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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
 
 
to
 
Commission file number: 001-08529
395661538_imageleggmasona08.jpg
LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
 
 
 
MARYLAND
 
52-1200960
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
100 International Drive - Baltimore, MD
 
21202
(Address of principal executive offices)
 
(Zip code)
 
 
 
(410) 539-0000
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
 
No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 
Yes
X
 
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
Emerging growth company
 

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. ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
 
No
X

As of November 2, 2018, there were 85,528,403 shares of the registrant's common stock outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.        Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
 
September 30, 2018
 
March 31, 2018
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
611,164

 
$
736,130

Cash and cash equivalents of consolidated investment vehicles
 
5,055

 
2,800

Restricted cash
 
19,579

 
30,428

Receivables:
 


 
 
Investment advisory and related fees
 
446,398

 
475,594

Other
 
80,885

 
77,024

Investment securities
 
404,087

 
399,370

Investment securities of consolidated investment vehicles
 
76,412

 
140,133

Other
 
68,536

 
65,010

Other current assets of consolidated investment vehicles
 
952

 
1,893

Total Current Assets
 
1,713,068

 
1,928,382

Fixed assets, net
 
153,906

 
148,406

Intangible assets, net
 
3,766,507

 
3,797,659

Goodwill
 
1,891,306

 
1,932,355

Deferred income taxes
 
194,352

 
202,068

Other
 
147,562

 
134,407

Other assets of consolidated investment vehicles
 
9,627

 
9,257

TOTAL ASSETS
 
$
7,876,328

 
$
8,152,534

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
LIABILITIES
 
 

 
 

Current Liabilities
 
 

 
 

Accrued compensation
 
$
406,640

 
$
476,061

Accounts payable and accrued expenses
 
175,861

 
175,583

Short-term borrowings
 

 
125,500

Current portion of long-term debt
 
250,971

 

Other
 
134,902

 
204,264

Other current liabilities of consolidated investment vehicles
 
1,533

 
634

Total Current Liabilities
 
969,907

 
982,042

Deferred compensation
 
101,252

 
92,422

Deferred income taxes
 
166,543

 
139,787

Other
 
125,526

 
132,042

Long-term debt, net
 
1,970,810

 
2,221,810

TOTAL LIABILITIES
 
3,334,038

 
3,568,103

Commitments and Contingencies (Note 7)
 
 
 
 
REDEEMABLE NONCONTROLLING INTERESTS
 
632,295

 
732,295

STOCKHOLDERS' EQUITY
 
 

 
 
Common stock, par value $0.10; authorized 500,000,000 shares; issued 85,503,455 shares for September 30, 2018 and 84,606,408 shares for March 31, 2018
 
8,550

 
8,461

Additional paid-in capital
 
2,013,541

 
1,976,364

Employee stock trust
 
(22,117
)
 
(21,996
)
Deferred compensation employee stock trust
 
22,117

 
21,996

Retained earnings
 
1,981,939

 
1,894,762

Accumulated other comprehensive loss, net
 
(122,109
)
 
(55,182
)
Total stockholders' equity attributable to Legg Mason, Inc.
 
3,881,921

 
3,824,405

Nonredeemable noncontrolling interest
 
28,074

 
27,731

TOTAL STOCKHOLDERS' EQUITY
 
3,909,995

 
3,852,136

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
7,876,328

 
$
8,152,534

See Notes to Consolidated Financial Statements

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Table of Contents

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
OPERATING REVENUES
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
Separate accounts
 
$
261,567

 
$
253,128

 
$
521,462

 
$
503,174

Funds
 
383,923

 
393,035

 
767,487

 
775,263

Performance fees
 
31,874

 
40,821

 
55,910

 
122,358

Distribution and service fees
 
79,074

 
80,668

 
158,264

 
159,574

Other
 
1,989

 
686

 
3,209

 
1,811

Total Operating Revenues
 
758,427

 
768,338

 
1,506,332

 
1,562,180

OPERATING EXPENSES
 
 
 
 
 
 
 
 
Compensation and benefits
 
364,885

 
367,951

 
726,453

 
781,258

Distribution and servicing
 
114,525

 
123,634

 
231,117

 
245,983

Communications and technology
 
57,489

 
51,299

 
114,229

 
101,602

Occupancy
 
27,352

 
25,171

 
52,256

 
49,579

Amortization of intangible assets
 
6,102

 
6,082

 
12,282

 
12,421

Impairment of intangible assets
 

 

 

 
34,000

Contingent consideration fair value adjustments
 
145

 

 
571

 
(16,550
)
Other
 
52,201

 
49,782

 
108,020

 
102,263

Total Operating Expenses
 
622,699


623,919

 
1,244,928

 
1,310,556

OPERATING INCOME
 
135,728

 
144,419

 
261,404

 
251,624

NON-OPERATING INCOME (EXPENSE)
 
 
 
 
 
 
 
 
Interest income
 
2,420

 
1,572

 
4,866

 
3,040

Interest expense
 
(29,860
)
 
(29,077
)
 
(59,777
)
 
(58,343
)
Other income, net
 
6,627

 
7,289

 
13,879

 
18,677

Non-operating income (loss) of consolidated investment vehicles, net
 
(3,998
)
 
2,094

 
(415
)
 
3,091

Total Non-Operating Income (Expense)
 
(24,811
)
 
(18,122
)
 
(41,447
)
 
(33,535
)
INCOME BEFORE INCOME TAX PROVISION
 
110,917

 
126,297

 
219,957

 
218,089

Income tax provision
 
29,844

 
38,673

 
60,519

 
66,928

NET INCOME
 
81,073

 
87,624

 
159,438

 
151,161

Less: Net income attributable to noncontrolling interests
 
8,270

 
11,960

 
20,545


24,577

NET INCOME ATTRIBUTABLE TO LEGG MASON, INC.
 
$
72,803

 
$
75,664

 
$
138,893

 
$
126,584

 
 
 
 
 
 
 
 
 
NET INCOME PER SHARE ATTRIBUTABLE TO LEGG MASON, INC. STOCKHOLDERS:
 
 
 
 
 
 
 
 
Basic
 
$
0.82

 
$
0.78

 
$
1.57

 
$
1.30

Diluted
 
0.82

 
0.78

 
1.57

 
1.29

See Notes to Consolidated Financial Statements

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Table of Contents

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
NET INCOME
 
$
81,073

 
$
87,624

 
$
159,438

 
$
151,161

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(14,658
)
 
21,442

 
(68,020
)
 
32,113

Changes in defined benefit pension plan
 
211

 
121

 
1,093

 
240

Total other comprehensive income (loss)
 
(14,447
)

21,563


(66,927
)
 
32,353

COMPREHENSIVE INCOME
 
66,626

 
109,187

 
92,511

 
183,514

Less: Comprehensive income attributable to noncontrolling interests
 
9,742

 
10,483

 
24,627

 
22,767

COMPREHENSIVE INCOME ATTRIBUTABLE TO LEGG MASON, INC.
 
$
56,884

 
$
98,704

 
$
67,884

 
$
160,747

See Notes to Consolidated Financial Statements

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Table of Contents

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
 
 
Six Months Ended September 30,
 
 
2018
 
2017
STOCKHOLDERS' EQUITY ATTRIBUTABLE TO LEGG MASON, INC.
 
 
 
 
COMMON STOCK
 
 
 
 
Beginning balance
 
$
8,461

 
$
9,573

Stock options exercised
 
16

 
32

Deferred compensation employee stock trust
 

 
1

Stock-based compensation
 
112

 
89

Employee tax withholdings by settlement of net share transactions
 
(39
)
 
(34
)
Shares repurchased and retired
 

 
(472
)
Ending balance
 
8,550

 
9,189

ADDITIONAL PAID-IN CAPITAL
 
 
 
 

Beginning balance
 
1,976,365

 
2,385,726

Stock options exercised
 
5,231

 
9,304

Deferred compensation employee stock trust
 
302

 
285

Stock-based compensation
 
34,814

 
38,994

Employee tax withholdings by settlement of net share transactions
 
(15,422
)
 
(13,017
)
Shares repurchased and retired
 

 
(179,177
)
Redeemable noncontrolling interest reclassification for affiliate management equity plans and affiliate noncontrolling interest
 
12,251

 

Ending balance
 
2,013,541

 
2,242,115

EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
(21,996
)
 
(24,057
)
Shares issued to plans
 
(302
)
 
(286
)
Distributions and forfeitures
 
181

 
2,617

Ending balance
 
(22,117
)
 
(21,726
)
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
21,996

 
24,057

Shares issued to plans
 
302

 
286

Distributions and forfeitures
 
(181
)
 
(2,617
)
Ending balance
 
22,117

 
21,726

RETAINED EARNINGS
 
 
 
 

Beginning balance
 
1,894,762

 
1,694,859

Net income attributable to Legg Mason, Inc.
 
138,893

 
126,584

Dividends declared
 
(61,441
)
 
(54,177
)
Reclassification to noncontrolling interest for net increase in estimated redemption value of affiliate management equity plans and affiliate noncontrolling interests
 
(2,538
)
 
(2,295
)
Adoption of new revenue recognition guidance
 
12,263

 

Adoption of new stock-based compensation guidance
 

 
24,327

Ending balance
 
1,981,939

 
1,789,298

ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
 
 
 
 

Beginning balance
 
(55,182
)
 
(106,784
)
Changes in defined benefit pension plan
 
1,093

 
240

Foreign currency translation adjustment
 
(68,020
)
 
32,113

Ending balance
 
(122,109
)
 
(74,431
)
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO LEGG MASON, INC.
 
3,881,921


3,966,171

NONREDEEMABLE NONCONTROLLING INTEREST
 
 
 
 
Beginning balance
 
27,731

 
27,798

Net income attributable to noncontrolling interests
 
4,937

 
4,291

Distributions
 
(4,594
)
 
(4,063
)
Ending balance
 
28,074

 
28,026

TOTAL STOCKHOLDERS’ EQUITY
 
$
3,909,995

 
$
3,994,197

See Notes to Consolidated Financial Statements

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Table of Contents

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
 
Six Months Ended September 30,
 
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net Income
 
$
159,438

 
$
151,161

Adjustments to reconcile Net Income to net cash provided by operations:
 
 
 
 

Impairments of intangible assets
 

 
34,000

Depreciation and amortization
 
36,143

 
36,634

Accretion and amortization of securities discounts and premiums, net
 
1,080

 
1,670

Stock-based compensation
 
35,225

 
39,531

Net unrealized losses (gains) on investments
 
3,237

 
(10,800
)
Net gains and earnings on investments
 
(15,128
)
 
(7,037
)
Net losses (gains) of consolidated investment vehicles
 
415

 
(3,091
)
Deferred income taxes
 
41,666

 
51,194

Contingent consideration fair value adjustments
 
571

 
(16,550
)
Other
 
217

 
(272
)
Decrease (increase) in assets:
 
 
 
 

Investment advisory and related fees receivable
 
24,621

 
(4,978
)
Net (purchases) sales of trading and other investments
 
(12,544
)
 
29,853

Other receivables
 
(15,697
)
 
9,207

Other assets
 
(14,482
)
 
11,456

Assets of consolidated investment vehicles
 
69,225

 
(31,100
)
Increase (decrease) in liabilities:
 
 
 
 

Accrued compensation
 
(64,931
)
 
(96,720
)
Deferred compensation
 
8,831

 
11,386

Accounts payable and accrued expenses
 
2,488

 
(9,301
)
Other liabilities
 
(73,876
)
 
(21,237
)
Other liabilities of consolidated investment vehicles
 
899

 
(100
)
CASH PROVIDED BY OPERATING ACTIVITIES
 
$
187,398


$
174,906











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Table of Contents

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)

 
 
Six Months Ended September 30,
 
 
2018
 
2017
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Payments for fixed assets
 
$
(29,831
)
 
$
(15,846
)
Business investments
 

 
(2,250
)
Contingent payment from prior sale of businesses
 
923

 
2,561

Returns of capital and proceeds from sales and maturities of investments
 
7,671

 
8,173

CASH USED IN INVESTING ACTIVITIES
 
(21,237
)
 
(7,362
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Dividends paid
 
(54,719
)
 
(47,639
)
Distributions to affiliate noncontrolling interests
 
(22,004
)
 
(27,076
)
Payment of contingent consideration
 
(4,319
)
 

Net (redemptions) subscriptions attributable to noncontrolling interests
 
(68,856
)

19,624

Employee tax withholdings by settlement of net share transactions
 
(15,461
)
 
(13,051
)
Issuances of common stock for stock-based compensation
 
5,548

 
9,622

Decrease in short-term borrowings
 
(125,500
)
 

Repurchases of common stock
 

 
(179,649
)
CASH USED IN FINANCING ACTIVITIES
 
(285,311
)
 
(238,169
)
EFFECT OF EXCHANGE RATES
 
(14,559
)
 
(1,245
)
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
(133,709
)
 
(71,870
)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
 
 
 
 
BEGINNING OF PERIOD
 
773,765

 
754,339

END OF PERIOD
 
$
640,056

 
$
682,469

Supplemental Disclosures
 
 
 
 
Cash paid for:
 
 
 
 

Income taxes, net of refunds of $9,505 in 2017
 
$
22,104

 
$
7,277

Interest
 
58,719

 
56,670

 
 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
 
Cash and cash equivalents
 
$
611,164

 
$
654,234

Restricted cash:
 
 
 
 
Corporate restricted cash
 
19,579

 
21,547

Cash and cash equivalents of consolidated investment vehicles
 
5,055

 
2,475

Affiliate employee benefit trust cash included in Other non-current assets
 
4,258

 
4,213

Total cash, cash equivalents and restricted cash per consolidated statements of cash flows
 
$
640,056

 
$
682,469

See Notes to Consolidated Financial Statements

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Table of Contents

LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts or unless otherwise noted)
September 30, 2018
(Unaudited)

1. Interim Basis of Reporting

The accompanying unaudited interim consolidated financial statements of Legg Mason, Inc. and its subsidiaries (collectively “Legg Mason”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (the "SEC"). The interim consolidated financial statements have been prepared using the interim basis of reporting and, as such, reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of interim consolidated financial statements requires management to make assumptions and estimates that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates and the differences could have a material impact on the interim consolidated financial statements. Terms such as “we,” “us,” “our,” and “Company” refer to Legg Mason.

The nature of Legg Mason's business is such that the results of any interim period are not necessarily indicative of the results of a full year. Certain disclosures included in the Company's annual report are not required to be included on an interim basis in the Company's Quarterly Reports on Form 10-Q. The Company has condensed or omitted these disclosures. Certain amounts in prior period financial statements have been reclassified to conform to new guidance and/or the current period presentation, including the classification and presentation of restricted cash and certain distributions received from equity method investees in the Consolidated Statements of Cash Flows, as discussed below.

The information contained in the interim consolidated financial statements should be read in conjunction with Legg Mason's latest Annual Report on Form 10-K filed with the SEC.

2. Significant Accounting Policies

Consolidation
Legg Mason sponsors and manages various types of investment products. For its services, Legg Mason is entitled to receive management fees and may be eligible, under certain circumstances, to receive additional subordinated management fees or other incentive fees. Legg Mason's exposure to risk in these entities is generally limited to any equity investment it has made or is required to make, and any earned but uncollected management fees, except those for which total return swap arrangements have been executed, for which additional risks are discussed below. Legg Mason did not sell or transfer investment assets to any of these investment products. In accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment products, some of which are designated and reported as consolidated investment vehicles ("CIVs"). The consolidation of sponsored investment products, including those designated as CIVs, has no impact on Net Income Attributable to Legg Mason, Inc. and does not have a material impact on Legg Mason's consolidated operating results. The change in the value of all consolidated sponsored investment products is recorded in Non-Operating Income (Expense) and reflected in Net income (loss) attributable to noncontrolling interests. The financial information of certain consolidated sponsored investment products is included in the Company's consolidated financial statements on a three-month lag based upon the availability of the investment product's financial information.

Certain of the investment products Legg Mason sponsors and manages are considered to be variable interest entities ("VIEs") (as further described below) while others are considered to be voting rights entities (“VREs”) subject to traditional consolidation concepts based on ownership rights. Legg Mason may fund the initial cash investment in certain VRE investment products to generate an investment performance track record in order to attract third-party investors in the product. Legg Mason's initial investment in a new product typically represents 100% of the ownership in that product. As further discussed in Note 3, the products with “seed capital investments” are consolidated as long as Legg Mason maintains a controlling financial interest in the product, but they are not designated as CIVs by Legg Mason unless the investment is longer-term. As of September 30, 2018, March 31, 2018, and September 30, 2017, no consolidated VREs were designated as CIVs.


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A VIE is an entity which does not have adequate equity to finance its activities without additional subordinated financial support; or the equity investors, as a group, do not have the normal characteristics of equity investors for a potential controlling financial interest. Legg Mason must consolidate any VIE for which it is deemed to be the primary beneficiary.

Under consolidation accounting guidance, if limited partners or similar equity holders in a sponsored investment vehicle structured as a limited partnership or a similar entity do not have either substantive investor rights to replace the manager (kick-out rights) or substantive participation rights over the general partner, the entities are VIEs. As a sponsor and manager of an investment vehicle, Legg Mason may be deemed a decision maker under the accounting guidance. If the fees paid to a decision maker are market-based, such fees are not considered variable interests in a VIE. Market-based fees are those fees which are both customary and commensurate with the level of effort required for the services provided. Additionally, if employee interests in a sponsored investment vehicle are not made to circumvent the consolidation guidance and are not financed by the sponsor, they are not included in the variable interests assessment, and are not included in the primary beneficiary determination.

A decision maker is deemed to be a primary beneficiary of a VIE if it has the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or receive benefits from variable interests that could be significant to the VIE. In determining whether it is the primary beneficiary of a VIE, Legg Mason considers both qualitative and quantitative factors such as the voting rights of the equity holders, guarantees, and implied relationships. If a fee paid to a decision maker is not market-based, it will be considered in the primary beneficiary determination.

As of September 30, 2018, March 31, 2018 and September 30, 2017, Legg Mason concluded it was the primary beneficiary of certain VIEs, which were consolidated and designated as CIVs, because it held significant financial interests in the funds. In addition, Legg Mason has entered into various total return swap arrangements with financial intermediaries with respect to certain Legg Mason sponsored exchange traded funds ("ETFs"). Under the terms of the total return swaps, Legg Mason absorbs all of the related gains and losses on the underlying ETF investments of these financial intermediaries, and therefore has variable interests in the related funds and, if significant, may be deemed the primary beneficiary. As of September 30, 2018, March 31, 2018, and September 30, 2017, Legg Mason consolidated the ETFs with significant open total return swap arrangements, which were designated as CIVs. See Note 14 for additional information.

Revenue Recognition
Effective April 1, 2018, Legg Mason adopted updated accounting guidance on revenue recognition which provides a single, comprehensive revenue recognition model for all contracts with customers, improves comparability and removes inconsistencies in revenue recognition practices across entities, industries, jurisdictions, and capital markets. The guidance also specifies the accounting for certain costs to obtain or fulfill a contract with a customer and revises the criteria for determining if an entity is acting as a principal or agent in certain arrangements. The adoption of the updated guidance did not result in significant changes to Legg Mason’s prior revenue recognition practices, except for the timing of the recognition of certain performance and incentive fees, the capitalization and amortization of certain sales commissions for separate accounts, and the net presentation of certain fund expense reimbursements which were previously presented on a gross basis. Each of these changes to Legg Mason’s previous revenue recognition practices is further discussed below.
Legg Mason adopted the updated guidance on a modified retrospective basis for any contracts that were not complete as of April 1, 2018, and recognized the cumulative effect of initially applying the updated guidance for certain sales commissions as an adjustment to the opening balance of retained earnings totaling $12,263. There was no cumulative effect for performance and incentive fees or fund expense reimbursement accounting. The comparative information for prior periods has not been restated and continues to be reported under the prior accounting guidance in effect for those periods. A summary of the cumulative-effect changes to Legg Mason’s Consolidated Balance Sheet as of April 1, 2018 is included below.
Legg Mason primarily earns revenues by providing investment management services and distribution and shareholder services for its customers, which are generally investment funds or the underlying investors in separately managed accounts. As further discussed below, revenues are calculated based on the value of the investments under management and are recognized when obligations under the terms of contracts with customers are satisfied, which is generally over time as the services are rendered.

Legg Mason also has responsibility for the valuation of assets under management ("AUM"), substantially all of which is based on observable market data from independent pricing services, fund accounting agents, custodians or brokers.


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Investment Advisory Fees
Legg Mason earns investment advisory fees on assets in separately managed accounts, investment funds, and other products managed for Legg Mason's clients. Generally, investment management services are a single performance obligation, as they include a series of distinct services that are substantially the same and are transferred to the customer over time using the same time-based measure of progress. Investment management services are satisfied over time as the customer simultaneously receives and consumes the benefits as the advisory services are performed.

Separate Account and Funds Advisory Fees
Separate account and funds advisory fees are variable consideration which is primarily based on predetermined percentages of the daily, monthly or quarterly average market value of the AUM, as defined in the investment management agreements. The average market value of AUM is subject to change based on fluctuations and volatility in financial markets, and as such, separate account and funds advisory fees are constrained until the end of the month or quarter when the actual average market value of the AUM is known and a significant revenue reversal is no longer probable. Therefore, separate account and funds advisory fees are included in the transaction price and allocated to the investment management services performance obligation at the end of each monthly or quarterly reporting period, as specified in the investment management contract. Payment for services under investment management contracts is due once the variable consideration is allocated to the transaction price, and generally within 30 days. Recognition of separate account and funds advisory fee revenue under the updated guidance is consistent with Legg Mason’s prior revenue recognition process.

Performance and Incentive Fees
Performance and incentive fees are variable consideration that may be earned on certain investment management contracts for exceeding performance benchmarks on a relative or absolute basis or for exceeding contractual return thresholds. Performance and incentive fees are estimated at the inception of a contract; however, a range of outcomes is possible due to factors outside the control of the investment manager, particularly market conditions. Performance and incentive fees are therefore excluded from the transaction price until it becomes probable that a significant reversal in the cumulative amount of revenue recognized will not occur. A portion of Legg Mason's performance and incentive fees are earned based on 12-month performance periods that end in differing quarters during the year, with a portion also based on quarterly performance periods. Legg Mason also earns performance and incentive fees on alternative and certain other products that lock at the earlier of the investor’s termination date or the liquidation of the fund or contract, in multiple-year intervals, or upon the occurrence of specific events, such as the sale of assets. For certain of these products, performance and incentive fees may be recognized as revenue earlier under the updated guidance than under prior revenue recognition practices, which deferred recognition until all contingencies were resolved. Any such performance fees recognized prior to the resolution of all contingencies are recorded as a contract asset in Other current assets or Other non-current assets in the Consolidated Balance Sheet, depending on the length of time until the contingencies are resolved.

Fee Waivers and Fund Expense Reimbursements
Legg Mason may waive certain fees for investors or may reimburse its investment funds for certain operating expenses when such expenses exceed a certain threshold. Fee waivers continue to be reported as a reduction in advisory fee revenue under the updated guidance. Under prior accounting guidance, fund expense reimbursements in excess of recognized revenue were recorded as Other expense in the Consolidated Statements of Income. Under the updated accounting guidance, these fund expense reimbursements that exceed the recognized revenue represent a change in the transaction price and are therefore reported as a reduction of Investment advisory fees - Funds in the Consolidated Statements of Income.

Distribution and Service Fees Revenue and Expense
Distribution and service fees represent fees earned from funds to reimburse the distributor for the costs of marketing and selling fund shares and are generally determined as a percentage of client assets. Reported amounts also include fees earned from providing client or shareholder servicing, including record keeping or administrative services to proprietary funds, and non-discretionary advisory services for assets under advisement. Distribution and service fees earned on company-sponsored investment funds are reported as revenue. Distribution services and marketing services are considered a single performance obligation as the success of selling the underlying shares is highly dependent upon the sales and marketing efforts. Ongoing shareholder servicing is a separate performance obligation as these services are not highly interrelated and interdependent on the sale of the shares. Fees earned related to distribution and shareholder serving are considered variable consideration because they are calculated based on the average market value of the fund. The average market value of the fund is subject to change based on fluctuations and volatility in financial markets, and as such, distribution and shareholder service fees are generally constrained until the end of the month or quarter when the actual market value of the fund is known and the related revenue is no longer subject to a significant reversal. Therefore, distribution and service fees are generally included in the

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transaction price at the end of each monthly or quarterly reporting period and are allocated to the two performance obligations based on the amount specified in each agreement. While distribution services are largely satisfied at the inception of an investment, the ultimate amounts of revenue are subject to the variable consideration constraint. Accordingly, a portion of distribution and service revenue will be recognized in periods subsequent to the satisfaction of the performance obligation.

Certain fund share classes only charge for distribution services at the inception of the investment based on a fixed percentage of the share price. This fixed price is allocated to the performance obligation, which is substantially satisfied at the time of the initial investment.

Recognition of distribution and service fee revenue under the updated guidance is consistent with Legg Mason’s prior revenue recognition process.

When Legg Mason enters into arrangements with broker-dealers or other third parties to sell or market proprietary fund shares, distribution and servicing expense is accrued for the amounts owed to third parties, including finders' fees and referral fees paid to unaffiliated broker-dealers or introducing parties and is recorded as Distribution and servicing expense in the Consolidated Statements of Income. Distribution and servicing expense also includes payments to third parties for certain shareholder administrative services and sub-advisory fees paid to unaffiliated asset managers.

Contract Costs and Deferred Sales Commissions
Legg Mason incurs ordinary costs to obtain investment management contracts and for services provided to customers in accordance with investment management agreements. These costs include commissions paid to wholesalers, employees and third-party broker dealers and administration and placement fees. Depending on the type of services provided, these fees may be paid at the time the contract is obtained or on an ongoing basis. Under the updated guidance, costs to obtain a contract should be capitalized if the costs are incremental and would not have been incurred if the contract had not been obtained, and costs to fulfill the contract should be capitalized if they relate directly to a contract, the costs will generate or enhance resources of the entity that will be used in satisfying performance obligations in the future, and the costs are expected to be recovered. Consistent with prior accounting procedures, fund launch costs, including organizational and underwriting costs, placement fees and commissions paid to employees, wholesalers and broker-dealers for sales of fund shares are expensed as incurred, as these costs would be incurred regardless of the investor. However, commissions paid to employees and retail wholesalers in connection with the sale of retail separate accounts are considered incremental, as these fees relate to obtaining a specific contract, are calculated based on specified rates and are recoverable through the management fees earned, and are therefore capitalized under the updated accounting guidance. Such commissions were expensed as incurred under Legg Mason’s prior accounting practices. Capitalized sales commissions are amortized based on the transfer of services to which the assets relate, which averages four years. Legg Mason recorded a cumulative-effect adjustment on the Consolidated Balance Sheet as of April 1, 2018, as referenced below.

Commissions paid by Legg Mason to financial intermediaries in connection with sales of certain classes of company-sponsored mutual funds are generally capitalized as deferred sales commissions. The asset is amortized over periods not exceeding six years, which represent the periods during which commissions are generally recovered from distribution and service fee revenues and from contingent deferred sales charges ("CDSC") received from shareholders of those funds upon redemption of their shares. CDSC consideration is generally variable and is based on the timing of when investors redeem their investment. Therefore, the variable consideration is included in the transaction price once the investors redeem their shares and is satisfied at a point in time. CDSC receipts are recorded as distribution and service fee revenue when received and a reduction of the unamortized balance of deferred sales commissions, with a corresponding expense.

Management periodically tests the deferred sales commission asset for impairment by reviewing the changes in value of the related shares, the relevant market conditions and other events and circumstances that may indicate an impairment in value has occurred. If these factors indicate an impairment in value, management compares the carrying value to the estimated undiscounted cash flows expected to be generated by the asset over its remaining life. If management determines that the deferred sales commission asset is not fully recoverable, the asset will be deemed impaired and a loss will be recorded in the amount by which the recorded amount of the asset exceeds its estimated fair value. For the six months ended September 30, 2018 and 2017, no impairment charges were recorded. Deferred sales commissions, included in Other non-current assets in the Consolidated Balance Sheets, were $1,560 and $4,047 at September 30, 2018 and March 31, 2018, respectively.

Under the updated accounting guidance, Legg Mason has elected to expense sales commissions related to certain fund share classes with amortization periods of one year or less as incurred. Legg Mason recorded a cumulative-effect adjustment on

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the Consolidated Balance Sheet as of April 1, 2018, as referenced below, to reflect the expense associated with such commissions, which had previously been capitalized under Legg Mason's prior accounting practices.

Impact of the Adoption of Updated Revenue Recognition Accounting Guidance
The cumulative effect of the changes made to Legg Mason’s Consolidated Balance Sheet as of April 1, 2018 for the adoption of the updated revenue recognition accounting guidance were as follows:
 
 
 
 
Adjustment due to Adoption of Updated Accounting Guidance
 
 
Consolidated Balance Sheet
 
Balance as of March 31, 2018
 
Capitalized Sales Commissions
 
Deferred Sales Commissions
 
Total
 
Balance as of April 1, 2018
Assets
 
 
 
 
 
 
 
 
 
 
Other, current
 
$
65,010

 
$
9,615

 
$

 
$
9,615

 
$
74,625

Deferred income taxes
 
202,068

 
(1,148
)
 

 
(1,148
)
 
200,920

Other, non-current
 
134,407

 
10,316

 
(2,576
)
 
7,740

 
142,147

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred income taxes
 
$
139,787

 
$
3,944

 
$

 
$
3,944

 
$
143,731

Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Retained Earnings
 
$
1,894,762

 
$
14,839

 
$
(2,576
)
 
$
12,263

 
$
1,907,025


The impact of the adoption of the updated revenue recognition accounting guidance on the Consolidated Balance Sheet and the Consolidated Statements of Income was as follows:
 
 
September 30, 2018
 
 
 
 
Impact of the Adoption of Updated Accounting Guidance
 
 
Consolidated Balance Sheet
 
Balances Excluding the Adoption of Updated Accounting Guidance
 
Capitalized Sales Commissions
 
Deferred Sales Commissions
 
Total
 
As Reported
Assets
 
 
 
 
 
 
 
 
 
 
Other, current
 
$
60,450

 
$
8,086

 
$

 
$
8,086

 
$
68,536

Deferred income taxes
 
195,500

 
(1,148
)
 

 
(1,148
)
 
194,352

Other, non-current
 
138,313

 
10,939

 
(1,690
)
 
9,249

 
147,562

Liabilities
 
 
 
 
 
 
 
 
 
 
Deferred income taxes
 
$
162,599

 
$
3,944

 
$

 
$
3,944

 
$
166,543

Stockholders Equity
 
 
 
 
 
 
 
 
 
 
Retained Earnings
 
$
1,969,696

 
$
13,933

 
$
(1,690
)
 
$
12,243

 
$
1,981,939



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Consolidated Statements of Income
 
 
Three months ended September 30, 2018
 
 
 
 
Impact of the Adoption of Updated Accounting Guidance
 
 
 
 
Balances Excluding the Adoption of Updated Accounting Guidance
 
Capitalized Sales Commissions
 
Deferred Sales Commissions
 
Fund Expense Reimbursements
 
Total
 
As Reported
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
 
 
 
 
Funds
 
$
384,964

 
$

 
$

 
$
(1,041
)
 
$
(1,041
)
 
$
383,923

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
$
364,332

 
$
553

 
$

 
$

 
$
553

 
$
364,885

Distribution and servicing
 
115,064

 

 
(539
)
 

 
(539
)
 
114,525

Other
 
53,242

 

 

 
(1,041
)
 
(1,041
)
 
52,201


 
 
Six months ended September 30, 2018
 
 
 
 
Impact of the Adoption of Updated Accounting Guidance
 
 
 
 
Balances Excluding the Adoption of Updated Accounting Guidance
 
Capitalized Sales Commissions
 
Deferred Sales Commissions
 
Fund Expense Reimbursements
 
Total
 
As Reported
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
 
 
 
 
Funds
 
$
769,811

 
$

 
$

 
$
(2,324
)
 
$
(2,324
)
 
$
767,487

Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
$
725,546

 
$
907

 
$

 
$

 
$
907

 
$
726,453

Distribution and servicing
 
232,003

 

 
(886
)
 

 
(886
)
 
231,117

Other
 
110,344

 

 

 
(2,324
)
 
(2,324
)
 
108,020


Cash Flow Reporting    
Effective April 1, 2018, Legg Mason adopted updated accounting guidance on a retrospective basis which clarifies the classification and presentation of restricted cash, investment activity and other items in the statements of cash flows. The updated guidance requires entities to include restricted cash and restricted cash equivalents in the cash and cash equivalents balances on the consolidated statements of cash flows and to disclose a reconciliation between the balances on the consolidated statements of cash flows and the consolidated balance sheets. Legg Mason includes cash of consolidated investment vehicles and affiliate benefit trust cash in restricted cash. Legg Mason’s restricted cash balances at September 30, 2018 and 2017, were $28,892 and $28,235, respectively. The updated guidance also clarifies how distributions from equity method investees should be classified based on either the cumulative earnings or the nature of distribution approach. Legg Mason elected to apply the nature of distribution approach when classifying distributions received from equity method investees. As a result of adopting this aspect of the updated guidance, $2,667 was reclassified from Cash Provided by Operating Activities to Cash Used in Investing Activities in the Consolidated Statement of Cash Flows for the six months ended September 30, 2017.


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Financial Instruments
Effective April 1, 2018, Legg Mason adopted accounting guidance on a prospective basis which requires equity investments to be measured at fair value, with changes recognized in earnings. This guidance does not apply to investments accounted for under the equity method of accounting or underlying investments of consolidated entities. The updated guidance also provides entities the option to elect to measure equity investments that do not have readily determinable fair values and do not qualify for the net asset value ("NAV") practical expedient at "adjusted cost". Under this adjusted cost method, investments are initially recorded at cost, and subsequently adjusted (increased or decreased) when there is an observable transaction involving the same investment, or similar investment from the same issuer. Adjusted cost investment carrying values are also adjusted for impairments, if any. Legg Mason has elected to measure certain investments under the adjusted cost approach. The adoption of this updated guidance did not have a material impact on Legg Mason’s consolidated financial statements.

Recent Accounting Developments
In August 2018, the Financial Accounting Standards Board ("FASB") updated the guidance to clarify accounting for implementation costs incurred for a cloud computing arrangement that is a service contract. The update conforms the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the accounting guidance that provides for capitalization of costs incurred to develop or obtain internal-use-software.  The updated guidance is effective for Legg Mason in fiscal 2021, unless adopted earlier.  Legg Mason is evaluating its adoption.

In August 2018, the FASB also updated the guidance for fair value measurements. The updated guidance modifies disclosure requirements based on the revised FASB Conceptual Framework for Financial Reporting finalized in August 2018. The updated guidance will be effective in fiscal 2021, unless adopted earlier. Legg Mason is evaluating its adoption.

In August 2017, the FASB updated the guidance on accounting for derivative hedging.  The updated guidance more closely aligns the results of cash flow and fair value hedging designations with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in the financial statements.  The new guidance also simplifies the application of hedge accounting.  The updated guidance is effective for Legg Mason in fiscal 2020, unless adopted earlier.  Legg Mason uses accounting hedge designation from time-to-time and would only potentially be impacted if derivative transactions were designated for hedging.

In January 2017, the FASB updated the guidance to simplify the test for goodwill impairment.  The updated guidance still requires entities to perform annual goodwill impairment tests by comparing the fair value of a reporting unit with its related carrying amount, but it eliminates the requirement to potentially calculate the implied fair value of goodwill to determine the amount of impairment, if any.  Under the new guidance, an entity should recognize an impairment charge if the reporting unit's carrying amount exceeds the reporting unit’s fair value, in the amount of such excess.  The guidance will be effective in fiscal 2020, unless adopted earlier. Legg Mason is evaluating its adoption.

In February 2016, the FASB updated the guidance on accounting for leases.  The updated guidance requires that a lessee shall recognize the assets and liabilities that arise from lease transactions.  A lessee will recognize a right-of-use asset to use the underlying asset and a liability representing the lease payments.  The updated guidance also requires an evaluation at the inception of a service or other contract, to determine whether the contract is or contains a lease.  In July 2018, the FASB further updated the lease guidance to make certain targeted improvements, including allowing for the guidance to be adopted on a modified retrospective basis.  The guidance will be effective for Legg Mason in fiscal 2020.  Legg Mason expects to recognize right of use assets and liabilities upon its adoption of the new standard and is continuing to evaluate the full impact of adoption, including transition method and practical expedient elections.
 
  

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3. Investments and Fair Value of Assets and Liabilities

The disclosures below include details of Legg Mason's financial assets and financial liabilities that are measured at fair value and NAV, excluding the financial assets and financial liabilities of CIVs. See Note 14, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value.

The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:
 
 
As of September 30, 2018
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Investments measured at NAV
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Cash equivalents:(1)
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
266,630

 
$

 
$

 
$

 
$
266,630

Time deposits and other
 

 
9,842

 

 

 
9,842

Total cash equivalents
 
266,630


9,842

 

 

 
276,472

Investments of proprietary fund products and other investments:(2)
 
 
 
 
 
 
 
 
 
 

Seed capital investments
 
127,448

 
27,307

 
1,394

 

 
156,149

Other(3)
 
20,642

 
2,049

 

 

 
22,691

Investments relating to long-term incentive compensation plans(4)
 
213,951

 

 

 

 
213,951

Equity method investments relating to long-term incentive compensation plans(5)
 

 

 

 
11,296

 
11,296

Total current investments(6)
 
362,041


29,356

 
1,394

 
11,296

 
404,087

Equity method investments in partnerships and LLCs:(5)(7)
 
 
 
 
 
 
 
 
 
 
Seed capital investments(6)
 

 

 
1,161

 
13,162

 
14,323

Seed capital investments in real estate funds
 

 

 
35,859

 

 
35,859

Other
 

 

 
1,840

 
10,796

 
12,636

Adjusted cost investments:(7)
 
 
 
 
 
 
 
 
 
 
Investments related to long-term incentive compensation plans
 

 

 
6,458

 

 
6,458

Other
 

 
74

 
4,448

 

 
4,522

Derivative assets(7)(8)
 
1,549

 

 

 

 
1,549

Total
 
$
630,220


$
39,272

 
$
51,160

 
$
35,254

 
$
755,906

Liabilities:
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities(9)
 
$

 
$

 
$
(1,900
)
 
$

 
$
(1,900
)
Derivative liabilities(8)
 
(6,296
)
 

 

 

 
(6,296
)
Total
 
$
(6,296
)
 
$

 
$
(1,900
)
 
$

 
$
(8,196
)

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As of March 31, 2018
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Investments measured at NAV
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
Cash equivalents:(1)
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
350,142

 
$

 
$

 
$

 
$
350,142

Time deposits and other
 

 
13,863

 

 

 
13,863

Total cash equivalents
 
350,142

 
13,863

 

 

 
364,005

Trading investments of proprietary fund products and other trading investments:(2)
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
131,715

 
37,598

 
1,242

 
3,225

 
173,780

Other(3)
 
29,051

 
2,565

 

 

 
31,616

Trading investments relating to long-term incentive compensation plans(4)
 
184,639

 

 

 
99

 
184,738

Equity method investments relating to proprietary fund products and long-term incentive compensation plans:(5)
 

 

 

 
9,236

 
9,236

Total current investments(6)
 
345,405


40,163

 
1,242

 
12,560

 
399,370

Equity method investments in partnerships and LLCs:(5)(7)
 
 
 
 
 
 
 
 
 
 
Seed capital investments(6)
 

 

 
962

 
14,360

 
15,322

Seed capital investments in real estate funds
 

 

 
32,763

 

 
32,763

Other
 

 

 

 
11,915

 
11,915

Investments in partnerships and LLCs:(7)
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 

 

 

 
2,549

 
2,549

Investments related to long-term incentive compensation plans
 

 

 
6,458

 

 
6,458

Other
 

 
78

 
380

 

 
458

Derivative assets(7)(8)
 
4,904

 

 

 

 
4,904

Other investments(7)
 

 

 
113

 

 
113

Total
 
$
700,451

 
$
54,104

 
$
41,918

 
$
41,384

 
$
837,857

Liabilities:
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities(9)
 
$

 
$

 
$
(5,607
)
 
$

 
$
(5,607
)
Derivative liabilities(8)
 
(6,446
)
 

 

 

 
(6,446
)
Total
 
$
(6,446
)
 
$

 
$
(5,607
)
 
$

 
$
(12,053
)
(1)
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are classified as Level 1.  Cash investments in time deposits and other are measured at amortized cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization and are classified as Level 2.
(2)
Current investments of proprietary fund products and other investments consist of approximately 86% and 14% equity and debt securities, respectively, as of September 30, 2018, and approximately 81% and 19% equity and debt securities, respectively, as of March 31, 2018.
(3)
Includes $9,035 and $15,452 in noncontrolling interests associated with consolidated seed investment products as of September 30, 2018 and March 31, 2018, respectively.
(4)
Primarily mutual funds where there is minimal market risk to the Company as any change in value is primarily offset by an adjustment to compensation expense and related deferred compensation liability.
(5)
Certain of Legg Mason's equity method investments are investment companies that record underlying investments at fair value. Therefore, the fair value of these investments is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee. Other equity method investments not measured at fair value on a recurring basis of $28,036 and $27,660 as of September 30, 2018 and March 31, 2018, respectively, are excluded from the tables above.
(6)
Excludes $43,820 and $43,854 of seed capital as of September 30, 2018 and March 31, 2018, respectively, which is related to Legg Mason's investments in CIVs. See Note 14.
(7)
Amounts are included in Other non-current assets in the Consolidated Balance Sheets for each of the periods presented.
(8)
See Note 13.
(9)
See Note 7.


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Proprietary fund products include seed capital investments made by Legg Mason to fund new investment strategies and products. Legg Mason had seed capital investments in proprietary fund products, which totaled $250,151 and $268,268 as of September 30, 2018 and March 31, 2018, respectively, which are substantially comprised of investments in 55 funds and 59 funds, respectively, that are individually greater than $1,000, and together comprise over 90% of the total seed capital investments at each period end.

As further discussed in Notes 2, 13, and 14, Legg Mason has entered into various total return swap arrangements with financial intermediaries with respect to certain Legg Mason sponsored ETFs for aggregate notional amounts totaling $22,130 as of September 30, 2018, which resulted in the investment in the respective ETF by these financial intermediaries. Under the terms of the total return swap arrangements, Legg Mason receives all of the related investment gains and losses on the underlying investments and therefore may be required to consolidate sponsored investment funds with significant open total return swap arrangements. These consolidated ETFs are designated as CIVs.

See Notes 2 and 14 for information regarding the determination of whether investments in proprietary fund products represent VIEs and consolidation.
The net realized and unrealized gains for investment securities classified as trading was $9,126 and $12,633 for the three months ended September 30, 2018 and 2017, respectively, and $9,573 and $22,802 for the six months ended September 30, 2018 and 2017, respectively.
The net unrealized gains (losses) relating to trading investments still held as of the reporting dates were $4,305 and $8,072 for the three months ended September 30, 2018 and 2017, respectively, and $(12,572) and $10,140 for the six months ended September 30, 2018 and 2017, respectively.

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The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended September 30, 2018 and 2017, are presented in the tables below:
 
 
Balance as of June 30,
 2018
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Balance as of September 30, 2018
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of seed capital investments in proprietary fund products
 
$
1,390

 
$

 
$

 
$

 
$

 
$
4

 
$
1,394

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
1,052

 

 

 

 

 
109
 
1,161

Seed capital investments in real estate funds
 
32,930

 
3,920

 

 
(2,172
)
 

 
1,181

 
35,859

Other
 
1,150

 
500

 

 

 

 
190

 
1,840

Adjusted cost investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments related to long-term incentive compensation plans
 
6,458

 

 

 

 

 

 
6,458

Other
 
4,492

 

 

 

 

 
(44
)
 
4,448

 
 
$
47,472

 
4,420

 

 
(2,172
)
 

 
1,440

 
$
51,160

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
(6,074
)
 
n/a

 
n/a

 
$
4,319

 
n/a

 
$
(145
)
 
$
(1,900
)



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Balance as of June 30,
 2017
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Balance as of September 30, 2017
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity method investments relating to long-term incentive compensation plans
 
$
1,349

 
$
11

 
$

 
$
(11
)
 
$

 
$
44

 
$
1,393

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
813

 

 

 

 

 
38

 
851

Seed capital investments in real estate funds
 
27,182

 
1,756

 

 
(2,131
)
 

 
575

 
27,382

Other
 
1,646

 

 

 
(1,646
)
 

 

 

Investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments related to long-term incentive compensation plans
 
9,367

 

 

 

 

 

 
9,367

Other
 
1,818

 

 

 
(1,398
)
 

 
65

 
485

Other investments
 
112

 

 

 

 

 
2

 
114

 
 
$
42,287

 
$
1,767

 
$

 
$
(5,186
)
 
$

 
$
724

 
$
39,592

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$
(20,697
)
 
n/a

 
n/a

 
n/a

 
n/a

 
$
(465
)
 
$
(21,162
)


20

Table of Contents

 
 
Balance as of March 31, 2018
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Balance as of September 30, 2018
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of seed capital investments in proprietary fund products
 
$
1,242

 
$

 
$

 
$

 
$

 
$
152

 
$
1,394

Equity method investments in partnerships and LLCs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Seed capital investments
 
962

 

 

 

 

 
199
 
1,161

Seed capital investments in real estate funds
 
32,763

 
3,967

 

 
(2,400
)
 

 
1,529

 
35,859

Other
 

 
1,650

 

 

 

 
190

 
1,840

Adjusted cost investments:
 
 
 
 
 
 
 
 
 
 
 
 
 


Investments related to long-term incentive compensation plans
 
6,458

 

 

 

 

 

 
6,458

Other
 
493

 
4,000