LEGG MASON, INC. BALTIMORE, July 31, 2015 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the first fiscal quarter ended June 30, 2015. The Company reported net income(1) of $94.5 million, or $0.84 per diluted share, as compared to $83.0 million, or $0.73 per diluted share, in the previous quarter, and net income of $72.2 million, or $0.61 per diluted share, in the first quarter of fiscal 2015. Included in this quarter's results was a non-cash tax benefit of $18.0 million, or $0.16 per diluted share, resulting from an increase in the value of our deferred tax assets, primarily due to changes in the New York City tax code. Adjusted income(2) for the first fiscal quarter was $129.3 million, or $1.14 per diluted share, as compared to $117.9 million, or $1.03 per diluted share, in the previous quarter and $107.2 million, or $0.91 per diluted share, in the first quarter of fiscal 2015. For the current quarter, operating revenues were $708.6 million, up 1% from $702.3 million in the prior quarter, and up 2% compared to $693.9 million in the first quarter of fiscal 2015. Operating expenses were $584.1 million, up 2% from $573.4 million in the prior quarter, and up 2% compared to $574.3 million in the first quarter of fiscal 2015.
Assets Under Management ("AUM") were $699.2 billion as of June 30, 2015, down slightly from $702.7 billion as of March 31, 2015, and down 1% from $704.3 billion as of June 30, 2014.
Legg Mason also announced today that its Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.20 per share.
(Amounts in millions, except per share amounts)
----------------------------------------------
Quarters Ended
--------------
Jun Mar % Jun %
2015 2015 Change 2014 Change
---- ---- ------ ---- ------
Operating Revenues $708.6 $702.3 1% $693.9 2%
Operating Expenses 584.1 573.4 2% 574.3 2%
Operating Income 124.5 128.9 (3)% 119.6 4%
Net Income(1) 94.5 83.0 14% 72.2 31%
Adjusted Income(2) 129.3 117.9 10% 107.2 21%
Net Income Per Share - Diluted(1) 0.84 0.73 15% 0.61 38%
Adjusted Income Per Share - Diluted(2) 1.14 1.03 11% 0.91 25%
(1) Net Income Attributable to Legg Mason, Inc.
(2) See "Use of Supplemental Non-GAAP Financial Information".
Comments on the First Quarter of Fiscal Year 2016 Results
Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "Despite industry headwinds, Legg Mason is pleased to have recorded a fifth straight quarter of net long-term inflows. Our unfunded wins and pipeline are also strong, underscoring the diversification of our business mix and the ability to accelerate the introduction of new and relevant products into the marketplace. Global Distribution delivered solid performance for the period, reporting positive net flows for the seventh straight quarter. In addition, Legg Mason filed an application with the SEC to offer index-based ETF vehicles that complement our investment affiliates' expertise. Finally, earlier this week we announced the acquisition of RARE Infrastructure, Ltd., expanding our capabilities in a growing asset class that meets important client needs, including growth, income and capital preservation.
"We are executing against a thoughtful set of strategic growth priorities that continue to position our affiliate portfolio for success and drive operating performance. In turn, we are poised to expand our market opportunity by helping a growing number of investors navigate increasingly volatile and unpredictable global markets. This, combined with an industry leading capital deployment strategy, has allowed us to invest in growth initiatives while also increasing our dividend and repurchasing shares. We are confident that our shareholders can benefit as we further leverage our global scale in the coming years."
Assets Under Management of $699 Billion
AUM decreased to $699.2 billion at June 30, 2015 compared with $702.7 billion at March 31, 2015, driven by $7.1 billion in negative market performance. This was partially offset by long-term net inflows of $1.3 billion as well as $2.3 billion of liquidity inflows. AUM was down 1% from $704.3 billion at June 30, 2014.
-- Long-term net inflows of $1.3 billion included fixed income inflows of
$2.6 billion, which were partially offset by equity outflows of $1.3
billion for the quarter ended June 30, 2015.
-- At June 30, 2015, fixed income represented 53% of AUM, while equity
represented 28%, and liquidity represented 19% of AUM.
-- By geography, 64% of AUM was from clients domiciled in the United States
and 36% from non-US domiciled clients.
-- Average AUM during the quarter was $703.9 billion compared to $707.1
billion in the prior quarter and $691.3 billion in the first quarter of
fiscal year 2015. Average long-term AUM was $575.6 billion compared to
$571.5 billion in the prior quarter and $552.7 billion in the first
quarter of fiscal year 2015.
Comparison to the Fourth Quarter of Fiscal Year 2015
Net income was $94.5 million, or $0.84 per diluted share, as compared with net income of $83.0 million, or $0.73 per diluted share, in the fourth quarter of fiscal year 2015. Included in this quarter's results was a tax benefit of $18.0 million, or $0.16 per diluted share.
-- Operating revenues of $708.6 million were up 1% from $702.3 million in
the prior quarter, primarily due to one additional day in the current
quarter and an increase in average long-term AUM.
-- Operating expenses of $584.1 million were up 2% from $573.4 million in
the prior quarter as a result of an increase in seasonal compensation
costs. The current quarter expenses included a $1.2 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
other non-operating income, compared to a gain of $3.1 million in the
prior quarter.
-- Other non-operating expense was $4.5 million compared to $2.1 million in
the prior quarter. Gains on corporate investments, not offset in
compensation, were $4.5 million compared with gains of $6.1 million in
the fourth fiscal quarter. Both quarters included gains on funded
deferred compensation and seed investments, as described above. In
addition, the current quarter included $0.4 million in gains associated
with consolidated investment vehicles compared to $1.2 million of gains
in the prior quarter. The consolidation of investment vehicles has no
impact on net income as the effects of consolidation are fully
attributable to noncontrolling interests.
-- Operating margin was 17.6%, as compared to 18.4% in the prior quarter.
Operating margin, as adjusted(2), was 22.6%, as compared to 23.8% in the
prior quarter.
-- Adjusted income was $129.3 million, or $1.14 per diluted share, as
compared to adjusted income of $117.9 million, or $1.03 per diluted
share, in the prior quarter.
Comparison to the First Quarter of Fiscal Year 2015
Net income was $94.5 million, or $0.84 per diluted share, as compared with $72.2 million, or $0.61 per diluted share, in the first quarter of fiscal year 2015. Included in this quarter's results was a tax benefit of $18.0 million, or $0.16 per diluted share.
-- Operating revenues of $708.6 million were up 2% compared with $693.9
million in the first quarter of fiscal year 2015, reflecting higher
advisory fee revenues due to a 4% increase in average long-term AUM and
an increase in performance fees.
-- Operating expenses of $584.1 million were up 2% compared with $574.3
million in the first quarter of fiscal year 2015 primarily due to
increased seasonal compensation costs, the net impact of acquisitions
and dispositions, and investments in our retail global distribution
business. The prior year's first quarter included $14.4 million in costs
related to the QS Investors integration and various other corporate
initiatives. In addition, the current quarter expenses included a gain
of $1.2 million in the market value of deferred compensation and seed
investments, which are recorded as an increase in compensation and
benefits with an offset in other non-operating income, compared to a
gain of $4.4 million in the prior year quarter. In addition, the current
quarter included higher revenue share compensation related to higher
revenues.
-- Other non-operating expense was $4.5 million, as compared to $5.3
million in the first quarter of fiscal year 2015. Gains on corporate
investments, not offset in compensation, were $4.5 million compared with
gains on corporate investments of $5.3 million in the first quarter of
fiscal year 2015. Both quarters included gains on funded deferred
compensation and seed investments, as described above. In addition, the
current quarter also included $0.4 million in gains associated with
consolidated investment vehicles, as compared to $1.5 million in gains
in the prior year quarter. The consolidation of investment vehicles has
no impact on net income as the effects of consolidation are fully
attributable to noncontrolling interests.
-- Operating margin was 17.6%, as compared to 17.2% in the first quarter of
fiscal year 2015. Operating margin, as adjusted, was 22.6%, as compared
to 22.9% in the first quarter of fiscal year 2015.
-- Adjusted income was $129.3 million, or $1.14 per diluted share, as
compared to adjusted income of $107.2 million, or $0.91 per diluted
share, in the first quarter of fiscal year 2015.
Quarterly Business Developments and Recent Announcements
-- Western Asset and Brandywine Global won 2015 Asset Management Awards
from Asian Investor. Western Asset won the "Best Institutional
Product/Strategy" award for Macro Opportunities and Brandywine Global
won the "Global Fixed Income, Unhedged" award for the Global
Opportunistic Fixed Income Strategy.
-- Legg Mason Australia (now Martin Currie Australia) won the Money
Management/Lonsec Fund Manager of the Year Award.
-- Western Asset has been named "Manager of the Year 2014" by the Korea
Investment Corporation (KIC) in the Fixed Income category.
-- In June, Legg Mason filed an application for exemptive relief to launch
index-based ETFs that is subject to SEC review and approval.
-- Legg Mason announced on July 28(th), the agreement to acquire RARE
Infrastructure, Ltd., a pioneer in global listed infrastructure
investing headquartered in Sydney, Australia. The transaction is
expected to be accretive to earnings in the first year after closing,
and is scheduled to close during the fourth quarter of calendar year
2015.
Quarterly Performance
At June 30, 2015:
1-Year 3-Year 5-Year 10-Year
% of Strategy AUM
beating Benchmark(3) 68% 83% 86% 89%
% of Long-Term US Fund
Assets Beating Lipper
Category Average(3)
Equity 36% 46% 57% 58%
Fixed Income 72% 78% 85% 87%
Total US Fund Assets 50% 59% 68% 68%
Of Legg Mason's long-term U.S. mutual fund assets, 47% were in funds rated 4 or 5 stars by Morningstar.
Balance Sheet
At June 30, 2015, Legg Mason's cash position was $530 million. Total debt was $1.1 billion and stockholders' equity was $4.5 billion. The ratio of total debt to total capital was 19%. In the first fiscal quarter, the Company completed additional open market purchases of 1.3 million shares and retired 0.4 million shares under net share settlements of annual deferred compensation award vesting. In addition, 1.0 million shares of restricted stock units were granted as part of annual incentive compensation. The net impact of the share activity discussed above on weighted average shares was a reduction of 364 thousand during the quarter.
The Board of Directors has declared a quarterly cash dividend on the Company's common stock in the amount of $0.20 per share. The dividend is payable October 26, 2015 to shareholders of record at the close of business on October 8, 2015.
Conference Call to Discuss Results
A conference call to discuss the Company's results, hosted by Mr. Sullivan, will be held at 8:00 am 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 39938363, at least 10 minutes prior to the scheduled start to ensure connection.
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), enter pass code 39938363# when prompted. Please note that the replay will be available beginning at 10:30 a.m. EDT on Friday, July 31, 2015, and ending at 11:59 p.m. EDT on Friday, August 14, 2015.
About Legg Mason
Legg Mason is a global asset management firm, with $699 billion in AUM as of June 30, 2015. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).
This release contains forward-looking statements subject to risks, uncertainties and other factors that may cause actual results to differ materially. For a discussion of these risks and uncertainties, see "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Legg Mason's Annual Report on Form 10-K for the fiscal year ended March 31, 2015 and in the Company's quarterly reports on Form 10-Q.
(3) See "Supplemental Data Regarding Quarterly Performance".
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 ninety percent of total AUM is included in strategy AUM as of June 30, 2015, 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 (including fund-of-hedge funds) which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. 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 table is provided solely for use in connection with this table, and is not directed toward existing or potential clients of Legg Mason.
Long-term US Fund Assets Beating Lipper Category Average
Long-term US fund assets include open-end, closed-end, and variable annuity funds. These performance comparisons do not reflect the actual performance of any specific fund; individual fund performance may differ. Past performance is not a guarantee of future results. Source: Lipper Inc.
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Quarters Ended
--------------
June March June
2015 2015 2014
---- ---- ----
Operating Revenues:
Investment advisory fees:
Separate accounts $208,104 $204,525 $204,770
Funds 384,345 385,040 381,627
Performance fees 18,653 24,089 16,303
Distribution and service fees 96,860 86,938 89,716
Other 688 1,754 1,465
Total operating revenues 708,650 702,346 693,881
------- ------- -------
Operating Expenses:
Compensation and benefits 315,052 303,640 305,506
Distribution and servicing 149,288 143,488 148,708
Communications and technology 48,677 48,755 41,950
Occupancy 25,987 26,829 26,957
Amortization of intangible assets 657 597 895
Other 44,446 50,087 50,319
Total operating expenses 584,107 573,396 574,335
------- ------- -------
Operating Income 124,543 128,950 119,546
------- ------- -------
Other Non-Operating Income (Expense):
Interest income 1,317 1,555 2,525
Interest expense (11,949) (14,058) (17,058)
Other income, net 5,711 9,186 6,248
Other non-operating income of
consolidated investment
vehicles, net 407 1,202 3,007
Total other non-operating income (expense) (4,514) (2,115) (5,278)
------ ------ ------
Income Before Income Tax Provision 120,029 126,835 114,268
Income tax provision 25,090 42,807 40,656
------
Net Income 94,939 84,028 73,612
Less: Net income attributable
to noncontrolling interests 391 1,069 1,424
--- ----- -----
Net Income Attributable to Legg Mason, Inc. $94,548 $82,959 $72,188
======= ======= =======
Net Income per Share Attributable to
Legg Mason, Inc. Shareholders:
Basic $0.85 $0.73 $0.62
=====
Diluted $0.84 $0.73 $0.61
=====
Weighted Average Number of Shares
Outstanding: (1)
Basic 111,691 112,947 117,126
Diluted 112,971 114,331 118,219
(1) Includes weighted-average unvested restricted shares deemed to be participating securities of 2,737, 3,048, and 3,007
for the quarters ended June 2015, March 2015, and June 2014, respectively.
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
Quarters Ended
--------------
June 2015 March 2015 June 2014
--------- ---------- ---------
Balance Before Consolidation of Consolidated Investment Vehicles Consolidated Totals Balance Before Consolidation of Consolidated Investment Vehicles Consolidated Totals Balance Before Consolidation of
Consolidated Investment Vehicles Consolidated Investment Vehicles Consolidated Investment Vehicles Consolidated Investment Vehicles Consolidated Totals
-------------------------------- -------------------------------- ------------------- -------------------------------- -------------------------------- ------------------- -------------------------------- -------------------------------- -------------------
Total operating revenues $708,735 $(85) $708,650 $702,518 $(172) $702,346 $694,064 $(183) $693,881
Total operating expenses 584,087 20 584,107 573,334 62 573,396 574,315 20 574,335
------- --- ------- ------- --- ------- ------- --- -------
Operating Income (Loss) 124,648 (105) 124,543 129,184 (234) 128,950 119,749 (203) 119,546
Other non-operating income (expense) (4,879) 365 (4,514) (3,270) 1,155 (2,115) (6,816) 1,538 (5,278)
------ --- ------ ------ ----- ------ ------ ----- ------
Income Before Income Tax Provision 119,769 260 120,029 125,914 921 126,835 112,933 1,335 114,268
Income tax provision 25,090 - 25,090 42,807 - 42,807 40,656 - 40,656
------ --- ------ ------ --- ------ ------ --- ------
Net Income 94,679 260 94,939 83,107 921 84,028 72,277 1,335 73,612
Less: Net income attributable
to noncontrolling interests 131 260 391 148 921 1,069 89 1,335 1,424
--- --- --- --- --- ----- --- ----- -----
Net Income Attributable to Legg Mason, Inc. $94,548 $ - $94,548 $82,959 $ - $82,959 $72,188 $ - $72,188
======= ===================== ======= ======= ===================== ======= ======= ===================== =======
LEGG MASON, INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
RECONCILIATION OF NET INCOME ATTRIBUTABLE TO LEGG MASON, INC.
TO ADJUSTED INCOME (1)
(Amounts in thousands, except per share amounts)
(Unaudited)
Quarters Ended
--------------
June March June
2015 2015 2014
---- ---- ----
Net Income Attributable to Legg Mason,
Inc. $94,548 $82,959 $72,188
Plus:
Amortization
of
intangible
assets 657 597 895
Tax
amortization
benefit on
intangible
assets 34,121 34,315 34,144
Adjusted Income $129,326 $117,871 $107,227
======== ======== ========
Net Income per Diluted Share
Attributable
to Legg Mason, Inc. Shareholders $0.84 $0.73 $0.61
Plus: (2)
Amortization
of
intangible
assets - - -
Tax
amortization
benefit on
intangible
assets 0.30 0.30 0.30
Adjusted Income per Diluted Share $1.14 $1.03 $0.91
===== ===== =====
(1) See explanations for "Use of
Supplemental Non-GAAP Financial
Information".
(2) In calculating Adjusted Income per
Diluted Share, we include the
weighted-average of unvested
restricted shares deemed to be
participating securities and the
earnings allocated to these
participating securities. For
purposes of this non-GAAP
performance measure, earnings are
allocated in the same ratio to
participating securities and
common shares. As a result, the
inclusion of these participating
securities and the earnings
allocated thereto do not impact
the per share amounts of the
adjustments made to Net Income per
Diluted Share Attributable to Legg
Mason, Inc. Shareholders.
LEGG MASON, INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
RECONCILIATION OF OPERATING MARGIN, AS ADJUSTED (1)
(Amounts in thousands)
(Unaudited)
Quarters Ended
--------------
June March June
2015 2015 2014
---- ---- ----
Operating Revenues, GAAP basis $708,650 $702,346 $693,881
Plus (less):
Operating
revenues
eliminated upon
consolidation of investment
vehicles 85 172 183
Distribution and
servicing
expense
excluding
consolidated investment vehicles (149,280) (143,474) (148,701)
-------- -------- --------
Operating Revenues, as Adjusted $559,455 $559,044 $545,363
======== ======== ========
Operating Income, GAAP basis $124,543 $128,950 $119,546
Plus:
Gains on
deferred
compensation
and seed investments 1,210 3,117 4,449
Amortization of
intangible
assets 657 597 895
Operating income of
consolidated
investment
vehicles, net 105 234 203
--- --- ---
Operating Income, as Adjusted $126,515 $132,898 $125,093
======== ======== ========
Operating Margin, GAAP basis 17.6% 18.4% 17.2%
Operating Margin, as Adjusted 22.6 23.8 22.9
(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
--------------
June 2015 March 2015 December 2014 September 2014 June 2014
--------- ---------- ------------- -------------- ---------
By asset class:
Equity $197.3 $199.4 $198.7 $193.6 $196.0
Fixed Income 372.2 376.1 367.4 360.4 366.7
Long-Term Assets 569.5 575.5 566.1 554.0 562.7
Liquidity 129.7 127.2 143.0 153.8 141.6
Total $699.2 $702.7 $709.1 $707.8 $704.3
====== ====== ====== ====== ======
Quarters Ended
--------------
By asset class (average): June 2015 March 2015 December 2014 September 2014 June 2014
--------- ---------- ------------- -------------- ---------
Equity $199.8 $198.3 $200.0 $194.6 $189.3
Fixed Income 375.8 373.2 365.8 364.1 363.4
Long-Term Assets 575.6 571.5 565.8 558.7 552.7
Liquidity 128.3 135.6 145.1 145.4 138.6
Total $703.9 $707.1 $710.9 $704.1 $691.3
====== ====== ====== ====== ======
Component Changes in Assets Under Management
Quarters Ended
--------------
June 2015 March 2015 December 2014 September 2014 June 2014
--------- ---------- ------------- -------------- ---------
Beginning of period $702.7 $709.1 $707.8 $704.3 $701.8
Net client cash flows:
Equity (1.3) (1.4) (1.1) 1.6 (1.8)
Fixed Income 2.6 7.6 9.9 (0.9) 2.5
Long-Term flows 1.3 6.2 8.8 0.7 0.7
Liquidity 2.3 (15.3) (10.6) 12.7 (8.9)
Total net client cash flows 3.6 (9.1) (1.8) 13.4 (8.2)
Market performance and other (1) (7.1) 2.7 3.1 (9.9) 5.7
Acquisition - - - - 5.0
End of period $699.2 $702.7 $709.1 $707.8 $704.3
====== ====== ====== ====== ======
Note: During the quarter ended June 2014, certain client assets previously reported as Assets Under Management (AUM) have been
reclassified as Assets Under Advisement (AUA). As a result of this change, $12.8 billion has been deducted from AUM, with the
deduction reflected in market performance and other.
(1) Includes the impact of foreign exchange movements of $1.8 billion, $(6.3) billion, $(6.4) billion, $(7.4) billion, and $1.6 billion
for the quarters ended June 2015, March
2015, December 2014, September 2014, and June 2014, respectively
Use of Supplemental Non-GAAP Financial Information
As supplemental information, we are providing performance measures that are based on methodologies other than generally accepted accounting principles ("non-GAAP") for "Adjusted Income" and "Operating Margin, as Adjusted" that management uses as benchmarks in evaluating and comparing our period-to-period operating performance.
Adjusted Income
We define "Adjusted Income" as Net Income Attributable to Legg Mason, Inc., plus amortization and deferred taxes related to intangible assets and goodwill, imputed interest and tax benefits on contingent convertible debt less deferred income taxes on goodwill and indefinite-life intangible asset impairment, if any. We also adjust for non-core items that are not reflective of our economic performance, such as intangible asset impairments, the impact of fair value adjustments of contingent consideration liabilities, if any, the impact of tax rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets, and loss on extinguishment of contingent convertible debt.
We believe that Adjusted Income provides a useful representation of our operating performance adjusted for non-cash acquisition related items and other items that facilitate comparison of our results to the results of other asset management firms that have not issued/extinguished contingent convertible debt or made significant acquisitions. We also believe that Adjusted Income is an important metric in estimating the value of an asset management business.
Adjusted Income only considers adjustments for certain items that relate to operating performance and comparability, and therefore, is most readily reconcilable to Net Income Attributable to Legg Mason, Inc. determined under GAAP. This measure is provided in addition to Net Income Attributable to Legg Mason, Inc., but is not a substitute for Net Income Attributable to Legg Mason, Inc. and may not be comparable to non-GAAP performance measures, including measures of adjusted earnings or adjusted income, of other companies. Further, Adjusted Income is not a liquidity measure and should not be used in place of cash flow measures determined under GAAP. Fair value adjustments of contingent consideration liabilities may or may not provide a tax benefit, depending on the tax attributes of the acquisition transaction. We consider Adjusted Income to be useful to investors because it is an important metric in measuring the economic performance of asset management companies, as an indicator of value, and because it facilitates comparison of our operating results with the results of other asset management firms that have not issued/extinguished contingent convertible debt or made significant acquisitions.
In calculating Adjusted Income, we adjust for the impact of the amortization of management contract assets and impairment of indefinite-life intangible assets, and add (subtract) the impact of fair value adjustments of contingent consideration liabilities, if any, all of which arise from acquisitions, to Net Income Attributable to Legg Mason, Inc. to reflect the fact that these items distort comparisons of our operating results with the results of other asset management firms that have not engaged in significant acquisitions. Deferred taxes on indefinite-life intangible assets and goodwill include actual tax benefits from amortization deductions that are not realized under GAAP absent an impairment charge or the disposition of the related business. Because we fully expect to realize the economic benefit of the current period tax amortization, we add this benefit to Net Income Attributable to Legg Mason, Inc. in the calculation of Adjusted Income. However, because of our net operating loss carry-forward, we will receive the benefit of the current tax amortization over time. Conversely, we subtract the non-cash income tax benefits on goodwill and indefinite-life intangible asset impairment charges and U.K. tax rate adjustments on excess book basis on certain acquired indefinite-life intangible assets, if applicable, that have been recognized under GAAP. We also add back, if applicable, non-cash imputed interest and the extinguishment loss on contingent convertible debt adjusted for amounts allocated to the conversion feature, as well as adding the actual tax benefits on the imputed interest that are not realized under GAAP. These adjustments reflect that these items distort comparisons of Legg Mason's operating results to prior periods and the results of other asset management firms that have not engaged in significant acquisitions, including any related impairments, or issued/extinguished contingent convertible debt.
Should a disposition, impairment charge or other non-core item occur, its impact on Adjusted Income may distort actual changes in the operating performance or value of our firm. Accordingly, we monitor these items and their related impact, including taxes, on Adjusted Income to ensure that appropriate adjustments and explanations accompany such disclosures.
Although depreciation and amortization of fixed assets are non-cash expenses, we do not add these charges in calculating Adjusted Income because these charges are related to assets that will ultimately require replacement.
Operating Margin, as Adjusted
We calculate "Operating Margin, as Adjusted," by dividing (i) Operating Income, adjusted to exclude the impact on compensation expense of gains or losses on investments made to fund deferred compensation plans, the impact on compensation expense of gains or losses on seed capital investments by our affiliates under revenue sharing agreements, amortization related to intangible assets, income (loss) of consolidated investment vehicles, the impact of fair value adjustments of contingent consideration liabilities, if any, and impairment charges by (ii) our operating revenues, adjusted to add back net investment advisory fees eliminated upon consolidation of investment vehicles, less distribution and servicing expenses which we use as an approximate measure of revenues that are passed through to third parties, which we refer to as "Operating Revenues, as Adjusted". The compensation items are removed from Operating Income in the calculation because they are offset by an equal amount in Other non-operating income (expense), and thus have no impact on Net Income 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 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. Operating Revenues, as Adjusted also includes our advisory revenues we receive from consolidated investment vehicles that are eliminated in consolidation under GAAP.
We believe that Operating Margin, as Adjusted, is a useful measure of our performance because it provides a measure of our core business activities. It excludes items that have no impact on Net Income Attributable to Legg Mason, Inc. and indicates what Legg Mason's operating margin would have been without distribution revenues that are passed through to third parties as a direct cost of selling our products, amortization related to intangible assets, changes in the fair value of contingent consideration liabilities, impairment charges, and the impact of the consolidation of certain investment vehicles described above. The consolidation of these investment vehicles does not have an impact on Net Income Attributable to Legg Mason, Inc. This measure is provided in addition to the Company's 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.
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SOURCE Legg Mason, Inc.
