317)

(22,189)


(2,622)


(24,811)

(19,970)


6,453


(13,517)

Income (Loss) Before Income Tax Provision (Benefit)

(268,242)


1,498


(266,744)

113,911


(2,994)


110,917

(46,581)


5,731


(40,850)

Income tax provision (benefit)

(60,354)



(60,354)

29,844



29,844

(209,396)



(209,396)

Net Income (Loss)

(207,888)


1,498


(206,390)

84,067


(2,994)


81,073

162,815


5,731


168,546

Less: Net income (loss) attributable
















to noncontrolling interests

9,000


1,498


10,498

11,264


(2,994)


8,270

13,593


5,731


19,324

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

$              (216,888)


$                —


$       (216,888)

$                72,803


$                —


$          72,803

$               149,222


$                —


$        149,222






























Nine Months Ended




December 2018


December 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

$            2,211,115


$             (461)


$     2,210,654

$            2,355,620


$             (350)


$     2,355,270


Total operating expenses

2,184,807


870


2,185,677

2,130,412


567


2,130,979


Operating Income (Loss)

26,308


(1,331)


24,977

225,208


(917)


224,291


Non-operating income (expense)

(74,131)


2,367


(71,764)

(55,892)


8,840


(47,052)


Income (Loss) Before Income Tax Benefit

(47,823)


1,036


(46,787)

169,316


7,923


177,239


Income tax provision (benefit)

165



165

(142,468)



(142,468)


Net Income (Loss)

(47,988)


1,036


(46,952)

311,784


7,923


319,707


Less: Net income attributable












to noncontrolling interests

30,007


1,036


31,043

35,978


7,923


43,901


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

$               (77,995)


$                —


$         (77,995)

$               275,806


$                —


$        275,806



(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



Nine Months Ended















December


September


December



December


December



2018


2018


2017



2018


2017














Operating Revenues, GAAP basis

$            704,322


$            758,427


$            793,090



$        2,210,654


$        2,355,270














Plus (less):












Pass-through performance fees

(7,436)


(24,006)


(9,970)



(44,062)


(95,275)


Operating revenues eliminated upon












consolidation of investment vehicles

155


103


283



461


350


Distribution and servicing expense excluding












consolidated investment vehicles

(108,771)


(114,516)


(124,071)



(339,845)


(369,998)














Operating Revenues, as Adjusted

$            588,270


$            620,008


$            659,332



$        1,827,208


$        1,890,347


























Operating Income (Loss), GAAP basis

$          (236,427)


$            135,728


$            (27,333)



$              24,977


$            224,291














Plus (less):












Gains (losses) on deferred compensation












and seed investments, net

(10,826)


3,964


4,333



(5,590)


14,585


Impairment of intangible assets

365,200



195,000



365,200


229,000


Amortization of intangible assets

6,089


6,102


6,071



18,371


18,492


Contingent consideration fair value adjustments


145


739



571


(15,811)


Charge related to regulatory matter


151




4,151



Operating loss of consolidated investment












vehicles, net

343


372


722



1,331


917














Operating Income, as Adjusted

$            124,379


$            146,462


$            179,532



$            409,011


$            471,474














Operating Margin, GAAP basis

(33.6)

%

17.9

%

(3.4)

%


1.1

%

9.5

%

Operating Margin, as Adjusted

21.1


23.6


27.2



22.4


24.9




(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


Nine Months Ended












December


September


December


December


December


2018


2018


2017


2018


2017











Cash provided by operating activities, GAAP basis

$                  256,591


$               289,568


$                  116,912


$            443,989


$            291,818











Plus (less):










Interest expense, net of accretion and amortization










of debt discounts and premiums

28,259


29,341


28,503


86,956


85,176

Current tax expense (benefit)

(1,218)


9,975


8,823


17,635


24,557

Net change in assets and liabilities

(170,384)


(69,426)


27,338


(24,794)


97,672

Net change in assets and liabilities










of consolidated investment vehicles

60,158


(84,704)


20,023


(9,966)


51,223

Net income attributable to noncontrolling interests

(10,498)


(8,270)


(19,324)


(31,043)


(43,901)

Net gains (losses) and earnings on investments

21,367


8,336


(4,163)


36,495


2,874

Net gains (losses) on consolidated investment vehicles

2,369


(3,998)


8,225


1,954


11,316

Other

(68)


153


663


(289)


934











Adjusted EBITDA

$                  186,576


$               170,975


$                  187,000


$            520,937


$            521,669


(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:

December 2018


September 2018


June 2018


March 2018


December 2017





Equity

$                         181.0


$                         214.5


$                         206.4


$                         203.0


$                         207.6





Fixed Income

406.6


411.0


412.3


422.3


420.1





Alternative

66.3


67.4


66.4


66.1


66.3





Long-Term Assets

653.9


692.9


685.1


691.4


694.0





Liquidity

73.3


62.5


59.5


62.7


73.2





Total

$                         727.2


$                         755.4


$                         744.6


$                         754.1


$                         767.2




















Quarters Ended


Nine Months Ended

By asset class (average):

December 2018


September 2018


June 2018


March 2018


December 2017


December 2018


December 2017

Equity

$                         198.2


$                         212.2


$                         205.0


$                         208.8


$                         204.7


$                         204.1


$                         197.9

Fixed Income

407.4


411.4


416.7


422.2


414.8


411.9


408.7

Alternative

66.8


66.4


66.0


66.1


65.8


66.3


66.4

Long-Term Assets

672.4


690.0


687.7


697.1


685.3


682.3


673.0

Liquidity

66.9


60.2


61.8


69.8


74.6


63.3


77.6

Total

$                         739.3


$                         750.2


$                         749.5


$                         766.9


$                         759.9


$                         745.6


$                         750.6





























Component Changes in Assets Under Management


Quarters Ended


Nine Months Ended


December 2018


September 2018


June 2018


March 2018


December 2017


December 2018


December 2017

Beginning of period

$                         755.4


$                         744.6


$                         754.1


$                         767.2


$                         754.4


$                         754.1


$                         728.4

Net client cash flows:














Equity

(3.3)


(1.1)


(2.2)


(2.1)


(3.2)


(6.6)


(4.6)

Fixed Income

(5.1)


(0.5)


1.3


2.8


5.4


(4.3)


6.6

Alternative

(0.1)


0.6



0.5



0.6


(1.5)

Long-Term flows

(8.5)


(1.0)


(0.9)


1.2


2.2


(10.3)


0.5

Liquidity

10.5


3.0


(2.9)


(10.7)


(2.3)


10.4


(13.6)

Total net client cash flows

2.0


2.0


(3.8)


(9.5)


(0.1)


0.1


(13.1)

Realizations(1)

(0.2)


(0.2)


(0.3)


(0.5)


(0.3)


(0.7)


(2.2)

Market performance and other

(30.0)


11.0


1.1


(6.0)


13.5


(17.8)


51.8

Impact of foreign exchange


(2.0)


(6.5)


2.9


(0.4)


(8.5)


2.5

Acquisitions (disposition), net





0.1



(0.2)

End of period

$                         727.2


$                         755.4


$                         744.6


$                         754.1


$                         767.2


$                         727.2


$                         767.2


(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) 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 stockholders.  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.

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