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Legg Mason Reports Results For Second Fiscal Quarter

-- Second Quarter Net Income of $67.1 million, or $0.74 per Diluted Share; Includes Restructuring Charges of $19.7 Million, or $0.16 per Diluted Share

-- Adjusted Net Income of $85.6 Million, or $0.95 per Diluted Share

-- Assets Under Management of $781.8 Billion

-- Long-term Net Outflows of $0.2 Billion

Company Release - 10/30/2019 4:15 PM ET

BALTIMORE, Oct. 30, 2019 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2019. 


Quarters Ended


Six Months Ended

Financial Results

Sep


Jun


Sep


Sep


Sep

(Amounts in millions, except per share amounts)

2019


2019


2018


2019


2018

Operating Revenues

$

743.3



$

705.4



$

758.4



$

1,448.6



$

1,506.3


Operating Expenses

618.3



621.4



622.7



1,239.7



1,244.9


Operating Income

125.0



83.9



135.7



208.9



261.4


Net Income1

67.1



45.4



72.8



112.4



138.9


Net Income Per Share - Diluted1

0.74



0.51



0.82



1.25



1.57












Adjusted Net Income2

$

85.6



$

67.0



$

78.0



$

152.6



$

152.6


Adjusted Earnings Per Share - Diluted2

0.95



0.75



0.88



1.70



1.72












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





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





"Legg Mason delivered strong financial results in a volatile quarter for the markets," said Joseph A. Sullivan, Chairman and CEO of Legg Mason.

"More specifically, this quarter's results reinforced the benefits of diversification, as strong inflows across alternative products mostly offset equity and fixed income outflows.  Further, we continued to make meaningful progress on our strategic restructuring efforts driving a significant improvement in adjusted earnings and margins, and we remain on track to meet or exceed projected cost savings by the end of fiscal year 2021.   

"Looking ahead, we will continue to focus on the evolving needs of our clients, encouraging innovation across investment strategies, vehicles and distribution to increasingly leverage the company's durable competitive advantages to drive growth and long-term shareholder value."

Assets Under Management of $781.8 Billion

Assets Under Management were $781.8 billion at September 30, 2019 compared with $780.2 billion at June 30, 2019, with the change resulting from positive market performance and other of $8.7 billion, partially offset by liquidity outflows of $3.5 billion, negative foreign exchange of $3.2 billion, long-term net outflows of $0.2 billion and realizations of $0.2 billion.












Quarter Ended September 30, 2019




Assets Under Management

($ in billions)

 

AUM


 

Flows


Operating
Revenue Yield 1




Equity

$

203.3



$

(2.1)



57 bps




Fixed Income

442.7



(0.5)



26 bps




Alternative

72.6



2.4

2


58 bps




Long-Term Assets

718.6



(0.2)







Liquidity

63.2



(3.5)



14 bps




Total

$

781.8



$

(3.7)



36 bps













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



(2) Excludes realizations of $0.2 billion


At September 30, 2019, fixed income represented 57% of AUM, while equity represented 26%, alternative represented 9% and liquidity represented 8%. 

By geography, 71% of AUM was from clients domiciled in the United States and 29% from non-US domiciled clients.

Average AUM during the quarter was $779.8 billion compared to $765.9 billion in the prior quarter and $750.2 billion in the second fiscal quarter of 2019.  Average long-term AUM was $716.6 billion compared to $699.0 billion in the prior quarter and $690.0 billion in the second quarter of fiscal year 2019.







Quarterly Performance








At September 30, 2018:


1-Year


3-Year


5-Year


10-Year



% of Strategy AUM beating Benchmark3


75%


79%


82%


84%















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


70%


66%


71%


64%















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





















Of Legg Mason's long-term U.S. mutual fund assets, 68% were in funds rated 4 or 5 stars by Morningstar.

Operating Results - Comparison to the First Quarter of Fiscal Year 2020

Adjusted net income was $85.6 million, or $0.95 per diluted share, compared to adjusted net income of $67.0 million, or $0.75 per diluted share.  The increase  was driven by an increase in operating revenues, reflecting higher average AUM and one additional day in the quarter as well as a $7.1 million increase in non-pass through performance fees.   In addition, the increase in adjusted net income reflected the impact of strategic restructuring savings as well as seasonally lower compensation and benefits expenses. 

Net income was $67.1 million, or $0.74 per diluted share, compared to net income of $45.4 million, or $0.51 per diluted share, in the first quarter of fiscal year 2020.  In addition to the items noted above, the changes were impacted by $13.2 million in reduced restructuring costs and losses on corporate investments not offset in compensation, compared with gains in the prior quarter.

Operating revenues of $743.3 million were up 5% compared to $705.4 million in the prior quarter reflecting:

  • An increase in separate account and fund advisory fee revenues of $13.0 million, or 2%, reflecting higher average AUM and one additional day in the quarter.
  • Performance fees increased by $28.0 million, of which $7.1 million were non-pass through.

Operating expenses of $618.3 million were down 1% from $621.4 million in the prior quarter, reflecting:

  • Lower compensation of $2.1 million driven by a $14.3 million decrease in strategic restructuring costs, a smaller gain in the market value of deferred compensation and seed investments of $2.9 million, with an offset in non-operating income, as compared to a gain of $7.0 million in the prior quarter as well as $5.0 million in lower seasonal compensation. These decreases more than offset increased compensation and benefits related to a $21.0 million increase in pass through performance fees, as well as higher advisory fees and non-pass through performance fees.
  • A decrease in other expenses of $3.2 million largely due to lower conference and travel and entertainment expenses, which more than offset a $1.0 million increase in restructuring costs.
  • The $19.7 million of restructuring costs consisted of $15.9 million of strategic restructuring costs related to the implementation of our cost savings initiative and $3.8 million of professional fees for other corporate matters.

Non-operating expense was $19.7 million, as compared to $4.3 million in the prior quarter reflecting:  

  • Losses on corporate investments, not offset in compensation, were $2.9 million compared with gains of $3.1 million in the prior quarter.
  • Gains on funded deferred compensation and seed investments, as described above.
  • A $5.0 million gain associated with the consolidation of sponsored investment vehicles compared to a $10.1 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 16.8% compared to 11.9% in the prior quarter.  Adjusted operating margin1, was 25.0%, as compared to 21.6% in the prior quarter. 

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $8.7 million compared to $9.7 million in the prior quarter, principally related to Clarion, EnTrust Global, RARE and Royce.

1 See "Use of Supplemental Non-GAAP Financial Information."

Comparison to the Second Quarter of Fiscal Year 2019

Adjusted net income was $85.6 million, or $0.95 per diluted share, compared to adjusted net income of $78.0 million, or $0.88 per diluted share, in the prior year quarter.   The increase was driven by a decrease in operating expenses as a result of the impact of savings from the strategic restructuring as well as an increase in non-pass through performance fees.   These more than offset a decline in investment advisory and distribution and service fees reflecting lower operating revenue yields, despite higher average long-term assets under management.   

Net income was $67.1 million, or $0.74 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 items noted above, the changes were driven by $19.7 million of restructuring costs in the current quarter as well as a discrete tax benefit of $2.8 million related to the completion of a prior year audit in fiscal 2019 partially offset by $5.6 million in corporate restructuring charges in the second quarter of fiscal year 2019.

Operating revenues of $743.3 million were down 2% compared with $758.4 million in the prior year quarter reflecting:

  • A decrease in distribution and service fees of $12.0 million reflecting a shift to lower fee earning mutual fund share classes and lower average fund AUM earning distribution fee revenue as well as a decrease in advisory fee revenues of $5.3 million, primarily due to asset mix, the shift from funds to lower fee vehicles and specific fee reductions.
  • These decreases were partially offset by an increase in non-pass through performance fees of $5.1 million.

Operating expenses of $618.3 million were down 1% compared with $622.7 million in the prior year quarter reflecting:

  • Distribution and servicing expenses decreased by $9.4 million reflecting the shift of assets under management as described above.
  • Compensation and benefits increased by 4%, primarily due to $14.4 million in strategic restructuring costs. Excluding the strategic restructuring costs, compensation and benefits were $1.6 million lower primarily due to strategic restructuring savings, which more than offset higher affiliate compensation as well as higher corporate compensation including increased sales commissions.
  • Communications and technology expenses decreased by $3.5 million primarily due to strategic restructuring savings.
  • Other expenses decreased by $2.9 million despite $4.8 million in restructuring costs. The lower other expenses were due in part to strategic restructuring savings of $5.3 million and lower professional fees.
  • A $2.9 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 $4.0 million in the prior year quarter.

Non-operating expense was $19.7 million, compared to $24.8 million in the prior year quarter reflecting:

  • Losses on corporate investments, not offset in compensation, were $2.9 million compared with gains of $2.9 million in the prior year quarter.
  • Gains on funded deferred compensation and seed investments as described above.
  • A $5.0 million gain associated with the consolidation of sponsored investment vehicles, as compared to a $4.3 million loss 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 16.8%, as compared to 17.9% in the prior year quarter.  Adjusted operating margin was 25.0%, as compared to 24.5% in the prior year quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $8.7 million, compared to $11.3 million in the prior year quarter, principally related to Clarion, EnTrust Global, RARE and Royce.

Quarterly Business Developments and Recent Announcements

  • On July 15, 2019, Legg Mason repaid $250 million in Senior Notes.
  • On July 30, 2019 Stephen C. Hooley, a financial services, technology and operational efficiency executive, was elected to Legg Mason's Board of Directors.
  • On September 3, 2019 Legg Mason and Cathay Financial Holdings, the largest financial holding company in Taiwan, announced that Legg Mason Investments (Taiwan) Limited and Cathay United Bank entered into a partnership to introduce theme based, customized investment portfolios to Taiwanese investors.
  • On October 15, 2019 Legg Mason announced the launch of the Clarion Partners Real Estate Income Fund Inc. (CPREIF), its first commercial real estate-focused fund designed for individual investors.

Balance Sheet

At September 30, 2019, Legg Mason's cash position was $580.9 million.  Total debt was $2.0 billion, and stockholders' equity was $3.7 billion.  The ratio of total debt to total capital was 35%, compared to 38% in the prior quarter.  Seed investments totaled $211.2 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. ET today. The call will be open to the general public.  Interested participants should access the call by dialing 1-800-891-8256 (or for international calls 1-212-271-4651), confirmation number 21932009 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 1-800-633-8284 (or for international calls 1-402-977-9140) enter pass code 21932009 when prompted.  Please note that the replay will be available beginning at 8:00 p.m. ET on Wednesday, October 30, 2019, and ending at 11:59 p.m. ET on Wednesday, November 13, 2019.

About Legg Mason

Guided by a mission of Investing to Improve Lives,TM  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 $781.8 billion as of September 30, 2019.  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, 2019 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 87% of total AUM is included in strategy AUM as of September 30, 2019, 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, 2019:


1-Year


3-Year


5-Year


10-Year














% of Strategy AUM beating Benchmark1












Fixed Income


75%


97%


90%


98%




Equity


66%


56%


54%


48%




Alternatives


97%


88%


98%


99%






(1) Effective July 1, 2019, comparative benchmarks for certain strategies were added to measure relative performance where a stated  benchmark was not previously available.  







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, 2019:


1-Year


3-Year


5-Year


10-Year











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










Fixed Income


74%


78%


73%


78%


Equity


66%


54%


69%


48%


Alternatives (performance relates to only 3 funds)


49%


0%


  n/a


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





2019


2019


2018


2019


2018

Operating Revenues:











Investment advisory fees:












Separate accounts

$          264,438


$          260,441


$          261,567


$          524,879


$          521,462



Funds

375,765


366,812


383,923


742,577


767,487



Performance fees

34,869


6,861


31,874


41,730


55,910


Distribution and service fees

67,064


69,937


79,074


137,001


158,264


Other

1,128


1,309


1,989


2,437


3,209




Total operating revenues

743,264


705,360


758,427


1,448,624


1,506,332














Operating Expenses:











Compensation and benefits

377,727


379,828


364,885


757,555


726,453


Distribution and servicing

105,099


103,906


114,525


209,005


231,117


Communications and technology

53,953


55,274


57,489


109,227


114,229


Occupancy

26,809


25,624


27,352


52,433


52,256


Amortization of intangible assets

5,442


5,457


6,102


10,899


12,282


Contingent consideration fair value adjustments


(1,165)


145


(1,165)


571


Other

49,257


52,501


52,201


101,758


108,020




Total operating expenses

618,287


621,425


622,699


1,239,712


1,244,928














Operating Income

124,977


83,935


135,728


208,912


261,404














Non-Operating Income (Expense):











Interest income

2,652


4,005


2,420


6,657


4,866


Interest expense

(27,331)


(28,483)


(29,860)


(55,814)


(59,777)


Other income (expense), net

458


10,599


6,627


11,057


13,879


Non-operating income (expense) of












consolidated investment vehicles, net

4,529


9,561


(3,998)


14,090


(415)




Total non-operating income (expense)

(19,692)


(4,318)


(24,811)


(24,010)


(41,447)














Income Before Income Tax Provision

105,285


79,617


110,917


184,902


219,957















Income tax provision

28,754


18,048


29,844


46,802


60,519














Net Income

76,531


61,569


81,073


138,100


159,438


Less: Net income attributable












to noncontrolling interests

9,448


16,219


8,270


25,667


20,545
























Net Income Attributable to Legg Mason, Inc.

$            67,083


$            45,350


$            72,803


$          112,433


$          138,893




(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





2019


2019


2018


2019


2018














Net Income Attributable to Legg Mason, Inc.

$            67,083


$            45,350


$            72,803


$          112,433


$          138,893













Less: Earnings (distributed and undistributed)












allocated to participating securities (1)

2,213


1,510


2,577


3,711


4,898














Net Income (Distributed and Undistributed)











Allocated to Shareholders (Excluding











Participating Securities)

$            64,870


$            43,840


$            70,226


$          108,722


$          133,995














Net Income per Share Attributable to











Legg Mason, Inc. Shareholders:













Basic

$                 0.75


$                 0.51


$                 0.82


$                 1.26


$                 1.57

















Diluted

$                 0.74


$                 0.51


$                 0.82


$                 1.25


$                 1.57














Weighted-Average Number of Shares











Outstanding:













Basic

86,813


86,297


85,482


86,558


85,303




Diluted

87,127


86,494


85,612


86,816


85,536














(1)

Participating securities excluded from weighted-average number of shares outstanding were 2,973, 2,852, and 3,156 for the quarters ended September 2019, June 2019, and September 2018, respectively, and 2,911 and 3,105 for the six months ended September 2019 and September 2018, respectively.










Quarters Ended




Six Months Ended







September


June




September



Strategic Restructuring effective January 1, 2019

2019


2019




2019




Strategic restructuring cost savings:












Compensation

$              7,523


$              2,850




$            10,373





Occupancy

175


240




$                 415





Other

7,760


6,894




$            14,654






Total strategic restructuring cost savings

$            15,458


$              9,984




$            25,442

















Strategic restructuring costs:












Compensation and benefits

$            14,422


$            28,694




$            43,116





Occupancy









Other

1,503


4,204




5,707






Total strategic restructuring costs

$            15,925


$            32,898




$            48,823



 

 

LEGG MASON, INC. AND SUBSIDIARIES

SUPPLEMENTAL NON-GAAP FINANCIAL INFORMATION

RECONCILIATION OF NET INCOME ATTRIBUTABLE TO LEGG MASON, INC. TO ADJUSTED NET INCOME AND

RECONCILIATION OF NET INCOME PER DILUTED SHARE ATTRIBUTABLE TO LEGG MASON, INC. SHAREHOLDERS TO

ADJUSTED EARNINGS PER DILUTED SHARE(1)

(Amounts in thousands, except per share amounts)

(Unaudited)






































Quarters Ended


Six Months Ended








September


June


September


September

September








2019


2019


2018


2019

2018
















Net Income Attributable to Legg Mason, Inc.


$                        67,083


$                        45,350


$                        72,803


$                      112,433

$                      138,893

















Plus (less):



























Restructuring costs:














Strategic restructuring and other corporate initiatives


19,666


32,898


5,647


52,564

8,422





Affiliate charges


237


1,203



1,440



Amortization of intangible assets


5,442


5,457


6,102


10,899

12,282



Gains and losses on seed and other investments













not offset by compensation or hedges


(51)


(6,411)


(1,285)


(6,462)

(7,700)



Acquisition and transition-related costs





1,468



Contingent consideration fair value adjustments



(1,165)


145


(1,165)

571



Charges related to significant regulatory matters




151


4,151



Income tax adjustments:(2)














Impacts of non-GAAP adjustments


(6,954)


(8,635)


(2,721)


(15,589)

(3,763)





Other tax items


220


(1,700)


(2,806)


(1,480)

(1,761)
















Adjusted Net Income


$                        85,643


$                        66,997


$                        78,036


$                      152,640

$                      152,563
















Net Income Per Diluted Share Attributable to











Legg Mason, Inc. Shareholders


$                             0.74


$                             0.51


$                             0.82


$                             1.25

$                             1.57

















Plus (less), net of tax impacts:



























Restructuring costs:













Strategic restructuring and other corporate initiatives


0.16


0.27


0.05


0.43

0.07




Affiliate charges



0.01



0.01



Amortization of intangible assets


0.05


0.04


0.05


0.09

0.10



Gains and losses on seed and other investments













not offset by compensation or hedges



(0.05)


(0.01)


(0.05)

(0.06)



Acquisition and transition-related costs





0.01



Contingent consideration fair value adjustments



(0.01)



(0.01)



Charges related to significant regulatory matters





0.05



Other tax items



(0.02)


(0.03)


(0.02)

(0.02)
















Adjusted Earnings per Diluted Share


$                             0.95


$                             0.75


$                             0.88


$                             1.70

$                             1.72
















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




(2)    The non-GAAP effective tax rates for the quarters ended September 30, 2019, June 30, 2019 and September 30, 2018


 were 27.3%, 27.0%, and 28.4% respectively, and for the six months ended September 30, 2019 and 2018 were 27.2% and 27.6%, respectively.

 

LEGG MASON, INC. AND SUBSIDIARIES


SUPPLEMENTAL DATA


 RECONCILIATION OF GAAP BASIS OPERATING MARGIN TO ADJUSTED OPERATING MARGIN (1)


(Amounts in thousands)


(Unaudited)





















Quarters Ended



Six Months Ended





















September


June


September



September


September






2019


2019


2018



2019


2018

















Operating Revenues, GAAP basis

$            743,264


$            705,360


$            758,427



$        1,448,624


$        1,506,332


















Plus (less):














Pass-through performance fees

(21,914)


(1,030)


(24,006)



(22,944)


(36,626)




Operating revenues eliminated upon















consolidation of investment vehicles

156


125


103



281


306




Distribution and servicing expense excluding















consolidated investment vehicles

(104,199)


(103,887)


(114,516)



(208,086)


(231,074)

















Adjusted Operating Revenues

$            617,307


$            600,568


$            620,008



$        1,217,875


$        1,238,938
































Operating Income, GAAP basis

$            124,977


$              83,935


$            135,728



$            208,912


$            261,404


















Plus (less):














Restructuring costs:















Strategic restructuring and other corporate initiatives

19,666


32,898


5,647



52,564


8,422





Affiliate charges

237


1,203




1,440





Amortization of intangible assets

5,442


5,457


6,102



10,899


12,282




Gains (losses) on deferred compensation















and seed investments, net

2,910


7,014


3,964



9,924


5,236




Acquisition and transition-related costs






1,468




Contingent consideration fair value adjustments


(1,165)


145



(1,165)


571




Charges related to significant regulatory matters



151




4,151




Operating loss of consolidated investment














vehicles, net

1,298


259


372



1,557


988

















Adjusted Operating Income

$            154,530


$            129,601


$            152,109



$            284,131


$            294,522

















Operating Margin, GAAP basis

16.8

%

11.9

%

17.9

%


14.4

%

17.4

%

Adjusted Operating Margin

25.0


21.6


24.5



23.3


23.8

















(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





2019


2019


2018


2019


2018














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

$                  229,303


$             (187,577)


$                  289,568


$              41,726


$            187,398















Plus (less):












Interest expense, net of accretion and amortization













of debt discounts and premiums

26,874


28,375


29,341


55,249


58,697



Current tax expense (benefit)

6,927


(4,246)


9,975


2,681


18,853



Net change in assets and liabilities

(111,207)


303,077


(69,426)


191,870


145,590



Net change in assets and liabilities













of consolidated investment vehicles

8,061


(13,012)


(84,704)


(4,951)


(70,124)



Net income attributable to noncontrolling interests

(9,448)


(16,219)


(8,270)


(25,667)


(20,545)



Net gains (losses) and earnings on investments

2,329


6,748


8,336


9,077


15,128



Net gains (losses) on consolidated investment vehicles

4,529


9,561


(3,998)


14,090


(415)



Other

(101)


(343)


153


(444)


(221)














Adjusted EBITDA

$                  157,267


$               126,364


$                  170,975


$            283,631


$            334,361



























(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 2019


June 2019


March 2019


December 2018


September 2018






Equity

$                         203.3


$                         205.6


$                         202.0


$                         181.0


$                         214.5






Fixed Income

442.7


438.0


419.6


406.6


411.0






Alternative

72.6


70.1


68.6


66.3


67.4







Long-Term Assets

718.6


713.7


690.2


653.9


692.9






Liquidity

63.2


66.5


67.8


73.3


62.5







Total

$                         781.8


$                         780.2


$                         758.0


$                         727.2


$                         755.4
























Quarters Ended


Six Months Ended

By asset class (average):

September 2019


June 2019


March 2019


December 2018


September 2018


September 2019


September 2018


Equity

$                         204.2


$                         202.7


$                         195.4


$                         198.2


$                         212.2


$                         203.2


$                         208.9


Fixed Income

440.9


427.0


413.7


407.4


411.4


433.3


414.3


Alternative

71.5


69.3


67.0


66.8


66.4


70.5


66.2



Long-Term Assets

716.6


699.0


676.1


672.4


690.0


707.0


689.4


Liquidity

63.2


66.9


72.6


66.9


60.2


64.8


61.3



Total

$                         779.8


$                         765.9


$                         748.7


$                         739.3


$                         750.2


$                         771.8


$                         750.7

































Component Changes in Assets Under Management














Quarters Ended


Six Months Ended




September 2019


June 2019


March 2019


December 2018


September 2018


September 2019


September 2018

Beginning of period

$                         780.2


$                         758.0


$                         727.2


$                         755.4


$                         744.6


$                         758.0


$                         754.1

Net client cash flows:














Equity

(2.1)


(3.6)


(1.0)


(3.3)


(1.1)


(5.7)


(3.3)

Fixed Income

(0.5)


3.9


0.1


(5.1)


(0.5)


3.4


0.8

Alternative

2.4


0.8


0.9


(0.1)


0.6


3.2


0.6

Long-Term flows

(0.2)


1.1



(8.5)


(1.0)


0.9


(1.9)

Liquidity

(3.5)


(1.6)


(8.1)


10.5


3.0


(5.1)


Total net client cash flows

(3.7)


(0.5)


(8.1)


2.0


2.0


(4.2)


(1.9)

Realizations(1)

(0.2)


(0.4)


(0.3)


(0.2)


(0.2)


(0.6)


(0.5)

Market performance and other

8.7


21.9


39.1


(30.0)


11.0


30.6


12.2

Impact of foreign exchange

(3.2)


0.6


0.1



(2.0)


(2.6)


(8.5)

Acquisition


0.6





0.6


End of period

$                         781.8


$                         780.2


$                         758.0


$                         727.2


$                         755.4


$                         781.8


$                         755.4

















(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) 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 performance measures for "Adjusted Net Income", "Adjusted Earnings per Diluted Share" ("Adjusted EPS"), and "Adjusted Operating Margin", along with a liquidity measure for "Adjusted EBITDA", each of which are based on methodologies other than generally accepted accounting principles ("non-GAAP").  Effective with the quarter ended June 30, 2019, we began disclosing Adjusted Operating Margin, which revises our prior disclosure of Operating Margin, as Adjusted to include adjustments for restructuring costs and acquisition expenses and transition-related costs for integration activities, each of which is further described below. 

Our management uses the performance measures as benchmarks to evaluate and compare our period-to-period operating performance.  We believe that these performance measures provide useful information about the operating results of our core asset management business and facilitate comparison of our results to other asset management firms and period-to-period results.  We are also providing a non-GAAP liquidity measure for Adjusted EBITDA, which our management uses as a benchmark in evaluating and comparing our period-to-period liquidity.  We believe that this measure is useful to investors as it provides additional information with regard to our ability to meet working capital requirements, service our debt, and return capital to our stockholders.

Adjusted Net Income and Adjusted Earnings per Diluted Share
Adjusted Net Income and Adjusted EPS only include adjustments for certain items that relate to operating performance, and therefore, are most readily reconcilable to Net Income (Loss) Attributable to Legg Mason, Inc. and Net Income (Loss) per Diluted Share Attributable to Legg Mason, Inc. Shareholders, determined under generally accepted accounting principles ("GAAP"), respectively.

We define Adjusted Net Income as Net Income (Loss) Attributable to Legg Mason, Inc. adjusted to exclude the following:

  • Restructuring costs, including:
    • Corporate charges related to the ongoing strategic restructuring and other cost saving and business initiatives, including severance, lease and other costs; and
    • Affiliate charges, including affiliate restructuring and severance costs, and certain one-time charges arising from the issuance of management equity plan awards
  • Amortization of intangible assets
  • Gains and losses on seed and other investments that are not offset by compensation or hedges
  • Acquisition expenses and transition-related costs for integration activities, including certain related professional fees and costs associated with the transition and acquisition of acquired businesses
  • Impairments of intangible assets
  • Contingent consideration fair value adjustments
  • Charges (credits) related to significant litigation or regulatory matters
  • Income tax expense (benefit) adjustments to provide an effective non-GAAP tax rate commensurate with our expected annual pre-tax Adjusted Net Income, including:
    • The impact on income tax expense (benefit) of the above non-GAAP adjustments; and
    • Other tax items, including deferred tax asset and liability adjustments associated with statutory rate changes, the impact of other aspects of recent U.S. tax reform, and shortfalls (and windfalls) associated with stock-based compensation

Adjustments for restructuring costs, gains and losses on seed and other investments that are not offset by compensation or hedges, and the income tax expense (benefit) items described above are included in the calculation because these items are not reflective of our core asset management business of providing investment management and related products and services.  We adjust for acquisition-related items, including amortization of intangible assets, impairments of intangible assets, and contingent consideration fair value adjustments, to make it easier to identify trends affecting our underlying business that are not related to acquisitions to facilitate comparison of our operating results with the results of other asset management firms that have not engaged in significant acquisitions.  We adjust for charges (credits) related to significant litigation or regulatory matters, net of any insurance proceeds and revenue share adjustments, because these matters do not reflect the underlying operations and performance of our business.

In calculating Adjusted EPS, we adjust Net Income (Loss) per Diluted Share Attributable to Legg Mason, Inc. Shareholders determined under GAAP for the per share impact of each adjustment (net of taxes) included in the calculation of Adjusted Net Income.

These measures are provided in addition to Net Income (Loss) Attributable to Legg Mason, Inc., and Net Income (Loss) per Diluted Share Attributable to Legg Mason, Inc. Shareholders, and are not substitutes for these measures. These non-GAAP measures should not be considered in isolation and may not be comparable to non-GAAP performance measures, including measures of adjusted earnings or adjusted income, and adjusted earnings per share, of other companies, respectively. Further, Adjusted Net Income and Adjusted EPS are not liquidity measures and should not be used in place of cash flow measures determined under GAAP.

Adjusted Operating Margin
We calculate Adjusted Operating Margin, by dividing "Adjusted Operating Income", by "Adjusted Operating Revenues", each of which are further discussed below.  These measures only include adjustments for certain items that relate to operating performance, and therefore, are most readily reconcilable to Operating Margin, Operating Income and Total Operating Revenues determined under GAAP, respectively.

We define Adjusted Operating Revenues as Operating Revenues, adjusted to:

  • Include:
    • Net investment advisory fees eliminated upon consolidation of investment vehicles
  • Exclude:
    • 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
    • Performance fees that are passed through as compensation expense or net income (loss) attributable to noncontrolling interests

We define Adjusted Operating Income, as Operating Income, adjusted to exclude the following:

  • Restructuring costs, including:
    • Corporate charges related to the ongoing strategic restructuring and other cost saving and business initiatives, including severance, lease and other costs; and
    • Affiliate charges, including affiliate restructuring and severance costs, and certain one-time charges arising from the issuance of management equity plan awards
  • Amortization of intangible assets
  • The impact on compensation expense of:
    • Gains and losses on investments made to fund deferred compensation plans
    • Gains and losses on seed capital investments by our affiliates under revenue sharing arrangements
  • Acquisition expenses and transition-related costs for integration activities, including certain related professional fees and costs associated with the transition and acquisition of acquired businesses
  • Impairments of intangible assets
  • Contingent consideration fair value adjustments
  • Charges (credits) related to significant regulatory matters
  • Income (loss) of consolidated investment vehicles

In calculating Adjusted Operating Income, we adjust for restructuring costs because these items are not reflective of our core asset management business of providing investment management and related products and services.  We adjust for the impact on compensation expense of gains and losses on investments made to fund deferred compensation plans and on seed capital investments by our affiliates under revenue sharing arrangements because they are offset by an equal amount in Non-operating income (expense), net, and thus have no impact on Net Income Attributable to Legg Mason, Inc.  We adjust for acquisition-related items, including amortization of intangible assets, impairments of intangible assets, and contingent consideration fair value adjustments, to make it easier to identify trends affecting our underlying business that are not related to acquisitions to facilitate comparison of our operating results with the results of other asset management firms that have not engaged in significant acquisitions.  We adjust for charges (credits) related to significant litigation or regulatory matters, net of any insurance proceeds and revenue share adjustments, because these matters do not reflect the underlying operations and performance of our business.  We adjust for income (loss) of consolidated investment vehicles because the consolidation of these investment vehicles does not have an impact on Net Income (Loss) Attributable to Legg Mason, Inc.

These measures are provided in addition to and are not substitutes for our Operating Margin, Operating Revenues, and Operating Income calculated under GAAP.  These non-GAAP measures should not be considered in isolation and may not be comparable to non-GAAP performance measures, including measures of adjusted margins, adjusted operating revenues, and adjusted operating income, of other companies.  Further, Adjusted Operating Margin, Adjusted Operating Revenues and Adjusted Operating Income are not liquidity measures and should not be used in place of cash flow measures determined under GAAP.

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)
  • Net change in assets and liabilities, which aligns with the Consolidated Statements of Cash Flows
  • Net (income) loss attributable to noncontrolling interests
  • Net gains (losses) and earnings on investments
  • Net gains (losses) on consolidated investment vehicles
  • Other

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.

This liquidity 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 is provided as a supplement to, and not in replacement of, GAAP measures.

 

Cision View original content:http://www.prnewswire.com/news-releases/legg-mason-reports-results-for-second-fiscal-quarter-300948184.html

SOURCE Legg Mason, Inc.

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