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Section 1: 8-K (8-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported)
October 25, 2017


LEGG MASON, INC.
(Exact name of registrant as specified in its charter)

Maryland
   
1-8529
   
52-1200960
(State or Other Jurisdiction
of Incorporation)
 
(Commission File
No.)
 
(IRS Employer
 Identification No.)

100 International Drive, Baltimore, Maryland
                
21202
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code:
(410) 539-0000

Not Applicable 
(Former name or former address if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 





Item 2.02
 
Results of Operations and Financial Condition.
 
 
 
 
 
 
 
 
On October 25, 2017, Legg Mason, Inc. announced its results of operations for the quarter ended September 30, 2017. A copy of the related press release is attached hereto as Exhibit 99.
 
 
 
The information in this Section 2.02 and Exhibit 99 attached hereto shall not be deemed "filed" for purposes of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
 
 
 
Item 9.01
 
Financial Statements and Exhibits.
 
 
 
(d)
 
Exhibits
 
 
 
 
 
Exhibit No.
Subject Matter
 
 
99
Press Release of Legg Mason, Inc. dated October 25, 2017








SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

                                          
                                         
LEGG MASON, INC.
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
Date:  October 25, 2017
By:
/s/ Thomas C. Merchant
 
 
 
Thomas C. Merchant
 
 
 
Executive Vice President and General Counsel






LEGG MASON, INC.
EXHIBIT INDEX

Exhibit No.
     
Subject Matter
                                                          
 
 
 
99
     









(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit
News Release
390774518_imageleggmason9302017lma05.jpg


    



FOR IMMEDIATE RELEASE        
 
Investor Relations:
 
 
Media:
 
Alan Magleby
 
 
Mary Athridge
 
410-454-5246
 
 
212-805-6035
 
amagleby@leggmason.com
 
 
mkathridge@leggmason.com
 


LEGG MASON REPORTS RESULTS FOR SECOND FISCAL QUARTER

-
Second Quarter Net Income of $75.7 Million, or $0.78 per Diluted Share
- Assets Under Management of $754.4 Billion    
- Long-term Net Outflows of $1.2 Billion for the Quarter


Baltimore, Maryland - October 25, 2017 - 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.”





 

Brandywine Global | Clarion Partners | ClearBridge Investments | EnTrustPermal | Martin Currie | QS Investors | RARE Infrastructure | Royce & Associates | Western Asset
1

News Release
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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 Revenue Yield 1
 
 
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.


Brandywine Global | Clarion Partners | ClearBridge Investments | EnTrustPermal | Martin Currie | QS Investors | RARE Infrastructure | Royce & Associates | Western Asset
2

News Release
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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.

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.
(4) See "Use of Supplemental Non-GAAP Financial Information."

Brandywine Global | Clarion Partners | ClearBridge Investments | EnTrustPermal | Martin Currie | QS Investors | RARE Infrastructure | Royce & Associates | Western Asset
3

News Release
390774518_imageleggmason9302017lma05.jpg


    


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.

Brandywine Global | Clarion Partners | ClearBridge Investments | EnTrustPermal | Martin Currie | QS Investors | RARE Infrastructure | Royce & Associates | Western Asset
4

News Release
390774518_imageleggmason9302017lma05.jpg


    



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.














Brandywine Global | Clarion Partners | ClearBridge Investments | EnTrustPermal | Martin Currie | QS Investors | RARE Infrastructure | Royce & Associates | Western Asset
5

News Release
390774518_imageleggmason9302017lma05.jpg


    


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.

Brandywine Global | Clarion Partners | ClearBridge Investments | EnTrustPermal | Martin Currie | QS Investors | RARE Infrastructure | Royce & Associates | Western Asset
6


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


7


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.


8


LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF INCOME
(Amounts in thousands)
(Unaudited)
 
 
 
 
Quarters Ended
 
 
 
 
September 2017
 
June 2017
 
September 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Before Consolidation of Consolidated Investment Vehicles and Other (1)
 
Consolidated Investment Vehicles and Other (1)
 
Consolidated Totals
Balance Before Consolidation of Consolidated Investment Vehicles and Other (1)
 
Consolidated Investment Vehicles and Other (1)
 
Consolidated Totals
Balance Before Consolidation of Consolidated Investment Vehicles and Other (1)
 
Consolidated Investment Vehicles and Other (1)
 
Consolidated Totals
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 Other (1)
 
Consolidated Investment Vehicles and Other (1)
 
Consolidated Totals
Balance Before Consolidation of Consolidated Investment Vehicles and Other (1)
 
Consolidated Investment Vehicles and Other (1)
 
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
 
 
 
 
 
 


9


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."
 

10


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."


11


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.

12

News Release
390774518_imageleggmason9302017lma05.jpg


    

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.


Brandywine Global | Clarion Partners | ClearBridge Investments | EnTrustPermal | Martin Currie | QS Investors | RARE Infrastructure | Royce & Associates | Western Asset
13

News Release
390774518_imageleggmason9302017lma05.jpg


    

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.

Brandywine Global | Clarion Partners | ClearBridge Investments | EnTrustPermal | Martin Currie | QS Investors | RARE Infrastructure | Royce & Associates | Western Asset
14
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Section 3: EX-99.1 (EXHIBIT 99.1)

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