LEGG MASON, INC. BALTIMORE, Oct. 30, 2015 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2015. The Company reported net income(1) of $64.3 million, or $0.58 per diluted share, as compared to $94.5 million, or $0.84 per diluted share, in the previous quarter, and net income of $4.9 million, or $0.04 per diluted share, in the second quarter of fiscal 2015. Included in this quarter's results were losses on corporate investments not offset in compensation, as well as an $11.1 million loss on an Australian dollar hedge related to the RARE Infrastructure acquisition which combined to total $22.6 million, or $0.13 per diluted share. In addition, the current quarter included a tax benefit largely due to reserve adjustments related to the successful conclusion of certain tax examinations of $5.0 million, or $0.05 per diluted share. Included in last quarter's results was a 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. In the prior year's quarter Legg Mason completed a debt refinancing that resulted in a $107.1 million charge, or $0.59 per diluted share. Adjusted income(2) for the second fiscal quarter was $99.1 million, or $0.89 per diluted share, as compared to $129.3 million, or $1.14 per diluted share, in the previous quarter and $40.6 million, or $0.35 per diluted share, in the second quarter of fiscal 2015. For the current quarter, operating revenues were $673.1 million, down 5% from $708.6 million in the prior quarter, and down 4% compared to $703.9 million in the second quarter of fiscal 2015. Operating expenses were $540.1 million, down 8% from $584.1 million in the prior quarter, and down 6% compared to $573.5 million in the second quarter of fiscal 2015.
Assets Under Management ("AUM") were $672.1 billion as of September 30, 2015, down 4% from $699.2 billion as of June 30, 2015, and down 5% from $707.8 billion as of September 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 Six Months Ended
-------------- ----------------
Sep Jun Sep Sep Sep
2015 2015 2014 2015 2014
---- ---- ---- ---- ----
Operating Revenues $673.1 $708.6 $703.9 $1,381.7 $1,397.8
Operating Expenses 540.1 584.1 573.5 1,124.2 1,147.9
Operating Income 133.0 124.5 130.4 257.5 249.9
Net Income(1) 64.3 94.5 4.9 158.9 77.1
Adjusted Income(2) 99.1 129.3 40.6 228.4 147.8
Net Income Per Share - Diluted(1) 0.58 0.84 0.04 1.42 0.66
Adjusted Income Per Share - Diluted(2) 0.89 1.14 0.35 2.03 1.26
(1) Net Income Attributable to Legg Mason, Inc.
(2) See "Use of Supplemental Non-GAAP Financial Information."
Comments on the Second Quarter of Fiscal Year 2016 Results
Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "Legg Mason generated solid operating results for the quarter against a backdrop of market volatility and declines that negatively impacted revenues and non-operating expenses. Legg Mason delivered its sixth straight quarter of long-term inflows driven by QS Investors, Brandywine and Western Asset, and largely from institutional investors. Legg Mason's long-term organic growth rate for the second quarter of fiscal 2016 was 2.2%, underscoring the diversity across our affiliate and product portfolios, by asset class, geography and investor type.
"We continue to execute against a thoughtful set of strategic growth priorities to position our affiliate portfolio for long-term operating success. At the same time, we continue to expand our equity and alternatives offerings through QS Investors, Martin Currie and now RARE Infrastructure, our most recent acquisition. We are well positioned across asset classes to capitalize on opportunities for our clients and we feel especially good about our fixed income positioning, as we manage through an evolving rate environment.
"As we navigate through a volatile market environment, we remain committed to managing the company efficiently and balancing business investments with dividend growth and share repurchases. We are confident that our shareholders will benefit as we execute this plan and further leverage our global scale and diversification in the coming years."
Assets Under Management of $672.1 Billion
AUM decreased 4% to $672.1 billion at September 30, 2015 compared with $699.2 billion at June 30, 2015, driven by $22.6 billion in negative market performance, $4.6 billion in negative foreign exchange and liquidity outflows of $3.0 billion. This was partially offset by long-term net inflows of $3.1 billion. AUM was down 5% from $707.8 billion at September 30, 2014.
-- Long-term net inflows of $3.1 billion included fixed income inflows of
$3.0 billion and equity inflows of $0.1 billion.
-- At September 30, 2015, fixed income represented 55% of AUM, while equity
represented 26%, and liquidity represented 19%.
-- 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 $687.2 billion compared to $703.9
billion in the prior quarter and $704.1 billion in the second quarter of
fiscal year 2015. Average long-term AUM was $560.4 billion compared to
$575.6 billion in the prior quarter and $558.7 billion in the second
quarter of fiscal year 2015.
Comparison to the First Quarter of Fiscal Year 2016
Net income was $64.3 million, or $0.58 per diluted share, as compared with net income of $94.5 million, or $0.84 per diluted share, in the first quarter of fiscal year 2016. Included in this quarter's results were losses on corporate investments not offset in compensation and a loss on an Australian dollar hedge related to the RARE Infrastructure acquisition, which combined to total $22.6 million or $0.13 per diluted share. In addition, the current quarter included a tax benefit largely due to reserve adjustments related to the successful conclusion of certain tax examinations of $5.0 million, or $0.05 per diluted share. Last quarter's results included a tax benefit of $18.0 million, or $0.16 per diluted share.
-- Operating revenues of $673.1 million were down 5% from $708.6 million in
the prior quarter, reflecting a 2% decrease in average AUM, a less
favorable AUM mix and lower performance fees.
-- Operating expenses of $540.1 million were down 8% from $584.1 million in
the prior quarter primarily due to lower revenue share compensation
related to lower revenues. Last quarter's expenses included $11.5
million in higher seasonal compensation costs. The current quarter
expenses included a $5.5 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 other non-operating income,
compared to a gain of $1.2 million in the prior quarter.
-- Other non-operating expense was $42.5 million compared to $4.5 million
in the prior quarter. Other non-operating expenses included an $11.1
million loss on an Australian dollar hedge related to the RARE
Infrastructure acquisition as well as losses on corporate investments,
not offset in compensation of $11.5 million, compared with gains of $4.5
million last quarter. Both quarters included losses and gains on funded
deferred compensation and seed investments, as described above. In
addition, the current quarter included $2.3 million in losses associated
with consolidated investment vehicles compared to $0.4 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 19.8%, as compared to 17.6% in the prior quarter.
Operating margin, as adjusted(2), was 24.0%, as compared to 22.6% in the
prior quarter.
-- Adjusted income was $99.1 million, or $0.89 per diluted share, as
compared to adjusted income of $129.3 million, or $1.14 per diluted
share, in the prior quarter.
Comparison to the Second Quarter of Fiscal Year 2015
Net income was $64.3 million, or $0.58 per diluted share, as compared with $4.9 million, or $0.04 per diluted share, in the second quarter of fiscal year 2015. Included in this quarter's results were losses on corporate investments not offset in compensation and a loss on an Australian dollar hedge related to the RARE Infrastructure acquisition which combined to total $22.6 million or $0.13 per diluted share. In addition, the current quarter included a tax benefit largely due to reserve adjustments related to the successful conclusion of certain tax examinations of $5.0 million, or $0.05 per diluted share. The second quarter of fiscal year 2015 included a $107.1 million charge, or $0.59 per diluted share, related to a debt refinancing.
-- Operating revenues of $673.1 million were down 4% compared with $703.9
million in the second quarter of fiscal year 2015, reflecting a less
favorable AUM mix, lower performance fees and a 2% decline in average
AUM.
-- Operating expenses of $540.1 million were down 6% compared with $573.5
million in the second quarter of fiscal year 2015 primarily due to lower
revenue share compensation related to lower revenues. In addition, the
prior year quarter included $8.7 million in costs related to the QS
Investors integration and other corporate initiatives. The current
quarter expenses also included a loss of $5.5 million in the market
value of deferred compensation and seed investments, which are recorded
as a decrease in compensation and benefits with an offset in other
non-operating income, compared to a loss of $0.4 million in the prior
year quarter.
-- Other non-operating expense was $42.5 million, as compared to $121.5
million in the second quarter of fiscal year 2015. Other non-operating
expenses included an $11.1 million loss on an Australian dollar hedge
related to the RARE Infrastructure acquisition as well as losses on
corporate investments, not offset in compensation, of $11.5 million
compared with losses of $0.7 million in the prior year quarter. The
prior year quarter included a $107.1 million charge related to the debt
refinancing. Both quarters included losses on funded deferred
compensation and seed investments, as described above. In addition, the
current quarter also included $2.3 million in losses associated with
consolidated investment vehicles, as compared to $0.1 million in losses
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 19.8%, as compared to 18.5% in the second quarter
of fiscal year 2015. Operating margin, as adjusted, was 24.0%, as
compared to 23.8% in the second quarter of fiscal year 2015.
-- Adjusted income was $99.1 million, or $0.89 per diluted share, as
compared to adjusted income of $40.6 million, or $0.35 per diluted
share, in the second quarter of fiscal year 2015.
Quarterly Business Developments and Recent Announcements
-- Legg Mason announced on July 28(th) the agreement to acquire RARE
Infrastructure Limited, a pioneer in global listed infrastructure
investing headquartered in Sydney, Australia. The transaction closed on
October 21, 2015.
-- On September 4, 2015 Legg Mason filed a preliminary prospectus for its
first four smart-beta ETFs, subadvised by QS Investors.
Quarterly Performance
At September 30, 2015:
1-Year 3-Year 5-Year 10-Year
% of Strategy AUM
beating Benchmark(3) 44% 84% 85% 88%
% of Long-Term US Fund
Assets Beating Lipper
Category Average(3)
Equity 33% 45% 56% 50%
Fixed Income 67% 69% 82% 80%
Total US Fund Assets 48% 55% 67% 62%
Of Legg Mason's long-term U.S. mutual fund assets, 42.7% were in funds rated 4 or 5 stars by Morningstar.
Balance Sheet
At September 30, 2015, Legg Mason's cash position was $619 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 second fiscal quarter, the Company completed additional open market purchases of 1.9 million shares which reduced the weighted average shares by 907 thousand.
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 January 11, 2016 to shareholders of record at the close of business on December 16, 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 40682166, 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 40682166# when prompted. Please note that the replay will be available beginning at 10:30 a.m. EDT on Friday, October 30, 2015, and ending at 11:59 p.m. EST on Friday, November 13, 2015.
About Legg Mason
Legg Mason is a global asset management firm, with $672.1 billion in AUM as of September 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 September 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 Six Months Ended
-------------- ----------------
September June September September September
2015 2015 2014 2015 2014
---- ---- ---- ---- ----
Operating Revenues:
Investment
advisory fees:
Separate
accounts $205,155 $208,104 $204,739 $413,259 $409,509
Funds 359,871 384,345 389,238 744,216 770,865
Performance
fees 7,902 18,653 13,993 26,555 30,296
Distribution and
service fees 99,602 96,860 94,481 196,462 184,197
Other 556 688 1,444 1,244 2,909
---
Total operating revenues 673,086 708,650 703,895 1,381,736 1,397,776
------- ------- ------- --------- ---------
Operating Expenses:
Compensation and
benefits 282,433 315,052 303,878 597,485 609,384
Distribution and
servicing 138,930 149,288 155,100 288,218 303,808
Communications
and technology 49,845 48,677 44,624 98,522 86,574
Occupancy 25,716 25,987 22,710 51,703 49,667
Amortization of
intangible
assets 670 657 464 1,327 1,359
Other 42,462 44,446 46,764 86,908 97,083
-----
Total operating expenses 540,056 584,107 573,540 1,124,163 1,147,875
------- ------- ------- --------- ---------
Operating Income 133,030 124,543 130,355 257,573 249,901
------- ------- ------- ------- -------
Other Non-Operating Income (Expense):
Interest income 1,229 1,317 1,680 2,546 4,205
Interest expense (13,280) (11,949) (14,975) (25,229) (32,033)
Other income
(expense), net,
including
$107,074
debt
extinguishment
loss in
September 2014
(28,110) 5,711 (108,156) (22,399) (101,908)
Other non-
operating income
(expense) of
consolidated
investment
vehicles, net
(2,303) 407 (79) (1,896) 2,928
------ --- --- ------ -----
Total other non-operating
income (42,464) (4,514) (121,530) (46,978) (126,808)
(expense)
Income Before Income Tax Provision 90,566 120,029 8,825 210,595 123,093
Income tax
provision 27,647 25,090 3,804 52,737 44,460
------
Net Income 62,919 94,939 5,021 157,858 78,633
Less: Net income
(loss)
attributable
to
noncontrolling
interests (1,400) 391 124 (1,009) 1,548
------ --- --- ------ -----
Net Income Attributable to Legg
Mason, Inc. $64,319 $94,548 $4,897 $158,867 $77,085
======= ======= ====== ======== =======
Net Income per Share Attributable to
Legg Mason, Inc.
Shareholders:
Basic $0.58 $0.85 $0.04 $1.43 $0.66
===== ===== ===== ===== =====
Diluted $0.58 $0.84 $0.04 $1.42 $0.66
===== ===== ===== ===== =====
Weighted-Average Number of Shares
Outstanding: (1)
Basic 110,624 111,691 115,799 111,154 116,459
Diluted 111,556 112,971 116,940 112,258 117,574
(1) Includes weighted-average
unvested restricted shares
deemed to be participating
securities of 2,772, 2,737, and
3,109 for the quarters ended
September 2015, June 2015, and
September 2014, respectively,
and 2,754 and 3,059 for the six
months ended September 2015 and
September 2014, respectively.
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
Quarters Ended
--------------
September 2015 June 2015 September 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 $673,168 $(82) $673,086 $708,735 $(85) $708,650 $704,079 $(184) $703,895
Total operating expenses 540,023 33 540,056 584,087 20 584,107 573,486 54 573,540
------- --- ------- ------- --- ------- ------- --- -------
Operating Income (Loss) 133,145 (115) 133,030 124,648 (105) 124,543 130,593 (238) 130,355
Other non-operating income (expense) (40,988) (1,476) (42,464) (4,879) 365 (4,514) (121,714) 184 (121,530)
------- ------ ------- ------ --- ------ -------- --- --------
Income (Loss) Before Income Tax Provision 92,157 (1,591) 90,566 119,769 260 120,029 8,879 (54) 8,825
Income tax provision 27,647 - 27,647 25,090 - 25,090 3,804 - 3,804
------ --- ------ ------ --- ------ ----- --- -----
Net Income (Loss) 64,510 (1,591) 62,919 94,679 260 94,939 5,075 (54) 5,021
Less: Net income (loss) attributable
191 (1,591) (1,400) 131 260 391 178 (54) 124
to noncontrolling interests
Net Income Attributable to Legg Mason, $64,319 $ - $64,319 $94,548 $ - $94,548 $4,897 $ - $4,897
Inc.
===
Six Months Ended
----------------
September 2015 September 2014
-------------- --------------
Balance Before Consolidation of Consolidated Investment Vehicles Consolidated Totals Balance Before Consolidation of
Consolidated Investment Vehicles Consolidated Investment Vehicles Consolidated Investment Vehicles Consolidated Totals
-------------------------------- -------------------------------- ------------------- -------------------------------- -------------------------------- -------------------
Total operating revenues $1,381,903 $(167) $1,381,736 $1,398,143 $(367) $1,397,776
Total operating expenses 1,124,110 53 1,124,163 1,147,801 74 1,147,875
--------- --- --------- --------- --- ---------
Operating Income (Loss) 257,793 (220) 257,573 250,342 (441) 249,901
Other non-operating income (expense) (45,867) (1,111) (46,978) (128,530) 1,722 (126,808)
------- ------ ------- -------- ----- --------
Income (Loss) Before Income Tax Provision 211,926 (1,331) 210,595 121,812 1,281 123,093
Income tax provision 52,737 - 52,737 44,460 - 44,460
------ --- ------ ------ --- ------
Net Income (Loss) 159,189 (1,331) 157,858 77,352 1,281 78,633
Less: Net income (loss) attributable
322 (1,331) (1,009) 267 1,281 1,548
to noncontrolling interests
Net Income Attributable to Legg Mason, Inc. $158,867 $ - $158,867 $77,085 $ - $77,085
======== ================ ======== ======= ================ =======
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 Six Months Ended
-------------- ----------------
September June September September September
2015 2015 2014 2015 2014
---- ---- ---- ---- ----
Net Income Attributable to
Legg Mason, Inc. $64,319 $94,548 $4,897 $158,867 $77,085
Plus:
Amortization
of
intangible
assets 670 657 464 1,327 1,359
Deferred tax
amortization
benefit 34,116 34,121 35,225 68,237 69,369
on intangible
assets
Adjusted Income $99,105 $129,326 $40,586 $228,431 $147,813
======= ======== ======= ======== ========
Net Income per Diluted
Share Attributable $0.58 $0.84 $0.04 $1.42 $0.66
to Legg Mason, Inc. Shareholders
Plus: (2)
Amortization
of
intangible
assets - - - - 0.01
Deferred tax
amortization
benefit 0.31 0.30 0.31 0.61 0.59
on intangible
assets
Adjusted Income per
Diluted Share $0.89 $1.14 $0.35 $2.03 $1.26
===== ===== ===== ===== =====
(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 Six Months Ended
-------------- ----------------
September June September September September
2015 2015 2014 2015 2014
---- ---- ---- ---- ----
Operating Revenues, GAAP basis $673,086 $708,650 $703,895 $1,381,736 $1,397,776
Plus (less):
Operating
revenues
eliminated upon
consolidation of investment
vehicles 82 85 184 167 367
Distribution and
servicing
expense
excluding
consolidated investment vehicles (138,920) (149,280) (155,090) (288,200) (303,791)
-------- -------- -------- -------- --------
Operating Revenues, as Adjusted $534,248 $559,455 $548,989 $1,093,703 $1,094,352
======== ======== ======== ========== ==========
Operating Income, GAAP basis $133,030 $124,543 $130,355 $257,573 $249,901
Plus (less):
Gains (losses)
on deferred
compensation
and seed investments, net (5,499) 1,210 (374) (4,289) 4,075
Amortization of
intangible
assets 670 657 464 1,327 1,359
Operating income
of consolidated
investment
vehicles, net
115 105 238 220 441
--- --- --- --- ---
Operating Income, as Adjusted $128,316 $126,515 $130,683 $254,831 $255,776
======== ======== ======== ======== ========
Operating Margin, GAAP basis 19.8% 17.6% 18.5% 18.6% 17.9%
Operating Margin, as Adjusted 24.0 22.6 23.8 23.3 23.4
(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 2015 June 2015 March 2015 December 2014 September 2014
-------------- --------- ---------- ------------- --------------
Equity $177.6 $197.3 $199.4 $198.7 $193.6
Fixed Income 368.4 372.2 376.1 367.4 360.4
Long-Term Assets 546.0 569.5 575.5 566.1 554.0
Liquidity 126.1 129.7 127.2 143.0 153.8
Total $672.1 $699.2 $702.7 $709.1 $707.8
====== ====== ====== ====== ======
Quarters Ended Six Months Ended
-------------- ----------------
By asset class (average): September 2015 June 2015 March 2015 December 2014 September 2014 September 2015 September 2014
-------------- --------- ---------- ------------- -------------- -------------- --------------
Equity $189.6 $199.8 $198.3 $200.0 $194.6 $194.3 $191.4
Fixed Income 370.8 375.8 373.2 365.8 364.1 373.5 363.4
Long-Term Assets 560.4 575.6 571.5 565.8 558.7 567.8 554.8
Liquidity 126.8 128.3 135.6 145.1 145.4 127.2 142.0
Total $687.2 $703.9 $707.1 $710.9 $704.1 $695.0 $696.8
====== ====== ====== ====== ====== ====== ======
Component Changes in Assets Under Management
Quarters Ended Six Months Ended
-------------- ----------------
September 2015 June 2015 March 2015 December 2014 September 2014 September 2015 September 2014
-------------- --------- ---------- ------------- -------------- -------------- --------------
Beginning of period $699.2 $702.7 $709.1 $707.8 $704.3 $702.7 $701.8
Net client cash flows:
Equity 0.1 (1.3) (1.4) (1.1) 1.6 (1.2) (0.2)
Fixed Income 3.0 2.6 7.6 9.9 (0.9) 5.6 1.6
--- --- --- --- ---- --- ---
Long-Term flows 3.1 1.3 6.2 8.8 0.7 4.4 1.4
Liquidity (3.0) 2.3 (15.3) (10.6) 12.7 (0.7) 3.7
Total net client cash flows 0.1 3.6 (9.1) (1.8) 13.4 3.7 5.1
Market performance and other (1) (22.6) (8.9) 9.0 9.5 (2.5) (31.4) 1.7
Impact of foreign exchange (4.6) 1.8 (6.3) (6.4) (7.4) (2.9) (5.8)
Acquisitions (Disposition), net - - - - - - 5.0
End of period $672.1 $699.2 $702.7 $709.1 $707.8 $672.1 $707.8
====== ====== ====== ====== ====== ====== ======
Note: Due to effects of rounding, the sum of the quarterly results may differ immaterially from the year-to-date results.
(1) Includes $12.8 billion of certain client assets previously reported as Assets Under Management that have been reclassified as Assets Under Advisement for the six months ended September 2014.
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 on 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. We do not adjust for debt extinguishment losses resulting from prepayment fees, if any. These adjustments reflect that these items distort comparisons of our operating results to other 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 amortization of management contract assets and the impact of fair value adjustments of contingent consideration liabilities, if any, which arise from acquisitions to reflect the fact that these items distort comparison of our operating results with results of other asset management firms that have not engaged in significant acquisitions. Impairment charges and income (loss) of consolidated investment vehicles are removed from Operating Income in the calculation because these items are not reflective of our core asset management operations. We use Operating Revenues, as Adjusted in the calculation to show the operating margin without distribution and servicing expenses, which we use to approximate our distribution revenues that are passed through to third parties as a direct cost of selling our products, although distribution and servicing expenses may include commissions paid in connection with the launching of closed-end funds for which there is no corresponding revenue in the period. Operating Revenues, as Adjusted also include our advisory revenues we receive from consolidated investment vehicles that are eliminated in consolidation under GAAP.
We believe that Operating Margin, as Adjusted, is a useful measure of our performance because it provides a measure of our core business activities. It excludes items that have no impact on Net Income Attributable to Legg Mason, Inc. and indicates what our operating margin would have been without the distribution revenues that are passed through to third parties as a direct cost of selling our products, amortization related to intangible assets, changes in the fair value of contingent consideration liabilities, if any, impairment charges, and the impact of the consolidation of certain investment vehicles described above. The consolidation of these investment vehicles does not have an impact on Net Income Attributable to Legg Mason, Inc. This measure is provided in addition to our operating margin calculated under GAAP, but is not a substitute for calculations of margins under GAAP and may not be comparable to non-GAAP performance measures, including measures of adjusted margins of other companies.
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SOURCE Legg Mason, Inc.
