LEGG MASON, INC. 
By BALTIMORE, Jan. 27, 2012 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the third fiscal quarter ended December 31, 2011. The Company reported net income(1) of $28.1 million, or $0.20 per diluted share, as compared with $56.7 million, or $0.39 per diluted share, in the previous quarter and $61.6 million, or $0.41 per diluted share, in the third quarter of fiscal 2011. Included in this quarter's results were $42.3 million, or $0.21 per diluted share, in transition-related costs as compared to $15.1 million, or $0.07 per diluted share, of such costs in the previous quarter, and $24.0 million, or $0.10 per diluted share, in the third quarter of fiscal 2011. Adjusted income(2) for the third quarter was $76.8 million, or $0.55 per diluted share, as compared to $87.6 million, or $0.61 per diluted share, in the previous quarter and $110.3 million, or $0.73 per diluted share, in the third quarter of fiscal 2011. For the third quarter, operating revenues were $627.0 million, down 6% from $669.9 million in the prior quarter and down 13% from $721.9 million in the prior year quarter. Operating expenses of $567.7 million were up 1% from $563.0 million in the second quarter of fiscal 2012 and down 9% from $624.9 million in the prior year quarter.
Assets Under Management ("AUM") were $627.0 billion, up 2% as compared with $611.8 billion as of September 30, 2011 and down 7% from $671.8 billion as of December 31, 2010.
Legg Mason also announced today that its Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.08 per share.
(Amounts in millions, except per share
amounts)
--------------------------------------
Quarters Ended Nine Months Ended
-------------- -----------------
Dec Sep Dec Dec Dec
2011 2011 2010 2011 2010
---- ---- ---- ---- ----
Total
Operating
Revenues $627.0 $669.9 $721.9 $2,014.0 $2,070.9
Total
Operating
Expenses 567.7 563.0 624.9 1,747.4 1,783.2
Operating
Income 59.3 106.9 97.0 266.5 287.7
Net
Income(1) 28.1 56.7 61.6 144.7 184.9
Adjusted
Income(2) 76.8 87.6 110.3 273.4 321.6
Net
Income
Per
Share
-
Diluted(1) 0.20 0.39 0.41 1.00 1.20
Adjusted
Income
Per
Share
-
Diluted(2) 0.55 0.61 0.73 1.89 2.08
(1) Net income represents Net income attributable to
Legg Mason, Inc.
(2) See Supplemental Data below for non-GAAP
performance measures.
Comments on the Third Quarter of Fiscal Year 2012 Results
Mark R. Fetting, Chairman and CEO of Legg Mason said, "It was a challenging quarter, with the cumulative effect of 2011's second-half market turmoil impacting AUM and revenues. However, our core business held up well, the flow picture improved and investment performance remained strong. More generally, we enter calendar year 2012 having made significant strategic progress relative to long-term earnings per share growth. The streamlining efforts announced in May of 2010 have positioned us to realize $140 million in run rate savings starting in the fiscal 4th quarter, and our balance sheet increasingly affords us the opportunity to invest in organic growth, while thoughtfully returning capital to our shareholders. Ultimately, despite short term market movements, we remain confident in our prospects and intend to capitalize on opportunities that arise in the markets where our affiliates invest."
Assets Under Management Increased to $627.0 Billion
AUM increased to $627.0 billion compared with $611.8 billion at September 30, 2011, primarily driven by $17.6 billion in market appreciation, partially offset by net client outflows of $1.3 billion and dispositions of $1.1 billion. AUM was down 7% from $671.8 billion as of December 31, 2010.
-- Fixed income and equity outflows were $7.1 billion and $4.9 billion,
respectively, while liquidity inflows were $10.7 billion for the quarter
ended December 31st.
-- At December 31, 2011, fixed income represented 56% of AUM, while equity
represented 25% and liquidity represented 19% of AUM.
-- By client domicile, 63% of AUM was United States and 37% of AUM was
non-U.S.
-- Average AUM during the quarter was $622.0 billion compared to $643.3
billion in the second quarter of fiscal year 2012 and $672.4 billion in
the third quarter of fiscal year 2011.
Comparison to the Second Quarter of Fiscal Year 2012
Net income was $28.1 million, or $0.20 per diluted share, as compared with $56.7 million, or $0.39 per diluted share, in the second quarter of fiscal year 2012. The prior quarter's results included a United Kingdom tax benefit of $18.3 million, or $0.13 per diluted share.
-- Revenues of $627.0 million were down 6% from $669.9 million in the prior
quarter, primarily due to a 3% decline in average AUM, including a less
favorable average asset mix and a $3.9 million decline in performance
fees.
-- Operating expenses of $567.7 million were up 1% from $563.0 million in
the prior quarter due to transition-related costs of $42.3 million,
compared to $15.1 million in the prior quarter. The current quarter's
expenses also included a $1.7 million gain 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 loss of $14.2 million in the prior
quarter. Excluding these two items, operating expenses declined 7% from
the second quarter of fiscal 2012, reflecting lower compensation under
revenue share arrangements due to reduced revenues.
-- Other non-operating expense was $11.6 million, as compared to $51.1
million of expense in the second quarter of fiscal 2012. Losses on
corporate investments, not offset in compensation, were $1.8 million
compared with losses of $19.7 million in the prior quarter. The current
quarter also included gains on funded deferred compensation and seed
investments as described above. In addition, the current quarter
included $7.8 million in gains associated with consolidated investment
vehicles compared to $1.5 million in 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 9.5%, as compared to 16.0% in the prior quarter.
Operating margin, as adjusted,(2) was 21.7%, as compared with 21.3% in
the prior quarter.
-- Adjusted income was $76.8 million, or $0.55 per diluted share, compared
to adjusted income of $87.6 million, or $0.61 per diluted share, in the
prior quarter.
Comparison to the Third Quarter of Fiscal Year 2011
Net income was $28.1 million, or $0.20 per diluted share, as compared with $61.6 million, or $0.41 per diluted share, in the third quarter of fiscal year 2011. This quarter's results included transition-related costs of $42.3 million compared to $24.0 million of such costs in the prior year quarter.
-- Operating revenues of $627.0 million decreased 13% from revenues of
$721.9 million in the prior year quarter reflecting a 7% decrease in
average AUM, including a less favorable average asset mix, as well as a
$28.5 million reduction in performance fees from the prior year quarter.
-- Operating expenses of $567.7 million were down 9% from operating
expenses of $624.9 million in the prior year quarter due to lower
compensation under revenue share arrangements from reduced revenues, and
$26.0 million in quarterly savings related to the company's streamlining
program as compared to $2.4 million in quarterly savings in the prior
year quarter. These savings were partially offset by incremental
transition-related costs of $18.3 million, as well as the $17.8 million
Western reimbursement step-down that was discussed in prior quarters.
-- Other non-operating expense was $11.6 million as compared to $9.8
million of expense in the prior year quarter. Losses on corporate
investments not offset in compensation were $1.8 million compared with
$9.4 million of gains in the prior year quarter. The current quarter
also included $7.8 million in gains associated with consolidated
investment vehicles, as compared to $7.7 million in losses in the prior
year quarter, which are attributable to noncontrolling interests and
therefore do not impact net income.
-- Operating margin was 9.5%, as compared to 13.4% in the prior year
quarter. Operating margin, as adjusted, was 21.7%, as compared with
24.3% in the same period a year ago.
-- Adjusted income was $76.8 million, or $0.55 per diluted share, compared
to adjusted income of $110.3 million, or $0.73 per diluted share, for
the prior year quarter.
Quarterly Business Developments
Product
-- Two municipal bond funds managed by Western Asset were named as Category
Kings by the Wall Street Journal based upon performance versus peers for
the calendar year ended December 31, 2011.
-- Permal won three awards at the Hedge Fund Review's Tenth European Fund
of Hedge Funds Awards: Long Term Achievement in Hedge Funds, Best
Performing Specialist FoHF over 10 years and the Best Performing
Emerging Markets Fund of Hedge Funds.
-- Brandywine Global Investment Management won two awards from Asia Asset
Management for global bond performance in 2011.
-- A Legg Mason Royce Fund was named Best in Class in the Benchmark Fund of
the Year Award, based upon data provided by Morningstar Asia.
-- The Legg Mason US Equity Income Builder Fund was launched in the quarter
in the UK. The fund managed by ClearBridge Advisors and mirroring the
$4 billion U.S. product raised $30 million in new client money.
Performance
At December 31, 2011:
-- Of Legg Mason's long-term U.S. mutual fund assets, 64% were beating
their Lipper category averages for the 1-year period; 73% for the 3-year
period; 77% for the 5-year period and 73% for the 10-year period.
-- Of Legg Mason's long-term U.S. mutual funds assets, 52% were rated 4 or
5 stars by Morningstar, including 68% of all funds managed by Royce and
55% of all funds managed by Western.
-- None of the funds in the Western Asset institutional fund family
outperformed their benchmarks for the 1-year period; 7 out of 8
outperformed their benchmarks for the 3-year period; 2 out of 8
outperformed for the 5-year period and 4 out of 6 funds outperformed for
the 10-year period.
-- Seven out of 25 funds managed by Royce outperformed their benchmarks for
the 1-year period; 15 out of 22 for the 3-year period; 15 out of 19 for
the 5-year period; and all 11 outperformed for the 10-year period.
-- None of the funds managed by Legg Mason Capital Management outperformed
their benchmarks for the 1-year, 5-year and 10-year periods; and 3 out
of 5 funds outperformed for the 3-year period.
-- Four out of 11 funds managed by ClearBridge Advisors outperformed their
benchmarks for the 1-year period; 6 out of 11 for the 3-year period; 5
out of 11 for the 5-year period; and 4 out of 11 outperformed for the
10-year period.
Balance Sheet
At December 31, 2011, Legg Mason's cash position was $1.2 billion. Total debt was $1.4 billion and stockholders' equity was $5.6 billion. The ratio of total debt to total capital (total equity plus total debt excluding consolidated investment vehicles) was 20%.
The Board of Directors has declared a quarterly cash dividend on its common stock in the amount of $0.08 per share. The dividend is payable April 16, 2012 to shareholders of record at the close of business on March 15, 2012.
Conference Call to Discuss Results
A conference call to discuss the Company's results, hosted by Mr. Fetting, will be held at 8:30 am EST today. The call will be open to the general public. Interested participants should access the call by dialing 1-877-269-7756 (or for international calls 1-201-689-7817) 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 (http://ir.leggmason.com/CorporateProfile.aspx?iid=102761) shortly after the release of the financial results.
A replay or transcript of the live broadcast will be available on the Legg Mason website, in the investor relations section, or by dialing 1-877-660-6853 (or for international calls 1-201-612-7415), enter account number 369 followed by conference number 386821 when prompted. Please note that the replay will be available beginning at 4:00 p.m. EST on Friday, January 27, 2012 and ending on February 11, 2012.
About Legg Mason
Legg Mason is a global asset management firm, with $627 billion in assets under management as of December 31, 2011. 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, 2011 and in the Company's quarterly reports on Form 10-Q.
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
For the Nine Months
Quarters Ended Ended
-------------- --------------------
December September December December December
2011 2011 2010 2011 2010
--- ---- ---- ---- ----
Operating Revenues:
Investment advisory fees:
Separate accounts $187,570 $196,019 $206,180 $588,382 $611,366
Funds 351,598 376,835 384,341 1,128,577 1,094,531
Performance fees 6,079 9,984 34,592 34,677 76,871
Distribution and
service fees 80,709 85,774 95,522 258,547 284,150
Other 1,022 1,285 1,293 3,800 3,969
----- ----- ----- ----- -----
Total operating
revenues 626,978 669,897 721,928 2,013,983 2,070,887
------- ------- ------- --------- ---------
Operating Expenses(1):
Compensation and
benefits 254,402 257,651 290,423 812,405 841,406
Transition-related
compensation 8,818 12,346 18,757 32,559 32,444
----- ------ ------ ------ ------
Total compensation and
benefits 263,220 269,997 309,180 844,964 873,850
Distribution and
servicing 148,275 160,391 187,412 489,422 537,946
Communications and
technology 43,466 41,571 39,399 125,538 118,689
Occupancy 56,401 35,700 37,259 125,339 104,426
Amortization of
intangible assets 4,869 5,504 5,776 15,951 17,253
Other 51,424 49,882 45,910 146,228 131,055
------ ------ ------ ------- -------
Total operating
expenses 567,655 563,045 624,936 1,747,442 1,783,219
------- ------- ------- --------- ---------
Operating Income 59,323 106,852 96,992 266,541 287,668
------ ------- ------ ------- -------
Other Non-Operating Income
(Expense)
Interest income 2,577 2,982 2,209 8,614 6,194
Interest expense (21,831) (21,636) (22,389) (65,828) (69,639)
Other income (expense) 255 (35,502) 18,806 (31,844) 44,704
Other non-operating income
(expense) of
consolidated investment
vehicles 7,424 3,081 (8,462) 15,607 (6,356)
----- ----- ------ ------ ------
Total other non-
operating income
(expense) (11,575) (51,075) (9,836) (73,451) (25,097)
------- ------- ------ ------- -------
Income Before Income
Tax Provision 47,748 55,777 87,156 193,090 262,571
Income tax provision
(benefit) 12,607 (1,606) 33,792 38,868 87,576
------ ------ ------ ------ ------
Net Income 35,141 57,383 53,364 154,222 174,995
Less: Net income (loss)
attributable
to noncontrolling
interests 7,009 719 (8,256) 9,474 (9,891)
----- --- ------ ----- ------
Net Income Attributable to
Legg Mason, Inc. $28,132 $56,664 $61,620 $144,748 $184,886
======= ======= ======= ======== ========
Net Income per share
Attributable to Legg Mason,
Inc.
Common Shareholders:
Basic $0.20 $0.39 $0.41 $1.00 $1.20
===== ===== ===== ===== =====
Diluted $0.20 $0.39 $0.41 $1.00 $1.20
===== ===== ===== ===== =====
Weighted Average Number of
Shares
Outstanding:
Basic 140,053 143,877 149,980 144,363 153,817
Diluted 140,082 143,931 150,972 144,428 154,548
(1) Operating expenses include transition costs related to streamlining
our business model.
See Supplemental Data -Operating margin, as
adjusted for additional details.
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)
For the Nine Months
Quarters Ended Ended
-------------- --------------------
December September December December December
2011 2011 2010 2011 2010
-- --- --- -- ---
Net Income
Attributable to
Legg Mason, Inc. $28,132 $56,664 $61,620 $144,748 $184,886
Plus (Less):
Amortization of
intangible assets 4,869 5,504 5,776 15,951 17,253
Deferred income
taxes on
intangible
assets:
Tax amortization
benefit 33,961 33,955 33,692 101,954 101,060
UK tax rate
adjustment - (18,268) - (18,268) (8,878)
Imputed interest
on convertible
debt 9,793 9,741 9,194 29,023 27,249
Adjusted Income $76,755 $87,596 $110,282 $273,408 $321,570
------- ------- -------- -------- --------
Net Income per
Diluted Share
Attributable
to Legg Mason,
Inc. Common
Shareholders $0.20 $0.39 $0.41 $1.00 $1.20
Plus (Less):
Amortization of
intangible assets 0.04 0.04 0.04 0.11 0.11
Deferred income
taxes on
intangible
assets:
Tax amortization
benefit 0.24 0.24 0.22 0.71 0.65
UK tax rate
adjustment - (0.13) - (0.13) (0.06)
Imputed interest
on convertible
debt 0.07 0.07 0.06 0.20 0.18
Adjusted Income
per Diluted Share $0.55 $0.61 $0.73 $1.89 $2.08
----- ----- ----- ----- -----
(1) See explanations for Use of Supplemental Data as Non-GAAP Performance
Measures.
LEGG MASON, INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
RECONCILIATION OF OPERATING MARGIN, AS ADJUSTED(1)
(Amounts in thousands)
(Unaudited)
For the Nine Months
Quarters Ended Ended
-------------- --------------------
December September December December December
2011 2011 2010 2011 2010
--- ---- ---- --- ----
Operating Revenues,
GAAP basis $626,978 $669,897 $721,928 $2,013,983 $2,070,887
Plus (Less):
Operating revenues
eliminated upon
consolidation of
investment vehicles 753 625 1,159 2,430 2,897
Distribution and
servicing expense
excluding
consolidated investment
vehicles (148,258) (160,379) (187,411) (489,380) (537,945)
-------- -------- -------- -------- --------
Operating Revenues, as
Adjusted $479,473 $510,143 $535,676 $1,527,033 $1,535,839
-------- -------- -------- ---------- ----------
Operating Income, GAAP
basis $59,323 $106,852 $96,992 $266,541 $287,668
Plus (Less):
Gains (losses) on
deferred compensation
and seed investments 1,674 (14,243) 8,566 (14,935) 26,066
Transition-related
costs(2) 42,311 15,138 23,998 71,169 38,741
Operating income and
expenses of
consolidated investment
vehicles 858 885 643 2,905 3,347
--- --- --- ----- -----
Operating Income, as
Adjusted $104,166 $108,632 $130,199 $325,680 $355,822
-------- -------- -------- -------- --------
Operating margin, GAAP
basis 9.5% 16.0% 13.4% 13.2% 13.9%
Operating margin, as
adjusted 21.7 21.3 24.3 21.3 23.2
(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.
(2) Transition-related costs:
Compensation $8,818 $12,346 $18,757 $32,559 $32,444
Communications and
technology 3,911 2,577 823 8,594 1,294
Occupancy 28,080 209 4,345 28,505 4,409
Other 1,502 6 73 1,511 594
----- --- --- ----- ---
Total $42,311 $15,138 $23,998 $71,169 $38,741
======= ======= ======= ======= =======
LEGG MASON, INC. AND SUBSIDIARIES
(Amounts in billions)
(Unaudited)
Assets
Under
Management
Quarters Ended
--------------
December September June March December
2011 2011 2011 2011 2010
--------- ---------- ----- ------ ---------
By asset
class:
Equity $153.3 $144.9 $181.5 $189.6 $184.2
Fixed
Income 352.6 355.5 365.4 356.6 355.8
----- ----- ----- ----- -----
Long-
Term
Assets 505.9 500.4 546.9 546.2 540.0
Liquidity 121.1 111.4 115.6 131.4 131.8
----- ----- ----- ----- -----
Total $627.0 $611.8 $662.5 $677.6 $671.8
====== ====== ====== ====== ======
By asset
class
(average):
Equity $153.4 $166.3 $187.5 $187.0 $175.7
Fixed
Income 353.9 364.7 363.1 354.7 364.9
----- ----- ----- ----- -----
Long-
Term
Assets 507.3 531.0 550.6 541.7 540.6
Liquidity 114.7 112.3 120.2 131.8 131.8
----- ----- ----- ----- -----
Total $622.0 $643.3 $670.8 $673.5 $672.4
====== ====== ====== ====== ======
Component Changes in
Assets Under
Management
Quarters Ended
--------------
December September June March December
2011 2011 2011 2011 2010
--------- ---------- ----- ------ ---------
Beginning
of
period $611.8 $662.5 $677.6 $671.8 $673.5
Net
client
cash
flows (1.3) (17.6) (3.7) (8.7) (16.7)
Market
performance
and
other 17.6 (32.9) 8.0 16.6 15.0
Acquisitions
(Dispositions),
net (1.1) (0.2) (19.4) (2.1) -
End of
period $627.0 $611.8 $662.5 $677.6 $671.8
====== ====== ====== ====== ======
Note: Due to rounding of quarterly results, total amounts for fiscal year may
differ immaterially from the annual results.
LEGG MASON, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENTS OF INCOME
TO NON-GAAP BASIS CONSOLIDATED STATEMENTS OF INCOME EXCLUDING INVESTMENT VEHICLES (1)
(Amounts in thousands, except per share amounts)
(Unaudited)
Quarter Ended December 31, 2011 Quarter Ended September 30, 2011 Quarter Ended December 31, 2010
------------------------------- -------------------------------- -------------------------------
Non-GAAP Non-GAAP Non-GAAP
Basis - Basis - Basis -
Consolidated Excluding Consolidated Excluding Consolidated Excluding
GAAP Investment Investment GAAP Investment Investment GAAP Investment Investment
Basis Vehicles Vehicles Basis Vehicles Vehicles Basis Vehicles Vehicles
----- ------------- ----------- ----- ------------- ----------- ----- ------------- -----------
Operating Revenues:
Investment advisory fees $545,247 $730 $545,977 $582,838 $608 $583,446 $625,113 $1,142 $626,255
Distribution and service
fees 80,709 23 80,732 85,774 17 85,791 95,522 17 95,539
Other 1,022 - 1,022 1,285 - 1,285 1,293 - 1,293
----- --- ----- ----- --- ----- ----- --- -----
Total operating revenues 626,978 753 627,731 669,897 625 670,522 721,928 1,159 723,087
------- --- ------- ------- --- ------- ------- ----- -------
Operating Expenses:
Compensation and benefits 263,220 - 263,220 269,997 - 269,997 309,180 - 309,180
Distribution and servicing 148,275 (17) 148,258 160,391 (12) 160,379 187,412 (1) 187,411
Other 156,160 (88) 156,072 132,657 (248) 132,409 128,344 517 128,861
------- --- ------- ------- ---- ------- ------- --- -------
Total operating expenses 567,655 (105) 567,550 563,045 (260) 562,785 624,936 516 625,452
------- ---- ------- ------- ---- ------- ------- --- -------
Operating Income 59,323 858 60,181 106,852 885 107,737 96,992 643 97,635
------ --- ------ ------- --- ------- ------ --- ------
Other Non-Operating Income
(Expense)
Net interest income
(expense) (19,254) - (19,254) (18,654) - (18,654) (20,180) - (20,180)
Other income (expense) 7,679 (7,782) (103) (32,421) (1,522) (33,943) 10,344 7,659 18,003
----- ------ ---- ------- ------ ------- ------ ----- ------
Other non-operating
income (expense) (11,575) (7,782) (19,357) (51,075) (1,522) (52,597) (9,836) 7,659 (2,177)
------- ------ ------- ------- ------ ------- ------ ----- ------
Income (Loss) Before
Income Tax Provision 47,748 (6,924) 40,824 55,777 (637) 55,140 87,156 8,302 95,458
Income tax provision
(benefit) 12,607 - 12,607 (1,606) - (1,606) 33,792 - 33,792
------ --- ------ ------ --- ------ ------ --- ------
Net Income (Loss) 35,141 (6,924) 28,217 57,383 (637) 56,746 53,364 8,302 61,666
Less: Net income (loss)
attributable
to noncontrolling
interests 7,009 (6,924) 85 719 (637) 82 (8,256) 8,302 46
----- ------ --- --- ---- --- ------ ----- ---
Net Income Attributable to
Legg Mason, Inc. $28,132 $- $28,132 $56,664 $- $56,664 $61,620 $- $61,620
======= === ======= ======= === ======= ======= === =======
Effective Income Tax Rate 26.4% -2.9% 38.8%
Effective Income Tax Rate Excluding
Consolidated Investment Vehicles 30.9% -2.9% 35.4%
(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.
LEGG MASON, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENTS OF INCOME
TO NON-GAAP BASIS CONSOLIDATED STATEMENTS OF INCOME EXCLUDING INVESTMENT VEHICLES (1)
(Amounts in thousands, except per share amounts)
(Unaudited)
For the Nine Months Ended December 31, For the Nine Months Ended December 31,
2011 2010
--------------------------------------- ---------------------------------------
Non-GAAP Non-GAAP
Basis - Basis -
Consolidated Excluding Consolidated Excluding
GAAP Investment Investment GAAP Investment Investment
Basis Vehicles Vehicles Basis Vehicles Vehicles
----- ------------- ----------- ----- ------------- -----------
Operating Revenues:
Investment advisory fees $1,751,636 $2,373 $1,754,009 $1,782,768 $2,823 $1,785,591
Distribution and service
fees 258,547 57 258,604 284,150 74 284,224
Other 3,800 - 3,800 3,969 - 3,969
----- --- ----- ----- --- -----
Total operating revenues 2,013,983 2,430 2,016,413 2,070,887 2,897 2,073,784
--------- ----- --------- --------- ----- ---------
Operating Expenses:
Compensation and benefits 844,964 - 844,964 873,850 - 873,850
Distribution and servicing 489,422 (42) 489,380 537,946 (1) 537,945
Other 413,056 (433) 412,623 371,423 (449) 370,974
------- ---- ------- ------- ---- -------
Total operating expenses 1,747,442 (475) 1,746,967 1,783,219 (450) 1,782,769
--------- ---- --------- --------- ---- ---------
Operating Income 266,541 2,905 269,446 287,668 3,347 291,015
------- ----- ------- ------- ----- -------
Other Non-Operating Income
(Expense)
Net interest income
(expense) (57,214) - (57,214) (63,445) - (63,445)
Other income (expense) (16,237) (12,135) (28,372) 38,348 6,695 45,043
------- ------- ------- ------ ----- ------
Other non-operating
income (expense) (73,451) (12,135) (85,586) (25,097) 6,695 (18,402)
------- ------- ------- ------- ----- -------
Income (Loss) Before
Income Tax Provision 193,090 (9,230) 183,860 262,571 10,042 272,613
Income tax provision 38,868 - 38,868 87,576 - 87,576
------ --- ------ ------ --- ------
Net Income (Loss) 154,222 (9,230) 144,992 174,995 10,042 185,037
Less: Net income (loss)
attributable
to noncontrolling
interests 9,474 (9,230) 244 (9,891) 10,042 151
----- ------ --- ------ ------ ---
Net Income Attributable to
Legg Mason, Inc. $144,748 $- $144,748 $184,886 $- $184,886
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Effective Income Tax Rate 20.1% 33.4%
Effective Income Tax Rate Excluding
Consolidated Investment Vehicles 21.1% 32.1%
(1) See explanations for Use of Supplemental Data as Non-GAAP Performance Measures.
Use of Supplemental Data as Non-GAAP Performance Measures
As supplemental information, we are providing performance measures that are based on methodologies other than generally accepted accounting principles ("non-GAAP") for "Adjusted Income", "Consolidated Statements of Income, Excluding Consolidated Investment Vehicles", and "Operating Margin, As Adjusted" that management uses as benchmarks in evaluating and comparing the period-to-period operating performance of Legg Mason, Inc. and its subsidiaries.
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, and 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 impairment charges and the impact of tax rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets and goodwill, and net money market fund support losses (gains).
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 contingent convertible debt, made significant acquisitions, or engaged in money market fund support transactions. 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. Legg Mason considers 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 Legg Mason's operating results with the results of other asset management firms that have not engaged in significant acquisitions, issued contingent convertible debt, or engaged in money market fund support transactions.
In calculating Adjusted Income, we add the impact of the amortization of intangible assets from acquisitions, such as management contracts, to Net Income Attributable to Legg Mason, Inc. to reflect the fact that these non-cash expenses distort comparisons of Legg Mason's 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 United Kingdom 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 imputed interest on contingent convertible debt, which is a non-cash expense, as well as the actual tax benefits on the related contingent convertible debt that are not realized under GAAP. We also add (subtract) other non-core items, such as net money market fund support losses (gains) (net of losses on the sale of the underlying structured investment vehicle securities, if applicable). 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 money market fund support transactions or significant acquisitions, including any related impairments.
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. Also, realized losses on money market fund support transactions are reflective of changes in the operating performance and 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.
Consolidated Statements of Income, Excluding Consolidated Investment Vehicles
In accordance with financial accounting standards on consolidation, Legg Mason consolidates and separately identifies certain sponsored investment vehicles, the most significant of which is a collateralized loan obligation entity. In presenting our "Consolidated Statements of Income, Excluding Consolidated Investment Vehicles", we add back the investment advisory and distribution and servicing fees that are eliminated upon the consolidation of investment vehicles and exclude the operating expenses and the impact on non-operating income (expense) and noncontrolling interests of consolidated investment vehicles.
We believe it is important to provide the Consolidated Statements of Income, Excluding Consolidated Investment Vehicles to present the underlying economic performance of our core asset management operations, which does not include the results of the investment funds that we manage but may not own all of the equity invested. By deconsolidating the consolidated investment vehicles from the Consolidated Statements of Income, the investment advisory and distribution fees earned by Legg Mason from consolidated investment vehicles are added back to reflect our actual revenues. Similarly the operating expenses and the impact on non-operating income (expense) and noncontrolling interests of consolidated investment vehicles are removed from the GAAP basis Statements of Income since this activity does not actually belong to Legg Mason. The deconsolidation of the investment vehicles does not have any impact on Net Income Attributable to Legg Mason, Inc. in any period presented. The Consolidated Statements of Income, Excluding Consolidated Investment Vehicles are presented in addition to our GAAP basis Consolidated Statements of Income, but are not substitutes for the GAAP basis Consolidated Statements of Income and may not be comparable to Statements of Income presented on a non-GAAP basis of other companies.
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, transition-related costs of streamlining our business model, income (loss) of consolidated investment vehicles 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 "adjusted operating revenues". The compensation items, other than transition-related costs, 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. Transition-related costs 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 adjusted operating revenues 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. Adjusted operating revenues 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 excluding items that have no impact on Net Income and because it indicates what Legg Mason's operating margin would have been without the distribution revenues that are passed through to third parties as a direct cost of selling our products, transition-related costs, 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.
SOURCE Legg Mason, Inc.
