Legg Mason Reports Results for First Fiscal Quarter 2011
- First Quarter Net Income of $48 Million, or $0.30 per Diluted Share -
- $1.3 Billion Closed-End Fund Raise Resulted in $0.07 per Diluted Share
of
Related Expenses -
- First Quarter Adjusted Income of $96 Million, or $0.60 per Diluted Share
-
- Assets Under Management of $645 Billion -
</pre>
<p><span class="xn-location">BALTIMORE</span>, <span class="xn-chron">July 26</span> /CNW/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the first fiscal quarter ended <span class="xn-chron">June 30, 2010</span>. The Company reported net income(1) of <span class="xn-money">$47.9 million</span> or <span class="xn-money">$0.30</span> per diluted share, as compared with <span class="xn-money">$63.6 million</span>, or <span class="xn-money">$0.39</span> per diluted share, in the previous quarter. In the quarter, Legg Mason raised <span class="xn-money">$1.3 billion</span>(2) through a closed-end fund launch, the largest in the industry since 2007. Adjusted income(3), for the first quarter was <span class="xn-money">$96.3 million</span>, or <span class="xn-money">$0.60</span> per diluted share, as compared to <span class="xn-money">$111.3 million</span>, or <span class="xn-money">$0.69</span> per diluted share, in the fourth quarter of fiscal 2010. For the first quarter, revenues were <span class="xn-money">$674.2 million</span>, up from <span class="xn-money">$671.4 million</span> in the prior quarter. Operating expenses of <span class="xn-money">$571.4 million</span> were up 1% from <span class="xn-money">$565.6 million</span> in the fourth quarter for fiscal year 2010 and included <span class="xn-money">$17.6 million</span> in costs related to the closed-end fund launch.</p>
<p/>
<p>Assets Under Management ("AUM") were <span class="xn-money">$645.4 billion</span>, down 6% as compared with <span class="xn-money">$684.5 billion</span> as of <span class="xn-chron">March 31, 2010</span> and down 2% from <span class="xn-money">$656.9 billion</span> as of <span class="xn-chron">June 30, 2009</span>.</p>
<p/>
<p>Legg Mason also announced today that its Board of Directors has declared a quarterly cash dividend on its common stock in the amount of <span class="xn-money">$0.04</span> per share.</p>
<pre>
</pre>
<p> </p>
<p>(Amounts in millions, except per share amounts)</p>
<p> </p>
<pre>
Quarters Ended
--------------
June March % June %
2010 2010 Change 2009 Change
---- ---- ------ ---- ------
</pre>
<p> </p>
<p>Total Operating Revenues <span class="xn-money">$674.2</span> <span class="xn-money">$671.4</span> 0% <span class="xn-money">$613.1</span> 10%</p>
<p> </p>
<p>Total Operating Expenses 571.4 565.6 1% 554.8 3%</p>
<p> </p>
<p>Operating Income 102.8 105.8 -3% 58.3 76%</p>
<p> </p>
<p>Net Income(1) 47.9 63.6 -25% 50.1 -4%</p>
<p> </p>
<p>Adjusted Income(3) 96.3 111.3 -13% 86.8 11%</p>
<p> </p>
<pre>
Net Income Per Share -
Diluted(1) 0.30 0.39 -23% 0.35 -14%
</pre>
<p> </p>
<pre>
Adjusted Income Per Share
(3) 0.60 0.69 -13% 0.61 -2%
</pre>
<p> </p>
<pre>
(1) Net income represents net income attributable to Legg Mason, Inc.
(2) Assuming full exercise of underwriters' over allotment option
(3) Adjusted income was formerly reported as "cash income, as
adjusted." Please see Supplemental Data
below for non-GAAP performance measures
Comments on First Fiscal Quarter 2011 Results
</pre>
<p>Mark R. Fetting, Chairman and CEO, said, "We delivered a solid quarter in a volatile market with more work to do to fully position Legg Mason for future growth. We are pleased to announce our first quarter of equity inflows in over four years, including the largest closed-end fund capital raise in the industry since 2007. In fixed income, we are hard at work on the longer term process of turning flows to positive following sustained improved investment performance. We believe that Western Asset's improved performance is a testament to both the strength of their investment process and the enhancements they made in integrating their risk management efforts with that process. Over the short term, market volatility has led to swings in equity performance, but our affiliates are positioning well for improvement in client results. Our overall 3- and 5-year performance numbers show improvement over the past year, and we are working in partnership with our affiliates to create investment vehicles that will bring clients back into the market and help them rebuild wealth.</p>
<p/>
<p>"We are making progress on our plans to transfer certain support functions to our affiliates and we are on track to meet our targets. Even as we streamline our business model, we continue to look at growth opportunities, and our affiliates continue to add talent, including an experienced professional to service sovereign wealth clients at Permal. We are actively evaluating the addition of investment capabilities. With regard to use of capital, we have entered into an accelerated share repurchase arrangement and remain fully committed to additional ways to drive shareholder value," concluded <span class="xn-person">Mr. Fetting</span>.</p>
<pre>
Assets Under Management Decreased to $645 Billion
</pre>
<p>AUM decreased to <span class="xn-money">$645.4 billion</span> at <span class="xn-chron">June 30, 2010</span> from <span class="xn-money">$684.5 billion</span>, driven by net outflows of <span class="xn-money">$23.1 billion</span> and market declines of <span class="xn-money">$16.0 billion</span>. Long-term asset net outflows of <span class="xn-money">$8.7 billion</span> continue to trend favorably.</p>
<pre>
-- Fixed income outflows were $9.4 billion and liquidity outflows were
$14.4 billion for the quarter ended June 30th. Equity inflows of $0.7
billion mark the first quarter of equity inflows in over four years.
-- At June 30, 2010, fixed income represented 56% of AUM, while equity
represented 24% and liquidity represented 20% of AUM.
-- By business division, 70% of AUM was in the Americas Division and 30%
of AUM was in the International Division.
-- Average AUM during the quarter was $668.3 billion compared to $681.2
billion in the fourth quarter of fiscal 2010 and $647.2 billion in the
first quarter of fiscal 2009.
Comparison to the Fourth Quarter of Fiscal Year 2010
</pre>
<p>Net income was <span class="xn-money">$47.9 million</span>, or <span class="xn-money">$0.30</span> per diluted share, as compared with <span class="xn-money">$63.6 million</span>, or <span class="xn-money">$0.39</span> per diluted share, in the fourth quarter of fiscal year 2010.</p>
<pre>
-- Revenues of $674.2 million were up from $671.4 million in the prior
quarter, due to higher realization rates which more than offset a 2%
decline in average AUM. Performance fees of $22.8 million were in
line
with the prior quarter due to fees earned at Western Asset Management,
Brandywine Global and Permal.
-- Operating expenses of $571.4 million increased 1% from $565.6 million
in the fourth quarter of fiscal 2010 due to $17.6 million of expenses
related to the launch of the closed-end fund this quarter. The
current
quarter's expenses also included $3.2 million in severance and other
costs related to the previously announced streamlining initiative.
-- Operating margin was 15.2%, as compared to 15.8% in the fourth quarter
of fiscal 2010. Operating margin, as adjusted(4), was 20.9% as
compared with 23.3% in the fourth quarter. The impact of the
closed-end
fund launch on our operating margin, as adjusted, was 2.9%
-- Adjusted income was $96.3 million, or $0.60 per diluted share,
compared
to adjusted income of $111.3 million, or $0.69 per diluted share, in
the prior quarter.
(4) Please see Supplemental Data below for non-GAAP performance measures
Comparison to the First Quarter of Fiscal Year 2010
</pre>
<p>Net income was <span class="xn-money">$47.9 million</span>, or <span class="xn-money">$0.30</span> per diluted share, as compared with net income of <span class="xn-money">$50.1 million</span>, or <span class="xn-money">$0.35</span> per diluted share, in the first quarter of fiscal year 2010.</p>
<pre>
-- Revenues of $674.2 million increased 10% from $613.1 million in the
prior year quarter reflecting higher performance fees and a 3%
increase
in average AUM.
-- Operating expenses of $571.4 million increased by 3% from $554.8
million in the prior year quarter. This was primarily due to costs
associated with this quarter's closed-end fund launch.
-- Operating margin was 15.2% as compared to 9.5% in the prior year
quarter. Operating margin, as adjusted, was 20.9% as compared with
20.4% in the same period a year ago.
-- Adjusted income was $96.3 million, or $0.60 per diluted share,
compared
to adjusted income of $86.8 million, or $0.61 per diluted share, for
the first fiscal quarter 2010.
Quarterly Business Developments
Product
-- Legg Mason and ClearBridge Advisors raised $1.3 billion for the
ClearBridge Energy MLP Fund Inc. (CEM), assuming full exercise of the
underwriters' over allotment option.
-- Legg Mason International and Western Asset launched the Legg Mason
Western Asset Global Credit Absolute Return Fund in the UK and
Ireland.
-- Legg Mason Japan received an award for "Best Sales, Client Service and
Marketing Support for fiscal year 2010" from MaDo, an industry
publication focused on the marketing and retail distribution of mutual
funds in Japan.
-- Western Asset's Global Inflation-Linked composite won the top honor in
the Global Fixed Income, Inflation-Linked category by AsianInvestor
Magazine.
Performance
At June 30, 2010:
-- Of Legg Mason's long-term U.S. mutual fund assets, 46% were beating
their Lipper category averages for the 1-year period; 71% for the
3-year period; 73% for the 5-year period and 78% for the 10-year
period.
-- Of Legg Mason's long-term U.S. mutual funds assets, 55% were rated 4
or
5 stars by Morningstar, including 92% of Royce's fund assets and 73%
of
Western's fund assets.
-- All 9 of the Western Asset funds outperformed their benchmarks for the
1-year period; 4 out of 9 outperformed their benchmarks for the 3-year
period; 3 out of 8 outperformed for the 5-year period and all 4 funds
outperformed for the 10-year period.
-- Ten out of 24 funds managed by Royce outperformed their benchmarks for
the 1-year period; 16 out of 19 for the 3-year period; all 17
outperformed for the 5-year period and all 9 outperformed for the
10-year period.
-- Five out of six funds managed by Legg Mason Capital Management
outperformed their benchmarks for the 1-year period; none outperformed
for the 3- and 5-year periods and 1 out of 6 outperformed for the
10-year period.
-- None of the funds managed by ClearBridge Advisors outperformed in the
1-year period; 5 out of 13 funds outperformed for the 3-year period; 4
out 13 outperformed for the 5-year period and 8 out of 13 outperformed
for the 10-year period.
Balance Sheet
</pre>
<p>At <span class="xn-chron">June 30, 2010</span>, Legg Mason's cash position was <span class="xn-money">$1.2 billion</span>. Total debt was <span class="xn-money">$1.4 billion</span> and stockholders' equity was <span class="xn-money">$5.6 billion</span>. The ratio of total debt to total capital (total equity plus total debt) was 20%. In the quarter, the Company announced it had entered into an accelerated share repurchase arrangement. As of <span class="xn-chron">June 30</span>, Legg Mason has repurchased and retired 9.7 million shares of common stock. The balance sheet amounts exclude consolidated investment vehicles.</p>
<p/>
<p>The Board of Directors has declared a quarterly cash dividend on its common stock in the amount of <span class="xn-money">$0.04</span> per share. The dividend is payable on <span class="xn-chron">October 25, 2010</span> to shareholders of record at the close of business on <span class="xn-chron">October 7, 2010</span>.</p>
<pre>
Conference Call to Discuss Results
</pre>
<p>A conference call to discuss the Company's results, hosted by <span class="xn-person">Mr. Fetting</span>, will be held at <span class="xn-chron">5:00 p.m.</span> E.D.T. 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.</p>
<p/>
<p>The presentation slides that will be reviewed during the conference call will be available on the Investor Relations section of the Legg Mason website (<a href="http://www.leggmason.com/about/investor_relations.aspx">www.leggmason.com/about/investor_relations.aspx</a>) shortly after the release of the financial results.</p>
<p/>
<p>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 and replay ID number 353728 when prompted. Please note that the replay will be available beginning at <span class="xn-chron">11:00 p.m.</span>, E.D.T. on <span class="xn-chron">July 26, 2010</span> and ending on <span class="xn-chron">August 9, 2010</span>.</p>
<pre>
About Legg Mason
</pre>
<p>Legg Mason is a global asset management firm, with <span class="xn-money">$645 billion</span> in assets under management as of <span class="xn-chron">June 30, 2010</span>. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in <span class="xn-location">Baltimore</span>, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).</p>
<p/>
<p>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 <span class="xn-chron">March 31, 2010</span>.</p>
<pre>
</pre>
<p> </p>
<pre>
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
</pre>
<p> </p>
<pre>
Quarters Ended
--------------
</pre>
<p> </p>
<p> </p>
<pre>
June March June
2010 2010 2009
----- ------ -----
Operating Revenues:
Investment advisory fees:
Separate accounts $200,972 $208,104 $190,888
Funds 352,699 341,135 328,024
Performance fees 22,774 24,656 5,684
Distribution and service fees 96,314 96,113 86,701
Other 1,406 1,412 1,787
----- ----- -----
Total operating revenues 674,165 671,420 613,084
------- ------- -------
</pre>
<p> </p>
<pre>
Operating Expenses:
Compensation and benefits 266,074 267,270 268,812
Transition-related compensation (1) 2,713 - -
----- --- ---
Total compensation and benefits 268,787 267,270 268,812
Distribution and servicing 184,702 167,419 172,464
Communications and technology 39,976 42,225 40,490
Occupancy 33,675 25,469 32,584
Amortization of intangible assets 5,728 5,731 5,628
Other (1) 38,520 57,470 34,791
------ ------ ------
Total operating expenses 571,388 565,584 554,769
------- ------- -------
</pre>
<p> </p>
<pre>
Operating Income 102,777 105,836 58,315
------- ------- ------
</pre>
<p> </p>
<pre>
Other Non-Operating Income (Expense)
Interest income 1,815 1,583 1,821
Interest expense (22,801) (25,095) (43,390)
Fund support - - 17,558
Other income (expense) (7,291) 14,986 41,311
Other non-operating income (expense)
of
consolidated investment vehicles (2,393) 4,410 5,089
------ ----- -----
Total other non-operating income
(expense) (30,670) (4,116) 22,389
------- ------ ------
</pre>
<p> </p>
<p>Income Before Income Tax Provision 72,107 101,720 80,704</p>
<p> </p>
<pre>
Income tax provision 27,064 36,619 28,380
------ ------ ------
</pre>
<p> </p>
<pre>
Net Income 45,043 65,101 52,324
Less: Net income (loss) attributable
to noncontrolling interests (2,888) 1,494 2,270
------ ----- -----
</pre>
<p> </p>
<pre>
Net Income Attributable to
Legg Mason, Inc. $47,931 $63,607 $50,054
======= ======= =======
</pre>
<p> </p>
<pre>
Net income per share
attributable to Legg Mason, Inc.
common shareholders:
Basic $0.30 $0.40 $0.35
===== ===== =====
</pre>
<p> </p>
<pre>
Diluted $0.30 $0.39 $0.35
===== ===== =====
</pre>
<p> </p>
<pre>
Weighted average number of shares
outstanding:
Basic 160,123 160,952 142,006
Diluted 160,762 161,703 143,126
</pre>
<p> </p>
<pre>
(1) Costs related to streamlining our business model. Other
operating expenses for June 2010 include
transition-related costs of $442.
</pre>
<p> </p>
<pre>
LEGG MASON, INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
</pre>
<p> </p>
<pre>
RECONCILIATION OF NET INCOME ATTRIBUTABLE TO LEGG MASON, INC.
TO ADJUSTED INCOME (1)
(Amounts in thousands, except per share amounts)
(Unaudited)
</pre>
<p> </p>
<pre>
Quarters Ended
--------------
</pre>
<p> </p>
<p> </p>
<pre>
June 2010 March 2010 June 2009
--------- ---------- ---------
</pre>
<p> </p>
<pre>
Net Income
Attributable to Legg
Mason, Inc. $47,931 $63,607 $50,054
</pre>
<p> </p>
<pre>
Plus (Less):
Amortization
of
intangible
assets 5,728 5,731 5,628
Deferred
income
taxes on
intangible
assets 33,687 33,077 35,297
Imputed
interest on
convertible
debt 8,909 8,862 8,364
Net money
market fund
support
gains (2) - - (12,524)
</pre>
<p> </p>
<p> </p>
<pre>
Adjusted Income $96,255 $111,277 $86,819
------- -------- -------
</pre>
<p> </p>
<p> </p>
<pre>
Net Income per Diluted
Share attributable
to Legg Mason, Inc.
common shareholders $0.30 $0.39 $0.35
</pre>
<p> </p>
<pre>
Plus (Less):
Amortization
of
intangible
assets 0.04 0.04 0.04
Deferred
income
taxes on
intangible
assets 0.21 0.20 0.24
Imputed
interest on
convertible
debt 0.05 0.06 0.06
Net money
market fund
support
gains (2) - - (0.08)
</pre>
<p> </p>
<p> </p>
<pre>
Adjusted Income per
Diluted Share $0.60 $0.69 $0.61
----- ----- -----
</pre>
<p> </p>
<pre>
(1) See explanations for Use of Supplemental Data as Non-GAAP
Performance Measures.
(2) Net of income taxes.
</pre>
<p> </p>
<pre>
LEGG MASON, INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
</pre>
<p> </p>
<pre>
RECONCILIATION OF OPERATING MARGIN, AS ADJUSTED(1)
(Amounts in thousands)
(Unaudited)
</pre>
<p> </p>
<pre>
Quarters Ended
--------------
</pre>
<p> </p>
<p> </p>
<pre>
June March June
2010 2010 2009
----- ------ -----
</pre>
<p> </p>
<pre>
Operating Revenues,
GAAP basis $674,165 $671,420 $613,084
</pre>
<p> </p>
<pre>
Plus
(Less):
Operating
revenues
eliminated
upon
consolidation
of
investment
vehicles 779 528 784
Distribution
and
servicing
expense
excluding
consolidated
investment
vehicles (184,689) (167,401) (172,446)
-------- -------- --------
</pre>
<p> </p>
<pre>
Operating Revenues,
as adjusted $490,255 $504,547 $441,422
-------- -------- --------
</pre>
<p> </p>
<p> </p>
<p>Operating Income <span class="xn-money">$102,777</span> <span class="xn-money">$105,836</span> <span class="xn-money">$58,315</span></p>
<p> </p>
<pre>
Plus
(Less):
Gains
(losses)
on
deferred
compensation
and
seed
investments (4,621) 11,182 31,386
Transition-
related
costs(2) 3,155 - -
Operating
income
and
expenses
of
consolidated
investment
vehicles 1,243 758 339
----- --- ---
</pre>
<p> </p>
<pre>
Operating Income, as
adjusted $102,554 $117,776 $90,040
-------- -------- -------
</pre>
<p> </p>
<pre>
Operating margin,
GAAP basis 15.2% 15.8% 9.5%
Operating margin, as
adjusted 20.9 23.3 20.4
</pre>
<p> </p>
<p> </p>
<pre>
(1) See explanations
for Use of
Supplemental Data as
Non-GAAP
Performance
Measures.
(2) Transition-
related costs:
Compensation $2,713
Other 442
---
Total $3,155
======
</pre>
<p> </p>
<p> </p>
<pre>
LEGG MASON, INC. AND SUBSIDIARIES
(Amounts in billions)
(Unaudited)
</pre>
<p> </p>
<p>Assets Under Management</p>
<p> </p>
<pre>
Quarters Ended
--------------
June March December September June
2010 2010 2009 2009 2009
---- ---- ---- ---- ----
By asset
class:
Equity $155.8 $173.8 $168.7 $165.6 $143.6
Fixed
Income 357.9 364.3 365.8 385.7 366.6
Liquidity 131.7 146.4 147.1 151.4 146.7
------ ------ ------ ------ ------
Total $645.4 $684.5 $681.6 $702.7 $656.9
====== ====== ====== ====== ======
</pre>
<p> </p>
<pre>
By asset
class
(average):
Equity $167.6 $167.4 $164.6 $155.7 $138.0
Fixed
Income 362.0 365.6 378.8 377.5 362.3
Liquidity 138.7 148.2 149.9 150.8 146.9
------ ------ ------ ------ ------
Total $668.3 $681.2 $693.3 $684.0 $647.2
====== ====== ====== ====== ======
</pre>
<p> </p>
<pre>
By
division:
Americas $450.3 $475.8 $472.9 $484.3 $457.1
International 195.1 208.7 208.7 218.4 199.8
------ ------ ------ ------ ------
Total $645.4 $684.5 $681.6 $702.7 $656.9
====== ====== ====== ====== ======
</pre>
<p> </p>
<p> </p>
<p>Component Changes in Assets under Management</p>
<p> </p>
<p> </p>
<pre>
Quarters Ended
--------------
June March December September June
2010 2010 2009 2009 2009
---- ---- ---- ---- ----
Beginning
of period $684.5 $681.6 $702.7 $656.9 $632.4
Net client
cash
flows (23.1) (10.9) (32.7) (8.1) (30.3)
Market
performance
and other (16.0) 13.8 11.6 53.9 54.8
Acquisitions
(Dispositions),
net - - - - -
------ ------ ------ ------ ------
End of
period $645.4 $684.5 $681.6 $702.7 $656.9
====== ====== ====== ====== ======
</pre>
<p> </p>
<pre>
BY
DIVISION
</pre>
<p> </p>
<pre>
Americas
Beginning
of period $475.8 $472.9 $484.3 $457.1 $446.7
Net client
cash
flows (17.6) (10.9) (21.4) (11.8) (27.0)
Market
performance
and other (7.9) 13.8 10.0 39.0 37.4
Acquisitions
(Dispositions),
net - - - - -
------ ------ ------ ------ ------
End of
period $450.3 $475.8 $472.9 $484.3 $457.1
====== ====== ====== ====== ======
</pre>
<p> </p>
<pre>
International
Beginning
of period $208.7 $208.7 $218.4 $199.8 $185.7
Net client
cash
flows (5.5) - (11.3) 3.7 (3.3)
Market
performance
and other (8.1) - 1.6 14.9 17.4
Acquisitions
(Dispositions),
net - - - - -
------ ------ ------ ------ ------
End of
period $195.1 $208.7 $208.7 $218.4 $199.8
====== ====== ====== ====== ======
</pre>
<p> </p>
<pre>
LEGG MASON, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME
TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING
INVESTMENT VEHICLES (1)
(Amounts in thousands, except per share amounts)
(Unaudited)
</pre>
<p> </p>
<pre>
Quarter Ended June 30, 2010
---------------------------
</pre>
<p> </p>
<pre>
GAAP Non-GAAP
Basis Consolidated Basis -
Investment
----- Vehicles Excluding
Investment
----------- Vehicles
-----------
</pre>
<p> </p>
<pre>
Operating Revenues:
Investment advisory
fees $576,445 $767 $577,212
Distribution and
service fees 96,314 12 96,326
Other 1,406 - 1,406
----- --- -----
Total operating
revenues 674,165 779 674,944
------- --- -------
</pre>
<p> </p>
<pre>
Operating Expenses:
Compensation and
benefits 268,787 - 268,787
Distribution and
servicing 184,702 (13) 184,689
Other 117,899 (451) 117,448
------- ---- -------
Total operating
expenses 571,388 (464) 570,924
------- ---- -------
</pre>
<p> </p>
<pre>
Operating Income 102,777 1,243 104,020
------- ----- -------
</pre>
<p> </p>
<pre>
Other Non-
Operating Income
(Expense)
Net interest income
(expense) (20,986) - (20,986)
Other income
(expense) (9,684) 1,699 (7,985)
------ ----- ------
Other non-
operating income
(expense) (30,670) 1,699 (28,971)
------- ----- -------
</pre>
<p> </p>
<pre>
Income Before
Income Tax
Provision 72,107 2,942 75,049
</pre>
<p> </p>
<pre>
Income tax
provision 27,064 - 27,064
------ --- ------
</pre>
<p> </p>
<p>Net Income 45,043 2,942 47,985</p>
<p> </p>
<pre>
Less: Net income
(loss)
attributable
to noncontrolling
interests (2,888) 2,942 54
------ ----- ---
</pre>
<p> </p>
<pre>
Net Income
Attributable to
Legg Mason, Inc. $47,931 $- $47,931
======= === =======
</pre>
<p> </p>
<pre>
Effective Income
Tax Rate 37.5%
</pre>
<p> </p>
<pre>
Effective Income
Tax Rate Excluding
Consolidated
Investment
Vehicles 36.1%
</pre>
<p> </p>
<pre>
(1) See explanations for Use of Supplemental Data as Non-GAAP
Performance Measures.
</pre>
<p> </p>
<pre>
LEGG MASON, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME
TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING
INVESTMENT VEHICLES (1)
(Amounts in thousands, except per share amounts)
(Unaudited)
</pre>
<p> </p>
<pre>
Quarter Ended March 31, 2010
----------------------------
</pre>
<p> </p>
<pre>
GAAP Non-GAAP Basis
Basis Consolidated -
Investment
----- Vehicles Excluding
Investment
----------- Vehicles
-----------
</pre>
<p> </p>
<pre>
Operating
Revenues:
Investment
advisory fees $573,895 $515 $574,410
Distribution and
service fees 96,113 13 96,126
Other 1,412 - 1,412
----- --- -----
Total operating
revenues 671,420 528 671,948
------- --- -------
</pre>
<p> </p>
<pre>
Operating
Expenses:
Compensation and
benefits 267,270 - 267,270
Distribution and
servicing 167,419 (18) 167,401
Other 130,895 (212) 130,683
------- ---- -------
Total operating
expenses 565,584 (230) 565,354
------- ---- -------
</pre>
<p> </p>
<pre>
Operating Income 105,836 758 106,594
------- --- -------
</pre>
<p> </p>
<pre>
Other Non-
Operating
Income
(Expense)
Net interest
income
(expense) (23,512) (1) (23,513)
Other income
(expense) 19,396 (2,202) 17,194
------ ------ ------
Other non-
operating
income
(expense) (4,116) (2,203) (6,319)
------ ------ ------
</pre>
<p> </p>
<pre>
Income (Loss)
Before Income
Tax Provision 101,720 (1,445) 100,275
</pre>
<p> </p>
<pre>
Income tax
provision 36,619 - 36,619
------ --- ------
</pre>
<p> </p>
<pre>
Net Income
(Loss) 65,101 (1,445) 63,656
</pre>
<p> </p>
<pre>
Less: Net income
(loss)
attributable
to
noncontrolling
interests 1,494 (1,445) 49
----- ------ ---
</pre>
<p> </p>
<pre>
Net Income
Attributable to
Legg Mason,
Inc. $63,607 $- $63,607
======= === =======
</pre>
<p> </p>
<pre>
Effective Income
Tax Rate 36.0%
</pre>
<p> </p>
<pre>
Effective Income
Tax Rate
Excluding
Consolidated
Investment
Vehicles 36.5%
</pre>
<p> </p>
<pre>
(1) See explanations for Use of Supplemental Data as Non-GAAP
Performance Measures.
</pre>
<p> </p>
<pre>
LEGG MASON, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS CONSOLIDATED STATEMENT OF INCOME
TO NON-GAAP BASIS CONSOLIDATED STATEMENT OF INCOME EXCLUDING
INVESTMENT VEHICLES (1)
(Amounts in thousands, except per share amounts)
(Unaudited)
</pre>
<p> </p>
<pre>
Quarter Ended June 30, 2009
---------------------------
</pre>
<p> </p>
<pre>
GAAP Non-GAAP
Basis Consolidated Basis -
Investment
----- Vehicles Excluding
Investment
----------- Vehicles
-----------
</pre>
<p> </p>
<pre>
Operating Revenues:
Investment advisory
fees $524,596 $784 $525,380
Distribution and
service fees 86,701 - 86,701
Other 1,787 - 1,787
----- --- -----
Total operating
revenues 613,084 784 613,868
------- --- -------
</pre>
<p> </p>
<pre>
Operating Expenses:
Compensation and
benefits 268,812 - 268,812
Distribution and
servicing 172,464 (18) 172,446
Other 113,493 463 113,956
------- --- -------
Total operating
expenses 554,769 445 555,214
------- --- -------
</pre>
<p> </p>
<pre>
Operating Income 58,315 339 58,654
------ --- ------
</pre>
<p> </p>
<pre>
Other Non-
Operating Income
(Expense)
Net Interest income
(expense) (41,569) - (41,569)
Fund support 17,558 - 17,558
Other income
(expense) 46,400 (2,573) 43,827
------ ------ ------
Other non-
operating income
(expense) 22,389 (2,573) 19,816
------ ------ ------
</pre>
<p> </p>
<pre>
Income (Loss)
Before Income Tax
Provision 80,704 (2,234) 78,470
</pre>
<p> </p>
<pre>
Income tax
provision 28,380 - 28,380
------ --- ------
</pre>
<p> </p>
<p>Net Income (Loss) 52,324 (2,234) 50,090</p>
<p> </p>
<pre>
Less: Net income
(loss)
attributable
to noncontrolling
interests 2,270 (2,234) 36
----- ------ ---
</pre>
<p> </p>
<pre>
Net Income
Attributable to
Legg Mason, Inc. $50,054 $- $50,054
======= === =======
</pre>
<p> </p>
<pre>
Effective Income
Tax Rate 35.2%
</pre>
<p> </p>
<pre>
Effective Income
Tax Rate Excluding
Consolidated
Investment
Vehicles 36.2%
</pre>
<p> </p>
<pre>
(1) See explanations for Use of Supplemental Data as Non-GAAP
Performance Measures.
Use of Supplemental Data as Non-GAAP Performance Measures
</pre>
<p>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.</p>
<pre>
Adjusted Income
</pre>
<p>Adjusted Income was formerly reported as "Cash Income, as Adjusted." We define "adjusted income" as net income (loss) 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 intangible asset impairment. We also adjust for non-core items that are not reflective of our economic performance, such as impairment charges on indefinite-life intangible assets and goodwill, including the related impact on deferred income taxes, and net money market fund support losses (gains).</p>
<p/>
<p>We believe that adjusted income provides a good 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, including any related goodwill or intangible asset impairments, 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.</p>
<p/>
<p>Adjusted income only considers adjustments for certain items that relate to operating performance and comparability, and therefore, is most readily reconcilable to Net income determined under GAAP. This measure is provided in addition to net income, but is not a substitute for net income 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.</p>
<p/>
<p>In calculating adjusted income, we add the impact of the amortization of intangible assets from acquisitions, such as management contracts, to net income 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 represent actual tax benefits that are not realized under GAAP absent an impairment charge or the disposition of the related business. Because we actually receive these tax benefits on indefinite-life intangibles and goodwill over time, we add them to net income in the calculation of adjusted income. Conversely, we subtract the income tax benefits on impairment charges 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) non-core items, such as net money market fund support losses (gains) (net of losses on the sale of the underlying SIV securities, if applicable) and impairment charges to net income to reflect that these charges 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.</p>
<p/>
<p>Should a disposition or impairment charge for indefinite-life intangibles or goodwill 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.</p>
<p/>
<p>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.</p>
<pre>
Consolidated Statements of Income, Excluding Consolidated Investment
Vehicles
</pre>
<p>Effective with the <span class="xn-chron">April 1, 2010</span> adoption of the new financial accounting standard on consolidations, "Amendments to FASB Interpretation No. 46 (R)", Legg Mason now consolidates and separately identifies certain sponsored investment vehicles, primarily comprised of a collateralized loan obligation entity.</p>
<p/>
<p>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 performance and economics of our core asset management operations, which does not include the results of the investment funds that we manage but do not own. 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 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 Consolidated Statements of Income presented on a non-GAAP basis of other companies.</p>
<pre>
Operating Margin, as Adjusted
</pre>
<p>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, primarily termination benefits, 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. 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. Legg Mason believes 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 do not have an impact to 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.</p>
<pre>
For further information: Investor Relations: Alan Magleby, +1-410-454-5246, [email protected], or Media: Mary Athridge, +1-212-805-6035, [email protected], both of Legg Mason, Inc. Web Site: http://www.leggmason.com
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