Legg Mason Reports Results For Third Fiscal Quarter

BALTIMORE, Jan. 24, 2018 /PRNewswire/ -- Legg Mason, Inc. (NYSE: LM) today reported its operating results for the third fiscal quarter ended December 31, 2017. 

Joseph A. Sullivan, Chairman and CEO of Legg Mason said, "Legg Mason's fiscal third quarter included strong core results driven by robust performance and advisory fees, and a keen focus on expense management.

"Long-term inflows of $2.2 billion were driven by fixed income inflows, partially offset by equity outflows. Alternative flows were flat for the period.  Legg Mason's adjusted operating margin³ was over 27%, the highest in nearly 10 years.  And finally, Global Distribution had another quarter of net positive flows with strong persistency of assets. 

"Stepping back from the quarter, we are pleased that expanding client choice is positioning us to create better outcomes for clients while creating more diversification, resiliency and better long-term returns for shareholders." 

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

Assets Under Management of $767.2 Billion

Assets Under Management were $767.2 billion at December 31, 2017 compared with $754.4 billion at September 30, 2017, resulting from $13.5 billion in positive market performance and other, $2.2 billion in long-term inflows and $0.1 billion in acquisitions, partially offset by liquidity outflows of $2.3 billion, negative foreign exchange of $0.4 billion and realizations of $0.3 billion.

At December 31, 2017, fixed income represented 55% of AUM, while equity represented 27%, alternative represented 9% and liquidity represented 9%. 

By geography, 69% of AUM was from clients domiciled in the United States and 31% from non-US domiciled clients.

Average AUM during the quarter was $759.9 billion compared to $750.3 billion in the prior quarter and $716.7 billion in the third quarter of fiscal year 2017.  Average long-term AUM was $685.3 billion compared to $675.1 billion in the prior quarter and $625.8 billion in the third quarter of fiscal year 2017.

Of Legg Mason's long-term U.S. mutual fund assets, 49% were in funds rated 4 or 5 stars by Morningstar.

Operating Results - Comparison to the Second Quarter of Fiscal Year 2018

Net income was $149.2 million, or $1.58 per diluted share, compared to net income of $75.7 million, or $0.78 per diluted share, in the second 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 and higher non-pass through performance fees. 

     This quarter's results included:

• One-time non-cash tax benefit of $213.7 million, or $2.27 per diluted share, related to the new tax law.
• Non-cash intangible asset impairment charge of $195.0 million, or $1.62 per diluted share.
• Discrete tax expense items of $7.4 million, or $0.08 per diluted share.
• EnTrustPermal acquisition and transition-related costs of $1.3 million, or $0.01 per diluted share.

     The prior 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.

Operating revenues of $793.1 million were up 3% compared to $768.3 million in the prior quarter reflecting:

• An increase in non-pass through performance fees of $28.0 million, which more than offset a decrease in pass through performance fees of $9.9 million.
• Excluding performance fees, operating revenues increased 1% due to higher average long-term AUM.

Operating expenses were $820.4 million compared to $623.9 million in the prior quarter, but excluding the non-cash impairment charge of $195.0 million, expenses were up less than 1%, reflecting:

• Lower compensation of $5.9 million driven by the decrease in Clarion pass through performance fees.
• Increases in Communications & Technology expenses and Other Expenses of $2.9 million and $3.3 million, respectively.
• A $4.3 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, as compared to a $4.8 million gain in the prior quarter.

Non-operating expense was $13.5 million, as compared to $18.1 million in the prior quarter reflecting:  

• Gains on corporate investments, not offset in compensation, were $1.5 million compared with gains of $2.4 million in the prior quarter.
• Gains on funded deferred compensation and seed investments, as described above.
• A $7.9 million gain associated with the consolidation of sponsored investment vehicles compared to a $2.1 million gain 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 (3.4%) compared to 18.8% in the prior quarter, reflecting the impact of the non-cash impairment charge of $195.0 million.  Operating margin, as adjusted⁵, was 27.2%, as compared to 24.9% in the prior quarter. 

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $13.6 million compared to $10.4 million in the prior quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

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

Operating Results - Comparison to the Third Quarter of Fiscal Year 2017

Net income was $149.2 million, or $1.58 per diluted share, compared to net income of $51.4 million, or $0.50 per diluted share, in the third quarter of fiscal year 2017.  In addition to the factors listed below, the increased earnings were driven by higher average long-term AUM and higher non-pass through performance fees.

     This quarter's results included:

• One-time non-cash tax benefit of $213.7 million, or $2.27 per diluted share, related to the new tax law.
• Non-cash intangible asset impairment charge of $195.0 million, or $1.62 per diluted share.
• Discrete tax expense items of $7.4 million, or $0.08 per diluted share.
• EnTrustPermal acquisition and transition-related costs of $1.3 million, or $0.01 per diluted share.

     The prior year quarter's results included:

• Non-cash impairment charges of $35.0 million, or $0.25 per diluted share.
• A credit of $14.5 million, or $0.10 per diluted share, related to contingent consideration fair value adjustments.
• A gain of $4.0 million, or $0.03 per diluted share, on the sale of Legg Mason Poland.
• EnTrustPermal acquisition and transition-related costs of $3.0 million, or $0.02 per diluted share.

Operating revenues of $793.1 million were up 11% compared with $715.2 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 $28.3 million, and an increase in pass through performance fees of $7.7 million.

Operating expenses of $820.4 million were up 36% compared with $604.1 million in the prior year quarter reflecting:

• A non-cash impairment charge related to an intangible asset of $195.0 million, compared with non-cash impairment charges of $35.0 million in the prior year quarter.
• Increased compensation, related to increased revenues driven by higher average long-term AUM and performance fees.
• Acquisition and transition-related charges of $1.3 million, as compared with $3.0 million in the prior year.
• The prior year quarter included a contingent consideration credit adjustment of $14.5 million.
• A $4.3 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 $1.5 million in the prior year quarter.

Non-operating expense was $13.5 million, compared to $20.2 million in the prior year quarter reflecting:

• A $4.0 million gain on the sale of Legg Mason Poland in the prior year quarter.
• Gains on corporate investments, not offset in compensation, were $1.5 million compared with gains of $1.3 million in the prior year quarter.
• Gains on funded deferred compensation and seed investments, as described above.
• A $7.9 million gain associated with the consolidation of sponsored investment vehicles, as compared to an $0.8 million gain 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 (3.4%) as compared to 15.5% in the prior year quarter reflecting the impact of the non-cash impairment charge of $195.0 million.  Operating margin, as adjusted, was 27.2%, as compared to 23.9% in the prior year quarter.

Net income attributable to noncontrolling interests, excluding consolidated investment vehicles, was $13.6 million, compared to $13.1 million in the prior year quarter, principally related to Clarion, EnTrustPermal, RARE and Royce.

Quarterly Business Developments and Recent Announcements

• Morningstar Inc. announced nominees for the U.S. Fixed Income Manager of the Year, which included David Hoffman, Stephen Smith, John McIntyre, and Anujeet Sareen for Brandywine Global's Global Opportunities Bond Fund (GOBSX) and Western Asset's Ken Leech and team for the Western Asset Core Plus Bond Fund (WACPX).
• Legg Mason, Brandywine Global, ClearBridge Investments and Western Asset were all recognized by Pensions & Investments (P&I) in their Best Places to Work in Investment Management survey for 2017.
• Legg Mason was ranked #73 overall and #3 among 30 Capital Markets companies in the Forbes/Just Capital, Just 100 annual ranking.
• RARE Infrastructure was named 2017 Listed Infrastructure Manager of the Year by Professional Pensions, a leading financial publication in the UK.
• Western Asset was ranked #1 in four out of seven categories in Chief Investment Officers' fifth annual ranking of liability driven investment (LDI) providers. Western was the top-ranked provider in the following categories: Responsiveness, Timely Reporting, Knowledge Sharing and Accessibility to Investment Team.
• On November 28, 2017, Legg Mason announced that Michelle Goldberg, a venture capital investor, and Alison Quirk, a financial services industry senior executive, were appointed to its Board of Directors, effective immediately.
• On December 22, 2017, Legg Mason repurchased all of the shares of the Company's common stock beneficially owned by Shanda Asset Management Investment Limited ("Shanda") in a private transaction.

Balance Sheet

At December 31, 2017, Legg Mason's cash position was $680 million.  Total debt was $2.5 billion and stockholders' equity was $3.8 billion.  The ratio of total debt to total capital was 39%, an increase from 36% in the prior quarter.  Seed investments totaled $271 million.

In the third fiscal quarter, the Company retired $299 million, or 7.5 million shares.  The net impact of the share activity reduced the weighted average shares by 1.5 million. These repurchases included 5.6 million shares that the Company repurchased from Shanda in a private transaction funded by a draw on its revolver.

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. EST 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 46274803, 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 46274803# when prompted.  Please note that the replay will be available beginning at 8:00 p.m. EST on Wednesday, January 24, 2018, and ending at 11:59 p.m. EST on Wednesday, February 7, 2018.

About Legg Mason

Guided by a mission of Investing to Improve Lives,™  Legg Mason helps investors globally achieve better financial outcomes by expanding choice across investment strategies, vehicles and investor access through independent investment managers with diverse expertise in equity, fixed income, alternative and liquidity investments.  Legg Mason's assets under management are $767 billion as of December 31, 2017.  To learn more, visit our web site, our newsroom, or follow us on LinkedIn, Twitter, or Facebook. 

This release contains forward-looking statements subject to risks, uncertainties and other factors that may cause actual results to differ materially. For a discussion of these risks and uncertainties, see "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Legg Mason's Annual report on Form 10-K for the fiscal year ended March 31, 2017 and in the Company's quarterly reports on Form 10-Q.

Supplemental Data Regarding Quarterly Performance

Strategy Performance

For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and other products) into a single group that represents a particular investment objective.  In the case of separate accounts, the investment performance of the account is based upon the performance of the strategy to which the account has been assigned.  Each of our asset managers has its own specific guidelines for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the performance comparison for all of the assets is based upon the performance of the separate account.

Approximately eighty-seven percent of total AUM is included in strategy AUM as of December 31, 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.