Legg Mason Reports Results For Second Fiscal Quarter
-- Second Quarter Net Income of $75.7 Million, or $0.78 per Diluted Share
BALTIMORE, Oct. 25, 2017 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the second fiscal quarter ended September 30, 2017.
Quarters Ended | Six Months Ended | ||||||||||||||||||
Financial Results | Sep | Jun | Sep | Sep | Sep | ||||||||||||||
(Amounts in millions, except per share amounts) | 2017 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||
Operating Revenues | $ | 768.3 | $ | 793.8 | $ | 748.4 | $ | 1,562.2 | $ | 1,448.5 | |||||||||
Operating Expenses | 623.9 | 686.6 | 620.7 | 1,310.6 | 1,247.3 | ||||||||||||||
Operating Income | 144.4 | 107.2 | 127.6 | 251.6 | 201.2 | ||||||||||||||
Net Income1 | 75.7 | 50.9 | 66.4 | 126.6 | 99.9 | ||||||||||||||
Net Income Per Share - Diluted1 | 0.78 | 0.52 | 0.63 | 1.29 | 0.94 | ||||||||||||||
Assets Under Management2 | |||||||||||||||||||
(Amounts in billions) | |||||||||||||||||||
End of Period Assets Under Management | $ | 754.4 | $ | 741.2 | $ | 732.9 | $ | 754.4 | $ | 732.9 | |||||||||
Average Assets Under Management | 750.3 | 740.3 | 742.1 | 745.8 | 723.3 | ||||||||||||||
(1) Net Income Attributable to Legg Mason, Inc. | |||||||||||||||||||
(2) September 2016 AUM excludes $12.8 billion of separately managed account assets classified as Assets Under Advisement reported in September and June 2017 as Assets Under Management | |||||||||||||||||||
Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "We are pleased to have delivered a strong operating quarter driven by solid core revenues and prudent expense management. The diversification of our business mix contributed to these results and the resiliency of our operating revenue yield. We are realizing greater client asset persistency in the retail channels as we continue to provide greater choice in investment strategies and vehicles. Net sales across our Global Distribution platform also reflect the diversification of our business by geography, channel and investment affiliate. We will continue to execute our strategy of expanding client choice to meet the rapidly evolving needs of our global client base."
Assets Under Management of $754.4 Billion
Assets Under Management ("AUM") were $754.4 billion at September 30, 2017 compared with $741.2 billion at June 30, 2017, resulting from $12.5 billion in positive market performance and other, $2.2 billion in positive foreign exchange and liquidity inflows of $0.2 billion, partially offset by long-term outflows of $1.2 billion.
Quarter Ended September 30, 2017 | |||||||||||
Assets Under Management | AUM (in billions) | Flows (in billions) | Operating | ||||||||
Equity | $ | 201.2 | $ | (2.0) | 63 bps | ||||||
Fixed Income | 411.9 | 1.5 | 27 bps | ||||||||
Alternative | 65.8 | (0.7)2 | 64 bps | ||||||||
Long-Term Assets | 678.9 | (1.2) | |||||||||
Liquidity | 75.5 | 0.2 | 13 bps | ||||||||
Total | $ | 754.4 | $ | (1.0) | 38 bps | ||||||
(1) Operating revenue yield equals total operating revenues less performance fees divided by average AUM | |||||||||||
(2) Excludes realizations of $0.5 billion | |||||||||||
At September 30, 2017, fixed income represented 54% of AUM, while equity represented 27%, liquidity represented 10% and alternatives represented 9%.
By geography, 68% of AUM was from clients domiciled in the United States and 32% from non-US domiciled clients.
Average AUM during the quarter was $750.3 billion compared to $740.3 billion in the prior quarter and $742.1 billion in the second quarter of fiscal year 2017. Average long-term AUM was $675.1 billion compared to $658.7 billion in the prior quarter and $631.9 billion in the second quarter of fiscal year 2017.
Quarterly Performance | |||||||||||
At September 30, 2017: | 1-Year | 3-Year | 5-Year | 10-Year | |||||||
% of Strategy AUM beating Benchmark3 | 74% | 74% | 79% | 85% | |||||||
% of Long-Term U.S. Fund Assets Beating Lipper Category Average | |||||||||||
Fixed Income | 81% | 74% | 79% | 87% | |||||||
Equity | 39% | 50% | 52% | 74% | |||||||
Alternatives (performance relates to only 3 funds) | 100% | 100% | 100% | n/a | |||||||
Total U.S. Fund Assets | 59% | 62% | 64% | 80% | |||||||
(3) See "Supplemental Data Regarding Quarterly Performance." | |||||||||||
Of Legg Mason's long-term U.S. mutual fund assets, 52% were in funds rated 4 or 5 stars by Morningstar.
Operating Results - Comparison to the First Quarter of Fiscal Year 2018
Net income was $75.7 million, or $0.78 per diluted share, compared to net income of $50.9 million, or $0.52 per diluted share, in the first quarter of fiscal year 2018. In addition to the net impact of the factors listed below, the increased earnings were driven by higher average AUM, one additional day in the quarter, higher non-pass through performance fees and lower compensation expenses due to seasonal factors in the prior quarter.
This quarter's results included:
- Severance charges of $1.7 million, or $0.01 per diluted share.
- EnTrustPermal acquisition and transition-related costs of $1.4 million, or $0.01 per diluted share.
- Year-to-date annualization tax benefit of $1.2 million, or $0.01 per diluted share.
The prior quarter's results included:
- Non-cash impairment charges totaling $34.0 million, or $0.24 per diluted share.
- Contingent consideration credit adjustments of $16.6 million, or $0.12 per diluted share.
- EnTrustPermal acquisition and transition-related costs of $2.6 million, or $0.02 per diluted share.
Operating revenues of $768.3 million were down 3% compared with $793.8 million in the prior quarter reflecting:
- A reduction in pass through performance fees at Clarion of $45.5 million, which, per the terms of the acquisition, were passed through as compensation.
- Excluding the pass through performance fees, revenues increased 3% due to higher average long-term AUM, one additional day in the quarter and an increase of 30% in non-pass through performance fees.
Operating expenses of $623.9 million were down 9% compared with $686.6 million in the prior quarter reflecting:
- Lower compensation of $45.4 million driven by the decrease in Clarion pass through performance fees.
- Acquisition and transition-related charges of $1.4 million, as compared to $2.6 million in the prior quarter.
- The prior quarter included non-cash impairment charges of $34.0 million, as well as credits of $16.6 million for contingent consideration fair value adjustments.
- A $4.8 million gain in the market value of deferred compensation and seed investments, which is recorded as an increase in compensation and benefits with an offset in non-operating income, in line with the prior quarter.
Non-operating expense was $18.1 million, as compared to $15.4 million in the prior quarter reflecting:
- Gains on corporate investments, not offset in compensation, were $2.4 million compared with gains of $5.7 million in the prior quarter. The prior quarter included a $2.3 million gain related to an accelerated contingent payment received on a prior sale of a non-strategic manager.
- Gains on funded deferred compensation and seed investments, as described above.
- A $2.1 million gain associated with the consolidation of sponsored investment vehicles compared to $1.2 million in gains in the prior quarter. The consolidation of sponsored investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.
Operating margin was 18.8% compared to 13.5% in the prior quarter. Operating margin, as adjusted4, was 24.9%, as compared to 22.5% in the prior quarter.
(4) See "Use of Supplemental Non-GAAP Financial Information." |
Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $10.4 million compared to $12.0 million in the prior quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.
Operating Results - Comparison to the Second Quarter of Fiscal Year 2017
Net income was $75.7 million, or $0.78 per diluted share, compared to net income of $66.4 million, or $0.63 per diluted share, in the second quarter of fiscal year 2017. The increased earnings were driven by higher average long-term AUM, higher non-pass through performance fees and lower acquisition and transition-related costs.
This quarter's results included:
- Severance charges of $1.7 million, or $0.01 per diluted share.
- EnTrustPermal acquisition and transition-related costs of $1.4 million, or $0.01 per diluted share.
- Year-to-date annualization tax benefit of $1.2 million, or $0.01 per diluted share.
The prior year quarter's results included:
- EnTrustPermal and Clarion acquisition and transition-related costs of $13.2 million, or $0.09 per diluted share.
- Contingent consideration credit adjustments of $7.0 million, or $0.05 per diluted share.
- A tax benefit of $6.3 million, or $0.06 per diluted share.
Operating revenues of $768.3 million were up 3% compared with $748.4 million in the prior year quarter reflecting:
- Increases principally due to higher average long-term AUM.
- An increase in non-pass through performance fees of $14.8 million, partially offsetting a decrease in pass through performance fees of $15.9 million.
Operating expenses of $623.9 million were up 1% compared with $620.7 million in the prior year quarter reflecting:
- Increased compensation, excluding acquisition and transition-related charges of $5.3 million, related to increased revenues driven by higher average long-term AUM.
- Acquisition and transition-related charges of $1.4 million, as compared with $13.2 million in the prior year.
- The prior year quarter included a contingent consideration credit adjustment of $7.0 million.
- A $4.8 million gain in the market value of deferred compensation and seed investments, which is recorded as an increase in compensation and benefits with an offset in non-operating income, compared with a gain of $5.4 million in the prior year quarter.
Non-operating expense was $18.1 million, compared to $11.2 million in the prior year quarter reflecting:
- A $1.2 million increase in interest expense for debt raised to pay for the Clarion and EnTrust acquisitions.
- A $3.7 million loss on the termination of an interest rate swap in the prior year quarter.
- Gains on corporate investments, not offset in compensation, were $2.4 million compared with gains of $7.3 million in the prior year quarter.
- Gains on funded deferred compensation and seed investments, as described above.
- $2.1 million in gains associated with the consolidation of sponsored investment vehicles, as compared to $6.2 million in gains in the prior year quarter. The consolidation of sponsored investment vehicles has no impact on net income as the effects of consolidation are fully attributable to noncontrolling interests.
Operating margin was 18.8% as compared to 17.1% in the prior year quarter . Operating margin, as adjusted, was 24.9%, as compared to 22.7% in the prior year quarter.
Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $10.4 million, compared to $14.4 million in the prior year quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.
Quarterly Business Developments and Recent Announcements
- ClearBridge's Large Cap Growth portfolio co-managers Margaret Vitrano and Peter Bourbeau won the Investment Advisor 2017 SMA Manager of the Year Award in the large cap equity category.
- On July 14, 2017, Legg Mason launched its first dedicated small-cap, multi-factor ETF sub-advised by Royce & Associates; Legg Mason Small-Cap Quality Value ETF (NASDAQ: SQLV).
- On October 5, 2017, Moody's Investor Services affirmed the Baa1 senior debt rating of Legg Mason and moved the rating outlook from negative to stable.
Balance Sheet
At September 30, 2017, Legg Mason's cash position was $654 million. Total debt, net was $2.2 billion and stockholders' equity was $4.0 billion. The ratio of total debt to total capital was 36%, in line with the prior quarter. Seed investments totaled $279 million.
In the second fiscal quarter, the Company retired $90 million, or 2.3 million shares, in the open market. The net impact of the share activity reduced the weighted average shares by 1.1 million.
Conference Call to Discuss Results
A conference call to discuss the Company's results, hosted by Joseph A. Sullivan, will be held at 5:00 p.m. 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 45681143, at least 10 minutes prior to the scheduled start to ensure connection. A live, listen-only webcast will also be available via the Investor Relations section of www.leggmason.com.
The presentation slides that will be reviewed during the discussion of the conference call will be available on the Investor Relations section of the Legg Mason website shortly after the release of the financial results.
A replay of the live broadcast will be available on the Legg Mason website, www.leggmason.com, in the Investor Relations section, or by dialing 1-888-843-7419 (or for international calls 1-630-652-3042), enter pass code 45681143# when prompted. Please note that the replay will be available beginning at 8:00 p.m. EDT on Wednesday, October 25, 2017, and ending at 11:59 p.m. EST on Wednesday, November 8, 2017.
About Legg Mason
Legg Mason is a global asset management firm, with $754.4 billion in AUM as of September 30, 2017. 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, 2017 and in the Company's quarterly reports on Form 10-Q.
Supplemental Data Regarding Quarterly Performance
Strategy Performance
For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and other products) into a single group that represents a particular investment objective. In the case of separate accounts, the investment performance of the account is based upon the performance of the strategy to which the account has been assigned. Each of our asset managers has its own specific guidelines for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the performance comparison for all of the assets is based upon the performance of the separate account.
Approximately eighty-eight percent of total AUM is included in strategy AUM as of September 30, 2017, although not all strategies have three-, five-, and ten-year histories. Total strategy AUM includes liquidity assets. Certain assets are not included in reported performance comparisons. These include: accounts that are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet been assigned to a strategy; and certain smaller products at some of our affiliates.
Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. Funds-of-hedge funds generally do not have specified benchmarks. For purposes of this comparison, performance of those products is net of fees, and is compared to the relevant HFRX index. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ. The information in this presentation is provided solely for use regarding this presentation, and is not directed toward existing or potential clients of Legg Mason.
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) | ||||||||||||
(Unaudited) | ||||||||||||
Quarters Ended | Six Months Ended | |||||||||||
September | June | September | September | September | ||||||||
2017 | 2017 | 2016 | 2017 | 2016 | ||||||||
Operating Revenues: | ||||||||||||
Investment advisory fees: | ||||||||||||
Separate accounts (1) | $ 253,128 | $ 250,046 | $ 233,328 | $ 503,174 | $ 460,181 | |||||||
Funds | 393,035 | 382,228 | 377,079 | 775,263 | 740,542 | |||||||
Performance fees | 40,821 | 81,537 | 41,970 | 122,358 | 59,429 | |||||||
Distribution and service fees (1) | 80,668 | 78,906 | 94,545 | 159,574 | 185,927 | |||||||
Other | 686 | 1,125 | 1,448 | 1,811 | 2,456 | |||||||
Total operating revenues | 768,338 | 793,842 | 748,370 | 1,562,180 | 1,448,535 | |||||||
Operating Expenses: (2) | ||||||||||||
Compensation and benefits | 367,951 | 413,307 | 368,330 | 781,258 | 726,955 | |||||||
Distribution and servicing | 123,634 | 122,349 | 128,868 | 245,983 | 253,531 | |||||||
Communications and technology | 51,299 | 50,303 | 51,281 | 101,602 | 104,013 | |||||||
Occupancy | 25,171 | 24,408 | 30,558 | 49,579 | 63,700 | |||||||
Amortization of intangible assets | 6,082 | 6,339 | 6,271 | 12,421 | 11,974 | |||||||
Impairment of intangible assets | — | 34,000 | — | 34,000 | — | |||||||
Contingent consideration fair value adjustments | — | (16,550) | (7,000) | (16,550) | (25,000) | |||||||
Other | 49,782 | 52,481 | 42,429 | 102,263 | 112,174 | |||||||
Total operating expenses | 623,919 | 686,637 | 620,737 | 1,310,556 | 1,247,347 | |||||||
Operating Income | 144,419 | 107,205 | 127,633 | 251,624 | 201,188 | |||||||
Non-Operating Income (Expense): | ||||||||||||
Interest income | 1,572 | 1,468 | 1,545 | 3,040 | 3,393 | |||||||
Interest expense | (29,077) | (29,266) | (27,925) | (58,343) | (52,490) | |||||||
Other income, net | 7,289 | 11,388 | 9,975 | 18,677 | 16,560 | |||||||
Non-operating income of | ||||||||||||
consolidated investment vehicles, net | 2,094 | 997 | 5,206 | 3,091 | 8,434 | |||||||
Total non-operating income (expense) | (18,122) | (15,413) | (11,199) | (33,535) | (24,103) | |||||||
Income Before Income Tax Provision | 126,297 | 91,792 | 116,434 | 218,089 | 177,085 | |||||||
Income tax provision | 38,673 | 28,255 | 29,902 | 66,928 | 45,213 | |||||||
Net Income | 87,624 | 63,537 | 86,532 | 151,161 | 131,872 | |||||||
Less: Net income attributable | ||||||||||||
to noncontrolling interests | 11,960 | 12,617 | 20,091 | 24,577 | 31,979 | |||||||
Net Income Attributable to Legg Mason, Inc. | $ 75,664 | $ 50,920 | $ 66,441 | $ 126,584 | $ 99,893 | |||||||
(Continued) | ||||||||||||
(1) For the quarters ended September 30, 2017 and June 30, 2017, separate accounts advisory fees include $13.8 million and $12.4 million, respectively, of revenue relating to retail separately managed accounts for which revenues were previously classified as Distribution and service fees. See note 2 on page 12. | ||||||||||||
(2) Operating expenses include acquisition and transition-related costs related to business combinations. | ||||||||||||
Acquisition and transition-related costs: | ||||||||||||
Compensation | $ 1,115 | $ 2,364 | $ 6,821 | $ 3,479 | $ 37,007 | |||||||
Occupancy | (23) | 121 | 5,086 | 98 | 14,179 | |||||||
Other | 266 | 77 | 1,269 | 343 | 18,775 | |||||||
Total acquisition and transition-related costs | $ 1,358 | $ 2,562 | $ 13,176 | $ 3,920 | $ 69,961 | |||||||
LEGG MASON, INC. AND SUBSIDIARIES | |||||||||||||||||||||
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED | |||||||||||||||||||||
(Amounts in thousands, except per share amounts) | |||||||||||||||||||||
(Unaudited) | |||||||||||||||||||||
Quarters Ended | Six Months Ended | ||||||||||||||||||||
September | June | September | September | September | |||||||||||||||||
2017 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||
Net Income Attributable to Legg Mason, Inc. | $ 75,664 | $ 50,920 | $ 66,441 | $ 126,584 | $ 99,893 | ||||||||||||||||
Less: Earnings (distributed and undistributed) | |||||||||||||||||||||
allocated to participating securities (1) | 2,687 | 1,736 | 2,183 | 4,387 | 3,173 | ||||||||||||||||
Net Income (Distributed and Undistributed) | |||||||||||||||||||||
Allocated to Shareholders (Excluding | |||||||||||||||||||||
Participating Securities) | $ 72,977 | $ 49,184 | $ 64,258 | $ 122,197 | $ 96,720 | ||||||||||||||||
Net Income per Share Attributable to | |||||||||||||||||||||
Legg Mason, Inc. Shareholders: | |||||||||||||||||||||
Basic | $ 0.78 | $ 0.52 | $ 0.63 | $ 1.30 | $ 0.94 | ||||||||||||||||
Diluted | $ 0.78 | $ 0.52 | $ 0.63 | $ 1.29 | $ 0.94 | ||||||||||||||||
Weighted-Average Number of Shares | |||||||||||||||||||||
Outstanding: | |||||||||||||||||||||
Basic | 93,087 | 94,869 | 101,817 | 93,973 | 103,075 | ||||||||||||||||
Diluted | 93,496 | 95,297 | 102,057 | 94,390 | 103,301 | ||||||||||||||||
(1) Participating securities excluded from weighted-average number of shares outstanding were 3,417, 3,192, and 3,447 for the quarters ended September 2017, June 2017, and September 2016, respectively, and 3,305 and 3,291 for the six months ended September 2017 and September 2016, respectively. |
LEGG MASON, INC. AND SUBSIDIARIES | ||||||||||||||||||||
CONSOLIDATING STATEMENTS OF INCOME | ||||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Quarters Ended | ||||||||||||||||||||
September 2017 | June 2017 | September 2016 | ||||||||||||||||||
Balance Before | Consolidated | Consolidated | Balance Before | Consolidated | Consolidated | Balance Before | Consolidated | Consolidated | ||||||||||||
Total operating revenues | $ 768,361 | $ (23) | $ 768,338 | $ 793,886 | $ (44) | $ 793,842 | $ 748,384 | $ (14) | $ 748,370 | |||||||||||
Total operating expenses | 623,814 | 105 | 623,919 | 686,614 | 23 | 686,637 | 620,613 | 124 | 620,737 | |||||||||||
Operating Income (Loss) | 144,547 | (128) | 144,419 | 107,272 | (67) | 107,205 | 127,771 | (138) | 127,633 | |||||||||||
Non-operating income (expense) | (19,794) | 1,672 | (18,122) | (16,128) | 715 | (15,413) | (17,023) | 5,824 | (11,199) | |||||||||||
Income Before Income Tax Provision | 124,753 | 1,544 | 126,297 | 91,144 | 648 | 91,792 | 110,748 | 5,686 | 116,434 | |||||||||||
Income tax provision | 38,673 | — | 38,673 | 28,255 | — | 28,255 | 29,902 | — | 29,902 | |||||||||||
Net Income | 86,080 | 1,544 | 87,624 | 62,889 | 648 | 63,537 | 80,846 | 5,686 | 86,532 | |||||||||||
Less: Net income attributable | ||||||||||||||||||||
to noncontrolling interests | 10,416 | 1,544 | 11,960 | 11,969 | 648 | 12,617 | 14,405 | 5,686 | 20,091 | |||||||||||
Net Income Attributable to Legg Mason, Inc. | $ 75,664 | $ — | $ 75,664 | $ 50,920 | $ — | $ 50,920 | $ 66,441 | $ — | $ 66,441 | |||||||||||
Six Months Ended | ||||||||||||||||||||
September 2017 | September 2016 | |||||||||||||||||||
Balance Before Consolidation of Consolidated Investment Vehicles and | Consolidated Investment Vehicles and Other (1) | Consolidated Totals | Balance Before Consolidation of Consolidated Investment Vehicles and | Consolidated Investment Vehicles and | Consolidated Totals | |||||||||||||||
Total operating revenues | $ 1,562,247 | $ (67) | $ 1,562,180 | $ 1,448,561 | $ (26) | $ 1,448,535 | ||||||||||||||
Total operating expenses | 1,310,428 | 128 | 1,310,556 | 1,247,124 | 223 | 1,247,347 | ||||||||||||||
Operating Income (Loss) | 251,819 | (195) | 251,624 | 201,437 | (249) | 201,188 | ||||||||||||||
Non-operating income (expense) | (35,922) | 2,387 | (33,535) | (32,518) | 8,415 | (24,103) | ||||||||||||||
Income Before Income Tax Provision | 215,897 | 2,192 | 218,089 | 168,919 | 8,166 | 177,085 | ||||||||||||||
Income tax provision | 66,928 | — | 66,928 | 45,213 | — | 45,213 | ||||||||||||||
Net Income | 148,969 | 2,192 | 151,161 | 123,706 | 8,166 | 131,872 | ||||||||||||||
Less: Net income attributable | ||||||||||||||||||||
to noncontrolling interests | 22,385 | 2,192 | 24,577 | 23,813 | 8,166 | 31,979 | ||||||||||||||
Net Income Attributable to Legg Mason, Inc. | $ 126,584 | $ — | $ 126,584 | $ 99,893 | $ — | $ 99,893 | ||||||||||||||
(1) Other represents consolidated sponsored investment products that are not designated as CIVs | ||||||||||||||||||||
LEGG MASON, INC. AND SUBSIDIARIES | ||||||||||||||
SUPPLEMENTAL DATA | ||||||||||||||
RECONCILIATION OF OPERATING MARGIN, AS ADJUSTED (1) | ||||||||||||||
(Amounts in thousands) | ||||||||||||||
(Unaudited) | ||||||||||||||
Quarters Ended | Six Months Ended | |||||||||||||
September | June | September | September | September | ||||||||||
2017 | 2017 | 2016 | 2017 | 2016 | ||||||||||
Operating Revenues, GAAP basis | $ 768,338 | $ 793,842 | $ 748,370 | $ 1,562,180 | $ 1,448,535 | |||||||||
Plus (less): | ||||||||||||||
Pass-through performance fees | (19,874) | (65,431) | (35,831) | (85,305) | (50,431) | |||||||||
Operating revenues eliminated upon | ||||||||||||||
consolidation of investment vehicles | 23 | 44 | 14 | 67 | 26 | |||||||||
Distribution and servicing expense excluding | ||||||||||||||
consolidated investment vehicles | (123,578) | (122,349) | (128,806) | (245,927) | (253,396) | |||||||||
Operating Revenues, as Adjusted | $ 624,909 | $ 606,106 | $ 583,747 | $ 1,231,015 | $ 1,144,734 | |||||||||
Operating Income, GAAP basis | $ 144,419 | $ 107,205 | $ 127,633 | $ 251,624 | $ 201,188 | |||||||||
Plus (less): | ||||||||||||||
Gains on deferred compensation | ||||||||||||||
and seed investments, net | 4,824 | 5,428 | 5,432 | 10,252 | 7,598 | |||||||||
Impairment of intangible assets | — | 34,000 | — | 34,000 | — | |||||||||
Amortization of intangible assets | 6,082 | 6,339 | 6,271 | 12,421 | 11,974 | |||||||||
Contingent consideration fair value adjustments | — | (16,550) | (7,000) | (16,550) | (25,000) | |||||||||
Operating loss of consolidated investment | ||||||||||||||
vehicles, net | 128 | 67 | 138 | 195 | 249 | |||||||||
Operating Income, as Adjusted | $ 155,453 | $ 136,489 | $ 132,474 | $ 291,942 | $ 196,009 | |||||||||
Operating Margin, GAAP basis | 18.8 | % | 13.5 | % | 17.1 | % | 16.1 | % | 13.9 | % | ||||
Operating Margin, as Adjusted | 24.9 | 22.5 | 22.7 | 23.7 | 17.1 | |||||||||
(1) See explanations for "Use of Supplemental Non-GAAP Financial Information." | ||||||||||||||
LEGG MASON, INC. AND SUBSIDIARIES | ||||||||||||
SUPPLEMENTAL DATA | ||||||||||||
RECONCILIATION OF CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||||||
TO ADJUSTED EBITDA (1) | ||||||||||||
(Amounts in thousands) | ||||||||||||
(Unaudited) | ||||||||||||
Quarters Ended | Six Months Ended | |||||||||||
September | June | September | September | September | ||||||||
2017 | 2017 | 2016 | 2017 | 2016 | ||||||||
Cash provided by (used in) operating activities, GAAP basis | $ 289,329 | $ (113,580) | $ 303,829 | $ 175,749 | $ 137,859 | |||||||
Plus (less): | ||||||||||||
Interest expense, net of accretion and amortization | ||||||||||||
of debt discounts and premiums | 28,343 | 28,330 | 26,487 | 56,673 | 50,393 | |||||||
Current tax expense | 9,662 | 6,072 | 15,689 | 15,734 | 14,906 | |||||||
Net change in assets and liabilities | (145,656) | 213,323 | (92,837) | 67,667 | 129,588 | |||||||
Net change in assets and liabilities | ||||||||||||
of consolidated investment vehicles | 1,235 | 31,789 | (97,344) | 33,024 | (58,773) | |||||||
Net income attributable to noncontrolling interests | (11,960) | (12,617) | (20,091) | (24,577) | (31,979) | |||||||
Net gains (losses) and earnings on investments | 1,491 | 5,546 | 1,103 | 7,037 | (3,391) | |||||||
Net gains on consolidated investment vehicles | 2,094 | 997 | 5,206 | 3,091 | 8,434 | |||||||
Other | 194 | 77 | 948 | 271 | (499) | |||||||
Adjusted EBITDA | $ 174,732 | $ 159,937 | $ 142,990 | $ 334,669 | $ 246,538 | |||||||
(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 2017 | June 2017 | March 2017 | December 2016 | September 2016 | ||||||||||
Equity | $ 201.2 | $ 196.2 | $ 179.8 | $ 169.0 | $ 168.4 | ||||||||||
Fixed Income | 411.9 | 403.6 | 394.3 | 381.1 | 396.9 | ||||||||||
Alternative | 65.8 | 66.5 | 67.9 | 71.5 | 72.0 | ||||||||||
Long-Term Assets | 678.9 | 666.3 | 642.0 | 621.6 | 637.3 | ||||||||||
Liquidity | 75.5 | 74.9 | 86.4 | 88.8 | 95.6 | ||||||||||
Total | $ 754.4 | $ 741.2 | $ 728.4 | $ 710.4 | $ 732.9 | ||||||||||
Quarters Ended | Six Months Ended | ||||||||||||||
By asset class (average): | September 2017 | June 2017 | March 2017 | December 2016 | September 2016 | September 2017 | September 2016 | ||||||||
Equity | $ 198.9 | $ 190.6 | $ 174.2 | $ 166.7 | $ 166.1 | $ 194.5 | $ 164.6 | ||||||||
Fixed Income | 410.2 | 400.7 | 388.1 | 387.8 | 393.7 | 405.7 | 385.5 | ||||||||
Alternative | 66.0 | 67.4 | 70.4 | 71.3 | 72.1 | 66.7 | 63.8 | ||||||||
Long-Term Assets | 675.1 | 658.7 | 632.7 | 625.8 | 631.9 | 666.9 | 613.9 | ||||||||
Liquidity | 75.2 | 81.6 | 86.2 | 90.9 | 110.2 | 78.9 | 109.4 | ||||||||
Total | $ 750.3 | $ 740.3 | $ 718.9 | $ 716.7 | $ 742.1 | $ 745.8 | $ 723.3 | ||||||||
Component Changes in Assets Under Management | |||||||||||||||
Quarters Ended | Six Months Ended | ||||||||||||||
September 2017 | June 2017 | March 2017 | December 2016 | September 2016 | September 2017 | September 2016 | |||||||||
Beginning of period | $ 741.2 | $ 728.4 | $ 710.4 | $ 732.9 | $ 741.9 | $ 728.4 | $ 669.6 | ||||||||
Net client cash flows: | |||||||||||||||
Equity | (2.0) | 1.0 | 3.1 | (3.7) | (1.5) | (1.0) | (4.5) | ||||||||
Fixed Income | 1.5 | 0.3 | 3.5 | 0.5 | 2.8 | 1.7 | 6.7 | ||||||||
Alternative | (0.7) | (0.8) | (2.7) | (0.8) | (1.6) | (1.5) | (3.6) | ||||||||
Long-Term flows | (1.2) | 0.5 | 3.9 | (4.0) | (0.3) | (0.8) | (1.4) | ||||||||
Liquidity | 0.2 | (11.5) | (3.1) | (6.9) | (25.4) | (11.3) | (17.4) | ||||||||
Total net client cash flows | (1.0) | (11.0) | 0.8 | (10.9) | (25.7) | (12.1) | (18.8) | ||||||||
Realizations(1) | (0.5) | (1.3) | — | — | — | (1.9) | — | ||||||||
Market performance and other(2) | 12.5 | 24.7 | 17.1 | (2.3) | 15.7 | 37.4 | 27.9 | ||||||||
Impact of foreign exchange | 2.2 | 0.7 | 4.0 | (8.4) | 1.0 | 2.9 | 3.1 | ||||||||
Acquisitions (disposition), net | — | (0.3) | (3.9) | (0.9) | — | (0.3) | 51.1 | ||||||||
End of period | $ 754.4 | $ 741.2 | $ 728.4 | $ 710.4 | $ 732.9 | $ 754.4 | $ 732.9 | ||||||||
(1) Realizations represent investment manager-driven distributions primarily related to the sale of assets. Realizations are specific to our alternative managers and do not include client-driven distributions (e.g. client requested redemptions, liquidations or asset transfers). Realizations of $0.2 billion, $0.4 billion, $0.4 billion, and $0.3 billion were included in net client cash flows for the quarters ended March 31, 2017, December 31, 2016, September 30, 2016, and June 30, 2016, respectively. | |||||||||||||||
(2) For the quarter ended June 30, 2017, Other includes a reclass, effective April 1, 2017, of $16.0 billion of certain assets which were previously included in Assets Under Advisement to Assets Under Management, specifically retail separately managed account programs that operate and have fee rates comparable to programs managed on a fully discretionary basis. These Assets Under Advisement as of the quarters ended March 31, 2017, December 31, 2016, and September 30, 2016 were $16.0 billion, $13.7 billion, and $12.8 billion, respectively. For the quarter ended June 30, 2017, Other also includes a $3.7 billion reconciliation to previously reported amounts. | |||||||||||||||
(3) Due to effects of rounding, the sum of the quarterly results may differ immaterially from the year-to-date results. | |||||||||||||||
Use of Supplemental Non-GAAP Financial Information
As supplemental information, we are providing a performance measure for "Operating Margin, as Adjusted" and a liquidity measure for "Adjusted EBITDA", each of which are based on methodologies other than generally accepted accounting principles ("non-GAAP"). Our management uses these measures as benchmarks in evaluating and comparing our period-to-period operating performance and liquidity.
Operating Margin, as Adjusted
We calculate "Operating Margin, as Adjusted," by dividing (i) Operating Income, adjusted to exclude the impact on compensation expense of gains or losses on investments made to fund deferred compensation plans, the impact on compensation expense of gains or losses on seed capital investments by our affiliates under revenue sharing 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, and less performance fees that are passed through as compensation expenses or net income (loss) attributable to non-controlling interests, which we refer to as "Operating Revenues, as Adjusted". The deferred compensation items are removed from Operating Income in the calculation because they are offset by an equal amount in Non-operating income (expense), 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. We also use Operating Revenues, as Adjusted in the calculation to show the operating margin without performance fees, which are passed through as compensation expense or net income (loss) attributable to non-controlling interests per the terms of certain more recent acquisitions. Operating Revenues as adjusted also include our advisory revenues we receive from consolidated investment vehicles that are eliminated in consolidation under GAAP.
We believe that Operating Margin, as Adjusted, is a useful measure of our performance because it provides a measure of our core business activities. It excludes items that have no impact on Net Income 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, performance fees that are passed through as compensation expense or net income (loss) attributable to non-controlling interests per the terms of certain more recent acquisitions, amortization related to intangible assets, changes in the fair value of contingent consideration liabilities, if any, impairment charges, 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.
Adjusted EBITDA
We define Adjusted EBITDA as cash provided by (used in) operating activities plus (minus) interest expense, net of accretion and amortization of debt discounts and premiums, current income tax expense (benefit), the net change in assets and liabilities, net (income) loss attributable to noncontrolling interests, net gains (losses) and earnings on investments, net gains (losses) on consolidated investment vehicles, and other. The net change in assets and liabilities adjustment aligns with the Consolidated Statements of Cash Flows. Adjusted EBITDA is not reduced by equity-based compensation expense, including management equity plan non-cash issuance-related charges. Most management equity plan units may be put to or called by Legg Mason for cash payment, although their terms do not require this to occur.
We believe that this measure is useful to investors and us as it provides additional information with regard to our ability to meet working capital requirements, service our debt, and return capital to our shareholders. This measure is provided in addition to Cash provided by operating activities and may not be comparable to non-GAAP performance measures or liquidity measures of other companies, including their measures of EBITDA or Adjusted EBITDA. Further, this measure is not to be confused with Net Income, Cash provided by operating activities, or other measures of earnings or cash flows under GAAP, and are provided as a supplement to, and not in replacement of, GAAP measures.
We have previously disclosed Adjusted EBITDA that conformed to calculations required by our debt covenants, which adjusted for certain items that required cash settlement that are not part of the current definition.
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SOURCE Legg Mason, Inc.
